-----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, EWS5pOLxnXO0gfVxyXK9v6OBDLRvywz0pUy3/2TvjqbacLO31FFN1SKuQvhw3sG4 EQTgydtI0/6BfTeZHh22EQ== 0000927016-99-000229.txt : 19990201 0000927016-99-000229.hdr.sgml : 19990201 ACCESSION NUMBER: 0000927016-99-000229 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 41 FILED AS OF DATE: 19990129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUMONICS INC CENTRAL INDEX KEY: 0001076930 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-71449 FILM NUMBER: 99517065 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 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999 REGISTRATION STATEMENT NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- LUMONICS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ONTARIO 36992 38-1859358 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE) ORGANIZATION)
105 SCHNEIDER ROAD KANATA, ONTARIO K2K 1Y3 (613) 592-1460 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) W. SCOTT NIX PRESIDENT AND CHIEF EXECUTIVE OFFICER LUMONICS INC. 130 LOMBARD STREET OXNARD, CALIFORNIA 93030 (805) 488-5559 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) Copies to: CHARLES J. GARDNER, Q.C. STUART M. CABLE, P.C. LABARGE WEINSTEIN GOODWIN, PROCTER & HOAR LLP 333 PRESTON STREET, 11TH FLOOR EXCHANGE PLACE OTTAWA, ONTARIO K1S 5M4 BOSTON, MASSACHUSETTS 02109-2881 (613) 231-3000 (617) 570-1000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the transactions described herein and from time to time after this registration statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF MAXIMUM MAXIMUM SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE - ------------------------------------------------------------------------------------------- Common Stock, no par value................. 17,827,894(1) N/A $78,446,214 (2) $21,808(3)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Shares issuable pursuant to the Amended and Restated Agreement and Plan of Merger by and among Lumonics Inc., Grizzly Acquisition Corp., New Grizzly Acquisition Corp. and General Scanning Inc. to the holders of currently outstanding shares of common stock of GSI. (2) The proposed maximum aggregate offering price has been estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act and has been calculated pursuant to Rule 457(f) under the Securities Act. Pursuant to Rule 457(f)(1) under the Securities Act, the proposed maximum aggregate offering price is based on the market value of the securities to be canceled pursuant to the merger agreement and is calculated in accordance with Rule 457(c) under the Securities Act as: (a) $6.1875, the average of the high and low sales prices per share of GSI common stock on January 26, 1999, as reported on the Nasdaq National Market, multiplied by (b) 12,678,176, the aggregate number of outstanding shares of GSI common stock. (3) In accordance with Rule 457(b), the registration fee of $21,808 was reduced by $16,470 which was previously paid by the Registrant with respect to the transaction described herein pursuant to Section 14(g) of the Securities Exchange Act of 1934, as amended. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GENERAL SCANNING INC. 500 ARSENAL STREET WATERTOWN, MASSACHUSETTS 02472 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of General Scanning Inc., a Massachusetts corporation, will be held at on , 1999, at the offices of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts. The meeting is called: 1. To consider and vote upon a proposal to approve and adopt the Amended and Restated Agreement and Plan of Merger, dated as of October 27, 1998, among Lumonics Inc., a corporation organized under the laws of Ontario, Grizzly Acquisition Corp., New Grizzly Acquisition Corp., each a Massachusetts corporation and a wholly-owned subsidiary of Lumonics, and GSI. 2. To transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting. The holders of a majority of the GSI common stock outstanding on , 1999 must approve the proposed merger which is more fully described in the attached joint proxy statement/prospectus. A list of stockholders will be available at the meeting and, during the ten days prior to the meeting, at the offices of Goodwin, Procter & Hoar llp. To make sure that your shares are voted at the meeting please sign and date the enclosed proxy and return it in the envelope provided. Sending in a signed proxy will not affect your right to attend the meeting and vote in person. You may revoke your proxy at any time before it is voted by following the directions beginning on page 12 of the joint proxy statement/prospectus. If the GSI stockholders approve the merger agreement at the special meeting and the merger occurs, any stockholder (1) who files with GSI before the vote on the merger agreement written objection to the merger agreement stating that such stockholder intends to demand payment for his or her shares of GSI common stock if the merger occurs and (2) whose shares of GSI common stock are not voted in favor of the merger agreement, has the right to demand in writing from GSI Lumonics, within 20 days after GSI Lumonics mails a written notice that the merger has occurred, payment for such shares and an appraisal of the shares' value. GSI and any such stockholder shall, in such cases, have the rights and duties and are required to follow the procedure set forth in Sections 88 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts a copy of which is attached to the joint proxy statement/prospectus as Annex F. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT. WHETHER OR NOT YOU EXPECT TO ATTEND, WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. By Order of the Board of Directors Victor H. Woolley, Clerk Watertown, Massachusetts , 1999 LUMONICS INC. 105 SCHNEIDER ROAD KANATA, ONTARIO K2K 1Y3 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of Lumonics Inc. will be held on , 1999, at , Ontario commencing at , local time, for the following purposes: 1. To consider and to approve the Amended and Restated Agreement and Plan of Merger dated October 27, 1998, by and among Lumonics, Grizzly Acquisition Corp. and New Grizzly Acquisition Corp., each a Massachusetts corporation and a wholly-owned subsidiary of Lumonics, and General Scanning Inc. and the issuance of additional common shares of Lumonics under the merger agreement, including the issuance of common shares of Lumonics upon the exercise of GSI stock options outstanding at the time of the merger. 2. To consider and approve, conditional upon the merger, the continuance of Lumonics into New Brunswick so that it will be governed by the Business Corporations Act (New Brunswick); 3. To consider and to confirm, conditional upon the continuance, the adoption by the Lumonics Board of Directors on , 1999 of By-Law No. 1 of Lumonics, a General By-Law which conforms with the requirements of the Business Corporations Act (New Brunswick) and which repeals By-Laws No. 18 and No. 19 of Lumonics; 4. To consider and to approve the change of the name of Lumonics Inc. to GSI Lumonics Inc., conditional upon the merger; and 5. To transact such other business as may properly come before the special meeting or any adjournment thereof. LUMONICS SHAREHOLDERS MUST APPROVE ALL OF THESE PROPOSALS, INCLUDING THE NAME CHANGE, IN ORDER FOR THE MERGER TO OCCUR. IF THE SHAREHOLDERS FAIL TO APPROVE ANY ONE OF THE LUMONICS PROPOSALS THE MERGER WILL NOT OCCUR. The accompanying joint proxy statement/prospectus and the Canadian financial statement supplement, which has been circulated to Lumonics shareholders with this notice, provide additional information relating to matters to be addressed at the special meeting and form part of this notice. Only those Lumonics shareholders of record at the close of business on , 1999 will be entitled to notice of the special meeting. If you transfer your shares after you receive this notice, the new holder may make a written demand prior to the special meeting to be included in the list of shareholders eligible to vote at the special meeting. You have the right to revoke your proxy at any time before it is exercised by following the directions on page 17 of the joint proxy statement/prospectus. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF ALL THE LUMONICS PROPOSALS. YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO BE AT THE SPECIAL MEETING. By Order of the Board of Directors LUMONICS INC. Charles Gardner, Q.C., Secretary Ottawa, Ontario , 1999 MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT The Boards of Directors of General Scanning Inc. and Lumonics Inc. have unanimously agreed on a merger of equals to form one of the world's leading suppliers of laser-based advanced manufacturing systems. In the merger, GSI stockholders will each receive 1.347 GSI Lumonics common shares for each share of GSI common stock they own and Lumonics shareholders will continue to hold their common shares of Lumonics, which, following the merger, will be renamed GSI Lumonics Inc. Immediately following the merger, the GSI stockholders and the Lumonics shareholders will each, as a group, own approximately 50% of the common shares of GSI Lumonics. Both GSI and Lumonics design, develop, manufacture and market laser-based advanced manufacturing systems for semiconductor, electronics, aerospace and automotive industries. Each company also conducts significant business outside of the industries they jointly serve. GSI Lumonics plans to leverage the companies' international sales and service structure by cross-selling products to each other's customers and by benefiting from GSI's strong direct presence in the Far East and Lumonics' similar strength in Europe. GSI Lumonics plans to offer more products to its current customer base and to expand its customer base through the joint development of new systems and applications. As a result, the combined company will be more diversified by market, customer, product and application. The GSI stockholders and the Lumonics shareholders must approve the merger agreement at their special meetings for the merger to occur. Lumonics shareholders must also approve certain other proposals, including the name change to GSI Lumonics Inc. If either the GSI stockholders or the Lumonics shareholders fail to approve all of the proposals relating to the merger, the merger will not occur. THUS, YOUR VOTE IS VERY IMPORTANT. The dates, times and places of the special meetings are as follows: FOR GSI STOCKHOLDERS: , , 1999 at a.m. Goodwin, Procter & Hoar LLP Exchange Place, Boston, MA 02109 FOR LUMONICS SHAREHOLDERS: , , 1999 at a.m. [place] GSI's common stock is traded on the Nasdaq National Market under the symbol "GSCN" and Lumonics' common shares are traded on The Toronto Stock Exchange under the symbol "LUM." The GSI Lumonics common shares will be listed on Nasdaq and The Toronto Stock Exchange. This document is the proxy statement and management information statement that we are furnishing to the GSI stockholders and the Lumonics shareholders in connection with the solicitation of proxies for matters related to the merger to be voted on at a special meeting of each company. WE URGE YOU TO READ THIS DOCUMENT CAREFULLY BEFORE VOTING AND TO CONSIDER THE DISCUSSION OF RISKS ASSOCIATED WITH THE MERGER WHICH BEGINS ON PAGE 7. This document is also the prospectus of Lumonics for the approximately GSI Lumonics common shares that will be issued to GSI stockholders upon completion of the merger. ________________________________________________________________________________ Charles D. Winston President and Chief Executive Officer ________________________________________________________________________________ W. Scott Nix President and Chief Executive Officer NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED THE GSI LUMONICS COMMON SHARES TO BE ISSUED UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Joint proxy statement/prospectus dated , 1999 and first mailed to GSI stockholders and Lumonics shareholders on or about that date. TABLE OF CONTENTS
PAGE ---- QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1 SUMMARY................................................................... 2 RISK FACTORS.............................................................. 7 Risk Factors Regarding the Merger....................................... 7 Risk Factors Regarding GSI, Lumonics and GSI Lumonics................... 9 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................ 11 GSI SPECIAL MEETING....................................................... 12 Purpose of the GSI Special Meeting...................................... 12 Record Date............................................................. 12 Quorum.................................................................. 12 Required Vote........................................................... 12 Voting Rights; Proxies.................................................. 12 Solicitation of Proxies................................................. 13 LUMONICS SPECIAL MEETING.................................................. 13 Matters to Be Addressed at the Lumonics Special Meeting................. 13 Record Date; Voting Securities.......................................... 15 Ownership............................................................... 16 Quorum.................................................................. 16 Votes Required.......................................................... 16 Solicitation of Proxies................................................. 16 Appointment and Revocation of Proxies................................... 16 Voting of Proxies and Discretionary Authority........................... 17 THE MERGER................................................................ 18 General................................................................. 18 Background of the Merger................................................ 18 Financial Information Exchanged Between GSI and Lumonics................ 20 Recommendation of the Board of Directors of GSI; Reasons for the Merg- er..................................................................... 21 Recommendation of the Board of Directors of Lumonics; Reasons for the Merger................................................................. 22 Structure of the Merger................................................. 24 Opinion of GSI's Financial Advisor...................................... 24 Opinion of Lumonics' Financial Advisor.................................. 29 Interests of Management, Board Members and a Significant Shareholder in the Merger............................................................. 32 Waiver of GSI Rights Agreement.......................................... 33 Accounting Treatment of the Merger...................................... 33 United States Federal Income Tax Consequences........................... 34 Canadian Federal Income Tax Consequences................................ 38 Regulatory Approvals Required........................................... 39 Nasdaq and Toronto Stock Exchange Listing............................... 39 Resale of GSI Lumonics Common Shares.................................... 40 Dissenters' Rights...................................................... 40 THE MERGER AGREEMENT...................................................... 42 Merger Consideration.................................................... 42 Conversion of Shares; Procedures for Exchange of Certificates........... 42 GSI Stock Options....................................................... 43 Effective Time.......................................................... 43
(i)
PAGE ---- Conduct of Business Prior to the Merger ................................ 43 Offers from Other Parties .............................................. 44 Conditions to the Merger................................................ 45 Representations and Warranties.......................................... 46 Termination; Termination Fees........................................... 46 Expenses................................................................ 47 Indemnification of GSI Officers and Directors by GSI Lumonics Following the Merger............................................................. 47 Amendments to the Merger Agreement...................................... 47 STOCK OPTION AGREEMENTS................................................... 48 COMPARATIVE MARKET DATA AND DIVIDENDS..................................... 50 Lumonics................................................................ 50 GSI..................................................................... 51 Dividend Policy......................................................... 51 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF GSI LUMONICS INC............................................................. 52 ENFORCEMENT OF JUDGMENTS AGAINST LUMONICS AND GSI LUMONICS................ 61 WHERE YOU MAY FIND MORE INFORMATION....................................... 61 BUSINESS OF GSI........................................................... 63 Overview................................................................ 63 Business Strategy....................................................... 63 Products and Services................................................... 64 Product List............................................................ 69 Customers............................................................... 70 Sales, Marketing and Customer Support................................... 70 Research and Development................................................ 71 Manufacturing........................................................... 72 Backlog................................................................. 72 Competition............................................................. 72 Patents and Intellectual Property....................................... 73 Legal Proceedings....................................................... 74 Employees............................................................... 75 Properties.............................................................. 76 Selected Financial Data................................................. 77 Supplementary Financial Information .................................... 79 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 80 Security Ownership of Management and Certain Beneficial Owners.......... 88 BUSINESS OF LUMONICS...................................................... 90 Corporate History and Structure......................................... 90 Business of Lumonics ................................................... 90 Corporate Strategy...................................................... 91 Acquisitions and Strategic Relationships ............................... 92 Customers............................................................... 93 Sales, Marketing and Distribution....................................... 93 Order Backlog........................................................... 93 Customer Service and Replacement Parts.................................. 94 Laser Systems........................................................... 94 Cutting, Drilling and Welding Systems .................................. 94
(ii)
PAGE ----- Coding and Marketing Systems........................................... 95 Competition............................................................ 96 Production and Operations.............................................. 97 Research and Development............................................... 97 Patents and Intellectual Property...................................... 97 Legal Proceedings...................................................... 98 Human Resources........................................................ 98 Principal Properties................................................... 99 Other Developments..................................................... 99 New Products........................................................... 100 Expansions............................................................. 100 Selected Financial Data................................................ 100 Management's Discussion and Analysis of Financial Condition and Operat- ing Results........................................................... 102 Security Ownership of Management of Certain Beneficial Owners.......... 110 DESCRIPTION OF LUMONICS COMMON SHARES.................................... 111 MANAGEMENT............................................................... 112 Directors of GSI Lumonics ............................................. 112 Management of GSI Lumonics............................................. 112 Current Executive Officers of GSI...................................... 112 Current Executive Officers of Lumonics................................. 113 Biographies ........................................................... 114 Compensation of Executive Officers..................................... 115 Executive Compensation Agreements...................................... 121 Director Compensation.................................................. 122 Compensation Committee Interlocks and Insider Participation............ 123 Certain Relationships and Related Transactions......................... 123 COMPARATIVE RIGHTS OF SHAREHOLDERS....................................... 124 Ontario vs. New Brunswick.............................................. 124 Massachusetts vs. New Brunswick........................................ 126 CURRENCY PRICES.......................................................... 131 OTHER MATTERS............................................................ 132 LEGAL MATTERS............................................................ 132 EXPERTS.................................................................. 132 GENERAL SCANNING STOCKHOLDER PROPOSALS................................... 132 LUMONICS DIRECTORS' APPROVAL UNDER CANADIAN LAW.......................... 133 INDEX TO FINANCIAL STATEMENTS............................................ FIN-1 Annexes: A. Agreement and Plan of Merger....................................... A-1 B. Stock Option Agreements............................................ B-1 C. Opinion of GSI's Financial Advisor................................. C-1 D. Opinion of Lumonics' Financial Advisor............................. D-1 E. Summary and Text of Section 185 of the Business Corporations Act (Ontario)............................................................. E-1 F. Text of Sections 85 to 98 of Chapter 156B of the Massachusetts Business Corporation Law................................................. F-1 G. Lumonics Resolutions Relating to the Lumonics Proposals............ G-1 H. Draft Articles of Continuance and General By-Law of Lumonics....... H-1
(iii) QUESTIONS AND ANSWERS ABOUT THE MERGER Q: Why are the companies proposing the merger? A: The companies are proposing a merger of equals in order to create a company with greater market and product diversity that is in a better position to develop new uses for the companies' existing technologies. Q: What is meant by a merger of equals? A: The stockholders of GSI and the shareholders of Lumonics, each as a group, will, immediately after the merger, own approximately 50% of the shares of the new entity. We have selected the eight directors of GSI Lumonics equally from the boards of GSI and Lumonics. In addition, GSI Lumonics will be managed by some members of the current management team of each company. Q: Where will the GSI Lumonics common shares be listed? A: The GSI Lumonics common shares will be listed on both The Toronto Stock Exchange and Nasdaq. Q: If I am a GSI stockholder, what will I receive in the merger? A: You will receive 1.347 GSI Lumonics common shares for each share of GSI common stock you own. Q: If I am a Lumonics shareholder, what will happen to my Lumonics common shares in the merger? A: Your Lumonics common shares will remain outstanding following the merger and, without further action on your part, will be GSI Lumonics common shares. Q: When will the merger be completed? A: We intend to complete the merger shortly after we receive the necessary shareholder and regulatory approvals. Q: If I am a GSI stockholder, should I send in my certificates now? A: No. Do not send in your GSI common stock certificates now. After the merger is completed, we will send you written instructions for exchanging your certificates. Q: What do I need to do now? A: Just mail your signed proxy card in the enclosed return envelope as soon as possible, so that your shares of GSI common stock or Lumonics common shares may be represented at the GSI special meeting or Lumonics special meeting, as applicable. Q: What do I do if I want to change my vote? A: You may send in a later-dated, signed proxy card to the Clerk of GSI or to the transfer agent of Lumonics, as applicable, so that it arrives before the appropriate special meeting, or attend the appropriate special meeting and vote in person. 1 SUMMARY This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should read this entire document carefully. Unless this document states otherwise: . references to GSI include all of its subsidiaries as they exist today; . references to Lumonics include all of its subsidiaries as they exist today; . references to GSI Lumonics include all of the companies' subsidiaries after the merger. All dollar amounts indicated by $ are in United States dollars and all dollar amounts indicated by Cdn$ are in Canadian dollars. THE COMPANIES (SEE PAGES 63 AND 90) GENERAL SCANNING INC. LUMONICS INC. 500 Arsenal Street 105 Schneider Road Watertown, MA 02472 Kanata, Ontario K2K 1Y3 (617) 924-1010 (613) 592-1460 www.genscan.com www.lumonics.com. Both GSI and Lumonics design, develop, manufacture and market laser-based advanced manufacturing systems for semiconductor, electronics, aerospace and automotive industries. Although the companies frequently serve similar customers in the same industries, the companies' product lines complement each other, with little overlap. GSI's applications use primarily low- to mid-power lasers integrated into sophisticated manufacturing systems for processing materials at micron-scale accuracy. GSI's applications include machining microelectronic components, inspection of printed circuit boards and repair of semiconductor memory chips. Lumonics' applications use primarily mid- to high- power lasers incorporated into complete advanced manufacturing systems. Lumonics' applications include cutting, drilling, welding and marking a wide range of materials from semiconductor wafers to automotive parts. Each company also conducts significant business outside of the industries they jointly serve. For example, GSI provides the medical industry with systems for diagnostic film imaging, biological scanners used in DNA research and medical chart recorders for critical patient care monitoring. Lumonics is a leading supplier of welding systems used in the manufacture of consumer products such as batteries and razor blades. THE MERGER (SEE PAGE 18) The companies have entered into a merger agreement under which GSI stockholders will receive 1.347 GSI Lumonics common shares in exchange for each share of GSI common stock they hold and will receive cash for any fractional shares. Lumonics shareholders will continue to hold their Lumonics common shares and Lumonics will change its name to GSI Lumonics Inc. The current GSI stockholders and the current Lumonics shareholders will, immediately following the merger, each, as a group, own approximately 50% of the outstanding GSI Lumonics common shares. THE MEETINGS (SEE PAGES 12 AND 13) THE GSI SPECIAL MEETING. At the GSI special meeting, holders of GSI common stock will vote on a proposal to approve and adopt the merger agreement. The holders of a majority of the outstanding shares of GSI common stock must approve the merger agreement in order for the merger to occur. The directors and executive officers of GSI beneficially own as a group approximately % of the shares of GSI common stock. 2 THE LUMONICS SPECIAL MEETING. At the Lumonics special meeting, holders of Lumonics common shares will vote upon: . the approval of the merger agreement and the issuance of Lumonics common shares under the merger agreement, including the issuance of Lumonics common shares upon the exercise of GSI stock options outstanding at the time of the merger; . the continuance of Lumonics into New Brunswick; . the confirmation of a new General By-Law of Lumonics; and . the change of the name of Lumonics to GSI Lumonics Inc. For the merger to occur, the holders of a majority of the Lumonics common shares voting at the Lumonics special meeting by proxy or in person must vote in favor of the merger agreement and share issuance and the by-law confirmation. The holders of at least two-thirds of the Lumonics common shares voting at the Lumonics special meeting by proxy or in person must vote in favor of the continuance and the name change. The Lumonics shareholders must approve all of these proposals in order for the merger to occur. The directors and officers of Lumonics beneficially own as a group approximately % of the outstanding Lumonics common shares. CHANGE OF PROXY VOTE. Lumonics shareholders and GSI stockholders may revoke proxies they have submitted at any time prior to the vote at the special meetings. GSI stockholders should follow the directions on page 12 and Lumonics shareholders should follow the directions on page 17. DISSENTERS' RIGHTS (SEE PAGE 40) Under Chapter 156B of the Massachusetts Business Corporation Law, holders of GSI common stock who do not vote in favor of the merger and who fully comply with the Massachusetts law requirements will have the right to an appraisal of their GSI common stock and to receive a cash payment for their shares instead of receiving common shares of GSI Lumonics. Under the Business Corporations Act (Ontario), holders of Lumonics common shares who send written objection to the continuance of Lumonics to New Brunswick and who fully comply with the dissent procedure under Ontario law will be entitled to be paid the cash fair value of their Lumonics common shares. If you fail to take any necessary step in connection with the exercise of your dissenters' rights, you may lose your dissenter's rights. OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 24 AND 29) Needham & Company, Inc., GSI's financial advisor, delivered its written opinion dated October 27, 1998 to the GSI Board of Directors. Needham's opinion states that, as of the date of the opinion and subject to specific matters stated in the opinion, the 1.347 GSI Lumonics common shares that GSI stockholders will receive for each share of GSI common stock is fair to the GSI stockholders from a financial point of view. CIBC Wood Gundy Securities Inc., Lumonics' financial advisor, delivered its written opinion dated October 27, 1998 to the Lumonics Board of Directors. CIBC Wood Gundy's opinion states that the merger is fair to the Lumonics shareholders from a financial point of view. For information on the assumptions made, matters considered and limits of the review undertaken by the Companies' financial advisors, see "The Merger-- Opinion of GSI's Financial Advisor" and "The Merger--Opinion of Lumonics' Financial Advisor." We have attached the opinion of GSI's financial advisor as Annex C and the opinion of Lumonics' financial advisor as Annex D to this document. TAX CONSEQUENCES (SEE PAGES 34 AND 38) It is not currently known whether or not the merger will require GSI stockholders to recognize gain for U.S. federal income tax purposes. We urge you to consider carefully the discussion of the tax consequences related to the merger and to review these tax consequences with your tax advisor. 3 EFFECT OF THE MERGER ON MANAGEMENT AND BOARD MEMBERS (SEE PAGE 32) The Board of Directors of GSI Lumonics will have eight members, four of whom currently serve on Lumonics' Board of Directors and four of whom currently serve on GSI's Board of Directors. In addition, some members of current management of GSI and Lumonics will join the management team of GSI Lumonics. In addition, GSI and its executive officers have, with one exception, amended their key officer and manager retention agreements in connection with the merger to limit the benefits they could receive under their agreement. CONDITIONS TO THE MERGER (SEE PAGES 39 AND 45) For the merger to occur, conditions specified in the merger agreement must be satisfied, including: . obtaining approval of the merger under the Hart-Scott-Rodino Antitrust Improvement Act; . obtaining the requisite shareholder approvals; . confirming that the shares of GSI common stock dissenting to the approval of the merger agreement and the Lumonics common shares dissenting to the continuance of Lumonics into New Brunswick does not exceed the amount prescribed by the merger agreement; and . confirming each party's compliance with the merger agreement. TERMINATION FEE (SEE PAGE 46) If either company receives an alternative proposal from a third party and the merger agreement terminates, the party that received the alternative proposal may be required to pay a termination fee. The termination fee would be equal to $4 million, plus expenses up to $500,000. STOCK OPTION AGREEMENTS (SEE PAGE 48) Each of GSI and Lumonics granted to the other an option to purchase approximately 19.9% of its common shares outstanding immediately before exercise of the relevant stock option agreement. These options may be exercised under substantially the same circumstances that require a company to pay the termination fee. The options may discourage offers by third parties to acquire GSI or Lumonics prior to the merger. The stock option agreements terminate upon completion of the merger. SUMMARY PRO FORMA FINANCIAL INFORMATION We prepared the following pro forma summary unaudited consolidated financial information to illustrate the estimated effects of the merger. You should read the information below in conjunction with the financial statements of Lumonics and GSI contained in this document, including the related notes. You should not rely on the pro forma information as being indicative of the historical results we would have had without the merger or the future results that we will achieve after the merger. The unaudited information reflects certain comparative per share data related to book value per share and income (loss) per share from continuing operations: . on a historical basis for GSI and Lumonics; . on a pro forma combined basis per GSI Lumonics common share which shows the data for a theoretical common share of GSI Lumonics as if the companies had historically been combined; and . on an equivalent pro forma basis per share of GSI common stock which shows the data for a theoretical share of GSI common stock as if the companies had historically been combined. The equivalent per share data for GSI has been computed by multiplying the GSI Lumonics pro forma amounts by the conversion number of 1.347. 4 GSI LUMONICS INC. SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
PRO FORMA PRO FORMA GSI LUMONICS SUBTOTAL ADJUSTMENTS CONSOLIDATED -------- -------- -------- ----------- ------------ (THOUSANDS OF US DOLLARS EXCEPT FOR SHARE AND PER SHARE AMOUNTS) OPERATIONS DATA (NINE MONTHS ENDED SEPT. 30, 1998): Sales................... $141,684 $110,210 $251,894 $251,894 Gross profit............ 65,826 31,862 97,688 97,688 Net loss for the period................. (742) (5,336) (6,078) (540) (6,618) ======== ======== ======== ======= ======== Net loss per common share Basic (000's)......... $ (0.06) $ (0.31) $ (0.19) Diluted (000's)....... $ (0.06) $ (0.31) $ (0.19) Adjusted weighted average common shares Basic................. 12,560 17,088 34,130 Diluted............... 12,560 17,088 34,130 BALANCE SHEET DATA (SEPT. 30, 1998): Working capital......... $ 59,668 $ 90,443 $150,111 $(5,448) $144,663 Total assets............ 113,457 164,994 278,451 5,820 284,271 Long-term debt.......... 1,516 4,439 5,955 5,955 Stockholders' equity.... 78,553 124,683 203,236 (2,076) 201,160
PRO FORMA PRO FORMA GSI LUMONICS SUBTOTAL ADJUSTMENTS CONSOLIDATED -------- -------- -------- ----------- ------------ (THOUSANDS OF US DOLLARS EXCEPT FOR SHARE AND PER SHARE AMOUNTS) OPERATIONS DATA (YEAR ENDED DECEMBER 31, 1997): Sales..................... $181,530 $177,328 $358,858 $358,858 Gross profit.............. 86,725 65,922 152,647 152,647 Net income for the year... 5,109 11,912 17,021 (905) 16,116 ======== ======== ======== ==== ======== Net income per common share Basic (000's)........... $ 0.42 $ 0.75 $ 0.49 Diluted (000's)......... $ 0.40 $ 0.72 $ 0.48 Adjusted weighted average common shares Basic................... 12,065 15,989 33,031 Diluted................. 12,657 16,454 33,841
PRO FORMA PER SHARE DATA
GSI LUMONICS PRO FORMA EQUIVALENT HISTORICAL HISTORICAL COMBINED PRO FORMA ---------- ---------- --------- ---------- Basic income (loss) per share from continuing operations: For the year ended December 31, 1997 ........................... $ 0.42 $ 0.75 $ 0.49 $ 0.66 For the first three quarters of 1998............................ $(0.06) $(0.31) $(0.19) $(0.26) Book value per share(a)............ $ 6.21 $ 7.33 $ 5.91 $ 7.96
(a) As of September 30, 1998 for Lumonics and as of October 3, 1998 for GSI. GSI historical book value per share excludes treasury stock. Neither GSI nor Lumonics has ever paid any cash dividends on their shares of common stock or common shares, respectively. 5 COMPARATIVE STOCK PRICES The following table discloses the closing sale price per share of GSI common stock on Nasdaq and closing sale price per Lumonics common share on The Toronto Stock Exchange on October 27, 1998, the business day preceding the public announcement of the merger. The GSI equivalent per share price was calculated by multiplying the closing sale price for a Lumonics common share by the conversion number of 1.347, and dividing that product by the exchange rate of Canadian dollars to US dollars of Cdn$1.5395 on October 27, 1998. The equivalent share price indicates what the per share price of GSI common stock would have been if the merger had occurred on October 27 and the merger did not affect the per share price of Lumonics common shares on that date.
PRICE PER SHARE ------------------------------------------------------------------------------------ GSI EQUIVALENT PER SHARE GSI LUMONICS PRICE ------ -------- ---------- $5.125 Cdn$8.75 $7.66
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES This document includes financial information relating to GSI derived from GSI's consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. Financial information relating to Lumonics was derived from Lumonics' consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles and recast in United States dollars. Pro forma financial information relating to GSI Lumonics was derived from historical financial information for GSI and Lumonics prepared in accordance with U.S. generally accepted accounting principles. A financial statement supplement is being delivered to Lumonics shareholders together with this document, as required by applicable Canadian provincial securities regulations. The supplement contains historical financial statements of GSI and Lumonics prepared in accordance with generally accepted accounting principles in Canada, and pro forma financial information of GSI Lumonics derived from financial statements prepared in accordance with Canadian generally accepted accounting principles. GSI Lumonics intends to prepare and distribute to its shareholders annual and quarterly financial information in US dollars prepared in accordance with US generally accepted accounting principles. GSI Lumonics will also comply with the financial disclosure requirements of applicable Canadian provincial securities regulations by preparing and distributing to its shareholders annual and quarterly financial information in accordance with Canadian generally accepted accounting principles. 6 RISK FACTORS SHAREHOLDERS OF LUMONICS AND STOCKHOLDERS OF GSI SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN CONJUNCTION WITH THE REST OF THIS DOCUMENT. RISK FACTORS REGARDING THE MERGER EXCHANGE RATIO REMAINS THE SAME EVEN IF STOCK PRICES CHANGE. The number of GSI Lumonics common shares issuable in exchange for one share of GSI common stock is a fixed ratio. This ratio was determined on October 27, 1998 and will not vary with increases or decreases in the price of either Lumonics common shares or GSI common stock. The price of GSI common stock and Lumonics common shares may vary for any of the following reasons: . changes in the business, operations or prospects of Lumonics or GSI; . market assessments of the likelihood that the merger will occur; . the timing of the merger; . the prospects of the merger and post-merger operations; . regulatory considerations; . settlement of patent litigation claims; or . general conditions in the laser industry; COMPANIES MAY NOT REALIZE SYNERGIES AFTER THE MERGER. The merger involves the integration of two companies that have previously operated independently. The companies believe they will benefit from the merger. However, there is a risk that combining the two companies' businesses will take longer than anticipated, or, even if achieved in an efficient, effective and timely manner, will not result in results of operations and financial conditions superior to what each company would have achieved independently. INTEGRATING OPERATIONS IN A MERGER OF EQUALS TRANSACTION MAY BE DIFFICULT. Lumonics and GSI believe that a merger of equals transaction may present more difficulties in integrating the operations of the constituent companies than most mergers, because neither constituent company is intended to be dominant. In the case of the merger of GSI and Lumonics, the board of directors and senior executives of the merged company will be drawn equally from both companies. The parties intend to integrate their research and development programs, and to reduce their reliance on third party distributors and component suppliers. The parties will also have to coordinate their product offerings and management information systems. GSI Lumonics management may be temporarily distracted from the company's day-to-day business until integration is completed. The integration of product lines could also cause confusion or dissatisfaction among existing customers of Lumonics and GSI. There is a risk that integration will not occur smoothly or successfully. The inability of management to successfully integrate the operations of the two companies could harm the business, results of operations and financial condition of GSI Lumonics including, without limitation, product development cycles and marketing efforts. As is common in the technology industry, competitors may attempt to recruit key employees and solicit customers of the companies during the merger and integration process. A loss of employees or customers could also harm the business, results of operations and financial condition of GSI Lumonics. MERGER MAY STIMULATE COMPETITION. The merger may cause GSI's and Lumonics' competitors to enter business combinations, accelerate product development or aggressively reduce prices. These and other competitive practices could create more powerful or aggressive competitors. There is a risk that GSI Lumonics will not be able to compete successfully as future markets evolve. Increased competitive pressure could lead to lower sales of and prices for GSI Lumonics' products, and this could harm GSI Lumonics' business, results of operations and financial condition. 7 OWNERSHIP WILL BE DILUTED AND VOTING POWER WILL DECLINE. After the merger, a substantial amount of additional GSI Lumonics common shares will be available for trading in the public market. The additional shares in the market may cause the price of the GSI Lumonics common shares to decline. In addition, the voting power of the existing Lumonics shareholders will substantially decline. Finally, if holders of GSI Lumonics common shares sold a significant portion of their stock in a short period of time, the market price of GSI Lumonics common share could be reduced. THE COMPANIES MAY INCUR SUBSTANTIAL EXPENSES AND PAYMENTS IF THE MERGER FAILS TO OCCUR. The merger may not occur. If the merger does not occur, the companies will each have incurred substantial expenses in connection with the transactions described in this document. In addition, if either party receives an alternative transaction proposal from a third party and the merger agreement is afterwards terminated the party receiving the alternative proposal may be required to reimburse the other party for its transaction expenses up to $500,000 and pay a termination fee of $4 million. THE COMPANIES GRANTED CROSS-OPTIONS TO PURCHASE SUBSTANTIAL AMOUNTS OF STOCK. GSI and Lumonics have granted to each other an option to purchase approximately 19.9% of its common stock. GSI or Lumonics may exercise these options in circumstances where it would be entitled to receive its transaction expenses and a termination fee. In addition, a party may have the right to require repurchase of the option. The exercise of an option, or the related repurchase rights, could harm the grantor of the option. See "Stock Option Agreements." THERE MAY BE FUTURE CHARGES AGAINST EARNINGS. Generally accepted accounting principles in the United States require use of the purchase method of accounting to account for the merger. The total purchase price will be allocated to the assets acquired and liabilities assumed based on their fair value. If the purchase price exceeds the fair value of the net tangible assets, GSI Lumonics will allocate the excess purchase price, based on independent expert valuation, to intangible assets which will include purchased in-process research and development and acquired technology, with the remainder to goodwill. While the amortization or write-off of these intangibles will have no effect on GSI Lumonics' cash flow, such amortization or write-off may reduce GSI Lumonics' reported earnings and earnings per share. Based on the preliminary purchase price allocation for the transaction, management has estimated that $6,802,000 of the purchase price will be allocated to purchased in-process research and development and will be expensed at the time of the merger, $6,801,000 will be allocated to acquired technology and will be amortized over 60 months and $2,448,000 will be allocated to goodwill and will be amortized over 15 years. The final purchase price allocation may differ significantly from the preliminary purchase price allocation. The difference could result in significant changes to the charges referenced above. IT MAY BE DIFFICULT TO EFFECT OR ENFORCE JUDGMENTS AGAINST LUMONICS AND GSI LUMONICS DUE TO FOREIGN LOCATION. Lumonics is a corporation organized under the laws of Ontario, Canada with its principal place of business in Kanata, Ontario. GSI Lumonics will be a corporation organized under the laws of New Brunswick, Canada. Some of the directors and officers and some experts named in this document are residents of Canada and their assets and Lumonics' assets are located outside the United States. Consequently, it may be difficult for United States investors to commence legal action within the United States against Lumonics, GSI Lumonics, or their directors or officers, or to collect on a judgment of a United States court. Investors should not assume that courts in Canada would enforce judgments of US courts based on US securities laws. Lumonics has appointed Warren Scott Nix as its agent for service of process in any action in any US court arising out of the registration of GSI Lumonics common shares. THE MERGER MAY REQUIRE RECOGNITION OF GAIN FOR GSI STOCKHOLDERS. The exchange of GSI common stock for GSI Lumonics common shares as contemplated by the merger may require recognition of gain under US federal income tax laws. See "The Merger--Certain United States Federal Income Tax Consequences." 8 RISK FACTORS REGARDING GSI, LUMONICS AND GSI LUMONICS THE COMPANIES EXPERIENCE QUARTERLY FLUCTUATIONS IN OPERATIONS. Lumonics and GSI have experienced and expect to continue to experience significant fluctuations in their quarterly operating results due to the following factors: . market acceptance of new and enhanced products, . timing and shipment of significant orders, . mix of products sold, . exchange rate fluctuations, . length of sales cycles and . cycles in the markets Lumonics and GSI serve. In addition, GSI Lumonics' net sales and operating results for a quarter will depend on generating and shipping orders in the same quarter that the order is received. The failure to receive anticipated orders or delays in shipments near the end of a quarter, due to rescheduling, cancellations or unexpected manufacturing difficulties, may cause net sales in a particular quarter to fall significantly below expectations. This could hurt GSI Lumonics' operating results for such quarter. THE COMPANIES RELY ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. Each company protects its intellectual property through patent filings, confidentiality agreements and the like. However, these methods of protection are uncertain and costly, and they may not succeed. In addition, each company may face allegations that it is violating the intellectual property rights of third parties. These types of allegations are common in the industry, and GSI in particular is subject to a number of potentially significant pending patent infringement actions. An adverse determination in a lawsuit could have a material adverse effect on GSI's business, financial condition, and results of operations. See "Business of GSI--Legal Proceedings". CUSTOMERS MAY DEFER PURCHASING DECISIONS PENDING EVALUATION OF GSI LUMONICS' FUTURE PRODUCT STRATEGY. Distributors, resellers and potential end users of Lumonics' and GSI's products may not continue their current buying patterns in light of the announced merger. Customers may defer purchasing decisions as they evaluate GSI Lumonics' future product strategy and consider the product offerings of competitors. If substantial numbers of customers defer purchases, these deferrals could harm the business, results of operations and financial condition of Lumonics, GSI or GSI Lumonics. INDUSTRIES SERVED BY THE COMPANIES MAY BE SUBJECT TO CYCLICAL FLUCTUATIONS. Several significant markets for Lumonics' and GSI's products have historically been subject to economic fluctuations, due to the substantial capital investment required in the industries served. In the past, this has led to significant short-term over or under capacity in some market segments, particularly in the semiconductor, aerospace and automotive industries where the companies generated more than 30% of their revenues on a combined basis in the nine months ended September 30, 1998. These fluctuations may continue and could have an adverse impact on GSI Lumonics' operations. THIRD PARTIES MAY BE RELUCTANT TO ENTER STRATEGIC RELATIONSHIPS WITH GSI LUMONICS. By increasing the scope of the businesses of GSI and Lumonics, the merger may make it more difficult for GSI Lumonics to enter into relationships with strategic partners, including customers, some of whom may view GSI Lumonics as a more direct competitor than either GSI or Lumonics. THE COMPANIES DEPEND ON LIMITED SOURCE SUPPLIERS. For some products, GSI obtains components from a single source. Disruption of supply could cause substantial manufacturing delays and additional cost which could harm GSI Lumonics' business, results of operations and financial condition. The companies also rely on a limited number of suppliers to provide materials and components and independent contractors to manufacture subassemblies for some of their products. If any suppliers or subcontractors experienced 9 difficulties that resulted in a reduction or interruption in supply to GSI Lumonics or a failure to meet any of GSI Lumonics' manufacturing requirements, GSI Lumonics' business, results of operations and financial condition would be harmed until GSI Lumonics secured alternative sources. Lumonics' and GSI's manufacturers may not be able to meet the future requirements of GSI Lumonics, and manufacturing services may not continue to be available to GSI Lumonics at favorable prices, or at all. INTRODUCTION OF NEW AND ENHANCED PRODUCTS MUST BE TIMELY. The markets for Lumonics' and GSI's products experience, and the markets for GSI Lumonics' products will experience, rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Approximately one-half of GSI's 1997 sales were from products introduced after 1995. The development of new technology is a complex and uncertain process requiring high levels of innovation and accurate anticipation of technological and market trends. GSI Lumonics may have to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excess inventory and ensure adequate supplies of new products. GSI Lumonics may not successfully develop, introduce or manage the transition of new products. Failed market acceptance of new products or problems associated with new product transitions could harm GSI Lumonics' business and financial condition and results of operations, particularly on a quarterly basis. FOREIGN EXCHANGE AND INTEREST RATES MAY FLUCTUATE. GSI Lumonics will report results in US dollars. Due to the geographic mix of GSI Lumonics' customers, any fluctuation in the value of the US dollar relative to the Canadian dollar, pounds sterling, German mark and the new "euro" currency may result in variations in the sales and earnings of GSI Lumonics expressed in US dollars. In addition, material portion of GSI Lumonics' revenues and expenses will be generated or incurred in Canadian dollars, pounds sterling and euro and translated into US dollars for the purposes of reporting GSI Lumonics' results of operations. The exchange rate between US dollars and other currencies has varied significantly over the last five years. Hedge contracts and currency swap agreements are currently used by Lumonics' and will be part of GSI Lumonics' foreign currency hedging policy. Risks associated with these instruments and other hedging instruments include: . elimination of potential gain if currencies change in relative value and GSI Lumonics cannot benefit from such movements as a result of entering into contracts and agreements; . credit risks with counterparties; . market risk if contracts or agreements are terminated before maturity in which case losses can be incurred if the currencies move in an unfavorable direction and; . liquidity risk relating to the transaction costs associated with the cancellation of such contracts and agreements. YEAR 2000 PROBLEMS MAY AFFECT THE COMPANIES. Many computer systems experience problems handling dates beyond the year 1999. GSI and Lumonics are assessing the readiness of their computer systems and products and believe they are taking the necessary actions to modify or replace software as required. Lumonics and GSI expect to implement successfully the systems and programming changes necessary to address Year 2000 issues, and do not believe that the associated costs will have a material effect on GSI Lumonics' results of operations or financial condition. There may, however, be a delay in, or increased costs associated with, the implementation of the required changes. GSI and Lumonics are also assessing the ability of major customers and suppliers to handle Year 2000 issues. There is a risk that third parties will not convert or replace their systems sufficiently or in a timely manner. GSI Lumonics' inability to implement such changes, failure to meet customer or competitive requirements on a timely basis, or the failure of the systems or equipment of third parties could harm future results of operations or financial condition. LUMONICS HAS A BUSINESS RELATIONSHIP WITH A SIGNIFICANT SHAREHOLDER. Upon completion of the merger, Sumitomo Heavy Industries Ltd. will indirectly control approximately 18% of GSI Lumonics' outstanding common shares and will be in a position to elect at least one director to the Board of Directors of 10 GSI Lumonics. In addition, Lumonics currently relies on Sumitomo for its sales into Japan. In fiscal 1997, sales to or through Sumitomo represented 10.7% of Lumonics' total sales. Sumitomo is not required to purchase any minimum quantities of Lumonics' products and may terminate its distribution agreement on three months notice. Lumonics and Sumitomo have discussed exploring initiatives to improve sales and distribution of Lumonics' products in Japan. However, there is a risk that Sumitomo will not continue to purchase GSI Lumonics' systems in similar quantities. ---------------- CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This document contains forward-looking statements, including, without limitation, statements concerning possible or assumed future results of operations of GSI, and those preceded by, followed by or that include the words believes, expects, anticipates or similar expressions. For those statements, GSI claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed under "Risk Factors" and elsewhere in this document, could affect the future results of GSI and GSI Lumonics, and could cause those results to differ materially from those expressed in the forward-looking statements: . changes in economic conditions in the markets served by the companies; . a significant delay in completing the merger; . future regulatory actions and conditions in the companies' operating areas; and . other risks and uncertainties described in GSI's public announcements and filings. 11 GSI SPECIAL MEETING PURPOSE OF THE GSI SPECIAL MEETING At the GSI Special Meeting, holders of GSI common stock will consider and vote on the merger agreement. Holders of GSI common stock may also consider and vote on matters related to the conduct of the GSI special meeting. THE BOARD OF DIRECTORS OF GSI HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT GSI STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. RECORD DATE The GSI Board has fixed the close of business on , 1999 as the record date for determining which shareholders are entitled to notice of and to vote at the GSI special meeting. As of the record date, there were shares of GSI common stock issued and outstanding, each of which entitles the holder to one vote. QUORUM Before business may be conducted at a GSI special meeting, there must be a quorum of shareholders. A quorum exists when a majority of the GSI voting stock is represented at the meeting in person or by proxy. REQUIRED VOTE For the merger to occur, the holders of a majority of the outstanding shares of GSI common stock must vote in favor of the merger agreement. As of the GSI record date, the directors and executive officers of GSI and their affiliates beneficially owned as a group approximately % of the outstanding shares of GSI common stock. The directors and executive officers of GSI have indicated to GSI that they and their affiliates presently intend to vote their shares in favor of the merger agreement. VOTING RIGHTS; PROXIES All shares of GSI common stock represented by properly executed proxies will, unless such proxies have been previously revoked, be voted as indicated on the proxies. IF YOU DO NOT INDICATE INSTRUCTIONS IN YOUR PROXY, YOUR SHARES OF GSI COMMON STOCK WILL BE VOTED FOR THE MERGER AGREEMENT. GSI does not know of any matter other than the merger agreement that is to come before the GSI special meeting. The persons acting under the enclosed proxy will have the discretion to vote on any other matter properly presented at the GSI special meeting using their best judgment, unless such authorization is expressly withheld in the proxy. If, however, the special meeting is adjourned to solicit additional proxies for the merger agreement, no proxy voted against the merger agreement will be voted in favor of the adjournment. If you execute a proxy, you may revoke it at any time before it is exercised by: . giving a subsequent proxy; . delivering to Victor H. Woolley, Clerk of GSI, a written revocation prior to the voting of the proxy at the GSI special meeting; or . attending the GSI special meeting and informing the Clerk of GSI in writing that you wish to vote your shares in person. Mere attendance at the GSI special meeting will not revoke your proxy. If you would like to attend the meeting and your shares are held by a broker, bank or other nominee, you must bring to the meeting a recent brokerage statement or a letter from the nominee confirming your beneficial ownership of the shares. You must also bring a form of personal identification. In addition, if you wish to vote your shares at the meeting, you must obtain from the nominee a proxy issued in your name. 12 If you abstain from voting as to a particular matter, or your broker or nominee indicates on a proxy that he or she lacks discretionary authority to vote as to a particular matter, your shares will be counted as present to determine whether a quorum exists. However, because the merger agreement and the merger must be approved by the holders of a majority of the shares of GSI common stock, any abstention or broker non-vote will have the same effect as a vote against the merger. The GSI special meeting may be postponed or adjourned for any reason. At a subsequent reconvening of the GSI special meeting, all proxies except for any proxies that have been revoked will be voted in the same manner as they would have been voted at the original meeting. SOLICITATION OF PROXIES GSI will assume all expenses of GSI's solicitation of proxies, including the cost of preparing and mailing this document to GSI stockholders. GSI has retained Mackenzie Partners, Inc. to assist it in soliciting proxies and will pay approximately $10,000, plus reasonable out of pocket expenses, in connection with the solicitation. PROXIES MAY ALSO BE SOLICITED FROM GSI STOCKHOLDERS BY DIRECTORS, OFFICERS AND EMPLOYEES OF GSI IN PERSON OR BY TELEPHONE, TELEGRAM OR OTHER MEANS OF COMMUNICATION. GSI will reimburse the directors, officers and employees who solicit proxies for reasonable out-of- pocket expenses; GSI will not, however, otherwise compensate them for the solicitation. GSI also plans to make arrangements to have proxy solicitation materials forwarded to beneficial owners of shares held by brokerage houses, custodians, nominees and fiduciaries. GSI will reimburse these parties for their reasonable expenses incurred in forwarding the materials. The merger agreement is of great importance to the stockholders of GSI. Accordingly, we urge you to read and carefully consider the information presented in this document, and to complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope. LUMONICS SPECIAL MEETING MATTERS TO BE ADDRESSED AT THE LUMONICS SPECIAL MEETING Merger Agreement and Share Issuance Proposal Lumonics shareholders at the Lumonics special meeting will be asked to approve the merger agreement and the issuance of Lumonics common shares which, as a result of the name change, will be GSI Lumonics common shares. Based on the shares of GSI common stock outstanding on the GSI record date and the conversion ratio of 1.347, approximately GSI Lumonics common shares will be issued to existing GSI stockholders under the merger agreement. These shares will represent approximately 50% of the outstanding GSI Lumonics common shares immediately after the merger. If you approve the merger agreement and share issuance, you will also approve the assumption by GSI Lumonics of all options and warrants to purchase shares of GSI common stock outstanding at the effective time of the merger. Approximately GSI Lumonics common shares will be issuable upon the exercise of assumed GSI stock options. The shareholders of Lumonics will consider the merger agreement and share issuance and if thought fit, pass the merger and share issuance resolution included in Annex G to this document. The resolution must be approved by a majority of the votes cast by the Lumonics shareholders who vote on the resolution at the special meeting. Continuance into New Brunswick Lumonics is incorporated under the Business Corporations Act (Ontario), which has the following requirements for directors: 13 . that a majority of the members of the Board of Directors and of each committee of the Board be resident Canadians; and . that the Board not transact business at a meeting of directors unless a majority of the directors present are resident Canadians unless the resident Canadians not attending previously approved the matter being considered. Lumonics and GSI have agreed that after the merger, the GSI Lumonics Board of Directors will consist of eight directors, four of whom have been selected from the current members of the GSI Board of Directors and four of whom have been selected from the current members of the Lumonics Board of Directors. A majority of the proposed GSI Lumonics Board of Directors are not residents of Canada. Thus, in order to complete the merger, GSI Lumonics must not be constrained by the Ontario residency requirements. The Business Corporations Act (New Brunswick) does not have any provisions analogous to the Ontario residency requirements for boards of directors. Lumonics shareholders will be asked to approve the continuance of Lumonics to New Brunswick following approval of the merger. The continuance will not have any material legal, business or tax consequences for GSI Lumonics. The continuance will afford GSI Lumonics the flexibility to structure its board of directors for the merger and its business needs. Differences between the Ontario and New Brunswick laws are summarized under "Comparative Rights of Shareholders." GSI Lumonics will continue to be bound by applicable Canadian provincial securities laws and The Toronto Stock Exchange rules, which currently impose auditing, financial reporting, continuous disclosure and other requirements relating to the rights of shareholders. Lumonics has included provisions in the draft articles of continuance and By-Law attached as Annex H to this document which would maintain some protections which the New Brunswick laws do not provide. These provisions relate to shareholder proposals, requisitions of meetings, and applications to court for investigations of GSI Lumonics. The shareholders of Lumonics will consider the continuance, and if thought fit, pass the continuance special resolution included in Annex G to this document. The special resolution must be approved by not less than two-thirds of the votes cast by the Lumonics shareholders who vote on the special resolution. Holders of Lumonics common shares have dissent rights concerning the continuance. See "The Merger--Dissenters' Rights." Approval of New General By-Law The current General By-Laws of Lumonics, By-Laws No. 18 and No. 19, conform to Ontario law. If Lumonics is continued under New Brunswick law, it will be necessary to create a new General By-Law. The directors of Lumonics have adopted, conditional upon completion of the continuance, By- Law No. 1, which is a General By-Law governing the business and affairs of GSI Lumonics. By-Law No. 1 is substantially similar to By-Laws No. 18 and No. 19, except as described below. By-Law No. 1 repeals By-Laws No. 18 and No. 19. The full text of By-Law No. 1 is attached in Annex H to this document. By-Law No. 1 sets out general regulations which govern the internal affairs of GSI Lumonics, including the following: . establishing the quorum for meetings of directors and shareholders; . establishing the manner of conducting meetings of directors and shareholders; . establishing signing authorities; . establishing the duties of the officers of the corporation; and . establishing the authority of designated persons to contract on behalf of the corporation. 14 The current By-Laws of Lumonics provide that a quorum is one holder of Lumonics common shares present in person or by proxy. Under By-Law No. 1, the quorum required for a shareholders' meeting of GSI Lumonics is the presence of holders of 20% of the issued and outstanding shares entitled to vote at such meeting. Lumonics shareholders must confirm By-Law No. 1 in order for the continuance to occur. By-Law No. 1 will be effective as a By-Law of GSI Lumonics upon the continuance. The shareholders of Lumonics will be asked to consider By-Law No. 1, and if deemed advisable, will pass the By-Law resolution included in Annex G to this document. The resolution must be approved by a majority of the Lumonics shareholders who vote on the resolution. Name Change In connection with and subject to the completion of the merger, Lumonics shareholders will be asked to approve the change of the name Lumonics to GSI Lumonics Inc. The merger agreement provides that, as a condition to the completion of the merger, Lumonics will change its name to GSI Lumonics Inc. Lumonics shareholders will be asked to consider the name change, and if thought fit, to pass the special resolution relating to the name change, included in Annex G to this document. The special resolution must be approved by not less than two-thirds of the votes cast by the Lumonics shareholders who vote on the special resolution. Other Matters. Other than the approval of the preceding matters, Lumonics is not presently aware of any other business to be brought before the Lumonics special meeting. If any matters come before the special meeting which are not directly referred to in this document or the enclosed proxy, including incidental matters, the proxyholders will vote the shares represented by the proxies based on the recommendations of the management of Lumonics. THE BOARD OF DIRECTORS OF LUMONICS HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND SHARE ISSUANCE, THE CONTINUANCE, THE BY-LAW CONFIRMATION AND THE NAME CHANGE. RECORD DATE; VOTING SECURITIES The Lumonics Board has fixed , 1999 as the Lumonics record date for determining those Lumonics shareholders entitled to receive notice of the Lumonics special meeting. If a Lumonics shareholder does not receive a notice, however, the shareholder is not deprived of a vote at the special meeting. A person who has acquired Lumonics common shares after the Lumonics record date is entitled to vote those shares at the Lumonics special meeting by: . producing properly endorsed share certificates or otherwise establishing share ownership; and . prior to the special meeting, demanding in writing to be included on the list of Lumonics shareholders entitled to vote at the special meeting. Lumonics is authorized to issue an unlimited number of common shares of which were issued and outstanding on the record date and are entitled to vote at the special meeting. Lumonics shareholders are entitled to one vote for each common share registered in their name. 15 OWNERSHIP Each person known by the directors or senior officers of Lumonics to beneficially own or exercise control or direction over 10% or more of the common shares is disclosed as follows:
PERCENTAGE OF OUTSTANDING SHARES AS OF SHAREHOLDER SHARES , 1999 ----------- --------- ----------- Sumitomo Heavy Industries Ltd. ........................... 6,078,238 %
QUORUM A quorum is required to conduct business at a special meeting. A quorum for the Lumonics special meeting is the presence in person or by properly executed proxy of one holder of Lumonics common shares entitled to vote. VOTES REQUIRED The merger agreement and share issuance and the By-Law confirmation must be approved by the holders of a majority of Lumonics common shares voting at the special meeting. The continuance and the name change must be approved by the holders of two-thirds of Lumonics common shares voting at the special meeting. As of the Lumonics record date, the directors and executive officers of Lumonics, their affiliates and Sumitomo beneficially owned as a group approximately % of the outstanding Lumonics common shares. They have indicated that they intend to vote in favor of all of the Lumonics proposals. SOLICITATION OF PROXIES We are providing this document in connection with a special meeting of Lumonics shareholders. We will hold the special meeting at the time and place and for the purposes described in the accompanying notice and at any adjournment(s). With this document, we are soliciting proxies by or on behalf of Lumonics management. While we expect to solicit proxies primarily by mail, management, employees or agents of Lumonics may solicit proxies in person or by telephone. Lumonics will assume all costs of this solicitation. APPOINTMENT AND REVOCATION OF PROXIES The individuals named in Lumonics' form of proxy are directors or officers of Lumonics. A Lumonics shareholder may appoint a proxyholder who is not listed on the form of proxy by deleting the names in the proxy related to Lumonics, inserting a person's name in the blank space provided, and returning the proxy or by completing a substitute form of proxy and returning it. A proxy will only be valid if it is complete and received by Lumonics' transfer agent 48 hours or more before the day of the special meeting. Saturdays, Sundays and holidays are not included in the calculation of time. Lumonics' transfer agent is Montreal Trust Company of Canada, 151 Front Street West, 8th Floor, Toronto, Ontario M5J 2N1. A Lumonics shareholder who has given a proxy has the right to revoke it at any time before it is exercised. In addition to revocation in any other manner permitted by law, a Lumonics shareholder may revoke a proxy by doing all of the following: . Preparing a written request to revoke a proxy. . Signing the request or having an attorney sign the request. If an attorney signs the request, the attorney must have written authority to do so. If the shareholder is a corporation, an authorized officer or attorney must sign the request. . Sending the request to Lumonics' transfer agent or Lumonics' head office before 4:30 p.m. Toronto time on the business day before the day of the special meeting or giving the request to the chairman of the special meeting before the meeting begins. 16 VOTING OF PROXIES AND DISCRETIONARY AUTHORITY You may direct management how to vote your shares on each proposal. IF YOU GIVE NO SPECIFIC VOTING INSTRUCTIONS, MANAGEMENT OF LUMONICS WILL VOTE YOUR SHARES "FOR" EACH MATTER. THE PERSON HOLDING YOUR PROXY WILL HAVE THE RIGHT TO EXERCISE DISCRETIONARY AUTHORITY TO VOTE ON ANY AMENDMENTS TO OR VARIATIONS IN ANY MATTERS IDENTIFIED IN THE NOTICE, AND OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE LUMONICS SPECIAL MEETING. Management will use their best judgment on such matters. The management of Lumonics knows of no amendment, variation or other matter which may be presented to the Lumonics special meeting. A person appointed as a proxyholder by a shareholder will be entitled to vote the shares represented by the proxy the form of proxy is properly completed and delivered and has not been revoked. 17 THE MERGER This section of this document, as well as the next two sections entitled "The Merger Agreement" and "Stock Option Agreements," describe the proposed merger, the merger agreement and the stock option agreements. To the extent that it relates to the merger agreement or the stock option agreements, the following description is not complete and is qualified in its entirety by reference to the merger agreement which is attached as Annex A and the stock option agreements which are attached as Annex B. We urge you to read the merger agreement and the stock option agreements in their entirety. GENERAL The merger will occur only if the Lumonics shareholders and GSI stockholders approve the merger and all other requirements in the merger agreement are satisfied or waived. In the merger, a wholly-owned subsidiary of Lumonics will merge into GSI and become a wholly-owned subsidiary of Lumonics. Lumonics will then change its name to "GSI Lumonics Inc." At the time of the merger, stockholders of GSI will have the right to receive 1.347 GSI Lumonics common shares for each share of GSI common stock. Lumonics shareholders will continue to hold their Lumonics common shares which due to the name change will be GSI Lumonics common shares. In the merger Lumonics will issue to holders of GSI common stock approximately Lumonics common shares. These shares will represent approximately 50% of the issued and outstanding GSI Lumonics common shares immediately following the completion of the merger. In addition, Lumonics will assume all options and warrants to purchase GSI common stock outstanding at the time of the merger, which will be exercisable for approximately GSI Lumonics common shares. BACKGROUND OF THE MERGER GSI. A strategy of GSI has been to continue to expand its expertise and leverage its core technologies to develop new products and enhance existing products to address new applications and evolving manufacturing requirements. While recognizing the need for industry consolidation, GSI focused its external growth initiatives on niche product line extensions which would broaden the range of GSI's products and the markets they serve, with complementary acquisitions of businesses consummated in 1996 and 1997. In 1998, following the consolidation in related capital equipment manufacturing industries occurring in recent years, GSI began to focus its strategic growth vision on the need for more large-scale consolidation in its industry. Lumonics. Lumonics has been interested in complementing its internal growth with an external business partnership for a variety of reasons. First, Lumonics believes that the laser systems industry is due for a large-scale consolidation. There has not been any significant consolidation in the industry since the 1980s, at which time Lumonics was one of the industry companies that participated in the trend. In addition, Lumonics believes that the current industry structure, with five public companies each with annual sales of less than $250 million, is not sustainable in the long-term. Second, Lumonics has already established a global infrastructure in sales, service and customer support. A potential merger candidate could provide complementary products and technologies to take advantage of existing infrastructure in an effort to achieve higher sales and profit levels. Finally, customers increasingly demand large suppliers that have the global product development and support resources to meet their present and future needs. Discussions between GSI and Lumonics. In the summer of 1995, prior to the initial public offerings of each of GSI and Lumonics, Robert Atkinson, Chairman of Lumonics, telephoned Jean Montagu, the then Chairman of GSI, to discuss a business combination of Lumonics and GSI. GSI was then in the process of pursuing its initial public offering, and no further discussion took place. 18 At a meeting of the Lumonics Board on February 24, 1997, management presented an in-depth analysis of specified potential strategic partners, including GSI. The Board authorized management to continue to pursue these opportunities. In the spring of 1997, Robert Atkinson and Jean Montagu had preliminary discussions, and scheduled an in-person meeting to discuss, the possibility of a business collaboration. The meeting never occurred. On September 21, 1997, Robert Atkinson and Scott Nix, President and Chief Executive Officer of Lumonics, visited GSI to meet with Charles Winston, Chief Executive Officer of GSI and Victor Woolley, Chief Financial Officer of GSI, to discuss the possibility of a business collaboration, including a merger of the two companies. Despite interest from both companies at this time, further discussions did not ensue for almost a year. On August 10, 1998, Charles Winston visited the offices of Lumonics to further discuss a possible merger. Dialogue at this time, though preliminary, was more detailed than the previous conversation. At the Lumonics Board of Directors meeting on August 11, 1998, management reviewed with the Board the preliminary discussions that had taken place with GSI and GSI's level of interest. The Board agreed that management should pursue this opportunity with the assistance of its financial advisors, CIBC Wood Gundy and Ernst & Young Corporate Finance. During the second week of August, Lumonics, along with CIBC Wood Gundy and Ernst & Young Corporate Finance, conducted an analysis of a possible merger with GSI, primarily focusing on relative value assessment and accounting implications of various transaction structures. On August 26, 1998, Lumonics management presented a preliminary term sheet to GSI. Both parties reconfirmed earlier observations that the transaction had significant strategic rationale, including the potential to realize synergies. Discussions subsequently commenced between the companies' financial advisors and on September 10, 1998 the companies signed a non-disclosure agreement to facilitate the sharing of certain confidential information for the purpose of further evaluating a potential merger. On September 19, 1998, Charles Winston and Victor Woolley met with Needham to seek advice regarding a possible transaction with Lumonics. On September 21, 1998, Lumonics' and GSI's respective financial advisors met to further discuss a proposed term sheet. On September 22, 1998, Needham presented its preliminary analysis of the proposed merger to GSI's Board of Directors. The Board agreed that GSI should continue discussions with Lumonics. On September 28, 1998, the management teams of Lumonics and GSI and their respective financial, accounting and legal advisors met to discuss the key transaction terms, including a "merger of equals" structure in which each company's stockholders would own approximately 50% of the combined company immediately following the merger. The teams also discussed potential issues and the next steps required to reach a final agreement. On October 7, 1998, Lumonics management met with its Board and Lumonics' financial advisors to review the proceedings that had taken place with GSI since the last Board meeting on August 11, 1998. At that meeting, Charles Winston made a presentation to the Lumonics Board. On October 13, 1998, GSI and Needham attended a due diligence meeting in Kanata, Ontario to review Lumonics' business plan and financial forecasts. On October 15, 1998, GSI management met with its Board to review the proceedings that had taken place with Lumonics since the last GSI Board meeting. At that meeting, Robert Atkinson and Scott Nix made a presentation to the Board of Directors of GSI. Representatives of Needham were present at this meeting and discussed their preliminary due diligence findings and other aspects of the proposed transaction. 19 The two companies and their respective financial advisors held a due diligence meeting in Boston, Massachusetts on October 16, 1998, to review GSI's business plan and financial forecasts. On October 22, 1998, the GSI Board of Directors held a telephonic meeting to discuss the proposed merger. Representatives of Needham participated and were available to answer questions of the Board of Directors. In light of the "merger of equals" structure, on October 22 Needham and CIBC Wood Gundy discussed various methodologies for calculating the conversion number. They concluded that it would be appropriate to calculate it on the basis of each company's outstanding common shares. This methodology produced an exchange ratio of 1.347 GSI Lumonics common shares for each share of GSI common stock. On October 24, 1998, senior executives of Lumonics and GSI and their respective legal advisors finalized the principal terms of the merger agreement. On October 27, 1998, Needham delivered its oral opinion (subsequently confirmed in writing) that, as of such date and subject to certain assumptions and other matters as set forth in such opinion, the conversion number of 1.347 was fair to the stockholders of GSI from a financial point of view. On that same date, CIBC Wood Gundy delivered its written opinion that as of that date, the transaction was fair to the shareholders of Lumonics from a financial point of view. In the afternoon, both Boards unanimously approved the merger agreement and the merger and authorized the execution and delivery of such agreement. The merger agreement was executed in the evening of October 27, 1998, and GSI and Lumonics issued a joint press release announcing the transaction on October 28, 1998 prior to the opening of financial markets in the United States and Canada. FINANCIAL INFORMATION EXCHANGED BETWEEN GSI AND LUMONICS In connection with their due diligence, GSI provided to Lumonics certain projections of future financial performance prepared by the management of GSI, and Lumonics provided to GSI certain projections of future financial performance prepared by the management of Lumonics. This projected financial information was also provided to the parties' respective financial advisors in connection with their analyses. The material portions of these projections are summarized below. The statements regarding GSI's financial projections constitute "forward- looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are subject to the safe harbors created thereby. In light of the significant uncertainties inherent in forward-looking financial information of any kind, the inclusion of such information in this document should not be regarded as a representation that the financial projections will be achieved. Investors are cautioned that these financial projections should not be regarded as fact and should not be relied upon as an accurate representation of future results. The projections were not examined, reviewed or compiled by Arthur Andersen LLP, GSI's independent public accountants, or Ernst & Young LLP, Lumonics' independent chartered accountants, and they assume no responsibility for the projections, they do not express any opinion or any other form of assurance on the projections and they disclaim any association with the projections. The projections were not prepared in accordance with the standards for prospective financial information established by the American Institute of Certified Public Accountants. The financial projections were prepared for internal budgeting and planning purposes and not for the purposes of the proposed merger or with a view toward public disclosure. They were based on numerous subjective estimates and other assumptions and are inherently subject to significant uncertainties and contingencies. Further, there will usually be differences between actual and forecasted results and such differences may be material. As disclosed elsewhere in this document under "Risk Factors," the business and operations of GSI and Lumonics are subject to substantial risks which increase the uncertainty inherent in the financial projections. Any of the factors disclosed under "Risk Factors" could cause the actual results to differ materially from the financial projections described above. See "Cautionary Statement Concerning Forward- Looking Statements." The projections were prepared in October 1998 and have not been adjusted to, and do not, reflect or take into account any circumstances or events occurring after that date. GSI and Lumonics disclaim any duty to 20 update or otherwise publicly to revise the projections and make no representations as to whether the projections will be achieved or otherwise. Since the date the projections were prepared, each of GSI and Lumonics have reduced the size of their respective work forces due to actual and anticipated continued lower sales activity. The companies currently anticipate that actual results may be below the financial projections, particularly in the near future. The GSI projections included the following projections:
1998 1999 2000 2001 ---- ---- ---- ---- Total Sales $185 million $169 million $199 million $245 million Gross Profit 86 78 95 121 Income from Operations/1/ 7 11 19 34
The Lumonics projections included the following projections:
1998 1999 2000 2001 ---- ---- ---- ---- Total Sales $146 million $149 million $162 million $186 million Gross Profit 44 52 59 71 Income (Loss) from Opera- tions/1/ (6) 6 10 15
- -------- /1/ Does not account for special one-time charges. RECOMMENDATION OF THE BOARD OF DIRECTORS OF GSI; REASONS FOR THE MERGER In reaching its determination that the merger is in the best interests of the GSI stockholders, and unanimously recommending that the GSI stockholders approve the merger agreement, the Board of Directors of GSI considered a number of factors, including the following: (1) The merger will create certain synergies, operating efficiencies and cost reductions, including reductions through volume purchases and the reduction of duplicative research and development and certain general administrative expenses. (2) GSI Lumonics will have greater resources and be better able to service customers by creating new and innovative products as a result of the combining of the proprietary information and technology of each company and the integration of the expertise of each company. (3) The merger will enable GSI Lumonics to sell complementary products to customers of the separate companies which prior to the merger purchased products from one of the companies. (4) GSI Lumonics will have significantly greater financial resources and industry presence, domestically and internationally. (5) GSI Lumonics will be better able to compete with competitors and to address supplier reduction programs by large customers. (6) The higher market capitalization of GSI Lumonics will expand GSI's investor base, reduce trading price volatility, increase trading volume, increase liquidity for its shareholders and result in coverage of its common stock by a larger number of financial analysts. (7) In addition, the Board of Directors: . reviewed the management, business, properties, financial condition, operating results and prospects of Lumonics and the current industry, economic and market conditions; . reviewed the merger agreement and the stock option agreements, including the circumstances under which GSI and Lumonics could terminate the merger agreement and the termination fees payable by GSI and Lumonics under certain circumstances; and 21 . received the oral opinion of Needham, subsequently confirmed by a written opinion dated October 27, 1998, that, as of the date of such opinion and based upon and subject to certain matters stated in the opinion, the conversion number of 1.347 is fair to GSI stockholders from a financial point of view. The Board of Directors also considered negative factors associated with the proposed merger, including the following: . the fact that GSI's revenue growth and profit margins exceeded those of Lumonics in recent periods; . the uncertainty concerning personal tax consequences arising from the merger and the potential that such consequences may be unfavorable to individual GSI stockholders; . the loss of the protections of corporate law of Massachusetts for the surviving parent corporation in the merger, and the corresponding uncertainty concerning the protections of the corporate law of New Brunswick; . the mandatory nature of cumulative voting in New Brunswick; and . the possibility that the termination fee would become payable to Lumonics or the stock option granted to Lumonics would become exercisable; . the potential effects of failing to complete the merger after having announced it, including providing information to competitors and disrupting GSI's ongoing operations. In view of the wide variety of factors considered, the GSI Board of Directors did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered, and individual directors may have given differing weights to different factors. After taking into consideration all the factors set forth above, the Board determined that, in its business judgment, the potential benefits of the merger outweighed the potential detriments associated with the proposed merger. THE BOARD OF DIRECTORS OF GSI UNANIMOUSLY BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE GSI STOCKHOLDERS. RECOMMENDATION OF THE BOARD OF DIRECTORS OF LUMONICS; REASONS FOR THE MERGER In reaching its determination that the Lumonics proposals are in the best interests of the Lumonics shareholders, and unanimously recommending that the Lumonics shareholders approve the Lumonics proposals, the Board of Directors of Lumonics considered a number of factors, including the following: (1) The business combination of Lumonics and GSI will create the largest publicly-traded company in the industrial laser systems industry. (2) Lumonics and GSI have similar cultures and operating philosophies. These common principles will assist with a rapid integration of operations. (3) The combination of Lumonics and GSI should achieve significant synergies with potential savings and benefits, including: . Materials Costs. Materials costs are expected to be reduced by using group buying power on commonly used parts, by supplying GSI with optical components and lasers from Lumonics, and by consolidating the galvo requirements of Lumonics with those of GSI. . Distribution Costs. Distribution costs are expected to be reduced by eliminating third party distribution in regions where the combined company has a direct sales presence. It is also expected that the merger will result in a reduction of expenses such as advertising, trade exhibition costs, travel and other marketing costs. . Research and Development Expenses. Significant savings are expected to be achieved by integrating research and development programs which are tailored to similar applications. 22 . Customer Service and Support Costs. New revenue is expected to be generated by eliminating the use of third parties to support GSI's parts and services business and keeping that business within GSI Lumonics and by increasing the amount of revenue generated from current GSI customers through the use of Lumonics' existing parts and service group. . Corporate Overhead. Corporate overhead costs are expected to be reduced through savings realized in areas such as information technology, public company costs and investor relations as a result of the merger. Furthermore, savings are expected to be generated due to the requirement for a single management team and the elimination of duplicated positions in such departments as operations and administration. (4) GSI Lumonics will be able to leverage the sales, service and customer support infrastructure of the two companies by cross-selling business and that the merger will enhance Lumonics' marketplace presence around the world by increasing market penetration in specific geographic regions where Lumonics and GSI each have current distribution strengths. (5) The technological, sales and customer support capabilities of GSI Lumonics will allow for quicker and more effective expansion of the applications for laser systems to better serve Lumonics' existing customers and to direct a broader array of product and services to new customers. (6) The merger will permit GSI Lumonics to improve manufacturing efficiencies and enhance customer service and support. (7) The merger will provide greater financial strength, market capitalization, increased public float and a dual stock exchange listing which should result in greater trading liquidity and broader research analyst coverage, thereby improving shareholder value. (8) GSI Lumonics will have greater scope and financial resources to pursue acquisition opportunities that may arise as the laser systems industry continues to consolidate worldwide. (9) The expanded product line of GSI Lumonics will increase access to certain industry segments, for example the medical instrument sector and packaging market. (10) In addition, the Board of Directors received a written opinion of CIBC Wood Gundy on October 27, 1998 to the effect that, as of the date of such opinion and based upon and subject to certain matters stated in the opinion, the transaction is fair to Lumonics shareholders from a financial point of view. The Board of Directors also considered negative factors associated with the proposed merger, including the following: . the potential negative consequences resulting from GSI's existing litigation; . GSI's relatively low cash position; . the mandatory nature of cumulative voting in New Brunswick; and . the potential effects of failing to complete the merger after having announced it, including providing information to competitors and disrupting Lumonics' ongoing operations. In view of the variety of factors considered in connection with its evaluation of the merger, the Lumonics Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. After considering the various factors, the Board determined that, in its business judgment, the positive factors far outweighed the negative factors. THE BOARD OF DIRECTORS OF LUMONICS UNANIMOUSLY BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF ITS SHAREHOLDERS. 23 STRUCTURE OF THE MERGER The companies agreed that Lumonics would be the surviving parent corporation resulting from the merger based upon a consideration of perceived positive and negative factors. The principal positive factors GSI and Lumonics considered were: . the perception that Lumonics has a more diverse and stable shareholder base and that such base would be otherwise lost because of Canadian institutional shareholder limitations on foreign stock ownership and a perceived unwillingness of Canadian shareholders to own foreign stocks; . the fact that Lumonics has historically traded at a greater multiple to earnings and had a less volatile share price than GSI, and the perception that this might support a higher valuation for GSI Lumonics; and . the belief that the structure would be favored by Lumonics' shareholders, including its principal shareholder, and that this would enhance the ability of Lumonics to gain shareholder approval of the merger. The principal negative factors considered were: . the uncertainty concerning personal tax consequences arising from the merger and the potential that such consequences may be unfavorable to individual GSI stockholders; . the potential that US stockholders may be unable or unwilling to own shares in a Canadian corporation due to internal investment criteria or other reasons; . the necessity of obtaining Lumonics shareholder approval of and the incremental cost in implementing the change in jurisdiction of Lumonics' incorporation to New Brunswick; . the perception that Massachusetts has more protective corporate law statutes and body of law; and . the mandatory nature of cumulative voting in New Brunswick. GSI and Lumonics decided, on balance, that the positive factors for having Lumonics be the surviving parent corporation outweighed the negative factors. The overriding considerations in making this determination, related to Lumonics' more stable shareholder base and greater historical trading multiple to earnings, supported the potential for higher prices for GSI Lumonics common shares. OPINION OF GSI'S FINANCIAL ADVISOR Under an engagement letter dated October 13, 1998, GSI retained Needham to furnish financial advisory services with respect to the proposed merger and to render an opinion as to the fairness, from a financial point of view, of the proposed conversion number to the stockholders of GSI. Although Needham assisted GSI in determining the methodology for calculating the conversion ratio of 1.347, the merger of equals structure, which provided the basis for determining the conversion ratio, was determined through arms' length negotiations between GSI and Lumonics and not by Needham. At a meeting of the Board of Directors of GSI on October 27, 1998, Needham delivered its oral opinion (subsequently confirmed in writing) that, as of such date and based upon and subject to certain assumptions and other matters described in its written opinion, the proposed conversion number of 1.347 is fair to the stockholders of GSI from a financial point of view. NEEDHAM'S OPINION IS ADDRESSED TO THE GSI BOARD, IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AGREEMENT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF GSI AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE GSI SPECIAL MEETING. The complete text of the October 27, 1998 opinion, which sets forth the assumptions made, matters considered, limitations on and scope of the review undertaken by Needham, is attached to this document as Annex C, and the summary of the Needham opinion set forth in this document is qualified in its entirety by 24 reference to the Needham opinion. GSI STOCKHOLDERS ARE URGED TO READ THE NEEDHAM OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE MATTERS CONSIDERED, AND THE ASSUMPTIONS MADE BY NEEDHAM. In arriving at the Needham opinion, Needham, among other things: . reviewed the merger agreement; . reviewed certain publicly available information concerning GSI and Lumonics and certain other relevant financial and operating data of GSI and Lumonics made available from the internal records of GSI and Lumonics; . reviewed the historical stock prices and trading volumes of the GSI common stock and the Lumonics common shares; . held discussions with members of senior management of GSI and Lumonics concerning their current and future business prospects; . reviewed certain financial forecasts and projections prepared by the respective managements of GSI and Lumonics; . compared certain publicly available financial data of companies whose securities are traded in the public markets and that Needham deemed relevant to similar data for GSI and Lumonics; . reviewed the financial terms of certain other business combinations that Needham deemed generally relevant; and . performed or considered such other studies, analyses, inquiries and investigations as Needham deemed appropriate. Needham assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by or discussed with it for purposes of rendering the Needham opinion. With respect to GSI's and Lumonics' financial forecasts provided to Needham by their respective managements, Needham assumed that such information reflects the best currently available estimates and judgments of the managements of Lumonics and GSI of the future operating and financial performance of GSI and Lumonics, and Needham relied upon the estimates of the respective managements of Lumonics and GSI of the synergies and cost savings that may be achieved as a result of the proposed merger. Needham did not assume any responsibility for or make or obtain any independent evaluation, appraisal or physical inspection of the assets or liabilities of GSI or Lumonics. The Needham opinion states that it was based on economic, monetary and market conditions as they existed and could be evaluated as of the date of such opinion. Needham expressed no opinion as to what the value of Lumonics common shares will be when issued to the stockholders of GSI in the merger or the prices at which the Lumonics common shares will actually trade at any time. In addition, Needham was not asked to consider, and the Needham opinion did not address, GSI's underlying business decision to engage in the merger, the relative merits of the merger as compared to any alternative business strategies that might exist for GSI, or the effect of any other transaction in which GSI might engage. No other limitations were imposed by GSI on Needham relating to the investigations made or procedures followed by Needham in rendering the Needham opinion. Based on this information, Needham performed a variety of financial analyses of the merger and the conversion number. The following paragraphs summarize the material financial analyses performed by Needham in arriving at the Needham opinion. In performing its analyses, Needham converted Canadian dollar- denominated data with respect to Lumonics into U.S. dollars at exchange rates or average exchange rates for the applicable date or period, calculated from data provided by a third-party information service. Exchange Ratio Analysis. Needham reviewed the exchange ratios of shares of GSI common stock and Lumonics common shares implied by the daily closing prices of GSI common stock and Lumonics common shares for various periods since Lumonics' initial public offering in September 1995. These exchange ratios 25 were calculated by dividing the closing price of GSI common stock by the closing price of Lumonics common shares for each day in the applicable period. Needham noted that the average implied exchange ratios for the period from Lumonics' initial public offering to October 23, 1998, from October 23, 1997 to October 23, 1998, and from January 1, 1998 to October 23, 1998 were 1.23, 0.85 and 0.87, respectively. Needham also noted that the implied exchange ratio on October 23, 1998 was 1.04. Based on the terms of the merger agreement, the conversion number is 1.347. Needham also reviewed the premium to GSI stockholders represented by the conversion number compared to the implied exchange ratios based on closing prices of the GSI common stock and Lumonics common shares as of one day, one week and four weeks prior to the announcement of the proposed merger. Such premiums were 40.6%, 85.9% and 25.3%, respectively. Needham noted that such premiums were higher than those found in selected merger of equals transactions reviewed by Needham. Contribution Analysis. Needham reviewed and analyzed pro forma contribution of each of Lumonics and GSI to pro forma combined financial and operating information as of June 30, 1998, for the year ended December 31, 1997 and for the twelve months ended June 30, 1998. The following table sets forth GSI's implied contributions, as of June 30, 1998, to pro forma combined cash, total assets, working capital and stockholders' equity of the combined GSI and Lumonics.
JUNE 30, 1998 ------------- Cash........................................................ 6.5% Total assets................................................ 38.3 Working capital............................................. 38.5 Stockholders' equity........................................ 38.3
The following table sets forth, for the periods indicated, GSI's implied contributions to estimated pro forma combined revenues, earnings before interest and taxes and net income.
YEAR ENDED TWELVE MONTHS ENDED DECEMBER 31, 1997 JUNE 30, 1998 ----------------- ------------------- Revenues ............................. 50.6% 54.2% Earnings before interest and taxes.... 53.6 76.6 Net income (1)........................ 50.8 70.5
(1) GSI net income for the year ended December 31, 1997 excludes a charge for acquired in-process research and development. Net income for the twelve months ended June 30, 1998 excludes one-time charges. Based on the conversion number, GSI's stockholders will own approximately 50% of the combined company after the merger. The results of the contribution analysis are not necessarily indicative of the contributions that the respective businesses may have in the future. Accretion/Dilution Analysis. Needham reviewed certain pro forma financial impacts of the merger (assuming that it had occurred at the end of the first quarter of 1999) on the holders of GSI common stock and Lumonics common shares based on the conversion number, GSI's and Lumonics' respective managements' projected financial results for the last three quarters of 1999 and calendar year 2000, and assumed post-Merger savings consisting of estimated cost savings associated with consolidating certain operations, research and development activities and administrative functions. Based upon these projections and assumptions, Needham noted that the merger would result in accretion of the equivalent projected earnings per share of GSI common stock in the last three quarters of 1999 and in calendar year 2000. The actual operating or financial results achieved by the combined entity may vary from projected results, and such variations may be material. Selected Company Analysis. Using publicly available information, Needham compared selected historical and projected financial and market data ratios for Lumonics and GSI, and for the combined data of the two 26 companies (the "Combined Company") without taking into account anticipated synergies or cost savings (other than estimated cost savings during the last three quarters of 1999), to the corresponding data and ratios of certain other publicly traded manufacturers of lasers and laser systems and companies in the machine vision industry that Needham determined to be generally comparable to GSI and Lumonics due to their lines of business and relative size. These companies (the "Selected Companies") consisted of: Coherent, Inc. Perceptron, Inc. CyberOptics Corporation Robotic Vision Systems, Inc. Electro Scientific Industries, Inc. Rofin-Sinar Technologies, Inc. Excel Technology, Inc. Spectra-Physics Lasers, Inc. ICOS Vision Systems, Inc.
The following table sets forth information concerning multiples for the Selected Companies, GSI, Lumonics and the Combined Company. Needham calculated multiples for the Selected Companies based on the closing stock prices for those companies on October 23, 1998, and for GSI and Lumonics based on the closing prices of GSI common stock and Lumonics common shares on October 23, 1998, of $5.35 per share and $5.13 per share, respectively.
SELECTED COMPANIES ------------------ COMBINED MEAN MEDIAN GSI LUMONICS COMPANY --------- ---------- ----- -------- -------- Total market capitalization to last twelve months' revenues.... 1.0x 0.7x 0.3x 0.4x 0.4x Total market capitalization to projected calendar 1998 revenues........................ 1.0x 0.7x 0.4x 0.4x 0.5x Total market capitalization to projected calendar 1999 revenues........................ 0.9x 0.6x 0.4x 0.4x 0.5x Market value of common stock to last twelve months' earnings per share........................... 14.4x 14.4x 7.2x 19.7x 11.0x Market value to projected calen- dar 1998 earnings per share..... 18.9x 15.8x 14.8x NM 137.7x Market value to projected calen- dar 1999 earnings per share..... 14.6x 10.7x 10.2x 18.1x 12.9x Market value to historical book value........................... 1.5x 1.2x 0.8x 0.8x 0.9x
- -------- NM = Not meaningful, due to Lumonics' projected net loss for calendar 1998 Selected Transaction Analysis. Needham also analyzed publicly available financial information for 18 selected mergers and acquisitions, representing the transactions since January 1, 1992 considered by Securities Data Company, a financial database service, to be mergers of equals with transaction values less than $1.5 billion (the "Selected Transactions"). Securities Data Company defined mergers of equals to encompass mergers involving parties of approximately equal market capitalization. Needham deemed none of these transactions to be comparable to the merger primarily because none of the transactions involved companies in the same industry as GSI and Lumonics. In examining these transactions, Needham analyzed certain parameters of the acquired companies' common stock relative to the consideration offered, such as one-day, one-week and four-week premiums of the consideration offered to the acquired companies' stock prices prior to the announcement of the transaction. The Selected Transactions were: .United Meridian Corporation / Ocean Energy, Inc.; .Rykoff-Sexton, Inc. / JP Foodservice, Inc.; .First Financial Corporation / Associated Banc-Corp; .BW/IP, Inc. / Durco International, Inc.; 27 .Central & Southern Holding Company / Premier BancShares, Inc.; .OSB Financial Corporation / FCB Financial Corp; .Indiana Federal Corporation / Pinnacle Financial Services, Inc.; .Health Systems International, Inc. / Foundation Health Corporation; .Liberty Bancorp, Inc. / Hinsdale Financial Corporation.; .Colonial Data Technologies Corporation / U.S. Order, Inc.; .Cupertino National Bancorp / Greater Bay Bancorp; .Southwestern Public Service Company / Public Service Company of Colorado; .FirstFed Michigan Corporation / Charter One Financial, Inc.; .Lexington Savings Bank / Main Street Community Bancorp; .Abbey Healthcare Group / Homedco Group, Inc.; .Anchor Bancorp, Inc. / Dime Bancorp, Inc.; .SynOptics Communications, Inc. / Wellfleet Communications, Inc.; and .Critical Care America, Inc. / Medical Care International Inc. The following table sets forth information concerning the stock price premiums in the Selected Transactions and the stock price premiums implied by the proposed merger:
SELECTED TRANSACTIONS -------------------------- GSI/ LUMONICS HIGH LOW MEAN MEDIAN MERGER ---- ----- ---- ------ -------- One day stock price premium................. 24.4% (13.9)% 8.2% 8.9% 40.6% One week stock price premium................ 33.3 (9.8) 12.7 13.3 85.9 Four week stock price premium............... 68.7 (83.7) 12.5 14.6 25.3
Needham also noted that, in the Selected Transactions, the acquired companies' stockholders had an average and median ownership in the Combined Company of 47.3% and 45.9%, respectively, compared to the pro forma ownership percentage of GSI's stockholders in the Combined Company of approximately 50%. No company, transaction or business used in the "Selected Company Analysis" or "Selected Transaction Analysis" as a comparison is identical to GSI, Lumonics or the Merger. Accordingly, these analyses are not simply mathematical; rather, they involve complex considerations and judgments concerning differences in the financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the Selected Companies, Selected Transactions, or the business segment, company or transaction to which they are being compared. Other Analyses. In rendering its opinion, Needham considered certain other analyses, including, among other things, a history of trading prices for GSI and Lumonics and a comparison of GSI's and Lumonics' indexed stock price performance relative to each other. The summary set forth above does not purport to be a complete description of the analyses performed by Needham in connection with the rendering of the Needham opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, Needham believes that its analyses must be considered as a whole and that considering any portions of such analyses and of the factors considered, 28 without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the Needham opinion. In its analyses, Needham made numerous assumptions relating to industry performance, general business and economic and other matters, many of which are beyond the control of GSI or Lumonics. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those set forth in the opinion. Additionally, analyses relating to the values of business or assets do not purport to be appraisals or necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. The Needham opinion and Needham's related analyses were only one of many factors considered by GSI's Board of Directors in its evaluation of the proposed merger and should not be viewed as determinative of the views of GSI's Board of Directors or management relating to the conversion number or the proposed merger. Under the terms of the Needham engagement letter, GSI has paid Needham an advisory fee of $100,000 and has agreed to pay Needham a fee for rendering the Needham opinion of $250,000. Needham will also receive an additional transaction fee, upon consummation of the merger, of 1.0% of the aggregate purchase price paid in the merger, against which the initial fee of $100,000 would be credited. GSI has also agreed to reimburse Needham for its reasonable out-of-pocket expenses and to indemnify it against certain liabilities relating to or arising out of services performed by Needham as financial advisor to GSI. Needham is a nationally recognized investment banking firm. As part of its investment banking services, Needham is frequently engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. Needham was retained by the GSI Board of Directors to act as GSI's financial advisor in connection with the Merger based on Needham's experience as a financial advisor in mergers and acquisitions as well as Needham's familiarity with the laser and laser systems manufacturing and machine vision industries. In the normal course of its business, Needham may actively trade the equity securities of GSI for its own account or for the account of its customers and, therefore, may at any time hold a long or short position in such securities. OPINION OF LUMONICS' FINANCIAL ADVISOR The Board of Directors of Lumonics retained CIBC Wood Gundy to review the merger and to provide to the Board financial advice and an opinion as to the fairness, from a financial point of view, of the merger to the shareholders of Lumonics. At the meeting of the Lumonics Board of Directors on October 27, 1998, CIBC Wood Gundy rendered its opinion in writing that, as of such date and based upon and subject to certain assumptions and other matters described in its opinion, the merger is fair, from a financial point of view, to the shareholders of Lumonics. The full text of the CIBC Wood Gundy opinion dated October 27, 1998, is attached as Annex D to this document. Lumonics shareholders and GSI stockholders should read the CIBC Wood Gundy opinion for a discussion of assumptions made, matters considered and limitations on the review undertaken by CIBC Wood Gundy in rendering its opinion. The summary of the CIBC Wood Gundy opinion set forth in this document is qualified in its entirety by reference to the full text of such opinion. CIBC Wood Gundy is one of Canada's largest investment banking firms, with operations in all facets of corporate and government finance, mergers and acquisitions, equity and fixed income sales and trading and investment research. CIBC Wood Gundy has provided investment banking services to Lumonics in the past including acting as lead manager in the underwriting of securities of Lumonics during the past 24 months. CIBC Wood Gundy was formally engaged by Lumonics in connection with the merger under an agreement between Lumonics and CIBC Wood Gundy dated January 29, 1997, as amended by letter agreement dated August 14, 1998. Under the terms of the engagement agreement, Lumonics has agreed to pay CIBC Wood Gundy a fee of Cdn$100,000 for rendering its opinion. CIBC Wood Gundy will also receive an additional transaction fee, upon consummation of the merger, of Cdn$2,160,000. Lumonics has also agreed to reimburse CIBC Wood 29 Gundy for its reasonable out-of-pocket travel expenses and to indemnify it against certain liabilities relating to or arising out of services performed by CIBC Wood Gundy as financial advisor to Lumonics. In preparing its opinion, CIBC Wood Gundy reviewed and relied upon, or undertook, among other things: . the merger agreement; . publicly available information for Lumonics and GSI, including annual reports for GSI and Lumonics, Lumonics' current Annual Information Form, GSI's current Form 10-K, and current proxy solicitation materials for both companies; . discussions with members of the management of both companies concerning their current business operations, financial condition and results and prospects; . information provided by management of both companies including budgets, forecasts, strategic plans and Board Committee minutes; . information and advice received from Lumonics' tax advisors and U.S. legal advisors; . conversations with other professional advisors assisting Lumonics during its due diligence process; . certain financial and stock market data of Lumonics, GSI and other companies in the laser-based advanced manufacturing systems industry; . certain recent public and non-public transactions in the laser systems industry; . a certificate dated the date of the CIBC Wood Gundy opinion from senior officers of Lumonics as to the accuracy and completeness of the information provided in connection with Lumonics; and . such other information, financial studies, analyses and investigations and financial, economic and market criteria that CIBC Wood Gundy deemed relevant. In delivering its opinion, CIBC Wood Gundy relied upon and assumed without independent verification the completeness, accuracy and fair presentation of all the financial and other information, data, advice, opinions and representations obtained by it from public sources, Lumonics, senior management of Lumonics and GSI and agents for and advisors to Lumonics and GSI. In preparing its opinion, CIBC Wood Gundy made several assumptions, including that all of the conditions required to implement the merger will be met and that the representations and warranties in the merger agreement with respect to Lumonics, its subsidiaries and affiliates, the merger and GSI are accurate in all material respects. In addition, CIBC Wood Gundy assumed that the potential damages arising from the pending patent litigation in which GSI is a defendant are not material. The CIBC Wood Gundy opinion was rendered on the basis of securities markets and economic, financial and general business conditions prevailing as at the date thereof. In its analyses and in preparing the opinion, CIBC Wood Gundy made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of CIBC Wood Gundy or any party involved in the merger. CIBC Wood Gundy's opinion has been provided for the use of the Board of Directors of Lumonics and should not be construed as a recommendation to any holder of Lumonics common shares as to whether to vote in favour of the transactions contemplated by the merger. CIBC Wood Gundy's opinion states that it may not be used by any other person or relied upon by any other person other than the Lumonics Board of Directors without the express prior written consent of CIBC Wood Gundy. Whether or not CIBC Wood Gundy's opinion could be relied upon by Lumonics shareholders to support a claim against CIBC Wood Gundy is an issue which if asserted, would be resolved by a court of competent jurisdiction. The resolution of such issue would have no effect on the rights and responsibilities of the Lumonics Board of Directors under applicable Canadian or United States law, including federal securities law. The availability of a defense would have no effect on the rights or responsibilities of the Lumonics Board of Directors or CIBC Wood Gundy under applicable U.S. federal securities laws. 30 Based on the foregoing information, CIBC Wood Gundy performed a variety of financial analyses of the merger. The following paragraphs summarize the material financial analyses performed by CIBC Wood Gundy in arriving at its opinion and presented to the Lumonics Board of Directors. Analysis of Comparable Companies Using publicly available information, CIBC Wood Gundy compared selected historical and projected financial and market data ratios for Lumonics and GSI to the corresponding data and ratios of certain other publicly traded manufacturers of lasers and laser systems. CIBC Wood Gundy determined certain other public companies to be generally comparable to Lumonics and GSI based on their lines of business and relative size. These companies consisted of Axcess Inc., Coherent Inc., Cyberoptics Corp., Cymer Inc., Electro Scientific Industries Inc., Excel Technology Inc., II-VI Inc., Laser Technology Inc., Rofin-Sinar Technologies Inc., and Zygo Corp. (the "Selected Companies"). The data and ratios included total enterprise value ("TEV") to earnings before interest, tax, depreciation and amortization ("EBITDA") and EBIT and total market capitalization to historical and projected earnings and historical cash flow, the last item being defined as net earnings plus depreciation and amortization. All historically based ratios were computed from public information disclosed in companies' year-end and quarterly reports. Ratios of total market capitalization to projected earnings were based on mean per-share earnings estimates of Institutional Brokers Estimate Services for Lumonics, GSI and the Selected Companies. CIBC Wood Gundy calculated multiples for Lumonics and GSI based on the closing of Lumonics common shares and GSI common stock on October 23, 1998 of Cdn$8.25 and $5.13 per share, respectively. Mean multiples for the Selected Companies were adjusted to exclude those values lying more than one standard deviation from the mean. For the Selected Companies, the calculated multiples are provided in the table below.
PRICE/1-YEAR PRICE/2-YEAR FORECAST FORECAST PRICE/CASH PRICE/EARNINGS/1/ EARNINGS PER EARNINGS PER FLOW/1/ TEV/EBITDA/1/ TEV/EBIT/1/ PER SHARE SHARE SHARE PER SHARE ------------- ----------- ----------------- ------------ ------------ ---------- Selected Companies Adjusted mean......... 5.7x 7.3x 14.5x 17.3x 10.7x 9.7x Median................ 5.6x 7.6x 12.4x 16.5x 11.5x 9.1x Lumonics................ 7.0x 12.9x 22.4x neg. 18.3x 11.2x GSI..................... 3.7x 5.0x 8.3x 16.5x 9.2x 5.3x
- -------- /1/ Latest-twelve-month figures. Based on the foregoing trading multiples of the Selected Companies, Lumonics' shareholders could expect to own between 40.5% and 49.0% of the combined company, as opposed to 50% implied by the exchange ratio of 1.347 GSI Lumonics shares per GSI share. Market Capitalization Analysis CIBC Wood Gundy reviewed the stock market price performance of Lumonics shares and GSI stock in relation to each other over the prior 1, 10, 30, 60, 90, 180 and 360 days ending October 23, 1998. According to this analysis, the implied ownership by Lumonics shareholders of the combined company would equal between 50.6% and 61.0%. Profit Contribution Analysis CIBC Wood Gundy reviewed and analyzed pro forma net income and cash flow contribution both on an historical and projected basis. The net income and cash flow figures for Lumonics and GSI were adjusted to remove the effects of one- time charges. Forecast results relate to 1999 and 2000 and were not meaningful for 31 1998 due to the anticipated net loss for Lumonics for this period. Forecast results were based on actual historical results, management projections, a review of industry and company research, and discussions with Lumonics and GSI management. CIBC Wood Gundy calculated Lumonics' mean share of combined net income and cash flow over several time periods as provided in the table below.
LATEST TEN LATEST FOUR FORECAST FORECAST 1996 1997 QUARTERS QUARTERS 1999 2000 ---- ---- ---------- ----------- -------- -------- Net income................. 56.0% 49.2% 45.3% 28.4% 44.0% 38.6% Cash flow.................. 55.0% 49.5% 47.2% 36.4% 50.0% 45.0%
This analysis indicated that Lumonics' mean share of pro forma combined net income equalled 43.6% (median of 44.7%) across these time periods; Lumonics' mean share of pro forma cash flow equalled 47.2% (median of 48.4%) across these time periods. Discounted Cash Flow Analysis CIBC Wood Gundy performed a discounted cash flow ("DCF") analysis for both Lumonics and GSI on a stand-alone basis using underlying operating projections based on actual historical results, management projections, a review of industry and company research, and discussions with Lumonics and GSI management. Using a range of discount rates, CIBC Wood Gundy calculated estimates of net present value of free unlevered cash flows for the years 1999 through 2003 and of the forecast free cash flow as at the end of 2003 assuming a range of perpetual growth rates. After calculating these present value estimates of all future unlevered free cash flows, CIBC Wood Gundy added each company's cash to and subtracted each company's debt from these estimates to arrive at present value estimates attributable to the common equity for each company. Based on this analysis, the implied value of Lumonics' equity equalled between 53.5% to 56.5% of the implied value of the combined company's equity. Pro forma Financial Impact Analysis CIBC Wood Gundy reviewed certain pro forma financial impacts of the merger on the earnings per share ("EPS") and cash flow per share ("CFPS") of Lumonics, based on the conversion number of 1.347 and the same forecast financial results for 1999 and 2000 as used in the profit contribution and DCF analyses. This analysis indicted that the merger would be accretive to Lumonics' forecast 1999 and 2000 EPS and CFPS, even in the absence of synergy, under both U.S. and Canadian GAAP. The actual operating or financial results achieved by the combined company may vary from projected results, and such variations may be material. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, CIBC Wood Gundy considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Furthermore, selecting any portion of its analyses, without considering all analyses, would create an incomplete view of the process underlying its opinion. In addition, CIBC Wood Gundy may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions, so that the ranges of output resulting from any particular analysis described above should not be taken to be CIBC Wood Gundy's view of the actual ownership level in the combined company that should be ascribed to shareholders of Lumonics. INTERESTS OF MANAGEMENT, BOARD MEMBERS AND A SIGNIFICANT SHAREHOLDER IN THE MERGER Employee Retention Agreements. GSI has a program to retain key personnel and has entered into agreements with some of its executive officers under the program. The agreements, with one exception, have been amended in connection with the execution of the merger agreement to limit the benefits payable under the agreements. See "Management--Executive Compensation Agreements." 32 Board and Management of GSI Lumonics. The Board of Directors of GSI Lumonics will be comprised of eight members. The initial Board is expected to be comprised of the following individuals: Charles D. Winston, Woodie C. Flowers, Ph.D., Richard B. Black, and Paul F. Ferrari, each of whom currently serves as a Director of GSI and Robert J. Atkinson, Warren Scott Nix, Yukihito Takahashi, and Benjamin J. Virgilio, each of whom currently serves as a Director of Lumonics. Mr. Atkinson will be Chairman of the Board of GSI Lumonics. In addition, the management team of GSI Lumonics will be comprised of some members of the management teams of GSI and Lumonics, including Charles Winston as Chief Executive Officer and Warren Scott Nix as Chief Operating Officer. Directors and Officers Indemnification and Insurance. The proposed General By-Law of GSI Lumonics will be effective after the merger. The By-Law requires the corporation to protect its officers and directors from liability incurred in such capacity to the extent permitted or required by New Brunswick law. The By-Law provides that no director or officer of GSI Lumonics will incur liability unless he acts dishonestly, not in good faith or imprudently. By-Law No. 1 does not, however, relieve a director or officer from the duty to comply with New Brunswick law. The merger agreement provides that GSI Lumonics will, until the sixth anniversary of the merger and for so long as any claim for insurance coverage asserted on or prior to that date has not been fully adjudicated, maintain directors' and officers' liability insurance coverage for directors and officers of GSI. The policies must provide at least the same coverage maintained by GSI on October 27, 1998, provided that GSI Lumonics will not be required to expend in excess of 150% of the premiums paid by GSI in 1997 for such insurance, in order to continue that insurance coverage. Interests of Principal Shareholder of Lumonics. Following the merger, Sumitomo Heavy Industries Ltd. will indirectly control approximately 18% of GSI Lumonics' outstanding common shares and will be in a position to elect at least one director to the Board of Directors of GSI Lumonics as a result of cumulative voting rights existing under New Brunswick law. In addition, Lumonics currently relies on Sumitomo for its sales into Japan. In fiscal 1997, sales to or through Sumitomo represented 10.7% of Lumonics' total sales. WAIVER OF GSI RIGHTS AGREEMENT On April 30, 1997, GSI entered into a Rights Agreement with American Stock Transfer & Trust Company as rights agent. Under the agreement, the GSI Board of Directors declared a dividend payable on May 1, 1997 of one preferred stock purchase right for each outstanding share of GSI Common Stock. Each right entitles the registered holder to purchase from GSI one ten-thousandth of a share of Preferred Stock of GSI, par value $0.01 per share, at a cash exercise price of $70.00 per one ten-thousandth of a share, subject to adjustment, upon the happening of trigger events. In the merger agreement, GSI represents and warrants that it has taken and will take all necessary action under the rights agreement so that the execution and delivery of the merger agreement and the stock option agreements and the occurrence of the merger will not trigger the rights agreement. In accordance with this representation, on October 27, 1998 GSI entered into a waiver of the rights agreement. The rights agreement will expire upon the completion of the merger. ACCOUNTING TREATMENT OF THE MERGER US generally accepted accounting principles require that the companies use the purchase method of accounting to account for the merger. The total purchase price will be allocated to the assets acquired and liabilities assumed, based on their respective fair values. To the extent that this purchase price exceeds the fair value of the net tangible assets acquired at the effective time of the merger, GSI Lumonics will allocate the excess purchase price, based on independent expert valuation, to intangible assets which will include purchased in-process research and development and acquired technology, with the remainder to goodwill. 33 Under Canadian generally accepted accounting principles, the merger of Lumonics and GSI will be accounted for as a pooling of interests because neither of the companies can be identified as the acquiror. Under this method of accounting, the consolidated financial statements of GSI Lumonics will reflect the combined historical carrying values of the assets, liabilities and shareholders' equity of each of Lumonics and GSI. Accordingly, no goodwill or other fair value increments will arise in connection with the merger under Canadian GAAP. Financial information contained in this document includes information from GSI financial statements prepared in accordance with US GAAP and Lumonics financial statements prepared in accordance with US GAAP, recast in US dollars and pro forma financial statements prepared based on such US GAAP historical financial statements of GSI and Lumonics. Pro forma financial statements prepared based on GSI and Lumonics historical financial information prepared in accordance with Canadian GAAP have been delivered to Lumonics shareholders, together with this document, in the Canadian GAAP financial statement supplement. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following discussion of the material US federal income tax consequences of the merger and of holding GSI Lumonics common shares is based on the Code, the final, proposed and temporary Treasury Regulations, administrative rulings and interpretations and judicial decisions, in each case as in effect as of the date hereof. All of the foregoing are subject to change at any time, possibly with retroactive effect, and to differing interpretations. Except as specifically provided below, the following discussion is limited to the US federal income tax consequences relevant to a US holder of GSI common stock. A US holder is: (1)an individual who is a citizen or resident of the United States; (2) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or (3) a partnership, trust or estate treated, for US federal income tax purposes, as a domestic partnership, trust or estate. A non-US holder is any stockholder other than a US holder. The discussion set forth below does not address all aspects of US federal income taxation that may be relevant to a particular holder of shares of GSI common stock in light of such holder's particular circumstances or to holders subject to special treatment under the US federal income tax laws, such as non-US holders, banks, other financial institutions, insurance companies, dealers in securities, tax- exempt entities, persons who hold GSI common stock or GSI Lumonics common shares as part of a "straddle," "hedge" or "conversion transaction," holders who acquired their GSI common stock by exercising employee stock options or otherwise as compensation or taxpayers whose functional currency is not the US dollar, nor any consequences arising under the laws of any state, locality or foreign jurisdiction. This discussion assumes that the holders of GSI common stock hold their shares of stock as capital assets within the meaning of Section 1221 of the Code. GSI has received an opinion from its counsel, Goodwin, Procter & Hoar LLP, to the effect that the merger will be treated for US federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. In cases of a reorganization in which stock of a US corporation is acquired by a foreign corporation, such as the merger, Section 367 of the Code and the Treasury Regulations promulgated thereunder impose requirements, in addition to those otherwise applicable, in order for the reorganization to qualify for nonrecognition of gain treatment. Goodwin, Procter & Hoar LLP did not opine as to whether the exchange of GSI common stock for GSI Lumonics common shares satisfies the requirements of Section 367 of the Code due to factual uncertainties concerning the relative values of GSI and Lumonics at the time of the merger, and other uncertainties concerning the satisfaction of the active trade or business requirement of the Treasury Regulations promulgated under Section 367 of the Code. The tax opinion of Goodwin, Procter and Hoar llp is based on facts existing on the date hereof, assumes the absence of changes in existing facts and relies on representations and covenants made by GSI and Lumonics. 34 In general, for an exchange of GSI common stock for GSI Lumonics common shares by a US person in the merger to qualify for nonrecognition of gain treatment (in addition to meeting the requirements of Section 368 of the Code), the reporting requirements of Treasury Regulation Section 1.367(a)-3(c)(6) must be satisfied and each of the following conditions must be met: . fifty percent or less of both the total voting power and the total value of the stock of the transferee foreign corporation is received, in the aggregate, by the "US transferors" (as defined in the Treasury Regulations) in the transaction; . fifty percent or less of the total voting power and the total value of the stock of the transferee foreign corporation is owned, in the aggregate, immediately after the transaction by US persons that are either officers or directors or "five-percent shareholders," as defined therein and computed taking into account direct, indirect and constructive ownership, of the US corporation; . either (1) the US person is not a "five-percent shareholder" (computed taking into account direct, indirect and constructive ownership) of the transferee foreign corporation or (2) the US person is a "five-percent shareholder" of the transferee foreign corporation and enters into an agreement with the IRS to recognize gain under certain circumstances; and . a specified active trade or business test is satisfied. The first two conditions will be satisfied and satisfaction of the third condition will depend on the circumstances of each shareholder. Whether the active trade or business test identified in the last item immediately above will be satisfied is highly uncertain and depends on a number of factual and legal uncertainties which may not be known until the time of the merger or after. These uncertainties include the relative fair market values of GSI and Lumonics at the effective time of the merger, the proper method to value each of GSI and Lumonics at such time, which of Lumonics' assets were acquired outside the ordinary course of its business within the 36 months prior to the effective time, and the use to which such assets or the proceeds therefrom have been put. Subject to the satisfaction of the reporting requirements of Treasury Regulation Section 1.367(a)-3(c)(6) and provided that the active trade or business test is satisfied, GSI believes that the merger will probably be eligible for nonrecognition of gain treatment. If, after the merger, GSI Lumonics, in its sole discretion, determines that there is a reasonable basis for satisfaction of the active trade or business test and other requirements of Section 367 of the Code, it intends to make the necessary U.S. federal income tax filings required of it under Section 367 of the Code. Thus, it is possible that the merger could so qualify. GSI Lumonics will determine whether there is a reasonable basis for the position that the merger is eligible for nonrecognition of gain treatment prior to the end of 1999. Neither Lumonics nor GSI has requested, or intends to request, a ruling from the IRS regarding the recognition of gain in connection with the merger. Tax Implications of the Merger to US Holders of GSI Common Stock. If the merger qualifies as a reorganization within the meaning of Section 368(a) of the Code but the exchange of GSI Lumonics common shares for GSI common stock does not qualify for nonrecognition of gain treatment as a result of the application of Section 367 of the Code, then: . a US holder of GSI common stock will recognize gain in an amount equal to the excess, if any, of the fair market value of the GSI Lumonics common shares at the time of the merger and any cash in lieu of fractional shares exchanged therefor as a result of the merger over such holder's adjusted basis in his GSI common stock surrendered; and . a US holder of GSI common stock will not recognize loss in the merger, except with respect to any cash received in lieu of factional shares. Alternatively, if all of the requirements of Section 367 of the Code and the Treasury Regulations promulgated thereunder are satisfied, no gain or loss will be recognized for US federal income tax purposes by US holders of GSI common stock as a result of the merger except with respect to any cash received in lieu of fractional shares, subject to the discussion in "Special Filing Requirements Applicable to Five-Percent Shareholders." 35 In either case, cash received in lieu of fractional share interests will be treated as received in exchange for a fractional GSI Lumonics common share. Gain or loss recognized on such exchange will be measured by the difference between the amount of cash received and the portion of the adjusted basis in the shares of the GSI common stock surrendered that is allocable to such fractional share. Any gain or loss recognized as a result of the merger, including gain recognized by virtue of Section 367 of the Code, will be capital gain or loss. In general, capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. The aggregate tax basis of GSI Lumonics common shares received as a result of the merger will be the same as the US holder's aggregate adjusted basis in the GSI common stock surrendered in the merger, decreased by the basis allocable to fractional shares for which cash is received in the merger and increased by the amount of gain, if any, recognized as a result of the merger other than gain attributable to the cash received in lieu of fractional share interests. If US holders of GSI common stock recognize gain from the merger as a result of the application of Section 367 of the Code, the holding period for any GSI Lumonics common shares received will be determined by reference to the effective time of the merger. Otherwise, the holding period of the GSI Lumonics common shares held by a former US holder of GSI common stock as a result of the merger will include the period during which such holder held the GSI common stock surrendered. Special Filing Requirement Applicable to Five-Percent Shareholders. If the merger qualifies as a tax-free reorganization in which gain is not recognized pursuant to Section 354 and Section 367 of the Code, a US holder who is a "five-percent shareholder" of GSI Lumonics in accordance with the Treasury Regulations under Section 367 of the Code immediately after the merger must file a "gain recognition agreement" with the IRS in order for the exchange by such five-percent shareholder of his GSI common stock for GSI Lumonics common shares to qualify for nonrecognition of gain treatment. Otherwise, such five- percent shareholder will be treated as if he had sold all of his GSI common stock in a fully taxable transaction. Under a gain recognition agreement, such a five-percent shareholder generally will be treated as having sold GSI common stock in a fully taxable transaction on the date of the merger if GSI Lumonics disposes of any stock of GSI in a taxable transaction, or if GSI Lumonics disposes of substantially all the assets of GSI in a taxable transaction, within a specified period of time after the merger or if certain other events occur within a specified period of time after the merger. Merger Consideration Backup Withholding. To the extent that GSI Lumonics, in its sole discretion, determines that the merger does not satisfy all of the applicable requirements of Section 367 of the Code for nonrecognition of gain treatment, a US holder of GSI common stock who participates in the merger may become subject to U.S. backup withholding tax at a rate of 31% with respect to the consideration received in the merger unless such holder: (1) is a corporation or other exempt recipient and, if required, demonstrates its status as such; or (2) provides a United States taxpayer identification number, certifies that the taxpayer identification number provided is correct and that the holder has not been notified by the IRS that he is subject to backup withholding due to the under-reporting of interest or dividends, and otherwise complies with the applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's US federal income tax liability provided that the required information is furnished to the IRS. Tax Implications of Holding GSI Lumonics Common Shares. A US holder of GSI Lumonics common shares will be required to include in gross income as dividend income the amount of any distributions, including constructive distributions, paid on the GSI Lumonics common shares, including any foreign taxes withheld from the amount received, on the date such distribution is received to the extent such distributions are paid out of GSI Lumonics' current or accumulated earnings and profits. Distributions in excess of such earnings and profits will be applied against and will reduce the US holder's basis in the GSI Lumonics common shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of the 36 GSI Lumonics common shares. Dividends paid on the GSI Lumonics common shares generally will not qualify for the dividends-received deduction available to corporations. Dividends paid in foreign currency will be includible in the income of the US holder in a US dollar amount calculated by reference to the exchange rate on the day the dividends are received. If the Canadian dollars received as a dividend are not converted into US dollars on the date of receipt, a US holder will have a basis in Canadian dollars equal to its US dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition will be treated as ordinary income or loss. Generally, a US holder will have the option of claiming the amount of Canadian tax withheld at source on the distribution of dividends on the GSI Lumonics common shares as either a deduction from adjusted gross income or as a dollar-for-dollar credit against the US holder's US federal income tax liability. If the US holder elects to claim a credit for such Canadian taxes, the election will be binding for all foreign taxes paid or accrued by the US holder for such taxable year. Individuals who claim the standard deduction rather than itemized deductions may not claim a deduction for foreign taxes withheld, but may claim such amount as a credit against the individual's US federal income tax liability. The foreign tax credit in any taxable year may not offset more than 90% of a US holder's liability for US individual or corporate alternative minimum tax. The amount of foreign income taxes for which a US holder may claim a credit in any year is subject to complex limitations and restrictions that must be determined on an individual basis by each US holder. These rules limit foreign tax credits allowable with respect to specific classes of income to the US federal income taxes otherwise payable with respect to each class of income. The total amount of allowable foreign tax credits in any year generally cannot exceed regular US tax liability for the year attributable to certain foreign source income. However, this limitation on the use of foreign tax credits generally will not apply to electing individual US holders whose creditable foreign taxes during the year do not exceed a specified maximum amount if such individual's gross income for the tax year from non-US sources consists solely of certain "passive income." Dividends paid by GSI Lumonics which are foreign source will generally be "passive income" for US foreign tax credit purposes. A US holder will not be allowed a foreign withholding tax credit for foreign withholding taxes imposed on dividends paid on GSI Lumonics common shares if such US holder: (1) has held GSI Lumonics common shares for less than 16 days of the 30-day period beginning 15 days before the date on which such shares become ex-dividend with respect to such dividend; or (2) is obligated to make certain payments related to such dividends, whether by a short sale or otherwise, with respect to a substantially similar or related property. For US federal income tax purposes, a US holder will recognize taxable gain or loss on any sale, exchange or other disposition of GSI Lumonics common shares in an amount equal to the difference between the US dollar value of the amount realized on such sale, exchange or other disposition and such US holder's basis in such shares. Any such gain or loss will be capital gain or loss. Capital gains of individuals from capital assets held for more than one year are eligible for reduced rates of taxation depending on the holding period of such capital assets. A US holder may deduct capital losses only from capital gains plus, in the case of a US holder other than a corporation, a maximum of $3,000, or $1,500 in the case of a married individual filing separately, of ordinary income. Generally, capital losses not allowed in the year recognized may, in the case of a corporation, be carried back three years and carried forward five years, and, in the case of an individual, be carried forward indefinitely. Any gain generally will be treated as US source income for US foreign tax credit purposes. Under current law, the source of a loss on the sale, exchange or other disposition of such GSI Lumonics common shares is unclear. A US holder that receives foreign currency upon the disposition of GSI Lumonics common shares and converts the currency into dollars subsequent to receipt will generally have foreign exchange gain or loss based on any appreciation or depreciation of the value of the foreign currency against the US dollar. US HOLDERS OF GSI COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM FROM THE MERGER AND FROM HOLDING GSI LUMONICS COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS. 37 CANADIAN FEDERAL INCOME TAX CONSEQUENCES The following is a discussion of the material Canadian federal income tax consequences of holding and disposing of GSI Lumonics common shares generally applicable to certain US holders who acquire GSI Lumonics common shares in the merger. This discussion only applies to a US holder of GSI Lumonics common shares who for the purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") at all relevant times: (1) is not, and is not deemed to be, resident in Canada; (2) deals at arms' length with GSI Lumonics; (3) holds GSI Lumonics common shares as capital property; and (4) does not use or hold and is not deemed to use or hold GSI Lumonics common shares in connection with the carrying on of a business in Canada, and who, for the purposes of the Canada-U.S. Income Tax Convention (the "Convention") at all relevant times, is resident in the United States. GSI Lumonics common shares will generally be considered to be capital property to a US holder for purposes of the Canadian Tax Act unless the US holder holds GSI Lumonics common shares in the course of carrying on a business of trading or dealing in securities or otherwise as part of a business of buying and selling securities or the US holder acquired GSI Lumonics common shares as part of a transaction considered to be an adventure or concern in the nature of trade. A limited liability company may not be, and a partnership will not be, a US holder that is resident in the United States for purposes of the Convention. This discussion does not apply to a US holder who is an organization exempt from tax in the United States and described in Article XXI of the Convention, a US holder which is a "financial institution" as defined in the Canadian Tax Act for purposes of the mark-to-market rules or a US holder which is a non-resident insurer carrying on an insurance business in Canada and elsewhere. This discussion is based on the current provisions of the Canadian Tax Act and the regulations thereunder in force as of the date hereof, the current published administrative policies of Revenue Canada and all specific proposals to amend the Canadian Tax Act and such regulations publicly announced by the Minister of Finance (Canada). This discussion is not exhaustive of all possible Canadian federal income tax consequences and, except for the announced proposals, does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action, and does not take into account provincial, territorial or foreign tax consequences which may differ significantly from those discussed herein. None of the announced proposals, if enacted in the form proposed, would affect this discussion. US HOLDERS OF GSI LUMONICS COMMON SHARES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS FOR ADVICE RELATING TO THE TAX CONSEQUENCES TO THEM HAVING REGARD TO THEIR OWN PARTICULAR CIRCUMSTANCES. Dividends. Subject to the provisions of the Convention, Canadian withholding tax at a rate of 25% will be payable on dividends paid or credited, or deemed to be paid or credited, by GSI Lumonics to a US holder on GSI Lumonics common shares. Under the Convention, the withholding tax rate is generally reduced to 15% or, if the US holder is a corporation that owns 10% or more of GSI Lumonics voting stock, to 5%. Disposition of GSI Lumonics Common Shares. Upon a disposition or deemed disposition by a US holder of GSI Lumonics common shares, a capital gain (or loss) will generally be realized by the US holder to the extent that the proceeds of disposition, less costs of disposition, exceed (or are exceeded by) the adjusted cost base of the GSI Lumonics common shares to such US holder. A deemed disposition of GSI Lumonics common shares will arise on the death of a US holder. 38 Subject to the provisions of the Convention, capital gains realized by a US holder on a disposition or deemed disposition of GSI Lumonics common shares will not be subject to tax under the Canadian Tax Act unless the GSI Lumonics common shares constitute "taxable Canadian property" (as defined in the Canadian Tax Act) to such US holder at the time of the disposition or deemed disposition, in which case the capital gains will be subject to tax under the Canadian Tax Act at rates which will approximate those payable by a Canadian resident. GSI Lumonics common shares will not be "taxable Canadian property" to a US holder at the time of a disposition or deemed disposition of such shares unless, at that time, the stock is not listed on a prescribed stock exchange, which includes the New York Stock Exchange, the Nasdaq, the Montreal Exchange and The Toronto Stock Exchange, or, at any time during the five-year period immediately preceding such time, the US holder, persons with whom the US holder did not deal at arm's length or the US holder together with such persons, owned or had a interest in or a right to acquire 25% of more of the issued shares of any class or series of shares of capital stock of GSI Lumonics. Further, under the Convention, a US holder will not be subject to tax under the Canadian Tax Act on a disposition or deemed disposition of GSI Lumonics common shares unless, at the time of the disposition or deemed disposition, the value of the GSI Lumonics common shares is derived principally from real property situated in Canada. Lumonics believes that the Lumonics common shares do not now derive their value principally from real property situated in Canada; however, the determination must be made at the time of the disposition or deemed disposition. REGULATORY APPROVALS REQUIRED The merger requires the consent of the Department of Justice (the "DOJ") and the US Federal Trade Commission (the "FTC") under the Hart-Scott-Rodino Antitrust Improvement Act. On January 6, 1999, the companies received a second request for information from the DOJ which stays the expiration of the applicable waiting period until the parties substantially comply with the request or the DOJ grants early termination of the waiting period. The request for information solicited information on particular products of the companies in order to assist the DOJ in their review of the transaction. The merger cannot occur until Hart-Scott approval is received. In addition, at any time before or after the merger, the FTC or the DOJ could take action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the merger or seeking divestiture of substantial assets of GSI or Lumonics. At any time before or after the merger, any state or locality could take such action under its own antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of GSI or Lumonics. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. Based on available information, each of GSI and Lumonics believes that the merger will be in compliance with Federal, state and local antitrust laws. However, a challenge to the merger on antitrust grounds might be made. Lumonics and GSI do not believe that any material governmental filings are required with respect to the merger other than the filing of the certificate of merger with the Commonwealth of Massachusetts and the notification under the Hart-Scott Act indicated above. The merger is conditioned upon, among other things, the absence of any preliminary or permanent injunction or other order issued by any federal or state court of competent jurisdiction which prohibits or restricts the consummation of the merger. NASDAQ AND TORONTO STOCK EXCHANGE LISTING For the merger to occur, the GSI Lumonics common shares to be issued to GSI stockholders in the merger and under GSI's stock option plans must be approved for listing on The Toronto Stock Exchange and Nasdaq, subject to official notice of issuance. Each of the Toronto Stock Exchange and Nasdaq has conditionally 39 granted approval subject to GSI Lumonics fulfilling all of its requirements. Lumonics and GSI have agreed to cooperate and promptly prepare and submit to The Toronto Stock Exchange and Nasdaq all reports, applications and other documents that may be necessary or desirable to enable all of the GSI Lumonics Common Shares that will be issued and outstanding or will be reserved for issuance at the effective time of the merger to be listed for trading on The Toronto Stock Exchange and Nasdaq. At the completion of the merger, GSI common stock will not trade on any exchange. RESALE OF GSI LUMONICS COMMON SHARES All GSI Lumonics common shares issued in connection with the merger will be freely transferable under US securities laws, except for any GSI Lumonics common shares received by persons who are deemed to be "affiliates," for purposes of Rule 145 under the Securities Act, of GSI at the time of the GSI special meeting or the Lumonics special meeting. The companies expect that approximately % of the GSI Lumonics common shares will be owned by affiliates. Affiliates of GSI may not sell their shares, except under an effective registration statement under the Securities Act covering the shares or in compliance with Rule 145 (or Rule 144 under the Securities Act in the case of persons who are or become affiliates of GSI Lumonics) or another applicable exemption from the registration requirements of the Securities Act. In general, under Rule 145, for one year following the effective time of the merger, an affiliate (together with certain related persons) would be entitled to sell GSI Lumonics common shares acquired in connection with the merger publicly only through unsolicited "brokers' transactions" or in transactions directly with a "market maker," as such terms are defined in Rule 144. Additionally, the number of shares to be sold by an affiliate (together with certain related persons) within any three-month period for purposes of Rule 145 may not exceed the greater of 1% of the outstanding GSI Lumonics common shares or the average weekly trading volume of the stock during the four calendar weeks preceding the sale. Rule 145 would remain available, however, to affiliates only if GSI Lumonics filed all required reports with the Commission for 90 days and remained current with its informational filings with the Commission under the Exchange Act. One year after the effective time of the merger, a person who was an affiliate of GSI at the time of the GSI special meeting would be able to sell GSI Lumonics common shares acquired in the merger without such manner of sale or volume limitations provided that GSI Lumonics was current with its Exchange Act informational filings and such person was not then an affiliate of GSI Lumonics. Two years after the effective time of the merger, a person who was an affiliate of GSI at the time of the GSI special meeting would be able to sell such GSI Lumonics common shares acquired in the merger without any restrictions so long as the person had not been an affiliate of GSI Lumonics for at least three months prior thereto. Under Canadian provincial securities laws, GSI Lumonics common shares issued in connection with the merger will be freely transferable subject to restrictions applicable to so-called "control persons." Generally, a control person is a shareholder holding more than 20% of the GSI Lumonics common shares or holding a sufficient number of GSI Lumonics common shares to affect materially the control of GSI Lumonics. DISSENTERS' RIGHTS GSI Stockholders. Under Massachusetts law, if the merger agreement is approved and the merger occurs, any holder of shares of GSI common stock: (1) who files with GSI, before the vote on the merger agreement, written objection to the merger stating that he or she intends to demand payment for his or her shares of GSI common stock if the merger occurs; and (2) whose shares of GSI common stock are not voted in favor of the merger agreement, has the right to demand in writing from GSI Lumonics, within twenty days after the date GSI Lumonics mails written notice that the merger has occurred, payment for his or her shares of GSI common stock and an 40 appraisal of the value of the shares. GSI Lumonics and any the holder will have the rights and duties and must follow the procedures set forth in Sections 85 through 98, inclusive, of Chapter 156B of the General Laws of Massachusetts. Any holder of shares of GSI common stock contemplating making a demand for appraisal is urged to review carefully the provisions of Sections 85 through 98 of Chapter 156B the full text of which is attached to this document as Annex F, particularly the procedural steps required to perfect such dissenters' rights. You will lose your dissenters' rights under Massachusetts law if you do not follow the procedural requirements. Voting against the merger is not sufficient to perfect your dissenters' rights; you must send a written objection to GSI prior to the vote of the GSI stockholders approving the merger. Lumonics Shareholders. Under the provisions of section 185 of the Business Corporations Act (Ontario) shareholders of Lumonics are entitled to send to Lumonics a written objection to the special resolution for approval of the continuance of Lumonics under the Business Corporations Act (New Brunswick). In addition to any other rights a holder of Lumonics common shares may have, when the continuance of Lumonics under the New Brunswick laws becomes effective, if a holder has complied with the dissent procedure under the Ontario law, the holder is entitled to be paid the fair value of the Lumonics common shares for which the holder has dissented, determined as at the close of business on the day before the special resolution is adopted. The dissent procedure provided by the Ontario law is summarized and set out in full in Annex E hereto and holders of Lumonics common shares who may wish to dissent are referred to the Annex. If you do not adhere strictly to the requirements of the Ontario law you may lose your rights under that section. The execution or exercise of a proxy does not constitute a written objection for the purposes of the Ontario law. 41 THE MERGER AGREEMENT THE FOLLOWING IS A DESCRIPTION OF THE MATERIAL PROVISIONS OF THE MERGER AGREEMENT WHICH IS ATTACHED AS ANNEX A TO THIS DOCUMENT. YOU SHOULD READ THE MERGER AGREEMENT IN ITS ENTIRETY. GSI and Lumonics have entered into the merger agreement which provides for, among other things, the following: . the merger consideration to be paid to GSI stockholders; . the procedures for exchanging shares of common stock of GSI for common shares of GSI Lumonics; . the continuation of the GSI stock options outstanding at the time of the merger; . when and how the merger will occur; . the conduct of business of each company from the date the merger agreement was signed until the time the merger occurs; . representations and warranties made by each of GSI and Lumonics concerning their respective businesses; . the conditions that must be met for the merger to occur; . the termination of the merger agreement under certain conditions; and . the effects of a termination upon the companies. Each of these provisions is discussed in further detail below. MERGER CONSIDERATION At the time of the merger, each issued and outstanding share of GSI common stock other than: (1) shares owned by GSI as treasury stock or by Lumonics or its subsidiaries, all of which will be canceled; or (2) shares held by GSI stockholders who exercise their dissenters rights, will be converted into the right to receive 1.347 GSI Lumonics common shares. GSI Lumonics will not issue fractional common shares, but will pay cash to any GSI stockholder who would have held fractional shares as the result of the merger. If before the merger, either company changes its common shares into a different number or kind of shares or securities, then a proportionate adjustment will be made to the number of GSI Lumonics common shares to be received by GSI stockholders so that the equity interest to be received by stockholders is equivalent to what they would have received had no change occurred. CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES Promptly after the merger, GSI Lumonics will deposit with an exchange agent certificates representing the GSI Lumonics common shares to be issued to GSI stockholders under the merger agreement and cash in lieu of fractional shares to be paid to the stockholders. As soon as reasonably practicable after the merger, the exchange agent will mail to each holder of GSI common stock a letter of transmittal and instructions for surrendering and exchanging GSI common stock for GSI Lumonics common shares. Upon surrender of a certificate for cancellation to the exchange agent and delivery to the exchange agent of a letter of transmittal, the holder of a certificate will be entitled to receive a certificate representing the number of whole GSI Lumonics common shares to which the holder is entitled, plus the cash amount payable in lieu of fractional shares which the holder has the right to receive. The holder of GSI common stock will not be entitled to receive interest on any funds to be received in the merger. If a transfer of GSI common stock has not been registered in the stock transfer records of GSI, the merger consideration may be issued to a transferee if the certificate representing shares of GSI common stock is 42 presented to the exchange agent accompanied by all necessary transfer documents. GSI certificates surrendered for exchange by any person constituting an "affiliate" of GSI for purposes of Rule 145 under the Securities Act may not be exchanged until GSI Lumonics has received an affiliate agreement from the person. After the merger, there will be no transfers on the stock transfer books of GSI of the shares of GSI common stock which were outstanding immediately prior to the merger. GSI stockholders who surrender their certificates in exchange for GSI Lumonics' common shares will be entitled to receive, without interest, all dividends or other distributions payable on GSI Lumonics common shares with a record date after the merger. The exchange agent, upon demand of GSI Lumonics, will deliver to GSI Lumonics any certificates representing GSI Lumonics common shares or cash which remain undistributed to the stockholders of GSI for six months after the merger. Any GSI stockholders who have not then submitted their GSI certificates may look only to GSI Lumonics as general creditors for payment of their claim for GSI Lumonics common shares, any cash in lieu of fractional shares of GSI Lumonics common shares and any dividends or distributions on GSI Lumonics common shares. GSI STOCKHOLDERS SHOULD NOT RETURN THEIR GSI CERTIFICATES WITH THE ENCLOSED PROXY AND SHOULD NOT FORWARD GSI CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. GSI STOCK OPTIONS Under the merger agreement, each outstanding option or warrant to purchase GSI common stock will be assumed by GSI Lumonics and will then, after the merger, be an option to acquire a number of GSI Lumonics common shares, rounded down to the nearest whole number, equal to the product of the number of shares of GSI common stock issuable upon exercise of the option and 1.347. The option exercise price will be the amount, rounded up to the nearest cent, equal to the exercise price of the option divided by 1.347. GSI Lumonics will comply with the GSI stock option plans and take actions within its control that are reasonably necessary to ensure that each GSI stock option that is an "incentive stock option" as defined in section 422 of the Internal Revenue Code of 1986 will continue to qualify under Section 422 of the Code. Lumonics will reserve for issuance a sufficient number of GSI Lumonics common shares for delivery under the merger agreement. As soon as practicable after the merger, GSI Lumonics will file a registration statement on Form S-8 (or any successor or other appropriate form) with respect to the GSI Lumonics common shares subject to such options and will use best efforts to maintain the effectiveness of the registration statement or registration statements for so long as such options remain outstanding. All options to purchase Lumonics common shares outstanding at the time of the merger will remain outstanding without any change to their terms. EFFECTIVE TIME The merger will become effective when the parties file Articles of Merger with the Secretary of State of the Commonwealth of Massachusetts. CONDUCT OF BUSINESS PRIOR TO THE MERGER GSI and Lumonics have each agreed that prior to the merger, it: (1) will conduct its business only in the ordinary course consistent with its past practice, and (2) will use all commercially reasonable efforts to: 43 . preserve its present business organization and reputation; . keep its key personnel; . maintain its assets in good working order; . maintain insurance; . preserve its relationships with customers and suppliers; and . comply in all material respects with all applicable laws and orders. In addition, neither company will take actions not in the ordinary course of business, except as permitted by the merger agreement or required by law. For example, neither company will: . amend its charter documents; . pay dividends or make distributions; . reclassify any of its capital stock; . adopt a plan of reorganization; . repurchase any capital stock; . issue, sell, any share of its stock or modify the rights of securityholders; . make acquisitions; . dispose of assets; . permit any material change in any pricing, marketing, purchasing, investment, accounting, financial reporting, inventory, credit, allowance or tax practice or policy; . permit any material change in any method of calculating any reserve for accounting, financial reporting or tax purposes; . permit any material change in, make any material tax election or settle or compromise any material income tax liability; . enter into, amend in any material respect or terminate any employee benefit plan; . increase in any manner the compensation or fringe benefits of any personnel; or . make any change in its lines of business. The companies have agreed to confer on a regular basis with the other party relating to matters relevant to the merger, and to promptly advise the other party of any change which could harm such party or its ability to complete the merger. No party will be required, however, to make any disclosure that would violate applicable law. Each party will try to cure any circumstance that will cause the merger agreement to be breached. The parties will also take all commercially reasonable steps to satisfy the conditions in the merger agreement. Finally, GSI has agreed not to amend or take any action with respect to its rights agreement, and Lumonics has agreed to adopt a shareholder rights plan as soon as possible after the merger. OFFERS FROM OTHER PARTIES In the merger agreement, GSI and Lumonics agreed that until either the termination of the merger agreement or the time of the merger, neither party will initiate, solicit or encourage any inquiries or proposal to acquire: (1) all or any significant portion of its assets; 44 (2) 20% or more of the outstanding shares of its common stock; or (3) 20% of the outstanding shares of the capital stock of any of its subsidiaries. If a third party contacts either GSI or Lumonics with such a proposal, that party must notify the other party immediately. Under the merger agreement, however, neither party's Board is prohibited from furnishing information to or entering into discussions or negotiations with any person or group that makes an unsolicited bona fide proposal if the following conditions are satisfied: . the parties have entered into a confidentiality agreement with terms and conditions no less favorable to such party than the confidentiality agreement between GSI and Lumonics; . the shareholders of the party considering an alternative proposal have not yet approved the merger; . such party's Board based upon the written opinion of outside counsel determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to its shareholders as imposed by law; . such proposal is not conditioned on the receipt of financing and the Board of Directors has reasonably concluded in good faith that the person or group making such proposal will have adequate sources of financing to consummate such acquisition; . the Board of Directors reasonably concludes that such other proposal is more favorable to such party's shareholders than the merger; and . the party considering the alternative proposal keeps the other party to the merger agreement fully informed of all discussions or negotiations. CONDITIONS TO THE MERGER Before the merger can occur, certain conditions must be fulfilled or, alternatively, waived by the appropriate party or parties. If any material condition is waived, the companies will resolicit the consent of their shareholders to the merger if required by law. The conditions which remain outstanding include the following: . approval under the Hart-Scott-Rodino Act must be obtained; . the necessary shareholder approvals must be obtained; . no regulatory authority shall have enacted or enforced any law or order which has the effect of restricting the merger; . all actions of, filings with and notices to any third parties must be obtained; and . the number of shares for which dissent rights are perfected cannot exceed 6% of the number of GSI Lumonics common shares that would be outstanding immediately following the merger. For this purpose, each dissenting share of GSI common stock will be multiplied by 1.347. The obligation of each company to effect the merger is further subject to each of the following additional conditions all which may be waived in whole or in part by the company in its sole discretion: . the representations and warranties made by the other company in the merger agreement must be true on the date of the merger; . the other company must have performed and complied with, in all material respects, each agreement required by the merger agreement; and . there will not have been any development having a negative impact on the other company, excluding stock market fluctuations, changes in general economic conditions, or any other development that could reasonably be expected generally to have a negative effect on companies in the industries in which the other company operates. In addition, in order for the merger to occur, the GSI rights agreement cannot be triggered by a third party. 45 REPRESENTATIONS AND WARRANTIES In the merger agreement, each of GSI and Lumonics made reciprocal representations and warranties, subject to exceptions which were disclosed by the appropriate party, concerning their business and assets. The representations and warranties must be true and correct at the time of the merger or else the other party will not be required to complete the merger. Such representations and warranties include, among other things: . that the party is duly authorized, validly existing and in good standing and that its issued and outstanding shares are fully paid and nonassessable; . that the party's Board of Directors authorized the signing and performance of the merger agreement; . that the party has provided and will provide accurate information to the Commission, the Canadian regulatory authorities, Nasdaq and The Toronto Stock Exchange; . that, except as otherwise disclosed, there are no suits, actions filed or threatened against the party; the party is not in violation of laws, including environmental laws and laws regulating employee benefit plans and tax laws; and there are no undisclosed liabilities; . that the party's regulatory reports are accurate; . that the party has all necessary rights to the intellectual property used in its business; . that the party has complied with its organizational documents including its by-laws and certificate of incorporation; and . that the party has received or as of the merger will receive all necessary consents from governmental and regulatory authorities and third parties. In addition, GSI makes representations relating to its Rights Agreement. GSI also represents and warrants that it has taken all necessary actions so that the provisions of Massachusetts laws regulating acquisitions of control shares are not applicable to the merger agreement, the stock option agreements, the merger or other transactions contemplated by such agreements. Lumonics represents and warrants that it is not subject to any "takeover" statute or regulation under Canadian laws. TERMINATION; TERMINATION FEES GSI or Lumonics may terminate the merger agreement, whether before or after receiving shareholder approval, if: . the merger is not completed by March 31, 1999; . the companies do not obtain the required shareholder approvals; . the other party materially breaches the merger agreement; . a law or court order permanently prohibits the merger; . its Board of Directors determines in good faith that termination of the merger agreement is required for such Board to comply with its fiduciary duties relating to an unsolicited bona fide alternative proposal by another party; or . the other party receives an unsolicited bona fide alternative proposal and such party's Board of Directors changes its recommendation regarding the merger in a manner adverse to the terminating party. 46 If either of the companies receives an alternative proposal from a third party and the merger agreement is thereafter terminated under any of the following circumstances, the party that received the alternative proposal must reimburse the other party for its transaction expenses up to $500,000 and pay a termination fee of $4 million: . the party that receives the alternative proposal terminates the merger agreement because its Board of Directors determines that termination of the merger agreement is required for the Board to comply with its fiduciary duties; or . the party that did not receive the alternative proposal terminates the merger agreement because the other party materially breaches the merger agreement; or . the party that did not receive the alternative proposal terminates the merger agreement because the Board of Directors of the other party changes its approval or recommendation of the merger; or . either party terminates the merger agreement for any reason and a definitive agreement with respect to an alternative proposal is executed within one year after such termination. This does not apply if the party who did not receive the alternative proposal breaches the merger agreement or fails to obtain its shareholders' approval. If the party required to pay the above fee fails to pay such amount due, and in order to obtain such payment, the other party files a lawsuit that results in a judgment against such party for such amount, then the party must also pay to the other party, as the case may be, all costs and expenses including attorneys' fees and expenses incurred by such other party or any of its subsidiaries in connection with such suit, together with interest on the amount of the fee at a rate equal to the prime rate publicly announced from time to time by The Chase Manhattan Bank and in effect on the date such payment was required to be made. EXPENSES The parties will share equally: . the fee required for the Hart-Scott-Rodino filing, . the filing fee payable to the Commission for this document, and . the expenses incurred in connection with the printing and mailing of this document. Each of GSI and Lumonics will pay all other costs or expenses incurred by it in connection with the merger agreement and the related transactions including any termination fees described above. INDEMNIFICATION OF GSI OFFICERS AND DIRECTORS BY GSI LUMONICS FOLLOWING THE MERGER GSI Lumonics has agreed to indemnify for six years after the merger each present and former director or officer of GSI against all losses incurred because such person is or was a director or officer of GSI and relating to any action or omission prior to the merger, as permitted by applicable law. GSI Lumonics will not be liable for any claim, resulting from the willful misconduct of the person seeking indemnification. GSI Lumonics will, for six years following the merger and for so long thereafter as any claim for insurance coverage asserted on or prior to such date has not been fully resolved or adjudicated, maintain directors' and officers' liability insurance terms that are at least as advantageous to the insured parties. GSI Lumonics will not, however, be required to spend more than 150% of the premiums paid by GSI in 1997 for such insurance in order to continue such insurance coverage. AMENDMENTS TO THE MERGER AGREEMENT The Boards of Directors of GSI or Lumonics may amend the merger agreement whether prior to or after the GSI stockholders' approval or the Lumonics shareholders' approval has been obtained, but only to the extent permitted by applicable law. 47 STOCK OPTION AGREEMENTS We have summarized the material terms of the stock option agreements below. You should, however, read the full text of the stock option agreements which are attached to this document as Annex B. As a condition to GSI's entering into the merger agreement, Lumonics entered into a stock option agreement, dated as of October 27, 1998, with GSI and as a condition to Lumonics' entering into the merger agreement, GSI entered into an amended and restated stock option agreement, dated as of October 27, 1998, with Lumonics and a Lumonics subsidiary. Under the stock option agreements: (1) Lumonics granted to GSI an option to purchase a number of Lumonics common shares up to approximately 19.9% of the number of Lumonics common shares outstanding immediately before exercise of the option to purchase Lumonics common shares at an exercise price of Cdn$8.09 per share, subject to adjustment under specified circumstances; and (2) GSI granted a Lumonics subsidiary an option for Lumonics to purchase a number of shares of GSI common stock up to approximately 19.9% of the number of shares of GSI common stock outstanding immediately before exercise of the option to purchase GSI common stock at exercise price of $4.57 per share, subject to adjustment under specified circumstances. The option exercise prices are equal to the average of the closing price of a share of the applicable security on the exchange on which it is traded for the ten days ended October 27, 1998. Each option price per share is payable in cash or by delivery of shares of the company granting such option having a value, based upon trailing ten-day average closing prices, equal to the aggregate option price for the shares to be purchased. Each of the options becomes exercisable in whole or in part if a triggering event occurs prior to the termination of the option. The stock option agreements generally provide that each option will become exercisable after the merger agreement becomes terminable by the grantee in circumstances under which the grantee could be entitled to payment of a termination fee. Each of the stock option agreements provides that the applicable options will terminate upon the earliest of: (1) the time of the merger; (2) the termination of the merger agreement, except where the grantee of the option is required to pay a termination fee; or (3) one year after termination of the merger agreement if a termination fee is paid, with such termination date extended to no later than the second anniversary of the date of the stock option agreement in the event that the option cannot be exercised because of an applicable judgment, decree, order, law or regulation. Neither option will be exercisable if grantee is in willful breach of any of its representations or warranties, or in material breach of any of its covenants, contained in the option agreement or the merger agreement. The issuance of shares pursuant to the exercise of each option is subject to the satisfaction of certain conditions, including governmental and regulatory approvals having been obtained, and the issuance of shares pursuant to the exercise of the GSI option is subject to The Toronto Stock Exchange having conditionally approved the listing of the shares issuable pursuant to the exercise of the Lumonics option. 48 At any time within two years of exercise of an option, the grantee will have certain registration rights relating to the shares issued under the option. In connection therewith, the issuer will use its reasonable best efforts to: . cause the filing with the Commission of a registration statement under the Securities Act or, in the case of the Lumonics stock option agreement, a prospectus under the Securities Act (Ontario) to cover the shares; and . cause the registration statement or prospectus to remain effective for a period of 180 days. Each stock option agreement provides that at any time after the option is exercisable upon request of the grantee, the company that granted the option will repurchase the option and all or any part of the shares purchased by the holder under such option received upon the full or partial exercise of the option from the holder thereof. The company that granted such option will repurchase the option at a price equal to the product of the greater of: (1) the average closing price of one share of the common stock of the issuer for the five trading days before the date the party seeking to sell such option or shares gives notice; or (2) the price per share that a third party offers to pay in a tender offer or acquisition; minus the price at which shares of common stock may be purchased under the option, multiplied by the number of shares subject to the option. If the company that granted the option is required to repurchase shares that were acquired under an option, then it must pay a price per share equal to the exercise price of the option (as adjusted) plus the difference between the highest price per share offered for the relevant shares by a third party during the repurchase period and such exercise price, multiplied by the number of option shares. If the party granting the option merges with another company and is not the surviving corporation, changes its stock or sells all or substantially all of its assets, the option will be converted into an option with terms similar to those of the outstanding option being to buy stock of the entity that survives the merger or acquires the assets of the issuer. Neither the company granting the option nor the company receiving the option may transfer or sell the option to a third party without the other's permission. The stock option agreements may increase the likelihood that the merger will occur. If the merger does not occur because a third party acquires the stock or assets of the party issuing the stock option, than the stock option agreements compensate the grantee for the efforts undertaken and the expenses, losses and opportunity costs incurred by it. THE STOCK OPTION AGREEMENTS MAY HAVE THE EFFECT OF DISCOURAGING OFFERS BY OTHERS TO ACQUIRE LUMONICS OR GSI PRIOR TO THE MERGER. As of the date of this document, GSI and Lumonics believe that the options have not become effective. 49 COMPARATIVE MARKET DATA AND DIVIDENDS LUMONICS The Lumonics common shares are listed and traded on The Toronto Stock Exchange. The following table sets forth the high and low sales prices per Lumonics common share as reported on The Toronto Stock Exchange, for the quarterly periods presented below:
LUMONICS COMMON SHARES ------------------- HIGH LOW --------- --------- Calendar 1996: First quarter....................................... Cdn$26.00 Cdn$18.75 Second quarter...................................... 29.20 25.125 Third quarter....................................... 28.00 25.00 Fourth quarter...................................... 28.00 24.05 Calendar 1997: First quarter....................................... 30.05 24.30 Second quarter...................................... 29.00 24.60 Third quarter....................................... 32.25 27.00 Fourth quarter...................................... 29.25 21.50 Calendar 1998: First quarter....................................... 27.00 21.50 Second quarter...................................... 23.00 11.80 Third quarter....................................... 13.75 7.55 Fourth quarter...................................... 8.75 6.50
On October 27, 1998, the last trading day prior to announcement of the execution of the merger agreement, the closing price per Lumonics common share as reported on The Toronto Stock Exchange was Cdn$8.75. On , 1999, the closing price per share was Cdn$ . Shareholders are urged to obtain current market quotations. As of , 1999, there were approximately holders of record of Lumonics common shares. 50 GSI The GSI common stock is listed and traded on Nasdaq. The following table sets forth the high and low sales prices per share of GSI common stock as reported on Nasdaq for the calendar quarters presented below:
GSI COMMON STOCK ------------- HIGH LOW ------ ------ Calendar 1996: First quarter............................................. $15.00 $8.875 Second quarter............................................ 25.00 12.75 Third quarter............................................. 18.00 9.00 Fourth quarter............................................ 13.375 8.00 Calendar 1997: First quarter............................................. 13.563 8.625 Second quarter............................................ 15.875 6.875 Third quarter............................................. 35.00 13.00 Fourth quarter............................................ 34.875 16.313 Calendar 1998: First quarter............................................. 21.875 12.625 Second quarter............................................ 24.625 8.25 Third quarter............................................. 9.75 3.75 Fourth quarter............................................ 6.625 3.750
On October 27, 1998, the last trading day prior to announcement of the execution of the merger agreement, the closing price per share of GSI common stock as reported on Nasdaq was $5.125. On January 26, 1999, the closing price per share was $6.375. Stockholders are urged to obtain current market quotations. As of January 26, 1999, there were approximately 266 holders of record of GSI common stock. Since many shares of GSI common stock are registered in "nominee" or "street" name, GSI estimates that the total number of beneficial owners is approximately 4,000. DIVIDEND POLICY Neither GSI nor Lumonics has paid any cash dividends on its shares of common stock or common shares, respectively. The GSI Lumonics Board of Directors will determine future dividends, if any, in light of the earnings and financial condition of GSI Lumonics and its subsidiaries and other factors. 51 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF GSI LUMONICS INC. The unaudited pro forma condensed consolidated financial information of GSI Lumonics was prepared to illustrate the estimated effects of the merger for balance sheet purposes as of September 30, 1998 and for purposes of the results of operations for the nine months ended September 30, 1998 and for the year ended December 31, 1997. Based upon the terms of the merger agreement, and the resulting attributes of the merger, the pro forma statements have been prepared using the purchase method of accounting for the merger in accordance with US GAAP. The unaudited pro forma condensed consolidated financial information of GSI Lumonics presented is derived from a combination of Lumonics' and GSI's financial information. The balance sheets and statements of operations of Lumonics and GSI have been summarized so they may be presented on a consistent basis for purposes of the unaudited pro forma condensed consolidated financial information of GSI Lumonics. The pro forma condensed consolidated balance sheet as at September 30, 1998 gives effect to the transactions set out in the merger agreement, more fully described in Note 2, as though they had occurred on September 30, 1998. The pro forma condensed consolidated statements of operations for the nine months ended September 30, 1998 and the year ended December 31, 1997 give effect to these transactions as if they had occurred on January 1, 1997. The allocation of the aggregate purchase price reflected in the unaudited pro forma condensed consolidated financial information of GSI Lumonics is preliminary. The actual purchase price allocation is to reflect the fair values of net identifiable assets acquired and liabilities assumed based upon management's evaluation of such assets and liabilities following the completion of the transaction and, accordingly, the adjustments that have been included will change based upon the final allocation of the total purchase price. Such allocation may differ significantly from the preliminary allocation included herein. The following GSI Lumonics pro forma financial statements have been prepared based on the historical financial statements of GSI and Lumonics which were prepared in accordance with US GAAP. Separate GSI Lumonics pro forma financial statements based on the historical financial statements of GSI and Lumonics which were prepared in accordance with Canadian GAAP have been delivered to Lumonics shareholders together with this document in the Canadian GAAP financial statement supplement. 52 GSI LUMONICS INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (UNAUDITED)
GENERAL PRO FORMA PRO FORMA NOTES LUMONICS SCANNING SUBTOTAL ADJUSTMENTS CONSOLIDATED ----- -------- -------- -------- ----------- ------------ (THOUSANDS OF US DOLLARS) ASSETS ------ Cash and cash equiva- lents.................. 25,924 4,423 30,347 30,347 Short term investments.. 12,585 -- 12,585 12,585 Accounts receivable..... 32,915 38,659 71,574 71,574 Due from related par- ties................... 4,551 -- 4,551 4,551 Inventories............. 43,437 37,848 81,285 81,285 Other assets............ 2.5 6,418 10,220 16,638 16,638 Current portion of swap contracts.............. 485 -- 485 485 ------- ------- ------- ------- ------- Total current as- sets............... 126,315 91,150 217,465 217,465 Fixed assets............ 32,041 15,428 47,469 47,469 Long term portion of swap contracts......... 727 -- 727 727 Goodwill and other as- sets................... 2.5 5,911 6,879 12,790 6,801 18,610 2.5 2,448 2.5 (3,429) ------- ------- ------- ------- ------- 164,994 113,457 278,451 5,820 284,271 ======= ======= ======= ======= ======= LIABILITIES & STOCKHOLDERS' EQUITY -------------------- Bank indebtedness and current portion of long-term debt......... 8,046 6,997 15,043 15,043 Accounts payable........ 8,825 8,822 17,647 17,647 Accrued liabilities and income taxes........... 2.3 14,828 11,101 25,929 5,448 31,377 Accrued compensation and benefits............... 4,173 4,562 8,735 8,735 ------- ------- ------- ------- ------- Total current lia- bilities........... 35,872 31,482 67,354 5,448 72,802 Long term debt.......... 4,439 1,516 5,955 5,955 Deferred compensation... -- 1,906 1,906 1,906 Deferred income taxes... 2.5 -- -- -- 2,448 2,448 ------- ------- ------- ------- ------- Total liabilities... 40,311 34,904 75,215 7,896 83,111 Stockholders' equity Capital stock ........ 2.5 138,690 130 138,820 (130) 221,969 2.1 82,891 2.2 836 2.3 (448) Additional paid in capital.............. 2.5 -- 50,040 50,040 (50,040) -- Retained earnings (deficit)............ 2.5 (6,872) 30,052 23,180 (30,052) (13,674) 2.5 (6,802) Treasury stock........ 2.5 -- (589) (589) 589 -- Accumulated other comprehensive income............... 2.5 (7,135) (1,080) (8,215) 1,080 (7,135) ------- ------- ------- ------- ------- Total stockholders' equity............. 124,683 78,553 203,236 (2,076) 201,160 ------- ------- ------- ------- ------- 164,994 113,457 278,451 5,820 284,271 ======= ======= ======= ======= =======
See accompanying notes 53 GSI LUMONICS INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
GENERAL PRO FORMA PRO FORMA NOTES LUMONICS SCANNING SUBTOTAL ADJUSTMENTS CONSOLIDATED ----- -------- -------- -------- ----------- ------------ (THOUSANDS OF US DOLLARS EXCEPT FOR SHARE AND PER SHARE AMOUNTS) Sales................... 110,210 141,684 251,894 251,894 Cost of goods sold...... 78,348 75,858 154,206 154,206 ------- ------- ------- ----- ------- Gross profit............ 31,862 65,826 97,688 97,688 Selling, general and administration......... 2.6 28,354 39,948 68,302 1,142 69,146 2.6 (298) Research and development............ 10,038 20,869 30,907 30,907 Restructuring, litigation and other charges................ 2,016 5,777 7,793 7,793 ------- ------- ------- ----- ------- Loss before the following.............. (8,546) (768) (9,314) (844) (10,158) Interest (expense) income (net)........... 1,007 (378) 629 629 ------- ------- ------- ----- ------- Loss before taxes....... (7,539) (1,146) (8,685) (844) (9,529) Recovery of taxes....... 2.6 (2,203) (404) (2,607) (304) (2,911) ------- ------- ------- ----- ------- Net loss for the period................. (5,336) (742) (6,078) (540) (6,618) Foreign currency translation adjustments............ (3,028) 312 (2,716) (2,716) Change in unrealized gain (loss) on marketable equity securities, net........ (501) (501) (501) ------- ------- ------- ----- ------- Comprehensive loss for the period............. (8,364) (931) (9,295) (540) (9,835) ======= ======= ======= ===== ======= Net loss per common share 3 Basic................. $ (0.31) $ (0.06) $ (0.19) Diluted............... $ (0.31) $ (0.06) $ (0.19) Adjusted weighted average common shares Basic (000's)......... 17,088 12,560 34,130 Diluted (000's)....... 17,088 12,560 34,130
See accompanying notes 54 GSI LUMONICS INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
GENERAL PRO FORMA PRO FORMA NOTES LUMONICS SCANNING SUBTOTAL ADJUSTMENTS CONSOLIDATED ----- -------- -------- -------- ----------- ------------ (THOUSANDS OF US DOLLARS EXCEPT FOR SHARE AND PER SHARE AMOUNTS) Sales................... 177,328 181,530 358,858 358,858 Cost of goods sold...... 111,406 94,805 206,211 206,211 ------- ------- ------- ------- Gross profit............ 65,922 86,725 152,647 -- 152,647 Research and develop- ment................... 11,993 22,302 34,295 34,295 Selling, general and admin. ................ 2.6 37,991 46,676 84,667 1,523 86,080 2.6 (110) Acquired in-process research and development............ 10,600 10,600 10,600 ------- ------- ------- ------ ------- Income before the fol- lowing................. 15,938 7,147 23,085 (1,413) 21,672 Interest income (net)... 1,048 464 1,512 -- 1,512 ------- ------- ------- ------ ------- Income before tax....... 16,986 7,611 24,597 (1,413) 23,184 Provision for taxes..... 2.6 5,074 2,502 7,576 (508) 7,068 ------- ------- ------- ------ ------- Net income for the year................... 11,912 5,109 17,021 (905) 16,116 Foreign currency trans- lation adjustment...... (4,193) (305) (4,498) (4,498) ------- ------- ------- ------ ------- Comprehensive income for the year............... 7,719 4,804 12,523 (905) 11,618 ======= ======= ======= ====== ======= Net income per common share 3 Basic................. $ 0.75 $ 0.42 $ 0.49 Diluted............... $ 0.72 $ 0.40 $ 0.48 Adjusted weighted aver- age common shares Basic (000's) ........ 15,989 12,065 33,031 Diluted (000's)....... 16,454 12,657 33,841
See accompanying notes 55 GSI LUMONICS INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA AND UNLESS OTHERWISE STATED) 1. BASIS OF PRESENTATION The pro forma condensed consolidated financial statements have been prepared using the purchase method of accounting for the merger of Lumonics Inc. and General Scanning Inc. described in this joint proxy statement/prospectus document. The ongoing business will continue as GSI Lumonics Inc. The accompanying pro forma condensed consolidated financial statements have been prepared by management of Lumonics based on the unaudited and audited consolidated financial statements of Lumonics, prepared in accordance with US GAAP, as at and for the nine months ended September 30, 1998 and for the year ended December 31, 1997, respectively, and the unaudited and audited consolidated financial statements of General Scanning, prepared in accordance with US GAAP, as at and for the nine months ended October 3, 1998 and for the year ended December 31, 1997, respectively. The use of General Scanning's financial statements for the fiscal period ended October 3, 1998 as opposed to September 30, 1998 had no significant impact on reported results. The accounting policies used in the preparation of the pro forma condensed consolidated financial statements are those disclosed in Lumonics' audited and unaudited consolidated financial statements. Management determined no adjustments are necessary to conform the General Scanning financial statements with the accounting policies used by Lumonics in the preparation of its consolidated financial statements. In the opinion of the management of Lumonics, these pro forma condensed consolidated financial statements include all adjustments necessary for a fair presentation of pro forma financial statements. The pro forma condensed consolidated financial statements are not necessarily indicative of the results that actually would have been achieved if the transactions reflected therein had been completed on the dates indicated or the results which may be obtained in the future. In preparing these pro forma condensed consolidated financial statements, no adjustments have been made to reflect transactions which have occurred since the dates indicated or to reflect the operating benefits and general and administrative cost savings expected to result from combining the operations of Lumonics and General Scanning. The pro forma condensed consolidated financial statements should be read in conjunction with the description of the merger in this joint proxy statement/prospectus, the unaudited and audited consolidated financial statements of Lumonics as at and for the nine months ended September 30, 1998 and for the year ended December 31, 1997, respectively, and notes thereto, included in this joint proxy statement/prospectus, and the unaudited and audited consolidated financial statements for General Scanning as at and for the nine month period ended October 3, 1998 and as at and for the year ended December 31, 1997, respectively, and notes thereto, also included in this joint proxy statement/prospectus. 2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS These pro forma condensed consolidated financial statements give effect to the following assumptions and adjustments as if they had occurred on September 30, 1998 in respect of the pro forma condensed consolidated balance sheet and on January 1, 1997 in respect of the pro forma condensed consolidated statements of operations: . Completion of the transactions contemplated by the merger agreement, as more fully described elsewhere in this joint proxy statement/prospectus. . Absence of any material transactions by, or changes in operations or the fair values of assets and liabilities of, Lumonics and General Scanning subsequent to September 30, 1998 other than as described elsewhere in this joint proxy statement/prospectus. 56 GSI LUMONICS INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA AND UNLESS OTHERWISE STATED) . Neither GSI stockholders nor Lumonics stockholders exercise dissenters' rights in respect of the Merger. The total purchase price will be allocated to the net identifiable assets acquired and liabilities assumed, based on their respective fair values. The aggregate purchase price reflected in the pro forma condensed consolidated financial statements is based upon the average Lumonics share price for the three days before and three days after the announcement of the merger agreement on October 28, 1998. TRANSACTIONS GIVING EFFECT TO THE MERGER AND AGREEMENTS RELATED THERETO 2.1 SHARES PURCHASED To record $82,891 for the issuance by Lumonics of 17,041,740 common shares at $4.864 (Cdn$7.60) per share in exchange for all 12,651,626 outstanding shares of General Scanning common stock as of October 27, 1998, on the basis of an exchange ratio of 1.347 common shares of Lumonics for each one share of General Scanning common stock. 2.2 GENERAL SCANNING STOCK OPTIONS/EMPLOYEE STOCK PURCHASE PLANS To record $836 as paid-in capital, to reflect the cost to Lumonics of assuming General Scanning stock options and warrants, as follows: A total of 1,869,387 Lumonics stock options (equal to 1,387,815 General Scanning stock options, outstanding as of October 27, 1998) were valued at a fair value of $0.443 per Lumonics Inc. stock option..................................................... $828 A total of 70,718 Lumonics stock options (equal to 52,500 General Scanning Stock warrants, outstanding as of October 27, 1998) were valued at a fair value of $0.11 per Lumonics Inc. stock option... 8 ---- Fair value of stock options to be issued.......................... $836 ====
The fair value of the options was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free rate of 4%, expected life of 4 years, expected volatility of 0.3, and a dividend yield at zero. The options entitle holders to one common share of Lumonics upon exercise, have a weighted average remaining life of 8 years and weighted average exercise price of $10.61. On or prior to the date of completion of the transaction, Lumonics may grant additional Lumonics stock options for common shares of Lumonics for newly-hired employees and the retention or promotion of current employees. These pro forma condensed consolidated financial statements do not reflect these possible grants since the total number of options is not known at this time and any options are to be issued at exercise prices equal to the price of Lumonics' stock on the date of grant. 2.3 COSTS ASSOCIATED WITH THE TRANSACTION To record the estimated costs of $5,000 associated with the transaction, consisting of investment banking, legal and other professional costs to be included in the cost of acquisition. Also to record the estimated costs (net of tax) of share issuance and registration of $448, which costs have been charged to share capital. 57 GSI LUMONICS INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA AND UNLESS OTHERWISE STATED) 2.4 COSTS OF MERGER RELATED PLANNING ACTIVITIES Management has commenced merger related planning activities and is not yet in a position to estimate merger related restructuring and integration costs, related to the rationalization of either Lumonics or General Scanning operations. These pro forma condensed consolidated financial statements do not reflect the costs of any such plans. Any amounts applicable to General Scanning will result in an adjustment to the final purchase price allocation. Any amounts applicable to Lumonics will be expensed as incurred. 2.5 ADJUSTMENTS TO RECORD THE PURCHASE To allocate the aggregate purchase price to General Scanning's net identifiable assets, in accordance with the purchase method of accounting. The aggregate purchase price was determined as follows: Shares purchased (2.1)........................................... $ 82,891 Options purchased (2.2).......................................... 836 -------- Total purchase price........................................... $ 83,727 ======== Allocated as follows: Current assets................................................... $ 91,150 Fixed assets..................................................... 15,428 Acquired technology of General Scanning(2)....................... 6,801 Deferred income taxes............................................ (2,448) Allocated to goodwill(2)(3)...................................... 2,448 Other long-term assets of General Scanning(1).................... 3,450 Current liabilities.............................................. (31,482) Long-term debt................................................... (1,516) Deferred compensation............................................ (1,906) Transaction costs................................................ (5,000) In-process research and development.............................. 6,802 -------- $ 83,727 ========
- -------- (1) Comprised of notes receivable of Robotic Vision Systems, Inc. ("RVSI") of $2,250, RVSI common stock of $730 and other deposits of $470. (2) Goodwill of $2,448 and the acquired technology of $6,801 have been classified as "Goodwill and other assets" in the pro forma balance sheet. (3) The historical goodwill of General Scanning of $3,429 has been eliminated. Management has estimated that $6,802 of the purchase price can be allocated to purchased in-process research and development and expensed at the time of the acquisition, $6,801 can be allocated to acquired technology and amortized over the useful life of 60 months and $2,448 can be allocated to goodwill and amortized over the useful life of 15 years. At the time of acquisition, the technological feasibility of the in-process research and development has not been established and management believes it has no determinable alternate future use. The non recurring charge of $6,802 for purchased in-process research and development is not considered in the pro forma income statement. 58 GSI LUMONICS INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA AND UNLESS OTHERWISE STATED) There is significant uncertainty surrounding the successful development of the purchased in-process technology because General Scanning's markets are characterized by rapid technological change and product innovation. There is also possibility for an adverse effect on the future results from operations if the research and development projects are not successfully developed. Examples of possible limitations of the success of the in-process research and development include alternative laser technologies that could be patented by others for use in memory repair or the industry may move to the next level of memory technology sooner than anticipated. General Scanning's in-process research and development efforts include development of new products and features for its next generation products and may be categorized broadly into three main product areas: (1) laser systems, (2) recorder/printer products, and (3) optical component products. General Scanning expects to complete these projects by late calendar year 1999 at a currently estimated cost of approximately $6.5 million. The remaining efforts of the in-process research and development include development and testing activities related to completion of the technology into commercially viable products. At the earliest, the economic benefits of the acquired in-process technology are expected to begin in late 1999. The allocation of the aggregate purchase price reflected in the unaudited pro forma condensed consolidated financial information of GSI Lumonics is preliminary and based on the financial position of General Scanning at September 30, 1998. The actual purchase price allocation is to reflect the fair value, at the merger date, of the assets acquired (including purchased in- process research and development, acquired technology, fixed assets and goodwill) and liabilities assumed based upon management's evaluation of such assets and liabilities following the closing of the merger and, accordingly, the adjustments that have been included will change based upon the final allocation of the total purchase price. Such allocation may differ significantly from the preliminary allocation included herein. Before such evaluation can be completed, pertinent information to be received includes estimates of the fair value of certain intangible and tangible assets, acquired as at the time of completion of the merger, and the final integration plan for the merger. The final purchase price allocations as of the time of completion of the merger may differ significantly from the preliminary allocation included herein. 2.6 ADJUSTMENTS TO AMORTIZE INTANGIBLES ACQUIRED IN THE MERGER
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ $000'S $000'S To give effect to amortization of acquired technol- ogy and other intangibles arising from the merger.. 1,142 1,523 ===== ===== Elimination of amortization of other goodwill in historical financial statements of GSI............. (298) (110) ===== ===== To give effect to income taxes on the above adjust- ment............................................... 304 508 ===== =====
59 GSI LUMONICS INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA AND UNLESS OTHERWISE STATED) 3. COMMON SHARES The number of pro forma common shares outstanding after giving effect to the transaction are:
000'S ------ Lumonics common shares outstanding at September 30, 1998.......... 17,019 Lumonics shares to be issued in exchange for all outstanding Gen- eral Scanning common stock....................................... 17,042 ------ Pro forma common shares outstanding of GSI Lumonics............... 34,061 ======
The number of pro forma common shares outstanding excludes Lumonics shares issuable upon the exercise of options to be issued as a result of the assumption of General Scanning stock options and warrants. See 2.2. The pro forma net income (loss) per common share was based on the weighted average number of common shares of Lumonics outstanding during the period giving effect to the transaction as if it had occurred on January 1, 1997.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ 000's 000's BASIC: Lumonics average shares outstanding............... 17,088 15,989 Lumonics shares to be issued for outstanding General Scanning shares.......................... 17,042 17,042 ------ ------ Total........................................... 34,130 33,031 ====== ====== DILUTED: Lumonics adjusted average shares outstanding...... 17,088 16,454 Lumonics adjusted average shares to be issued for outstanding General Scanning shares, options and warrants......................................... 17,042 17,387 ------ ------ Total........................................... 34,130 33,841 ====== ======
60 ENFORCEMENT OF JUDGMENTS AGAINST LUMONICS AND GSI LUMONICS Lumonics is currently organized under the Business Corporation Act (Ontario) and GSI Lumonics will be organized under the laws of New Brunswick under the Business Corporation Act (New Brunswick). Some of Lumonics' current directors and some of GSI Lumonics' proposed directors and officers and certain experts named in this document are residents of Canada, and a substantial portion of their assets will be located outside the United States. Consequently, it may be difficult for United States investors to effect service of process on such persons, or to enforce, in United States courts, judgments (in original actions or in actions for enforcement) against Lumonics or GSI Lumonics or these persons which are obtained in the courts of the United States and which are based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Canada against Lumonics or GSI Lumonics or any of its directors and officers or experts named in this document who are not residents of the United States, in original actions or in actions for enforcement of judgments rendered by courts of the United States, of claims arising solely from the application of the United States federal securities laws. WHERE YOU MAY FIND MORE INFORMATION This document is a part of the Registration Statement on Form S-4 which Lumonics has filed with the Securities and Exchange Commission under the Securities Act of 1933. It does not, however, contain all the information set forth in the registration statement on Form S-4, including any amendments. Statements contained in this document concerning the provisions of documents are necessarily summaries of such documents and, while such summaries contain the material provisions of such documents, each statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission or attached as an annex hereto. GSI files annual, quarterly, and special reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information filed may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and are available at the following regional offices of the Commission: the Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048 and the Chicago Regional Office, Northwest Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may obtain copies of the Lumonics registration statement or GSI's filings at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or such materials may be inspected and copied at the Commission's Web site (http://www.sec.gov). In addition, material filed by GSI can be inspected at the offices of the National Association of Securities Dealers, Inc., 1935 K Street, N.W., Washington, D.C. 20006. Lumonics files annual, quarterly, and special reports, proxy statements and other information with the Canadian securities regulatory authorities in such provinces where so required. Reports, proxy and information statements and other information that have been or will be filed by Lumonics with the Canadian securities administrators are available at a Web site (http://www.sedar.com) maintained on behalf of the Canadian securities administrators. Lumonics common shares are traded on The Toronto Stock Exchange. Reports, proxy statements and other information concerning Lumonics can be inspected at the offices of The Toronto Stock Exchange at 2 First Canadian Place, Toronto, Ontario, Canada M5X 1J2. GSI Lumonics will, following the merger, be subject to the requirements of the Exchange Act and will file annual, quarterly, and special reports, proxy statements and other information with the Securities and Exchange 61 Commission, Canadian Securities Administrators, Nasdaq and The Toronto Stock Exchange. After the merger, information will be available regarding GSI Lumonics from the Securities and Exchange Commission as indicated above. ---------------- NEITHER GSI NOR LUMONICS HAS AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION NOT CONTAINED IN THIS DOCUMENT AND YOU MAY NOT RELY UPON ANY INFORMATION NOT CONTAINED IN THIS DOCUMENT AS HAVING BEEN AUTHORIZED. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS DOCUMENT, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR THE DISTRIBUTION OF ANY SECURITIES UNDER THIS DOCUMENT SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH IN THIS DOCUMENT SINCE THE DATE OF THIS DOCUMENT. LUMONICS HAS PROVIDED ALL INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO LUMONICS AND GSI HAS PROVIDED ALL INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO GSI. THE PRECEDING SENTENCE DOES NOT AFFECT THE PARTIES RESPONSIBILITIES UNDER U.S. FEDERAL SECURITIES LAWS. 62 BUSINESS OF GSI OVERVIEW GSI was incorporated in Massachusetts in 1968. GSI develops and manufactures a broad line of laser systems for a wide range of applications in the automotive, electronics, semiconductor, medical and aircraft industries. In addition, GSI produces a line of laser subsystems and components, which are used in GSI's own systems as well as sold in the merchant market. GSI also designs and manufactures a line of printers for medical instrument companies, and recently introduced a new foil imprinting technology for use in photo labs and retail photo finishing outlets. In 1997, over 85% of GSI's revenues were derived from the sale of laser systems and components. GSI sells and supports its products worldwide. In 1997, 56% of its sales were in the United States, 27% in Asia and 17% in Europe. For the first nine months of 1998, 59% of its sales were in the United States, 20% in Asia and 21% in Europe. GSI manufactures laser systems for a variety of industrial applications including: thin film resistor processing systems used in the production of automotive sensors for airbags, anti-lock brakes, emissions control and airflow measurement; thick film resistor processing systems used in the manufacture of surface mount ("SMT") electronic components; memory repair processing systems used in the fabrication of high density computer memory chips; inspection systems for solder paste and component placement on SMT printed circuits; laser marking systems used for permanent identification of products such as integrated circuit packages and automotive components; component handling and sorting systems used in the integration of one or more laser process or inspection systems; precision alignment systems used primarily in the fabrication of aircraft composite structures; inspection and metrology systems employing non-contact 3-D image processing used in the manufacture of disk drives and other precise tolerance devices; micro-array scanners for biological analysis; and laser systems and subsystems used in film imaging. In addition, GSI manufactures laser subsystems and components used by GSI and its customers in many applications including materials processing, test and measurement, alignment, inspection, graphics, vision systems, rapid prototyping and certain medical procedures including dermatology and ophthalmology. GSI's core technological expertise which is employed in each of these applications is high speed micropositioning and precise power control of lasers, as well as 2-D and 3-D image processing. Designing and manufacturing GSI's products requires specialized expertise in: electronics that can operate reliably and accurately under a wide range of environmental conditions; electromechanical devices that can sustain high torsional acceleration; optics and lenses that operate with a variety of laser power and wavelength; closed- loop electronic servo systems that precisely and quickly measure and control relative positions of mechanical components; and software that controls laser systems and interfaces with adjunct equipment. In addition, GSI maintains control of the critical production processes which, GSI believes, allows it to control costs, realize higher quality production and bring new products to market more quickly. Two of GSI's core development and manufacturing sites, located in Wilmington, MA and Bedford, MA, are ISO 9001 certified operations. GSI expands the scope and use of its core products by working closely with leading customers to identify both value-added functionality and new applications. GSI designs and manufactures systems and components with the aim of providing its customers with low overall cost of ownership. GSI's close relationship with its customers enables it to expand the number of applications for its core technology and reduce the risks associated with new product development. GSI believes that the diversity of applications for its products reduces the risk of dependence on the economic conditions in any one industrial sector it serves. BUSINESS STRATEGY GSI's strategy is to continue to apply its expertise in rapid and high accuracy micropositioning and precise power control of laser beams and 2-D and 3-D image processing to the development and manufacture of end-user and OEM systems, subsystems and components for a broad range of market applications. This strategy builds upon GSI's strengths in technology, manufacturing and distribution. 63 The key elements of GSI's business strategy are as follows: Leverage Core Technology. GSI is committed to developing new products and enhancing existing products to address new applications and evolving manufacturing requirements primarily by leveraging GSI's core technologies for high accuracy micropositioning and precise power control of lasers and in image processing. Customer Driven Product Development. GSI seeks to partner and work closely with leading manufacturing companies in selected but diverse areas. This approach allows GSI to incorporate customer feedback during the design process, which expedites product development, thereby saving development time and expense. GSI believes that developing a product to meet a need identified by a market leader and potential customer decreases the risk typically associated with new product introductions. Broad Applications in Diverse Markets. GSI currently offers products serving broad applications in diverse markets, including laser systems for semiconductor manufacturing, production of automotive sensors, manufacturing of electronic components and circuits, precision alignment of manufactured parts, permanent product marking, film imaging and biological analysis. GSI makes subsystems and components for OEM manufacturers of equipment for detection of in-process defects and contamination, performance of medical diagnostic and corrective procedures, confocal microscopy, film imaging, rapid prototyping, and medical patient vital sign recording. By addressing diverse markets, GSI seeks to increase its product sales and reduce its reliance on any single industry or customer. In addition, GSI's marketing strategy is to continue to develop products based on its core technical and manufacturing competencies for markets in which it believes it can attain a leading position in market share. Maintain Control of Critical Production Processes. GSI's manufacturing strategy is to identify and perform internally those manufacturing functions which enable GSI to maintain control over critical portions of the production process and which add value to its products. GSI believes it achieves a number of competitive advantages from such integration, including the ability to achieve lower cost and higher quality, to bring new products and product enhancements quickly and reliably to market, and to produce sophisticated component parts not readily available from other sources. Focus on Customers' Overall Cost of Ownership. GSI designs and manufactures systems, subsystems and components aimed at providing its customers with low overall cost of ownership relative to competing solutions. GSI's laser systems are intended to assist customers in achieving higher yields, greater productivity, more efficient use of operator time and more economical use of manufacturing space. Address Worldwide Markets. GSI markets, sells and supports its products worldwide. GSI believes the strength of its international sales and customer support organization is important to its continued success. To facilitate its worldwide marketing strategy, GSI has dedicated sales and support organizations in Japan, Hong Kong, Korea, Taiwan, Singapore, Malaysia, the Philippines, Germany, England, France and Italy, in addition to eight major locations in the United States. PRODUCTS AND SERVICES Laser Systems and Components Thin Film Laser Processing Systems--GSI's laser systems are used in the production of thin film circuits to precisely tune the performance of linear and mixed signal devices used in a variety of applications including automotive electronics, consumer products, personal computers, communications products, appliances, and medical instruments. Tuning is accomplished by adjusting various component parameters with selective laser cuts, while the circuit is under test, thereby achieving the desired electrical performance. For example, in automotive applications, these precision sensor circuits are used to measure analog variables such as acceleration, voltage, temperature and pressure, and convert them into electronic signals suitable for computer 64 processing and subsequent control of vehicle performance and safety. Automotive applications include engine control, airbag deployment, anti-lock brake control and active suspension systems. The M310 laser system subjects the sensor to a calibrating pressure and then the laser adjusts the sensor parameters to exacting specifications. GSI's M310 systems combine material handling, test stimulus, temperature control and laser trim subsystems into a single turnkey package for tuning linear and mixed signal devices. Recently, such linear mixed signal circuits are being adopted for smart appliances (such as camcorders and mobile GPS devices), extended life batteries, video games, medical instruments and HVAC systems. Such mixed signal devices were among the fastest growing segments in the electronic components industry during 1997. GSI's thin film resistor processing systems range in price from approximately $300,000 to $1,000,000. Representative customers include Analog Devices, Robert Bosch, Denso, Fuji Denki, Burr Brown, Maxim, Motorola and Texas Instruments. Thick Film Laser Processing Systems--GSI's laser systems are used in the production of thick film resistive components (known as chip resistors) for SMT electronic circuits. Chip resistors are microelectronic components that replace larger axial lead resistors formerly used in electronic circuits. Chip resistors are used in most consumer and industrial electronic products including CD players, VCRs, TVs, camcorders and cellular telephones. A camcorder, for example, may contain over five hundred chip resistors. The increasing use of these devices is being driven by the demand for enhanced functionality, reduced size, and lower cost of consumer electronics. SMT components meet these needs by providing reduced package size and production set-up time, and improved reliability and delivery times. GSI's W724C laser system is an integral part of the process for manufacturing chip resistors. By means of selected cuts, laser systems are used to change the effective length and cross section of the electrical conductor of each resistor element. The resistance is monitored, and the laser action continues until the precise resistance value is obtained. GSI believes that the size of resistors will continue to shrink and, as a result, manufacturers will require more precise laser systems. In November 1998, GSI introduced the W770 Chip Component Trim System featuring faster and higher quality cuts, as well as an intelligent parts handler for increased reliability and simplicity, delivering production tolerant, "lights out" operation on the smallest packages sizes and automatically manages multi-lot jobs and non-conforming parts. GSI's W670 laser systems are used for processing more general purpose hybrid thick film electronic circuits. These circuits are designed to withstand harsh environmental uses, such as automotive ignition controls, fuel sensors and high voltage regulation. GSI's thick film resistor processing systems range in price from approximately $200,000 to $350,000. Representative customers include Kyocera, Matsushita, Philips, Samsung and Vishay. Litigation with Robotic Vision Systems, Inc. ("RVSI"), arising from GSI's acquisition of View Engineering, Inc., was settled in June 1998. Under the terms of the settlement, in consideration of $3.75 million in stock and notes from RVSI, GSI has agreed not to compete and has granted an exclusive technology license to RVSI in the field of semiconductor interconnection inspection. RVSI agreed not to compete in the field of solder paste inspection. Surface Mount Measurement Systems--GSI's surface mount measurement products address another sector of the electronics industry, the manufacture of printed circuit board assemblies. Customers for SMT measurement products require systems which can be used for prototyping, near-process monitoring and in-line process control. These systems can be installed near or in the circuit board assembly line to address these needs. In the manufacture of surface-mount electronics, solder, in paste form, is stenciled onto the circuit board with a screen printer, and then components are placed in their respective positions on the board by automated equipment. Critical variables in the manufacturing process, which GSI's systems address, include the amount of solder deposited on the board and the accurate placement of the electronic components. 65 The Model 8100 system was introduced in 1995 and represents the third generation of equipment design. The Model 8100 uses GSI's patented three- dimensional scanning laser data acquisition technology, and can inspect either solder paste depositions or component placement accuracy. The current base price for the Model 8100 system is approximately $200,000 to $250,000. The strongest market segments for SMT measurement products have been in the computer, telecommunications and automotive industries as well as in contract manufacturers which serve those and other industries. The Model 8200 system was introduced in March 1998 and offers a faster, lower-priced solution for inspection of smaller sized circuit boards. The current price for the Model 8200 is approximately $125,000 to $150,000. The strongest market segments for SMT measurement products have been in the telecommunications, automotive, and computer industries as well as contract manufacturers which serve those and other industries. Customers include Celestica, Delco, Ericsson, Jabil Circuits, and Motorola. Memory Repair Systems--Dynamic random access memory chips are critical components in the active memory portion of computers and a broad range of other digital electronic products. To obtain efficient yields in the production process, each memory component is designed with redundant circuitry. Using GSI's M325 and M325 Plus laser systems, a semiconductor manufacturer can effectively disconnect defective or redundant circuits in a memory chip with accurately positioned and power modulated laser pulses. This improves the yield of usable components per treated wafer, effectively lowering the cost per unit produced. The demand for memory, measured in megabits, has in recent years been growing at greater than 50% per year. Approximately half to three quarters of memory components produced are used in personal computers, with additional demand coming from networked systems (file servers), flat panel displays, multimedia systems and consumer electronics. Memory demand by the computer industry is driven by both memory intensive software (Windows 95, graphics, etc.) and higher speed microprocessors. As the memory capacity increases, the feature size and spacing between the elements of the microcircuits decrease. The industry is presently changing from 16 megabit to 64 megabit memory in response to the demand for additional memory, space limitations to accommodate it and manufacturing economics. GSI offers products which are currently being used for processing memory up to and including 64 megabits. First-pass manufacturing yields are typically low at the start of production of a new generation of higher capacity devices. First-pass yields have decreased to, now, less than 20% with each successive generation of memory chips as geometries shrink and manufacturing becomes more difficult. Laser processing is used to raise production yields to acceptable economic levels, frequently to greater than 95%. Memory components are currently produced in batches on silicon wafers typically measuring 6" or 8" in diameter. The industry is currently planning for production using 12" (300 millimeter) diameter wafers. GSI believes that its technology and systems architecture will allow it to develop and introduce products to process the new 12" wafers. However, industry implementation of conversion to 12" wafers has been delayed due to current conditions of excess capacity within the semiconductor industry. GSI's M325 memory processing systems range in price from approximately $500,000 to $900,000. Representative customers include Cypress Semiconductor, Dominion Semiconductor, IBM, Mitsubishi and Toshiba. Permanent Marking Systems--GSI's moving spot laser marking systems are used to apply permanent alphanumeric, graphic and bar-code identification directly onto electronic components, industrial products and packaging materials. Laser marking systems remove precise amounts of material from, or modify the surface of, an object being marked by exact control of the laser beam as it moves along a prescribed path. Such systems are gaining acceptance over a broad range of markets, replacing older technologies such as inkjet, mechanical imprinting, chemical etching and ink stamping. This change is being driven by the need for permanent marking and for marking systems which can be interfaced with computers, and by environmental acceptance. Industry has recently begun to require product traceability for years after the date of manufacture. At present, inkjet and ink stamping do not provide this permanence, while laser marking does. Also, the laser marking process does not involve the use of environmentally hazardous solvents. As an example of this application, GSI's HM1500 laser system is used to mark integrated circuit ("IC") packages. The plastic or ceramic package surrounding an IC must be marked without penetration of its thin wall to avoid damaging the expensive circuits it protects. This process requires a high degree of precision. 66 Laser marking for this application is gaining widespread usage. GSI's laser systems are also used in other applications including the marking of automotive parts, electrical components, tools, medical implants, as well as in the decorative marking of consumer items. During 1996, GSI replaced its current product offerings with the 1000 Series products which offered significant advantages in terms of higher power, larger marking fields, faster marking speeds and higher precision. In 1997, GSI introduced a diode-pumped laser marker, with a full 8,760 hour warranty on the laser, which requires no external cooling or three-phase power. The FM3500-4 laser marking system, also introduced in mid-1997, multiplexes a high power laser beam into four completely independent marking heads that can be remotely located up to 100 feet away from the laser by fiber optic cable. GSI's laser marking systems range in price from approximately $50,000 to $225,000. Representative customers include Harris, Hewlett-Packard, Motorola, SGS Thompson, Texas Instruments and Toshiba. Components Handling Systems--GSI designs, manufactures and, then, integrates electronic components handling systems for laser marking, lead inspection, parts sorting and parts packaging. This capability was added in late 1997 through the acquisition of Reel-Tech, Inc. Products include in-tray laser marking, tube-to-tube laser marking, tape and reel systems, media transfer systems and integrated multi-process systems. These systems can handle a wide variety of component package configurations. This capability enables GSI to more effectively serve its customers by meeting the emerging trend to more closely integrate multiple processes and, therefore, increase manufacturing productivity. GSI's component handler systems sell in the price range of approximately $125,000 to $400,000. Representative customers include Micron, Motorola and Samsung. Precision Alignment Systems--GSI's precision alignment systems interface with computer assisted design and manufacturing ("CAD/CAM") software to assist in the precision alignment of parts during manufacturing assembly processes. The principal use to date has been in the precision alignment of composite materials for the aircraft industry. Composite materials are important elements in the fabrication of critical structures for aircraft, such as jet engine cowlings, cargo and nose wheel doors, and control surfaces of the wings and vertical stabilizer, as well as for major components in jet engines, helicopters, communication satellites and rockets. GSI's systems project a precise image generated from existing CAD/CAM data to guide the assembly operations personnel in the proper placement and order of layers of composite materials. GSI's OLT4000 precision alignment systems allow aircraft manufacturers to eliminate mechanical alignment templates, minimize costs from engineering changes, and reduce operator learning time and assembly labor requirements. GSI is exploring the applications of these systems in other markets. GSI's precision alignment systems sell in the range from approximately $50,000 to $250,000. Representative customers include Bell Helicopter, Boeing, CFAN, Daimler-Benz Aerospace, Hughes Aircraft and Northrop Grumman. Metrology Systems--GSI's metrology products are automated, non-contact dimensional coordinate measurement systems which provide major electronics, telecommunications, and computer manufacturers with the ability to perform micron accurate measurements of component parts and assemblies produced throughout their manufacturing processes. These systems use combinations of CCD video camera, image processing, and various laser sensor technologies to acquire part measurement data. The metrology products are primarily sold to manufacturers of disk drives, semiconductor packages, printed circuit boards, and their associated micro-electronic components. During 1997, GSI replaced one of its core product offerings with a new Voyager platform featuring advances in illumination and autofocus technology, complemented by easy-to-use graphical user interface to facilitate measurement and programming. Current prices range from $55,000 to $150,000. Representative customers include Applied Magnetics, Cummins Engine, IBM, Intel, K. R. Precision and Seagate Technology. Film Imaging Systems--The application of lasers for imaging directly onto film has progressed steadily over the past decade to the point where it has become the technology of choice in two major markets: medical diagnostics and graphics. Both applications demand precise micropositioning for pixel placement and adjustable contrast range. Medical diagnostics often involve images of the human anatomy derived from computer assisted tomography ("CAT"), magnetic resonance imaging ("MRI") or nuclear medicine systems. Such images are usually presented on photographic film for viewing by a radiologist. GSI's laser imaging subsystems are used to produce images of adjustable gray-level contrast and high resolution for enhanced medical diagnostic 67 purposes. GSI's laser imaging equipment, using data sets from CAT, MRI or nuclear medicine equipment, creates a film image by moving a laser beam across the width of the film, and modulating it to produce the correct gray scale level for each picture element, or pixel. When the width of the film has been scanned, the next line is scanned in sequence. The process is continued until the entire image is exposed. In late 1997, GSI introduced a film duplicating system which duplicates 8 x 10 and 14 x 17 films from existing X-ray, CAT and MRI electronic films. Initially, the system will directly interface with wet and dry laser imaging systems including Imation's DryView 8700 Laser Imaging System. In November 1998, GSI expanded this digitizing equipment to include applications in teleradiology and PACS (picture archiving and communication systems). GSI also sells a modified version of its film imaging subsystem to write directly onto a film plate for graphic printing. GSI's laser imaging systems and subsystems sell in the range from approximately $1,500 to $20,000. Representative customers include A.B. Dick, Agfa and Imation. Imation's imaging business, including its OEM relationship with GSI, is being acquired by Eastman Kodak. Large format systems--In 1997, GSI commenced development of an innovative laser patterning system for use in the manufacture of flat panel displays ("FPD"). The development, alpha and beta phases of this project are funded by two multinational companies with an interest in the FPD industry. In 1998, GSI delivered and installed two prototypes. FPDs are compact, lightweight, low power alternatives to the traditional picture tube used in televisions and computer monitors. A typical FPD is composed of a thin layer of liquid crystal sandwiched between two sheets of glass, with a variety of layers of material patterned onto the glass surfaces. The rapidly growing FPD market has been driven by the growth in "laptop" portable computers and is projected to grow from $10.8 billion in 1995 to $23.7 billion in 2002 (Stanford Resources). To reduce manufacturing costs per FPD, the industry is moving to large (up to 1 meter by 1 meter) glass substrates, capable of simultaneously fabricating six to nine FPDs per substrate, and to new techniques for one or more of the manufacturing steps. The product under development combines GSI's expertise in the precision pointing, shaping and control of laser beams to precision patterns, this time over a large field of view when compared to GSI's current applications. Production versions of the product are expected to be priced between $2.5 to $3.5 million each. Biological scanners--In late 1997, GSI introduced a laser-based fluorescence imaging system for use in the measurement of gene expression. Identification and quantification of the expression level of different genes under varying conditions provide researchers with a rough functional analysis of genomic sequence information, which could lead to potential drug targets. Similarly, gene expression analysis can be used for diagnostic purposes. Some scientists believe that pharmacogenomics (the discipline of identifying genes responsible for different reactions to drugs) could be the quickest route to improving the therapeutic specificity of drugs. Several biotechnology companies are active in the development of molecular array technology and fluorescently labeled ligands. The ScanArray 3000 Biochip Analysis System measures the fluorescent intensity at each DNA grid spot facilitating, at high speed, the analysis of the expression level of a particular gene. The system is offered for sale to end users in research and, on an OEM basis, for resale by those companies active in biochemistry and microchip technology. The average unit selling price is less than $100,000. Components--GSI develops, produces and sells optical scanners and scanner subsystems which include optics, software and control systems. These are used by GSI and its customers in a variety of applications including materials processing, test and measurement, alignment, inspection, displays, graphics, vision, rapid prototyping, and medical applications including dermatology and ophthalmology. GSI intends to continue to work with its customers to develop new components and subsystems based upon its optical scanning technology. GSI sells its scanners in a range from approximately $100 to $4,000 and its subsystems in a range from approximately $2,000 to $30,000. Representative customers include Eastman Kodak, Nikon, Perceptron and Texas Instruments. 68 Printing Products GSI develops, produces and sells a variety of thermal printers which are designed for use with defibrillators, patient care monitors, cardiac pacemaker programmers, and other medical applications. The printers are used to provide a permanent record of a patient's condition during critical medical care. GSI's printers generate signal traces, grids and real time annotation on heat sensitive paper. Paper widths ranging from 48 to 216 millimeters are moved at speeds that can be remotely selected in the range from 1 millimeter per hour to 125 millimeters per second, and have a resolution of 8 x 32 dots per millimeter. The text and graphics are generated by selectively and instantaneously modulating the temperature of small (approximately 0.105 x 0.175 millimeters) elements of a print head across the width of the chart. The heated elements create dots on thermal sensitive paper. By repeated action under the control of an on-board microprocessor, the desired graphic output can be produced. GSI works closely with its OEM customers to develop and produce thermal printers which are incorporated into its customers' products. Typical customized features of thermal printers offered by GSI include: package and size dimensions dictated by the customer's end products; speed and accuracy of chart transport; print resolution; number of fonts; and number of data channels. Medical uses for GSI's thermal printers require high reliability, since they are often used in emergency medical equipment which must be rugged and lightweight. GSI believes that its ability to work rapidly and efficiently with its customers provides an important benefit to such customers. Approximately, 66,000 thermal printers were shipped during 1997. GSI's thermal printers sell in a range from approximately $200 to $3,000. Representative customers include Datascope, Marquette, Medtronic, Physio-Control, Solectron, Spacelabs Medical and Zoll Medical. In 1997, GSI introduced a new foil imprinting technology, initially for use in photo labs and in retail photo finishing locations for personalization of greeting cards. The new process can replace time-consuming litho techniques, as well as film, metal dies, type and plates typically required by current foil stamping processes. Qualex, Inc., a subsidiary of Eastman Kodak, is GSI's initial customer for this new application. This technology may be applied to other materials in graphics art. PRODUCT LIST The following is an abbreviated list of GSI's products and their typical market applications:
PRODUCTS MARKET APPLICATIONS - -------- ------------------- Laser Systems M310ST................ Automotive sensor production M310/W678............. Processing of thin film electronic circuits W770.................. Manufacture of thick film resistive components (chip resistors) W670.................. Processing of hybrid thick film electronic circuits Model 8100 and 8200... Solder paste measurement, component placement inspection M325.................. Memory and PLD fabrication HM1000 Series......... Integrated circuit marking DM1100................ Permanent marking of manufactured parts FM3500-4.............. Marking across multiple production lines VersaStation.......... Material handling and marking of large industrial parts LM-4000............... Integrated tube-to-tube marking LM-6000............... Integrated in-tray marking LM-3000MT............. Dual probe tape and reel for fine pitch SMDs OLT4000............... Assembly of composite structures Voyager 1000.......... Benchtop metrology Ultra 8............... Automated, non-contact 3-D measurement TAE................... Production of film images for both medical and graphics applications
69
PRODUCTS MARKET APPLICATIONS - -------- ------------------- LD2000.................... Digitizer for film duplication, teleradiology, PACs ScanArray................. Fluorescent imaging for DNA analysis Components HPM/SPM/HPLK.............. Laser processing of materials, including permanent marking, cutting, drilling and rapid prototyping VSH....................... Semiconductor inspection Performance of medical procedures in ophthalmology and dermatology Performance of biomedical measurement and analysis Optical Scanners.......... Processing of materials Test, measurement and alignment Ophthalmology and dermatology applications Confocal microscopes Projection of images on film Inspection Printers AR42...................... Defibrillator vital sign recording OMNI-100.................. Patient critical care monitoring OMNI-200.................. Cardiac pacemaker programming AR200FB................... Stress testing; electroencephalograph Slimline.................. Foil imprinting at point-of-sale Decorator 2000............ Foil imprinting at central labs
CUSTOMERS GSI has over 1,000 customers. During 1997, no single customer accounted for more than 5% of total sales. GSI's ten most significant customers in terms of sales in 1997, listed alphabetically, were: Analog Devices, Boeing, Denso, IBM, Imation, Intel, Maxim, Micron, Physio-Control and Texas Instruments. SALES, MARKETING AND CUSTOMER SUPPORT GSI believes that its marketing, sales and customer support organizations are important to its long-term growth and give GSI the ability to respond rapidly to the needs of its customers. GSI has marketing managers for each major product line who have worldwide responsibility for determining product strategy based on knowledge of the industry, customer requirements and product performance. These marketing managers have direct contact with customers and support the field sales and service personnel. GSI believes that its business has been, and is expected to continue to be, dependent upon the capital expenditure approval cycles of its customers which are, in turn, affected by cycles in the markets served by these customers. GSI sells and supports its products worldwide primarily through its own direct sales and customer service organization. This domestic and international sales network is augmented by selected independent sales representatives for end-user laser systems, due to the geographical dispersion of customers for such products. Field offices have been located in close proximity to key customers to help achieve short response time. In the United States, GSI provides marketing support at its locations in Watertown, Wilmington, Arlington and Bedford, Massachusetts, Simi Valley and Santa Clara, California and in Ann Arbor, Michigan. In Europe, GSI distributes its products through its direct sales offices located in Germany, the United Kingdom, Italy and France. GSI distributes its products in Japan through its offices in Tokyo and Osaka. Throughout the remainder of Asia, GSI distributes through its offices in Hong Kong, Korea, Singapore, Malaysia, the Philippines and Taiwan. 70 GSI provides customer support in the form of applications engineering, repair services and spare parts inventory through its offices in Massachusetts, Michigan, California, France, Germany, Italy, the United Kingdom, Hong Kong, Japan, Korea, Singapore, Malaysia, the Philippines and Taiwan. Engineering and field support personnel provide telephone support or are dispatched to customer locations. Additionally, GSI's offices generally have certain models of GSI's laser systems which are used for demonstration purposes and for applications engineering. From time to time, at the request of a customer, GSI will install a laser system at the customer's manufacturing site to establish manufacturing process and demonstrate product performance as part of the selling process prior to receipt of an order. The typical purchase of a laser system includes installation and on-site customer support and applications engineering during a warranty period. RESEARCH AND DEVELOPMENT GSI devotes significant resources to development programs directed at creating new products and product enhancements, as well as developing new applications for existing products. All of the markets served by GSI are characterized by rapid technological change and product innovation. GSI believes that continued timely development of new products and product enhancements to serve both existing and new markets is necessary to remain competitive. GSI maintains significant expertise in the following core technologies: Mechanics: design of mechanisms with high rigidity and low moving mass; use of materials at high stress levels; techniques for precise assembly and vibration isolation of bearings, lasers and lenses. Optics: design of laser quality lenses with variable depth of field or large numerical aperture; design of mirrors of high dynamic rigidity; selection of wavelength-specific mirror and lens coatings; specification and adjustment of lasers; and interaction of lasers with materials. Magnetics: design and use of rare-earth magnets; heat treatment of specialty magnetic alloys; design and heat dissipation of compact electrical drive coils. Electronics: design of wide bandwidth power amplifiers and high signal-to- noise ratio and low thermal drift signal detection circuits; design and manufacture of analog servo controllers with low electromagnetic interference (EMI) circuitry. Software: development of high-speed computing algorithms for real-time control of servo mechanisms; handling of data transmitted according to customer-specific protocols; design of operator-friendly computer/systems interfaces. Systems Design: integration of mechanisms, optics, lasers, laser electro- optics, power supplies, electronics, communications interfaces and software. GSI's personnel work closely with customers, frequently at the customers' facilities, to develop complete process solutions that often involve new or extended application of GSI's existing products. This close cooperation leads to new products being developed for a ready customer. For the years ended December 31, 1997, 1996 and 1995, GSI's research and development expenditures were approximately $22.3 million (excluding a one-time expense relating to acquired in-process research and development associated with the acquisition of Reel-Tech), $18.4 million and $17.1 million, respectively. These amounts were approximately 12%, 12% and 14% of sales in the respective periods. As of November 13, 1998, GSI had 133 people engaged in research and product development activities. Because GSI believes that the development of new products is vital to its continued success, GSI expects significant expenditures to continue on research and development activities. Approximately one-half of 1997 sales were from products introduced during the current and previous two years. 71 MANUFACTURING GSI's manufacturing strategy is to identify and perform internally those manufacturing functions which enable GSI to maintain control over critical portions of the production process and which add value to its products. GSI believes it achieves a number of competitive advantages from such integration, including the ability to achieve lower costs and higher quality, the ability to bring new products and product enhancements quickly and reliably to market, and the ability to produce sophisticated component parts not available from other sources. GSI's manufacturing is conducted at four facilities located near Boston, Massachusetts and in Simi Valley, California. Each of GSI's manufacturing facilities has co-located manufacturing, manufacturing engineering, marketing and product design personnel. GSI believes, based on its experience, that this organizational proximity greatly accelerates development and entry into production of new products and aids economical manufacturing. GSI's thermal printers and many of its laser systems are manufactured under ISO 9001 certification. GSI has fully integrated manufacturing operations in key strategic elements, such as state-of-the-art metals and plastics fabrication, surface mount (SMT) printed circuit board fabrication and testing, and extensive in-process and final product testing capabilities. GSI believes it gains competitive advantages in its capability to produce high quality, short-run parts and assemblies in a just-in-time environment which reduces delivery times to customers. Certain of the components and materials included in GSI's laser systems and optical products are currently obtained from single source suppliers. GSI currently obtains a component for one of its laser systems products from a single source. GSI currently maintains a six month inventory of this component and plans to increase this over the next year. GSI has explored the possibility of producing this component internally, and in the event of a disruption in the outside supply of this component, GSI believes that it could commence production internally within twelve months GSI is subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used on GSI's premises. GSI believes that it is in material compliance with these regulations and that it has obtained all necessary environmental permits to conduct its business. Such compliance has not had a material effect upon GSI capital expenditures, earnings and competitive position. GSI has no current or planned capital expenditures for environmental control facilities. Nevertheless, future regulations could require GSI to purchase expensive equipment or to incur other substantial expenses to comply with environmental regulations. Any failure by GSI to control the use of, or adequately restrict the discharge or disposal of, hazardous substances could subject GSI to future liabilities, result in fines being imposed on GSI, or result in the suspension of production or cessation of GSI's manufacturing operations in one or more locations. BACKLOG GSI defines backlog as written purchase orders or other contractual agreements for products for which the customer has requested delivery within the next twelve months. Backlog was approximately $44 million on December 31, 1997 compared to $36 million on December 31, 1996 and was $35 million as of October 3, 1998, compared to $47 million as of September 27, 1997. COMPETITION The markets for GSI's products are highly competitive. GSI is subject to substantial competition from both established competitors and potential new market entrants. Significant competitive factors include: product functionality, performance, size, flexibility, cost, market presence, customer satisfaction, customer support capabilities and breadth of product line. GSI believes that it competes favorably on the basis of each of these factors. 72 Competition in the development, manufacture and sale of laser systems is concentrated in certain segments and fragmented in others. To GSI's knowledge, the automotive sensor manufacturing market in which GSI's thin film processing systems are used has no other competitors. The markets for the thick film hybrid circuit processing systems in which GSI competes have several other manufacturers. GSI is aware of three competitors in vision systems for solder paste and component placement inspection. GSI competes primarily with Electro Scientific Industries, which has the major market share, in laser systems for memory fabrication. GSI is aware of laser marking systems produced by many other manufacturers which compete with GSI's laser marking equipment. There are several competitors in the field of component handling systems. To GSI's knowledge, in the precision alignment market for the aircraft industry, GSI has one competitor. There are several competitors in the field of general purpose, non-contact metrology in which GSI competes. GSI knows of at least five other manufacturers of subsystems for the film imaging systems and subsystems market. In the optical scanner subsystem and components markets, GSI knows of two other manufacturers. Additionally, there exist two alternate technologies, rotating polygons and XY-moving tables, to the galvonometric scanning technology used by GSI, which compete for certain segments of the markets served by GSI's products. Printers for the medical equipment market has fragmented competition, mostly from vertically integrated equipment manufacturers. GSI expects its competitors to continue to improve the design and performance of their products. There can be no assurance that GSI's competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new processes or technologies will not emerge that render GSI's products less competitive or obsolete. As a result of the substantial investment required by a customer to integrate capital equipment into a production line, or to integrate components and subsystems into a product design, GSI believes that once a customer has selected certain capital equipment, or certain components or subsystems from a particular vendor, the customer generally relies upon that vendor to provide equipment for the specific production line or product application and may seek to rely upon that vendor to meet other capital equipment, or component or subsystem requirements. Accordingly, GSI may be at a competitive disadvantage with respect to a particular customer if that customer uses a competitor's manufacturing equipment or components. Increased competitive pressure could lead to lower prices for GSI's products, thereby adversely affecting GSI's business and results of operations. There can be no assurance that GSI will be able to compete successfully in the future. PATENTS AND INTELLECTUAL PROPERTY GSI believes that the success of its business depends more on the technical competence and creativity of its employees than on patents, trademarks and copyrights. Nevertheless, GSI has a policy of seeking patents, when appropriate, on inventions concerning new products and improvements as part of its ongoing research, development and manufacturing activities. Although GSI has been granted, has filed applications for and has been licensed under a number of patents in the United States and foreign countries, there can be no assurance as to the degree of protection offered by these patents or as to the likelihood that patents will be issued for pending applications. Competitors in the United States and foreign countries, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or interfere with GSI's ability to make and sell some of its products. Although GSI believes that its products do not infringe the patents or other proprietary rights of third parties, there can be no assurance that other third parties will not assert infringement claims against GSI or that such claims will not be successful. 73 GSI also relies upon trade secret protection for its confidential and proprietary information. GSI routinely enters into confidentiality agreements with its employees and consultants. There can be no assurance, however, that these agreements will provide meaningful protection of GSI's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. LEGAL PROCEEDINGS Robotic Vision Systems, Inc. v. View Engineering, Inc. USDC Case No. 95-7441. This case involves a patent infringement complaint by Robotic Vision Systems, Inc. ("RVSI") alleging infringement of U.S. Patent No. 5,463,227. A trial date is scheduled for June 1, 1999. The referenced patent covers a method of inspecting the electronic interconnect leads of certain semiconductor components. In settlement of separate litigation with RVSI in June 1998 (see below), arising from GSI's acquisition of View in August 1996, GSI agreed not to compete in the field of semiconductor interconnection inspection. During the first six months of 1998, sales by GSI of all products used in semiconductor lead interconnection inspection which involved products relating to the alleged infringement totalled approximately 2% of GSI's total sales. Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case No. C- 96-4628. In October, 1998 the U.S. District Court for the Northern District of California issued a decision on motions for summary judgment in an action filed against GSI for alleged patent infringement concerning U.S. Patent Nos. 5,265,114 and 5,473,624. The Court granted Electro Scientific's motions for summary judgment on infringement and on the issue of whether Electro Scientific committed inequitable conduct by intentionally failing to cite prior art to the U.S. Patent Office in connection with one of its patents. The Court denied GSI's motion for summary judgment that the Electro Scientific patents are invalid due to prior art. The case is in a phase of further discovery and a trial is scheduled for March, 1999. The referenced patents cover the use of 1.32 micron wavelength lasers in the repair of memory chips and semiconductors with imbedded memory. During the first nine months of 1998, sales by GSI of products associated with memory repair using 1.32 micron wavelength accounted for approximately 2% of total sales. Since the District Court's decision in October 1998, GSI has discontinued sales of 1.32 wavelength laser systems for use in memory repair applications. General Scanning is a licensee under a U.S. patent owned by a third party; which GSI believes covers 1.32 micron wavelength laser technology for laser processing of semiconductor devices including memory, that predates the Electro Scientific patents by ten years. While GSI believes that this prior art demonstrates the invalidity of Electro Scientific's patents, the District Court decided that certain issues of fact were raised which must be determined at trial. Electro Scientific Industries, Inc. v. General Scanning Inc. USDC Case No. 98-4027. On or about October 20, 1998 Electro Scientific commenced an action in the U.S. District Court for the Northern District of California alleging infringement of three Electro Scientific patents (U.S. Patent Nos. 5,569,398, 5,685,995 and 5,808,272) and seeking an injunction, damages and attorneys' fees. Discovery has not yet commenced, and a trial date has not been set. The referenced patents cover the use of 1.32 micron wavelength lasers in the trimming of certain semiconductor devices. To date, GSI has shipped only one system employing such technology for an application covered by the patents and this unit is being converted to another wavelength at the request of the customer. Robotic Vision Systems Inc. v. View Engineering, Inc. USDC Case No. 96-2288. In June 1998, the U.S. District Court for the Central District of California found infringement by View Engineering, Inc. ("View") on a particular method of measuring substrate coplanarity of unpopulated ball grid array packages. RVSI had previously dropped all claims for damages; hence, no damages were awarded. The Court determined that View had not willfully infringed and therefore refused RVSI's claim for attorneys' fees. The Court enjoined View from infringing or inducing infringement of the patent in question, No. 5,465,152. GSI, on behalf of View, has appealed the injunction. No date has been set for oral argument on the appeal. In settlement of separate litigation with RVSI, in June 1998 (see below), arising from the GSI acquisition of View in August 1996, GSI agreed not to compete in the field of semiconductor interconnection inspection. Systems for use in inspection of ball grid electronic interconnection and for measuring substrate coplanarity accounted for approximately 1% of total sales during the first six months of 1998. 74 Robotic Vision Systems, Inc. v. General Scanning Inc. USDC Case No. 96-3884. Litigation with RVSI, arising from GSI's acquisition of View in August 1996, was settled in June 1998. RVSI claimed that GSI used improperly obtained information in connection with the acquisition. GSI denied all such claims. Under the terms of the settlement, in consideration of $3.75 million in stock and notes from RVSI, GSI has agreed not to compete and has granted an exclusive technology license to RVSI in the field of semiconductor interconnection inspection. RVSI agreed not to compete in the field of solder paste inspection. GSI believes that RVSI's and Electro Scientific's claims in each of the above actions are without merit; and GSI is vigorously defending these proceedings. However, if RVSI or Electro Scientific prevails on one or more of its claims, there could be a material adverse effect on GSI's business, operating results and/or financial condition. General Scanning Inc. v. Voxel. In May 1998, a three-member panel of the American Arbitration Association decided in favor of GSI and awarded GSI $1.9 million plus applicable post-judgement interest. The award included $1.0 million that GSI had recorded as earned and due from Voxel as of December 31, 1997 for engineering services performed and out-of-pocket expenses related to the construction of beta units. Following the arbitration decision Voxel filed a voluntary petition under Chapter 11, which was subsequently converted to a proceeding under Chapter 7 of the Federal Bankruptcy Code. Accordingly, in the quarter ended July 4, 1998, GSI fully reserved for the possible uncollectibility of approximately $1.0 million due to GSI. Other. A party has commenced legal proceedings in the United States against a number of US semiconductor manufacturing companies, including companies that have purchased systems from GSI. The plaintiff in the proceedings has alleged that certain equipment used by these manufacturers infringes patents claimed to be held by the claimant. While GSI is not a defendant in any of the proceedings, several of GSI's customers have notified GSI that, if the party successfully pursues infringement claims against them, they may require GSI to indemnify them to the extent that any of their losses can be attributed to systems sold to them by GSI. EMPLOYEES As of November 13, 1998 and taking into account the workforce reduction discussed below, GSI had 762 full-time employees worldwide, including 341 in manufacturing, 191 in marketing, sales and field service, 133 in research and development, and 97 in general administration. Approximately 105 of these employees, mostly foreign nationals, reside and work outside of the United States, primarily in marketing, sales and support. In addition, GSI periodically engages contract employees principally in new product development and manufacturing operations. None of GSI's employees is represented by a labor union, and GSI has never experienced a work stoppage or strike. GSI considers its employee relations to be good. In early November, GSI reduced its staff by 70 employees, or about 8% of its total work force, from its manufacturing process systems group located in Massachusetts and California as well as in its worldwide systems sales and service force, particularly in the Far East. This action was designed to allow the company to operate profitably at lower levels of sales over the next several quarters, while maintaining critical skills and capacity to respond to an anticipated upturn late in 1999. 75 PROPERTIES GSI's headquarters is located in Watertown, Massachusetts, which is a suburb of Boston. The principal owned and leased properties of GSI and its subsidiaries are listed in the table below.
APPROXIMATE LOCATION PURPOSE SQUARE FEET OWNED/LEASED - -------- --------------------------------------------- ----------- ------------ Watertown, MA, USA Marketing, sales, manufacturing, engineering, 84,000 owned offices; corporate headquarters Wilmington, MA, USA Marketing, sales, manufacturing, engineering, 78,000 leased(/1/) offices Arlington, MA, USA Marketing, sales, manufacturing, engineering, 32,000 leased(/2/) offices Bedford, MA, USA Marketing, sales, manufacturing, engineering, 50,000 leased(/3/) offices Simi Valley, CA, USA Marketing, sales, manufacturing, engineering, 41,000 owned offices Ann Arbor, MI, USA Marketing, sales, engineering, offices 15,000 leased(/4/) Billerica, MA, USA Marketing, sales, manufacturing, engineering, 80,000 leased(/5/) offices
Additional sales and service offices are located in Japan, Germany, France, Italy, the United Kingdom, Hong Kong, Korea, Taiwan, Singapore, Malaysia, the Philippines and other locations in the United States. These additional marketing and sales offices are in leased facilities occupying approximately 25,000 square feet in the aggregate. GSI believes that additional manufacturing facilities will be required within the next two years and that suitable additional or substitute space will be available as needed. - -------- /1/Lease expires in 2007, with two 5-year renewal options. /2/Lease expires in 2000, with one 2-year renewal option. /3/Lease expires in 2003, with one 3-year renewal option. /4/Lease expires in 2001, with two 3-year renewal options. /5/Lease expires in 2008, with two 5-year renewal options. 76 SELECTED FINANCIAL DATA The following table presents selected historical income statement and balance sheet data of GSI. The balance sheet data presented below as of December 31, 1993, 1994, 1995, 1996 and 1997 and the income statement data presented below for each of the years in the five year-period ended December 31, 1997 are derived from GSI's consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants. The financial statements as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 and the report of Arthur Andersen LLP relating thereto are included elsewhere in this document. The balance sheet data presented below as of October 3, 1998 and income statement data for the nine- month periods ended September 27, 1997 and October 3, 1998 are derived from unaudited consolidated financial statements, which, in the opinion of GSI management, contain all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the financial position and results of operations for these periods. The operating results for the nine months ended September 27, 1997 and October 3, 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year. The data should be read in conjunction with GSI's financial statements and related notes and GSI's Management's Discussion and Analysis of Financial Condition and Results of Operations. In August 1996 GSI acquired View Engineering, Inc. by issuing 1,437,060 shares of GSI common stock in exchange for all of View's outstanding shares of capital stock, accrued preferred dividends and the net value of warrants and options. The transaction was accounted for as a pooling of interests for accounting purposes and, accordingly, the financial statements for the years 1993, 1994 and 1995 were retroactively restated to include the accounts of View. On November 28, 1997 GSI acquired the assets of Reel-Tech, Inc. in a transaction that was accounted for as a purchase. Accordingly, the operations of Reel-Tech, Inc. have been included in the consolidated financial statements from the date of acquisition. The purchase price of $14.4 million includes $0.7 million of tangible net assets, $10.6 million of acquired in-process research and development and $3.1 million of goodwill. 77 GENERAL SCANNING INC. SELECTED FINANCIAL DATA (IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED ------------------------ YEAR ENDED DECEMBER 31, ---------------------------------------------- SEPTEMBER 27, OCTOBER 3, 1993 1994 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- ------------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales: Laser systems and com- ponents............... $62,994 $77,488 $103,405 $131,867 $154,536 $109,128 $116,134 Printers............... 18,821 20,624 22,915 24,666 26,994 18,859 25,550 ------- ------- -------- -------- -------- -------- -------- Total sales.......... 81,815 98,112 126,320 156,533 181,530 127,987 141,684 ------- ------- -------- -------- -------- -------- -------- Gross profit: Laser systems and com- ponents............... 29,785 37,760 47,861 60,829 74,686 52,349 54,695 Printers............... 7,614 8,533 10,061 10,851 12,039 8,383 11,131 ------- ------- -------- -------- -------- -------- -------- Total gross profit... 37,399 46,293 57,922 71,680 86,725 60,732 65,826 ------- ------- -------- -------- -------- -------- -------- Operating expenses: Research and product development........... 11,208 13,090 17,106 18,400 22,302 16,056 20,869 Selling, general and administrative........ 21,689 27,326 33,091 39,475 46,169 32,781 40,043 Acquired in-process research and development........... -- -- -- -- 10,600 -- -- Restructuring, litiga- tion and other charges............... -- -- -- -- -- -- 5,777 ------- ------- -------- -------- -------- -------- -------- Total operating ex- penses.............. 32,897 40,416 50,197 57,875 79,071 48,837 66,689 ------- ------- -------- -------- -------- -------- -------- Income (loss) from oper- ations................. 4,502 5,877 7,725 13,805 7,654 11,895 (863) Merger expenses......... -- -- -- (1,950) -- -- -- Interest income (ex- pense), net............ (896) (847) (682) 272 464 398 (378) Foreign exchange trans- action gains (losses).. (24) 636 331 (159) (507) (326) 95 ------- ------- -------- -------- -------- -------- -------- Income (loss) before in- come taxes............. 3,582 5,666 7,374 11,968 7,611 11,967 (1,146) Income taxes............ 1,291 1,868 2,803 5,367 2,502 4,030 (404) ------- ------- -------- -------- -------- -------- -------- Net income (loss)....... $ 2,291 $ 3,798 $ 4,571 $ 6,601 $ 5,109 $ 7,937 $ (742) ======= ======= ======== ======== ======== ======== ======== Basic income (loss) per common share........... $ 0.31 $ 0.52 $ 0.48 $ 0.56 $ 0.42 $ 0.66 $ (0.06) ======= ======= ======== ======== ======== ======== ======== Diluted income (loss) per common share....... $ 0.26 $ 0.42 $ 0.44 $ 0.53 $ 0.40 $ 0.63 $ (0.06) ======= ======= ======== ======== ======== ======== ======== Weighted average common shares outstanding and dilutive potential com- mon shares............. 8,863 9,099 10,357 12,476 12,657 12,585 12,560 ======= ======= ======== ======== ======== ======== ========
DECEMBER 31, --------------------------------------- OCTOBER 3, 1993 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- ---------- BALANCE SHEET DATA: Working capital.............. $19,725 $20,275 $52,396 $57,680 $62,663 $59,668 Total assets................. 47,732 49,859 89,708 95,573 115,042 113,457 Long-term obligations........ 6,980 2,961 3,102 3,442 3,208 3,422 Stockholders' equity......... 23,216 27,111 59,754 68,289 78,229 78,553
78 SUPPLEMENTARY FINANCIAL INFORMATION The following table presents unaudited supplementary financial information of GSI for each of the quarters in 1996 and 1997 and for the first three quarters of 1998. The supplementary financial information is derived from the unaudited consolidated financial statements of GSI, which, in the opinion of GSI management, contain all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the results of operations for these periods. These operating results are not necessarily indicative of the results that may be expected for any other interim period or the entire fiscal year. The data should be read in conjunction with GSI's financial statements and related notes and GSI's Management's Discussion and Analysis of Financial Condition and Results of Operations. GENERAL SCANNING INC. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
96Q1 96Q2 96Q3 96Q4 97Q1 97Q2 97Q3 97Q4 98Q1 98Q2 98Q3 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales: Laser systems and components........... $31,350 $34,522 $32,744 $33,251 $31,109 $37,504 $40,515 $45,408 $44,504 $39,753 $31,877 Printers.............. 6,334 6,148 5,419 6,765 6,608 5,210 7,041 8,135 6,068 9,319 10,163 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total sales........... 37,684 40,670 38,163 40,016 37,717 42,714 47,556 53,543 50,572 49,072 42,040 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross profits: Laser systems and components........... 14,672 15,845 15,569 14,743 15,012 17,527 19,810 22,337 21,757 19,377 13,561 Printers.............. 2,706 2,657 2,336 3,152 3,061 2,291 3,051 3,656 2,745 3,984 4,402 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total gross profit.... 17,378 18,502 17,905 17,895 18,073 19,818 22,841 25,993 24,502 23,361 17,963 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and product development.......... 4,603 4,534 4,853 4,410 4,952 4,978 6,126 6,246 7,461 7,269 6,139 Selling, general and administrative....... 9,903 10,376 9,313 9,883 10,321 11,103 11,357 13,388 13,385 14,447 12,211 Restructuring, litigation and other charges.............. -- -- -- -- -- -- -- -- -- 5,060 717 Acquired in-process research and development.......... -- -- -- -- -- -- -- 10,600 -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............. 14,506 14,910 14,166 14,293 15,273 16,081 17,483 30,234 20,846 26,776 19,067 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations............ 2,872 3,592 3,739 3,602 2,800 3,737 5,358 (4,241) 3,656 (3,415) (1,104) Merger (expenses)...... -- -- (1,950) -- -- -- -- -- -- -- -- Interest income (expense), net........ 125 32 34 81 98 165 135 65 (34) (240) (104) Foreign exchange transaction gains (losses).............. (19) (42) (70) (28) (110) 11 (227) (181) (82) 62 115 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.......... 2,978 3,582 1,753 3,655 2,788 3,913 5,266 (4,356) 3,540 (3,593) (1,093) Income taxes........... 1,400 1,683 824 1,460 978 1,367 1,685 (1,528) 1,239 (1,261) (382) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)...... $ 1,578 $ 1,899 $ 929 $ 2,195 $ 1,810 $ 2,546 $ 3,581 $(2,828) $ 2,301 $(2,332) $ (711) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Basic income (loss) per common share.......... $ 0.14 $ 0.16 $ 0.08 $ 0.19 $ 0.15 $ 0.21 $ 0.30 $ (0.23) $ 0.18 $ (0.19) $ (0.06) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Diluted income (loss) per common share...... $ 0.13 $ 0.15 $ 0.07 $ 0.18 $ 0.15 $ 0.20 $ 0.28 $ (0.23) $ 0.18 $ (0.19) $ (0.06) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding and dilutive potential common shares......... 12,422 12,513 12,514 12,456 12,465 12,553 12,739 12,310 12,870 12,571 12,637 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
79 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW GSI is a leading manufacturer of laser systems and components and thermal printers. In the first nine months of 1998, approximately 82% of GSI's revenues were derived from sales of laser systems and components and the balance was derived from sales of thermal printers compared to 85% for the first nine months of 1997. In 1997, 1996 and 1995, such sales accounted for approximately 85%, 84%, and 82%, respectively, of GSI's revenues. Sales of laser systems and components for the first nine months of 1988 grew approximately 6% over sales in the same period in 1997 and in 1997 and in 1996 grew approximately 17% and 28%, respectively, over sales for this segment in the comparable prior periods. Printers sales during the first nine months of 1998 grew approximately 35% over sales for the same period in 1997 and in 1997 and 1996 grew approximately 9% and 8%, respectively, over the comparable prior periods. In November 1997, GSI acquired Reel-Tech, Inc., a wholly-owned subsidiary of Data I/O Corporation. The transaction was structured as a purchase of substantially all the assets and the business of Reel-Tech and its subsidiary in Singapore and was accounted for as a purchase. The operations of Reel-Tech have been included in the consolidated financial statements from the date of acquisition and are not material to comparative prior periods. The purchase price of $14.4 million included $0.7 million of tangible net assets, $10.6 million of acquired in-process research and development, which was recorded as a charge to operations on the date of acquisition, and $3.1 million of goodwill. Reel-Tech is an integrator of electronics components handling systems for marking, inspection, sorting and packaging. Upon consummation of the Reel-Tech acquisition, GSI immediately expensed $10.6 million representing purchased in-process technology that had not yet reached technological feasibility and has no alternative future use. The value was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. The in-process projects were expected to be commercially viable on dates ranging from the end of calendar year 1998 through calendar year 1999. Expenditures to complete these projects were expected to total approximately $3.2 million. To date, GSI has not achieved any economic benefits from the purchase of Reel-Tech's in-process research and development. This is due to GSI entering into a non-compete agreement with Robotic Vision Systems, Inc. as part of the settlement of legal actions brought by Robotic Vision Systems against View Engineering and GSI. The agreement states that GSI will not compete in semiconductor interconnection inspection market for a period of ten years. This non-compete agreement has caused GSI to change its business strategy as it relates to the Reel-Tech purchased in-process research and development. GSI's original objective in acquiring the assets of Reel-Tech was to implement a strategy of combining certain functions performed at the back end of the semiconductor component manufacturing process, specifically marking, inspection and packaging. GSI planned to combine its laser marking capability and View Engineering's vision inspection technology with Reel-Tech's new component parts handling/packaging systems. The settlement agreement with RVSI limits GSI's ability to offer certain of these features to its customers. As a result, the in-process research and development projects at Reel-Tech were discontinued. The resulting impact is included in GSI's restructuring charges recorded during 1998. GSI does not expect any future revenue or cash flow from Reel-Tech's in- process research and development. In August 1996, GSI acquired View Engineering, Inc. by issuing 1,437,060 shares of GSI common stock. The transaction was recorded as a pooling of interests for accounting purposes. Accordingly, the consolidated financial statements include the accounts of View for all periods presented. View employs laser image processing technology to serve applications requiring precision inspection, measurement and process control in several industries. 80 GSI sells its laser systems primarily to manufacturers of products containing advanced electronic components and circuitry. In addition, GSI produces a line of laser subsystems and components which are used in GSI's own systems, as well as sold to other manufacturers of laser systems. GSI's laser systems sales have been, and are expected to continue to be, dependent upon its customers' capital expenditures which are in turn affected by cycles in the markets served by those customers. GSI's strategy is to expand applications for its products into different and varied markets to limit its dependency on any one market; but it may not always be successful in doing so. GSI also sells printers to manufacturers of medical equipment for patient care monitoring. Product prices have remained relatively stable during the periods covered by this discussion, and price fluctuations did not have a material effect on reported gross profit until the third quarter of 1998. A significant portion of sales are made in foreign currencies. Fluctuations in currency exchange rates, particularly in the Japanese yen and European currencies as compared to the U.S. dollar, can impact GSI's sales and expenses, which are reported in U.S. dollars. In September 1995, GSI raised a net $27.7 million through its initial public offering of 2,585,000 shares of common stock including over-allotments. The following table sets forth, for the periods indicated, the percentage of net sales represented by each item reflected in GSI's consolidated statements of income:
YEAR ENDED FOR THE NINE DECEMBER 31, MONTHS ENDED ------------------- --------------------------- 1995 1996 1997 SEPT. 27, 1997 OCT. 3, 1998 ----- ----- ----- -------------- ------------ Net Sales: Laser systems and compo- nents...................... 81.9% 84.2% 85.1% 85.3% 82.0% Printers.................... 18.1 15.8 14.9 14.7 18.0 ----- ----- ----- ----- ----- Total sales................. 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of Sales: Laser systems and compo- nents...................... 53.7 53.9 51.7 52.0 52.9 Printers.................... 56.1 56.0 55.4 55.5 56.4 ----- ----- ----- ----- ----- Total cost of sales......... 54.1 54.2 52.2 52.5 53.5 ----- ----- ----- ----- ----- Gross profit: Laser systems and compo- nents...................... 46.3 46.1 48.3 48.0 47.1 Printers.................... 43.9 44.0 44.6 44.5 43.6 ----- ----- ----- ----- ----- Total gross profit.......... 45.9 45.8 47.8 47.5 46.5 ----- ----- ----- ----- ----- Operating expenses: Research and product devel- opment..................... 13.5 11.8 12.3 12.6 14.7 Selling, general and admin- istrative.................. 26.2 25.2 25.5 25.6 28.3 Acquired in-process research and development............ -- -- 5.8 -- -- Restructuring, litigation settlement and other charges.................... -- -- -- -- 4.1 ----- ----- ----- ----- ----- Total operating expenses.... 39.7 37.0 43.6 38.2 47.1 Income from operations........ 6.1 8.8 4.2 9.3 (0.6) Merger (expenses)............. -- (1.2) -- -- -- Interest income (expense), net.......................... (0.5) 0.1 0.3 0.3 (0.3) Foreign exchange transaction gains (losses)............... 0.2 (0.1) (0.3) (0.2) 0.1 ----- ----- ----- ----- ----- Income before income taxes.... 5.8 7.6 4.2 9.4 (0.8) Income taxes.................. 2.2 3.4 1.4 3.2 (0.3) ----- ----- ----- ----- ----- Net income.................... 3.6% 4.2% 2.8% 6.2 (0.5)% ===== ===== ===== ===== =====
81 NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 RESULTS OF OPERATIONS SALES. Total sales were $141.7 million for the nine months ended October 3, 1998, an increase of 11% over $128.0 million in total sales in the nine-month period ended September 27, 1997. Laser systems and component sales for the nine months ended October 3, 1998 increased 6% to $116.1 million from $109.1 million in the comparable period of 1997 primarily due to strengthening sales in medical imaging, DNA biochip scanning, continued solid performance in trim and test applications for the automotive and electronics markets, and sales by the Reel-Tech operation, which was acquired by GSI in November 1997. GSI continues to benefit from continued strong performance in laser imaging for medical applications, the microarray biochip reader, the recently introduced laser duplicator for diagnostic film and the LD2000 Series Digitizer for teleradiology and PACs applications. GSI expects that these products will provide the opportunity for growth in the medical market during 1999. Although laser systems and component sales increased 6% over the same nine- month period in the prior year, they fell short of GSI's expectations. Slower than expected activity occurred in GSI's semiconductor product lines and in Asia. Since early summer, GSI has experienced a dramatic slowdown in systems sales into the semiconductor and electronics markets, particularly in Asia. Approximately 40% of the company's current total sales are exposed to these issues. Total sales to Asia have declined more than 40% from a recent peak in the third quarter 1997 to the third quarter 1998. Sales to the semiconductor industry, excluding discontinued products, have declined more than 40% from a peak in the fourth quarter of 1997 to the third quarter 1998. Product lines most affected by the slowdown are in the company's manufacturing process systems group including applications for memory repair, component parts handling, marking of semiconductor packages and certain other related applications. GSI is experiencing delays requested by customers in deliveries and orders previously considered to be highly probable. As a result, visibility for ordering and shipment of these manufacturing process systems is more limited than has been the case in prior time periods. Pursuant to a litigation settlement, GSI has agreed not to compete in the field of semiconductor interconnection inspection. Sales in this sector have historically ranged between 5% and 10% of total sales. GSI does not anticipate marked improvement in its semiconductor product line sales or in the Asian markets it serves until later in 1999, at the earliest. Therefore, as previously announced, GSI is aggressively continuing its fixed expense reductions by consolidating operations of its manufacturing process systems group, reductions in employment worldwide, tighter controls on discretionary expenses, and lower capital expenditures. These actions are designed to allow the company to operate profitably at the new expected lower level of revenues over the next several quarters. Printer sales for the nine months ended October 3, 1998 increased 35% to $25.6 million from $18.9 million in the comparable period of 1997 primarily due to expanded shipments of the new photo finishing system which was introduced late last fall. This segment of the company's business has not experienced significant cyclicality in the past, however, sales of certain printers used in the greeting card industry tend to increase in the third quarter in anticipation of holiday greeting card sales. Laser systems and components sales were 82% of total sales in the nine months ended October 3, 1998 compared to 85% of total sales for the comparable period of 1997. International sales, many of which are denominated in foreign currencies, were approximately 41% and 45% of total sales in the nine months ended October 3, 1998 and September 27, 1997, respectively. Sales to Asia have declined in recent quarters, partially offset by increases in sales to Europe in the first half of 1998. GROSS PROFIT. Total gross profit was $65.8 million, or 46% of sales, for the nine months ended October 3, 1998, compared to $60.7 million, or 47% of sales, for the nine-month period ended September 27, 1997. Laser systems and components gross profit decreased to 47% of sales in the nine months ended October 3, 1998 from 48% of sales for the comparable nine-month period of 1997. The decrease was primarily due to product mix (including lower sales of higher- margin products into the memory segment of the semiconductor industry due to over capacity in plant and equipment), and lower pricing frequently associated with a weakening in product 82 demand. Printers gross profit remained at 44% of sales in the nine months ended October 3, 1998 from 44% for the comparable nine-month period of 1997. RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses increased to $20.9 million, or 15% of total sales, for the nine months ended October 3, 1998, from $16.1 million, or 13% of total sales, for the nine-month period ended September 27, 1997. This increase was primarily due to the addition of full-time and consulting personnel and related costs to support the development of new laser systems and components products. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased to $40.0 million in the nine months ended October 3, 1998 from $32.8 million in the comparable period of 1997. This increase was primarily due to the addition of sales and marketing support personnel and related costs incurred in supporting anticipated increased sales. Headcount in sales, general and administrative functions increased during the first half of the year from 307 at December 1997. As a result of weak business conditions, particularly in GSI's systems group which requires a disproportionate share of total sales and support costs because of the sophistication of the products and their intentional distribution, GSI reduced staff in this functional area in the third and fourth quarter to its current level of 288. Approximately $2 million of the increase was attributable to ongoing legal fees associated with litigation with RVSI arising out of the company's acquisition of View Engineering, Inc. in August 1996, as discussed below. Also, in the prior quarter, GSI fully reserved for the possible uncollectibility of $1.0 million due (and previously recorded as earned) from Voxel, which after an arbitration panel ruling in favor of GSI, during the prior quarter, filed a voluntary petition under Chapter 11, which was subsequently converted to a proceeding under Chapter 7 or the Federal Bankruptcy Code. Selling, general and administrative expenses were 28% of total sales for the nine-month period ended October 3, 1998 compared to 26% of total sales for the comparable period in 1997. RESTRUCTURING, LITIGATION SETTLEMENT AND OTHER CHARGES. GSI reduced its staff, primarily in its large systems product lines, by approximately 230 employees including temporary help. The reduction was primarily the result of the legal settlement with RVSI and adverse business conditions in the market for semiconductor and, to a lesser extent, electronic capital equipment, particularly in Asia. GSI has also, however, added approximately 10 employees in other product lines unaffected by such adverse business factors. GSI believes that such changes made during the year will be adequate to allow the company to operate profitably at lower levels of revenues over the next several quarters, while maintaining critical skills and capacity to respond to an anticipated upturn late in 1999. In November 1998, GSI announced a staff reduction of approximately 70 employees (who are included in the 230 employees referenced above) and consolidation of certain manufacturing operations at an estimated one-time cost of $1 to 2 million which will be recorded by GSI in the fourth quarter of 1998. Annual savings from these most recent reductions are expected to be approximately $5 million annually. A charge of $0.7 million was taken during the three months ended October 3, 1998 to accrue employee severance costs associated with the move of Reel-Tech operations from Indiana to Massachusetts, and with the restructuring of overseas operations. In the quarter ending July 4, 1998, the $5.1 million restructuring, litigation settlement and other charges included: $3.7 million relating to a litigation settlement with Robotic Vision Systems, Inc. ("RVSI") and charges of $1.4 million relating to a reduction in GSI's cost structure, including $1.1 million of leased facility costs and $0.3 million of employee severance costs. Accruals remaining as of October 3, 1998 from prior quarter restructuring charges are $0.6 million of leased facility costs. Litigation with RVSI, arising from GSI's acquisition of View Engineering, was settled in June 1998. RVSI claimed that GSI used improperly obtained information in connection with the acquisition. GSI denied all such claims. Under the terms of the settlement, GSI has agreed not to compete and has granted an exclusive technology license to RVSI in the field of semiconductor interconnection inspection. RVSI agreed not to compete in the field of solder paste inspection. Costs associated with the settlement were $7.4 million, including unsaleable inventory of $5.1 million, legal fees of $1.3 million, employee severance of $0.2 million, leased facility costs of $0.2 million and other related costs of $0.6 million. Partially offsetting these costs is $3.75 million consideration RVSI agreed to pay GSI for the non-competition agreement and technology license. 83 The consideration consists of a subordinated note of $2.25 million and 271,493 shares of RVSI common stock valued at $1.5 million at the settlement date. The subordinated note bears interest at the prime rate with quarterly pro-rata principal payments from September 2001 through June 2003. GSI considers the common stock to be available-for-sale and, accordingly, is recording changes in its fair market value, net of tax effects, as a component of stockholders' equity. INTEREST. Net interest expense was $0.4 million for the nine-month period ended October 3, 1998 compared to net interest income of $0.4 million for the comparable period of 1997. A decrease in cash, resulting in less interest income, and an increase in debt, resulting in more interest expense, were primarily due to a $12.4 million cash outlay used for the acquisition of the assets of Reel-Tech, Inc. in November 1997. FOREIGN EXCHANGE. Foreign exchange transactions resulted in a gain of $95 thousand in the nine months ended October 3, 1998 compared to a loss of $326 thousand in the comparable period of 1997. Gains and losses are incurred when GSI's net receivables denominated in certain non-U.S. currencies, including yen, deutsche marks and other major European currencies, are not fully hedged. GSI continues to use foreign exchange forward contracts, primarily to reduce the impact of foreign currency fluctuations arising from intercompany balances. INCOME TAX. The effective income tax rate for GSI was 35% for the nine months ended October 3, 1998 compared to 34% for the nine months ended September 27, 1997. NET INCOME (LOSS). Net loss for the nine months ended October 3, 1998 was $0.7 million or $0.06 per share, and net income for the nine months ended September 27, 1997 was $7.9 million or $0.63 per share, based upon 12.6 million weighted average common and dilutive potential common shares in each of the 1998 and 1997 periods. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $4.4 million on October 3, 1998 compared to $8.4 million on December 31, 1997. Notes payable to banks and the current portion of long-term debt increased to $7.0 million on October 3, 1998 from $4.2 million on December 31, 1997. During the first nine months of 1998, $4.5 million was used in operating activities, $4.2 million was provided by financing activities and $3.8 million was used in investing activities. Net loss of $0.7 million in the first nine months of 1998, supplemented by non-cash charges for depreciation and amortization and deferred compensation totaling $3.4 million, offset by $3.8 million non-cash income for the consideration received from RVSI pursuant to the litigation settlement and by a net increase in working capital of $3.0 million, resulting in $4.5 million used in operating activities. Cash flow from investing activities was primarily due to capital expenditures of $3.8 million including $2.6 million of equipment, $0.7 million of applications software for operations and $0.5 million of facility and leasehold improvements. GSI's revolving credit agreement with its lending bank provides for a maximum $20 million revolving credit facility. GSI also has $6 million in international credit lines. Borrowings under the $20 million revolving credit facility, of which $3.0 million were outstanding at October 3, 1998, bear interest at the London InterBank Offered Rate (LIBOR) plus one and one-half percent, or prime, determined at the time of borrowing, 8.25% as of October 3, 1998. The agreement requires compliance with certain financial ratios and expires December 31, 1999. The financial ratios relate to tangible net worth, the ratio of total liabilities divided by tangible net worth, quick ratio reflecting the relationship of the sum of cash and accounts receivable to current liabilities and pre-tax earnings coverage of interest expense. Borrowings under the international credit lines, of which $4.0 million denominated in yen were outstanding at October 3, 1998, currently accrue interest at a rate of 1.42%. 84 GSI believes that existing cash, together with cash generated by future operations and the existing bank lines of credit, will be sufficient to satisfy anticipated cash needs to fund working capital and investments in manufacturing facilities and equipment for its existing businesses over the next twelve months. Longer term, working capital financing that may be required to respond to future growth of its business should be covered by the company's existing basic credit agreement. GSI may, however, from time to time, as market and business conditions warrant, invest in or acquire complementary businesses, products or technologies, and GSI may require additional equity or debt financings to fund such activities, which could result in additional dilution to GSI's shareholders. FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 RESULTS OF OPERATIONS SALES. Total sales increased to $181.5 million in 1997 from $156.5 million in 1996 and $125.3 million in 1995. Sales of laser systems and components increased primarily due to increased unit volume of end-user systems, primarily reflecting growth in demand for the GSI's products used in semiconductor production and electronics manufacturing. Secondarily, sales in 1997 increased by approximately $4.8 million due to funding by two multinational companies for development of a laser patterning system for use in the manufacture of flat panel displays. Less than $1 million in revenues were anticipated during the following year to complete this development project. The increase in the sales of printers were primarily due to increased unit volume of printers and to the introduction of a new product in the fourth quarter of 1997. International sales, as a percentage of total sales, were 44% in 1997, 41% in 1996 and 47% in 1995. Sales in Asia were 27% and in Europe were 17% of total sales in 1997. GROSS PROFIT. Total gross profit was $86.7 million, or 47.8% of sales, in 1997, $71.7 million, or 45.8% of sales, in 1996 and $57.9 million, or 45.9% of sales, in 1995. Laser systems and components gross profit as a percentage of sales was 48.3%, 46.1% and 46.3% for the years 1997, 1996 and 1995, respectively. The improvement in the laser systems and components gross profit in 1997 was primarily due to an increase in sales into semiconductor and electronics manufacturing which typically involve sophisticated applications which generate a higher gross profit and, to a lesser content, improved absorption of labor and manufacturing overhead resulting from a 17% increase in production volume. Printers gross profit as a percentage of sales was 44.6% in 1997, 44.0% in 1996 and 43.9% in 1995. RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses increased 21% to $22.3 million in 1997 (excluding a one-time expense relating to acquired in-process research and development associated with the acquisition of Reel-Tech) from $18.4 million in 1996 and $17.1 million in 1995. This increase in research and product development expenses was primarily due to the addition of personnel and related costs to support the development of new laser systems and components. Research and product development expenses as a percentage of sales have ranged between approximately 12% to 13% over the past three years. Because GSI believes that the development of new products is vital to its continued success, GSI expects to maintain similar levels of research and development expenses as a percentage of sales over the long term. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses were $46.2 million in 1997, $39.5 million in 1996 and $33.1 million in 1995. These increases in selling, general and administrative expenses were primarily due to the addition of sales and marketing personnel and related costs and to additional sales commission expense incurred in supporting increased sales. Additionally, in 1997 legal costs increased by approximately $1.5 million as a result of defending various legal proceedings associated with GSI's acquisition of View Engineering. Selling, general and administrative expenses as a percentage of sales have ranged between approximately 25% to 26% over the past three years. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and development expense in 1997 of $10.6 million results from an independent appraisal of Reel-Tech's intangible assets acquired. 85 INTEREST. Net interest was $464 thousand in 1997 compared to $272 thousand in 1996 and net expense of $682 thousand in 1995. These changes primarily reflect interest earned on cash raised in GSI's initial public offering in September 1995 and the repayment of View's revolving credit debt subsequent to View's acquisition by GSI in August 1996. FOREIGN EXCHANGE. Foreign exchange transactions resulted in a loss of $507 thousand in 1997 an $159 thousand in 1996 as compared to a gain of $331 thousand in 1995. The losses in 1997 and 1996 were due primarily to a weakening of the Japanese yen and major European currencies compared to the U.S. dollar at a time when GSI's net receivables denominated in these currencies were not fully hedged. INCOME TAX. The effective income tax rate for GSI was 33% in 1997, 45% in 1996 and 38% in 1995, compared to a United States Federal tax rate of 34%. GSI's effective tax rate for each year was benefited by research and development credits and by deductions associated with GSI's foreign sales corporation. GSI's effective rate for each year was increased by higher tax rates in many of the countries where GSI operates and by state income taxes. The high 1996 rate was the result of: . a portion of merger expenses not being tax deductible; and . losses incurred at View prior to the effective date of the merger that could not be used to offset GSI's profit for tax purposes. The 1995 rate reflects increased profits in GSI's foreign operations. GSI has provided a valuation allowance against View's net operating loss carryforwards and tax credits due to the uncertainty of their realizability as a result of limitations on their utilization in accordance with certain tax laws and regulations. View's operating loss carryforwards and tax credit carryforwards were approximately $4.3 million and $0.7 million, respectively, as of December 31, 1997 and are restricted to offsetting future profits in that business and their use is limited to approximately $1.2 million per year. NET INCOME. Net income was $5.1 million in 1997, $6.6 million in 1996 and $4.6 million in 1995. The decrease in net income in 1997 from 1996 was due to the $10.6 million acquired in-process research and development expense associated with the acquisition of Reel-Tech. The increase in net income in 1996 over 1995, despite one-time merger expenses and an increase in the effective tax rate associated with the acquisition of View, was primarily due to increased sales and a leveraging of operating expenses which grew at a lower rate than did the increase in sales. SUMMARY. GSI has experienced, and may continue to experience, fluctuations in operating results due to a variety of factors, including: the rate of growth of the markets for its products; market acceptance of GSI's products and those of its competitors; development and promotional expenses relating to the introduction of new products or new versions of existing products; changes in pricing policies by GSI and its competitors; the timing of the receipt of orders from major customers; the timing of shipments; and economic conditions in markets served by GSI. GSI's expense levels are based, in part, on its expectations as to future sales and, as a result, operating results would be disproportionately affected by a reduction in sales or a failure to meet GSI's sales expectations. GSI believes that its business has been, and is expected to continue to be, dependent upon its customers' capital expenditures which are, in turn, affected by cycles in the markets served by those customers. GSI's worldwide sales expose GSI to risks relating to economic conditions outside of the United States. GSI believes that recent and ongoing economic turmoil in certain Asian markets has reduced GSI's sales. It is difficult to predict the future effect of the Asian situation on GSI's results. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $8.4 million on December 31, 1997 compared to $17.7 million on December 31, 1996. In the Fall of 1995, GSI raised a net $27.7 million through its initial public offering of 2,585,000 shares of GSI Common Stock, inclusive of 335,000 shares exercised by the underwriters to cover over-allotments. 86 A net $3.2 million was provided by operating activities during 1997. Net income of $5.1 million was supplemented by non-cash charges totaling $0.5 million for depreciation, amortization and deferred compensation, net of deferred income taxes and by $10.6 million for acquired in-process research and development, which is included in cash flows used in investing activities. In support of expanded business activity, accounts receivable and inventory increased by $19.9 million offset by an increase in payables and accrued expenses of $7.0 million. Cash flows in investing activities in 1997 include $12.4 million for the acquisition of Reel-Tech, representing cash expended. An additional $2.0 million of consideration for Reel-Tech was represented by the issuance of 75,118 shares of the GSI's Common Stock. Investing activities in 1997 also includes capital expenditures of $5.3 million. These expenditures were primarily for the purposes of adding manufacturing capacity, providing equipment for operating efficiencies within GSI's existing facilities and the acquisition and initial installation of a new company-wide information system platform. GSI began to occupy newly leased 78,000 square feet of additional manufacturing, research and office space in December 1997. GSI's revolving credit agreement with its lending bank, as amended in 1997, provides for a maximum $20 million revolving credit facility and $6 million in international credit lines. Borrowings under the $20 million revolving credit facility bear interest at the London InterBank Offered Rate (LIBOR) plus one and one-quarter percent or prime, determined at time of borrowing. Borrowings under the international credit lines, of which $4.2 million was outstanding at December 31, 1997, accrue interest at a negotiated rate approximating the prime rate in the applicable country. The agreement requires compliance with certain financial ratios and expires December 31, 1999. YEAR 2000 The use of computer programs written using two digits rather than four to define the applicable year gives rise to what is commonly referred to as the Year 2000 problem. The major areas being addressed by GSI in regards to Year 2000 compliance are internal operating systems, the installed base of products at customer sites and third party compliance issues. The efficient operation of GSI's business is dependant, in part, on its computer software and hardware. These systems are used in several key areas of GSI's business, including sales, purchasing, engineering, inventory control, manufacturing, service and financial reporting. GSI has been evaluating its systems to identify potential Year 2000 compliance problems. These actions are necessary to ensure that the programs and systems will recognize and accurately process the Year 2000 and beyond. Evaluation and planning phases have been completed. Based on present information, GSI believes its systems for operations will be Year 2000 compliant by the first quarter of 1999. GSI also continues to assess the impact of the Year 2000 issue on the operations of its products installed at customers. The installed base customers that have older products that are not Year 2000 compliant are being contacted and offered upgrade options. This effort should be complete by the third quarter of 1999. Finally, GSI is in the process of assessing its major suppliers' compliance with Year 2000 issues. This will be an ongoing effort through the next year. GSI believes that suppliers and customers present the area of greatest risk to GSI in part because of GSI's limited ability to influence actions of such third parties, and in part because of GSI's inability to estimate the level of impact of noncompliance of third parties throughout the extended supply chain. The most reasonably likely worst case scenario would involve non-performance by a supplier, which could delay production and delivery of product to customers. Independent of issues related to Year 2000, in 1995, GSI began a program to select, acquire and install a new hardware and software platform to replace its then current system which did not have the capacity to accommodate GSI's growth plans. Recent upgrades to such systems to make them Year 2000 compliant have been made by GSI's hardware and software providers under standard maintenance contracts at no additional 87 cost to GSI. Because GSI has been upgrading its operations systems to newer applications which are Year 2000 compliant, it is anticipated that the future costs of the Year 2000 compliance for operations will not materially impact the financial results of GSI. Separate expenditures exclusively for Year 2000 compliance have been immaterial to date. However, the effect of third party impact cannot be quantified at this time because GSI cannot accurately estimate the magnitude, duration, or ultimate impact of noncompliance by suppliers, customers and other third parties that have no direct relationship to GSI. GSI believes that its competitors face a similar risk. Going forward GSI will continue to make every effort to identify and minimize that risk. Contingency plans include identifying second source suppliers for critical components, and review of accounts receivable statements with customers and preparing to assist customers in the event their accounts payable systems fail. To the extent this analysis discusses financial projections, information or expectations about GSI's products or markets, or otherwise makes statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These factors include the fact that GSI's sales have been, and are expected to continue to be, dependent upon customer capital equipment expenditures which are, in turn, affected by business cycles in the markets served by those customers. Other factors include continued volatility in the semiconductor industry and Asian markets, the risk of order delays and cancellations, the risk of delays by GSI's OEM customers in introducing their new products and market acceptance of those products incorporating subsystems supplied by GSI, similar risks to GSI in delays in new product introductions and market acceptance of its new products, and other risks detailed in this document. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth as of December 31, 1998 certain information regarding the beneficial ownership of GSI common stock and GSI Lumonics common shares by: . each of the persons or entities known by GSI to be the beneficial owners of more than 5% of the GSI common stock, . each of the GSI named executive officers, . each director of GSI and . all directors and executive officers of GSI as a group (14 persons).
NUMBER OF SHARES OF GSI LUMONICS COMMON STOCK PERCENTAGE OF GSI NUMBER OF SHARES OF GSI PERCENTAGE OF GSI BENEFICIALLY LUMONICS COMMON COMMON STOCK BENEFICIALLY COMMON STOCK OWNED (1) (2) STOCK OUTSTANDING OWNED (1) (2) (3)(4) OUTSTANDING (3) (3)(4)(10) (10) ------------------------- ----------------- ----------------------- ----------------- Pierre J. Brosens Sc.D. (5)(8)................. 774,297 6.11% 1,042,978 3.06% Jean I. Montagu (5)(6).. 400,000(7) 3.16% 538,800 1.58% Charles D. Winston (9).. 133,079 1.05% 179,257 * Gregory S. Baletsa (9).. 66,660 * 89,791 * Thomas R. Swain (9)..... 68,212 * 91,882 * Joseph A. Verderber (9).................... 65,076 * 87,657 * Victor H. Woolley (9)... 69,040 * 92,997 * Paul F. Ferrari (9)..... 111,000 * 149,517 * Woodie C. Flowers (9)... 31,400 * 42,296 * Richard B. Black, Ph.D. (9).................... 11,000 * 14,817 * Dorothy S. Zinberg, Ph.D. (9).............. 4,000 * 5,388 * Arthur R. Buckland (9).. 4,000 * 5,388 * All directors, nominees for director and executive officers as a group (14 persons)..... 1,910,536 15.08% 2,573,492 7.54%
- -------- *Less than 1% of outstanding common shares 88 (1) The inclusion herein of shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, each stockholder referred to above has sole voting and investment power with respect to the shares listed. Each stockholder's applicable share of ownership is based on 12,666,476 shares of common stock, excluding treasury shares, outstanding as of December 31, 1998 together with applicable options for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. (2) The amounts listed include the following shares of common stock that may be acquired within 60 days of December 31, 1998 through the exercise of stock options or warrants: Mr. Winston, 42,790 shares; Mr. Baletsa, 56,660 shares; Mr. Swain 9,248 shares; Mr. Verderber, 24,360 shares; Mr. Woolley, 45,840 shares; Mr. Ferrari, 18,500 shares; Mr. Black, 6,000 shares; Dr. Zinberg, 6,000 shares; Dr. Brosens, 2,000 shares; Mr. Buckland, 4,000 shares; Dr. Flowers, 2,000 shares; and all directors and executive officers as a group, 235,598 shares. (3) The amounts of shares of GSI common stock listed do not include the following shares which may be acquired upon the achievement by GSI of certain performance goals: Mr. Baletsa, 15,000 shares; Mr. Winston, 75,000 shares; Mr. Swain, 5,000 shares; Mr. Verderber, 20,000 shares; Mr. Woolley, 15,000 shares. GSI does not expect to reach such performance goals within 60 days, and, thus, does not expect that such shares may be acquired by those persons within such time. (4) Shares of GSI common stock subject to options and warrants that are currently exercisable within 60 days of December 31, 1998 are deemed to be beneficially owned by the person holding such option for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (5) Mr. Montagu resigned as an executive officer and director of GSI on April 17, 1997. Dr. Brosens resigned as an executive officer as of September 30, 1997 and a Director of GSI in October 1998. (6) Address: 76 Walnut Place, Brookline, MA 02146. (7) A number of the shares indicated in the table may be held by Mr. Montagu indirectly through a corporation or may be held jointly by Mr. Montagu and his wife. (8) 34 Dundonald Road, Belmont, MA 02178. (9) Address: c/o GSI, 500 Arsenal Street, Watertown, MA 02472 (10) Assumes the merger had occurred on December 31, 1998. 89 BUSINESS OF LUMONICS CORPORATE HISTORY AND STRUCTURE Lumonics was incorporated by letters patent as Lumonics Research Limited under the laws of Ontario on November 26, 1970 for the purpose of producing lasers for scientific and research applications. By articles of amendment dated June 11, 1980, the company changed its name to Lumonics Inc. Lumonics first became a public company in 1980 and Lumonics common shares were listed on The Toronto Stock Exchange until 1989. From 1980 to 1988 annual revenues of Lumonics increased twelve-fold from Cdn$7.4 million to Cdn$87.5 million. In 1989, all of the outstanding Lumonics common shares were acquired by SHI Canada Inc. ("SHI"), a wholly-owned subsidiary of Sumitomo Heavy Industries, Ltd. ("Sumitomo"), and Lumonics ceased to be a public company. Sumitomo acquired Lumonics to expand its relationship with the company, which began in 1988 when Sumitomo became a value-added reseller of Lumonics' products in Japan. Sumitomo, a Tokyo Stock Exchange listed company, is one of Japan's leading manufacturers and builders of ships, heavy machinery and equipment, chemical plants, steel structures and bridges. Sales to Sumitomo, Lumonics' largest distributor, represented 10.7% of Lumonics' total sales in fiscal 1997. On September 28, 1995, Lumonics again became a public company and its shares were listed on The Toronto Stock Exchange. As part of the public offering, SHI participated in a secondary offering. On June 9, 1997 Lumonics completed a public offering of 2.0 million shares from treasury, with SHI participating in a secondary offering of 1.0 million shares. SHI completed a sale to the public of an additional 1.0 million shares on September 29, 1997. Lumonics has historically prepared and filed its consolidated financial statements in Canadian dollars and in accordance with Canadian GAAP. The consolidated financial statements of Lumonics included in this document have been prepared in accordance with US GAAP and have been recast in US dollars in accordance with US GAAP. The following discussion is based on the US GAAP financial statements. Lumonics shareholders are also referred to the Canadian GAAP Financial Statements Supplement in which Lumonic's consolidated financial statements prepared in accordance with Canadian GAAP are presented. BUSINESS OF LUMONICS Lumonics is a world leader in the development, design, manufacture and marketing of laser-based advanced manufacturing systems, products and services. Lumonics' systems are used in highly automated manufacturing environments for cutting, drilling and welding and for coding and marking a wide range of products. In addition to lasers, Lumonics' systems often include precision or fibre optics, proprietary control software, robotics, machine vision, motion control and parts handling. Lumonics' laser systems are sold to a variety of targeted industrial markets. Some markets, such as the semiconductor, electronics, aerospace, medical device manufacturing and nuclear energy industries have used laser systems as enabling technologies where precision, reliability, speed, process quality and flexibility are essential. Other industries, such as automotive and packaging, have used laser systems less frequently and for a more limited range of applications, although utilization of lasers in these markets is increasing. Still other industries, such as consumer products manufacturing, are characterized by comparatively low utilization of laser systems. 90 The following table sets forth sales to Lumonics' primary markets and each market's primary applications for the nine months ended September 30, 1998:
MARKET % OF SALES PRIMARY APPLICATIONS ------ ---------- -------------------- Semiconductor 11% Marking of wafers and integrated circuits Electronics 21 Micro welding, wire stripping, component identification Automotive 8 3-D cutting, body welding, component identification Aerospace 10 Engine drilling, wire identification, welding components Packaging 8 Marking of packages (food, pharmaceuticals) and bottles (beer, wine) Emerging 20 Spot welding, metal marking, remote welding Parts and Service 22 --- 100%
Lumonics markets its systems worldwide in more than 40 countries through its global distribution network, which includes 13 sales offices in North America, Europe and Asia-Pacific and 45 independent distributors and agents in 30 countries. Lumonics has seven manufacturing facilities located in Canada, the United States and the United Kingdom. Many of Lumonics' customers are among the largest global participants in their respective industries. Approximately 60% of the company's sales in 1997 were generated from existing customers. CORPORATE STRATEGY Lumonics' objective is to maintain and enhance its market position and to use its competitive advantages to establish leadership positions for additional applications and in other targeted industries. The strategies to achieve this goal are: One Lumonics--Lumonics is managed as an integrated business combining its worldwide skills and capabilities to increase market share and to maximize its profitability. Employees operate in an environment in which they are provided with information about Lumonics' systems, services and operational activities and are encouraged to work together to use all of the Lumonics' resources in delivering value-added total solutions to meet customer needs in targeted markets. Total Solutions--Lumonics focuses on identifying for its customers the solutions which the Lumonics' systems represent, rather than on the systems themselves. To grow market share, Lumonics delivers turn-key, total solutions which add value to manufacturing processes, are customer-defined and Lumonics- developed. Industry Focused Operations--Lumonics concentrates its marketing activities on the advanced manufacturing segments of the Semiconductor, Electronics, Aerospace, Automotive and Packaging industries. These industries were targeted because of their projected growth rates and utilization of advanced manufacturing processes and because of Lumonics' established market presence. Rapid Response Organization--Lumonics recognizes that being a customer driven organization is key to its continued growth. With approximately 60% of the Lumonics' sales in 1997 generated from existing customers, the timeliness and effectiveness of all customer interaction is a high priority. In 1994, Lumonics successfully implemented 24 hour, 365 day a year, field service support in North America. This field service support has subsequently been extended to both Europe and the Asia-Pacific region. Global Perspective--Lumonics provides its total solutions in the principal geographic locations in which its customers operate. The company recognizes the global nature of its customer base as well as the important regional areas in which certain of the targeted industries operate. This strategy exploits Lumonics' international manufacturing capability and global distribution and service network to serve its multinational and regional customers. 91 People Development--Lumonics believes that its human resources are integral to its profitable growth. Lumonics makes a significant investment in human resources through personnel development and training programs at all levels of the organization. Profitable Growth--Lumonics achieves its growth by developing new products internally and by acquiring complementary product lines and technology which enhance Lumonics' position in the targeted industries. Lumonics' global distribution and service network and the size and nature of its existing customer base position Lumonics to profitably add new technologies, products and systems to its existing product offerings. Since the implementation of the strategies outlined above, Lumonics has generated a 130% increase in sales, from $77.0 million in 1992 to $177.3 million in 1997, and a 156% increase in gross profit, from $25.7 million in 1992 to $65.9 million in 1997. Net income in 1997 was $11.9 million and order backlog as at December 31, 1997 was $45 million. ACQUISITIONS AND STRATEGIC RELATIONSHIPS In addition to growing its level of internally generated sales, expanding through acquisitions and strategic relationships is an integral component of Lumonics' strategy. Lumonics seeks to acquire complementary products and technologies which can be integrated easily into Lumonics' global distribution and service network. Lumonics has a history of expanding its product lines by acquiring laser-based technologies and systems from others and entering into strategic relationships which increase penetration of targeted markets. ACQUISITIONS The purchase in June 1993 of the Xymark(R) line of advanced laser marking systems enabled Lumonics to expand the portfolio of laser-based marking systems it offers to the Packaging industry. Xymark systems also provide Lumonics with technology that may be applied in other markets in which Lumonics operates. Since the purchase of Xymark for approximately $3.8 million, annual unit sales of Xymark systems have more than tripled. In June 1996, Lumonics acquired substantially all of the assets and technology of Hobart Laser Products Inc. for approximately $4.4 million. Hobart technology extends Lumonics' high-power, solid state product range giving Lumonics more potential applications within the target markets. Hobart's high- power laser systems have been integrated into Lumonics' core product offerings as the MultiWave(TM) 3000 and MultiWave(TM) 1500. In June 1998, Lumonics made a technology acquisition for approximately $1.1 million, acquiring Meteor Optics Inc., of Glendale, Arizona which specializes in manufacturing fibre optics - a key component in the beam delivery of higher- powered YAG lasers. Meteor Optics has been a valued supplier to Lumonics for several years and has now been renamed Lumonics Phoenix Operations. STRATEGIC RELATIONSHIPS In forming and evaluating strategic relationships, Lumonics seeks: . to achieve greater market penetration into its target markets; . to develop new markets for Lumonics' systems; . to provide Lumonics with additional products to manufacture, sell and distribute into its target markets. 92 CUSTOMERS Lumonics has over 1,000 customers, many of whom are among the largest global participants in their respective industries. Lumonics's customers include:
SEMICONDUCTOR& ELECTRONICS AEROSPACE AUTOMOTIVE PACKAGING OTHER - -------------- --------- ---------- --------- ----- Lucent Beech Aircraft Audi Allied Lyons British Nuclear Fuels Canon Boeing Bosch Allied Distillers Cardiac Pacemakers Hewlett Packard British Aerospace BMW Carlsberg Corning IBM General Electric Chrysler Coca-Cola Gillette Intel Lockheed Ford General Foods Johnson & Johnson Motorola McDonnell Douglas General Motors Glaxo Solar Turbine Nortel Pratt & Whitney Harley Davidson Kellogg's Westinghouse Philips Rolls Royce Kelsey Hayes Labatts Whirlpool Texas Instruments SNECMA Nippon Denso Procter & Gamble Toshiba Pico Industrial Tools United Distillers Yamaha Toyota Seagrams Volvo Honda Magna
SALES, MARKETING AND DISTRIBUTION Lumonics' systems are marketed in more than 40 countries. Lumonics has 53 direct sales personnel operating in 12 sales offices located in eight countries. In addition, Lumonics has 45 independent distributors and agents in 30 countries. For the nine months ended September 30, 1998, 6% of sales were in Canada, 43% of sales were in the United States, 27% were in Europe, 12% were in Japan and 12% were in Asia-Pacific. Lumonics directs its worldwide sales and marketing activities from Oxnard, California. In Europe, Lumonics maintains offices in the United Kingdom, Germany, France, and Italy. Sales offices are maintained in Singapore and Malaysia to cover the Asia-Pacific market outside of Japan. In Japan, Lumonics' principal distributor is Sumitomo, which accounted for 10.7% of Lumonics' total sales in 1997. Independent distributors and agents market Lumonics' systems in areas such as Eastern Europe, South Korea, People's Republic of China, Australia and Latin America. All direct sales staff and distributors are trained on Lumonics' systems, services and operational activities, and are given information on industry trends and applications. Sales and marketing teams identify new opportunities based on customers' medium to long term manufacturing requirements. Internal and external resources are used to develop and implement industry and country- specific marketing strategies which are shared across Lumonics' sales and marketing network. Once a sales opportunity has been identified, Lumonics tries to provide the optimal solution to satisfy a customer's application requirements. Lumonics provides customers with process diagnostic and verification techniques, as well as specialized training in the operation and maintenance of its systems. ORDER BACKLOG Backlog is defined by Lumonics as an unconditional purchase order for a product to be delivered within the next twelve months, although typical delivery dates average eight to 12 weeks from the date an order is placed. As at December 31, 1997 Lumonics' order backlog was $45 million. As at December 31, 1996 order backlog was $46 million. Backlog at September 30, 1998 was $36 million. Backlog at September 30, 1997 was $51 million. 93 CUSTOMER SERVICE AND REPLACEMENT PARTS One of Lumonics' principal strategies is to focus on customer service. Recognizing the importance of its existing and growing installed base Lumonics follows its customers into new geographic regions by providing local service and support. Lumonics has 166 customer service personnel of which 85 are field service technicians located in 10 countries. Lumonics' field service and in- house technical support personnel receive ongoing training with respect to Lumonics' laser-based systems, maintenance procedures, laser-operating techniques and processing technology. Most of Lumonics' distributors also provide customer service and support. Many of Lumonics' laser systems are operated 24 hours a day in high speed, quality intensive manufacturing operations. Accordingly, in 1994 Lumonics successfully launched 24-hour, 365-day-a-year service support to its North American customers. This support includes field service personnel who reside in close proximity to Lumonics' installed base. Lumonics has subsequently extended this support to Europe and the Asia-Pacific region. Lumonics' approach to the sale of replacement parts is closely linked to Lumonics' strategic focus on rapid customer response. Lumonics provides same or next day delivery of parts worldwide to minimize disruption to a customers manufacturing operations. Lumonics generally expects to provide after sale parts and service for seven to ten years. Lumonics' growing base of installed systems is expected to continue to generate a stable source of parts and service sales. LASER SYSTEMS More than 14,000 of Lumonics' laser systems have been sold since 1970, including those sold by entities which have since been acquired by Lumonics. Lumonics currently offers a range of laser-based systems of which there are ten principal product lines. Lumonics' systems can be used in a variety of applications, including robotic welding of automobile bodies, precision hole drilling in jet engine turbo fans for the Aerospace industry and land-based turbines, and marking silicon wafers in the manufacture of semiconductor microchips. Lumonics' range of products, breadth of technology, ability to offer customized solutions and 28 years of application and laser processing expertise allow Lumonics to satisfy customers' needs for enhanced productivity. Lumonics' systems can be divided into two core application areas: . cutting, drilling and welding (materials processing); . coding and marking. In addition to lasers, Lumonics' systems often include precision or fibre optics, proprietary control software, robotics, machine vision, motion control and parts handling. The following is a description of Lumonics' principal product lines: CUTTING, DRILLING AND WELDING SYSTEMS JK700 Series Lumonics' JK700 Series laser systems incorporate advanced solid state laser technology to produce efficient, reliable, dependable and accurate production systems. The JK700 systems operate at uniform energy density, offer improved process efficiency and require less energy to be used. These systems use Lumonics' patented power supply, allowing a wide range of applications, including drilling cooling holes in jet engine turbo fans, seam welding cardiac pacemakers and welding automotive parts such as ignition components, fuel injector assemblies and smog detection sensors. These systems also permit high speed, repetitive processing which maximizes production rates. The JK700 Series can be readily linked with robotics systems to provide manufacturers with a flexible production tool. The current price range for a JK700 system is $100,000 to $250,000. 94 LuxStar(TM) The introduction by Lumonics of the LuxStar laser welding system in 1993 brought its high power, state-of-the-art laser expertise to lower power, high volume applications. The LuxStar produces welds that would be difficult or impossible for conventional welding systems to produce. The product's low heat input prevents damage or distortion to surrounding components. In addition, Lumonics' proprietary control software ensures reliable laser output and consistent weld quality. The LuxStar is compact, with its laser beam deliverable through flexible fibre optics, and is used in the Electronics industry for welding micro components in the manufacture of televisions, computers, hard disk drives and related applications. As with Lumonics' other laser systems, there is no tool wear since the laser does not come in contact with the workpiece. Current prices for a LuxStar system range from $60,000 to $150,000. MultiWave(TM) Lumonics' MultiWave laser product line was introduced in 1993. Since then the product line has been expanded by the acquisition of Hobart Laser Products in 1996 adding the MultiWave 3000 and MultiWave 1500, and by the development of Lumonics' latest high power laser, the MultiWave Auto, launched in late 1997. MultiWave systems produce continuous and modulated power with high throughput speeds and power flexibility to achieve cutting and high speed, deep penetration welding in reflective materials. MultiWave is often integrated with customers' robotic systems. MultiWave is used in various applications, including processing of zinc coated materials and aluminum in the Automotive industry, deep penetration welding for energy and petrochemical applications, and processing reflective or difficult materials in the manufacture of both airframes and turbines in the Aerospace industry. The current price range for a MultiWave system is $125,000 to $400,000. Laserdyne(R) Laserdyne systems provide fully integrated motion and laser control on multi- axis, articulated machines. These systems incorporate proprietary control software and permit high speed, precision processing of large parts where the workpiece cannot be in motion during processing. Laserdyne systems are used in the manufacture and repair of jet aircraft engines, and trimming of aerospace and automobile stampings and other large formed parts. Laserdyne systems can be integrated with automated guided vehicles and conveyor systems. The current price range for a Laserdyne system is $625,000 to $950,000. ScreenCut(TM) ScreenCut laser stencil cutting systems are designed to reduce the time to produce solder stencils in the printed circuit board industry by combining fast conversion of design files with a state-of-the-art linear motor based laser cutting system. The ScreenCut laser system is used for cutting stencils as an alternate to or, in some cases, a complement to the traditional, photochemical machining process. ScreenCut systems sell for approximately $350,000. INDEX(R)/IMPACT(R) INDEX and IMPACT laser systems are used for cutting and drilling thin materials with very high resolution and precision such as drilling via holes of sizes less than 20 microns in flexible printed circuit boards. Current prices for INDEX and IMPACT systems range from $60,000 for a single laser to $600,000 for a turn-key system. CODING AND MARKING SYSTEMS LaserMark(R) The LaserMark system, which was pioneered by Lumonics in 1976, was the world's first industrial laser-based marking system. LaserMark, which Lumonics continues to upgrade and enhance, provides flexible, 95 reliable, programmable, clean and safe marks for the Electronics and Packaging industries. As a result, LaserMark is still a market leader with over 3,000 systems installed to date. LaserMark provides high speed, non-contact coding without ink, thereby allowing clean, permanent and attractive date and batch coding on a wide range of materials including paper, foil, glass, plastics, coated metals and ceramics. LaserMark systems currently range in price from $40,000 to $100,000. WaferMark(R) Lumonics' WaferMark laser systems are used for marking silicon wafers used in the Semiconductor manufacturing industry. Lumonics' position as a principal supplier of wafer marking laser systems enables it to work closely with customers and to keep current with their future development needs and activities. The current generation of WaferMark systems incorporates advanced robotics to provide debris free marking of high density silicon wafers along an automated production line. WaferMark systems currently range in price from $160,000 to $500,000. LightWriter(R) LightWriter systems are used for tracing and regulatory compliance purposes on various materials including metals, plastics and ceramics. Applications include serializing micro processors in the Semiconductor industry, coding automotive airbag assemblies and engraving surgical instruments. The current price range for a LightWriter system is $55,000 to $85,000. Xymark(R) Xymark high speed dot matrix laser coding systems complement the LaserMark(R) product line. Xymark systems can be programmed and adjusted to vary the length, character style and height of a mark. These systems use Lumonics' proprietary software and are employed in a wide variety of applications such as marking food packages, bottles and beverage containers. Prices for Lumonics' Xymark systems currently range between $20,000 and $50,000. Other Systems and Products Other systems and products offered by Lumonics include diode-pumped solid state lasers, various custom designed systems, precision optical components and fiber optics. COMPETITION The market for laser-based advanced manufacturing systems is fragmented, and includes a large number of competitors, many of which are small or privately owned or which compete with Lumonics on a limited geographic, industry-specific or application-specific basis. Lumonics also competes in certain target markets with competitors which are part of large industrial groups. Lumonics believes it has the largest market share for many applications in the markets in which its systems are sold. Companies such as ESI, GSI, Trumpf-Haas, Mazak, NEC and Rofin-Sinar compete in certain of the markets in which Lumonics operates. However, in Lumonics' opinion, none of these companies competes in all of the industries, applications and geographic markets currently served by Lumonics. Lumonics also competes with manufacturers of conventional non-laser products in applications such as welding, drilling, cutting and marking. Lumonics believes that as industries continue to modernize, seek to reduce production costs and require more precise and flexible manufacturing, the features of laser-based systems will become more desirable than systems incorporating conventional manufacturing techniques and processes. 96 PRODUCTION AND OPERATIONS Lumonics' systems are manufactured in seven locations: two in the Ottawa area, one in each of Minnesota and California and Phoenix and two in the United Kingdom. Lumonics' in-house manufacturing includes only those manufacturing operations which are critical to achieve quality standards or protect intellectual property. Such operations include process development, sub-assembly, testing, proprietary software design and hardware/software integration. Lumonics minimizes the number of suppliers and component types but, wherever practicable, it has at least two sources of supply for key items. Lumonics is not dependent on any supplier and has not experienced difficulty in obtaining necessary materials and components. Lumonics is committed to meeting internationally recognized manufacturing standards. Lumonics facilities with ISO 9001 certification include: its two facilities in England, its Kanata, Ontario facility, and its California facility. Lumonics intends to apply for certification of all of its manufacturing sites. Lumonics is subject to various federal, provincial, state and local provisions concerning the discharge of materials into the environment or otherwise relating to the protection of the environment. Lumonics believes it is currently in compliance with these provisions and that continued compliance with current provisions will not have a material impact on its capital expenditures in the current year or in future years. Lumonics also believes that continued compliance with current provisions will not impact on the earnings and competitive position of Lumonics and its subsidiaries. It should be noted that future regulations could be enacted which could require Lumonics to purchase costly capital equipment or otherwise incur substantial expenses in order to comply with those new regulations. RESEARCH AND DEVELOPMENT Lumonics' research and development activities are directed at meeting customers' manufacturing needs and application processes. Core technologies include gas and solid state lasers, precision optics, electronic power supplies, fibre optics, control systems and systems integration. Lumonics strives for customer-driven development activities and promotes the use of alliances with key customers and joint development programs in a wide range of its target markets. Lumonics has 157 employees engaged in product research and development. Lumonics' research and development activities are carried out in five locations around the world and are centrally coordinated and managed. Interaction and communication among research and development personnel throughout Lumonics promote a sharing of their cumulative expertise. Lumonics maintains strong links with leading industrial, government and university research laboratories around the world, including Sumitomo's corporate technology group. Such linkages include funding of doctoral and post-doctoral research, joint development programs with research institutes and personnel exchange programs with universities and other research organizations. For the nine months ended September 30, 1998, Lumonics' research and development expenditures represented 9.1% of sales, compared to 6.8% of sales for the same period in 1997. During the years ended December 31, 1997, 1996 and 1995 the following amounts were spent on research and development activities: $12.0 million; $11.9 million; and $7.1 million, respectively. During these years, the amount of expenditures on customer-sponsored research activities was not material in comparison to total research and development activities for each year. R&D investments during the past two years have resulted in the introduction of 5 new products which are targeted across all major markets. PATENTS AND INTELLECTUAL PROPERTY Lumonics has intellectual property which includes patents, proprietary software, technical know-how and expertise, designs, process techniques and inventions. While policies and procedures are in place to protect 97 critical intellectual properties, Lumonics believes that its success depends to a larger extent on the innovative skills, know-how, technical competence and abilities of Lumonics' personnel. Lumonics protects its intellectual property in a number of ways including, in certain circumstances, through patents. Lumonics has sought patent protection primarily in the United States. Some patents have also been registered in other jurisdictions including Great Britain, Japan and Germany. Lumonics currently holds 24 separate patents for inventions relating to lasers, processes and power supplies. In addition, Lumonics requires its employees and certain of its customers, suppliers, distributors, agents and consultants to enter into confidentiality agreements to further safeguard Lumonics' intellectual property. LEGAL PROCEEDINGS A party has commenced legal proceedings in the United States against a number of U.S. manufacturing companies, including companies which have purchased systems from Lumonics. The plaintiff in the proceedings has alleged that certain equipment used by these manufacturers infringes patents claimed to be held by the claimant. While Lumonics is not a defendant in any of the proceedings, seven of Lumonics' customers have notified Lumonics that, if the party successfully pursues infringement claims against them, they may require Lumonics to indemnify them to the extent that any of their losses can be attributed to systems sold to them by Lumonics. While Lumonics does not believe that the outcome of these claims will have a material adverse effect upon Lumonics, there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon Lumonics' financial condition or results of operations. HUMAN RESOURCES As at September 30, 1998, Lumonics had 930 employees in the following departments:
NUMBER OF EMPLOYEES PERCENTAGE --------- ---------- Production and Operations............................... 346 37% Customer Service........................................ 166 18% Sales, Marketing and Distribution....................... 148 16% Research and Development................................ 157 17% Administration.......................................... 113 12% --- --- Total................................................. 930 100%
Lumonics believes in the principle of performance-linked compensation. Most employees of Lumonics participate in a profit sharing program which provides for payments determined on the achievement of annual operating targets and calculated as a percentage of base salaries. Lumonics considers its employee relations to be satisfactory. 98 PRINCIPAL PROPERTIES The following table lists the location and additional details of Lumonics' principal manufacturing facilities and properties:
APPROX. FLOOR AREA LOCATION (SQ. FT.) OWNERSHIP USE -------- ---------- --------- --- CANADA Kanata, Ontario 74,000 Owned Corporate head office, manufacturing operations and research & development Nepean, Ontario 40,900 (two sites) Owned Manufacturing operations for custom optics UNITED STATES Livonia, Michigan 30,000 Leased; lease North American customer support expires March 31, center, product demonstration 2000 facility and parts depot Eden Prairie, 69,000 Leased; lease Manufacturing operations and Minnesota expires June 1999; research & development no option to renew Oxnard, California 44,000 Leased; lease Manufacturing operations and expires June 30, research & development 2004; option to purchase Phoenix, Arizona 6,000 Leased; lease Manufacturing operations for expires July 2000 customer fibre optics UNITED KINGDOM Rugby, England 110,000 Owned Manufacturing operations and research & development Hull, England 35,000 Leased; lease Manufacturing operations and expires June 2002; research & development no option to renew CONTINENTAL EUROPE Munich, Germany 29,600 Leased; lease European customer support center, expires January product demonstration facility 2013; option to and parts depot renew ASIA-PACIFIC Singapore 5,800 Leased; lease Asia-Pacific customer support expires February, center, product demonstration 2002 option to facility and parts depot renew
Additional sales and services offices are located in France, Italy, Belgium, Malaysia and Brazil. These offices are in leased facilities occupying a total of approximately 7,000 square feet. OTHER DEVELOPMENTS On July 15, 1998, Lumonics announced its intention to make a normal course issuer bid to repurchase up to 855,550 common shares, representing 5% of the 17,111,026 common shares outstanding as of July 15, 1998. The issuer bid became effective July 17, 1998 and will not extend beyond July 16, 1999. Purchases will be made from time to time at the then prevailing open market prices and paid out of general corporate funds. All repurchased shares are to be canceled. No shares will be knowingly purchased from Lumonics insiders or their affiliates. 99 During the period from July 21, 1998 to August 10, 1998, Lumonics purchased 94,900 shares in the open market under the normal course issuer bid. Since August 10, 1998 no further shares have been repurchased by Lumonics. NEW PRODUCTS Consistent with its plans to introduce new laser-based systems this year, Lumonics launched its Impact(R) GS-600 system into the electronics market early in the second quarter. This innovative system, which incorporates two types of lasers, enables customers to drill blind vias (very precise holes) in every type of circuit construction and material commonly used for printed wire board fabrication. Drilling speeds can reach 600 holes per second depending on the material being processed, and the system can create holes as small as 0.025 millimeters in diameter. EXPANSIONS Mid-way through the second quarter of 1998, Lumonics opened a new 20,000 square foot European regional customer center in Munich, Germany. Housing 14 application labs where customers test their material samples on Lumonics laser systems, this facility has attracted considerable attention since its opening and is the centerpiece of Lumonics' European sales and support network. Lumonics has now completed phase one of a two-phase building and consolidation program in Rugby, England. Phase one involved constructing an extension to its main facility and moving personnel to allow for refurbishment to begin on the older section of the main building. When phase two is complete in the first quarter of 1999, Lumonics will have consolidated three buildings into one facility. Late in the second quarter of 1998, Lumonics established its first service and future sales office in Brazil. This will allow Lumonics to support customers in the large and emerging markets of South America. Lumonics has negotiated an operating lease on a new 55,000 square-foot, purpose-built facility in Livonia, Michigan, to relocate and expand its North American regional customer center. This facility is expected to be ready for occupancy in June, 1999. Lease payments under the agreement will be finalized in 1999 but are expected to be approximately $500,000 per year for 5 years. Lumonics has also negotiated an operating lease on a new 100,000 square-foot, purpose-built facility in Eden Prairie, Minnesota, to relocate and expand its current Eden Prairie manufacturing facility. This facility is expected to be ready for occupancy in July, 1999. Lease payments under the agreement will be finalized in 1999 but are expected to be approximately $600,000 per year for 5 years. SELECTED FINANCIAL DATA Lumonics has historically prepared and filed its consolidated financial statements in Canadian dollars and in accordance with Canadian GAAP. The selected financial information of Lumonics set forth below has been prepared in accordance with US GAAP, and has been recast in US dollars in accordance with US GAAP. Lumonics shareholders are also referred to the Canadian GAAP financial statement supplement in which Lumonic's consolidated financial statements prepared in accordance with Canadian GAAP are presented. The following table presents selected historical income statement and balance sheet data of Lumonics. The balance sheet data presented below as of December 31, 1993, 1994, 1995, 1996 and 1997 and the income statement data presented below for each of the years in the five year-period ended December 31, 1997 are derived from Lumonics' consolidated financial statements which have been audited by Ernst & Young LLP, independent chartered accountants. The financial statements as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 and the report of Ernst & Young LLP relating thereto are included elsewhere in this joint proxy statement/prospectus. The balance sheet data presented 100 below as of September 30, 1997 and 1998 and income statement data for the nine- month periods ended September 30, 1997 and 1998 are derived from unaudited consolidated financial statements, which, in the opinion of Lumonics management, contain all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the financial position and results of operations for these periods. The operating results for the nine months ended September 30, 1997 and 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year. The data should be read in conjunction with Lumonics' financial statements and related notes and Lumonics' Management's Discussion and Analysis of Financial Conditions and Results of Operations. 101 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS OVERVIEW Lumonics is a world leader in development, design, manufacture and marketing of laser-based advanced manufacturing systems for the semiconductor, electronics, aerospace, automotive, aerospace and packaging markets. Lumonics also sells to other emerging markets such as consumer products, medical device manufacturing and nuclear energy. For the years ended December 31, 1997, 1996 and 1995 Lumonics achieved annual sales growth of 15%, 22% and 28% respectively. For the first nine months of 1998 sales declined 14% from the corresponding period of 1997. Product prices have remained relatively stable during the periods covered by this discussion, and price fluctuations did not have a material effect on reported gross profit. A significant portion of sales are made in foreign currencies. Fluctuations in currency exchange rates, particularly in the U.S. dollar, the Japanese yen and European currencies can impact Lumonics' sales and expenses. During 1996, Lumonics continued to make significant investments in its distribution channels and accelerated product development programs to strengthen its position in selected markets and acquired the assets of Hobart Laser Products Inc. in June 1996. In May 1997, Lumonics raised a net $35.7 million through a public offering of two million Lumonics Common Shares. Lumonics sales have been and are expected to continue to be heavily dependent upon its customers capital expenditures which are in turn affected by cycles in the markets served by those customers. Lumonics' strategy is to expand applications for its products into different and varied markets to limit its dependency on any one market, but it may not always be successful in doing so. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 RESULTS OF OPERATIONS SALES. Due to continued cyclical weakness, sales in the semiconductor industry were down 58.2% in the first nine months of 1998 compared to the corresponding period in the prior year. Automotive sales were off 38.1% in the first nine months of 1998 due to lower capital spending by North American automotive companies. Packaging market sales were essentially flat over the first three quarters of 1998. The emerging markets, which include a variety of customers in diverse industries, recorded an 18.7% increase over the first nine months, primarily as a result of increased demand from customers in the medical device, consumer products and other markets. In the electronics market, sales for the nine months ended September 30, 1998 were up 28.9% primarily as a result of increased demand for systems from the printed circuit board industry. Lumonics' aerospace market declined in the first nine months of 1998 of 17.3% compared with the same period in 1997, primarily due to a decline in demand for systems from the aerospace sector in North America. The parts and service business declined 6.0% primarily as a result of a slowdown in the semiconductor industry. SALES BY MARKET. Lumonics sales mix, that is the relative weighting of sales among its target markets, has shifted this year because of the semiconductor decline. As a point of reference, semiconductor sales accounted for 11% of sales in the first nine months of 1998 versus 22% of sales in the first nine months of 1997. 102 The table below sets forth sales (in millions of $) by market for the periods covered by this discussion.
INCREASE (DECREASE) NINE MONTHS ENDED NINE MONTHS ENDED % OF OVER PRIOR SEPTEMBER 30, % OF SEPTEMBER 30, 1998 TOTAL PERIOD 1997 TOTAL ------------------ ----- ---------- ----------------- ----- Semiconductor $12.0 10.9% (58.2)% $28.7 22.4% Electronics............. 23.2 21.1 28.9 18.0 14.0 Automotive.............. 9.1 8.2 (38.1) 14.7 11.4 Aerospace............... 11.0 10.0 (17.3) 13.3 10.4 Packaging............... 9.4 8.5 (6.0) 10.0 7.8 Emerging................ 21.6 19.6 18.7 18.2 14.2 Parts and Service....... 23.9 21.7 (5.9) 25.4 19.8 ----- ---- ----- ---- Total 110.2 100% 128.3 100%
SALES BY REGION. On a geographic basis, sales in Europe increased 26.1% in the first nine months of 1998 compared to the first nine months of 1997, a result of activities to reorganize and enlarge the European sales and service staff and a generally improving market. Sales declined 14.7% in Canada because of a decline in sales to the automotive sector. Sales declined in the United States due to a weak semiconductor market and lower capital spending in automotive and aerospace markets. Sales declined in Latin and South America following lower demand from the packaging market. The performance of Asia- Pacific and Japanese markets was generally weak, primarily because of a weak semiconductor market and a decline in economic activity in those regions. The table below sets forth sales (in millions of $) to each geographic region for the periods covered by this discussion.
INCREASE (DECREASE) NINE MONTHS ENDED NINE MONTHS ENDED % OF OVER PRIOR SEPTEMBER 30, % OF SEPTEMBER 30, 1998 TOTAL PERIOD 1997 TOTAL ------------------ ----- ---------- ----------------- ----- Canada.................. $ 6.4 5.8% (14.7)% $ 7.5 5.8% United States........... 47.2 43.2 (28.4) 65.9 51.4 Latin and South Ameri- ca..................... 0.4 -- (71.4) 1.4 1.1 Europe.................. 30.0 27.2 26.1 23.8 18.6 Japan................... 12.9 11.7 (11.6) 14.6 11.4 Asia-Pacific............ 13.3 12.1 (11.9) 15.1 11.7 ------ ---- ------ ---- Total 110.2 100% 128.3 100%
BACKLOG. Order backlog as of September 30, 1998 was $36 million down 29.0% from $51.0 million as of September 30, 1997 due to factors described above. GROSS PROFIT MARGIN. Due to lower overall sales volume, declines in sales of higher margin products, varying levels of capacity use at Lumonics' manufacturing plants, cost overruns on large and custom systems, and costs associated with consolidating UK (Rugby) facilities, Lumonics generated lower gross profit and margin in 1998. For the nine months ended September 30, 1998, gross profit was $31.9 million (28.9% margin) versus $48.7 million (38.0% margin) in the nine months ended September 30, 1997. Gross margin in 1998 also reflects additional inventory provisions totaling $1.4 million charged to cost of goods sold in the second quarter of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the first nine months of 1998 expenses increased $0.3 million from the corresponding period in 1997. The increase is primarily attributable to the expansion of Lumonics worldwide direct sales force. RESEARCH AND DEVELOPMENT EXPENSES. Expenses increased by $0.7 million in the first nine months of 1998 compared with the first nine months of 1997. Investments in development programs for new products targeted at the aerospace and electronics markets and a reduction in external funding accounted for the increase in expenses during the period. 103 RESTRUCTURING CHARGE. In an effort to align operating expenses with anticipated sales volumes of $30 million to $36 million per quarter until at least the first quarter of fiscal 1999, Lumonics incurred a pre-tax restructuring charge during the nine months ended September 30, 1998 of $2.0 million for severance costs related to a 15% downsizing of Lumonics' global workforce (to reduce the number of employees from 1,066 at March 31, 1998). As well, inventory provisions totaling $1.4 million were charged to cost of goods sold. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $25.9 million on September 30, 1998 compared to $56.8 million on December 31, 1997. Bank indebtedness decreased to $5.1 million on September 30, 1998 from $15.2 on December 31, 1997. Bank indebtedness at September 30, 1998 bore interest at 7.0%. The current portion of long-term debt decreased to $3.0 million on September 30, 1998 from $3.1 million on December 31, 1997. During the first nine months of 1998, $2.2 million was used in operating activities, $13.7 million was used in investing activities and $11.4 million was used in financing activities. Net loss of $5.3 million in the first nine months of 1998, less non-cash charges for depreciation and amortization of $3.6 million, plus other adjustments totalling $0.5 million, resulted in a use of $2.2 million in operating activities. Cash flow used in investing activities was $13.7 million for the nine months ended September 30, 1998 compared to $36.1 million for the corresponding period in the prior year. Changes during the nine month period ended September 30, 1998 were primarily due to capital expenditures of $11.8 million for fixed assets, $42 million for purchases and $41.1 million from maturities of short term investments, and $1.1 million for the purchase of Meteor Optics Inc. Changes during the nine month period ended September 30, 1997 were primarily due to capital expenditures of $3.9 million for fixed assets, $80.7 million for purchases and $48.2 million from maturities of short term investments. Cash flow used in financing activities was $11.4 million for the nine months ended September 30, 1998 compared to $39.9 million cash provided by financing activities for the same period in the prior year. Changes during the nine month period ended September 30, 1998 were primarily due to $9.7 million reduction in bank indebtedness, $1.2 million used to repay long term debt and $0.6 million used to repurchase and cancel 94,900 common shares. Changes during the nine month period ended September 30, 1997 were primarily due to $3.5 million increase in bank indebtedness, $1.3 million used to repay long term debt, $35.7 million raised through a public offering of 2 million shares of common stock and $1.9 million raised from the exercise of stock options. Capital expenditures during the nine months ended September 30, 1998 of $11.8 million include approximately $8.5 million on new facilities expansions in England and Canada, approximately $1.0 million on new computer equipment and $2.3 million on machinery and equipment. Capital expenditures during the nine months ended September 30, 1997 of $3.9 million include approximately $1.1 million on new facilities expansions in England approximately $1.2 million on new computer equipment and $1.6 million on machinery and equipment. At September 30, 1998, Lumonics has credit facilities available of approximately $21 million in Canadian dollar, US dollar and pound sterling. In connection with these borrowing facilities, Lumonics has provided a security interest against Lumonics' assets and is subject to covenants requiring, among other things, Lumonics to maintain specific financial ratios and conditions. These financial covenants include requirements for Lumonics' current ratio, debt to equity ratio, interest coverage ratio, shareholders' equity, and a yearly limitation on capital expenditures. Lumonics is in compliance with all such covenants, ratios and conditions as at September 30, 1998, after obtaining a waiver with respect to interest coverage ratio requirements. Borrowings under these facilities amounted to $5.1 million as at September 30, 1998 and $15.2 million as at December 31, 1997. 104 FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 RESULTS OF OPERATIONS The following table sets forth items in the Consolidated Statement of Operations as a percentage of sales for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------- 1997 1996 1995 ----- ----- ----- Sales................................................... 100.0% 100.0% 100.0% Cost of goods sold...................................... 62.8 60.2 61.7 Gross profit margin..................................... 37.2 39.8 38.3 Expenses Selling, general and administrative............ 21.4 21.8 23.0 Research and development................................ 6.8 7.7 5.6 Income before the following............................. 9.0 10.3 9.7 Net interest income (expense)........................... 0.6 0.4 (0.7) Income before taxes..................................... 9.6 10.7 9.0 Provision for income taxes.............................. 2.9 3.0 2.6 Net income.............................................. 6.7 7.7 6.4
SALES BY MARKET. The following table sets forth sales (in millions of dollars) to Lumonics' primary markets as well as parts and service revenue for 1997, 1996 and 1995.
1997 1996 1995 ------------------------ ------------------------ ------------ INCREASE INCREASE (DECREASE) (DECREASE) % OF OVER PRIOR % OF OVER PRIOR SALES TOTAL YEAR SALES TOTAL YEAR SALES TOTAL ------ ----- ---------- ------ ----- ---------- ------ ----- Semiconductor........... $ 38.1 21.5% 5.0% $ 36.3 23.7% 41.8% $ 25.6 20.4% Electronics............. 27.7 15.6 51.4 18.3 11.9 (3.2) 18.9 15.1 Automotive.............. 18.7 10.6 37.5 13.6 8.8 63.9 8.3 6.6 Aerospace............... 17.7 10.0 12.0 15.8 10.3 49.1 10.6 8.5 Packaging............... 13.7 7.7 20.2 11.4 7.4 8.6 10.5 8.4 Emerging................ 26.6 15.0 (4.7) 27.9 18.2 29.2 21.6 17.2 Parts and Service....... 34.8 19.6 15.6 30.1 19.7 1.0 29.8 23.8 ------ ----- ---- ------ ----- ---- ------ ----- Total.................. $177.3 100.0% 15.6% $153.4 100.0% 22.4% $125.3 100.0%
Despite weak conditions in the Semiconductor market and a slight decline in Emerging markets, sales increased 15.6% to $177.3 million in 1997, compared with $153.4 million in 1996 and $125.3 million in 1995. The increase in 1997 over 1996 is primarily attributable to continued strong demand in North America, a recovering market in Europe, successful new product introductions in the Electronics market and further penetration in the Automotive market. Sales increased in 1996 primarily as a result of strong demand for Lumonics' laser- based systems from the semiconductor, automotive, aerospace and emerging markets, offset by lower sales to the electronics market. For the Semiconductor market in 1997, as expected, sales of systems were far below traditional growth levels because of a lack of fabrication plant construction worldwide. The 5% sales growth achieved in 1997 comes after increases of 41.8% in 1996 and 79% in 1995. The Semiconductor market is cyclical and the recent downturn in the industry slowed demand for Lumonics' products. For 1996, contributing to the rate of growth was strong demand for Lumonics' silicon wafer marking systems for new semiconductor fabrication plants, market acceptance of Lumonics' TrayMark(R) product (part of the Lightwriter(R) product line) introduced in 1996 and a strong replacement market. For the electronics market, sales grew 51.4% in 1997, primarily as a result of market acceptance of Lumonics' new and enhanced system offerings and new applications. In late 1996 and early 1997, Lumonics started shipping new versions of its ScreenCut(TM) 400 and IMPACT(R) GS-300 systems to manufacturers of 105 printed circuit boards. New applications such as welding components used in the production of computer disk drives also contributed to sales growth. Sales to the electronics market declined 3.2% in 1996 compared to 1995. Sales in the fourth quarter of 1996 were weak, primarily as a result of lower-than-expected order intake in the third quarter and delays in shipping new products. In the automotive market, Lumonics continued to penetrate the market in 1997 with strong demand from automakers and their suppliers and this market represented 10.6% of total sales. Sales increased 37.5% in 1997 following growth of 63.9% in 1996 when Lumonics' products were gaining acceptance by both automakers and parts suppliers for applications such as welding, cutting and marking. In late 1997, after more than 18 months of development, Lumonics introduced a major new product, the MultiWave-Auto(TM), designed principally for applications in the automotive market. Sales to the aerospace market increased 12.0% to $17.7 million in 1997, compared with $15.8 million in 1996. During 1997, Lumonics delivered a $3.5 million order (two systems), the largest advanced laser-based systems ever built by Lumonics. In early 1996, Lumonics reorganized its distribution channels for the packaging market, establishing a sales team complemented by agents with industry knowledge and experience. After implementing this distribution system, Lumonics was able to increase sales to customers in this market by 20.2% in 1997 versus 8.6% revenue growth in 1996. Sales of systems to emerging markets decreased 4.7% in 1997, largely because of lower sales to customers in the nuclear energy industry and manufacturers of consumer products. Sales of systems to emerging markets increased 29.2% in 1996 compared to 1995 principally as a result of increased demand from customers in the medical device, nuclear energy and consumer products industries. Parts and service revenue increased 15.6% in 1997. A growing installed base, improved service offerings from Lumonics and more customers using multiple production shifts contributed to sales growth. Parts and service sales increased 1% in 1996 to $30.1 million representing 19.7% of consolidated sales compared to 23.8% in 1995. During 1996, particularly in the second and third quarters, some customers were reducing their manufacturing output to lower their inventory levels, resulting in reduced parts and service sales for Lumonics during that period. SALES BY REGION. Distribution of Lumonics' systems and services is via Lumonics' global network of sales and service offices and through third-party distributors and agents. In 1997, 77% of sales were made through Lumonics' direct sales and service channel, compared with 76% in 1996. Lumonics' sales territories are divided into the following regions: Canada, the United States and Latin and South America, Europe (consisting of Europe, the Middle East and Africa), Japan and Asia-Pacific (consisting of ASEAN countries, China and other Asia-Pacific countries). The table below sets forth sales (in millions of US$) to each geographic region for 1997, 1996 and 1995.
1997 1996 1995 ------------------------ ------------------------ ------------ INCREASE INCREASE (DECREASE) (DECREASE) % OF OVER PRIOR % OF OVER PRIOR % OF SALES TOTAL YEAR SALES TOTAL YEAR SALES TOTAL ------ ----- ---------- ------ ----- ---------- ------ ----- Canada.................. $ 9.7 5.5% 31.1% $ 7.4 4.8% 42.3% $ 5.2 4.1% United States........... 91.8 51.8 23.7 74.2 48.4 42.1 52.2 41.7 Latin and South Ameri- ca..................... 1.6 0.9 300.0 0.4 0.3 (73.3) 1.5 1.2 Europe.................. 33.4 18.8 13.2 29.5 19.2 (0.7) 29.7 23.7 Japan................... 19.8 11.2 4.2 19.0 12.4 1.1 18.8 15.0 Asia-Pacific............ 21.0 11.8 (8.3) 22.9 14.9 27.9 17.9 14.3 ------ ----- ----- ------ ----- ----- ------ ----- Total.................. $177.3 100.0% 15.6% $153.4 100.0% 22.4% $125.3 100.0%
106 Sales to customers in Canada increased 31.1% in 1997 on higher demand in the automotive and electronics markets. In 1996, Canadian sales increased 42.3% on demand from the automotive and aerospace markets. Sales in the United States increased 23.7% in 1997 with gains in the semiconductor, electronics, automotive and aerospace markets. Growth of 42.1% in 1996 was primarily due to increased demand from the semiconductor, automotive and aerospace markets. Sales in Latin and South America increased 300% in 1997 from a low base in 1996. The increase in 1997 was attributable to demand in the packaging and electronics markets. The sales decline of 73.3% in 1996 was due to lower sales in the automotive market. Sales in Europe increased 13.2% in 1997 after a 0.7% decline in 1996. Sales growth in this region can be attributed to Lumonics' reorganized and enlarged European sales force as well as some improvement in general market conditions. The small 1996 decline occurred during a reorganization of its European distribution channels to mirror the successful market-focused distribution channel Lumonics implemented in North America. Sales to Japan grew 4.2% in 1997 to $19.8 million, compared with $19.0 million in 1996 and $18.8 million in 1995. Economic conditions in Japan affected Lumonics' ability to improve sales performance in that country in 1997. The Japanese market is served primarily by Lumonics' largest distributor and significant shareholder, Sumitomo Heavy Industries, Ltd., which accounted for $18.9 million of 1997 sales and $17.4 million of 1996 sales and $17.4 million of 1995 sales. In 1997, Lumonics commenced discussions with Sumitomo to explore initiatives to improve sales and distribution of Lumonics' products in Japan. Sales to the Asia-Pacific region declined 8.3% in 1997, primarily as a result of a weak semiconductor market. Most of Lumonics' large customers in this region are multinationals manufacturing products for global markets. The economic crisis in the region did not have a material impact on 1997 sales. Growth of 27.9% during 1996 in the Asia-Pacific market can be attributed to Lumonics' increased presence in the region with the opening and staffing of Lumonics' new customer support center in Singapore in April 1996, and strong demand from the semiconductor and electronics markets. GROSS PROFIT MARGIN. Gross profit margin declined to 37.2% in 1997, compared with 39.8% in 1996 and 38.3% in 1995. Inefficiencies in the manufacture of large custom systems during the 1997 year and higher costs associated with the introduction of advanced products to serve new applications in Lumonics' targeted markets contributed to lower 1997 gross margins. Gross profit margin increased to 39.8% in 1996 compared with 1995, primarily as a result of higher sales volumes, improvements in manufacturing operations and a favorable product mix. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased to 21.4% of sales in 1997 from 21.8% of sales in 1996 and 23.0% in 1995. Actual expenses increased to $38.0 million in 1997 from $33.4 million in 1996, primarily as a result of higher costs associated with the launch of new laser-based advanced manufacturing systems, a larger direct sales force and higher sales volumes. During 1996, selling, general and administrative expenses decreased to 21.8% of sales from 23.0% in 1995. Actual 1996 expenses increased to $33.4 million from $28.8 million in 1995, primarily as a result of Lumonics' strengthened distribution channels, investments in customer support centers and higher promotional expenditures. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for 1997, net of government assistance, were 6.8% of sales or $12.0 million, compared with 7.7% of sales or $11.9 million in 1996 and 5.6% of sales or $7.1 million in 1995. Government assistance in 1997 was $2.1 million, compared with $0.2 million in 1996 and $0.3 million in 1995. During the 1997 year, Lumonics launched five new or enhanced products: the MultiWave-Auto(TM) for high-power applications in the Automotive market, the LightWriter(R) 2000 107 for high-speed marking of semiconductor components, the IMPACT(R) GS-300 and the ScreenCut(TM) 4000 for applications in the printed circuit board industry, and the WaferMark(R) Sigma XC for marking 300-millimeter silicon wafers. During 1996, Lumonics increased expenditures to accelerate development programs for products aimed at the automotive, aerospace, and semiconductor and electronics markets. Lumonics believes the development of new products is vital to its continued success. INTEREST. Net interest income was $1.0 million or 0.6% of sales in 1997, compared with $0.6 million or 0.4% in 1996 and net interest expense of $0.9 million or (0.7%) of sales in 1995. The change in 1997 is a result of interest on the investment of proceeds from a public issue of two million shares in May 1997, which raised $35.7 million. INCOME TAXES. The effective tax rate for the year ended December 31, 1997 was 29.9%, compared with 28.3% in 1996 and 29.1% in 1995. Lumonics' effective tax rate for each year was less than the Canadian statutory tax rate because tax rates in many of the countries where Lumonics operates are lower than the Canadian statutory rate. Lumonics has provided a valuation allowance against operating loss tax carryforwards and investment tax credits due to the uncertainty of their realizability as a result of limitations on their utilization in accordance with certain tax laws and regulations, market conditions, and historical operations in those jurisdictions. NET INCOME. Net income was $11.9 million in 1997, $11.7 million in 1996 and $8.0 million in 1995. The increase in net income was primarily due to increased sales and a leveraging of operating expenses which grew at a lower rate than did the increase in sales. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $56.8 million on December 31, 1997 compared to $29.3 million on December 31, 1996. During 1997, Lumonics issued two million shares for proceeds of $35.7 million pursuant to a public offering and also issued 386,932 shares for total proceeds of $1.9 million pursuant to Lumonics' share option plans. During 1996, Lumonics issued 893,343 shares for a total of $4.8 million pursuant to Lumonics' share option plans. In 1997, Lumonics used $5.3 million to fund operations, including investing $21 million in non-cash working capital balances, primarily a result of an increase in accounts receivable from shipments late in the fourth quarter. In 1996, a net $15.2 million was provided by operating activities, when net income of $11.7 million was supplemented by non-cash charges totaling $3.1 million for depreciation. In 1995, a net $6.5 million was provided by operating activities, when net income of $8.0 million was supplemented by non-cash charges totaling $2.9 million for depreciation and, in support of expanded business activity, accounts receivable and inventory increased by $3.3 million and $7.8 million respectively. Cash flows used in investing activities totaled $9.3 million in 1997, including $80.2 million of purchases and $79.4 million of maturities of short term investments, and $8.7 million in capital expenditures. Capital expenditures included $4.2 million of costs incurred in the expansion and modernization of Lumonics' manufacturing facility in Rugby, England and $4.5 million invested in machinery and equipment at other Lumonics' locations. Cash flows provided by investing activities totaled $9.8 million in 1996, including $20.8 million of purchases and $38.1 million of maturities of short term investments, $5.1 million in net fixed asset additions and $4.4 million to acquire the assets of Hobart Laser Products Inc. Capital additions during 1996 included $4.6 million on machinery and equipment, $0.3 million on building improvements and $0.2 million on vehicles. During the 1996 year, Lumonics received $1.5 million as payment in full of a mortgage receivable that was not due until December 31, 2001. Cash flows used in investing activities totaled $34.6 million in 1995, including $32.7 million of purchases and $3.5 million of maturities of short term investments and $6.7 million in net capital asset additions. Capital additions in 1995 included $3.7 million for the construction and the outfitting of Lumonics' optics manufacturing facility in Nepean, Ontario, $2.8 million for machinery and equipment and $0.2 million on vehicles. 108 Under borrowings by Lumonics from Sumitomo Heavy Industries, Ltd. in 1990 and 1991, term loans are repayable by Lumonics in 10 equal semi-annual installments, which commenced in April 1996. Lumonics made two payments in 1997 totaling $2.5 million and two payments in 1996 totaling $2.6 million and, as at December 31, 1997, the current portion of the long-term debt was $3.1 million. Borrowings under Lumonics credit facilities amounted to $15.2 million as at December 31, 1997 and $7.5 million as at December 31, 1996. Lumonics believes that its existing cash, together with cash generated from future operations and its existing bank lines of credit, will be sufficient to satisfy anticipated cash needs to fund working capital and investments in manufacturing facilities and equipment for its existing businesses over the next two years. CURRENCY EXCHANGE MATTERS Lumonics has substantial operations in the United States and the United Kingdom, the sales and related expenses of which create a partial hedge against foreign currency exposure. In addition, Lumonics has a policy that permits up to 50% of the foreign currency exposure in the annual operating plan to be hedged. As at December 31, 1997, Lumonics had hedge contracts in place to exchange $9.0 million for Canadian dollars at an average rate of Cdn$1.4161 ($0.7061). As at December 31, 1996, Lumonics had hedge contracts in place to exchange $2.0 million for Canadian dollars at an average rate of Cdn$1.3426 ($0.7448). YEAR 2000 Lumonics has an evolving plan intended to achieve Year 2000 compliance for its products and operations. In November 1998, Lumonics notified its customers that all of its laser system products in current manufacture had achieved Year 2000 compliance. For products which were not in current manufacture, Lumonics provides advice and information to customers regarding those products and, where possible, provides upgrades or modifications to the existing products so as to render those products Year 2000 compliant. Lumonics has upgraded major information technology systems to serve its business needs, which suppliers have confirmed to be Year 2000 compliant. Lumonics performed individual tests on internal desktop and laptop computers. Lumonics has performed tests on, or has received certification of compliance from suppliers on embedded systems such as telephone systems, security systems and heating, ventilation and air conditioning systems. Computers and systems found to be non-compliant will be upgraded during 1999. The Year 2000 specific costs incurred in the past, and expected to be incurred in the future, do not have a material effect on Lumonics' financial position or results of operations. Lumonics is confident of its readiness in the area of internal operations. However, some customers, suppliers and distributors have not certified Year 2000 compliance to Lumonics. The Company's reasonable worst case scenario with respect to Year 2000 is manufacturing problems of customers or suppliers having a material impact on Lumonics if customers delay orders or suppliers delay delivery of parts. Through 1999, Lumonics intends to develop contingency relationships with alternate suppliers where existing suppliers cannot certify Year 2000 compliance to offset, to the extent possible, potential disruption in the supply of parts. INFLATION Product prices have remained relatively stable during the periods covered by this discussion and price fluctuations did not have a material effect on reported gross profit. RECENT DEVELOPMENTS Lumonics expects to report an after-tax loss of between $2.4 million and $2.7 million (14 cents to 16 cents per share) for the three months ended December 31, 1998. The company expects to release its year-end audited 109 results on February 25, 1999. The loss is primarily attributed to the extended downturn in worldwide capital equipment markets, particularly the semiconductor industry. As a result, Lumonics' sales mix continued a shift to lower margin products. The Company incurred higher than expected costs associated with the introduction of new products and the manufacture of large, custom systems. Sales in the fourth quarter are expected to be approximately $35 million. Lumonics expects its sales to remain between $30 million and $37 million per quarter pending a recovery in capital equipment spending. Because of lower backlog to start the year, first quarter 1999 sales are expected to come in at the lower end of this range. In response, Lumonics plans to reduce its global workforce by 12%. To cover the associated costs, Lumonics will record a restructuring charge of between $0.9 million and $1.1 million in the first quarter of 1999. Because of the timing of restructuring initiatives, Lumonics expects to report a loss in the first quarter of 1999. SECURITY OWNERSHIP OF MANAGEMENT OF CERTAIN BENEFICIAL OWNERS The following table sets forth as of December 31, 1998 certain information regarding the beneficial ownership of Lumonics common shares by: . each of the persons or entities known by Lumonics to be the beneficial owners of more than 5% of the Lumonics common shares; . each of the named executive officers; . each director of Lumonics; and . all directors and executive officers of Lumonics as a group (13 persons).
PERCENTAGE OF NUMBER OF LUMONICS PERCENTAGE OF LUMONICS COMMON COMMON SHARES GSI LUMONICS SHARES BENEFICIALLY OUTSTANDING COMMON SHARES OWNED(1)(2)(3) BEFORE MERGER(3) OUTSTANDING(3)(5) ------------------- ---------------- ----------------- Robert J. Atkinson (4).. 141,249 * * Warren Scott Nix (4).... 199,083 1.15% * Desmond J. Bradley (4).. 79,582 * * Michael W. Lupiano (4).. 23,499 * * Patrick J. Austin (4)... 32,499 * * John W. George (4)...... 20,500 * * Charles J. Gardner (4).. 15,500 * * Douglas C. Cameron (4).. 23,000 * * Atsushi Naito (4)....... 20,000 * * Dr. Peter Rose (4)...... 16,667 * * Yukihito Takahashi (4).. 3,333 * * Benjamin J. Virgilio (4).................... 0 * * William B. Waite (4).... 16,667 * * Sumitomo Heavy Indus- tries Ltd. (4)......... 6,078,238 35.64% 17.81% All directors and executive officers as a group (13 persons)..... 591,579 3.36% 1.72%
- -------- *Less than 1% of outstanding common shares. (1) The inclusion herein of shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, each stockholder referred to above has sole voting and investment power with respect to the shares listed. Applicable share of ownership is based on 17,056,001 Lumonics common shares, issued and outstanding as of December 31, 1998 together with applicable options for each stockholder. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. 110 (2) The amounts listed include the following common shares that may be acquired within 60 days of December 31, 1998 through the exercise of stock options or warrants: Mr. Atkinson, 131,249; Mr. Nix, 192,083; Mr. Bradley, 79,582; Mr. Lupiano, 22,499; Mr. Austin, 32,499; Mr. George, 20,000; Mr. Gardner, 12,500; Mr. Cameron, 20,000; Mr. Naitoh, 20,000; Dr. Rose, 16,667; Mr. Takahashi, 3,333; Mr. Virgilio, 0; and Mr. Waite, 16,667. (3) Common shares subject to options and warrants that are currently exercisable within 60 days of December 31, 1998 are deemed to be beneficially owned by the person holding such option for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (4) The persons listed above have the following municipality of residence: Mr. Atkinson, Kanata, Ontario, Canada; Mr. Nix, West Lake Village, California, U.S.A.; Mr. Bradley, Stittsville, Ontario, Canada; Mr. Lupiano, Nepean, Ontario, Canada; Mr. Austin, Ojai, California, U.S.A.; Mr. George, Rochester Hills, Michigan, U.S.A.; Mr. Gardner, Ottawa, Ontario, Canada; Mr. Cameron, Ottawa, Ontario, Canada; Mr. Naitoh, Tokyo, Japan; Dr. Rose, Rockport, Massachusetts, U.S.A.; Mr. Takahashi, Tokyo, Japan; Mr. Virgilio, Kleinberg, Ontario, Canada; and Mr. Waite, Victoria, B.C., Canada. (5) Assuming the merger had occurred on December 31, 1998. DESCRIPTION OF LUMONICS COMMON SHARES The authorized capital of Lumonics consists of an unlimited number of Lumonics common shares of which 17,056,001 shares were issued and outstanding on December 31, 1998. The holders of Lumonics common shares are entitled to one vote per share at all meetings of shareholders of Lumonics, to participate ratably in any dividends which may be declared by the board of directors and, in the event of liquidation, dissolution or winding-up or other distribution of assets or property of Lumonics, to a pro rata share of the assets of Lumonics after payment of all liabilities and obligations. For a description of the rights of shareholders of Lumonics after Lumonics is continued into the province of New Brunswick, including the right to cumulative voting for the election of directors, see "Comparative Rights of Shareholders--Ontario vs. New Brunswick." Lumonics has neither declared nor paid any dividends on the Lumonics common shares. 111 MANAGEMENT DIRECTORS OF GSI LUMONICS The Board of Directors of GSI Lumonics will consist of eight directors. Of the eight Directors, four have been selected from the current Lumonics Board of Directors and four have been selected from the current GSI Board of Directors. It is currently expected that the following individuals will be the directors of the GSI Lumonics:
DIRECTOR AGE EXPECTED PRINCIPAL OCCUPATION AFTER THE MERGER -------- --- ---------------------------------------------- Robert J. Atkinson 57 Chairman, GSI Lumonics Inc. Richard B. Black 65 President, Oak Technology, Inc. Paul F. Ferrari 68 Independent Consultant/Former V.P. and Treasurer Thermo Electron Corporation Woodie C. Flowers 55 Pappalardo Professor of Mechanical Engineering at MIT President & Chief Operating Officer, GSI Lumonics Warren Scott Nix 51 Inc. Yukihito Takahashi 59 Managing Director, Sumitomo Heavy Industries, Ltd. Benjamin J. Virgilio 59 President & CEO, Rea International Inc. Charles D. Winston 57 Chief Executive Officer, GSI Lumonics Inc.
MANAGEMENT OF GSI LUMONICS The management team of GSI Lumonics will be comprised of members of the management teams of GSI and Lumonics and is expected to consist of the following persons:
NAME AGE POSITION WITH LUMONICS ---- --- ---------------------- Charles D. Winston 57 Chief Executive Officer Warren Scott Nix 51 President and Chief Operating Officer Desmond J. Bradley 41 Vice President, Finance and Chief Financial Officer Michael R. Kampfe 48 Vice President, Laser Systems Group Patrick D. Austin 47 Vice President, Sales John W. George 55 Vice President, Customer Support Gregory S. Baletsa 45 Vice President, Instruments Group Victor Sabella 53 Vice President, Components Group CURRENT EXECUTIVE OFFICERS OF GSI The following table sets forth the names, ages and positions of the current executive officers of GSI: NAME AGE POSITION WITH GSI ---- --- ----------------- Charles D. Winston 57 President, Chief Executive Officer and Director Vice President, Chief Financial Officer, Treasurer and Victor H. Woolley 56 Clerk Vice President and General Manager of the Recorder Gregory S. Baletsa 45 Products Division Vice President and General Manager of the Optical Michael R. Kampfe 48 Scanning Products Division Victor Sabella 53 Group Vice President, Laser Systems Thomas R. Swain 53 Vice President, Corporate Development Joseph A. Verderber 59 Group Vice President, Laser Systems
112 CURRENT EXECUTIVE OFFICERS OF LUMONICS The following table sets forth the names, ages and positions of the current executive officers of Lumonics:
NAME AGE POSITION WITH LUMONICS - ---- --- ---------------------- Robert J. Atkinson 57 Chairman of the Board and Director Warren Scott Nix 51 President, Chief Executive Officer and Director Patrick D. Austin 47 Vice President, Sales Desmond J. Bradley 41 Vice President, Finance and Administration and Chief Financial Officer John W. George 55 Vice President, Customer Support Michael W. Lupiano 44 Vice President, Human Resources
BIOGRAPHIES The name of each Executive Officer and Director of GSI, Lumonics and GSI Lumonics and the principal occupation held by each person named for at least the past five years are as follows: Robert J. Atkinson has served as Chairman of the Board of Lumonics since January 1997. Prior to January 1997, Mr. Atkinson also served as Chief Executive Officer of Lumonics. Mr. Atkinson has been a director of Lumonics since 1973. Patrick Austin has held his current position since January 1996. Prior to that time he was Vice President, Market Development of Lumonics and prior to October 1992 was Vice President, Laser Marking Division. Gregory S. Baletsa joined GSI in 1985. Since 1989, he has served as Vice President and General Manager of GSI's Recorder Products Division. Richard B. Black has served as President of Oak Technology, Inc. since 1998. He has served as a Director of GSI since 1992. He has served as Chairman of the Board of ERCM Incorporated since 1983. He also serves as a Director of Oak Technology, Inc., Morgan Group, Inc., Gabelli Funds, Inc., Benedetto Gartland, Inc. and Grand Eagle Companies. Desmond J. Bradley has held his current position since October 1994. From September 1993 until October 1994, Mr. Bradley was Vice President, Finance and Administration of Lumonics. Prior to September 1993, he was Vice President, Laser Products Division. Paul F. Ferrari has been an independent consultant since 1991. He has served as a Director of GSI since 1969. Previously, he was Vice President of Thermo Electron Corporation from 1988 to 1991 and was Treasurer of Thermo Electron Corporation from 1967 to 1988. He also serves as a Director of Thermedics Inc. and ThermoTrex Inc. Woodie C. Flowers, Ph.D., is the Pappalardo Professor of Mechanical Engineering at Massachusetts Institute of Technology. He has been a Director of GSI since 1991. Professor Flowers also served as a Professor of Teaching Innovation at the MIT School of Engineering from 1991 to 1993 and was Head of the Systems Design Division at MIT from 1989 to 1991. He also serves as a Director of Nypro, Inc. and is a member of the National Academy of Engineering. John W. George has held his position since January 1997. Prior to that time he was Director, North American Service. Michael R. Kampfe joined GSI in 1984. From 1990 through 1996, he served as Vice President and General Manager of GSI's Laser Graphics Division. In late 1996, the Laser Graphics Division was merged into the Optical Scanning Products Division under Mr. Kampfe. Michael W. Lupiano has held his current position since February 1990 when he joined Lumonics. 113 Warren Scott Nix has been President and Chief Executive Officer of Lumonics since January 1997. Prior to that time, Mr. Nix was President and Chief Operating Officer of Lumonics. Prior to January 1996, Mr. Nix was Vice President, Operations of Lumonics and prior to July 1994, was Executive Vice President, North American Operations. Prior to June 1993, Mr. Nix was Vice President and General Manager of the Nuclear Division of Allied Signal Inc. Victor Sabella served as Vice President and General Manager of GSI's Optical Scanning Products Division from October 1992 through 1996. In late 1996, Mr. Sabella became General Manager of the then newly-formed Industrial Laser Products Division, a combination of the Laser Systems Division's laser marking product line and a new initiative for this technology into expanded industrial applications. Since the reorganization of the Laser Systems Group in July 1998, Mr. Sabella has served as Group Vice President, Laser Systems. Prior to joining GSI, from 1991 to 1992, Mr. Sabella served as Senior Vice President of Crosscomm Corp., a communication inter-networking firm. From 1986 to 1991, he served as the General Manager of the Microelectronics Division at Analog Devices, Inc. Thomas R. Swain joined GSI in August 1996 with the acquisition of View. From the acquisition through March, 1998, Mr. Swain was Vice President and General Manager of View Engineering Division. Since April 1998, Mr. Swain has been Vice President of Corporate Development. Prior to the acquisition, Mr. Swain was President and Chief Executive Officer of View. Mr. Swain originally joined View in 1984 as the Vice President of Finance and Chief Financial Officer and was promoted to President in 1992. Yukihito Takahashi is General Manager of the Laser Systems Division of Sumitomo Heavy Industries, Ltd. and has held his position for the past five years. He has been a Director of Lumonics since 1997. Joseph A. Verderber has served as Vice President and General Manager of GSI's Laser Systems Division since May 1991. Since the reorganization of the Laser System Group in July 1998, Mr. Verderber has served as Group Vice President, Laser Systems. Before joining GSI, Mr. Verderber served as President of Barco Graphics, Inc. from 1990 to 1991. From 1961 to 1990, Mr. Verderber served in a number of executive positions at AM International, Inc., including Vice President and General Manager, VariTyper. Benjamin J. Virgilio is the President and Chief Executive Officer of Rea International Inc., an automotive fuel systems manufacturer, and has been a Director of Lumonics since 1998. Prior to May 1995 Mr. Virgilio was a business consultant. Prior to November 1993, he was President and Chief Executive Officer of A.G. Simpson Limited. Charles D. Winston has served as President and Chief Executive Officer of GSI since September 1988. He has served as a Director of GSI since 1989. Prior to joining GSI, from 1986 to 1988, Mr. Winston served as a management consultant. In 1986, Mr. Winston was an officer of Savin Corporation. From 1981 to 1985, he served as a Senior Vice President of Federal Express Corporation. Victor H. Woolley has been Vice President and Chief Financial Officer of GSI since August 1995. From 1986 to 1995, Mr. Woolley was Vice President and Chief Financial Officer of Sepracor Inc., a public company involved in the manufacture of systems, medical devices and consumables for the biotechnology and pharmaceutical industries, as well as conducting research in drug development. 114 COMPENSATION OF EXECUTIVE OFFICERS GSI SUMMARY COMPENSATION TABLE. The following table provides certain information for the fiscal years ended December 31, 1997, 1996 and 1995 concerning the compensation paid or accrued for: (1) GSI's Chief Executive Officer; (2) the other four most highly compensated executive officers who were serving as executive officers of GSI at the end of the fiscal year ended December 31, 1997; and (3) two additional individuals who served as executive officers of GSI during 1997 but were not serving as executive officers at the end of the fiscal year ended December 31, 1997.
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------- ------------ SECURITIES NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION - ------------------ ---- ------- ------- ------------ ------------ ------------ Charles D. Winston 1997 268,383 221,740 6,400 25,000 53,000(5) (6) President and Chief 1996 230,753 160,280 6,000 14,650 32,000(5) Executive Officer 1995 219,764 149,243 6,000 0 32,000(5) Jean I. Montagu 1997 53,693 39,544 6,400 0 138,400(7) Former Chairman, Board 1996 178,801 94,413 6,000 0 0 of Directors 1995 171,515 97,769 6,000 0 0 Pierre J. Brosens 1997 149,482 100,349 6,400 0 90,198(8) Former Chairman, Board of 1996 178,801 94,413 6,000 0 0 Directors 1995 171,515 97,769 6,000 0 0 Victor H. Woolley 1997 146,190 84,320 6,400 9,600 0 Vice President & Chief 1996 140,070 53,428 6,000 0 0 Financial Officer 1995(9) 50,777 28,798 690 50,000 0 Gregory S. Baletsa 1997 137,871 67,000 6,400 8,400 0 Vice President and Gen- eral 1996 130,528 39,846 6,000 3,000 0 Manager Recorder Prod- ucts 1995 125,298 44,784 6,000 0 0 Division Thomas R. Swain 1997 153,645 53,550 10,610 10,000 0 Vice President and Gen- eral 1996(10) 60,581 4,914 1,390 10,000 0 Manager, View Engineer- ing Division Joseph A. Verderber 1997 154,611 52,200 6,400 8,400 0 Vice President and 1996 144,208 16,688 6,000 5,000 0 General Manager, 1995 135,182 124,202 6,000 0 0 Laser Systems Division
- -------- (1) Salary includes amounts deferred pursuant to Section 401(k) of the Internal Revenue Code and to GSI's payroll deferral plan. (2) In each case, bonuses were paid in the year subsequent to the year indicated but were in respect of, and earned in, GSI's fiscal year as shown in the table pursuant to GSI's officer bonus plan approved by the Compensation Committee of the Board of Directors, in accordance with a formula based upon performance of GSI as a whole and the relevant operating units. (3) Amounts shown are GSI's contributions made under the Company's employee benefit plan pursuant to Section 401(k) of the Internal Revenue Code, and, in respect of 1995, GSI's contribution under the General Scanning Inc. Employee Stock Ownership Plan. The amount shown for Mr. Swain also includes an auto allowance of $5,941 in 1997 and $1,130 in 1996. 115 (4) GSI provides a group life insurance policy for all of its employees. GSI does not believe that the amount of allocable premiums paid under the policy is material. (5) In 1992, GSI's Board of Directors authorized a loan to Charles D. Winston in the amount of $160,000 for expenses of his relocation to Massachusetts, secured by deferred income owed to Mr. Winston in a like amount. Under the agreement, as amended, the loan was forgiven over a five year period ending December 31, 1997. Amounts shown for 1997, 1996 and 1995 include $32,000 of the loan amount forgiven and charged as compensation expense. (6) During 1997 GSI purchased a life insurance policy on the life of Charles D. Winston with a death benefit of $1,250,000. GSI and Mr. Winston have entered into a split dollar compensation agreement under which one half of the death benefit will be paid to the beneficiary designated by Mr. Winston and one half of the death benefit will be paid to GSI. The split dollar compensation agreement also provides for Mr. Winston to bear a share of each annual premium under the policy. Upon the surrender or cancellation of the policy GSI will receive an amount equal to the premium payments made by GSI and not reimbursed by Mr. Winston (net of loans and withdrawals by GSI), and Mr. Winston will receive any remaining proceeds from the policy. The amount shown for 1997 includes the $21,000 premium paid by GSI during 1997 without reduction for any portion of the premium to be borne by Mr. Winston. (7) Jean I. Montagu's employment with GSI ended effective April 17, 1997. The amount shown for 1997 represents severance payments made by GSI to Mr. Montagu under a non-competition agreement by and between General Scanning and Mr. Montagu dated February 28, 1985. Severance payments to Mr. Montagu under the agreement ceased in April 1998. (8) Pierre J. Brosens resigned his employment with GSI effective September 30, 1997, and he resigned as Chairman of the Board of Directors in October 1998. The amount shown for 1997 represents $4,500 in directors fees paid to Dr. Brosens after his resignation and $85,698 in severance payments made by GSI to Dr. Brosens under a certain non-competition agreement. (9) Victor H. Woolley joined GSI in August 1995. (10) Thomas R. Swain joined GSI in August 1996. GSI STOCK OPTION PLANS. In 1981, GSI established the 1981 Stock Option Plan, as amended and restated in 1987, for the benefit of key employees of GSI and its subsidiaries. Subject to the requirements of the 1981 Plan, the Board of Directors of GSI has the authority to select those employees to whom options will be granted, the number of options to be granted, and the exercise price of such options; provided, however, that such option price shall not be lower than the fair market value of the common stock on the date of the grant, as determined by the Board of Directors. A maximum of 283,000 shares of common stock were issuable under the 1981 Plan. As of the GSI record date, there were outstanding options to acquire shares of GSI Common Stock under the 1981 Plan. In 1992, GSI established the 1992 Stock Option Plan, as amended, which provides for the issuance of incentive stock options (options that do not meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options. Under the 1992 Plan, options may be granted to employees or directors of, or consultants or advisors to GSI or its subsidiaries or parent; provided, however, that incentive options may be granted only to employees of GSI or its subsidiaries or parent. The 1992 Plan is administered by a committee comprised of directors of GSI as appointed by the Board of Directors. No committee member shall have received an option under the 1992 Plan for one year prior to or while serving on the committee. The committee has the authority to select those persons to whom options will be granted, the number of options to be granted, and the exercise price of such options; provided, however, that such option price shall not be lower than the fair market value of the common stock on the date of the grant, as determined by the committee. A total of 2,000,000 options to purchase shares of GSI Common Stock are eligible to be issued under the 1992 Plan. As of the GSI record date, there were outstanding options to acquire shares of GSI Common Stock under the 1992 Plan. 116 In 1995, GSI established the 1995 Directors' Warrant Plan (the "1995 Warrant Plan") for the benefit of those directors of GSI who are not employees of GSI at the time of the grant of such warrant issued under the 1995 Warrant Plan. The 1995 Warrant Plan is administered by a committee of disinterested directors of GSI which has the discretionary authority to select those directors to whom a warrant will be granted, the time of granting, the number of shares subject to the warrant and the vesting schedule and the exercise period of the warrant. The exercise price of the warrant shall be the fair market value of the common stock as of the date such warrant is granted as determined by the committee. A total of 100,000 shares of common stock are subject to the 1995 Warrant Plan. As of the GSI record date, there were outstanding warrants to acquire 40,000 shares of GSI common stock under the 1995 Warrant Plan. In addition, as of the GSI record date there were outstanding warrants to acquire 12,500 shares of GSI Common Stock held by non-employee directors. As of the GSI record date there were an aggregate of options and warrants under the 1981 Stock Option Plan, the 1982 Stock Option Plan, the 1995 Warrant Plan and held by non-employee directors. Each of these options and warrants will be assumed by GSI Lumonics upon completion of the Merger. See "The Merger Agreement--GSI Stock Options." GSI OPTION GRANTS IN FISCAL YEAR 1997. The following table provides information regarding options granted under GSI's 1992 Stock Option Plan during the fiscal year ended December 31, 1997 to the GSI executive officers named in the GSI Summary Compensation Table.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM(1) ------------------------------------------- ----------------- PERCENT OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED EXERCISE UNDERLYING TO EMPLOYEES OR BASE OPTIONS IN FISCAL PRICE EXPIRATION NAME GRANTED YEAR ($/SH) DATE 5% 10% ---- ---------- ------------ -------- ---------- -------- -------- Charles D. Winston 25,000 8.7 13.375 06/04/07 210,287 532,908 Jean I. Montagu 0 0 0 0 Pierre J. Brosens 0 0 0 0 Victor H. Woolley 9,600 3.4 13.375 06/04/07 80,746 204,634 Gregory S. Baletsa 8,400 2.9 13.375 06/04/07 70,652 179,054 Thomas R. Swain 10,000 3.5 9.125 03/19/07 57,370 145,430 Joseph A. Verderber 8,400 2.9 13.375 06/04/07 70,652 179,054
- -------- (1) This column shows the hypothetical gain of the options granted based on assumed annual compound stock appreciation rates of 5% and 10% above the exercise price over the full 10-year term of the options. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent GSI's estimate or projection of future GSI Common Stock prices. 117 AGGREGATED GSI OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES. The following table sets forth information regarding options exercised in Fiscal 1997 and unexercised options held at December 31, 1997 by the Named Executive Officers.
NUMBER OF SHARES VALUE OF UNDERLYING UNEXERCISABLE UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL AT FISCAL SHARES YEAR-END(#) YEAR-END ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE(1)(2) ---- ------------ ---------- -------------- ------------------- Charles D. Winston 226,000 $3,942,358 110,860/28,790 $1,533,560/$97,278 Jean I. Montagu 0 0 0/0 0/0 Pierre J. Brosens 0 0 0/0 0/0 Victor H. Woolley 0 0 31,920/27,680 314,940/234,760 Gregory S. Baletsa 3,750 83,438 55,380/8,520 793,442/ 30,110 Thomas R. Swain 2,496 19,778 4,000/14,496 9,000/ 84,055 Joseph A. Verderber 40,000 1,025,600 16,680/9,720 204,580/32,790
- -------- (1) Market value of the underlying shares on the date of exercise, less the option exercise price. (2) Market value of shares covered by in-the-money options on December 31, 1997, less the option exercise price. Options are in-the-money if the market value of the share covered thereby is greater than the option exercise price. LUMONICS SUMMARY COMPENSATION TABLE. The following table provides certain information for the fiscal years ended December 31, 1997, 1996 and 1995 concerning the compensation paid or accrued for Lumonics' Chief Executive Officer and the other four most highly compensated executive officers who were serving as executive officers of Lumonics at the end of the fiscal year ended December 31, 1997.
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------ ------------ SECURITIES UNDER NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION ------------------ ------ -------- ------- ------------ ------------ ------------ Robert J. Atkinson (5) 1997 $183,956 $25,278 $41,944(1) 100,000 Chairman since January 2, 1996 209,598 110,011 40,837(1) 0 1997, formerly Chairman 1995 196,441 138,434 35,434(1) 0 and Chief Executive Of- ficer Warren Scott Nix 1997 275,000 37,500 (4) 240,000 60,000(2) President and Chief 1996 215,000 113,000 (4) 0 Executive Officer since 1995 195,000 153,005 (4) 0 January 2, 1997, for- merly President and Chief Operating Officer Patrick D. Austin 1997 153,000 25,400 (4) 40,000 V.P. Sales 1996 142,000 55,739 (4) 0 1995 140,000 58,800 (4) 0 Desmond J. Bradley (5) 1997 109,526 11,195 19,692(3) 45,000 V.P. Finance 1996 105,921 38,137 18,454(3) 0 Chief Financial Officer 1995 94,297 48,816 16,264(3) 0 Dave B. Egleston (6) 1997 122,669 11,813 (4) 40,000 V.P. Operations
118 - -------- (1) For 1997, 1996 and 1995, includes total amounts accrued of $34,689, $33,982 and $29,557 with respect to a deferred retirement benefit. (2) Represents the forgiveness of a demand loan for relocation expenses. (3) For 1997, 1996 and 1995, includes total amounts accrued of $14,808, $13,071, $10,736 with respect to a deferred retirement benefit and $4,064, $4,764 and $4,850 of automobile expenses. (4) Perquisites and Personal Benefits do not exceed the lesser of $50,000 and 10% of the total of the annual salary and bonus of the executive. (5) For 1997, 1996 and 1995 compensation paid in Canadian dollars has been translated to U.S. dollars at the following rates: 0.7222, 0.7334 and 0.7286. (6) Mr. Egleston joined Lumonics in February 1997. LUMONICS STOCK OPTION PLANS. Lumonics entered into option agreements ("Option Agreements") dated May 11, 1994 (the "Date of Grant") with five executive officers under which options to purchase 700,000 common shares were granted at an exercise price of Cdn$4.00 per share. As of November 16, 1998 there are options to acquire 141,250 common shares outstanding under the Option Agreements. The options granted pursuant to the Option Agreements will expire on September 14, 2001. On September 1, 1994, Lumonics adopted a stock option plan for key employees and directors (the "Plan"). As of November 16, 1998, there are outstanding options held by 71 employees and directors to acquire 245,075 common shares under the Plan, all of which options were granted on September 1, 1994. The exercise price of all outstanding options under the Plan is Cdn$7.00 per share. All outstanding options under the Plan will expire September 14, 2001. No additional options will be granted under the Plan and the outstanding options will continue until they expire as options of GSI Lumonics. On September 14, 1995, Lumonics established the 1995 Stock Option Plan for Employees and Directors (the "1995 Plan") for the benefit of employees (including contract employees) and directors of Lumonics. Subject to the requirements of the 1995 Plan, the Compensation Committee or in lieu thereof, the Board of Directors, has the authority to select those directors and employees to whom options will be granted, the number of options to be granted and the price at which the common shares may be purchased. The exercise price of options granted under the 1995 Plan must be equal to the closing price of Lumonics' Common Shares on The Toronto Stock Exchange on the trading day immediately preceding the date of grant. Originally a maximum of 406,000 options to purchase common shares were permitted to be issued under the 1995 Plan. On February 24, 1997 the Board amended the 1995 Plan to increase by 1,500,000 Common Shares, to 1,906,000, the maximum aggregate number of Common Shares of Lumonics that may be issued under the 1995 Plan, subject to adjustment for stock splits or other changes in Lumonics capital structure. As of November 16, 1998, 1,661,435 options are issued and outstanding under the 1995 Plan at prices ranging from Cdn$7.25 per share to Cdn$28.60 per share. As of the Lumonics record date, there were aggregate options outstanding under the Option Agreements and the 1995 Plan. These options will continue as options of GSI Lumonics upon completion of the Merger. No past financial assistance has been given to participants to assist them in purchasing common shares under the 1995 Plan, nor is any such financial assistance contemplated. The 1995 Plan contains no provision for Lumonics to provide any such assistance. 119 LUMONICS STOCK OPTION GRANTS IN FISCAL 1997. The following table provides information regarding options granted by Lumonics during the fiscal year ended December 31, 1997 to the Lumonics Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATE OF SHARE PRICE APPRECIATION FOR OPTION TERM(3) ----------------- NUMBER PERCENT OF OF SHARES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES OR BASE EXPIRATION NAME GRANTED IN FISCAL YEAR PRICE($/SH)(1) DATE(2) 5%($) 10%($) ---- ---------- -------------- -------------- ---------- -------- -------- Robert J. Atkinson 50,000 6.0% $19.50 02/03/01 $210,000 $452,500 Chairman 50,000 6.0 17.33 12/29/01 186,500 402,000 Warren Scott Nix 100,000 12.0 18.06 01/02/01 389,000 838,000 President and Chief 50,000 6.0 19.50 02/03/01 210,000 452,500 Executive Officer 90,000 10.8 17.33 12/29/01 335,700 723,600 Patrick D. Austin 20,000 2.4 19.50 02/03/01 84,000 181,000 V.P. Sales 20,000 2.4 17.33 12/29/01 74,600 160,800 Desmond J. Bradley 25,000 3.0 19.50 02/03/01 105,000 226,250 V.P. Finance and 20,000 2.4 17.33 12/29/01 74,600 160,800 Chief Financial Officer David B. Egleston 20,000 2.4 18.42 01/27/01 79,400 171,000 V.P. Operations 20,000 2.4 17.33 12/29/01 74,600 160,800
- -------- (1) The exercise price is expressed in US$ using an exchange rate of 0.7222. (2) All options expire on the fourth anniversary of the date of grant. Options granted on January 2, 1997 are exercisable starting 12 months after the date of grant, with one-half becoming exercisable at that time, and with full vesting occurring on the second anniversary date. Options granted on January 27, 1997 and December 29, 1997 are exercisable starting 12 months after the date of grant, with one-third of the options becoming exercisable at that time, and with an additional one-third of the options becoming exercisable on each successive anniversary date, with full vesting occurring on the third anniversary date. Options granted on February 3, 1997 are exercisable starting 12 months after the date of grant, with two- thirds becoming exercisable at that time, and with full vesting occurring on the second anniversary date. (3) This column shows the hypothetical gain of the options granted based on assumed annual share appreciation rates of 5% and 10% above the exercise price over the full term of the option. The 5% and 10% rates of appreciation are mandated by the rules of the Commission and do not represent Lumonics' estimate of future GSI Lumonics' common share prices. 120 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES. The following table sets forth information regarding stock options exercised by executive officers of Lumonics named in the Lumonics Summary Compensation Table during fiscal 1997 and the value of unexercised options held by them as of December 31, 1997.
NUMBER OF VALUE OF SHARES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL AT FISCAL SHARES YEAR-END(#) YEAR-END NAME AND PRINCIPAL ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ POSITION EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE(1)(2) ------------------ ------------ ---------- ----------------- ------------------- Robert J. Atkinson Chairman 81,250 $1,848,438 0/181,250 $ 0/1,864,063 Warren Scott Nix President and Chief Executive Officer 41,250 969,375 18,750/300,000 360,938/1,606,250 Patrick D. Austin V.P. Sales 12,500 253,125 0/52,500 0/285,625 Desmond J. Bradley V.P. Finance and Chief Finance Officer 31,250 734,375 12,500/88,750 240,625/935,938 David B. Egleston V.P. Operations 0 0 0/40,000 0/60,000
- -------- (1) Market value of the underlying shares on the date of exercise less the option exercise price. (2) Market value of shares covered by in-the-money options on December 31, 1997, less the option exercise price. Options are in-the-money if the market value of the share covered thereby is greater than the option exercise price. EXECUTIVE COMPENSATION AGREEMENTS. Each of GSI and Lumonics has entered into arrangements with certain of its executive officers, each of whom will serve as an executive officer of the GSI Lumonics. GSI COMPENSATION AGREEMENTS. On May 1, 1997, the Board of Directors of GSI adopted a Key Officer and Manager Retention Program to assist GSI in securing the commitment of certain key employees. Under the program, GSI entered into Key Employee Retention Agreements (the "Retention Agreements") with Messrs. Winston, Baletsa, Kampfe, Verderber, Sabella, Woolley and Pelsue and Ms. Palmer. The one-year Retention Agreements are renewable for successive one-year terms, unless a Change of Control occurs. Following a Change of Control, the terms of the Retention Agreements extend for a period of not less than two years after the last day of the month in which the Change of Control occurred. A Change of Control consists of: . certain changes in the composition of GSI's Board of Directors; . the acquisition by certain persons of beneficial ownership of 20% or more of the outstanding voting securities of GSI; . a change in control of GSI that must be reported under the Exchange Act; or . adoption of a plan of liquidation or an agreement to sell substantially all of the GSI's assets. Each employee's Retention Agreement provides for a severance payment if a Change of Control occurs or employment with GSI is terminated under certain circumstances. Subject to various adjustments, the severance payment equals four times the sum of the employee's annual salary, and the employee's average annual bonus for the three preceding fiscal years. In addition, GSI will make a lump sum cash payment to the employee equal to the estimated cost of providing life, disability, accident and health insurance benefits to the employee for a period of four years. The Retention Agreements of all employees, other than Mr. Woolley, were amended to waive severance payments and other rights under the Retention Agreements as they relate to the Merger. The employees executed amendments providing that the Merger will not constitute a Change of Control and trigger rights under the Retention Agreements. Mr. Verderber's Retention Agreement was amended to provide for employment for one year in the combined company following the Merger, in addition to a severance package if Mr. Verderber's employment is terminated after the twelve month period. Upon termination, Mr. Verderber is 121 entitled to a one-time payment of the sum of his annual base salary, and his average annual bonus for the proceeding three years. In addition, Mr. Verderber is entitled to the continuation of the benefits program in existence at the time of the termination or a lump sum payment of benefits. Ms. Palmer's Retention Agreement was amended to secure her continued employment in the combined company through September 30, 1999. Effective October 1, 1999, Ms. Palmer is entitled to a severance package that includes salary, bonus and benefits coverage for one year following the termination of her employment. If a position in the combined company is offered to Ms. Palmer after October 1, 1999, Ms. Palmer may decide to accept the offer or exercise her rights under the severance package as amended. Mr. Winston's Retention Agreement as amended provides for "severance exactly as defined in the severance package held by Robert Atkinson, Chairman of Lumonics." The other Retention Agreements were amended (with the exception of Mr. Woolley's Agreement) to provide for a one- time severance payment in the event of termination of employment with GSI equal to the sum of the employee's annual base salary, and the employee's average annual bonus for the preceding three years. The employee is also entitled to health, medical and disability insurance coverage for one year following the termination. Mr. Baletsa and Mr. Sabella included an additional provision providing that, during the six months or one year respectively following the Merger, each is entitled to the severance payment even if the employee terminates his employment without good reason. Mr. Woolley's Retention Agreement has not been amended. LUMONICS COMPENSATION AGREEMENTS. On April 13, 1998 Lumonics Inc. concluded compensation agreements with its Chairman and members of its Executive Management Team. Agreements are effective January 1, 1998, continue for a minimum term of three years and automatically extend for periods of one year after the initial term unless notice is given by Lumonics or the individual at least 90 days prior to the expiration of the current period that the agreement shall not be extended. Lumonics entered into such an agreement with each of the following individuals: Robert Atkinson, W. Scott Nix, Pat Austin, Desmond Bradley, Dave Egleston, John George and Michael Lupiano. Each employee's Retention Agreement provides for a severance payment if a Change of Control occurs or employment with Lumonics is terminated under certain circumstances. Under the agreements applicable to Mr. Atkinson and Mr. Nix, the severance payment is equal to twice the sum of annual salary, average target and actual bonus payments for the last two years and the cost of certain employment benefits. If the payment is as a result of a Change of Control, the benefit is calculated as three times the previously noted sum. Under the agreements applicable to Messrs. Austin, Bradley, Egleston, George and Lupiano, the severance payment is equal to a factor (one month times the number of months employed with Lumonics, minimum one year, maximum two years) times the sum of annual salary, average target and actual bonus payments for the last two years and the cost of certain employment benefits. If the payment is as a result of a Change of Control, the factor is increased by one year. The merger does not constitute a change of control for purposes of these employment agreements. During August 1998, Mr. Egleston terminated his employment with Lumonics. He received the full amount payable under the terms of the above-noted employment agreement. DIRECTOR COMPENSATION GSI DIRECTOR COMPENSATION. During the fiscal year ended December 31, 1997, GSI directors who were not employees of GSI received the following directors' fees in consideration of their services as directors: an annual retainer of $10,000, plus $1,000 for each meeting of the Board of Directors attended in person or by telephone conference as well as reimbursement of travel expenses. Additionally, the Chairs of the Audit Committee and of the Compensation Committee of the GSI Board of Directors received an annual retainer of $4,000, and other members of these committees received an annual retainer of $2,000. During 1997, GSI also 122 granted to each of Messrs. Ferrari and Black, each a non-employee director, a warrant for the purchase of 2,000 shares of GSI Common Stock with an exercise price of $13.00 per share, the fair market value on the date of grant. LUMONICS DIRECTOR COMPENSATION. Lumonics Directors who are not employees of Lumonics or representatives of Sumitomo Heavy Industries Limited currently receive an annual retainer of $7,500 and an attendance fee of $1,000 for attending meetings of shareholders, the Board of Directors and committees of the Board of Directors. In addition, upon initial election and every third year thereafter, they receive an option to purchase 10,000 shares of Lumonics Common Stock with an exercise price of fair market value on the date of grant. Directors who are employees of Lumonics receive no remuneration for serving as members of the Board of Directors. Directors who represent Sumitomo Heavy Industries Limited receive an option to purchase 10,000 shares of Lumonics Common Stock with an exercise price of fair market value on the date of grant upon their initial election and every third year thereafter. All directors, other than those representing Sumitomo Heavy Industries Limited, are entitled to reimbursement by Lumonics for all reasonable expenses incurred in attending meetings of shareholders, the Board of Directors and committees of the Board of Directors. No additional compensation is paid to the chairs of the various committees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Each of the members of the Compensation Committee of GSI, Messrs. Ferrari and Richard, is, and was during the fiscal year ended December 31, 1997, an outside member of the GSI Board of Directors. As of December 31, 1997, the members of the Compensation Committee of Lumonics were Messrs. Atkinson, Gardner and Naitoh. Mr. Atkinson is Chairman of Lumonics. Mr. Gardner is Secretary of Lumonics and provides legal services to it, but is not an employee. Mr. Gardner is Counsel to a law firm that provides legal services to Lumonics. During the fiscal year ended December 31, 1997, Mr. Gardner's firm was paid Cdn$69,751 for legal services which included Mr. Gardner acting as a director of Lumonics and as a member of its audit and compensation committees. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In 1992, GSI's Board of Directors authorized a loan to Charles D. Winston in the amount of $160,000 for expenses of relocation to Massachusetts, secured by deferred income owed to Mr. Winston in a like amount. The single amount was intended to cover all relocation and related expenses including real estate fees, moving services, temporary housing and other relocation expenses. Under the agreement, as amended, the loan was to be forgiven over the five year period ended December 31, 1997. In each of 1997, 1996, 1995, 1994 and 1993, $32,000 of the loan amount was forgiven and charged as compensation expense. There was no balance remaining at December 31, 1997. In August 1990, Lumonics borrowed Japanese yen ((Yen)) 500 million from Sumitomo Heavy Industries, Ltd., which, through a currency and interest rate swap agreement with a Canadian chartered bank, was converted to US dollars. In June 1991, Lumonics borrowed an additional (Yen)1.5 billion from Sumitomo, which, through two separate currency and interest rate swap agreements with two Canadian chartered banks, was converted into Canadian dollars and US dollars. Both loans from Sumitomo are term loans repayable in 10 equal semi-annual installments, which commenced in April 1996. Lumonics made two payments in 1997 totaling $2.5 million and two payments in 1996 totaling $2.6 million and, as at December 31, 1997, the current portion of the long-term debt was $3.1 million. Sumitomo currently owns 35.5% of the outstanding Lumonics common shares. Upon completion of the Merger, Sumitomo will own approximately % of the outstanding GSI Lumonics common shares. Sumitomo acts as Lumonics' principal distributor in Japan. Lumonics also currently relies on Sumitomo for its sales in Japan. In fiscal year 1997, sales to and through Sumitomo were $18.9 million, in fiscal 1996 and 1995 were $17.4 million representing 10.7%, 11.3% and 13.9%, respectively, of Lumonics' total sales. Lumonics and Sumitomo have also discussed exploring initiatives to improve sales and distribution of Lumonics products in Japan. 123 COMPARATIVE RIGHTS OF SHAREHOLDERS ONTARIO VS. NEW BRUNSWICK Upon the issuance of a certificate of continuance under New Brunswick law, the shareholders of Lumonics, a corporation incorporated under the laws of the province of Ontario, will become shareholders of a corporation continued under the laws of the province of New Brunswick. Generally, Ontario and New Brunswick law provide substantially similar rights to shareholders of a corporation existing under either of those jurisdictions. New Brunswick law contains derivative action, oppression, and dissent and appraisal rights similar to those prescribed by Ontario law. There are, however, differences between Ontario and New Brunswick law which will result in various changes to the rights of shareholders of Lumonics. The following is a summary of the significant differences between Ontario and New Brunswick law insofar as they may be regarded as affecting the rights of shareholders of Lumonics. The following is a summary only and does not purport to be a comprehensive statement of the particulars of the actual statutory provisions to which reference is made. Residency and Qualification of Directors. There is no requirement under New Brunswick law that directors be residents or citizens of Canada. Accordingly, following the continuance, Lumonics will not be required to have a majority of directors who are resident Canadians on the board of directors of Lumonics, or any committee thereof, as currently required under Ontario law. Cumulative Voting. Under New Brunswick law, shareholders have cumulative voting rights in the election of directors. Ontario law permits, but does not require, such cumulative voting rights. Cumulative voting rights permit each shareholder entitled to vote at a meeting of shareholders to cast a number of votes equal to the number of shares held by the shareholder multiplied by that number of directors to be elected. The shareholder is entitled to cast all such votes in favor of one candidate for director or distribute them among the candidates in any manner. The Articles of Continuance, however, provide that, subject to applicable law, the shareholders of Lumonics will not have cumulative voting rights. Such provision has been included in the Articles of Continuance to anticipate any potential future amendment of New Brunswick law, should New Brunswick law be amended to permit articles to provide that such cumulative voting rights will not be available to shareholders of Lumonics subject to New Brunswick law. Shareholders of Lumonics should note, however, that New Brunswick law does not currently contain any such provision permitting articles to provide that such cumulative voting rights will not apply. Place of Meetings of Shareholders. Under Ontario law, meetings of shareholders may be held at such place in or outside Ontario as the directors determine, or, in the absence of such determination, at the place where the registered office of Lumonics is located. The by-laws of Lumonics currently permit the directors to determine the location of shareholders meetings. Under New Brunswick law, there is no mandatory requirement to hold shareholders' meetings within New Brunswick or within Canada. The GSI Lumonics Articles provide that shareholders' meetings may be held at any one or more locations throughout the world, including without limitation, locations specifically identified in such articles. Auditors and Financial Statements. After the Merger, GSI Lumonics intends to prepare and deliver quarterly audited annual financial statements in accordance with US GAAP. As described above, Lumonics, notwithstanding continuance under New Brunswick law, will continue to be subject to applicable securities laws in Canada and the rules of The Toronto Stock Exchange which provide for comprehensive financial reporting and audit requirements including, for example, preparation and delivery of audited financial statements in accordance with Canadian GAAP and the appointment of an audit committee. Accordingly, the following differences between the Ontario and New Brunswick law will not impact upon the financial statements and audit requirements currently imposed upon Lumonics by such securities laws and stock exchange rules. New Brunswick law does not require Lumonics to appoint an auditor or that financial statements be subject to audit. Further, under New Brunswick law financial statements can be prepared in accordance with generally accepted accounting principles applicable in non-Canadian jurisdictions. Under 124 Ontario law a public company is required to appoint an auditor and to deliver audited financial statements to shareholders and to the Director under the Ontario Act. Such financial statements, under the Ontario Act, are required to be prepared in accordance with standards of the Canadian Institute of Chartered Accountants. Further, under Ontario law, Lumonics is required to appoint an audit committee. New Brunswick law does not contain a similar requirement. Capital. Under New Brunswick law, share capital may be specified as having a par value or no par value. Under Ontario law, there is no provision for par value shares. However, the GSI Lumonics Articles continue to provide for only non-par value shares. Pre-Emptive Rights. Under New Brunswick law, unless otherwise provided in the articles of a corporation, shareholders have pre-emptive rights in respect of the issuance of certain securities of the corporation. However, New Brunswick law provides that a corporation which has its shares listed on a prescribed stock exchange including The Toronto Stock Exchange is not subject to the otherwise applicable pre-emptive rights provisions in the New Brunswick Act. Furthermore, the GSI Lumonics Articles specifically provide that such pre- emptive rights will not be available to shareholders of the corporation. Under Ontario law, the granting of pre-emptive rights is permissive rather than mandatory and, at present, there is no provision in the articles of Lumonics for pre-emptive rights. Take-Over Bid Rules. Ontario law does not prescribe take-over bid rules and requirements. Applicable securities laws, however, contain comprehensive take- over bid rules which stipulate a 20% threshold for their application to an offer to acquire shares. Generally stated, these rules provide that any person or company which offers to acquire shares which result in such person or company holding more than 20% of the outstanding shares of Lumonics, must, with certain exceptions, make an identical offer to all the shareholders of Lumonics. The corresponding percentage under New Brunswick law is 50%; however the 20% threshold under applicable securities laws will continue to apply to GSI Lumonics. Financial Assistance. Under New Brunswick law the articles of Lumonics may provide that financial assistance may be given to certain persons and related corporations notwithstanding solvency tests otherwise prescribed in New Brunswick law. The GSI Lumonics Articles do not so provide. Ontario law subjects financial assistance to prescribed solvency tests, which cannot be removed by provision in the articles of Lumonics. Shareholder Proposals. New Brunswick law provides that holders of not less than 10% of the voting shares of Lumonics may submit a proposal with respect to the election of directors. Under Ontario law the corresponding threshold is 5%. However, the Articles of Continuance specifically provide that holders of not less than 5% of the voting shares of Lumonics may submit a proposal with respect to the election of directors. Mandatory Solicitation of Proxies. As described above, Lumonics, notwithstanding continuance under New Brunswick law will continue to be subject to applicable securities laws and The Toronto Stock Exchange rules which provide for comprehensive mandatory proxy solicitation rules. Accordingly, the following differences between New Brunswick and Ontario law will not impact upon the requirement for the mandatory solicitation of proxies by Lumonics currently imposed upon Lumonics by such securities laws and stock exchange rules. New Brunswick law contains no provisions relating to the mandatory solicitation of proxies. Ontario law provides that, in the event a corporation offers its securities to the public, management must, in respect of any meeting of shareholders, provide a form of proxy together with the giving of notice of such meeting to each shareholder who is entitled at that time to receive notice of the meeting. Under Ontario law, proxies cannot be solicited without the delivery of either a management proxy circular or a dissident's proxy circular. Requisition of Meeting by Shareholders. New Brunswick law provides that holders of not less than 10% of the voting shares of Lumonics may require the directors to call a meeting of shareholders. Under Ontario law, the corresponding threshold is 5%. The Articles of Continuance specifically provide that the holders of not less than 10% of the voting shares of Lumonics may require the directors to call a meeting of shareholders. 125 Investigations of Lumonics. Under the New Brunswick Act, the holders of not less than 10% of the issued shares of any class of a corporation may apply to the Court for an order requiring that an investigation be made of a corporation or of any affiliated corporation. Under Ontario law, any security holder (which term includes any shareholder), may make such an application. We have attached the draft Articles of Continuance and By-Law of GSI Lumonics as Annex H to this document. MASSACHUSETTS VS. NEW BRUNSWICK Following the merger, the stockholders of GSI will become stockholders of GSI Lumonics. As stockholders of GSI, their rights are presently governed by the Massachusetts law and by the GSI Articles of Organization and the GSI By-Laws. As stockholders of GSI Lumonics, their rights will be governed by the law of New Brunswick, Canada and by the GSI Lumonics Articles and the GSI Lumonics By- Laws. The following discussion summarizes the material differences between the rights of holders of GSI common stock and holders of GSI Lumonics common shares and differences between the charters and by-laws of GSI and GSI Lumonics. The GSI Lumonics Articles and the GSI Lumonics By-Laws are attached to this Joint Proxy Statement/Prospectus as Annex H. Reference is also made to the GSI Articles, the GSI By-Laws and the relevant provisions of Massachusetts law and New Brunswick law for the complete text of each of the relevant provisions of such documents and statutes. Special Meeting of Stockholders. Massachusetts law provides that special meetings of stockholders of a corporation with a class of voting stock registered under the Securities Exchange Act of 1934, as amended (a "public company"), may be called by a corporation's president or directors, and, unless otherwise provided in the articles of organization or by-laws, must be called by its clerk or any other officer upon written application of the owners of at least 40% of the corporation's stock entitled to vote at such meeting. GSI's By-Laws provide for the call of a special meeting of stockholders by the president or directors of GSI, or upon written application of the owners of not less than 40% in interest of GSI's stock entitled to vote at such meeting. New Brunswick law and the GSI Lumonics Articles provide that holders of not less than 10% of the voting shares of GSI Lumonics may require the directors to call a meeting of shareholders. Notice of Stockholders Meetings. Under Massachusetts law, written notice of all meetings of stockholders must be given to stockholders at least seven days before the meeting. The GSI By-Laws provide that such notice must be given at least seven days, but not more than 60 days, before the meeting. Under New Brunswick law, subject to the articles or a unanimous shareholders agreement, notice of all meetings of shareholders must be sent not less than 21 days and not more than 50 days before the meeting to each shareholder entitled to vote at the meeting. The GSI Lumonics By-laws provide that a written notice of all meetings of shareholders be given to shareholders at least 21 days, but not more than 50 days, before the meeting. The GSI Lumonics By-laws also provide that such notice may specify a time not more than 48 hours (excluding Saturdays and holidays) before which time proxies to be used at such meeting must be deposited. Neither Massachusetts law nor the GSI Articles or By-Laws contain a similar provision. The presence of the provision could make it more difficult or impossible for a shareholder not attending a meeting of shareholders in person to vote or change its vote in the period preceding the meeting. Proposals of Stockholders. Under New Brunswick law, shareholders may submit to the corporation notice of any matter to be raised at a shareholders meeting. The corporation shall set out the proposal in the notice of meeting provided that it is submitted at least 90 days before the anniversary of the date of the previous annual meeting, it has not been submitted in the last two years and is not being submitted for an improper purpose. A proposal may include nominations for the election of directors if it is signed by holders of not less than 10% of the voting shares. However, the GSI Lumonics Articles specifically provide for a reduced threshold of 5% of the voting shares in respect of a proposal for the election of directors. There are no similar provisions currently applicable to GSI. The practical effect of the provision in the GSI Lumonics Articles is to require shareholders to own 5% of the GSI Lumonics shares before they can have a proposal with respect to the nomination of directors set out in the notice of the shareholders meeting. 126 Inspection Rights. Under Massachusetts law, a corporation's stockholders have the right for a proper purpose to inspect the corporation's articles of organization, by-laws, records of all meetings of incorporators and stockholders, and stock and transfer records, including the stockholder list. In addition, stockholders of a Massachusetts business corporation have a qualified common law right under certain circumstances to inspect other books and records of the corporation. Under New Brunswick law, the holders of not less than 10% of the issued shares of any class of a corporation may apply to the Court for an order requiring that an investigation be made of a corporation or of any affiliated corporation. Under New Brunswick law a shareholder of a corporation has the right to inspect copies of: (1) the articles and by-laws of the corporation, including any amendments; (2) any unanimous shareholders' agreement; (3) minutes of meetings and resolutions of shareholders; (4) notices of changes of directors or registered office; (5) the share register; and (6) the list of all current and former directors. Action by Consent of Stockholders. Under Massachusetts law, any action to be taken by stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing, and a corporation may not provide otherwise in its articles of organization or by- laws. New Brunswick law contains a similar provision. Cumulative Voting. Massachusetts law does not provide for cumulative voting. Under New Brunswick law, shareholders have cumulative voting rights in the election of directors. Cumulative voting rights permit each shareholder entitled to vote at a meeting of shareholders to cast at such meeting a number of votes equal to the number of shares held by the shareholders multiplied by the number of directors to be elected. The shareholder is entitled to cast all such votes in favor of one candidate for director or distribute them among the candidates in any manner. Accordingly, cumulative voting may allow shareholders with a relatively small percentage of the shares voting at a meeting of shareholders to have a greater chance to elect a director or directors as compared to an election of directors without cumulative voting. The GSI Lumonics Articles, however, provide that, subject to applicable law, the shareholders of GSI Lumonics will not have cumulative voting rights. Such provision has been included in the GSI Lumonics Articles to anticipate any potential future amendment of New Brunswick law, should New Brunswick law be amended to permit articles to provide that such cumulative voting rights will not be available to shareholders of GSI Lumonics subject to New Brunswick law. New Brunswick law does not currently contain any such provision permitting articles to provide that such cumulative voting rights will not apply. Voting By a Show of Hands. Under New Brunswick law, unless the by-laws otherwise provide, voting at a meeting of shareholders shall be by a show of hands except where a ballot is demanded, either before or after the vote, by a shareholder or proxyholder entitled to vote at the meeting. The GSI Lumonics By-Laws provide for voting by a show of hands except where a ballot is demanded. On a vote by a show of hands, every shareholder or proxyholder present has one (1) vote. On a vote by a ballot, every shareholder or proxyholder present has one (1) vote for each share registered in his or her name. Accordingly, if no shareholder or proxyholder requests to vote by ballot at a meeting of shareholders, those shareholders or proxyholders who do attend the meeting can control the vote despite the fact that they would not control the vote if the vote had been taken by ballot. Massachusetts law and the GSI By-Laws do not have any similar provisions regarding voting by a show of hands. Quorum, Votes Required. Under Massachusetts law and the GSI By-Laws, a majority-in-interest of all capital stock entitled to vote at a stockholders meeting constitutes a quorum for the transaction of business at such meeting. A quorum being present, the vote of stockholders required to pass a resolution under 127 Massachusetts law is typically a majority or two-thirds of the outstanding shares, depending upon the action being voted upon. Under New Brunswick law, unless the articles, by-laws or a unanimous shareholders agreement otherwise provide, the holders of a majority of the shares entitled to vote at a meeting, present in person or by proxy, constitute a quorum. The quorum requirement in the GSI Lumonics By-Laws is 20% of the shares entitled to vote at a meeting of shareholders. A quorum being present, the requisite vote of shareholders under New Brunswick law is typically a majority or two-thirds of the votes cast on the resolution, depending upon the action being voted upon. The GSI Lumonics By-Laws provide that in case of an equality of shareholder votes, the chairman of the meeting shall not have a second or casting vote in addition to the vote or votes to which he may be entitled as a shareholder or proxyholder. There is no method for breaking such a tie under New Brunswick law. Dividends and Repurchases of Stock. Under Massachusetts law, the payment of dividends and the repurchase of a corporation's stock are generally permissible if such actions are not taken when the corporation is insolvent, do not render the corporation insolvent, and do not violate the corporation's articles of organization. Similarly, the payment of dividends or the repurchase of stock under New Brunswick law, except in circumstances where a corporation's articles so provide in the case of a repurchase of shares, would not be permitted if the corporation would be unable to pay its liabilities as they become due or the realizable value of the corporations assets would after payment be less than the aggregate of its liabilities and stated capital of all classes. Classification of the Board of Directors. Massachusetts law permits classification of a corporation's board of directors. However, in the case of a public company, Massachusetts law requires classification into three classes and provides that the directors may be removed from office by the stockholders only for cause unless the directors or two-thirds in interest of its stockholders elect by vote to be exempt from such requirements. The GSI Articles provide that GSI's Board of Directors is to be divided into three classes with the directors of each class being elected for staggered three-year terms. All directors under New Brunswick law are elected for terms of one year which are not staggered. A practical effect of not having a board of directors with staggered terms is that stockholders may replace the entire board of directors by election in one year. With a staggered board, only one-third of the members of the board can be replaced by election each year. Removal of Directors. Under Massachusetts law, except as otherwise provided in a corporation's articles of organization or by-laws, directors may be removed from office by a majority of the directors then in office with or without cause. The GSI Articles contain a provision providing for the removal of directors only for cause by vote of either the holders of a majority of shares outstanding or a majority of the directors then in office. Under New Brunswick law, directors may not remove a director but shareholders may do so by a majority vote, provided that a director may not be removed if the number of votes cast against this removal would be sufficient to elect him under cumulative voting procedures. A practical effect of the different provisions concerning the removal of directors is that a shareholder of GSI Lumonics may be able to more easily remove directors from office as compared with such ability under the GSI Articles. Vacancies on the Board of Directors. Under Massachusetts law, unless otherwise provided in the charter or by-laws, vacancies on the board of directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by the remaining directors. The GSI Articles do not provide otherwise. This ability to fill vacancies could be used by an incumbent board of directors to maintain control of the board in the face of an election by stockholders of new board members not favored by the incumbent board. Under New Brunswick law, vacancies caused by an increase in the number of directors or a failure to elect directors must be filled by shareholders. Exculpation of Directors. Massachusetts law permits, and the GSI Articles provide, that no director shall be personally liable to GSI, or its stockholders for monetary damages for breaches of fiduciary duty except where such exculpation is expressly prohibited. The circumstances under which such exculpation is prohibited relate to unauthorized distributions and loans to insiders, breaches of a director's duty of loyalty, acts not in 128 good faith or involving intentional misconduct or a knowing violation of law, and transactions from which a director derives an improper personal benefit. New Brunswick law does not contain a similar provision. However, GSI Lumonics By-Laws do contain a similar provision with respect to the protection of directors. Indemnification of Directors, Officers and Others. Both Massachusetts law and New Brunswick law generally permit indemnification of directors and officers for expenses incurred by them by reason of their position with the corporation, if the director or officer has acted in good faith and with the reasonable belief that his conduct was in the best interest of the corporation. Interested Director Transactions. Massachusetts law does not prohibit related party transactions. The GSI Articles provide that no transaction by GSI shall be invalidated by the fact that one or more of GSI's directors or officers is a party to the transaction or has a position or financial interest in a party to the transaction. The GSI Articles also provide that any such interested director may vote on the transaction, notwithstanding such interest. New Brunswick law restricts interested directors from participating in meetings in which transactions in which such director has an interest are considered. Sale, Lease or Exchange of Assets and Mergers. Massachusetts law provides that a vote of two-thirds of the shares of each class of stock outstanding and entitled to vote thereon is required to authorize the sale, lease, or exchange of all or substantially all of a corporation's property and assets or a merger or consolidation of the corporation into any other corporation, except that the articles of organization may provide that the vote of a greater or lesser proportion, but not less than a majority of the outstanding shares of each class, is required. Under Massachusetts law, the articles of organization or by-laws may provide that all outstanding classes of stock shall vote as a single class, but, in the case of a merger or consolidation, the separate vote of all classes of stock, the rights of which would be adversely affected by the transaction, is also required. The GSI Articles reduce from two-thirds to a majority of each class outstanding and entitled to vote thereon, the stockholder vote required to approve such transactions, if the transaction is approved by the Board of Directors. Under New Brunswick law, a sale, lease or exchange of all or substantially all of the assets of a corporation outside the ordinary course of business must be approved by the affirmative vote of at least two-thirds of votes cast by the shareholders entitled to vote. At a meeting to consider such a resolution all shares are entitled to vote whether or not they otherwise carry the right to vote and, if the sale, lease or exchange affects a class or series of shares in a different manner than the other classes or series, the transaction must be separately approved by a two- thirds vote of such class or series. Authority to Issue Shares. Massachusetts law provides a corporation the authority to issue the maximum number of shares of its capital stock as authorized in its articles of organization. The articles of organization, and any amendments thereto, require the approval of the corporation's stockholders. New Brunswick law does not require that any maximum number of shares which a corporation has the authority to issue be specified in its articles, and the GSI Lumonics articles of continuance authorize it to issue an unlimited number of shares. Accordingly, the board of directors of GSI Lumonics has the authority to issue shares of capital stock without a vote of its shareholders which may result in a change in control of the company or dilution to shareholders. Such a vote might have been required under Massachusetts law in order to amend the corporation's articles of organization as discussed in the following paragraph in order to increase the number of shares which the corporation has the authority to issue. GSI Lumonics' ability to issue an unlimited amount of shares allows the board of directors to issue shares as full or partial consideration for the acquisition of new businesses. However, applicable securities laws specifically restrict GSI Lumonics from issuing shares for the purposes of preventing a takeover bid. Amendments to Charter. Under Massachusetts law, amendments to a corporation's articles of organization relating to certain changes in capital or in the corporate name require the vote of at least a majority of each class of stock outstanding and entitled to vote thereon. Amendments relating to other matters require a vote of at least two-thirds of each class outstanding and entitled to vote thereon or, if the articles of organization so provide, a greater or lesser proportion but not less than a majority of the outstanding shares of each class. Under Massachusetts law, the articles of organization or by-laws may provide that all outstanding 129 classes of stock shall vote as a single class, but the separate vote of any class of stock the rights of which would be adversely affected by the amendment, is also required. The GSI Restated Articles reduce from two-thirds to a majority of each class outstanding and entitled to vote thereon, the stockholder vote to approve such amendments, if the amendment is approved by the Board of Directors. Under New Brunswick law, any change to the articles of a corporation must be approved by the affirmative vote of at least two-thirds of the votes cast by the shareholders entitled to vote at a meeting. In addition, if the change affects a particular class or series as specified under New Brunswick law, the change must be separately approved by the two-thirds vote of that class or series whether or not the class or series otherwise carries the right to vote. New Brunswick law permits a corporation to provide in its articles that a class or series shall not be entitled to vote separately in the case of an amendment to increase or decrease the maximum number of shares of a class or series having rights equal or superior to that class or series, to effect an exchange, reclassification or cancellation of all of the part of the shares of a class or series, or to create a new class or series equal or superior to that class or series. However, the GSI Lumonics Articles do not so provide. Amendments to By-laws. Massachusetts law provides that stockholders may amend the By-laws and, if provided in its charter, the board of directors also has this power. Under Massachusetts law, the power to make, amend or repeal by-laws also lies in the stockholders; provided that if authorized by the articles of organization, the by-laws may provide that the directors may also make, amend or repeal the by-laws, except with respect to any provision which by law, the articles of organization or the by-laws requires action by the stockholders. The GSI By-laws provide that the By-laws may be amended by affirmative vote of either the stockholders or a majority of the directors. Under New Brunswick law, the Board of Directors of a corporation may make and amend by-laws provided that any such by-law or amendment must be confirmed at the next meeting of shareholders by the affirmative vote of a majority of the shareholders entitled to vote thereat. Any by-law or amendment is effective when made by the Board of Directors but ceases to be effective if not confirmed by the shareholders. Appraisal Rights. Under Massachusetts law, a properly dissenting stockholder is entitled to receive the appraised value of his shares when the corporation votes: (1) to sell, lease, or exchange all or substantially all of its property and assets; (2) to adopt an amendment to its articles of organization which adversely affects the rights of the stockholder; or (3) to merge or consolidate with another corporation. New Brunswick law provides for similar rights to dissent and receive fair value for shares. "Anti-Takeover" Statutes. Business Combination Statute. The Massachusetts "business combination" statute provides that, if a person (with certain exclusions) acquires 5% or more of the stock of a Massachusetts corporation without the approval of the board of directors of that corporation (an "interested stockholder"), he may not engage in certain transactions with the corporation for a period of three years. The Massachusetts statute includes certain exceptions to this prohibition; for example, if the board of directors approves the acquisition of stock or the transaction prior to the time that the person became an interested stockholder, or if the interested stockholder acquires 90% of the voting stock of the corporation (excluding voting stock owned by directors who are also officers and certain employee stock plans) in one transaction, or if the transaction is approved by the board of directors and by the affirmative vote of two-thirds of the outstanding voting stock which is not owned by the interested stockholder. GSI is subject to the Massachusetts Business Combination statute. New Brunswick law does not provide any similar restriction. Control Share Acquisition Statute. Under the Massachusetts Control Share Acquisition statute for Massachusetts corporations, a person (hereinafter, the "acquirer") who makes a bona fide offer to acquire, or 130 acquires, shares of stock of a corporation that when combined with shares already owned, would increase the acquirer's ownership to at least 20%, 33 1/3%, or a majority of the voting stock of the corporation, must obtain the approval of a majority of shares held by all stockholders except the acquirer and the officers and inside directors of the corporation, to vote the shares acquired. The statute does not require the acquirer to consummate the purchase before the stockholder vote is taken. The Control Share Acquisition statute permits a Massachusetts corporation to elect not to be governed by these provisions by including such an election in its articles of organization or by- laws. The GSI By-Laws contain a provision pursuant to which GSI elects not to be governed by the Massachusetts Control Share Acquisition statute. However, if at a future date the Board of Directors of GSI determines that it is in the best interests of GSI and its stockholders that GSI be governed by the statute, the By-Laws may be amended to permit GSI to be governed by such statute. Any such amendment, however, would apply only to acquisitions crossing the thresholds which occur after the effective date of such amendment. New Brunswick law does not contain any statute which is similar to the Massachusetts Control Share Statute. Other Interests. Massachusetts law expressly provides that in determining what a director reasonably believes to be in the best interests of the corporation, he may consider the interests of the corporation's employees, suppliers, creditors and customers; the economy of the state, region and nation; community and societal considerations; and the long-term as well as short-term interests of the corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the corporation. Thus, these interests could be considered even in connection with a decision to sell a company. The GSI Articles and GSI By- Laws do not discuss the consideration of societal factors. New Brunswick law does not contain any specific similar factors that may be considered in determining the best interests of a corporation. CURRENCY PRICES The following table sets forth in Canadian dollars the exchange rates of the Canadian dollar to the United States dollar, determined based upon publicly available information from the Federal Reserve Bank of New York for the calendar years 1993 through 1998. For example, on December 31, 1997, one US dollar bought 1.4288 Canadian dollars.
1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- High.................... Cdn$1.5770 Cdn$1.4398 Cdn$1.3822 Cdn$1.4238 Cdn$1.4078 Cdn$1.3443 Low..................... 1.4075 1.3357 1.3310 1.3285 1.3103 1.2428 End of Period........... 1.5375 1.4288 1.3697 1.3655 1.4030 1.3255 Average(1).............. 1.4898 1.3845 1.3637 1.3727 1.3661 1.2903
- -------- (1) The average of the exchange rate on the last business day of each month during the applicable period. 131 OTHER MATTERS It is not expected that any matters other than those described in this document will be brought before the GSI special meeting or the Lumonics special meeting. If any other matters are presented, however, it is the intention of the persons named in the GSI proxy and Lumonics proxy to vote the proxy in accordance with the discretion of the persons named in such proxy. LEGAL MATTERS Certain legal matters with respect to the validity of the securities offered hereby will be passed upon for Lumonics by Stewart McKelvey Stirling Scales. EXPERTS The consolidated financial statements of GSI at December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, included in the proxy statement of GSI and elsewhere in this registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included in this document in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The consolidated balance sheets of Lumonics as at December 31, 1996 and 1997 and the consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, included in this document, have been audited by Ernst & Young, LLP, independent chartered accountants, as indicated in their report appearing elsewhere in this document, and are included in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. Representatives from Arthur Andersen will be present at the GSI special meeting and representatives from Ernst & Young will be present at the Lumonics special meeting. The representatives present at the respective meetings will have the opportunity to make a statement and will be available to respond to appropriate questions. GENERAL SCANNING STOCKHOLDER PROPOSALS If the merger occurs, GSI will not hold its annual meeting of stockholders in 1999 . If the merger does not occur, GSI would hold its 1999 meeting on April 15, 1999, in accordance with its by-laws. In order for the company to consider a stockholder proposal for inclusion in GSI's proxy materials for its 1999 meeting, the company must receive the stockholder proposal at 500 Arsenal Street, Watertown, Massachusetts 02472, Attention: Clerk, no later than October 31, 1998. If a stockholder submits a proposal other than in accordance with Rule 14a-8 under the Exchange Act, it will be deemed untimely if it is received after February 12, 1999 (60 days prior to the scheduled meeting). However, if GSI gives less than 70 days' notice of the meeting, a stockholder must give GSI only 10 days' notice of the proposal. 132 LUMONICS DIRECTORS' APPROVAL UNDER CANADIAN LAW The contents and the sending of this document insofar as it relates to Lumonics and GSI Lumonics have been approved by the directors of Lumonics. (Signed) Charles J. Gardner, Q.C. _____________________________________ Corporate Secretary LUMONICS INC. January 29, 1999 133 [Outside back cover] Until [twenty-five calendar days after the offering date], all dealers that effect the transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 134 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ------ GENERAL SCANNING INC. Report of Independent Public Accountants................................ FIN-2 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 27, 1997 and October 3, 1998 (unaudited).................................................... FIN-3 Consolidated Balance Sheets as of December 31, 1996 and 1997 and October 3, 1998 (unaudited).................................................... FIN-4 Consolidated Statements of Stockholders' Equity for the years ended De- cember 31, 1995, 1996 and 1997 and the nine months ended October 3, 1998 (unaudited)....................................................... FIN-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 27, 1997 and October 3, 1998 (unaudited)............................................ FIN-6 Notes to Consolidated Financial Statements.............................. FIN-7 PAGE ------ LUMONICS INC. Auditors' Report........................................................ FIN-22 Consolidated Balance Sheets as at December 31, 1997 and 1996............ FIN-23 Consolidated Statements of Stockholders' Equity for the years ended De- cember 31, 1997, 1996 and 1995......................................... FIN-24 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.................................................... FIN-25 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.................................................... FIN-26 Notes to Consolidated Financial Statements.............................. FIN-27 Consolidated Balance Sheets as at September 30, 1998 (unaudited) and De- cember 30, 1997........................................................ FIN-41 Consolidated Statements of Operations for the three months and nine months ended September 30, 1998 and 1997 (unaudited) .................. FIN-42 Consolidated Statements of Cash Flows for the nine months ended Septem- ber 30, 1998 and 1997 (unaudited)............................................................ FIN-43 Notes to Consolidated Financial Statements (unaudited).................. FIN-44
FIN-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of General Scanning Inc.: We have audited the accompanying consolidated balance sheets of General Scanning Inc. (a Massachusetts corporation) and subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Scanning Inc. and subsidiaries as of December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 2, 1998 FIN-2 GENERAL SCANNING INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS ENDED ---------------------- YEAR ENDED DECEMBER 31, ---------------------------------- SEP. 27, OCT. 03, 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Net sales: Laser systems and com- ponents.............. $ 103,405 $ 131,867 $ 154,536 $ 109,128 $ 116,134 Printers.............. 22,915 24,666 26,994 18,859 25,550 ---------- ---------- ---------- ---------- ---------- Total sales......... 126,320 156,533 181,530 127,987 141,684 ---------- ---------- ---------- ---------- ---------- Cost of sales: Laser systems and com- ponents.............. 55,544 71,038 79,850 56,779 61,439 Printers.............. 12,854 13,815 14,955 10,476 14,419 ---------- ---------- ---------- ---------- ---------- Total cost of sales.............. 68,398 84,853 94,805 67,255 75,858 ---------- ---------- ---------- ---------- ---------- Gross profit: Laser systems and com- ponents.............. 47,861 60,829 74,686 52,349 54,695 Printers.............. 10,061 10,851 12,039 8,383 11,131 ---------- ---------- ---------- ---------- ---------- Total gross profit.. 57,922 71,680 86,725 60,732 65,826 ---------- ---------- ---------- ---------- ---------- Operating expenses: Research and product development.......... 17,106 18,400 22,302 16,056 20,869 Selling, general and administrative....... 33,091 39,475 46,169 32,781 40,043 Restructuring, litigation, and other charges.............. -- -- -- -- 5,777 Aquired in-process research and development.......... -- -- 10,600 -- -- ---------- ---------- ---------- ---------- ---------- Total operating ex- penses............. 50,197 57,875 79,071 48,837 66,689 ---------- ---------- ---------- ---------- ---------- Income (loss) from oper- ations................. 7,725 13,805 7,654 11,895 (863) Merger expenses......... -- (1,950) -- -- -- Interest income (ex- pense), net............ (682) 272 464 398 (378) Foreign exchange transaction gains (losses)............... 331 (159) (507) (326) 95 ---------- ---------- ---------- ---------- ---------- Income (loss) before in- come taxes............. 7,374 11,968 7,611 11,967 (1,146) Income taxes ........... 2,803 5,367 2,502 4,030 (404) ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ 4,571 $ 6,601 $ 5,109 $ 7,937 $ (742) ========== ========== ========== ========== ========== Foreign currency translation adjustment............. (256) (139) (305) (193) 312 Change in unrealized gain (loss) on marketable equity securities, net........ -- -- -- -- (501) ---------- ---------- ---------- ---------- ---------- Comprehensive income (loss)................. $ 4,315 $ 6,462 $ 4,804 $ 7,744 $ (931) ========== ========== ========== ========== ========== Basic income (loss) per common share........... $ 0.48 $ 0.56 $ 0.42 $ 0.66 $ (0.06) ========== ========== ========== ========== ========== Diluted income (loss) per common share....... $ 0.44 $ 0.53 $ 0.40 $ 0.63 $ (0.06) ========== ========== ========== ========== ========== Weighted average common shares outstanding and dilutive potential common shares.......... 10,357,287 12,476,237 12,656,763 12,585,418 12,559,869 ========== ========== ========== ========== ==========
See accompanying notes. FIN-3 GENERAL SCANNING INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, ----------------- OCT. 03, 1996 1997 1998 ------- -------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents..................... $17,655 $ 8,418 $ 4,423 Accounts receivable, less allowance of $867, $1,203 and $2,420, respectively.............. 32,213 44,425 38,659 Inventories................................... 26,051 34,051 37,848 Deferred income taxes......................... 4,022 7,857 8,126 Other current assets.......................... 1,581 1,517 2,094 ------- -------- -------- Total current assets........................ 81,522 96,268 91,150 ------- -------- -------- Property, plant and equipment, net.............. 12,922 14,611 15,428 Other assets.................................... 428 437 3,450 Intangible assets, net of amortization of $1,753, $1,863 and $2,161, respectively........ 701 3,726 3,429 ------- -------- -------- $95,573 $115,042 $113,457 ======= ======== ======== Current liabilities: Notes payable to banks and current portion of long-term debt............................... $ 3,030 $ 4,169 $ 6,997 Current portion of deferred compensation...... -- 582 136 Accounts payable.............................. 7,025 12,775 8,822 Accrued expenses.............................. 13,787 16,079 15,527 ------- -------- -------- Total current liabilities................... 23,842 33,605 31,482 ------- -------- -------- Long-term debt, less current portion ........... 1,549 1,530 1,516 Deferred compensation, less current portion..... 1,893 1,678 1,906 Commitments and contingencies (Note 10) Stockholders' equity: Preferred stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding-- none......................................... -- -- -- Common stock, $.01 par value; authorized 15,000,000 shares; issued 12,245,655, 12,791,796 and 13,017,301, respectively...... 122 128 130 Additional paid-in capital.................... 43,657 48,788 50,040 Retained earnings............................. 25,685 30,794 30,052 Cumulative translation adjustment............. (587) (892) (579) Unrealized loss on marketable equity securi- ties, net.................................... -- -- (501) Treasury stock, at cost; 365,995; 366,073 and 366,073, respectively........................ (588) (589) (589) ------- -------- -------- Total stockholders' equity.................. 68,289 78,229 78,553 ------- -------- -------- $95,573 $115,042 $113,457 ======= ======== ========
See accompanying notes. FIN-4 GENERAL SCANNING INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
UNREALIZED TREASURY COMMON STOCK LOSS ON STOCK -------------- ADDITIONAL CUMULATIVE MARKETABLE ------------ $.01PAR PAID-IN RETAINED TRANSLATION EQUITY SHARES VALUE CAPITAL EARNINGS ADJUSTMENT SECURITIES SHARES COST ------ ------- ---------- -------- ----------- ---------- ------ ----- Balance, December 31, 1994................... 9,228 $ 92 $13,286 $14,513 $(192) $ -- (366) $(588) Net income.............. -- -- -- 4,571 -- -- -- -- Issuance of common stock.................. 2,585 26 27,714 -- -- -- -- -- Stock option and warrant exercises, including tax effects............ 155 1 587 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (256) -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, December 31, 1995................... 11,968 119 41,587 19,084 (448) -- (366) (588) Net income.............. -- -- -- 6,601 -- -- -- -- Stock option and warrant exercises, including tax effects............ 278 3 2,070 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (139) -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, December 31, 1996................... 12,246 122 43,657 25,685 (587) -- (366) (588) Net income.............. -- -- -- 5,109 -- -- -- -- Stock option and warrant exercises, including tax effects............ 471 5 3,132 -- -- -- -- -- Fractional shares from View Engineering, Inc. merger................. -- -- -- -- -- -- -- (1) Shares issued in acquir- ing Reel-Tech, Inc. ... 75 1 1,999 -- -- -- -- -- Cumulative translation adjustment............. -- -- -- -- (305) -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, December 31, 1997................... 12,792 $128 $48,788 $30,794 $(892) -- (366) $(589) Net loss (unaudited).... -- -- -- (742) -- -- -- -- Stock option and warrant exercises, including tax effects (unaudited)............ 225 2 1,252 -- -- -- -- -- Unrealized loss on mar- ketable equity securities, net (unaudited)............ -- -- -- -- -- (501) -- -- Cumulative translation adjustment (unaudited)............ -- -- -- -- 313 -- -- -- ------ ---- ------- ------- ----- ----- ---- ----- Balance, October 3, 1998 (unaudited)............ 13,017 $130 $50,040 $30,052 $(579) $(501) (366) $(589) ====== ==== ======= ======= ===== ===== ==== =====
See accompanying notes. FIN-5 GENERAL SCANNING INC. CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS)
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED -------------------------- ------------------ SEP. 27, OCT. 3, 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............. $ 4,571 $ 6,601 $ 5,109 $ 7,937 $ (742) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Acquired in-process research and development............ -- -- 10,600 -- -- Depreciation and amortization............... 1,984 3,180 3,941 2,748 3,353 Deferred compensation....... 319 347 367 320 (218) Deferred income taxes....... (460) (646) (3,837) -- (328) Subordinated note and equity securities received for non- competition agreement and technology license pursuant to litigation settlement..... -- -- -- -- (3,750) Changes in current assets and liabilities, net of effect of Reel-Tech, Inc. acquisition-- Accounts receivable......... (4,194) (9,444) (13,659) (12,413) 5,885 Inventories................. (9,104) (1,119) (6,271) (3,981) (3,748) Other current assets........ (1,111) 2 (42) (278) (456) Accounts payable and accrued expenses................... 4,520 (592) 6,977 5,214 (4,510) ------- ------- -------- -------- -------- Net cash provided by (used in) operating activities......... (3,475) (1,671) 3,185 (453) (4,514) ------- ------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Reel-Tech, Inc.(1)...................... -- -- (12,446) -- -- Additions to property, plant and equipment, net........... (2,596) (6,902) (5,335) (3,143) (3,848) Decrease (increase) in other assets....................... (67) 15 20 41 27 ------- ------- -------- -------- -------- Net cash used in investing activities................... (2,663) (6,887) (17,761) (3,102) (3,821) ------- ------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable to banks and others............. 2,464 13,633 16,662 14,619 30,059 Payments on notes payable to banks and others............. -- (15,567) (15,087) (13,023) (27,059) Net payments on long-term debt......................... (178) (7) (19) (13) (14) Net proceeds from issuance of common stock................. 27,740 -- -- -- -- Stock option and warrant exercises, including tax effects...................... 588 2,073 3,136 1,212 1,254 ------- ------- -------- -------- -------- Net cash provided by financing activities................... 30,614 132 4,692 2,795 4,240 ------- ------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents.................. (143) 386 647 632 100 ------- ------- -------- -------- -------- Increase (decrease) in cash and cash equivalents......... 24,333 (8,040) (9,237) (128) (3,995) Cash and cash equivalents, beginning of period.......... 1,362 25,695 17,655 17,655 8,418 ------- ------- -------- -------- -------- Cash and cash equivalents, end of period.................... $25,695 $17,655 $ 8,418 $ 17,527 $ 4,423 ======= ======= ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest.................... $ 1,064 $ 862 $ 478 $ 317 $ 525 ======= ======= ======== ======== ======== Income taxes................ $ 2,540 $ 4,834 $ 4,485 $ 4,101 $ 502 ======= ======= ======== ======== ======== Net assets and in-process research and development acquired................... $ -- $ -- $(14,446) $ -- $ -- Issuance of common stock.... -- -- 2,000 -- -- ------- ------- -------- -------- -------- Net cash used to acquire business................... $ -- $ -- $(12,446) $ -- $ -- ======= ======= ======== ======== ========
- -------- (1) Acquisition of Reel-Tech, Inc.: See accompanying notes. FIN-6 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 1. SIGNIFICANT ACCOUNTING POLICIES Nature of operations General Scanning Inc. develops, manufactures and sells its products on a worldwide basis through two industry segments: laser systems and components; and printers. The laser systems and components segment provides products for a wide range of applications in the automotive, electronics, semiconductor, medical and aircraft industries. The Company's core technological expertise which is employed in each of these applications is high speed micropositioning and precise power control of lasers, as well as 2D and 3D image processing. The printer segment provides a line of thermal printers for the medical industry. Basis of presentation The consolidated financial statements include the accounts of General Scanning Inc. and its wholly-owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. The Company's 50% joint venture in the United Kingdom, which had been accounted for by the equity method, was fully acquired on December 31, 1995 in a purchase transaction. The acquisition was not material to the Company's operations. In August 1996, the Company acquired View Engineering, Inc. ("View") by issuing 1,437,060 shares of General Scanning Inc. common stock (after giving effect to certain adjustments at the closing) in exchange for all of View's outstanding shares of capital stock, accrued preferred dividends and the net value of warrants and options. View uses laser image processing technology to serve applications requiring precision inspection, measurement and process control. The transaction has been accounted for as a pooling of interests for accounting purposes and, accordingly, the accompanying consolidated financial statements have been retroactively restated to include the accounts of View for all periods presented. Merger expenses include primarily brokers' fees and legal and accounting costs. The following is a reconciliation of certain restated amounts with amounts previously reported.
1995 -------------- (IN THOUSANDS) Sales: General Scanning Inc. .................................... $101,819 View Engineering, Inc. ................................... 24,501 -------- As restated............................................. $126,320 ======== Net income: General Scanning Inc. .................................... $ 6,009 View Engineering, Inc. ................................... (1,438) -------- As restated............................................. $ 4,571 ======== Diluted income per common share: General Scanning Inc. .................................... $ 0.67 View Engineering, Inc. ................................... (0.23) -------- As restated............................................. $ 0.44 ========
On November 28, 1997, the Company acquired the assets of Reel-Tech, Inc. ("Reel-Tech") for $14.4 million, which consisted of $12.4 million of cash and 75,118 shares of General Scanning Inc. common stock. FIN-7 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Reel-Tech is an integrator of electronics components handling systems for marking, lead inspection, parts sorting and parts packaging. The transaction was accounted for as a purchase for accounting purposes and, accordingly, the operations of Reel-Tech have been included in the consolidated financial statements from the date of acquisition. Acquired in-process research and development of $10.6 million charged against income in 1997 results from an independent appraisal of Reel-Tech's intangible assets acquired. Goodwill arising from the transaction of $3.1 million is being amortized on a straight- line basis over a 10 year period. Results of operations would not have changed materially for 1996 or 1997 if Reel-Tech had been acquired on January 1, 1996. Upon consummation of the Reel-Tech acquisition, GSI immediately expensed $10.6 million representing purchased in-process technology that had not yet reached technological feasibility and has no alternative future use. The value was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. The in-process projects were expected to be commercially viable on dates ranging from the end of calendar year 1998 through calendar year 1999. Expenditures to complete these projects were expected to total approximately $3.2 million (see Note 13). Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risks and uncertainties The Company has experienced, and may continue to experience, fluctuations in operating results due to a variety of factors, including: the rate of growth of the markets for laser systems and components and printers; market acceptance of the Company's products and those of its competitors; development and promotional expenses relating to the introductions of new products or new versions of existing products; changes in pricing policies by the Company and its competitors; the timing of the receipt of orders from major customers; the timing of shipments and economic conditions in foreign markets. Certain of the components and materials included in the Company's laser systems and optical products are currently obtained from single source suppliers. There can be no assurance that a disruption of this outside supply would not create substantial manufacturing delays and additional cost to the Company. Cash and cash equivalents Cash and cash equivalents include cash in banks and highly liquid investments having original maturity dates not exceeding three months. The investments are stated at cost, which approximates their fair value. The Company does not believe it is exposed to any significant credit risk on its cash and cash equivalents. FIN-8 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Inventories Inventories, which include materials and conversion costs, are stated at the lower of cost (primarily first-in, first-out) or market. Inventories consist of the following:
DECEMBER 31, --------------- OCTOBER 3, 1996 1997 1998 ------- ------- ----------- (UNAUDITED) (IN THOUSANDS) Purchased parts................................ $12,572 $14,992 $16,396 Work-in-process................................ 5,341 8,127 9,855 Finished goods................................. 8,138 10,932 11,597 ------- ------- ------- Total inventory.............................. $26,051 $34,051 $37,848 ======= ======= =======
Depreciation and amortization Depreciation and amortization are determined by the straight-line and declining-balance methods over the estimated useful lives of the owned assets. Estimated useful lives for buildings and improvements range from 5 to 31 years and for machinery and equipment from 3 to 15 years. Leasehold improvements are amortized over the lesser of their useful lives or the lease term, including option periods expected to be utilized. Foreign currency Assets and liabilities of foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the period-end. Revenues and expenses are translated at the average exchange rate in effect for the period. The resulting translation adjustments are recorded as a component of stockholders' equity. Foreign exchange forward contracts and local currency borrowings are used to reduce the impact of certain foreign currency balance sheet fluctuations. Gains and losses from the forward contracts that are not hedges of firm commitments are accrued at each balance sheet date and included in the Consolidated Statements of Income as foreign exchange transaction gains (losses). At December 31, 1997, the Company had such contracts to exchange foreign currencies (yen, French francs and Deutsche marks) for U.S. dollars totaling $4.2 million maturing through May 1998. The fair value of these contracts was approximately $0.1 million at December 31, 1997, which was based on the present value (using a 6% discount rate) of the difference between the U.S. dollars to be received on these contracts and the U.S. dollar equivalent of the contract price in the foreign currency (at the forward exchange rates at December 31, 1997). To the extent the Company utilizes foreign exchange forward contracts, it purchases them from major financial institutions for terms that have not exceeded six months. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. FIN-9 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impact of adopting SFAS No. 133 on the financial statements and have not determined the timing of or method of the adoption of SFAS No. 133. However, the Statement could increase volatility in earnings and other comprehensive income. Income (loss) per share of common stock In 1997, the Company adopted SFAS No. 128, Earnings per Share, effective December 15, 1997. Amounts reported herein for 1995 and 1996 as "Diluted income per common share" are the same as those reported prior as "Net income per common and common equivalent share outstanding." Basic income (loss) per common share was computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. For diluted income per common share, the denominator also includes dilutive outstanding stock options and warrants determined using the treasury stock method. Common and diluted common shares calculations are:
YEAR ENDED DECEMBER NINE MONTHS 31, ENDED -------------------- ---------------- OCT. SEPT. 27, 3, 1995 1996 1997 1997 1998 ------ ------ ------ --------- ------ (UNAUDITED) (IN THOUSANDS) Weighted average common shares outstand- ing..................................... 9,608 11,774 12,065 11,984 12,560 Dilutive potential common shares......... 749 702 592 601 -- ------ ------ ------ ------ ------ Diluted common shares.................... 10,357 12,476 12,657 12,585 12,560 ====== ====== ====== ====== ====== Options and warrants excluded from di- luted income per common share as their effect would be antidilutive............ 2 76 104 126 926 ====== ====== ====== ====== ======
Revenue recognition The Company recognizes product revenues generally at the later of the time of shipment or when substantially all terms and conditions of the sale have been met. For certain long-term contracts, revenues and profits are recognized using the percentage-of-completion method. The Company provides for estimated warranty costs at the time of revenue recognition. Research and product development expense Expenditures for research and development of products and manufacturing processes are expensed as incurred. Interest Interest income in 1996 and 1997 is net of $845,000 and $498,000 of interest expense, respectively, and interest expense in 1995 is net of $373,000 of interest income. Impairment of long-lived assets The Company periodically assesses the realizability of its long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. FIN-10 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Comprehensive income SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The statement is effective for fiscal years beginning after December 15, 1997 and the Company has adopted the statement in its fiscal quarter ending April 4, 1998. Interim financial statements The financial information as of and for the nine months ended September 27, 1997 and October 3, 1998 is not subject to audit by independent public accountants. The information furnished reflects all adjustments (consisting of only normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of results for the interim periods. It should also be noted that results for the interim periods are not necessarily indicative of the results expected for any other interim period or the full year. 2. INTANGIBLE ASSETS Purchase price in excess of the fair market value of assets acquired, including in-process research and development, is recorded as intangible assets. Such assets arising from the acquisition of the minority interest in Teradyne Laser Systems, Inc. in 1991 are being amortized on a straight-line basis over their estimated useful lives of from 3 to 15 years. Goodwill arising in connection with the acquisition of the assets of Reel-Tech, Inc. in 1997 is being amortized on a straight-line basis over 10 years. Amortization expense was $84,000 in 1995 and 1996 and $109,000 in 1997. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, ------------------ 1996 1997 -------- -------- (IN THOUSANDS) Cost: Land, buildings and improvements....................... $ 10,936 $ 13,134 Machinery and equipment................................ 26,271 28,955 -------- -------- Total cost........................................... 37,207 42,089 Accumulated depreciation............................... (24,285) (27,478) -------- -------- Net property, plant and equipment.................... $ 12,922 $ 14,611 ======== ========
4. ACCRUED EXPENSES Accrued expenses consists of the following:
DECEMBER 31, --------------- 1996 1997 ------- ------- (IN THOUSANDS) Accrued compensation and benefits........................... $ 6,701 $ 8,448 Income taxes................................................ 3,893 3,404 Other....................................................... 3,193 4,227 ------- ------- Total accrued expenses.................................... $13,787 $16,079 ======= =======
FIN-11 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 5. DEBT Notes payable to banks and current portion of long-term debt Notes payable to banks and current portion of long-term debt consists of the following:
DECEMBER 31, ------------- 1996 1997 ------ ------ (IN THOUSANDS) Lines of credit............................................... $3,013 $4,150 Current portion of long-term debt............................. 17 19 ------ ------ Total....................................................... $3,030 $4,169 ====== ======
The Company's revolving credit agreement with its lending bank was amended on November 28, 1997. Under its amended terms, the agreement provides for borrowings of up to $20,000,000 and will expire on December 31, 1999. Interest on outstanding borrowings is charged at the London InterBank Offered Rate (LIBOR) plus 1.25% or prime, determined at the time of borrowing. No such debt was outstanding at December 31, 1997. A commitment fee of 3/8% per annum is paid quarterly in arrears on the unused portion. Among other restrictions, the agreement requires a minimum level of tangible net worth and compliance with certain financial ratios. Under the terms of the revolving credit agreement, the Company's foreign operations may borrow up to a maximum of $6,000,000 under lines of credit. Such debt outstanding at December 31, 1997 was denominated in yen with a weighted average interest rate of 1.6%. Long-term debt Long-term debt consists of a mortgage payable at 10 3/8% interest, collateralized by certain land and building. Interest and principal are payable at $14,906 per month until maturity in February 2000, at which time the remaining principal of $1,507,516 will be payable. The portion of principal payable within one year, which is included in current liabilities, is $19,000. Fair value of financial instruments SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the year-end fair value of significant financial instruments, including debt. The Company believes, based upon current terms, that the carrying value of its debt approximates its fair value. 6. DEFERRED COMPENSATION Officers and certain employees may defer payment of their compensation until termination of employment or later. Interest on the outstanding balance is credited quarterly at the prime rate. The portion of deferred compensation estimated to be due within one year is included in current liabilities. 7. STOCKHOLDERS' EQUITY Recapitalization In August 1995, the Company's stockholders voted to amend its Articles of Organization to change the par value of the Company's common stock from $1.00 to $.01. Subsequently, the Board of Directors authorized FIN-12 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) a 5-for-1 stock split, effected as a dividend, of the Company's common stock. All share and per share amounts of common stock for all periods presented have been retroactively adjusted to reflect the change in par value and the stock split. Preferred stock In August 1995, the stockholders approved an amendment to the Articles of Organization which authorizes 1,000,000 shares of preferred stock, $.01 par value. The preferred stock is divisible and issuable into one or more series. The rights and preferences of the different series may be established by the Board of Directors without further action by the stockholders. The Board of Directors is authorized, with respect to each series, to fix and determine, among other things, (i) the dividend rate, (ii) the liquidation preference, (iii) whether such shares will be convertible into, or exchangeable for, any other securities and (iv) whether such shares will have voting rights and, if so, the conditions under which such shares will vote as a separate class. Shareholder rights plan On April 30, 1997, the Board of Directors adopted a Shareholders Rights Plan ( the "Plan") and declared a dividend distribution, payable on May 1, 1997, of one preferred share purchase right under the Plan (each a "Right") for each outstanding share of common stock of the Company. Under the Plan, each Right, when exercisable, entitles the holder to purchase from the Company one ten- thousandth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $70 per one ten-thousandth of a Preferred Share, subject to adjustment and to certain exceptions. The value of the one ten-thousandth interest in a share of Preferred Stock purchasable upon exercise of each Right is intended to approximate the value of one share of common stock. The rights are not exercisable and cannot be transferred separately from the common stock until the first to occur of (a) 10 business days after a public announcement that a person or group of affiliated or associated persons (excluding certain persons and groups) has acquired beneficial ownership of 20% or more of the outstanding common stock (the date of such an announcement, a "Shares Acquisition Date"), or (b) 10 business days (subject to extension by the Board) after the start or announcement of a tender or exchange offer, the consummation of which would result in beneficial ownership by a person or group of 20% or more of the outstanding common stock. Prior to the earlier of (a) the tenth day after the Shares Acquisition Date, or (b) the expiration of the Rights, the Company may under certain circumstances redeem the Rights at a price of $0.001 per Right. In certain cases a Right will entitle the holder to purchase common stock of the Company or an acquiring company having a value of two times the exercise price of the Right. Under certain conditions the Company may exchange the Rights for common stock or preferred stock. The Rights expire on May 1, 2007 unless they are redeemed by the Company. So long as the Rights are not transferable separately from the common stock, the Company will issue one Right with each new share of common stock issued. The Rights could have certain anti-takeover effects, in that they would cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors. Stock options The 1992 Stock Option Plan, as amended in August 1995, provides for the issuance of nonqualified and incentive stock options to purchase up to 1,000,000 shares of the Company's common stock, of which 175,611 FIN-13 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) were available for future grant at December 31, 1997. Under this plan, options are granted at the fair value per share as determined by the Board of Directors at the date of grant. Outstanding options vest over periods of three or four years beginning on the date of grant and expire ten years from the date of grant. The Company's 1981 Stock Option Plan has terminated; however, options to purchase 197,160 shares of common stock were outstanding under the 1981 Plan at December 31, 1997. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, which defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation costs for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. ("APB") 25. Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share as if the fair value based method of accounting defined in the Statement had been applied. The Company has elected to account for its stock-based compensation plans under APB 25, under which immaterial amounts of compensation have been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts below. Because SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation costs may not be representative of that to be expected in future years.
1995 1996 1997 ------ ------ ------ Net income (thousands): As reported........................................... $4,571 $6,601 $5,109 Pro forma............................................. $4,483 $6,354 $4,410 Diluted income per share: As reported........................................... $ 0.44 $ 0.53 $ 0.40 Pro forma............................................. $ 0.43 $ 0.51 $ 0.35
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 5.5% in 1997 (6.3% in 1995 and 1996), expected dividend yield of zero, expected lives of 4 years upon vesting and expected volatility of 50%. FIN-14 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Stock option activity for the years ended December 31, 1995, 1996 and 1997 is presented below. The weighted average fair value of options granted was $4.47 in 1996 and $6.74 in 1997.
WTD. AVG. OPTIONS EX. PRICE --------- --------- Outstanding at December 31, 1994........................ 1,120,660 $2.38 Granted................................................. 116,064 6.30 Exercised............................................... (155,000) 2.29 Canceled................................................ (750) 2.36 --------- ----- Outstanding at December 31, 1995........................ 1,080,974 2.81 Granted................................................. 166,250 14.33 Exercised............................................... (212,810) 2.32 Canceled................................................ (6,250) 7.65 --------- ----- Outstanding at December 31, 1996........................ 1,028,164 4.75 Granted................................................. 287,000 14.78 Exercised............................................... (449,523) 2.71 Canceled................................................ (11,065) 10.97 --------- ----- Outstanding at December 31, 1997........................ 854,576 $9.10 ========= ===== Exercisable at December 31, 1997........................ 462,335 $5.87 ========= =====
Additional information regarding the options outstanding at December 31, 1997 follows:
RANGE OF NO. OF WTD. AVG. WTD. AVG. NUMBER WTD. AVG. EXERCISE PRICES OPTIONS EXERCISE PRICE REMAINING LIFE EXERCISABLE EXERCISE PRICE --------------- ------- -------------- -------------- ----------- -------------- $1.75-$2.36............. 241,910 $ 2.29 2.8 years 227,660 $ 2.29 $2.50-$12.09............ 212,956 $ 5.70 7.0 years 131,515 $ 4.82 $13.38.................. 222,910 $13.38 9.4 years 41,390 $13.38 $15.00-$32.63........... 176,800 $17.10 9.0 years 61,770 $16.29
Warrants The Company has issued warrants for the purchase of common stock to the nonemployee members of the Board of Directors. Warrants issued through 1995 vested over periods of three or four years, beginning on the date of grant, and expire ten years from the date of grant. In 1996, 65,000 of such warrants were exercised at prices ranging from $1.75 to $2.50 per share and in 1997, 17,500 of such warrants were exercised at $1.75 per share. At December 31, 1997, 37,500 of such warrants, all of which are exercisable, remain outstanding at exercise prices ranging from $2.36 to $2.50 per share. During 1995, the stockholders adopted the 1995 Directors' Warrant Plan and reserved 100,000 shares for future issuance of warrants to nonemployee Directors under the Plan. The exercise price of such warrants is the fair market value per share as determined by a committee of the Board of Directors at the date of grant. The warrants are subject to vesting as determined by such committee and expire ten years from the date of grant. In 1996, 8,000 of such warrants were granted at an exercise price of $20.75 per share and in 1997 8,000 such warrants were granted at an exercise price of $13.00 per share. In 1997, 4,000 warrants were exercised at prices ranging from $13.00 to $20.75 per share. At December 31, 1997, 12,000 of such warrants, all of which are exercisable, remain outstanding at exercise prices ranging from $13.00 to $20.75 per share. FIN-15 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) 8. BENEFIT PLANS Employee Stock Ownership Plan Under the Employee Stock Ownership Plan (ESOP) established in 1989, Company contributions were in the form of cash or common stock and were allocated to eligible employees based on their relative compensation. The ESOP was terminated effective December 31, 1995 and the plan assets have been distributed to plan participants. Company contributions to the ESOP were $367,000 in 1995. Defined contribution plans The Company has an employee savings defined contribution plan under the provisions of Section 401(k) of the Internal Revenue Code under which contributions may be made by its domestic employees. The Company matches the contributions of participating employees on the basis of the percentages specified in the plan. Company matching contributions to the plan were $488,000, $1,080,000 and $1,379,000 for the years ended December 31, 1995, 1996 and 1997, respectively. 9. INCOME TAXES The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the currently enacted tax rates. The components of income before income taxes for the years ended December 31 are as follows:
YEAR ENDED DECEMBER 31, --------------------- 1995 1996 1997 ------ ------- ------ (IN THOUSANDS) United States.......................................... $5,245 $10,348 $3,860 Foreign................................................ 2,129 1,620 3,751 ------ ------- ------ Total................................................ $7,374 $11,968 $7,611 ====== ======= ======
The provision for income taxes for the years ended December 31 consists of the following:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1996 1997 ------ ------ ------ (IN THOUSANDS) Current: Federal and State.................................. $2,200 $5,209 $4,165 Foreign............................................ 1,292 804 2,174 ------ ------ ------ Total current.................................... 3,492 6,013 6,339 Deferred............................................. (689) (646) (3,837) ------ ------ ------ Total............................................ $2,803 $5,367 $2,502 ====== ====== ======
FIN-16 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) The income tax provision for the years ended December 31 is different from that which would be computed by applying the U.S. federal income tax rate to income before taxes as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 ------- ------- -------- U.S. federal statutory tax rate............. 34.0 % 34.0 % 34.0 % State income taxes, net..................... 3.9 3.9 6.0 Foreign sales corporation................... (4.1) (3.0) (5.0) Research and development credits............ (6.6) (3.3) (10.5) Foreign tax rate differential............... 1.0 2.1 12.5 View Engineering merger expenses not deduct- ible for tax purposes...................... -- 4.0 -- Change in valuation allowance for View pre- acquisition losses......................... -- 6.8 (6.0) Other, net.................................. 9.8 0.3 1.9 ------- ------- -------- Effective tax rate........................ 38.0 44.8 32.9 ======= ======= ========
Significant components of deferred income tax assets as of December 31 are as follows:
DECEMBER 31, ---------------- 1996 1997 ------- ------- (IN THOUSANDS) Deferred compensation...................................... $ 700 $ 814 Vacation and sick pay benefit.............................. 496 576 Inventory valuation........................................ 2,020 1,577 Warranty costs............................................. 299 357 Depreciation............................................... (298) (260) Operating loss and tax credit carryforwards................ 2,673 2,248 Acquired in-process research and development............... -- 3,816 Accounts receivable valuation.............................. 210 356 Other...................................................... 595 621 ------- ------- Total deferred income tax assets......................... 6,695 10,105 Less valuation allowance................................... (2,673) (2,248) ------- ------- Net deferred income tax assets........................... $ 4,022 $ 7,857 ======= =======
The Company has provided a valuation allowance on the net operating loss carryforwards and tax credits related to its wholly-owned subsidiary, View Engineering, Inc., due to the uncertainty of their realizability as a result of limitations on their utilization in accordance with certain tax laws and regulations. The operating loss carryforwards expire from 2005 through 2011 and the tax credits expire in 1999 and 2000. View's US federal operating loss carryforwards and tax credit carryforwards were approximately $4.3 million and $0.7 million, respectively, as of December 31, 1997. Utilization of the operating loss carryforwards and tax credit carryforwards is limited to approximately $1.2 million per year. 10. COMMITMENTS AND CONTINGENCIES Operating leases The Company leases certain equipment and facilities under operating lease agreements that expire through 2007. The facility leases require the Company to pay real estate taxes and other operating costs. For the years ended December 31, 1995, 1996 and 1997, lease expense was approximately $1,500,000, $1,787,000 and $1,948,000, respectively. FIN-17 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Minimum lease payments under operating leases expiring subsequent to December 31, 1997 are:
(IN THOUSANDS) -------------- 1998........................................................ $2,219 1999........................................................ 1,834 2000........................................................ 1,432 2001........................................................ 1,020 2002........................................................ 847 Thereafter.................................................. 2,326 ------ Total minimum lease payments.............................. $9,678 ======
Recourse receivables In Japan, where it is customary to do so, the Company discounts certain notes receivable at a bank with recourse. The Company's maximum exposure was $1,858,000 at December 31, 1997. The fair value of the recourse receivables was not determinable. The Company received cash proceeds relating to the discounted receivables of $7,188,000, $4,144,000 and $5,262,000 during the years ended December 31, 1995, 1996 and 1997, respectively. Legal proceedings and disputes In August 1996, Robotic Vision Systems, Inc. ("RVSI") commenced an action against General Scanning in the United States District Court for the Eastern District of New York. RVSI claimed that General Scanning improperly obtained proprietary information from RVSI for the purpose of obtaining ownership of View Engineering, Inc. and of thwarting RVSI's attempts to acquire View Engineering. The plaintiff was seeking compensatory and punitive damages in an unspecified amount. In September 1997 and January 1998, that same Court issued a series of decisions on General Scanning's motion for summary judgment. Claims were dismissed for: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) violations under the Massachusetts Unfair and Deceptive Business Practices Statute. Claims were not dismissed for: (1) tortious interference with business relations, (2) fraud of confidential business information, and (3) unfair competition in contravention of New York common law. The claims not dismissed, which the Company believes are without merit and is defending vigorously, are expected to result in a jury trial during 1998 (see Note 13). Voxel, a prior customer of the Company, asserted in December 1996 that the Company may not have met certain product specifications. The Company believes its product has met the necessary specifications. Pursuant to the dispute resolution section in the Development Agreement between Voxel and the Company, the matter had been submitted to binding arbitration. Net accounts receivable at December 31, 1996 and 1997 included approximately $931,000 and $1,012,000, respectively, of billed and unbilled amounts due from Voxel. Management believes its case is meritorious and that the amounts due from Voxel are recoverable (see Note 13). The Company has certain other contingent liabilities resulting from litigation and claims incidental to its business, including three patent infringement suits relating to products currently sold or expected to be sold by the Company. Management believes that the probable resolution of such contingencies will not have a materially adverse effect on the Company's results of operations or financial position. FIN-18 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO MANDATED PERIODS) 11. RELATED PARTY TRANSACTION In 1992, the Company's Board of Directors authorized a loan to an officer in the amount of $160,000 as a reimbursement for certain relocation expenses. Under the agreement, as amended, the loan has been forgiven and charged as compensation expense on a pro-rata basis over the five years ending December 31, 1997. 12. SEGMENT INFORMATION Industry segment reporting Information with respect to the Company's industry segments is set forth in the table below.
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 -------- -------- -------- (IN THOUSANDS) Sales to unaffiliated customers: Laser systems and components.................... $103,564 $131,867 $154,536 Printers........................................ 22,915 24,666 26,994 Intersegment elimination........................ (159) -- -- -------- -------- -------- Total......................................... $126,320 $156,533 $181,530 ======== ======== ======== Income from operations: Laser systems and components(1)................. $ 6,330 $ 11,967 $ 6,075 Printers........................................ 3,845 4,321 5,034 Corporate expenses.............................. (2,450) (2,483) (3,455) -------- -------- -------- Total......................................... $ 7,725 $ 13,805 $ 7,654 ======== ======== ======== Identifiable assets: Laser systems and components.................... $ 55,556 $ 64,836 $ 91,923 Printers........................................ 5,081 8,150 6,844 Corporate assets(2)............................. 29,071 22,587 16,275 -------- -------- -------- Total......................................... $ 89,708 $ 95,573 $115,042 ======== ======== ======== Capital expenditures: Laser systems and components.................... $ 2,155 $ 5,704 $ 5,244 Printers........................................ 441 1,198 91 -------- -------- -------- Total......................................... $ 2,596 $ 6,902 $ 5,335 ======== ======== ======== Depreciation and amortization: Laser systems and components.................... $ 1,699 $ 2,773 $ 3,459 Printers........................................ 285 407 482 -------- -------- -------- Total......................................... $ 1,984 $ 3,180 $ 3,941 ======== ======== ========
- -------- (1) Includes $10,600 charge for acquired in-process research and development in 1997. (2) Consists primarily of cash, cash equivalents and deferred tax assets. FIN-19 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Geographic segment information Information with respect to the Company's geographic operations is set forth in the table below.
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 -------- -------- -------- (IN THOUSANDS) Sales to unaffiliated customers: US, including export............................ $ 84,621 $107,033 $118,985 Europe.......................................... 12,461 21,300 23,554 Asia............................................ 29,238 28,200 38,991 -------- -------- -------- Total......................................... $126,320 $156,533 $181,530 ======== ======== ======== Transfers to affiliates........................... $ 25,188 $ 31,800 $ 47,102 ======== ======== ======== Export sales: From US......................................... $ 17,245 $ 15,200 $ 17,300 ======== ======== ======== Income from operations: US, including export(1)......................... $ 7,884 $ 13,623 $ 7,299 Europe.......................................... 456 898 2,081 Asia............................................ 1,835 1,767 1,729 Corporate....................................... (2,450) (2,483) (3,455) -------- -------- -------- Total......................................... $ 7,725 $ 13,805 $ 7,654 ======== ======== ======== Identifiable assets: US.............................................. $ 48,935 $ 57,803 $ 75,184 Europe.......................................... 4,845 5,925 9,356 Asia............................................ 5,952 10,588 16,757 Corporate(2).................................... 29,976 21,257 13,745 -------- -------- -------- Total......................................... $ 89,708 $ 95,573 $115,042 ======== ======== ========
- -------- (1) Includes $10,600 charge for acquired in-process research and development in 1997. (2) Consists primarily of cash, cash equivalents and deferred tax assets. 13. SUBSEQUENT EVENTS (UNAUDITED) Restructuring, Litigation and Other Charges The $5,777,000 restructuring, litigation and other charges in 1998 includes $3,670,000 relating to the settlement with RVSI and charges of $2,107,000 relating to a reduction in the Company's cost structure. Litigation with RVSI, arising from the Company's acquisition of View in August 1996, was settled in June 1998. RVSI claimed that the Company used improperly obtained information in connection with the acquisition (see Note 10). The Company denied all such claims. Under the terms of the settlement, the Company has agreed not to compete and has granted an exclusive technology license to RVSI in the field of semiconductor interconnection inspection. RVSI agreed not to compete in the field of solder paste inspection. Costs associated with the RVSI settlement were $7,420,000, including unsaleable inventory of $5,130,000, legal fees of $1,290,000, employee severance of $210,000, leased facility costs of $188,000 and other related FIN-20 GENERAL SCANNING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) costs of $602,000. Partially offsetting these costs is $3,750,000 consideration RVSI agreed to pay the Company for the non-competition agreement and technology license. The consideration consists of a subordinated note of $2,250,000 and 271,493 shares of RVSI common stock valued at $1,500,000 at the settlement date. The subordinated note bears interest at the prime rate with quarterly pro-rata principal payments from September 2001 through June 2003. The Company considers the common stock to be available-for-sale and, accordingly, is recording changes in its fair market value, net of tax effects, as a component of stockholders' equity. The total amount of consideration for RVSI has been included in Other Assets in the accompanying unaudited balance sheet as of October 3, 1998. In addition, as a result of the RVSI settlement, the Company has not achieved the expected economic benefits from the purchase of Reel-Tech's in-process research and development. The Company's original objective in acquiring the assets of Reel-Tech was to implement a strategy of combining certain functions performed at the back end of the semiconductor component manufacturing process, specifically marking, inspection and packaging. The Company planned to combine its laser marking capability and View Engineering's vision inspection technology with Reel-Tech's new component parts handling/packaging systems. The settlement agreement with RVSI limits the Company's ability to offer certain of these features to its customers. As a result, the in-process research and development projects at Reel-Tech were discontinued. The resulting impact is included in the Company's restructuring charges recorded during 1998. The Company does not expect any future revenue or cash flow from Reel-Tech's in- process research and development. Charges of $2,107,000 relating to a reduction in the Company's cost structure include $1,050,000 of leased facility costs and $1,057,000 of employee severance. Merger Agreement On October 27, 1998 the Company and Lumonics Inc. ("Lumonics") entered into an Agreement and Plan of Merger (the "Agreement") to combine the companies in a merger of equals transaction. Pursuant to the terms of the Agreement, a wholly- owned subsidiary of Lumonics will be merged with and into the Company and each outstanding share of the Company will be exchanged for 1.347 shares of GSI Lumonics stock. Upon consummation of the transaction, the stockholders of General Scanning will own approximately 50% of the combined company. Consummation of the transaction is subject to the satisfaction of certain conditions to closing, including regulatory approval and stockholder approval of both companies. The merger is expected to close during the first quarter of 1999. Other In May 1998, a three-member panel of the American Arbitration Association decided in favor of the Company with respect to the dispute with Voxel (see Note 10) and awarded the Company $1.9 million plus applicable post-judgement interest. Following the arbitration decision Voxel filed a voluntary petition under Chapter 11, which was subsequently converted to a proceeding under Chapter 7 of the Federal Bankruptcy Code. As of October 3, 1998, the amount due from Voxel of approximately $1,012,000 has been fully reserved for by the Company. During 1998, a party commenced legal proceedings in the U.S. District Court for the District of Arizona against a number of U.S. semiconductor manufacturing companies, including companies that have purchased systems from the Company. The complaint alleges that methods used by these manufacturers infringe patents held by this party. While the Company is not named as a defendant in any of the proceedings, several of the Company's customers are involved. A few of these customers have notified the Company of the allegations and have asked the Company about the actions the Company plans to take in light of patent indemnification provisions under which the Company's equipment was purchased for the operations involved in the alleged infringements. FIN-21 AUDITORS' REPORT To the Board of Directors of Lumonics Inc. We have audited the consolidated balance sheets of Lumonics Inc. as at December 31, 1997 and 1996 and the consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 in accordance with accounting principles generally accepted in the United States of America. On February 9, 1998 we reported without reservation to the stockholders on the Company's consolidated financial statements prepared in accordance with accounting principles generally accepted in Canada. Ernst & Young LLP Ottawa, Canada, February 9, 1998. FIN-22 LUMONICS INC. (INCORPORATED UNDER THE LAWS OF ONTARIO) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF U.S. DOLLARS)
AS OF DECEMBER 31, ---------------- 1997 1996 ------- ------- ASSETS ------ Current Cash and cash equivalents..................................... $56,828 $29,338 Short-term investments (note 13).............................. 12,325 12,071 Accounts receivable (notes 2 and 6)........................... 45,096 25,662 Due from related party (note 12).............................. 5,328 3,475 Inventories (notes 3 and 6)................................... 35,369 32,983 Other assets (note 5)......................................... 4,783 4,444 Current portion of swap contracts (note 13).................. 564 900 ------- ------- Total current assets.......................................... 160,293 108,873 Fixed assets (note 4)......................................... 23,960 19,755 Long-term portion of swap contracts (note 13)................. 1,128 2,702 Other assets (note 5)......................................... 3,799 4,272 ------- ------- 189,180 135,602 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness (note 6).................................... 15,213 7,473 Accounts payable.............................................. 8,145 4,703 Accrued compensation and benefits............................. 3,657 3,911 Other accruals (note 17)...................................... 16,178 16,001 Income taxes payable.......................................... 3,125 1,349 Current portion of long-term debt (note 7).................... 3,080 3,455 ------- ------- Total current liabilities..................................... 49,398 36,892 Long-term debt (note 7)....................................... 6,159 10,365 ------- ------- Total liabilities............................................. 55,557 47,257 ------- ------- Commitments and contingencies (notes 13 and 14) Stockholders' equity (note 8) Capital stock (1997--17,101,000; 1996--14,714,000)............ 139,178 101,619 Deficit....................................................... (1,448) (13,360) Accumulated other comprehensive income........................ (4,107) 86 ------- ------- Total stockholders' equity.................................... 133,623 88,345 ------- ------- 189,180 135,602 ======= =======
See accompanying notes FIN-23 LUMONICS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
ACCUMULATED CAPITAL STOCK OTHER --------------- COMPREHENSIVE COMPREHENSIVE SHARES AMOUNT DEFICIT INCOME INCOME TOTAL # $ $ $ $ $ ------- ------- ------- ------------- ------------- ------- (000'S) BALANCE, DECEMBER 31, 1994................... 10,774 67,473 (33,142) (1,013) 33,318 Net income.............. 8,036 8,036 8,036 Issuance of capital stock --public offering (net of issuing costs).... 2,871 28,866 28,866 --stock options....... 176 515 515 Foreign currency translation adjustment............. (1,293) (1,293) (1,293) ------ ------- ------- ------ ------ ------- BALANCE, DECEMBER 31, 1995................... 13,821 96,854 (25,106) (2,306) 6,743 69,442 ====== Net income.............. 11,746 11,746 11,746 Issuance of capital stock --stock options....... 893 4,765 4,765 Foreign currency translation adjustment............. 2,392 2,392 2,392 ------ ------- ------- ------ ------ ------- BALANCE, DECEMBER 31, 1996................... 14,714 101,619 (13,360) 86 14,138 88,345 ====== Net income.............. 11,912 11,912 11,912 Issuance of capital stock --public offering (net of issuing costs).... 2,000 35,658 35,658 --stock option........ 387 1,901 1,901 Foreign currency translation adjustment............. (4,193) (4,193) (4,193) ------ ------- ------- ------ ------ ------- BALANCE, DECEMBER 31, 1997................... 17,101 139,178 (1,448) (4,107) 7,719 133,623 ====== ======= ======= ====== ====== =======
See accompanying notes FIN-24 LUMONICS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------- 1997 1996 1995 $ $ $ ------- ------- ------- Sales................................................ 177,328 153,367 125,268 Cost of goods sold................................... 111,406 92,368 77,237 ------- ------- ------- Gross profit......................................... 65,922 60,999 48,031 Selling, general and administrative expenses......... 37,991 33,380 28,769 Research and development costs (note 9).............. 11,993 11,872 7,068 ------- ------- ------- Income before the following:......................... 15,938 15,747 12,194 Interest expense (note 7)............................ 1,104 1,213 1,228 Interest income...................................... (2,152) (1,847) (374) ------- ------- ------- Income before income taxes........................... 16,986 16,381 11,340 Provision for income taxes (note 10)................. 5,074 4,635 3,304 ------- ------- ------- Net income for the year.............................. 11,912 11,746 8,036 ======= ======= ======= Net income per common share (note 8) -- Basic........................................... 0.75 0.83 0.70 ------- ------- ------- -- Weighted average shares (000's)................. 15,989 14,077 11,521 ------- ------- ------- -- Diluted......................................... 0.72 0.78 0.65 ------- ------- ------- -- Adjusted weighted average shares (000's)........ 16,454 15,079 12,457 ------- ------- -------
See accompanying notes FIN-25 LUMONICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [IN THOUSANDS OF U.S. DOLLARS]
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 $ $ $ -------- -------- -------- OPERATING ACTIVITIES Net income for the year......................... 11,912 11,746 8,036 Items not affecting cash Depreciation................................... 3,607 3,070 2,862 Amortization of intangible assets.............. 400 380 384 Deferred income taxes.......................... (434) (732) 994 Exchange loss (gain)........................... 241 13 (234) Net change in non-cash operating assets and lia- bilities (note 11)............................. (21,011) 686 (5,503) -------- -------- -------- Cash provided by (used in) operating activi- ties........................................... (5,285) 15,163 6,539 -------- -------- -------- INVESTING ACTIVITIES Additions to fixed assets....................... (8,706) (5,145) (6,745) Maturity of short-term investments.............. 79,351 38,136 3,499 Purchase of short-term investments.............. (80,185) (20,835) (32,733) Proceeds on disposal of fixed assets............ 294 548 1,349 Additions to patents and technology............. (53) (84) (26) Decrease in other long-term assets.............. 10 1,523 102 Acquisition of assets of Hobart Laser Products Inc. (note 16)................................. -- (4,356) -- -------- -------- -------- Cash provided by (used in) investing activi- ties........................................... (9,289) 9,787 (34,554) -------- -------- -------- FINANCING ACTIVITIES Issue of share capital (net of issue costs)..... 37,560 4,765 29,381 Repayment of long-term debt..................... (2,527) (2,561) (5,000) Bank indebtedness............................... 7,741 (151) 6,580 -------- -------- -------- Cash provided by financing activities........... 42,774 2,053 30,961 -------- -------- -------- Effect of foreign currency translation on cash and cash equivalents........................... (710) (1,383) 278 -------- -------- -------- Net increase in cash and cash equivalents....... 27,490 25,620 3,224 Cash and cash equivalents, beginning of year.... 29,338 3,718 494 -------- -------- -------- Cash and cash equivalents, end of year.......... 56,828 29,338 3,718 ======== ======== ========
See accompanying notes FIN-26 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS) 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Lumonics Inc. designs, develops, manufactures and markets laser-based advanced manufacturing systems. The systems are used in highly automated environments for applications such as cutting, drilling, welding, marking and coding a wide range of products and materials. The Company's principal markets are in Canada, United States, Europe and Asia-Pacific. BASIS OF PRESENTATION AND CHANGE IN REPORTING CURRENCY These consolidated financial statements have been prepared by the Company in United States (U.S.) dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"), applied on a consistent basis. The Company has historically prepared and filed its consolidated financial statements in Canadian dollars. In these consolidated financial statements, the Company has adopted the U.S. dollar as its reporting currency for presentation. Accordingly, these consolidated financial statements have been restated in accordance with SFAS No. 52, Foreign Currency Translation. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents are investments held to maturity and have original maturities of three months or less. Cash equivalents consist principally of Canadian commercial paper and banker's acceptances. Cash equivalents are stated at cost, which approximates their fair value. SHORT-TERM INVESTMENTS Short-term investments consist principally of Government of Canada Treasury Bills and banker's acceptances, with original maturities greater than three months. The Company has classified these investments as available-for-sale securities in accordance with SFAS 115, and carries them at fair value. Any unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a component of accumulated other comprehensive income until realized. INVENTORIES Finished goods are valued at the lower of average cost and net realizable value. Work-in-process and raw materials are valued at the lower of average cost and replacement cost. FIN-27 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) FIXED ASSETS Fixed assets are stated at cost. Buildings, machinery and equipment are predominantly amortized using the declining balance method at the following rates: Buildings......................................................... 5% Machinery and equipment........................................... 20-33%
GOODWILL Goodwill consists of the excess of cost over acquired net identifiable assets for business purchase combinations. The amortization period for goodwill is determined on a separate basis for each acquisition. Goodwill is amortized on a straight-line basis over periods ranging from a minimum of two to a maximum of ten years from the date of acquisition. The Company assessed the recoverability of its goodwill by determining whether the amortization of goodwill over the remaining lives can be recovered from future discounted operating results. At this time, the company expects full recoverability. PATENTS AND TECHNOLOGY Patents and purchased technology are stated at cost and are amortized on a straight-line basis over the expected life of the asset, up to 17 years. The Company periodically assesses the recoverability of its patents and technology assets in accordance with SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of. REVENUE RECOGNITION The Company recognizes substantially all of its revenue at date of shipment or when services are provided. Where applicable, a percentage of completion basis is used for certain long term contracts. The Company accrues potential product liability and warranty claims, based on the Company's claim experience, when revenue is recognized. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense as incurred and are reduced by related non-refundable government assistance. FOREIGN CURRENCY TRANSLATION The financial statements of the parent company and its non-U.S. subsidiaries have been translated into U.S. dollars in accordance with the Financial Accounting Standards Board (FASB) Statement No. 52, Foreign Currency Translation. All balance sheet amounts have been translated from foreign currencies into U.S. dollars at the exchange rates in effect at year end. Income statement amounts have been translated using the weighted average exchange rate for the applicable year. Gains and losses resulting from changes in exchange rates from year to year have been reported as a separate component of accumulated other comprehensive income. FIN-28 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) DERIVATIVE FINANCIAL INSTRUMENTS Foreign exchange forward contracts and local currency borrowings are used to reduce the impact of certain foreign currency balance sheet fluctuations and foreign currency denominated sales. Gains and losses from forward contracts that are not hedges of firm commitments are accrued at each balance sheet date and included in the Consolidated Statements of Operations as foreign exchange transactions gains (losses). In certain circumstances, the Company uses currency and interest rate swap contracts to manage foreign currency exposures and interest rate risk. Payments and receipts under such swap contracts are recognized as adjustments to interest expense on a basis that matches them with the fluctuations in the interest receipts and payments under floating rate financial assets and liabilities. INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between financial reporting and the income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board recently issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which will be effective for the Company's December 31, 1998 year end. The Company has not determined the impact of this pronouncement on its consolidated financial statements. 2. ACCOUNTS RECEIVABLE Accounts receivable are net of an allowance for doubtful accounts of $191,000 and $221,000 as of December 31, 1997 and 1996, respectively. Accounts receivable include unbilled receivables on long-term contracts of $3,367,000 and $1,775,000 as of December 31, 1997 and 1996, respectively. 3. INVENTORIES
1997 1996 $ $ ------ ------ Raw materials................................................ 9,082 11,540 Work-in-process.............................................. 12,138 8,906 Finished goods............................................... 14,149 12,537 ------ ------ 35,369 32,983 ====== ======
FIN-29 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) 4. FIXED ASSETS
1997 1996 --------------------- --------------------- ACCUMULATED ACCUMULATED COST AMORTIZATION COST AMORTIZATION $ $ $ $ ------- ------------ ------- ------------ Land............................. 2,117 -- 2,201 -- Buildings........................ 15,939 3,986 12,024 3,532 Machinery and equipment.......... 26,634 16,744 23,759 14,697 ------- ------ ------- ------ 44,690 20,730 37,984 18,229 Accumulated amortization......... (20,730) (18,229) ------- ------- Net book value................... 23,960 19,755 ======= =======
5. OTHER ASSETS
1997 1996 $ $ ----- ----- Short term other assets Prepaid expenses............................................. 1,677 2,051 Deferred income taxes........................................ 3,106 2,393 ----- ----- 4,783 4,444 ----- ----- Long term other assets Due from an employee......................................... 52 60 Patents and technology, net of accumulated amortization of $1,125 (1996--$868)......................................... 3,443 3,748 Goodwill, net of accumulated amortization of $1,084 (1996-- $990)....................................................... 304 464 ----- ----- 3,799 4,272 ===== =====
6. BANK INDEBTEDNESS The Company has credit facilities of approximately $21 million which are denominated in Canadian dollars, US dollars and Pound Sterling (1996--$20 million). Actual bank indebtedness is due on demand and bears interest based on prime which resulted in an effective average rate of 8% for fiscal 1997 (1996-- 6%). Accounts receivable and inventories have been pledged as collateral for the bank indebtedness under general security agreements. The borrowings require, among other things, the Company to maintain specified financial ratios and conditions. As at December 31, 1997, the Company had unused and available demand lines of credit amounting to approximately $3 million (1996--$10 million). 7. LONG-TERM DEBT The Company has a long term loan from Sumitomo Heavy Industries, Ltd., a significant shareholder, all of which is repayable in Japanese yen. The foreign exchange rates as at December 31, 1997 were 1 $Cdn to 90.5 yen (1996--1 $Cdn to 84.5 yen) and 1 $US to 129.9 yen (1996--1 $U.S. to 115.8 yen). FIN-30 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) The Company has entered into currency and interest rate swap contracts which oblige it to pay Canadian dollars and receive Japanese yen, and pay U.S. dollars and receive Japanese yen, on the dates principal and interest payments are due. The terms of these contracts are described in Note 13. Long term debt is comprised of:
1997 1996 $ $ ------ ------ Long term debt: Sumitomo Heavy Industries, Ltd., Japanese yen term loans, interest payable semi-annually at 6.30% with semi-annual principal payments, maturing October 31, 2000.............. 9,239 13,820 Less current portion........................................ (3,080) (3,455) ------ ------ 6,159 10,365 ====== ======
Interest on long-term debt during the year amounted to $464,000 (1996-- $640,000; 1995--$1,228,500). Payments of long-term debt are as follows:
$ ----- 1998............................................................... 3,080 1999............................................................... 3,080 2000............................................................... 3,079 ----- 9,239 =====
8. STOCKHOLDERS' EQUITY ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income comprises unrealized foreign currency translation gains and losses. For the year end December 31, 1997, the Company has an unrealized loss of $4,193,000, (1996--gain of $2,392,000; 1995--loss of $1,293,000) primarily as a result of fluctuations of the U.S. dollar against the Canadian dollar and pound sterling. CAPITAL STOCK The authorized capital of the Company consists of an unlimited number of common shares without nominal or par value. In fiscal 1994, the shareholders approved a reduction in the stated legal capital and deficit totalling $29,575,000. The stated legal capital stock of the company at December 31, 1997 is $109,603,000. NET INCOME PER COMMON SHARE The dilutive effect of stock options is excluded under the new requirements of SFAS 128 for calculating basic net income per share, but is included in the calculation of diluted net income per share. FIN-31 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) The reconciliation of the numerator and denominator for the calculation of basic net income per share and diluted net income per shares is as follows: (000's, except for per-share amounts)
1997 1996 1995 ------- ------- ------ Basic net income per share Net income............................................ $11,912 $11,746 $8,036 ------- ------- ------ Weighted average number of shares outstanding......... 15,989 14,077 11,521 Basic net income per share............................ $ 0.75 $ 0.83 $ 0.70 ------- ------- ------ Diluted net income per share Net income............................................ $11,912 $11,746 $8,036 ------- ------- ------ Weighted average number of shares outstanding......... 15,989 14,077 11,521 Dilutive effect of stock options...................... 465 1,002 936 ------- ------- ------ Adjusted weighted average number of shares outstand- ing.................................................. 16,454 15,079 12,457 ------- ------- ------ Diluted net income per share.......................... $ 0.72 $ 0.78 $ 0.65 ======= ======= ======
STOCK OPTIONS The Company has stock option plans providing for the issue of options to purchase the Company's common stock. Outstanding options vest over periods of one to four years beginning on the date of grant. The options expire over a period of two to seven years beginning at the date of grant. Of the 3.7 million options authorized under these plans, 843,198 options were available for grant as at December 31, 1997. Under SFAS No. 123, the Company has elected to continue applying APB Opinion 25 in accounting for its stock option plans, and to provide the pro forma disclosure of earnings per share as if the fair value based method of accounting had been applied. The exercise price of all stock options is equal to the market price of the stock on the trading day preceding the date of grant. Accordingly, no compensation cost has been recognized in the financial statements for the Company's stock option plans. If the fair values of the options granted in fiscal 1997, 1996 and 1995 had been recognized as compensation expense on a straight-line basis over the vesting period of the grant (consistent with the method prescribed by SFAS No. 123), the Company's net income and earnings per share would have been reduced to the pro forma amounts below:
1997 1996 1995 $ $ $ ------ ------ ----- Net income As reported............................................... 11,912 11,746 8,036 Pro forma................................................. 11,145 11,486 7,967 Basic net income per share As reported............................................... 0.75 0.83 0.70 Pro forma................................................. 0.70 0.82 0.69 Diluted net income per share As reported............................................... 0.72 0.78 0.65 Pro forma................................................. 0.68 0.76 0.64
FIN-32 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) Because SFAS No. 123 is applicable only to options granted subsequent to January 1, 1995, the above pro forma disclosure is not indicative of pro forma amounts that will be reported in future years. It is expected that all non- vested awards will be included in the pro forma disclosure in fiscal 2000. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.8%, 5.9% and 5.6%; expected life of the options of 1.82 years, 1.78 years and 1.23 years; and expected volatility of 30% and a dividend yield of zero for all years. Activity in the stock option plans for fiscal 1997, 1996 and 1995 was as follows:
1997 1996 1995 ---------------- ---------------- ---------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE # $ # $ # $ ------- -------- ------- -------- ------- -------- (000'S) (000'S) (000'S) Outstanding, beginning of year....................... 951 5.71 1,836 5.16 1,794 4.16 Granted................... 833 18.40 50 19.16 220 10.56 Exercised................. (387) 4.91 (893) 5.33 (176) 2.92 Cancelled................. (76) 10.34 (42) 5.13 (2) 5.10 ----- ----- ----- ----- ----- ----- Outstanding, end of year.... 1,321 13.15 951 5.71 1,836 5.16 ----- ----- ----- ----- ----- ----- Options exercisable at year end........................ 123 69 273 ----- ----- ----- Weighted average per share fair value of options granted during the year calculated using the Black- Scholes option pricing model...................... 3.76 3.79 1.69 ===== ===== =====
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 1997:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE -------------------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE RANGE OF AVERAGE EXERCISE EXERCISE EXERCISE PRICES OPTIONS REMAINING PRICE OPTIONS PRICE $ # LIFE $ # $ --------------- ------- --------- -------- ------- -------- (000'S) (000'S) $2.79 to $10.10............. 463 3.8 years 4.62 80 6.19 $16.72 to $19.93............ 858 3.1 years 17.77 43 17.93 ----- --- 1,321 123 ===== ===
9. RESEARCH AND DEVELOPMENT COSTS Research and development costs are net of non-refundable government assistance of $2,123,000 (1996--$167,000; 1995--$333,000). FIN-33 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) 10. INCOME TAXES Details of the income tax provision are as follows:
1997 1996 1995 $ $ $ ----- ------ ----- Current Canadian........................................... 2,513 830 180 Foreign............................................ 2,995 4,537 2,130 ----- ------ ----- 5,508 5,367 2,310 ----- ------ ----- Deferred Canadian........................................... 384 1,029 1,215 Foreign............................................ (818) (1,761) (221) ----- ------ ----- (434) (732) 994 ----- ------ ----- Income tax provision................................. 5,074 4,635 3,304 ===== ====== =====
The income tax provision reported differs from the amounts computed by applying the Canadian rate to income before income taxes. The reasons for this difference and the related tax effects are as follows:
1997 1996 1995 $ $ $ ----- ------ ------ Expected Canadian tax rate..................... 44 % 44 % 44 % Expected income tax provision.................. 7,474 7,208 4,990 Canadian rate adjustment for manufacturing and processing activities......................... (624) (354) (311) Foreign tax rate differences................... (244) (98) (391) Change in valuation allowance.................. (230) (195) (1,345) Non-recurring tax deductions................... (423) (1,325) -- Other individually immaterial items............ (879) (601) 361 ----- ------ ------ Reported income tax provision.................. 5,074 4,635 3,304 ===== ====== ======
FIN-34 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and tax reporting purposes. Significant components of the Company's deferred tax assets and liabilities as at December 31 are as follows:
1997 1996 $ $ ------ ------ Deferred tax assets Operating tax loss carryforwards........................... 2,803 1,348 Investment tax credits..................................... 1,042 1,660 Research and development expenses.......................... 1,454 2,258 Accounting provisions not deductible....................... 1,504 1,341 Deferred revenue........................................... 790 883 Other...................................................... 756 430 ------ ------ Total deferred tax assets.................................... 8,349 7,920 Valuation allowance for deferred tax assets.................. (4,515) (4,745) ------ ------ Net deferred tax assets...................................... 3,834 3,175 ------ ------ Deferred tax liabilities Book and tax differences on assets......................... 728 782 ------ ------ Net deferred income tax asset................................ 3,106 2,393 ====== ======
The Company has provided a valuation allowance at December 31, 1997 related primarily to (1) operating losses and unclaimed expenses of companies with an inconsistent history of taxable incomes and losses and (2) investment tax credits when realization is uncertain because they were not yet reviewed by the taxation authorities. The 1996 valuation allowance relates primarily to (1) investment tax credits earned during years not yet reviewed by taxation authorities and (2) operating tax loss carry forwards and unclaimed expenses of companies with a history of tax losses. The net change in the total valuation allowance for the years ended December 31, 1997 and December 31, 1996 was a decrease of $230,000 and a decrease of $195,000, respectively. As at December 31, 1997, the Company had loss carryforwards of approximately $7.5 million available to reduce future years' income for tax purposes of which $310,000 expires by the end of 2000, a further $210,000 expires by the end of 2002, with the remainder carried forward indefinitely. Income before taxes attributable to foreign operations was $7,370,000; $9,693,000; and $6,358,000 in each of fiscal 1997, 1996 and 1995, respectively. The Company has not recorded a provision for withholding tax on unremitted earnings of foreign subsidiaries as the Company currently has no plans to repatriate those earnings. The amount of retained earnings of foreign subsidiaries as at December 31, 1997 was $13,020,000 (1996--$7,381,000). The determination of the amount of the unrecognized tax provision on foreign retained earnings is not practicable due to the complexities associated with the hypothetical calculation. Income taxes paid were $2,531,000; $4,527,000; and $792,000 for fiscal years 1997, 1996 and 1995, respectively. FIN-35 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) 11. STATEMENT OF CASH FLOWS The net change in non-cash working capital balances related to operations consists of:
1997 1996 1995 $ $ $ ------- ------ ------ (000'S) (000'S) (000'S) Accounts receivable................................. (21,405) (745) (3,349) Due from related party.............................. (2,086) 1,345 (1,598) Inventories......................................... (3,654) (217) (7,835) Accounts payable.................................... 3,790 (931) 909 Deferred revenue.................................... (608) 2,654 2,638 Accrued warranty provision.......................... 777 765 393 Other accrued liabilities........................... (74) (3,051) 2,333 Accrued compensation and benefits................... (77) 1,290 952 Income taxes........................................ 2,013 450 314 Prepaid expenses.................................... 313 (874) (260) ------- ------ ------ (21,011) 686 (5,503) ======= ====== ======
Supplemental cash flow information: Interest paid during the year totaled $1,112,000, $1,231,000 and $1,379,000 for the years 1997, 1996 and 1995, respectively. 12. RELATED PARTY TRANSACTIONS In addition to matters discussed elsewhere, the Company had the following transactions with related parties: During the year ended December 31, 1997, the Company recorded sales revenue of $18,891,000 (1996--$17,380,000; 1995 $17,391,000) from Sumitomo Heavy Industries, Ltd., a significant shareholder, at values and terms approximately equivalent to third party transactions. Transactions with Sumitomo are at normal trade terms. 13. FINANCIAL INSTRUMENTS The Company does not actively trade derivative financial instruments but uses them to manage foreign currency and interest rate positions associated with its debt instruments. The terms of these derivative contracts match the terms of the underlying debt instruments and are generally used to reduce financing costs. The Company currently has three such contracts outstanding, two of which convert yen denominated debt to U.S. dollar denominated debt and one contract which converts a yen denominated debt into Canadian dollars. FIN-36 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) The fair value of the Company's recognized financial instruments approximates carrying amounts where applicable, except as shown in the table below. The fair value of long-term debt was determined by discounting cash flows of the obligation at the rates generally available to the Company on similar credit facilities. The fair values of the swap contracts have been estimated by management using available market information and do not necessarily represent amounts that the Company could potentially realize in a current market exchange transaction between willing parties.
1997 1996 -------------- --------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE $ $ $ $ -------- ----- -------- ------ Long-term debt: Sumitomo Heavy Industries, Ltd., Japanese yen term loans................................... 9,239 9,797 13,820 15,114 Favorable value of swaps: --to convert 300 million yen (1996--400 million yen) to U.S. $2,047 (1996--U.S. $2,729), semi-annual interest at the six- month LIBOR less 1.56%....................... 262 748 726 1,195 --to convert 450 million yen (1996--600 million yen) to Cdn $3,488 (1996--Cdn $4,651) semi-annual interest at the three month BA rate less 1.62%.............................. 1,035 1,416 1,787 2,501 --to convert 450 million yen (1996--600 million yen) to U.S. $3,070 (1996--U.S. $4,093) interest payable semi-annually at 8.20%........................................ 395 575 1,089 1,454 ----- ----- ------ ------ Favorable value of swaps........................ 1,692 2,739 3,602 5,150 ----- ----- ------ ------ Economic value.................................. 7,547 7,058 10,218 9,964 ===== ===== ====== ======
The Company is exposed to credit-related losses with respect to the positive fair value of the swap contracts in the event of non-performance by the Canadian Imperial Bank of Commerce and the Industrial Bank of Japan as counterparties. The Company does not expect any counterparties to fail to meet their obligations. The payments under the swap contracts are as follows:
$ ----- 1998............................................................... 2,515 1999............................................................... 2,516 2000............................................................... 2,516 ----- 7,547 =====
As of December 31, 1997, the Company had foreign exchange forward contracts with maturity dates ranging from March 18, 1998 to December 15, 1998 to sell approximately U.S. $9 million in exchange for Canadian dollars at an average rate of $1.416 which approximates market rates at December 31, 1997 for contracts with similar terms. As at December 31, 1997, the Company had $12,325,000 (1996--$12,071,000) invested in short-term investments denominated in Canadian dollars with maturity dates between January 6, 1998 and July 9, 1998. FIN-37 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) RISK AND UNCERTAINTIES The Company operates internationally in one business segment. The Company principally manufactures and distributes lasers. The Company is not dependent on any single customer, group of customers, or supplier. The Company may experience fluctuations in operating results due to a variety of factors including the rate of growth of markets for lasers, market acceptance of the Company's products and those of its competitors, expenses relating to the introduction of new products or new versions of existing products, changes in pricing policies by the Company and its competitors, timing of receipts of orders from major customers, the timing of shipments and conditions in foreign markets and reliance on a limited number of suppliers. There is no concentration of credit risk related to the Company's position in trade accounts receivable other than the amount due from Sumitomo Heavy Industries, Ltd., a related party. Credit risk, with respect to trade receivables, is minimized because of the diversification of the Company's operations, as well as its large customer base and its geographical dispersion. 14. COMMITMENTS AND CONTINGENCIES Future minimum payments under long-term operating leases for manufacturing premises, automobiles and equipment are as follows:
$ ------ 1998.............................................................. 2,540 1999.............................................................. 1,534 2000.............................................................. 1,221 2001.............................................................. 965 2002.............................................................. 955 2003 and beyond................................................... 5,808 ------ 13,023 ======
Rent expense during fiscal 1997, 1996 and 1995 was $1,645,000; $1,754,000 and $1,511,000 respectively. As has been reported by the Company since 1994, a party has commenced legal proceedings in the United States against a number of U.S. manufacturing companies, including companies which have purchased systems from Lumonics. The plaintiff in the proceedings has alleged that certain equipment used by these manufacturers infringes patents claimed to be held by him. While the Company is not a defendant in any of the proceedings, five of Lumonics' customers have notified the Company and others that, if the individual successfully pursues his infringement claims against them, they may require Lumonics to indemnify them to the extent that any of their losses can be attributed to systems sold to them by the Company. While the Company does not believe that the outcome of these claims will have a material adverse effect upon the Company, 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. YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when FIN-38 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 15. DEFINED BENEFIT PENSION PLAN The Company's subsidiary in the United Kingdom maintains a defined benefit pension plan which has a defined contribution section, known as the Lumonics Ltd. UK Pension Scheme Retirement Savings Plan. Effective April 1997, membership to the Final Salary Plan was closed to new entrants and the Company provided a new Retirement Savings Plan which is a Money Purchase arrangement. The most recent actuarial valuation as at December 1, 1997 indicates the actuarial present value of the accrued pension benefits and the net assets available to provide for these benefits, at market value, were as follows:
1997 1996 $ $ ------ ----- Pension fund assets......................................... 10,000 8,600 Accrued pension benefits.................................... 8,100 6,900
The assumptions used to develop the actuarial present value of the accrued pension benefits were as follows for 1997, 1996, and 1995: Discount rate................................................... 9% Compensation increase rate...................................... 7% Investment return assumption.................................... 9% Average remaining service life of employees..................... 18 years
The estimates are based on actuarially computed best estimates of pension asset long-term rates of return and long-term rate of obligation escalation. Variances between these estimates and actual experience are amortized over the employees' average remaining service life. Pension expense during fiscal 1997, 1996 and 1995 was $500,000, $360,000 and $335,000 respectively. 16. ACQUISITION In June 1996, the Company acquired, for cash consideration of $4,356,000, working capital of $2,526,000 and technology for $1,830,000 from Hobart Laser Products Inc., a laser manufacturer and distributor based in the United States. This transaction has been accounted for as a purchase. FIN-39 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AS OF DECEMBER 31, 1997 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) 17. OTHER ACCRUALS Other accruals consist of:
1997 1996 $ $ ------ ------ Deferred revenue............................................. 5,449 6,324 Accrued warranty provision................................... 3,619 3,007 Other........................................................ 7,110 6,670 ------ ------ 16,178 16,001 ====== ======
18. SEGMENTED INFORMATION The Company and its subsidiaries operate in Canada, the United States, Europe and Asia-Pacific in one dominant industry segment, the manufacture and distribution of laser based advanced manufacturing systems.
1997 1996 1995 $ $ $ ------- ------- ------- By operating location Sales: Canada: Sales to customers.............................. 21,160 19,971 17,092 Inter-segment sales............................. 13,383 9,384 7,951 United States: Sales to customers.............................. 103,310 90,746 60,110 Inter-segment sales............................. 12,395 5,355 4,450 Europe: Sales to customers.............................. 43,767 39,382 44,975 Inter-segment sales............................. 35,516 24,123 17,040 Asia-Pacific: Sales to customers.............................. 9,091 3,267 3,091 Inter-segment sales............................. 363 296 134 Eliminations...................................... (61,657) (39,157) (29,575) ------- ------- ------- 177,328 153,367 125,268 ======= ======= ======= Canadian export sales (including intersegment sales of $12,413, $8,519 and $6,828, respectively)....... 29,762 24,686 21,157 ------- ------- ------- Income from operations before interest, income taxes and foreign exchange Canada............................................ 7,027 4,208 4,346 United States..................................... 10,540 11,789 5,578 Europe............................................ (1,951) (403) 2,001 Asia-Pacific...................................... 241 (62) (25) ------- ------- ------- 15,857 15,532 11,900 ------- ------- ------- Identifiable assets: Canada............................................ 28,094 23,908 20,250 United States..................................... 47,800 40,374 31,598 Europe............................................ 44,599 32,047 31,638 Asia-Pacific...................................... 5,372 2,565 1,894 Corporate (including cash and cash equivalents and short term investments).......................... 63,315 36,708 37,422 ------- ------- ------- 189,180 135,602 122,802 ======= ======= =======
Transfers between operating locations are made at values approximately equal to third party transactions. FIN-40 LUMONICS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US DOLLARS EXCEPT SHARE DATA) UNAUDITED
SEPTEMBER 30, DECEMBER 31, 1998 1997 $ $ ------------- ------------ ASSETS ------ Current Cash and cash equivalents........................... 25,924 56,828 Short-term investments.............................. 12,585 12,325 Accounts receivable................................. 32,915 45,096 Due from related party.............................. 4,551 5,328 Inventories (note 4)................................ 43,437 35,369 Other assets........................................ 6,418 4,783 Current portion of swap contracts................... 485 564 ------- ------- Total current assets................................ 126,315 160,293 Fixed assets........................................ 32,041 23,960 Long term portion of swap contracts................. 727 1,128 Other assets........................................ 5,911 3,799 ------- ------- 164,994 189,180 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness................................... 5,087 15,213 Accounts payable.................................... 8,825 8,145 Accrued compensation and benefits................... 4,173 3,657 Other accrued liabilities........................... 14,828 16,178 Income taxes payable................................ -- 3,125 Current portion of long-term debt................... 2,959 3,080 ------- ------- Total current liabilities........................... 35,872 49,398 Long-term debt...................................... 4,439 6,159 ------- ------- Total liabilities................................... 40,311 55,557 ------- ------- Stockholders' equity Capital stock (authorized--unlimited; issued--17,019,000; 1997--17,101,000) (note 6)...... 138,690 139,178 Deficit............................................. (6,872) (1,448) Accumulated other comprehensive income.............. (7,135) (4,107) ------- ------- Total stockholders' equity.......................... 124,683 133,623 ------- ------- 164,994 189,180 ======= =======
See accompanying notes FIN-41 LUMONICS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) UNAUDITED
NINE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER SEPTEMBER 30, 30, -------------------- ---------------- 1998 1997 1998 1997 $ $ $ $ --------- --------- ------- ------- Sales................................. 34,878 44,881 110,210 128,267 Cost of goods sold.................... 24,954 28,076 78,348 79,525 --------- --------- ------- ------- Gross profit.......................... 9,924 16,805 31,862 48,742 Selling, general and administrative expenses............................. 8,374 9,362 28,354 28,115 Research and development costs........ 2,832 2,642 10,038 9,315 Restructuring costs (note 5).......... -- -- 2,016 -- --------- --------- ------- ------- Income (loss) before the following.... (1,282) 4,801 (8,546) 11,312 Interest expense...................... 162 284 816 797 Interest income....................... (512) (671) (1,823) (1,482) --------- --------- ------- ------- Income (loss) before income taxes..... (932) 5,188 (7,539) 11,997 Provision for income taxes (benefit).. (277) 1,544 (2,203) 3,573 --------- --------- ------- ------- Net income (loss) for the period...... (655) 3,644 (5,336) 8,424 Foreign currency translation adjust- ments................................ (1,175) (28) (3,028) (1,226) --------- --------- ------- ------- Comprehensive income (loss) for the period............................... (1,830) 3,616 (8,364) 7,198 ========= ========= ======= ======= Net income (loss) per common share --Basic............................. (0.04) 0.22 (0.31) 0.54 --Diluted........................... (0.04) 0.21 (0.31) 0.52 Adjusted weighted average shares (note 2) --Basic (000's)..................... 17,049 16,897 17,088 15,614 --Diluted (000's)................... 17,049 17,382 17,088 16,338
See accompanying notes FIN-42 LUMONICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [IN THOUSANDS OF US DOLLARS] UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1998 1997 -------- -------- OPERATING ACTIVITIES Net income (loss)......................................... $ (5,336) $ 8,424 Items not affecting cash Depreciation............................................. 3,579 2,697 Amortization of intangible assets........................ 279 287 Deferred income taxes.................................... (882) (752) Exchange loss (gain)..................................... 164 68 Net change in non-cash operating assets and liabilities... (20) (12,125) -------- -------- Cash used in operating activities......................... (2,216) (1,401) -------- -------- INVESTING ACTIVITIES Additions to fixed assets................................. (11,819) (3,891) Proceeds on disposal of fixed assets...................... 148 190 Additions to patents and technology....................... (23) -- Maturity of short-term investments........................ 41,136 48,232 Purchase of short-term investments........................ (42,015) (80,657) Acquisition of assets of Meteor Optics Inc. (note 3)...... (1,078) -- -------- -------- Cash used in investing activities......................... (13,651) (36,126) -------- -------- FINANCING ACTIVITIES Issue (repurchase) of common shares (net of issue costs).. (575) 37,707 Increase (decrease) in bank indebtedness.................. (9,660) 3,454 Repayment of long-term debt............................... (1,174) (1,278) -------- -------- Cash (used in) provided by financing activities........... (11,409) 39,883 -------- -------- Effect of foreign currency translation on cash and cash equivalents.............................................. (3,628) 1,261 -------- -------- Net (decrease) increase in cash and cash equivalents...... (30,904) 3,617 Cash and cash equivalents, beginning of period............ 56,828 29,338 -------- -------- Cash and cash equivalents, end of period.................. 25,924 32,955 ======== ======== Supplemental disclosure of cash flow information cash paid during the period for: Interest paid............................................ 691 810 Income taxes............................................. 3,005 1,780
See accompanying notes FIN-43 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 [TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS] UNAUDITED 1. BASIS OF PRESENTATION The unaudited interim financial statements presented herein have been prepared in accordance with generally accepted accounting principles for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements reflect all adjustments and accruals which management considers necessary for fair presentation of financial position and results of operations for periods presented. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1997. The results for the interim periods are not necessarily indicative of results to be expected for the year or for any future periods. 2. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share was computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. For diluted net income (loss) per common share, the denominator also includes dilutive outstanding stock options determined using the treasury stock method.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1998 1997 1998 1997 ------ ------ ------ ------ 000'S 000'S 000'S 000'S Weighted average number of shares outstanding.. 17,049 16,897 17,088 15,614 Dilutive effect of stock options............... -- 485 -- 724 ------ ------ ------ ------ Adjusted weighted average number of shares out- standing...................................... 17,049 17,382 17,088 16,338 ====== ====== ====== ======
3. BUSINESS ACQUISITION On June 15, 1998, the Company acquired Meteor Optics Inc., a company which specializes in the manufacture of fibre optics for $1.1 million in cash. The transaction was accounted for as a purchase and, accordingly, the results of operations have been included in the consolidated financial statements from the acquisition date. Net tangible assets and acquired in-process research and development costs had no significant value. The purchase price was allocated to goodwill and will be amortized in accordance with the company's accounting policies. 4. INVENTORIES Finished goods are valued at the lower of average cost and net realizable value. Work-in-process and raw materials are valued at the lower of average cost and replacement cost. The components of inventory are:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Raw materials..................................... $10,766 $ 9,082 Work-in-process................................... 14,388 12,138 Finished goods.................................... 18,283 14,149 ------- ------- $43,437 $35,369 ======= =======
FIN-44 LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 (TABULAR AMOUNTS IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS) 5. RESTRUCTURING COSTS The Company incurred $2.0 million in restructuring costs in the form of severance costs in the nine month period ended September 30, 1998. In addition, an inventory write-down of $1.4 million is included in the cost of goods sold. 6. COMMON STOCK The Company announced a normal course issuer bid on July 15, 1998 to repurchase and cancel up to 5% of its 17.1 million common shares outstanding at that time. These purchases may continue until July 16, 1999 and will be paid out of general corporate funds. The Company purchased and canceled 94,900 shares in the third quarter of 1998 at a total cost of $612,000 pursuant to this bid. 7. RECENT PRONOUNCEMENTS The Financial Accounting Standards Board recently issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective for the Company's December 31, 2000 year end. The Company has not determined the impact of this pronouncement on its consolidated financial statements. 8. SUBSEQUENT EVENT The Company signed an Agreement and Plan of Merger dated as of October 27, 1998 to merge with General Scanning Inc. FIN-45 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANNEX A AGREEMENT AND PLAN OF MERGER DATED AS OF OCTOBER 27, 1998 BY AND AMONG LUMONICS INC., GRIZZLY ACQUISITION CORP. AND GENERAL SCANNING INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS THIS TABLE OF CONTENTS IS NOT PART OF THE AGREEMENT TO WHICH IT IS ATTACHED BUT IS INSERTED FOR CONVENIENCE ONLY.
PAGE NO. ---- ARTICLE I THE MERGER................................................. A-1 1.01 The Merger................................................. A-1 1.02 Closing.................................................... A-1 1.03 Effective Time............................................. A-2 1.04 Articles of Incorporation and Bylaws of the Surviving Corporation............................................... A-2 1.05 Directors and Officers of the Surviving Corporation........ A-2 1.06 Effects of the Merger...................................... A-2 1.07 Further Assurances......................................... A-2 ARTICLE II CONVERSION OF SHARES....................................... A-2 2.01 Conversion of Capital Stock................................ A-2 2.02 Exchange of Certificates................................... A-4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF GRIZZLY.................. A-5 3.01 Organization and Qualification............................. A-5 3.02 Capital Stock.............................................. A-6 3.03 Authority Relative to This Agreement....................... A-7 3.04 Non-Contravention; Approvals and Consents.................. A-7 3.05 Reports and Financial Statements........................... A-8 3.06 Absence of Certain Changes or Events....................... A-8 3.07 Absence of Undisclosed Liabilities......................... A-8 3.08 Legal Proceedings.......................................... A-9 3.09 Information Supplied....................................... A-9 3.10 Compliance with Laws and Orders............................ A-9 3.11 Compliance with Agreements; Certain Agreements............. A-9 3.12 Taxes...................................................... A-10 3.13 Employee Benefit Plans; ERISA.............................. A-10 3.14 Labor Matters.............................................. A-11 3.15 Environmental Matters...................................... A-11 3.16 Intellectual Property Rights............................... A-12 3.17 Vote Required.............................................. A-14 3.18 Opinion of Financial Advisor............................... A-14 3.19 Grizzly Rights Agreement................................... A-14 3.20 Ownership of Lynx Common Stock............................. A-14 3.21 Chapter 110D of Mass. Ann. Laws Not Applicable............. A-14 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF LYNX AND SUB............. A-14 4.01 Organization and Qualification............................. A-14 4.02 Capital Stock.............................................. A-15 4.03 Authority Relative to This Agreement....................... A-15 4.04 Non-Contravention; Approvals and Consents.................. A-16 4.05 Reports and Financial Statements........................... A-16 4.06 Absence of Certain Changes or Events....................... A-17 4.07 Absence of Undisclosed Liabilities......................... A-17 4.08 Legal Proceedings.......................................... A-17 4.09 Information Supplied....................................... A-18
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PAGE NO. ---- 4.10 Compliance with Laws and Orders........................... A-18 4.11 Compliance with Agreements; Certain Agreements............ A-18 4.12 Taxes..................................................... A-19 4.13 Employee Benefit Plans; ERISA............................. A-19 4.14 Labor Matters............................................. A-20 4.15 Environmental Matters..................................... A-20 4.16 Intellectual Property Rights.............................. A-20 4.17 Vote Required............................................. A-21 4.18 Opinion of Financial Advisor.............................. A-22 4.19 Ownership of Grizzly Common Stock......................... A-22 4.20 Control Share Statute Not Applicable...................... A-22 ARTICLE V COVENANTS................................................. A-22 5.01 Covenants of Grizzly and Lynx............................. A-22 5.02 No Solicitations.......................................... A-24 5.03 Grizzly Rights Agreement.................................. A-25 5.04 Conduct of Business of Sub................................ A-25 5.05 Third Party Standstill Agreements......................... A-25 5.06 Purchases of Common Stock of the Other Party.............. A-25 5.07 Adoption of Lynx Rights Agreement......................... A-25 ARTICLE VI ADDITIONAL AGREEMENTS..................................... A-26 6.01 Access to Information; Confidentiality.................... A-26 6.02 Preparation of Registration Statement and Proxy Statement................................................ A-26 6.03 Approval of Shareholders.................................. A-26 6.04 Grizzly Affiliates........................................ A-27 6.05 Stock Exchange Listing.................................... A-27 6.06 Certain Tax Matters....................................... A-27 6.07 Regulatory and Other Approvals............................ A-28 6.08 [Omitted]................................................. A-28 6.09 Grizzly Stock Plan........................................ A-28 6.10 Directors' and Officers' Indemnification and Insurance.... A-29 6.11 Lynx Governance........................................... A-30 6.12 Continuation; Name Change................................. A-30 6.13 Stock Option Agreements................................... A-30 6.14 Expenses.................................................. A-30 6.15 Brokers or Finders........................................ A-30 6.16 Takeover Statutes......................................... A-30 6.17 Conveyance Taxes.......................................... A-31 ARTICLE VII CONDITIONS................................................ A-31 7.01 Conditions to Each Party's Obligation to Effect the Merger................................................... A-31 7.02 Conditions to Obligation of Lynx and Sub to Effect the Merger................................................... A-32 7.03 Conditions to Obligation of Grizzly to Effect the Merger.. A-32 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER......................... A-33 8.01 Termination............................................... A-33 8.02 Effect of Termination..................................... A-34 8.03 Amendment................................................. A-35 8.04 Waiver.................................................... A-35
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PAGE NO. ---- ARTICLE IX GENERAL PROVISIONS.......................................... A-35 9.01 Non-Survival of Representations, Warranties, Covenants and Agreements................................................. A-35 9.02 Notices..................................................... A-35 9.03 Entire Agreement; Incorporation of Exhibits................. A-36 9.04 Public Announcements........................................ A-36 9.05 No Third Party Beneficiaries................................ A-36 9.06 No Assignment; Binding Effect............................... A-36 9.07 Headings.................................................... A-37 9.08 Invalid Provisions.......................................... A-37 9.09 Governing Law............................................... A-37 9.10 Enforcement of Agreement.................................... A-37 9.11 Certain Definitions......................................... A-37 9.12 Counterparts................................................ A-38 EXHIBITS EXHIBIT A Form of Affiliate Agreement EXHIBIT B Form of Incorporation and Bylaws of Lynx Post-Merger
iii GLOSSARY OF DEFINED TERMS The following terms, when used in this Agreement, have the meanings ascribed to them in the corresponding Sections of this Agreement listed below: "affiliate".............................................. Section 9.11(a) "Affiliate Agreement".................................... Section 6.04 "this Agreement"......................................... Preamble "Alternative Proposal"................................... Section 5.02 "Antitrust Division"..................................... Section 6.07 "Articles of Merger"..................................... Section 1.03 "beneficially"........................................... Section 9.11(b) "business day"........................................... Section 9.11(c) "CERCLA"................................................. Section 3.15(b) "Certificates"........................................... Section 2.02(b) "Closing"................................................ Section 1.02 "Closing Date"........................................... Section 1.02 "Code"................................................... Section 3.13 "Common Stock Trust"..................................... Section 2.02(e)(iii) "Confidentiality Agreement".............................. Section 6.01(a "Confidential Information"............................... Section 6.01(a) "Constituent Corporations"............................... Section 1.01 "Contracts".............................................. Section 3.04(a) "control," "controlling," "controlled by" and "under com- mon control with"....................................... Section 9.11(a) "Conversion Number"...................................... Section 2.01(c) "Current Grizzly Directors".............................. Section 6.11 "MBCL"................................................... Section 1.01 "Dissenting Share"....................................... Section 2.01(d)(i) "Effective Time"......................................... Section 1.03 "Environmental Law"...................................... Section 3.15(e)(i) "Environmental Permits".................................. Section 3.15(a) "ERISA".................................................. Section 3.13(b)(i) "Excess Shares".......................................... Section 2.02(e)(ii) "Exchange Act"........................................... Section 3.04(b) "Exchange Agent"......................................... Section 2.02(a) "Exchange Fund".......................................... Section 2.02(a) "FTC".................................................... Section 6.07 "Grizzly"................................................ Preamble "Grizzly Affiliates"..................................... Section 6.04 "Grizzly Common Stock"................................... Section 2.01(b) "Grizzly Disclosure Letter".............................. Section 3.01 "Grizzly Employee Benefit Plan".......................... Section 3.13(b)(i) "Grizzly Financial Statements"........................... Section 3.05 "Grizzly Option Plans"................................... Section 2.01(e) "Grizzly Permits"........................................ Section 3.10 "Grizzly Preferred Stock"................................ Section 3.02 "Grizzly Reports"........................................ Section 3.05 "Grizzly Rights"......................................... Section 3.02(a) "Grizzly Rights Agreement"............................... Section 3.02(a) "Grizzly Series A Preferred Stock"....................... Section 3.02(a) "Grizzly Stock Option"................................... Section 6.09 "Grizzly Shareholders' Approval"......................... Section 6.03(b)
iv "Governmental or Regulatory Authority".................... Section 3.04(a) "group"................................................... Section 9.11(f) "Hazardous Material"...................................... Section 3.15(e)(ii) "HSR Act"................................................. Section 3.04(b) "Indemnified Liabilities"................................. Section 6.10(a) "Indemnified Parties"..................................... Section 6.10(a) "Indemnifying Party"...................................... Section 6.10(a) "Intellectual Property Rights"............................ Section 3.16(a) "knowledge"............................................... Section 9.11(d) "laws".................................................... Section 3.04(a) "Lien".................................................... Section 3.02(b) "Lynx".................................................... Preamble "Lynx Common Stock"....................................... Section 2.01(c) "Lynx Directors".......................................... Section 6.11 "Lynx Disclosure Letter".................................. Section 4.01 "Lynx Employee Benefit Plan".............................. Section 4.13(b) "Lynx Financial Statements"............................... Section 4.05 "Lynx Option Plan"........................................ Section 5.01(b) "Lynx Permits"............................................ Section 4.10 "Lynx Reports"............................................ Section 4.05 "Lynx Shareholders' Approval"............................. Section 6.03(a) "Lynx Shareholders' Meeting".............................. Section 6.03(a) "Lynx Shareholders' Proposals"............................ Section 6.03(a) "material", "material adverse effect" and "materially ad- verse"................................................... Section 9.11(e) "Merger".................................................. Preamble "Options"................................................. Section 3.02(a) "orders".................................................. Section 3.04(a) "person".................................................. Section 9.11(f) "Plan".................................................... Section 3.13(b)(ii) "Principal Party"......................................... Section 5.01 "Proxy Statement"......................................... Section 3.09 "qualified stock options"................................. Section 6.09(a) "Registration Statement".................................. Section 4.09 "Representatives"......................................... Section 9.11(g) "SEC"..................................................... Section 3.04(b) "Secretary of State"...................................... Section 1.03 "Securities Act".......................................... Section 3.04(b) "Shareholders' Meetings".................................. Section 6.03(b) "Stock Option Agreements"................................. Preamble "Sub"..................................................... Preamble "Sub Common Stock"........................................ Section 2.01(a) "Subsidiaries"............................................ Section 9.11(h) "Subsidiary".............................................. Section 9.11(h) "Surviving Corporation"................................... Section 1.01 "Surviving Corporation Common Stock"...................... Section 2.01(a) "taxes"................................................... Section 3.12(c)
v This AGREEMENT AND PLAN OF MERGER dated as of October 27, 1998 ("this Agreement") is made and entered into by and among LUMONICS INC., an Ontario corporation ("Lynx"), GRIZZLY ACQUISITION CORP., a Massachusetts corporation wholly owned by Lynx ("Sub"), and GENERAL SCANNING INC., a Massachusetts corporation ("Grizzly"). WHEREAS, the Boards of Directors of Lynx, Sub and Grizzly have each determined that it is advisable and in the best interests of their respective shareholders to consummate, and have approved, the merger of equals business combination transaction provided for herein in which Sub would merge with and into Grizzly and Grizzly would become a wholly-owned subsidiary of Lynx (the "Merger"); WHEREAS, the respective Boards of Directors of Lynx and Grizzly have determined that the Merger is in furtherance of and consistent with their respective long-term business strategies and is fair to and in the best interests of their respective shareholders, and Lynx has approved this Agreement and the Merger as the sole shareholder of Sub; WHEREAS, concurrently with the execution and delivery of this Agreement and as condition and inducement to the parties' willingness to enter into this Agreement, Grizzly, Lynx and Sub have entered into Stock Option Agreements of even date herewith (the "Stock Option Agreements") providing for the granting by (i) Grizzly to Sub or Lynx of an option to purchase from Grizzly up to 2,517,673 shares of Grizzly Common Stock (as defined in Section 2.01(b)) at U.S. $4.57 per share, and (ii) Lynx to Grizzly of an option to purchase from Lynx up to 3,391,656 shares of Lynx Common Stock (as defined in Section 2.01(c) at Can. $8.09 per share, in each case subject to the terms and conditions set forth therein; and WHEREAS, Lynx, Sub and Grizzly desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe various conditions to the Merger; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. ARTICLE I THE MERGER 1.01 The Merger. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in Section 1.03), Sub shall be merged with and into Grizzly in accordance with the Business Corporation Law of the Commonwealth of Massachusetts (the "MBCL"). At the Effective Time, the separate existence of Sub shall cease and Grizzly shall continue as the surviving corporation in the Merger (the "Surviving Corporation"). Sub and Grizzly are sometimes referred to herein as the "Constituent Corporations". As a result of the Merger, the outstanding shares of capital stock of the Constituent Corporations shall be converted or cancelled in the manner provided in Article II. 1.02 Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 8.01, and subject to the satisfaction or waiver (where applicable) of the conditions set forth in Article VII, the closing of the Merger (the "Closing") will take place at the offices of LaBarge Weinstein, 333 Preston Street, 11th floor, Ottawa, Ontario, at 10:00 a.m., local time, on the fifth business day following satisfaction of the condition set forth in Section 7.01(a) unless another date, time or place is agreed to in writing by the parties hereto (the "Closing Date"). At the Closing there shall be delivered to Lynx, Sub and Grizzly the certificates and other documents and instruments required to be delivered under Article VII. A-1 1.03 Effective Time. At the Closing, articles of merger (the "Articles of Merger") shall be duly prepared and executed by the Surviving Corporation and thereafter delivered to the Secretary of State of the Commonwealth of Massachusetts (the "Secretary of State") for filing, as provided in Section 78 of the MBCL, as soon as practicable on the Closing Date. The Merger shall become effective at the time of the filing of the Articles of Merger with the Secretary of State (the date and time of such filing being referred to herein as the "Effective Time"). 1.04 Articles of Incorporation and Bylaws of the Surviving Corporation. At the Effective Time, (i) the Articles of Incorporation of the Surviving Corporation shall be amended to read in their entirety (except for the corporate name) as set forth in the Articles of Incorporation of Sub as in effect immediately prior to the Effective Time until thereafter amended as provided by law and such Articles of Incorporation, and (ii) the Bylaws of Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by law, the Articles of Incorporation of the Surviving Corporation and such Bylaws. 1.05 Directors and Officers of the Surviving Corporation. The directors of Sub and the officers of Sub immediately prior to the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and Bylaws. 1.06 Effects of the Merger. Subject to the foregoing, the effects of the Merger shall be as provided in the applicable provisions of the MBCL. 1.07 Further Assurances. Each party hereto will, either prior to or after the Effective Time, execute such further documents, instruments, deeds, bills of sale, assignments and assurances and take such further actions as may reasonably be requested by one or more of the others to consummate the Merger, to vest the Surviving Corporation with full title to all assets, properties, privileges, rights, approvals, immunities and franchises of either of the Constituent Corporations or to effect the other purposes of this Agreement. 2. ARTICLE II CONVERSION OF SHARES 2.01 Conversion of Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof: (a) Capital Stock of Sub. Each issued and outstanding share of the common stock, par value U.S. $.01 per share, of Sub ("Sub Common Stock") shall be converted into and become one fully paid and nonassessable share of common stock, par value U.S.$.01 per share, of the Surviving Corporation ("Surviving Corporation Common Stock"). Each certificate representing outstanding shares of Sub Common Stock shall at the Effective Time represent an equal number of shares of Surviving Corporation Common Stock. (b) Cancellation of Treasury Stock and Stock Owned by Lynx and Subsidiaries. All shares of common stock, par value U.S. $.01 per share, of Grizzly ("Grizzly Common Stock") that are owned by Grizzly as treasury stock and any shares of Grizzly Common Stock owned by Lynx, Sub or any other wholly-owned Subsidiary (as defined in Section 9.11) of Lynx shall be canceled and retired and shall cease to exist and no stock of Lynx or other consideration shall be delivered in exchange therefor. (c) Exchange Ratio for Grizzly Common Stock. (i) Each issued and outstanding share of Grizzly Common Stock (other than shares to be canceled in accordance with Section 2.01(b) and other than A-2 Dissenting Shares (as defined in Section 2.01(d))) shall be converted into the right to receive 1.347 (the "Conversion Number") fully paid and nonassessable shares of common stock of Lynx ("Lynx Common Stock"). (ii) If, prior to the Effective Time, Lynx shall pay a dividend in, subdivide, combine into a smaller number of shares or issue by reclassification of its shares any shares of Lynx Common Stock, the Conversion Number shall be multiplied by a fraction, the numerator of which shall be the number of shares of Lynx Common Stock outstanding immediately after, and the denominator of which shall be the number of such shares outstanding immediately before, the occurrence of such event, and the resulting product shall from and after the date of such event be the Conversion Number, subject to further adjustment in accordance with this paragraph. If, prior to the Effective Time, Grizzly shall pay a dividend in, subdivide, combine into a smaller number of shares or issue by reclassification of its shares any shares of Grizzly Common Stock, the Conversion Number shall be multiplied by a fraction, the numerator of which shall be the number of shares of Grizzly Common Stock outstanding immediately before, and the denominator of which shall be the number of such shares outstanding immediately after, the occurrence of such event, and the resulting product shall from and after the date of such event be the Conversion Number, subject to further adjustment in accordance with this paragraph. (iii) All shares of Grizzly Common Stock converted in accordance with paragraph (i) of this Section 2.01(c) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Lynx Common Stock and any cash in lieu of fractional shares of Lynx Common Stock to be issued or paid in consideration therefor (determined in accordance with Section 2.02(e)), upon the surrender of such certificate in accordance with Section 2.02, without interest. (d) Dissenting Shares. (i) Notwithstanding any provision of this Agreement to the contrary, each outstanding share of Grizzly Common Stock the holder of which has not voted in favor of the Merger, has perfected such holder's right to an appraisal of such holder's shares in accordance with the applicable provisions of the MBCL and has not effectively withdrawn or lost such right to appraisal (a "Dissenting Share") shall not be converted into or represent a right to receive shares of Lynx Common Stock pursuant to Section 2.01(c), but the holder thereof shall be entitled only to such rights as are granted by the applicable provisions of the MBCL; provided, however, that any Dissenting Share held by a person at the Effective Time who shall, after the Effective Time, withdraw the demand for appraisal or lose the right of appraisal, in either case pursuant to the MBCL, shall be deemed to be converted into, as of the Effective Time, the right to receive shares of Lynx Common Stock pursuant to Section 2.01(c). (ii) Grizzly shall give Lynx (x) prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other instruments served pursuant to the applicable provisions of the MBCL relating to the appraisal process received by Grizzly and (y) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the MBCL. Grizzly will not voluntarily make any payment with respect to any demands for appraisal and will not, except with the prior written consent of Lynx, settle or offer to settle any such demands. (e) Stock Option Plans. Subject to Canadian securities law and The Toronto Stock Exchange rules and subject to the terms and conditions of Grizzly's Director Warrant Plan, 1981 Stock Option Plan and 1992 Stock Option Plan (the "Grizzly Option Plans") and the stock option agreements executed pursuant thereto the Grizzly Option Plans and each warrant or option to purchase Grizzly Common Stock granted thereunder that is outstanding at the Effective Time shall be assumed by Lynx and continued in accordance with their respective terms and each such warrant or option shall become a right to purchase a number of shares of Lynx Common Stock equal to the Conversion Number multiplied by the number of shares of Grizzly Common Stock subject to such warrant or option immediately prior to the Effective Time, as more fully described in Section 6.09. A-3 2.02 Exchange of Certificates. (a) Exchange Agent. Promptly following the Effective Time, Lynx shall make available to the Surviving Corporation for deposit with a bank, trust company or transfer agent designated before the Closing Date by Lynx and reasonably acceptable to Grizzly (the "Exchange Agent") certificates representing the number of duly authorized whole shares of Lynx Common Stock issuable in connection with the Merger plus an amount of cash equal to the aggregate amount payable in lieu of fractional shares in accordance with Section 2.02(e), to be held for the benefit of and distributed to such holders in accordance with this Section. The Exchange Agent shall agree to hold such shares of Lynx Common Stock and funds (such shares of Lynx Common Stock and funds, together with earnings thereon, being referred to herein as the "Exchange Fund") for delivery as contemplated by this Section and upon such additional terms as may be agreed upon by the Exchange Agent, Grizzly and Lynx. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Grizzly Common Stock (the "Certificates") whose shares are converted pursuant to Section 2.01(c) into the right to receive shares of Lynx Common Stock (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as the Surviving Corporation may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Lynx Common Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal duly executed and completed in accordance with its terms, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Lynx Common Stock, plus the cash amount payable in lieu of fractional shares in accordance with Section 2.02(e), which such holder has the right to receive pursuant to the provisions of this Article II, and the Certificate so surrendered shall forthwith be canceled. In no event shall the holder of any Certificate be entitled to receive interest on any funds to be received in the Merger. In the event of a transfer of ownership of Grizzly Common Stock which is not registered in the transfer records of Grizzly, a certificate representing that number of whole shares of Lynx Common Stock, plus the cash amount payable in lieu of fractional shares in accordance with Section 2.02(e), may be issued to a transferee if the Certificate representing such Grizzly Common Stock is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.02(b), each Certificate shall be deemed at any time after the Effective Time for all corporate purposes of Lynx, except as limited by paragraph (c) below, to represent ownership of the number of shares of Lynx Common Stock into which the number of shares of Grizzly Common Stock shown thereon have been converted as contemplated by this Article II. Notwithstanding the foregoing, Certificates representing Grizzly Common Stock surrendered for exchange by any person constituting an "affiliate" of Grizzly for purposes of Section 6.04 shall not be exchanged until Lynx has received an Affiliate Agreement (as defined in Section 6.04) executed by such person as provided in Section 6.04. (c) Distributions with Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Lynx Common Stock with a record date on or after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Lynx Common Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.02(e) until the holder of record of such Certificate shall surrender such Certificate in accordance with this Section (or affidavits of loss with respect to lost, stolen or destroyed certificates). Subject to the effect of applicable laws, following surrender of any such Certificate or affidavit, there shall be paid to the record holder of the certificates representing whole shares of Lynx Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions, if any, with a record date on or after the Effective Time which theretofore became payable, but which were not paid by reason of the immediately preceding sentence, A-4 with respect to such whole shares of Lynx Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date on or after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Lynx Common Stock. (d) No Further Ownership Rights in Grizzly Common Stock. All shares of Lynx Common Stock issued upon the surrender for exchange of Certificates in accordance with the terms hereof (including any cash paid pursuant to Section 2.02(e)) shall be deemed to have been issued at the Effective Time in full satisfaction of all rights pertaining to the shares of Grizzly Common Stock represented thereby. From and after the Effective Time, the stock transfer books of Grizzly shall be closed and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Grizzly Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section. (e) No Fractional Shares. (i) No certificate or scrip representing fractional shares of Lynx Common Stock will be issued in the Merger upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a shareholder of Lynx. In lieu of any such fractional shares, each holder of Certificates who would otherwise have been entitled to a fraction of a share of Lynx Common Stock in exchange for such Certificates pursuant to this Section shall receive from the Exchange Agent a cash payment in U.S. dollars without interest in lieu of such fractional share determined by multiplying such fraction by the average of the last sale prices of Lynx Common Stock, as reported by The Toronto Stock Exchange, for the five Toronto Stock Exchange trading days immediately preceding the Effective Date. As promptly as practicable after the determination of the amount of cash, if any, to be paid to holders of fractional interests, the Exchange Agent shall so notify Lynx, and Lynx shall cause the Surviving Corporation to deposit such amount with the Exchange Agent and shall cause the Exchange Agent to forward payments to such holders of fractional interests subject to and in accordance with the terms hereof. (f) Termination of Exchange Fund and Common Stock Trust. Any portion of the Exchange Fund and Common Stock Trust which remains undistributed to the shareholders of Grizzly for six months after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any shareholders of Grizzly who have not theretofore complied with this Article II shall thereafter look only to the Surviving Corporation (subject to abandoned property, escheat and other similar laws) as general creditors for payment of their claim for Lynx Common Stock, any cash in lieu of fractional shares of Lynx Common Stock and any dividends or distributions with respect to Lynx Common Stock. Neither Lynx nor the Surviving Corporation shall be liable to any holder of shares of Grizzly Common Stock for shares of Lynx Common Stock (or dividends or distributions with respect thereto) or cash payable in respect of fractional share interests delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 3. ARTICLE III REPRESENTATIONS AND WARRANTIES OF GRIZZLY Grizzly represents and warrants to Lynx and Sub as follows: 3.01 Organization and Qualification. Each of Grizzly and its Subsidiaries (as defined in Section 9.11) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties, except for such failures to be so incorporated, existing and in good standing or to have such power and authority which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect (as defined in Section 9.11) on Grizzly and its Subsidiaries taken as a whole. Each of Grizzly and its Subsidiaries is duly qualified, licensed A-5 or admitted to do business and is in good standing in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for such failures to be so qualified, licensed or admitted and in good standing which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. Section 3.01 of the letter dated the date hereof and delivered to Lynx and Sub by Grizzly concurrently with the execution and delivery of this Agreement (the "Grizzly Disclosure Letter") sets forth (i) the name and jurisdiction of incorporation of each Subsidiary of Grizzly, (ii) its authorized capital stock, (iii) the number of issued and outstanding shares of its capital stock and (iv) the record owners of such shares. Except for interests in the Subsidiaries of Grizzly and as disclosed in Section 3.01 of the Grizzly Disclosure Letter, Grizzly does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity (other than (i) non-controlling investments in the ordinary course of business and corporate partnering, development, cooperative marketing and similar undertakings and arrangements entered into in the ordinary course of business and (ii) other investments of less than U.S. $100,000). Grizzly has previously made available to Lynx correct and complete copies of the certificate or articles of incorporation and bylaws (or other comparable charter documents) of Grizzly. 3.02 Capital Stock. (a) The authorized capital stock of Grizzly consists solely of 30,000,000 shares of Grizzly Common Stock and 1,000,000 shares of preferred stock, par value $.01 per share ("Grizzly Preferred Stock"). As of the close of business on October 26, 1998, 12,651,626 shares of Grizzly Common Stock were issued and outstanding, 366,073 shares were held in the treasury of Grizzly and 2,100,000 shares we reserved for issuance upon the exercise of Options under the Grizzly Option Plans of which 1,440,315 were granted and are outstanding. Since such date, there has been no change in the number of issued and outstanding shares of Grizzly Common Stock or shares of Grizzly Common Stock held in treasury or reserved for issuance other than the reservation of 2,517,673 shares pursuant to the relevant Stock Option Agreement. As of the date hereof, no shares of Grizzly Preferred Stock are issued and outstanding and 3,000 shares are designated Series A Junior Participating Preferred Stock ("Grizzly Series A Preferred Stock") and are reserved for issuance in accordance with the Rights Agreement dated as of May 1, 1997, as amended, by and between Grizzly and American Stock Transfer & Trust Company, as Rights Agent (the "Grizzly Rights Agreement"), pursuant to which Grizzly has issued rights (the "Grizzly Rights") to purchase shares of Grizzly Series A Junior Participating Preferred Stock. All of the issued and outstanding shares of Grizzly Common Stock are, and all shares reserved for issuance will be, upon issuance in accordance with the terms specified in the instruments or agreements pursuant to which they are issuable, duly authorized, validly issued, fully paid and nonassessable. Except pursuant to this Agreement, the Grizzly Rights Agreement and the Stock Option Agreements and except as set forth in Section 3.02 of the Grizzly Disclosure Letter, there are no outstanding subscriptions, options, warrants, rights (including "phantom" stock rights), preemptive rights or other contracts, commitments, understandings or arrangements, including any right of conversion or exchange under any outstanding security, instrument or agreement (together, "Options"), obligating Grizzly or any of its Subsidiaries to issue or sell any shares of capital stock of Grizzly or to grant, extend or enter into any Option with respect thereto. (b) Except as disclosed in Section 3.02 of the Grizzly Disclosure Letter, all of the outstanding shares of capital stock of each Subsidiary of Grizzly are duly authorized, validly issued, fully paid and nonassessable and are owned, beneficially and of record, by Grizzly or a Subsidiary wholly owned, directly or indirectly, by Grizzly, free and clear of any liens, claims, mortgages, encumbrances, pledges, security interests, equities and charges of any kind (each a "Lien"). Except as disclosed in Section 3.02 of the Grizzly Disclosure Letter, there are no (i) outstanding Options obligating Grizzly or any of its Subsidiaries to issue or sell any shares of capital stock of any Subsidiary of Grizzly or to grant, extend or enter into any such Option or (ii) voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person other than Grizzly or a Subsidiary wholly owned, directly or indirectly, by Grizzly with respect to the voting of or the right to participate in dividends or other earnings on any capital stock of any Subsidiary of Grizzly. A-6 (c) Except as disclosed in Section 3.02 of the Grizzly Disclosure Letter, there are no outstanding contractual obligations of Grizzly or any Subsidiary of Grizzly to repurchase, redeem or otherwise acquire any shares of Grizzly Common Stock or any capital stock of any Subsidiary of Grizzly or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Subsidiary of Grizzly or any other person. 3.03 Authority Relative to This Agreement. Grizzly has full corporate power and authority to enter into this Agreement and, subject to obtaining the Grizzly Shareholders' Approval (as defined in Section 6.03(b)), to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Grizzly and the consummation by Grizzly of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Grizzly, the Board of Directors of Grizzly has recommended adoption of this Agreement by the shareholders of Grizzly and directed that this Agreement be submitted to the shareholders of Grizzly for their consideration, and no other corporate proceedings on the part of Grizzly or its shareholders are necessary to authorize the execution, delivery and performance of this Agreement by Grizzly and the consummation by Grizzly of the transactions contemplated hereby, other than obtaining the Grizzly Shareholders' Approval. This Agreement has been duly and validly executed and delivered by Grizzly and constitutes a legal, valid and binding obligation of Grizzly enforceable against Grizzly in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.04 Non-Contravention; Approvals and Consents. (a) The execution and delivery of this Agreement by Grizzly do not, and the performance by Grizzly of its obligations hereunder and the consummation of the transactions contemplated hereby will not, conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any Lien upon any of the assets or properties of Grizzly or any of its Subsidiaries under, any of the terms, conditions or provisions of (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of Grizzly or any of its Subsidiaries, or (ii) subject to the obtaining of Grizzly Shareholders' Approval and the taking of the actions described in paragraph (b) of this Section, (x) any statute, law, rule, regulation or ordinance (together, "laws"), or any judgment, decree, order, writ, permit or license (together, "orders"), of any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, province, county, city or other political subdivision (a "Governmental or Regulatory Authority") applicable to Grizzly or any of its Subsidiaries or any of their respective assets or properties, or (y) any note, bond, mortgage, security agreement, indenture, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind (together, "Contracts") to which Grizzly or any of its Subsidiaries is a party or by which Grizzly or any of its Subsidiaries or any of their respective assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations and creations and impositions of Liens which, individually or in the aggregate, could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole or on the ability of Grizzly to consummate the transactions contemplated by this Agreement. (b) Except (i) for the filing of a premerger notification report by Grizzly under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (ii) for the filing of the Proxy Statement (as defined in Section 3.09) and the Registration Statement (as defined in Section 4.09) with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), and the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), the declaration of the effectiveness of the Registration Statement by the SEC and filings with various state securities authorities that are required in connection with the transactions contemplated by this Agreement, (iii) A-7 for the filing of the Certificate of Merger and other appropriate merger documents required by the MBCL with the Secretary of State and appropriate documents with the relevant authorities of other states in which the Constituent Corporations are qualified to do business, (iv) the filing(s) as may be required by the Investment Canada Act and/or the Competition Act (Canada) and (v) as disclosed in Section 3.04 of the Grizzly Disclosure Letter, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party is necessary or required under any of the terms, conditions or provisions of any law or order of any Governmental or Regulatory Authority or any Contract to which Grizzly or any of its Subsidiaries is a party or by which Grizzly or any of its Subsidiaries or any of their respective assets or properties is bound for the execution and delivery of this Agreement by Grizzly, the performance by Grizzly of its obligations hereunder or the consummation by Grizzly of the transactions contemplated hereby, other than such consents, approvals, actions, filings and notices which the failure to make or obtain, as the case may be, individually or in the aggregate, could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole or on the ability of Grizzly to consummate the transactions contemplated by this Agreement. 3.05 Reports and Financial Statements. Grizzly has made available to Lynx prior to the execution of this Agreement a true and complete copy of each form, report, schedule, registration statement, definitive proxy statement and other document (together with all amendments thereof and supplements thereto) filed by Grizzly or any of its Subsidiaries with the SEC since January 1, 1993 (as such documents have since the time of their filing been amended or supplemented, the "Grizzly Reports"), which are all the documents (other than preliminary material) that Grizzly and its Subsidiaries were required to file with the SEC since such date. As of their respective dates, the Grizzly Reports (i) complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements (including, in each case, the notes, if any, thereto) included in the Grizzly Reports (the "Grizzly Financial Statements") complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles in the United States applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto and except with respect to unaudited statements as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited interim financial statements, to normal, recurring year-end audit adjustments (which are not expected to be, individually or in the aggregate, materially adverse to Grizzly and its Subsidiaries taken as a whole)) the consolidated financial position of Grizzly and its consolidated subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. Except as set forth in Section 3.05 of the Grizzly Disclosure Letter, each Subsidiary of Grizzly is treated as a consolidated subsidiary of Grizzly in the Grizzly Financial Statements for all periods covered thereby. 3.06 Absence of Certain Changes or Events. Except as disclosed in Grizzly Reports filed prior to the date of this Agreement or in Section 3.06 of the Grizzly Disclosure Letter, (a) since June 30, 1998 there has not been any change, event or development (excluding stock market fluctuations, changes in general economic conditions, or any change, event, or development having, or that could reasonably be expected to have, individually or in the aggregate, a material adverse effect on companies in the industries in which Grizzly operates generally) having, or that could be reasonably expected to have, individually or in the aggregate, a material adverse effect on Grizzly and its Subsidiaries taken as a whole, and (b) between such date and the date hereof (i) Grizzly and its Subsidiaries have conducted their respective businesses only in the ordinary course consistent with past practice and (ii) neither Grizzly nor any of its Subsidiaries has taken any action which, if taken after the date hereof, would constitute a breach of any provision of clause (ii) of Section 5.01(b). 3.07 Absence of Undisclosed Liabilities. Except for matters reflected or reserved against in the consolidated balance sheet of Grizzly and its consolidated subsidiaries dated June 30, 1998 included in the A-8 Grizzly Financial Statements or as disclosed in Section 3.07 of the Grizzly Disclosure Letter, neither Grizzly nor any of its Subsidiaries had at such date, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due) of any nature that would be required by generally accepted accounting principles to be reflected on a consolidated balance sheet of Grizzly and its consolidated subsidiaries (including the notes thereto), except liabilities or obligations (i) which were incurred in the ordinary course of business consistent with past practice or (ii) which have not been, and could not be reasonably expected to be, individually or in the aggregate, materially adverse to Grizzly and its Subsidiaries taken as a whole. 3.08 Legal Proceedings. Except as disclosed in the Grizzly Reports filed prior to the date of this Agreement or in Section 3.08 of the Grizzly Disclosure Letter, (i) there are no actions, suits, arbitrations or proceedings pending or, to the knowledge of Grizzly, threatened against, relating to or affecting, nor to the knowledge of Grizzly are there any Governmental or Regulatory Authority investigations or audits pending or threatened against, relating to or affecting, Grizzly or any of its Subsidiaries or any of their respective assets and properties which, individually or in the aggregate, could be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole or on the ability of Grizzly to consummate the transactions contemplated by this Agreement, and (ii) neither Grizzly nor any of its Subsidiaries is subject to any order of any Governmental or Regulatory Authority which, individually or in the aggregate, is having or could be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole or on the ability of Grizzly to consummate the transactions contemplated by this Agreement. 3.09 Information Supplied. The joint proxy statement relating to the Shareholders' Meetings (as defined in Section 6.03(b)), as amended or supplemented from time to time (as so amended and supplemented, the "Proxy Statement"), and any other documents to be filed by Grizzly with the SEC, The Toronto Stock Exchange or any other Governmental or Regulatory Authority in connection with the Merger and the other transactions contemplated hereby will (in the case of the Proxy Statement and any such other documents filed with the SEC under the Exchange Act or the Securities Act) comply as to form in all material respects with the requirements of the Exchange Act and the Securities Act, respectively, and will not, on the date of its filing or, in the case of the Proxy Statement, at the date it is mailed to shareholders of Grizzly and of Lynx and at the times of the Shareholders' Meetings, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by Grizzly with respect to information supplied in writing by or on behalf of Lynx or Sub expressly for inclusion therein and information incorporated by reference therein from documents filed by Lynx or any of its Subsidiaries with the SEC. 3.10 Compliance with Laws and Orders. Grizzly and its Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental and Regulatory Authorities necessary for the lawful conduct of their respective businesses as presently conducted (the "Grizzly Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. Grizzly and its Subsidiaries are in compliance with the terms of the Grizzly Permits, except failures so to comply which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. Except as disclosed in the Grizzly Reports filed prior to the date of this Agreement, Grizzly and its Subsidiaries are not in violation of or default under any law or order of any Governmental or Regulatory Authority, except for such violations or defaults which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. 3.11 Compliance with Agreements; Certain Agreements. (a) Except as disclosed in the Grizzly Reports filed prior to the date of this Agreement, neither Grizzly nor any of its Subsidiaries nor, to the knowledge of Grizzly, any other party thereto is in breach or violation of, or in default in the performance or observance of A-9 any term or provision of, and no event has occurred which, with notice or lapse of time or both, could be reasonably expected to result in a default under, (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of Grizzly or any of its Subsidiaries or (ii) any Contract to which Grizzly or any of its Subsidiaries is a party or by which Grizzly or any of its Subsidiaries or any of their respective assets or properties is bound, except in the case of clause (ii) for breaches, violations and defaults which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. Except for this Agreement and those agreements and other documents filed as exhibits to the Grizzly Reports or set forth in Section 3.11 of the Grizzly Disclosure Letter, as of the date of this Agreement, neither Grizzly nor any of its Subsidiaries is a party to or bound by (i) any "material contract" within the meaning of item 601(b)(10) of the SEC's Regulation S-K or (ii) any non-competition agreement or other agreement or arrangement that materially restricts it or any of its Subsidiaries from competing in any line of business. (b) Except as disclosed in Section 3.11 of the Grizzly Disclosure Letter or in the Grizzly Reports filed prior to the date of this Agreement or as provided for in this Agreement, as of the date hereof, neither Grizzly nor any of its Subsidiaries is a party to any oral or written (i) consulting agreement not terminable on 30 days' or less notice involving the payment of more than U.S. $100,000 per annum in the aggregate for all such agreements, (ii) union or collective bargaining agreement which covers any employees, (iii) agreement with any executive officer or other employee of Grizzly or any of its Subsidiaries the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence of a transaction involving Grizzly or any of its Subsidiaries of the nature contemplated by this Agreement, (iv) agreement with respect to any executive officer or other employee of Grizzly or any of its Subsidiaries providing any term of employment or compensation guarantee or (v) agreement or plan, including any stock option, stock appreciation right, restricted stock or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. 3.12 Taxes. (a) Each of Grizzly and its Subsidiaries has filed all material tax returns and reports required to be filed by it, or requests for extensions to file such returns or reports have been timely filed or granted and have not expired, and all tax returns and reports are complete and accurate in all respects, except to the extent that such failures to file, have extensions granted that remain in effect or be complete and accurate in all respects, as applicable, individually or in the aggregate, would not have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. Grizzly and each of its Subsidiaries has paid (or Grizzly has paid on its behalf) all taxes shown as due on such tax returns and reports. The most recent financial statements contained in the Grizzly Reports reflect an adequate reserve for all taxes payable by Grizzly and its Subsidiaries for all taxable periods and portions thereof accrued through the date of such financial statements, and no deficiencies for any taxes have been proposed, asserted or assessed against Grizzly or any of its Subsidiaries that are not adequately reserved for, except for inadequately reserved taxes and inadequately reserved deficiencies that would not, individually or in the aggregate, have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. No requests for waivers of the time to assess any taxes against Grizzly or any of its Subsidiaries have been granted or are pending, except for requests with respect to such taxes that have been adequately reserved for in the most recent financial statements contained in the Grizzly Reports, or, to the extent not adequately reserved, the assessment of which would not, individually or in the aggregate, have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. (b) To the best knowledge of Grizzly, there are no liens for material amounts of taxes on the assets of Grizzly or any of its Subsidiaries except for statutory liens for current taxes not yet due and payable. (c) As used in this Section 3.12 and in Section 4.12, "taxes" shall include all federal, provincial, state, local and foreign income, capital, franchise, property, sales, use, goods and services, excise, land transfer, workers compensation, employment insurance, workers health and other taxes, including obligations for taxes A-10 and other amounts required to be withheld from payments due or made to any other person (including employees and non-resident persons) and any interest, penalties or additions to tax. 3.13 Employee Benefit Plans; ERISA. (a) Except as described in the Grizzly Reports filed prior to the date of this Agreement or as would not have a material adverse effect on Grizzly and its Subsidiaries taken as a whole, (i) all Grizzly Employee Benefit Plans (as defined below) are in compliance with all applicable requirements of law, including ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) neither Grizzly nor any of its Subsidiaries has any liabilities or obligations with respect to any such Grizzly Employee Benefit Plans, whether accrued, contingent or otherwise, nor to the knowledge of Grizzly are any such liabilities or obligations expected to be incurred. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Grizzly Employee Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. The only severance agreements or severance policies applicable to Grizzly or any of its Subsidiaries are the agreements and policies specifically referred to in Section 3.13 of the Grizzly Disclosure Letter. The last date on which stock options were granted to any officer or director of Grizzly was May 15, 1998. Except as set forth in Section 3.13 of the Grizzly Disclosure Letter, Grizzly has caused the executive party to all existing executive retention agreements to waive application of such agreement to the Merger, and copies of such waivers have been furnished to Lynx. The Board of Directors of Grizzly has amended all Grizzly's deferred compensation agreements so that the Merger will not result in the maturity thereof. (b) As used herein: (i) "Grizzly Employee Benefit Plan" means any Plan entered into, established, maintained, sponsored, contributed to or required to be contributed to by Grizzly or any of its Subsidiaries for the benefit of the current or former employees or directors of Grizzly or any of its Subsidiaries and existing on the date of this Agreement or at any time subsequent thereto and on or prior to the Effective Time and, in the case of a Plan which is subject to Part 3 of Title I of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder ("ERISA"), Section 412 of the Code or Title IV of ERISA, at any time during the five-year period preceding the date of this Agreement; and (ii) "Plan" means any employment, bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, medical, accident, disability, workmen's compensation or other insurance, severance, separation, termination, change of control or other benefit plan, agreement, practice, policy, program or arrangement of any kind, whether written or oral, including, but not limited to any "employee benefit plan" within the meaning of Section 3(3) of ERISA. 3.14 Labor Matters. Except as disclosed in the Grizzly Reports filed prior to the date of this Agreement or in Section 3.14 of the Grizzly Disclosure Letter, there are no material controversies pending or, to the knowledge of Grizzly, threatened between Grizzly or any of its Subsidiaries and any representatives of its employees, except as would not, individually or in the aggregate, have a material adverse effect on Grizzly and its Subsidiaries taken as a whole, and, to the knowledge of Grizzly, there are no material organizational efforts presently being made involving any of the now unorganized employees of Grizzly or any of its Subsidiaries. Since January 1, 1993, there has been no work stoppage, strike or other concerted action by employees of Grizzly or any of its Subsidiaries except as would not, individually or in the aggregate, have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. 3.15 Environmental Matters. (a) Each of Grizzly and its Subsidiaries has obtained all licenses, permits, authorizations, approvals and consents from Governmental or Regulatory Authorities which are required under any applicable Environmental Law (as defined below) in respect of its business or operations ("Environmental Permits"), except for such failures to have Environmental Permits which, individually or in the aggregate, A-11 could not reasonably be expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. Each of such Environmental Permits is in full force and effect and each of Grizzly and its Subsidiaries is in compliance with the terms and conditions of all such Environmental Permits and with any applicable Environmental Law, except for such failures to be in compliance which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. (b) To the knowledge of Grizzly, no site or facility now or previously owned, operated or leased by Grizzly or any of its Subsidiaries is listed or proposed for listing on the National Priorities List promulgated pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations thereunder ("CERCLA"), or on any similar state or local list of sites requiring investigation or clean-up. (c) No Liens have arisen under or pursuant to any Environmental Law on any site or facility owned, operated or leased by Grizzly or any of its Subsidiaries, other than any such real property not individually or in the aggregate material to Grizzly and its Subsidiaries taken as a whole, and no action of any Governmental or Regulatory Authority has been taken or, to the knowledge of Grizzly, is in process which could subject any of such properties to such Liens, and neither Grizzly nor any of its Subsidiaries would be required to place any notice or restriction relating to the presence of Hazardous Materials at any such site or facility owned by it in any deed to the real property on which such site or facility is located. (d) There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or which are in the possession of, Grizzly or any of its Subsidiaries in relation to any site or facility now or previously owned, operated or leased by Grizzly or any of its Subsidiaries which have not been delivered to Lynx prior to the execution of this Agreement. (e) As used herein in this Section 3.15 and in Section 4.15: (i) "Environmental Law" means any law or order of any Governmental or Regulatory Authority relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes; and (ii) "Hazardous Material" means (A) any petroleum or petroleum products, flammable explosives, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs); (B) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants" or words of similar import under any Environmental Law; and (C) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated by any Governmental or Regulatory Authority under any Environmental Law. 3.16 Intellectual Property Rights. Except as set forth in Section 3.16 of the Grizzly Disclosure Letter, (a) Grizzly and its Subsidiaries have all right, title and interest in, or a valid and binding license to use, all Intellectual Property Rights (as defined below) individually or in the aggregate material to the conduct of the businesses of Grizzly and its Subsidiaries taken as a whole. Neither Grizzly nor any Subsidiary of Grizzly is in default (or with the giving of notice or lapse of time or both, would be in default) under any license to use such Intellectual Property, such Intellectual Property Rights are not being infringed by any third party, and neither Grizzly nor any Subsidiary of Grizzly is infringing any Intellectual Property Rights of any third party, except for such defaults and infringements which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Grizzly and its Subsidiaries taken as a whole. For A-12 purposes of this Agreement, "Intellectual Property Rights" means patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, copyrights and copyright rights and other proprietary intellectual property rights and all pending applications for and registrations of any of the foregoing. (b) Section 3.16 of the Grizzly Disclosure Letter contains (or will be supplemented to prior to Closing to contain) an accurate and complete list as of the date of this Agreement of all licenses and agreements under which Grizzly and its Subsidiaries are licensed to use third party Intellectual Property Rights which are material to the business of Grizzly as currently conducted (the "Grizzly Intellectual Property Rights"). (c) Except as set forth in Section 3.16 of the Grizzly Disclosure Letter (including as it may be supplemented prior to Closing), to the knowledge of Grizzly's chief executive and chief financial officers (acting in their corporate and not personal capacities), Grizzly and its Subsidiaries are not required to pay any royalties, fees or other amounts to any Person in connection with the use or exploitation of the Grizzly Intellectual Property Rights or the development, manufacture or commercial exploitation of any products of Grizzly or its Subsidiaries in each such case in excess of $250,000 per annum. (d) Section 3.16 of the Grizzly Disclosure Letter contains an accurate and complete list as of the date of this Agreement of all registered patents, registered trademarks, trade names, registered service marks and registered copyrights (in each case that are currently in use), as well as all applications for any and all of the foregoing, included in the Grizzly Intellectual Property Rights (excluding third party Intellectual Property Rights), including the jurisdiction in which each such Grizzly Intellectual Property Rights has been issued or registered or in which any such application for such issuance, approval or registration has been filed. All registered patents, registered trademarks, trade names, registered service marks and registered copyrights owned by Grizzly or any of its Subsidiaries and which are material to the conduct of their business as currently conducted are valid and enforceable. (e) Section 3.16 of Grizzly Disclosure Letter contains an accurate and complete list as of the date of this Agreement of all licenses and sublicenses under which Grizzly or any of its Subsidiaries has granted the right to manufacture, reproduce, market or exploit any material products of Grizzly or any Subsidiaries or any material adaptation, derivative or reformulation based on any such product or any portion thereof. (f) Neither Grizzly nor any of its Subsidiaries is or will be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any license, sublicense, assignment or other agreement to which it is a party giving it a license to material third party Intellectual Property Rights (the "IP Licenses"). Neither the execution or delivery of this Agreement nor the consummation of the transactions contemplated hereby will cause or will result in a material change to the terms of any material license, sublicense or other similar agreement. (g) Except as set forth in Section 3.16 of the Grizzly Disclosure Letter, neither Grizzly nor its Subsidiaries (A) has been sued in any suit, action or proceeding which involves a claim of infringement or violation of any Intellectual Property Right of any third party or (B) has received any written claim or allegation that the manufacturing, importation, marketing, licensing, sale, offer for sale, or use of any of its products infringes Intellectual Property Rights of any third party. (h) Grizzly and its Subsidiaries have taken all reasonable steps to protect and preserve the confidential information, trade secrets and know-how of Grizzly and its Subsidiaries, including appropriate non-disclosure agreements with all employees and third persons having access to any confidential information, trade secrets or know-how of Grizzly and its Subsidiaries. (i) Neither Grizzly nor any of its Subsidiaries has made any written claim or allegation that any third person is or has infringed, misappropriated, breached or violated the rights of Grizzly or its Subsidiaries in any of the Grizzly Intellectual Property Rights which are material to the business of Grizzly as currently conducted. A-13 (j) Except as set forth in Section 3.16 of the Grizzly Disclosure Letter, all internal computer systems that are material to the business, finances or operations of Grizzly ("Material Grizzly Systems") are (i) able to receive, record, store, process, calculate, manipulate and output dates from and after January 1, 2000, time periods that include January 1, 2000 and information that is dependent on or relates to such dates or time periods, in the same manner and with the same accuracy, functionality, data integrity and performance as when dates or time periods prior to January 1, 2000 are involved and (ii) able to store and output date information in a manner that is unambiguous as to century (collectively with clause (i) above, "Year 2000 Compliant") or can be freely modified to be made Year 2000 Compliant without breaching any third party license agreements or otherwise infringing any intellectual property rights of any third party. All Material Systems that are not Year 2000 Compliant as of the date of this Agreement are set forth in Section 3.16 of the Grizzly Disclosure Letter. 3.17 Vote Required. Assuming the accuracy of the representation and warranty contained in Section 4.19, the affirmative vote of the holders of record of at least a majority of the outstanding shares of Grizzly Common Stock with respect to the adoption of this Agreement is the only vote of the holders of any class or series of the capital stock of Grizzly required to adopt this Agreement and to approve the Merger and the other transactions contemplated hereby and by the Stock Option Agreements. 3.18 Opinion of Financial Advisor. Grizzly has received the opinion of Needham & Company, Inc., dated the date hereof, to the effect that, as of the date hereof, the consideration to be received in the Merger by the shareholders of Grizzly is fair from a financial point of view to the shareholders of Grizzly, and a true and complete copy of such opinion has been delivered to Lynx prior to the execution of this Agreement. 3.19 Grizzly Rights Agreement. As of the date hereof and after giving effect to the execution and delivery of this Agreement and the Stock Option Agreements, each Grizzly Right is represented by the certificate representing the associated share of Grizzly Common Stock and is not exercisable or transferable apart from the associated share of Grizzly Common Stock, and Grizzly has (i) taken all necessary actions so that the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and by the Stock Option Agreements will not result in a "Distribution Date", a "Triggering Event" or a "Business Combination" (as defined in the Grizzly Rights Agreement) and (ii) amended the Grizzly Rights Agreement to (x) render it inapplicable to this Agreement, the Merger and the other transactions contemplated hereby and (y) ensure that the Grizzly Rights Agreement may not be further amended by Grizzly without the prior written consent of Lynx in its sole discretion. 3.20 Ownership of Lynx Common Stock. Neither Grizzly nor any of its Subsidiaries or other affiliates beneficially owns any shares of Lynx Common Stock. 3.21 Chapter 110D of Mass. Ann. Laws Not Applicable. Grizzly has taken all necessary actions so that the provisions of Chapter 110D of Mass. Ann. Laws will not, before the termination of this Agreement, apply to this Agreement, the Stock Option Agreements, the Merger or the other transactions contemplated hereby or thereby. 4. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF LYNX AND SUB Lynx and Sub represent and warrant to Grizzly as follows: 4.01 Organization and Qualification. Each of Lynx and its Subsidiaries (including Sub) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties, except for such failures to be so incorporated, existing and in good standing or to have such power and authority which, individually or in the aggregate, are not having and could A-14 not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities and has conducted its operations only as contemplated hereby. Each of Lynx and its Subsidiaries is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for such failures to be so qualified, licensed or admitted and in good standing which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. Section 4.01 of the letter dated the date hereof and delivered by Lynx and Sub to Grizzly concurrently with the execution and delivery of this Agreement (the "Lynx Disclosure Letter") sets forth (i) the name and jurisdiction of incorporation of each Subsidiary of Lynx, (ii) its authorized capital stock, (iii) the number of issued and outstanding shares of its capital stock and (iv) the record owners of such shares. Except for interests in the Subsidiaries of Lynx and as disclosed in Section 4.01 of the Lynx Disclosure Letter, Lynx does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity (other than (i) non-controlling investments in the ordinary course of business and corporate partnering, development, cooperative marketing and similar undertakings and arrangements entered into in the ordinary course of business and (ii) other investments of less than U.S. $100,000). Lynx has previously made available to Grizzly correct and complete copies of the certificate or articles of incorporation and bylaws (or other comparable charter documents) of Lynx. 4.02 Capital Stock. (a) The authorized capital stock of Lynx consists solely of an unlimited number of shares of Lynx Common Stock. As of the close of business on October 26, 1998, 17,043,501 shares of Lynx Common Stock were issued and outstanding, and 2,121,650 shares were reserved for issuance pursuant to Options of which 1,586,865 were granted and are outstanding. Since such date, there has been no change in the number of issued and outstanding shares of Lynx Common Stock or shares of Lynx Common Stock held in treasury or (other than pursuant to the Stock Option Agreements) reserved for issuance since such date. All of the issued and outstanding shares of Lynx Common Stock are, and all shares reserved for issuance will be, upon issuance in accordance with the terms specified in the instruments or agreements pursuant to which they are issuable, duly authorized, validly issued, fully paid and nonassessable. Except pursuant to this Agreement and except as set forth in Section 4.02 of the Lynx Disclosure Letter, there are no outstanding Options obligating Lynx or any of its Subsidiaries to issue or sell any shares of capital stock of Lynx or to grant, extend or enter into any Option with respect thereto. (b) Except as disclosed in Section 4.02 of the Lynx Disclosure Letter, all of the outstanding shares of capital stock of each Subsidiary of Lynx are duly authorized, validly issued, fully paid and nonassessable and are owned, beneficially and of record, by Lynx or a Subsidiary wholly owned, directly or indirectly, by Lynx, free and clear of any Liens. Except as disclosed in Section 4.02 of the Lynx Disclosure Letter, there are no (i) outstanding Options obligating Lynx or any of its Subsidiaries to issue or sell any shares of capital stock of any Subsidiary of Lynx or to grant, extend or enter into any such Option or (ii) voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person other than Lynx or a Subsidiary wholly owned, directly or indirectly, by Lynx with respect to the voting of or the right to participate in dividends or other earnings on any capital stock of any Subsidiary of Lynx. (c) Except as disclosed in Section 4.02 of the Lynx Disclosure Letter, there are no outstanding contractual obligations of Lynx or any Subsidiary of Lynx to repurchase, redeem or otherwise acquire any shares of Lynx Common Stock or any capital stock of any Subsidiary of Lynx or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Subsidiary of Lynx or any other person. 4.03 Authority Relative to This Agreement. Each of Lynx and Sub has full corporate power and authority to enter into this Agreement and, subject (in the case of this Agreement) to obtaining the Lynx Shareholders' Approval (as defined in Section 6.03(a)), to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of Lynx A-15 and Sub and the consummation by each of Lynx and Sub of the transactions contemplated hereby have been duly and validly approved by its Board of Directors and by Lynx in its capacity as the sole shareholder of Sub, the Board of Directors of Lynx has adopted a resolution declaring the advisability of the Lynx Shareholders' Proposals (as defined in Section 6.03(a)) and directed that the Lynx Shareholders' Proposals be submitted for consideration by the shareholders of Lynx in accordance with applicable laws, and no other corporate proceedings on the part of either of Lynx or Sub or their shareholders are necessary to authorize the execution, delivery and performance of this Agreement by Lynx and Sub and the consummation by Lynx and Sub of the transactions contemplated hereby, other than obtaining the Lynx Shareholders' Approval. This Agreement has been duly and validly executed and delivered by each of Lynx and Sub and constitutes a legal, valid and binding obligation of each of Lynx and Sub enforceable against each of Lynx and Sub in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.04 Non-Contravention; Approvals and Consents. (a) The execution and delivery of this Agreement by each of Lynx and Sub do not, and the performance by each of Lynx and Sub of its obligations hereunder and the consummation of the transactions contemplated hereby will not, conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any Lien upon any of the assets or properties of Lynx or any of its Subsidiaries under, any of the terms, conditions or provisions of (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of Lynx or any of its Subsidiaries, or (ii) subject to the obtaining of the Lynx Shareholders' Approval and the taking of the actions described in paragraph (b) of this Section, (x) any laws or orders of any Governmental or Regulatory Authority applicable to Lynx or any of its Subsidiaries or any of their respective assets or properties, or (y) any Contracts to which Lynx or any of its Subsidiaries is a party or by which Lynx or any of its Subsidiaries or any of their respective assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations and creations and impositions of Liens which, individually or in the aggregate, could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole or on the ability of Lynx and Sub to consummate the transactions contemplated by this Agreement. (b) Except (i) for the filing of a premerger notification report by Lynx under the HSR Act, (ii) for the filing of the Registration Statement with the SEC pursuant to the Exchange Act and the Securities Act, the declaration of the effectiveness of the Registration Statement by the SEC and filings with various state securities authorities that are required in connection with the transactions contemplated by this Agreement, (iii) for the filing of the Articles of Merger and other appropriate merger documents required by the MBCL with the Secretary of State and appropriate documents with the relevant authorities of other states in which the Constituent Corporations are qualified to do business, (iv) as may be required under applicable requirements of the Competition Act (Canada) and the Investment Canada Act, (v) as may be required by the by-laws, rules, regulations or policies of The Toronto Stock Exchange in respect of the Lynx Common Stock to be issued in the Merger and upon the exercise of the Grizzly Options to be assumed by Lynx by reason of the Merger and the listing of such Lynx Common Stock on such stock exchanges, (vi) such filings as are required to be made and exemption rulings or orders as are required to be obtained under the Ontario Business Corporations Act or Business Corporations Act, c.B-9.1, Statutes of New Brunswick, 1981, or under Canadian securities laws, and (vii) as disclosed in Section 4.04 of the Lynx Disclosure Letter, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party is necessary or required under any of the terms, conditions or provisions of any law or order of any Governmental or Regulatory Authority or any Contract to which Lynx or any of its Subsidiaries is a party or by which Lynx or any of its Subsidiaries or any of their respective assets or properties is bound for the execution and delivery of this Agreement by each of Lynx and Sub, the performance by each of Lynx and Sub of its obligations hereunder or the consummation by Lynx of the transactions contemplated hereby, other than such consents, approvals, actions, filings and notices which the failure to make or obtain, as the case may be, individually or A-16 in the aggregate, could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole or on the ability of Lynx and Sub to consummate the transactions contemplated by this Agreement. 4.05 Reports and Financial Statements. Lynx has made available to Grizzly prior to the execution of this Agreement a true and complete copy of each form, report, schedule, registration statement, definitive proxy statement and other document (together with all amendments thereof and supplements thereto) filed by Lynx or any of its Subsidiaries with Canadian securities regulatory authorities and The Toronto Stock Exchange since January 1, 1993 (as such documents have since the time of their filing been amended or supplemented, the "Lynx Reports"), which are all the documents (other than preliminary material) that Lynx and its Subsidiaries were required to file with Canadian securities regulatory authorities and The Toronto Stock Exchange since such date. As of their respective dates, the Lynx Reports (i) complied as to form in all material respects with the requirements of Canadian securities laws and The Toronto Stock Exchange, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements (including, in each case, the notes, if any, thereto) included in the Lynx Reports (the "Lynx Financial Statements") complied as to form in all material respects with the published rules and regulations of the Canadian securities regulatory authorities with respect thereto, were prepared in accordance with generally accepted accounting principles in Canada applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto and except with respect to unaudited statements as permitted by Canadian securities laws) and fairly present (subject, in the case of the unaudited interim financial statements, to normal, recurring year- end audit adjustments (which are not expected to be, individually or in the aggregate, materially adverse to Lynx and its Subsidiaries taken as a whole)) the consolidated financial position of Lynx and its consolidated subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. Except as set forth in Section 4.05 of the Lynx Disclosure Letter, each Subsidiary of Lynx is treated as a consolidated subsidiary of Lynx in the Lynx Financial Statements for all periods covered thereby. 4.06 Absence of Certain Changes or Events. Except as disclosed in the Lynx Reports filed prior to the date of this Agreement or in Section 4.06 of the Lynx Disclosure Letter, (a) since June 30, 1998 there has not been any change, event or development (excluding stock market fluctuations, changes in general economic conditions, or any change, event or development having, or that could reasonably be expected to have, individually or in the aggregate, a material adverse effect on companies in the industries in which Lynx operates generally) having, or that could be reasonably expected to have, individually or in the aggregate, a material adverse effect on Lynx and its Subsidiaries taken as a whole, and (b) between such date and the date hereof (i) Lynx and its Subsidiaries have conducted their respective businesses only in the ordinary course consistent with past practice and (ii) neither Lynx nor any of its Subsidiaries has taken any action which, if taken after the date hereof, would constitute a breach of any provision of clause (ii) of Section 5.01(b). 4.07 Absence of Undisclosed Liabilities. Except for matters reflected or reserved against in the consolidated balance sheet of Lynx and its consolidated subsidiaries dated June 30, 1998 included in the Lynx Financial Statements or as disclosed in Section 4.07 of the Lynx Disclosure Letter, neither Lynx nor any of its Subsidiaries had at such date, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due) of any nature that would be required by generally accepted accounting principles to be reflected on a consolidated balance sheet of Lynx and its consolidated subsidiaries (including the notes thereto), except liabilities or obligations (i) which were incurred in the ordinary course of business consistent with past practice or (ii) which have not been, and could not be reasonably expected to be, individually or in the aggregate, materially adverse to Lynx and its Subsidiaries taken as a whole. A-17 4.08 Legal Proceedings. Except as disclosed in the Lynx Reports filed prior to the date of this Agreement or in Section 4.08 of the Lynx Disclosure Letter, (i) there are no actions, suits, arbitrations or proceedings pending or, to the knowledge of Lynx, threatened against, relating to or affecting, nor to the knowledge of Lynx are there any Governmental or Regulatory Authority investigations or audits pending or threatened against, relating to or affecting, Lynx or any of its Subsidiaries or any of their respective assets and properties which, individually or in the aggregate, could be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole or on the ability of Lynx and Sub to consummate the transactions contemplated by this Agreement, and (ii) neither Lynx nor any of its Subsidiaries is subject to any order of any Governmental or Regulatory Authority which, individually or in the aggregate, is having or could be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole or on the ability of Lynx and Sub to consummate the transactions contemplated by this Agreement. 4.09 Information Supplied. The registration statement on Form S-4 to be filed with the SEC by Lynx in connection with the issuance of shares of Lynx Common Stock in the Merger, as amended or supplemented from time to time (as so amended and supplemented, the "Registration Statement"), and any other documents to be filed by Lynx with the SEC, Canadian securities regulatory authorities, The Toronto Stock Exchange or any other Governmental or Regulatory Authority in connection with the Merger and the other transactions contemplated hereby will (in the case of the Registration Statement and any such other documents filed with the SEC under the Securities Act or the Exchange Act, with Canadian securities regulatory authorities under Canadian securities laws or with The Toronto Stock Exchange) comply as to form in all material respects with the requirements of the Exchange Act, the Securities Act or comparable Canadian laws, respectively, and will not, on the date of its filing or, in the case of the Registration Statement, at the time it becomes effective under the Securities Act, at the date the Proxy Statement is mailed to shareholders of Grizzly and of Lynx and at the times of the Shareholders' Meetings, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by Lynx or Sub with respect to information supplied in writing by or on behalf of Grizzly expressly for inclusion therein and information incorporated by reference therein from documents filed by Grizzly or any of its Subsidiaries with the SEC, Canadian securities regulatory authorities or The Toronto Securities Exchange. 4.10 Compliance with Laws and Orders. Lynx and its Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental and Regulatory Authorities necessary for the lawful conduct of their respective businesses as presently conducted (the "Lynx Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. Lynx and its Subsidiaries are in compliance with the terms of the Lynx Permits, except failures so to comply which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. Except as disclosed in the Lynx Reports filed prior to the date of this Agreement, Lynx and its Subsidiaries are not in violation of or default under any law or order of any Governmental or Regulatory Authority, except for such violations or defaults which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. 4.11 Compliance with Agreements; Certain Agreements. (a) Except as disclosed in the Lynx Reports filed prior to the date of this Agreement, neither Lynx nor any of its Subsidiaries nor, to the knowledge of Lynx, any other party thereto is in breach or violation of, or in default in the performance or observance of any term or provision of, and no event has occurred which, with notice or lapse of time or both, could be reasonably expected to result in a default under, (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of Lynx or any of its Subsidiaries or (ii) any Contract to which Lynx or any of its Subsidiaries is a party or by which Lynx or any of its Subsidiaries or any of their respective assets or properties is bound, except in the case of clause (ii) for breaches, violations and defaults which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on A-18 Lynx and its Subsidiaries taken as a whole. Except for this Agreement and those agreements and other documents filed as exhibits to the Lynx Reports or set forth in Section 4.11 of the Lynx Disclosure Letter, as of the date of this Agreement, neither Lynx nor any of its Subsidiaries is a party to or bound by (i) any material contract or (ii) any non-competition agreement or other agreement or arrangement that materially restricts it or any of its Subsidiaries from competing in any line of business. (b) Except as disclosed in Section 4.11 of the Lynx Disclosure Letter or in the Lynx Reports filed prior to the date of this Agreement or as provided for in this Agreement, as of the date hereof, neither Lynx nor any of its Subsidiaries is a party to any oral or written (i) consulting agreement not terminable on 30 days' or less notice involving the payment of more than U.S. $100,000 per annum in the aggregate for all such agreements, (ii) union or collective bargaining agreement which covers any employees, (iii) agreement with any executive officer or other employee of Lynx or any of its Subsidiaries the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence of a transaction involving Lynx or any of its Subsidiaries of the nature contemplated by this Agreement, (iv) agreement with respect to any executive officer or other employee of Lynx or any of its Subsidiaries providing any term of employment or compensation guarantee or (v) agreement or plan, including any stock option, stock appreciation right, restricted stock or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. 4.12 Taxes. (a) Each of Lynx and its Subsidiaries has filed all material tax returns and reports required to be filed by it, or requests for extensions to file such returns or reports have been timely filed or granted and have not expired, except that Lynx and its Subsidiaries have not filed federal or state income taxes in the United States for calendar year 1997, and all tax returns and reports are complete and accurate in all respects, except to the extent that such failures to file, have extensions granted that remain in effect or be complete and accurate in all respects, as applicable, individually or in the aggregate, would not have a material adverse effect on Lynx and its Subsidiaries taken as a whole. Lynx and each of its Subsidiaries has paid (or Lynx has paid on its behalf) all taxes shown as due on such tax returns and reports. The most recent financial statements contained in the Lynx Reports reflect an adequate reserve for all taxes payable by Lynx and its Subsidiaries for all taxable periods and portions thereof accrued through the date of such financial statements, and no deficiencies for any taxes have been proposed, asserted or assessed against Lynx or any of its Subsidiaries that are not adequately reserved for, except for inadequately reserved taxes and inadequately reserved deficiencies that would not, individually or in the aggregate, have a material adverse effect on Lynx and its Subsidiaries taken as a whole. No waivers of the time to assess any taxes against Lynx or any of its Subsidiaries have been given or filed or are pending, except for waivers with respect to such taxes that have been adequately reserved for in the most recent financial statements contained in the Lynx Reports, or, to the extent not adequately reserved, the assessment of which would not, individually or in the aggregate, have a material adverse effect on Lynx and its Subsidiaries taken as a whole. (b) To the best knowledge of Lynx, there are no liens for material amounts of taxes on the assets of Lynx or any of its Subsidiaries except for statutory liens for current taxes not yet due and payable. 4.13 Employee Benefit Plans; ERISA. (a) Except as described in the Lynx Reports filed prior to the date of this Agreement or as would not have a material adverse effect on Lynx and its Subsidiaries taken as a whole, (i) all Lynx Employee Benefit Plans (as defined below) are in compliance with all applicable requirements of law, including ERISA and the Code, and (ii) neither Lynx nor any of its Subsidiaries has any liabilities or obligations with respect to any such Lynx Employee Benefit Plans, whether accrued, contingent or otherwise, nor to the knowledge of Lynx are any such liabilities or obligations expected to be incurred. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Lynx Employee Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, A-19 forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. The only severance agreements or severance policies applicable to Lynx or any of its Subsidiaries are the agreements and policies specifically referred to in Section 4.13 of the Lynx Disclosure Letter. The last date on which stock options were granted to any officer or director of Lynx was May 12, 1998. (b) As used herein "Lynx Employee Benefit Plan" means any Plan entered into, established, maintained, sponsored, contributed to or required to be contributed to by Lynx or any of its Subsidiaries for the benefit of the current or former employees or directors of Lynx or any of its Subsidiaries and existing on the date of this Agreement or at any time subsequent thereto and on or prior to the Effective Time and, in the case of a Plan which is subject to Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of ERISA, at any time during the five-year period preceding the date of this Agreement. 4.14 Labor Matters. Except as disclosed in the Lynx Reports filed prior to the date of this Agreement or in Section 4.14 of the Lynx Disclosure Letter, there are no material controversies pending or, to the knowledge of Lynx, threatened between Lynx or any of its Subsidiaries and any representatives of its employees, except as would not, individually or in the aggregate, have a material adverse effect on Lynx and its Subsidiaries taken as a whole, and, to the knowledge of Lynx, there are no material organizational efforts presently being made involving any of the now unorganized employees of Lynx or any of its Subsidiaries. Since January 1, 1993, there has been no work stoppage, strike or other concerted action by employees of Lynx or any of its Subsidiaries except as would not, individually or in the aggregate, have a material adverse effect on Lynx and its Subsidiaries taken as a whole. 4.15 Environmental Matters. (a) Each of Lynx and its Subsidiaries has obtained all Environmental Permits which are required under any applicable Environmental Law in respect of its business or operations, except for such failures to have Environmental Permits which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. Each of such Environmental Permits is in full force and effect and each of Lynx and its Subsidiaries is in compliance with the terms and conditions of all such Environmental Permits and with any applicable Environmental Law, except for such failures to be in compliance which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. (b) To the knowledge of Lynx, no site or facility now or previously owned, operated or leased by Lynx or any of its Subsidiaries is listed or proposed for listing on the National Priorities List promulgated pursuant to CERCLA or on any similar state, Canadian federal, provincial or local list of sites requiring investigation or clean-up. (c) No Liens have arisen under or pursuant to any Environmental Law on any site or facility owned, operated or leased by Lynx or any of its Subsidiaries, other than any such real property not individually or in the aggregate material to Lynx and its Subsidiaries taken as a whole, and no action of any Governmental or Regulatory Authority has been taken or, to the knowledge of Lynx, is in process which could subject any of such properties to such Liens, and neither Lynx nor any of its Subsidiaries would be required to place any notice or restriction relating to the presence of Hazardous Materials at any such site or facility owned by it in any deed to the real property on which such site or facility is located. (d) There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or which are in the possession of, Lynx or any of its Subsidiaries in relation to any site or facility now or previously owned, operated or leased by Lynx or any of its Subsidiaries which have not been delivered to Grizzly prior to the execution of this Agreement. 4.16 Intellectual Property Rights. Except as set forth in Section 4.16 of the Lynx Disclosure Letter, (a) Lynx and its Subsidiaries have all right, title and interest in, or a valid and binding license to use, all Intellectual Property Rights individually or in the aggregate material to the conduct of the businesses of Lynx and its Subsidiaries taken as a whole. Neither Lynx nor any Subsidiary of Lynx is in default (or with the giving A-20 of notice or lapse of time or both, would be in default) under any license to use such Intellectual Property Rights, such Intellectual Property Rights are not being infringed by any third party, and neither Lynx nor any Subsidiary of Lynx is infringing any Intellectual Property Rights of any third party, except for such defaults and infringements which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries taken as a whole. (b) Section 4.16 of the Lynx Disclosure Letter contains (or will be supplemented prior to Closing to contain) an accurate and complete list as of the date of this Agreement of all licenses and agreements under which Lynx and its Subsidiaries are licensed to use third party Intellectual Property Rights which are material to the business of Lynx as currently conducted (the "Lynx Intellectual Property Rights"). (c) Except as set forth in Section 4.16 of the Lynx Disclosure Letter (including as it may be supplemented prior to Closing), Lynx and its Subsidiaries are not required to pay any material royalties, fees or other amounts to any Person in connection with the use or exploitation of the Lynx Intellectual Property Rights or the development, manufacture or commercial exploitation of any products of Lynx or its Subsidiaries. (d) Section 4.16 of the Lynx Disclosure Letter contains an accurate and complete list as of the date of this Agreement of all registered patents, registered trademarks, trade names, registered service marks and registered copyrights (in each case that are currently in use), as well as all applications for any and all of the foregoing, included in the Lynx Intellectual Property Rights (excluding third party Intellectual Property Rights), including the jurisdiction in which each such Lynx Intellectual Property Rights has been issued or registered or in which any such application for such issuance, approval or registration has been filed. All registered patents, registered trademarks, trade names, registered service marks and registered copyrights owned by Lynx or any of its Subsidiaries and which are material to the conduct of their business as currently conducted are valid and enforceable. (e) Section 4.16 of the Lynx Disclosure Letter contains an accurate and complete list as of the date of this Agreement of all licenses and sublicenses under which Lynx or any of its Subsidiaries has granted the right to manufacture, reproduce, market or exploit any material products of Lynx or its Subsidiaries or any material adaptation, derivative or reformulation based on any such product or any portion thereof. (f) Neither Lynx nor any of its Subsidiaries is or will be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any IP Licenses. Neither the execution or delivery of this Agreement nor the consummation of the transactions contemplated hereby will cause or will result in a material change to the terms of any material license, sublicense or other similar agreement. (g) Except as set forth in Section 4.08 of the Lynx Disclosure Letter, neither Lynx nor its Subsidiaries (A) has been sued in any suit, action or proceeding which involves a claim of infringement or violation of any Intellectual Property Right of any third party or (B) has received any written claim or allegation that the manufacturing, importation, marketing, licensing, sale, offer for sale, or use of any of its products infringes Intellectual Property Rights of any third party. (h) Lynx and its Subsidiaries have taken all reasonable steps to protect and preserve the confidential information, trade secrets and know-how of Lynx and its Subsidiaries, including appropriate non-disclosure agreements with all employees and third persons having access to any confidential information, trade secrets or know-how of Lynx and its Subsidiaries. (i) Neither Lynx nor any of its Subsidiaries has made any written claim or allegation that any third person is or has infringed, misappropriated, breached or violated the rights of Lynx or its Subsidiaries in any of the Lynx Intellectual Property Rights which are material to the business of Lynx as currently conducted. A-21 (j) Except as set forth in Section 4.16 of the Lynx Disclosure Letter, all internal computer systems that are material to the business, finances or operations of Lynx ("Material Lynx Systems") are Year 2000 Compliant or can be freely modified to be made Year 2000 Compliant without breaching any third party license agreements or otherwise infringing any intellectual property rights of any third party. All Material Lynx Systems that are not Year 2000 Compliant as of the date of this Agreement are set forth in Section 4.16(j) of the Lynx Disclosure Schedule. 4.17 Vote Required. The affirmative votes of the holders of record of at least the portion of the outstanding shares of Lynx Common Stock represented at the meeting and specified in Section 4.17 of the Lynx Disclosure Schedule with respect to the approval of each of the Lynx Shareholders' Proposals are the only votes of the holders of any class or series of the capital stock of Lynx required to approve the Merger and the other transactions contemplated hereby. 4.18 Opinion of Financial Advisor. Lynx has received the opinion of CIBC Wood Gundy Securities Inc., dated the date hereof, to the effect that, as of the date hereof, the consideration to be paid in the Merger by Lynx is fair from a financial point of view to the shareholders of Lynx, and a true and complete copy of such opinion has been delivered to Grizzly prior to the execution of this Agreement. 4.19 Ownership of Grizzly Common Stock. Neither Lynx nor any of its Subsidiaries or other affiliates beneficially owns any shares of Grizzly Common Stock. 4.20 Control Share Statute Not Applicable. Neither Lynx nor any of its subsidiaries is subject to a statute or regulation of the type specified in Section 6.16 that would affect this Agreement, the Stock Option Agreements, the Merger or the other transactions contemplated hereby or thereby. 5. ARTICLE V COVENANTS 5.01 Covenants of Grizzly and Lynx. At all times from and after the date hereof until the Effective Time, each of Grizzly and Lynx (each, a "Principal Party") covenants and agrees as to itself and its Subsidiaries that (except as expressly contemplated or permitted by this Agreement or the Stock Option Agreements, or to the extent that the other Principal Party shall otherwise previously consent in writing): (a) Ordinary Course. Each Principal Party and each of its Subsidiaries shall conduct their respective businesses only in, and each Principal Party and each of its Subsidiaries shall refrain from taking any action except in, the ordinary course consistent with past practice. (b) Without limiting the generality of paragraph (a) of this Section, (i) each Principal Party and its Subsidiaries shall use all commercially reasonable efforts to preserve intact in all material respects their present business organization and reputation, to keep available the services of its key officers and employees, to maintain its assets and properties in good working order and condition, ordinary wear and tear excepted, to maintain insurance on its tangible assets and businesses in such amounts and against such risks and losses as are currently in effect, to preserve its relationships with customers and suppliers and others having significant business dealings with it and to comply in all material respects with all laws and orders of all Governmental or Regulatory Authorities applicable to it, and (ii) neither Principal Party shall, nor shall it permit any of its Subsidiaries to, except as otherwise expressly provided for in this Agreement: (A) amend or propose to amend its certificate or articles of incorporation or bylaws (or other comparable corporate charter documents), except that Lynx may amend its Certificate of Incorporation as contemplated by Section 6.03(a); A-22 (B) (w) declare, set aside or pay any dividends on or make other distributions in respect of any of its capital stock, except for the declaration and payment of dividends by a wholly-owned Subsidiary solely to its parent corporation, (x) split, combine, reclassify or take similar action with respect to any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (y) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing such liquidation or a dissolution, merger, consolidation, restructuring, recapitalization or other reorganization or (z) directly or indirectly redeem, repurchase or otherwise acquire any shares of its capital stock or any Option with respect thereto; (C) issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or any Option with respect thereto (other than (I) the issuance of Grizzly Common Stock or Lynx Common Stock pursuant to options granted under the Grizzly Option Plans, the 1995 Stock Option Plan for Employees and Directors (the "Lynx Option Plan"), in each case outstanding on the date of this Agreement and in accordance with their present terms, (II) the issuance of options pursuant to the Grizzly Option Plan and the Lynx Option Plan, in each case in accordance with their present terms and only after consent with the other Principal Party (provided that no such consent shall be required in connection with the issuance of options to purchase up to 500,000 shares of Lynx Common Stock under the Lynx Option Plan and up to 230,000 shares of Grizzly Common Stock under the Grizzly Option Plans, in each case at fair value and as otherwise provided in the respective Plans), and the issuance of shares of Grizzly Common Stock and Lynx Common Stock, as the case may be, upon exercise of such options, (III) the issuance by a wholly-owned Subsidiary of its capital stock to its parent corporation, (IV) the issuance of Grizzly Common Stock or Lynx Common Stock, as the case may be, in accordance with the terms of the applicable Stock Option Agreement and (V) the issuance of Grizzly Rights and reservation and issuance of Grizzly Series A Preferred Stock pursuant to the Grizzly Rights Agreement in accordance with the terms thereof) or modify or amend any right of any holder of outstanding shares of capital stock or Options with respect thereto; (D) acquire (by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner) any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets other than in the ordinary course of its business consistent with past practice; (E) other than in the ordinary course of its business consistent with past practice, sell, lease, grant any security interest in or otherwise dispose of or encumber any of its assets or properties; (F) except to the extent required by applicable law, (x) permit any material change in (A) any pricing, marketing, purchasing, investment, accounting, financial reporting, inventory, credit, allowance or tax practice or policy or (B) any method of calculating any bad debt, contingency or other reserve for accounting, financial reporting or tax purposes or (y) make any material tax election or settle or compromise any material income tax liability with any Governmental or Regulatory Authority; (G) (x) incur (which shall not be deemed to include entering into credit agreements, lines of credit or similar arrangements until borrowings are made under such arrangements) any indebtedness for borrowed money or guarantee any such indebtedness other than in the ordinary course of its business consistent with past practice or (y) voluntarily purchase, cancel, prepay or otherwise provide for a complete or partial discharge in advance of a scheduled repayment date with respect to, or waive any right under, any indebtedness for borrowed money other than in the ordinary course of its business consistent with past practice; (H) enter into, adopt, amend in any material respect (except as may be required by applicable law) or terminate any Grizzly Employee Benefit Plan or Lynx Employee Benefit Plan, as the case may be, or other agreement, arrangement, plan or policy between such Principal Party or one of its A-23 Subsidiaries and one or more of its directors, officers or employees, or, except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to such Principal Party and its Subsidiaries taken as a whole, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan or arrangement in effect as of the date hereof; (I) enter into any Contract or amend or modify any existing Contract, or engage in any new transaction outside the ordinary course of business consistent with past practice or not on an arm's length basis, with any affiliate of such Principal Party or any of its Subsidiaries; (J) make any capital expenditures or commitments for additions to plant, property or equipment constituting capital assets except in the ordinary course of business consistent with past practice; (K) make any change in the lines of business in which it participates or is engaged; or (L) enter into any Contract, commitment or arrangement to do or engage in any of the foregoing. Grizzly acknowledges that (x) Lynx has had ongoing negotiations with Sumitomo Heavy Industries, Ltd. concerning, and may enter into a joint venture with respect to the manufacture, assembly and/or marketing of Lynx products in Japan, and (y) Lynx's activities in connection with this joint venture will not contravene this Section 5.01 (provided that nothing in this sentence shall supersede the requirements of paragraph (b)(ii)(C) of this Section 5.01). (c) Advice of Changes. Each Principal Party shall confer on a regular and frequent basis with the other with respect to its business and operations and other matters relevant to the Merger, and shall promptly advise the other, orally and in writing, of any change or event, including, without limitation, any complaint, investigation or hearing by any Governmental or Regulatory Authority (or communication indicating the same may be contemplated) or the institution or threat of litigation, having, or which, insofar as can be reasonably foreseen, could have, a material adverse effect on such Principal Party and its Subsidiaries taken as a whole or on the ability of such Principal Party, to consummate the transactions contemplated hereby; provided that no party shall be required to make any disclosure to the extent such disclosure would constitute a violation of any applicable law. In addition, Grizzly shall promptly disclose any change or event with respect to the litigation listed in Section 5.01(c) of the Grizzly Disclosure Letter. (d) Notice and Cure. Each Principal Party will notify the other of, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance, as soon as practical after it becomes known to such Principal Party, that causes or will cause any covenant or agreement of such Principal Party under this Agreement to be breached or that renders or will render untrue any representation or warranty of such Principal Party contained in this Agreement. Each Principal Party also will notify the other in writing of, and will use all commercially reasonable efforts to cure, before the Closing, any violation or breach, as soon as practical after it becomes known to such party, of any representation, warranty, covenant or agreement made by such Principal Party. No notice given pursuant to this paragraph shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement for purposes of determining satisfaction of any condition contained herein. (e) Fulfillment of Conditions. Subject to the terms and conditions of this Agreement, each Principal Party will take or cause to be taken all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the other's obligations contained in this Agreement and to consummate and make effective the transactions contemplated by this Agreement, and neither Principal Party will, nor will it permit any of its Subsidiaries to, take or fail to take any action that could be reasonably expected to result in the nonfulfillment of any such condition. 5.02 No Solicitations. At all times from and after the date hereof until the Effective Time, each Principal Party covenants and agrees as to itself and its Subsidiaries (a) that neither it nor any of its Subsidiaries or other A-24 affiliates shall, and it shall use its best efforts to cause its Representatives (as defined in Section 9.11) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, consolidation or other business combination including such Principal Party or any of its Subsidiaries or any acquisition or similar transaction (including, without limitation, a tender or exchange offer) involving the purchase of (i) all or any significant portion of the assets of such Principal Party and its Subsidiaries taken as a whole, (ii) 20% or more of the outstanding shares of such Principal Party's common stock or (iii) 20% of the outstanding shares of the capital stock of any Subsidiary of such Principal Party (any such proposal or offer being hereinafter referred to as an "Alternative Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person or group relating to an Alternative Proposal (excluding the transactions contemplated by this Agreement), or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal; (b) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties with respect to any of the foregoing, and it will take the necessary steps to inform such parties of its obligations under this Section; and (c) that it will notify the other Principal Party immediately if any such inquiries, proposals or offers are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it or any of such persons; provided, however, that nothing contained in this Section 5.02 shall prohibit the Board of Directors of either Principal Party from (i) furnishing information to (but only pursuant to a confidentiality agreement in customary form and having terms and conditions no less favorable to such Principal Party than the Confidentiality Agreement) or entering into discussions or negotiations with any person or group that makes an unsolicited bona fide Alternative Proposal, if, and only to the extent that, prior to receipt of the Grizzly Shareholders' Approval (if such Principal Party is Grizzly) or the Lynx Shareholders' Approval (if such Principal Party is Lynx), (A) the Board of Directors of such Principal Party, based upon the written opinion of outside counsel (a copy of which shall be provided promptly to the other Principal Party), determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to shareholders imposed by law, (B) such Alternative Proposal is not conditioned on the receipt of financing and the Board of Directors has reasonably concluded in good faith that the person or group making such Alternative Proposal will have adequate sources of financing to consummate such Alternative Proposal and that such Acquisition Proposal is more favorable to such Principal Party's shareholders than the Merger, (C) prior to furnishing such information to, or entering into discussions or negotiations with, such person or group, such Principal Party provides written notice to the other Principal Party to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or group, which notice shall identify such person or group in reasonable detail, and (D) such Principal Party keeps the other Principal Party informed of the status and all material information with respect to any such discussions or negotiations; and (ii) to the extent required, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Alternative Proposal. Nothing in this Section 5.02 shall (x) permit any party to terminate this Agreement (except as specifically provided in Article VIII), (y) permit any party to enter into any agreement with respect to an Alternative Proposal for so long as this Agreement remains in effect (it being agreed that for so long as this Agreement remains in effect, no party shall enter into any agreement with any person or group that provides for, or in any way facilitates, an Alternative Proposal (other than a confidentiality agreement under the circumstances described above)), or (z) affect any other obligation of any party under this Agreement. 5.03 Grizzly Rights Agreement. Prior to the Effective Time, without the prior written consent of Lynx, Grizzly will not take any action with respect to, or make any determination under, or amend the Grizzly Rights Agreement, including a redemption of the Grizzly Rights. 5.04 Conduct of Business of Sub. Prior to the Effective Time, except as may be required by applicable law and subject to the other provisions of this Agreement, Lynx shall cause Sub to (a) perform its obligations under this Agreement in accordance with its terms, (b) not incur directly or indirectly any liabilities or obligations other than those incurred in connection with the Merger, (c) not engage directly or indirectly in any business or activities of any type or kind and not enter into any agreements or arrangements with any person, or be subject to or bound by any obligation or undertaking, which is not contemplated by this Agreement and A-25 (d) not create, grant or suffer to exist any Lien upon its properties or assets which would attach to any properties or assets of the Surviving Corporation after the Effective Time. 5.05 Third Party Standstill Agreements. Each Principal Party agrees that, during the period from the date of this Agreement through the Effective Time, neither it nor any of its Subsidiaries shall terminate, amend, modify or waive any provision of any confidentiality or standstill agreement to which it is a party. During such period, each Principal Party shall enforce, to the fullest extent permitted under applicable law, the provisions of any such agreement, including, but not limited to, by obtaining injunctions to prevent any breaches of such agreements and to enforce specifically the terms and provisions thereof in any court having jurisdiction. 5.06 Purchases of Common Stock of the Other Party. Each Principal Party agrees that, during the period from the date hereof through the Effective Time, neither it nor any of its Subsidiaries or other affiliates will purchase any shares of capital stock of the other Principal Party (except pursuant to the Stock Option Agreements). 5.07 Adoption of Lynx Rights Agreement. As soon as possible following the Effective Time, Lynx shall establish a shareholder rights plan and have it approved by the Lynx Board of Directors and submit it to the Lynx shareholders at the next annual shareholders general meeting. 6. ARTICLE VI ADDITIONAL AGREEMENTS 6.01 Access to Information; Confidentiality. Each Principal Party shall, and shall cause each of its Subsidiaries to, throughout the period from the date hereof to the Effective Time, (i) provide the other Principal Party and its Representatives with full access, upon reasonable prior notice and during normal business hours, to all officers, employees, agents and accountants of such Principal Party and its Subsidiaries and their respective assets, properties, books and records, but only to the extent that such access does not unreasonably interfere with the business and operations of such Principal Party and its Subsidiaries, and (ii) furnish promptly to such persons (x) a copy of each report, statement, schedule and other document filed or received by such Principal Party or any of its Subsidiaries pursuant to the requirements of federal or state securities laws and each material report, statement, schedule and other document filed with any other Governmental or Regulatory Authority, and (y) all other information and data (including, without limitation, copies of Contracts, Grizzly Employee Benefit Plans or Lynx Employee Benefit Plans, as the case may be, and other books and records) concerning the business and operations of such Principal Party and its Subsidiaries as the other party or any of such other persons reasonably may request. No investigation pursuant to this paragraph or otherwise shall affect any representation or warranty contained in this Agreement or any condition to the obligations of the parties hereto. Any such information or material obtained pursuant to this Section 6.01 that constitutes "Confidential Information" (as such term is defined in the letter agreement dated as of September 10, 1998 between Grizzly and Lynx, as amended and as attached to Section 6.01 of the Grizzly Disclosure Letter (the "Confidentiality Agreement")) shall be governed by the terms of the Confidentiality Agreement. 6.02 Preparation of Registration Statement and Proxy Statement. Grizzly and Lynx shall prepare and file with the SEC, applicable Canadian securities regulatory authorities and The Toronto Stock Exchange as soon as reasonably practicable after the date hereof the Proxy Statement. Lynx shall prepare and file with the SEC as soon as reasonably practicable after the date hereof the Registration Statement, in which the Proxy Statement will be included as the prospectus. Lynx and Grizzly shall use their best efforts to have the Registration Statement declared effective by the SEC as promptly as practicable after such filing. Lynx shall also take any action (other than qualifying as a foreign corporation or taking any action which would subject it to service of process in any jurisdiction where Lynx is not now so qualified or subject) required to be taken A-26 under applicable state blue sky or securities laws in connection with the issuance of Lynx Common Stock in connection with the Merger. If at any time prior to the Effective Time any event shall occur that should be set forth in an amendment of or a supplement to the Registration Statement, Lynx shall prepare and file with the SEC such amendment or supplement as soon thereafter as is reasonably practicable. Lynx, Sub and Grizzly shall cooperate with each other in the preparation of the Registration Statement and the Proxy Statement and any amendment or supplement thereto, and each shall notify the other of the receipt of any comments of the SEC with respect to the Registration Statement or the Proxy Statement and of any requests by the SEC for any amendment or supplement thereto or for additional information, and shall provide to the other promptly copies of all correspondence between Lynx or Grizzly, as the case may be, or any of its Representatives and the SEC with respect to the Registration Statement or the Proxy Statement. Lynx shall give Grizzly and its counsel the opportunity to review the Registration Statement and all responses to requests for additional information by and replies to comments of the SEC before their being filed with, or sent to, the SEC. Each of Grizzly, Lynx and Sub agrees to use its best efforts, after consultation with the other parties hereto, to respond promptly to all such comments of and requests by the SEC and to cause (x) the Registration Statement to be declared effective by the SEC at the earliest practicable time and to be kept effective as long as is necessary to consummate the Merger, and (y) the Proxy Statement to be mailed to the holders of Grizzly Common Stock and Lynx Common Stock entitled to vote at the meetings of the shareholders of Grizzly and Lynx at the earliest practicable time. 6.03 Approval of Shareholders. (a) Lynx shall, through its Board of Directors, duly call, give notice of, convene and hold a meeting of its shareholders (the "Lynx Shareholders' Meeting") for the purpose of voting on (i) the adoption of a proposal that Lynx continue its existence under the laws of the Province of New Brunswick, (ii) the adoption of this Agreement and (iii) the adoption of a proposal to amend Lynx's Certificate of Incorporation to change Lynx's name to GSI Lumonics Inc. (the "Lynx Shareholders' Proposals"). Unless it determines based upon the written opinion of outside counsel (a copy of which shall be provided promptly to Grizzly) that doing so would violate the Board of Directors' fiduciary duties to shareholders imposed by law, Lynx shall, through its Board of Directors, include in the Proxy Statement the recommendation of the Board of Directors of Lynx that the shareholders of Lynx approve the Lynx Shareholders' Proposals by the requisite majorities (the "Lynx Shareholders' Approval"), and shall use its best efforts to obtain the Lynx Shareholders' Approval. At such meeting, Grizzly shall, and shall cause its Subsidiaries to, cause all shares of Lynx Common Stock then owned by Grizzly or any such Subsidiary to be voted in favor of the Lynx Shareholders' Proposals. In the event that the Lynx Shareholders' Approval will likely not be obtained on the date on which the Lynx Shareholders' Meeting is initially convened, the Board of Directors of Lynx agrees to adjourn such Lynx Shareholders' Meeting at least twice for the purpose of obtaining the Lynx Shareholders' Approval and to use its best efforts during any such adjournments to obtain the Lynx Shareholders' Approval. (b) Grizzly shall, through its Board of Directors, duly call, give notice of, convene and hold a meeting of its shareholders (the "Grizzly Shareholders' Meeting" and, together with the Lynx Shareholders' Meeting, the "Shareholders' Meetings") for the purpose of voting on the adoption of this Agreement (the "Grizzly Shareholders' Approval") as soon as reasonably practicable after the date hereof. Unless it determines, based upon the written opinion of outside counsel (a copy of which shall be provided promptly to Lynx) that doing so would violate the Board of Directors' fiduciary duties to shareholders imposed by law, Grizzly shall, through its Board of Directors include in the Proxy Statement the recommendation of the Board of Directors of Grizzly that the shareholders of Grizzly adopt this Agreement, and shall use its best efforts to obtain such adoption. At such meeting, Lynx shall, and shall cause its Subsidiaries to, cause all shares of Grizzly Common Stock then owned by Lynx or any such Subsidiary to be voted in favor of the adoption of this Agreement. In the event that the Grizzly Shareholders' Approval will likely not be obtained on the date on which the Grizzly Shareholders' Meeting is initially convened, the Board of Directors of Grizzly agrees to adjourn such Lynx Shareholders' Meeting at least twice for the purpose of obtaining the Grizzly Shareholders' Approval, and to use its best efforts during any such adjournments to obtain the Grizzly Shareholders' Approval. (c) Lynx and Grizzly shall coordinate and cooperate with respect to the timing of the Shareholders' Meetings and shall use their best efforts to cause both of the Shareholders' Meetings to be held on the same day and as soon as practicable after the date hereof. A-27 6.04 Grizzly Affiliates. At least 30 days prior to the Closing Date Grizzly shall deliver a letter to Lynx identifying all persons who, at the time of the Grizzly Shareholders' Meeting, may, in Grizzly's reasonable judgment, be deemed to be "affiliates" (as such term is used in Rule 145 under the Securities Act) of Grizzly ("Grizzly Affiliates"). Grizzly shall use its best efforts to cause each Grizzly Affiliate to deliver to Lynx on or prior to the Closing Date a written agreement substantially in the form and to the effect of Exhibit A hereto (an "Affiliate Agreement"). Lynx shall be entitled to place legends as specified in such Affiliate Agreements on the certificates evidencing any Lynx Common Stock to be received by such Grizzly Affiliates pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the Lynx Common Stock, consistent with the terms of such Affiliate Agreements. 6.05 Stock Exchange Listing. Lynx shall use its reasonable efforts to cause the shares of Lynx Common Stock to be issued in the Merger and under the Grizzly Stock Plans after the Merger in accordance with this Agreement to be approved for listing on the Toronto Stock Exchange and on Nasdaq, subject to official notice of issuance, prior to the Closing Date. 6.06 Certain Tax Matters. Lynx and Grizzly shall not take or fail to take any action which action or failure would cause Lynx, Grizzly or their respective shareholders (except to the extent that any shareholder of Grizzly may receive cash in lieu of fractional shares or is the owner of Dissenting Shares) to recognize gain or loss for United States or Canadian federal income tax purposes as a result of the consummation of the Merger. 6.07 Regulatory and Other Approvals. Subject to the terms and conditions of this Agreement and without limiting the provisions of Sections 6.02 and 6.03, each Principal Party will proceed diligently and in good faith to, as promptly as practicable, (a) obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other public or private third parties required of Principal Party or any of their Subsidiaries to consummate the Merger and the other matters contemplated hereby, and (b) provide such other information and communications to such Governmental or Regulatory Authorities or other public or private third parties as the other Principal Party or such Governmental or Regulatory Authorities or other public or private third parties may reasonably request in connection therewith. In addition to and not in limitation of the foregoing, each Principal Party will (x) take promptly all actions necessary to make the filings required of either of the Principal Party or their affiliates under the HSR Act, (y) comply at the earliest practicable date with any request for additional information received by such party or its affiliates from the Federal Trade Commission (the "FTC") or the Antitrust Division of the Department of Justice (the "Antitrust Division") pursuant to the HSR Act, and (z) cooperate with the other Principal Party in connection with such Principal Party's filings under the HSR Act and in connection with resolving any investigation or other inquiry concerning the Merger or the other matters contemplated by this Agreement commenced by either the FTC or the Antitrust Division or state attorneys general. 6.08 [Omitted] 6.09 Grizzly Stock Plan. (a) Subject to approval of The Toronto Stock Exchange, at the Effective Time, each outstanding option to purchase shares of Grizzly Common Stock (a "Grizzly Stock Option") under the Grizzly Option Plans, whether vested or unvested, shall be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Grizzly Stock Option, a number of shares of Lynx Common Stock equal to the product (rounded down to the nearest whole share) of (i) the number of shares of Grizzly Common Stock issuable upon exercise of the option immediately prior to the Effective Time and (ii) the Conversion Number; and the option exercise price per share of Lynx Common Stock at which such option is exercisable shall be the amount (rounded up to the nearest whole cent) obtained by dividing (iii) the option exercise price per share of Grizzly Common Stock at which such option is exercisable immediately prior to the Effective Time by (iv) the Conversion Number; provided, however, that, in the case of any Grizzly Stock Option to which Section 421 of the Code applies by reason of its qualification under any of Sections 422-424 of the Code ("qualified stock options"), the option exercise price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such option shall be determined in order to comply with Section 425(a) of the Code. The adjustments provided herein with respect to any Stock Options that are A-28 "incentive stock options" (as defined in Section 422 of the Code) shall be effected in a manner consistent with Section 424(a) of the Code. (b) As soon as practicable after the Effective Time, Lynx shall deliver to the participants in the Grizzly Option Plans appropriate notices setting forth such participants' rights pursuant thereto and the grants pursuant to the Grizzly Option Plans shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section after giving effect to the Merger). Subject to compliance with Canadian securities laws and the rules of The Toronto Stock Exchange, Lynx shall comply with the terms of the Grizzly Option Plans and ensure subject to the provisions of the Grizzly Option Plans that Grizzly Stock Options which qualified as qualified stock options prior to the Effective Time will continue to qualify as qualified stock options after the Effective Time. (c) Lynx shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Lynx Common Stock for delivery under the Grizzly Option Plans as adjusted in accordance with this Section. As soon as practicable after the Effective Time, Lynx shall file a registration statement on Form S-8 promulgated by the SEC under the Securities Act (or any successor or other appropriate form) with respect to the Lynx Common Stock subject to such options and shall use its best efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding. With respect to those individuals who subsequent to the Merger will be subject to the reporting requirements under Section 16(a) of the Exchange Act, where applicable, Lynx shall administer the Grizzly Option Plans in a manner that complies with Rule 16b-3 promulgated under the Exchange Act. 6.10 Directors' and Officers' Indemnification and Insurance. (a) From and after the Effective Time and until the sixth anniversary of the Effective Time and for so long thereafter as any claim for indemnification asserted on or prior to such date has not been fully adjudicated, Lynx and the Surviving Corporation (each, an "Indemnifying Party") shall indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Time, a director or officer of Grizzly or any of its Subsidiaries (the "Indemnified Parties") against (i) all losses, claims, damages, costs and expenses (including reasonable attorneys' fees), liabilities, judgments and settlement amounts that are paid or incurred in connection with any claim, action, suit, proceeding or investigation (whether civil, criminal, administrative or investigative and whether asserted or claimed prior to, at or after the Effective Time) that is based in whole or in part on, or arises in whole or in part out of, the fact that such Indemnified Party is or was a director or officer of Grizzly or any of its Subsidiaries and relates to or arises out of any action or omission occurring at or prior to the Effective Time ("Indemnified Liabilities"), and (ii) all Indemnified Liabilities based in whole or in part on, or arising in whole or in part out of, or pertaining to this Agreement or the transactions contemplated hereby, in each case to the full extent a corporation is permitted under applicable law to indemnify its own directors or officers, as the case may be; provided that no Indemnifying Party shall be liable for any settlement of any claim effected without its written consent, which consent shall not be unreasonably withheld; and provided, further, that no Indemnifying Party shall be liable for any Indemnified Liabilities which occur as a result of the willful misconduct of any Indemnified Party. Except as disclosed in Section 6.10 of the Grizzly Disclosure Letter, Grizzly is not aware of any Indemnified Liabilities or of any basis for the assertion thereof. Without limiting the foregoing, in the event that any such claim, action, suit, proceeding or investigation is brought against any Indemnified Party (whether arising prior to or after the Effective Time), (w) the Indemnifying Parties will pay expenses in advance of the final disposition of any such claim, action, suit, proceeding or investigation to each Indemnified Party to the full extent permitted by applicable law; provided that the person to whom expenses are advanced provides any undertaking required by applicable law to repay such advance if it is ultimately determined that such person is not entitled to indemnification; (x) the Indemnified Parties shall retain counsel reasonably satisfactory to the Indemnifying Parties; (y) the Indemnifying Parties shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties (subject to the final sentence of this paragraph) promptly as statements therefor are received; and (z) the Indemnifying Parties shall use all commercially reasonable efforts to assist in the defense of any such matter. A-29 Any Indemnified Party wishing to claim indemnification under this Section, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Indemnifying Parties, but the failure so to notify an Indemnifying Party shall not relieve such Indemnifying Party from any liability which it may have under this paragraph except to the extent such failure materially prejudices such Indemnifying Party. The Indemnified Parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties, in which case the Indemnified Parties may to the extent necessary to avoid such conflict retain more than one or more additional law firm, in which event the Indemnifying Parties shall be required to pay the reasonable fees and expenses of only one law firm representing the Indemnified Parties. (b) Except to the extent required by law, until the sixth anniversary of the Effective Time, Lynx will not take any action so as to amend, modify or repeal the provisions for indemnification and limitation of liability of directors or officers contained in the certificates or articles of incorporation or bylaws (or other comparable charter documents) of the Surviving Corporation and its Subsidiaries (which immediately before the Effective Time shall be no less favorable to such individuals than those maintained by Grizzly and its Subsidiaries on the date hereof) in such a manner as would adversely affect the rights of any individual who shall have served as a director or officer of Grizzly or any of its Subsidiaries prior to the Effective Time to be indemnified by such corporations or limited in their liability in respect of their serving in such capacities prior to the Effective Time. (c) The Surviving Corporation shall, until the sixth anniversary of the Effective Time and for so long thereafter as any claim for insurance coverage asserted on or prior to such date has not been fully adjudicated, cause to be maintained in effect, to the extent available, the policies of directors' and officers' liability insurance maintained by Grizzly and its Subsidiaries as of the date hereof (or policies of at least the same coverage and amounts containing terms that are no less advantageous to the insured parties) with respect to claims arising from facts or events that occurred on or prior to the Effective Time; provided that in no event shall the Surviving Corporation be obligated to expend in order to maintain or procure insurance coverage pursuant to this paragraph any amount per annum in excess of 150% of the aggregate premiums payable by Grizzly and its Subsidiaries in 1997 (on an annualized basis) for such purpose. (d) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and each party entitled to insurance coverage under paragraph (c) above, respectively, and his or her heirs and legal representatives, and shall be in addition to any other rights an Indemnified Party may have under the certificate or articles of incorporation or bylaws of the Surviving Corporation or any of its Subsidiaries, under the MBCL or otherwise. 6.11 Lynx Governance. Lynx's Board of Directors shall take action to (i) cause the full Board of Directors of Lynx at the Effective Time to include persons who are directors of Grizzly ("Current Grizzly Directors"), and (if necessary) shall obtain the resignations of persons who are directors of Lynx ("Lynx Directors"). At the Effective Time, the Board of Directors of Lynx shall be comprised of eight or ten directors, of whom an equal number will be Current Grizzly Directors and Lynx Directors and (ii) cause the following persons, so long as they are willing and able to serve, to be duly appointed to the following offices: Bob Atkinson, Chairman of the Board of Directors; Charles Winston, chief executive officer; Scott Nix, chief operating officer. Following the Effective Time, Lynx's operational headquarters shall be in the United States. 6.12 Continuation; Name Change. At or prior to the Effective Time, (a) Lynx shall continue its existence as a corporation in the Province of New Brunswick, with articles of incorporation and by laws substantially in the form set forth in Exhibit B hereto and (b) Lynx shall change its corporate name to GSI Lumonics Inc., provided, however, that the Lynx Shareholder Approval shall have been obtained therefor. 6.13 Stock Option Agreements. Grizzly, Lynx and Sub shall perform fully their respective obligations under the Stock Option Agreements. A-30 6.14 Expenses. Except as set forth in Section 8.02, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense, except that the filing fee in connection with the filings required under the HSR Act and the expenses incurred in connection with printing and mailing the Registration Statement, as well as any filing fees relating thereto, shall be shared equally by Lynx and Grizzly. 6.15 Brokers or Finders. Each of Lynx and Grizzly represents, as to itself and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Needham & Company, Inc., whose fees and expenses will be paid by Grizzly in accordance with Grizzly's agreement with such firm, and CIBC Wood Gundy Securities Inc. and Ernst & Young Corporate Finance Inc., whose fees and expenses will be paid by Lynx in accordance with Lynx's agreements with such firms, and each of Lynx and Grizzly shall indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other such fee or commission or expenses related thereto asserted by any person on the basis of any act or statement alleged to have been made by such party or its affiliate. 6.16 Takeover Statutes. If any "fair price", "moratorium", "control share acquisition" or other form of antitakeover statute or regulation shall become applicable to the transactions contemplated hereby, each Principal Party and the members of the Board of Directors of such Principal Party shall grant such approvals and take such actions as are reasonably necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and thereby and otherwise act to eliminate or minimize the effects of such statute or regulation on the transactions contemplated hereby and thereby. 6.17 Conveyance Taxes. Grizzly and Lynx shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes which become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Effective Time. 7. ARTICLE VII CONDITIONS 7.01 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) Shareholder Approval. This Agreement shall have been adopted by the requisite vote of the shareholders of Grizzly under the MBCL and Grizzly's Articles of Incorporation. The shareholders of Lynx shall have approved the Lynx Shareholders' Proposals by the requisite majority under applicable law and governing documents. (b) Registration Statement; State Securities Laws. The Registration Statement shall have become effective in accordance with the provisions of the Securities Act, and no stop order suspending such effectiveness shall have been issued and remain in effect and no proceeding seeking such an order shall be pending or threatened. Lynx shall have received all state securities or "Blue Sky" permits and other authorizations, and all approvals, rulings and exceptions from applicable Canadian securities regulatory authorities, necessary to issue the Lynx Common Stock pursuant to this Agreement and under Grizzly Stock Plans after the Merger. A-31 (c) Exchange Listing. The shares of Lynx Common Stock issuable to Grizzly's Shareholders in the Merger and under Grizzly Stock Plans after the Merger in accordance with this Agreement shall have been authorized for listing on The Toronto Stock Exchange and Nasdaq subject to official notice of issuance. (d) HSR Act. Any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (e) No Injunctions or Restraints. No court of competent jurisdiction or other competent Governmental or Regulatory Authority shall have enacted, issued, promulgated, enforced or entered any law or order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making illegal or otherwise restricting, preventing or prohibiting consummation of the Merger or the other transactions contemplated by this Agreement. (f) Governmental and Regulatory and Other Consents and Approvals. Other than the filing provided for by Section 1.03, all consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority or any other public or private third parties required of Lynx, Grizzly or any of their Subsidiaries to consummate the Merger and the other matters contemplated hereby, the failure of which to be obtained or taken could be reasonably expected to have a material adverse effect on Lynx and its Subsidiaries or the Surviving Corporation and its Subsidiaries, in each case taken as a whole, or on the ability of any of the parties hereto to consummate the transactions contemplated hereby shall have been obtained, all in form and substance reasonably satisfactory to Lynx and Grizzly. (g) Continuation; Name Change. At the Effective Time, Lynx shall have (a) continued its existence as a corporation in New Brunswick and (b) changed its corporate name to GSI Lumonics Inc. (h) Dissenting Shares. The sum (i) the product of the Conversion Number and the number of Dissenting Shares plus (ii) shares of Lynx Common Stock the holders of which have not voted in favor of the matters referred to in Section 7.01(g), have perfected their rights to dissent with respect to their shares in accordance with applicable law and have not effectively withdrawn or lost such right to dissent ("Lynx Dissenting Shares") shall not exceed 6% of the sum (iii) the number of shares of Lynx Common Stock and (iv) the product of the Conversion Number and the number of shares of Grizzly Common Stock, in each case outstanding on the Closing Date. 7.02 Conditions to Obligation of Lynx and Sub to Effect the Merger. The obligation of Lynx and Sub to effect the Merger is further subject to the fulfillment, at or prior to the Closing, of each of the following additional conditions (all or any of which may be waived in whole or in part by Lynx and Sub in their sole discretion): (a) Representations and Warranties. The representations and warranties made by Grizzly in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date or, in the case of representations and warranties made as of a specified date earlier than the Closing Date, on and as of such earlier date, except as affected by the transactions contemplated by this Agreement, and Grizzly shall have delivered to Lynx a certificate, dated the Closing Date and executed in the name and on behalf of Grizzly by its Chairman of the Board, President or any Executive Vice President, to such effect. (b) Performance of Obligations. Grizzly shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Grizzly at or prior to the Closing, and Grizzly shall have delivered to Lynx a certificate, dated the Closing Date and executed in the name and on behalf of Grizzly by its Chairman of the Board, President or any Executive Vice President, to such effect. (c) Grizzly Rights Agreement. On or prior to the Closing Date, Grizzly Rights shall not have become exercisable or transferable apart from the associated shares of Grizzly Common Stock, no "Shares Acquisition Date" or "Distribution Date" (each as defined in the Grizzly Rights Agreement) A-32 shall have occurred and the Grizzly Rights shall not have become nonredeemable, in each case other than as a result of actions by Lynx or any of its affiliates. (d) Absence of Certain Change or Events. Except as disclosed in Grizzly Reports filed prior to the date of this Agreement, (a) since June 30, 1998 there shall not have been any change, event or development (excluding stock market fluctuations, changes in general economic conditions, or any change, event, or development having, or that could reasonably be expected to have, individually or in the aggregate, a material adverse effect on companies in the industries in which Grizzly operates generally) having, or that could be reasonably expected to have, individually or in the aggregate, a material adverse effect on Grizzly and its Subsidiaries taken as a whole. (e) Acceptance of Officer and Director Positions. The Grizzly officer listed in Section 6.11 shall have accepted his officer position set forth therein. (f) Proceedings. All proceedings to be taken on the part of Grizzly in connection the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Lynx, and Lynx shall have received copies of all such documents and other evidences as Lynx may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. 7.03 Conditions to Obligation of Grizzly to Effect the Merger. The obligation of Grizzly to effect the Merger is further subject to the fulfillment, at or prior to the Closing, of each of the following additional conditions (all or any of which may be waived in whole or in part by Grizzly in its sole discretion): (a) Representations and Warranties. The representations and warranties made by Lynx and Sub in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date or, in the case of representations and warranties made as of a specified date earlier than the Closing Date, on and as of such earlier date, except as affected by the transactions contemplated by this Agreement, and Lynx and Sub shall each have delivered to Grizzly a certificate, dated the Closing Date and executed in the name and on behalf of Lynx by its Chairman of the Board, President or any Executive Vice President and in the name and on behalf of Sub by its Chairman of the Board, President or any Vice President, to such effect. (b) Performance of Obligations. Lynx and Sub shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Lynx or Sub at or prior to the Closing, and Lynx and Sub shall each have delivered to Grizzly a certificate, dated the Closing Date and executed in the name and on behalf of Lynx by its Chairman of the Board, President, any Executive Vice President or its Chief Financial Officer and in the name and on behalf of Sub by its Chairman of the Board, President or any Vice President, to such effect. (c) Absence of Certain Changes or Events. Except as disclosed in the Lynx Reports filed prior to the date of this Agreement, (a) since June 30, 1998 there shall not have been any change, event or development (excluding stock market fluctuations, changes in general economic conditions, or any change, event or development having, or that could reasonably in general economic conditions, or any change, event or development having, or that could reasonably be expected to have, individually or in the aggregate, a material adverse effect on companies in the industries in which Lynx operates generally) having, or that could be reasonably expected to have, individually or in the aggregate, a material adverse effect on Lynx and its Subsidiaries taken as a whole. (d) Appointment of Directors and Officers. Lynx shall have duly appointed the Grizzly directors and officer listed in Section 6.11 to the positions set forth therein, subject to consummation of the Merger and acceptance of such appointment. (e) Proceedings. All proceedings to be taken on the part of Lynx and Sub in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Grizzly, and Grizzly shall have received copies of all such documents and other evidences as Grizzly may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. A-33 (8) ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.01 Termination. This Agreement may be terminated, and the transactions contemplated hereby may be abandoned, at any time prior to the Effective Time, whether prior to or after Grizzly Shareholders' Approval or the Lynx Shareholders' Approval: (a) By mutual written agreement of the parties hereto duly authorized by action taken by or on behalf of their respective Boards of Directors; (b) By either Principal Party upon notification to the non-terminating Principal Party by the terminating Principal Party: (i) at any time after March 31, 1999 if the Merger shall not have been consummated on or prior to such date and such failure to consummate the Merger is not caused by a breach of this Agreement by the terminating Principal Party; (ii) if the Grizzly Shareholders' Approval or the Lynx Shareholders' Approval shall not be obtained by reason of the failure to obtain the requisite vote upon a vote held at a meeting of such shareholders, or any adjournment thereof, called therefor; (iii) if there has been a material breach of any representation, warranty, covenant or agreement on the part of the non-terminating Principal Party set forth in this Agreement, which breach is not curable or, if curable, has not been cured within 30 days following receipt by the non-terminating Principal Party of notice of such breach from the terminating Principal Party; or (iv) if any court of competent jurisdiction or other competent Governmental or Regulatory Authority shall have issued an order making illegal or otherwise restricting, preventing or prohibiting the Merger and such order shall have become final and nonappealable; or (c) By either Principal Party if (i) the Board of Directors of such Principal Party determines in good faith, based upon the written opinion of outside counsel (a copy of which shall be provided promptly to the other Principal Party), that termination of the Agreement is required for the Board of Directors to comply with its fiduciary duties to shareholders imposed by law by reason of an unsolicited bona fide Alternative Proposal meeting the requirements of clauses (A) and (B) of Section 5.02 having been made; provided that the terminating Principal Party shall have complied with the provisions of clauses (C) and (D) of Section 5.02 and shall notify the other Principal Party promptly of its intention to terminate this Agreement or enter into a definitive agreement with respect to such Alternative Proposal, but in no event shall such notice be given less than 48 hours prior to the public announcement of the terminating Principal Party's termination of this Agreement; or (ii) the Board of Directors of the other Principal Party shall have withdrawn or modified in a manner materially adverse to the terminating Principal Party its approval or recommendation of this Agreement or the Merger (it being understood that an announcement by such other Principal Party that states that an Alternative Proposal is under consideration by such Board of Directors shall be deemed such a withdrawal or modification, unless the Board of Directors publicly reaffirms its original recommendation within ten business days after such announcement); and provided further that the terminating Principal Party's ability to terminate this Agreement pursuant to clause (i) of this paragraph (c) is conditioned upon the prior payment by the terminating Principal Party of any amounts owed by it pursuant to Section 8.02(b). 8.02 Effect of Termination. (a) If this Agreement is validly terminated by either Grizzly or Lynx pursuant to Section 8.01, this Agreement will forthwith become null and void and there will be no liability or obligation on the part of either Grizzly or Lynx (or any of their respective Representatives or affiliates), except (i) that the provisions of Sections 6.13, 6.14 and 6.15 and this Section 8.02 will continue to apply following any such termination, (ii) that nothing contained herein shall relieve any party hereto from liability for willful A-34 breach of its representations, warranties, covenants or agreements contained in this Agreement and (iii) as provided in paragraph (b) below. (b) In the event that any person or group shall have made an Alternative Proposal with respect to a Principal Party and thereafter this Agreement is terminated (x) by such Principal Party pursuant to Section 8.01(c)(i), then such Principal Party shall pay the Specified Amounts (as defined below) to the other Principal Party, or (y) by the other Principal Party pursuant to Section 8.01(b)(iii) as a result of a breach of covenant or agreement or pursuant to Section 8.01(c)(ii), then the non-terminating Principal Party shall pay the Specified Amounts to the terminating Principal Party. In addition, if any person or group shall have made an Alternative Proposal with respect to a Principal Party and thereafter this Agreement is terminated for any other reason (other than by reason of the breach of this Agreement by the Non- Executing Party (as defined below) or as a result of the Shareholders' Approval of the Non-Executing Party not being obtained) and, in the case of this sentence only, a definitive agreement with respect to an Alternative Proposal is executed by such Principal Party within one year after such termination, then the Principal Party executing such agreement (the "Executing Party") shall pay the Specified Amounts to the other Principal Party (the "Non-Executing Party"). The Specified Amounts shall be paid by wire transfer of same day funds, either on the date contemplated in Section 8.01(c) if applicable, or otherwise within two business days after such amount becomes due. "Specified Amounts" means (x) a termination fee of U.S. $4,000,000 and (y) an amount equal to all documented out-of-pocket expenses and fees incurred by the Principal Party who is entitled to receive such fee, or by any of its Subsidiaries, in connection with this Agreement and the transactions contemplated hereby (including, without limitation, fees and expenses payable to all banks, investment banking firms and other financial institutions and persons and their respective agents and counsel for acting as such Principal Party's financial advisor with respect to, or arranging or committing to provide or providing any financing for, the Merger), provided that in no event shall the amount of such reimbursable fees and expenses exceed U.S. $500,000 in the aggregate. (c) Each Principal Party acknowledges that the agreements contained in the preceding paragraph are an integral part of the transactions contemplated by this Agreement and that, without these agreements, the other Principal Party would not enter into this Agreement; accordingly, if such Principal Party fails promptly to pay the amount due pursuant to such paragraph, and in order to obtain such payment, the other Principal Party commences a suit which results in a judgment against such Principal Party for such amount, such Principal Party shall pay to the other Principal Party, as the case may be, all costs and expenses (including attorneys' fees and expenses) incurred by such other Principal Party or any of its Subsidiaries in connection with such suit, together with interest on the amount of the fee at a rate equal to the prime rate publicly announced from time to time by The Chase Manhattan Bank and in effect on the date such payment was required to be made. 8.03 Amendment. This Agreement may be amended, supplemented or modified by action taken by or on behalf of the respective Boards of Directors of the parties hereto at any time prior to the Effective Time, whether prior to or after the Grizzly Shareholders' Approval or the Lynx Shareholders' Approval shall have been obtained, but after such adoption and approval only to the extent permitted by applicable law. No such amendment, supplement or modification shall be effective unless set forth in a written instrument duly executed by or on behalf of each party hereto. 8.04 Waiver. At any time prior to the Effective Time any party hereto, by action taken by or on behalf of its Board of Directors, may to the extent permitted by applicable law (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties hereto contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the covenants, agreements or conditions of the other parties hereto contained herein. No such extension or waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party extending the time of performance or waiving any such inaccuracy or non- compliance. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. A-35 (9) ARTICLE IX GENERAL PROVISIONS 9.01 Non-Survival of Representations, Warranties, Covenants and Agreements. The representations, warranties, covenants and agreements contained in this Agreement or in any instrument delivered pursuant to this Agreement shall not survive the Merger but shall terminate at the Effective Time, except for the agreements contained in Article I and Article II, in Sections 6.09, 6.10 and 6.11, this Article IX and the agreements of the "affiliates" of Grizzly delivered pursuant to Section 6.04, which shall survive the Effective Time. 9.02 Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to Lynx or Sub, to: Lumonics Inc. Oxnard Operation 130 Lombard Street Oxnard, CA 93030 Facsimile No.: 805/485-3335 Attn: W. Scott Nix with copies to: 105 Schneider Road Kanata, Ontario KZK 1Y3 Facsimile No.: 603/592-7549 Attn: Desmond J. Bradley Goldberg Shinder 280 Slater Street, 18th Floor Ottawa, K1P 1C2 Facsimile No.: 613/237-1920 Attn: Charles Gardner, Esq. If to Grizzly, to: 500 Arsenal Street Watertown, MA 02171 Facsimile No.: 617/924-7327 Attn: Charles D. Winston with a copy to: Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 Facsimile No.: 617/523-1231 Attn: Stuart M. Cable, Esq. All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (iii) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto. A-36 9.03 Entire Agreement; Incorporation of Exhibits. (a) This Agreement supersedes all prior discussions and agreements among the parties hereto with respect to the subject matter hereof, other than the Confidentiality Agreement, which shall survive the execution and delivery of this Agreement in accordance with its terms, and contains, together with the Confidentiality Agreement and the Stock Option Agreements, the sole and entire agreement among the parties hereto with respect to the subject matter hereof. (b) The Grizzly Disclosure Letter, the Lynx Disclosure Letter and any Schedule or Exhibit attached to this Agreement and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. 9.04 Public Announcements. Except as otherwise required by law or the rules of any applicable securities exchange or national market system, so long as this Agreement is in effect, Lynx and Grizzly will not, and will not permit any of their respective Subsidiaries or Representatives to, issue or cause the publication of any press release or make any other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. Lynx and Grizzly will cooperate with each other in the development and distribution of all press releases and other public announcements with respect to this Agreement and the transactions contemplated hereby, and will furnish the other with drafts of any such releases and announcements as far in advance as practicable. 9.05 No Third Party Beneficiaries. Except as provided in Section 6.09 and Section 6.10, the terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and except as otherwise expressly provided for herein, it is not the intention of the parties to confer third-party beneficiary rights upon any other person. 9.06 No Assignment; Binding Effect. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other parties hereto and any attempt to do so will be void, except that Sub may assign any or all of its rights, interests and obligations hereunder to another direct or indirect wholly-owned Subsidiary of Lynx, provided that any such Subsidiary agrees in writing to be bound by all of the terms, conditions and provisions contained herein that would otherwise be applicable to Sub. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. 9.07 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define, modify or limit the provisions hereof. 9.08 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law or order, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (i) such provision will be fully severable, (ii) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. 9.09 Governing Law. Except to the extent that the MBCL is mandatorily applicable to the Merger and the rights of the shareholders of the Constituent Corporations, this Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 9.10 Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specified terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. A-37 9.11 Certain Definitions. As used in this Agreement: (a) except as provided in Section 6.04, the term "affiliate," as applied to any person, shall mean any other person directly or indirectly controlling, controlled by, or under common control with, that person; for purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that person, whether through the ownership of voting securities, by contract or otherwise; (b) a person will be deemed to "beneficially" own securities if such person would be the beneficial owner of such securities under Rule 13d-3 under the Exchange Act, including securities which such person has the right to acquire (whether such right is exercisable immediately or only after the passage of time); (c) the term "business day" means a day other than Saturday, Sunday or any day on which banks located in the Province of Ontario or the Commonwealth of Massachusetts are authorized or obligated to close; (d) the term "knowledge" or any similar formulation of "knowledge" shall mean, with respect to Grizzly, the knowledge of Grizzly's executive officers, and with respect to Lynx, the knowledge of Lynx's executive officers; (e) any reference to any event, change or effect being "material" or "materially adverse" or having a "material adverse effect" on or with respect to an entity (or group of entities taken as a whole) means such event, change or effect is material or materially adverse, as the case may be, to the business, financial condition or results of operations of such entity (or of such group of entities taken as a whole); (f) the term "person" shall include individuals, corporations, partnerships, trusts, other entities and groups (which term shall include a "group" as such term is defined in Section 13(d)(3) of the Exchange Act); (g) the "Representatives" of any entity means such entity's directors, officers, employees, legal, investment banking and financial advisors, accountants and any other agents and representatives; (h) the term "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which more than 50% of either the equity interests in, or the voting control of, such corporation or other organization is, directly or indirectly through Subsidiaries or otherwise, beneficially owned by such party. 9.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. A-38 IN WITNESS WHEREOF, each party hereto has caused this Agreement to be signed by its officers thereunto duly authorized and its corporate seal to be affixed as of the date first above written. Attest: Lumonics Inc. /s/ Charles J. Gardner /s/ Robert J. Atkinson _____________________________________ By: _________________________________ Name: Robert J. Atkinson Title: Chairman /s/ W. Scott Nix By: _________________________________ Name: W. Scott Nix Title: President and Chief Executive Officer Attest: Grizzly Acquisition Corp. /s/ Charles J. Gardner /s/ Robert J. Atkinson _____________________________________ By: _________________________________ Name: Robert J. Atkinson Title:President /s/ Desmond J. Bradley By: _________________________________ Name: Desmond J. Bradley Title:Treasurer Attest: General Scanning Inc. /s/ Katherine McGaugh /s/ Charles D. Winston _____________________________________ By: _________________________________ Name: Charles D. Winston Title: President and Chief Executive Officer /s/ Victor H. Woolley By: _________________________________ Name: Victor H. Woolley Title: Treasurer A-39 EXHIBIT A [FORM OF AFFILIATE'S AGREEMENT] [DATE] Lumonics Inc. 105 Schneider Road Kanata, Ontario K2K 1Y3 Ladies and Gentlemen: I have been advised that as of the date hereof I may be deemed to be an "affiliate" of General Scanning Inc., a Massachusetts corporation ("Grizzly"), as that term is defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"). Neither my entering into this agreement, nor anything contained herein, shall be deemed an admission on my part that I am such an "affiliate". Pursuant to the terms of the Agreement and Plan of Merger dated as of October 27, 1998 (the "Merger Agreement"), among Lumonics Inc., an Ontario corporation ("Lynx"), Grizzly Acquisition Corp., a Massachusetts corporation wholly owned by Lynx ("Sub"), and Grizzly providing for the merger of Sub with and into Grizzly (the "Merger"), and as a result of the Merger, I may receive shares of Lynx's common stock (the "Lynx Securities"), in exchange for the shares of common stock, par value $.01 per share, of Grizzly owned by me at the Effective Time (as defined in the Merger Agreement) of the Merger. I represent, warrant and covenant to Lynx that in such event: A. I shall not make any sale, transfer or other disposition of the Lynx Securities in violation of the Act or the Rules and Regulations. B. I have carefully read this letter and the Merger Agreement and discussed its requirements and other applicable limitations upon my ability to sell, transfer or otherwise dispose of Lynx Securities, to the extent I felt necessary, with my counsel or counsel for Grizzly. C. I have been advised that the issuance of Lynx Securities to me pursuant to the Merger has been registered with the Commission under the Act on a Registration Statement on Form S-4. However, I have also been advised that, since at the time the Merger was submitted for a vote of the Shareholders of Grizzly I may have been deemed to have been an affiliate of Grizzly and a distribution by me of Lynx Securities has not been registered under the Act, the Lynx Securities must be held by me indefinitely unless (i) a distribution of Lynx Securities by me has been registered under the Act, (ii) a sale of Lynx Securities by me is made in conformity with the volume and other limitations of Rule 145 promulgated by the Commission under the Act or (iii) in the opinion of counsel reasonably acceptable to Lynx, some other exemption from registration is available with respect to a proposed sale, transfer or other disposition of the Lynx Securities by me. D. I understand that Lynx is under no obligation to register the sale, transfer or other disposition of Lynx Securities by me or on my behalf or to take any other action necessary in order to make compliance with an exemption from registration available. E. I also understand that stop transfer instructions will be given to Lynx's transfer agents with respect to the Lynx Securities and that there will be placed on the certificates for the Lynx Securities, or any substitutions therefor, a legend stating in substance: A-40 "The shares represented by this certificate were issued in a transaction to which Rule 145 promulgated under the Securities Act of 1933, as amended, applies. The shares represented by this certificate may only be transferred in accordance with the terms of an agreement dated , , between the registered holder hereof and Lumonics Inc. (the "Corporation"), a copy of which agreement is on file at the principal offices of the Corporation." F. I also understand that unless the transfer by me of my Lynx Securities has been registered under the Act or is a sale made in conformity with the provisions of Rule 145, Lynx reserves the right to put the following legend on the certificates issued to my transferee: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and were acquired from a person who received such shares in a transaction to which Rule 145 promulgated under such Act applies. The shares have been acquired by the holder not with a view to, or for resale in connection with, any distribution thereof within the meaning of such Act and may not be sold, pledged or otherwise transferred except in accordance with an exemption from the registration requirements of such Act." It is understood and agreed that the legends set forth in paragraph E and F above shall be removed by delivery of substitute certificates without such legend if the undersigned shall have delivered to Lynx a copy of a letter from the staff of the Commission, or an opinion of counsel reasonably acceptable to Lynx to the effect that such legend is not required for purposes of the Act. By its acceptance hereof, Lynx agrees, for a period of two years after the Effective Time, that it will file on a timely basis all reports required to be filed by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, so that the public information provisions of Rule 144(c) under the Act are satisfied and the resale provisions of Rules 145(d)(1) and (2) under the Act are therefore available to me in the event I desire to transfer any Lynx Securities issued to me in the Merger. Very truly yours, ___________________________________ Name: Accepted this day of , , by: LUMONICS INC. By __________________________________ Name: Title A-41 ANNEX B STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated October 27, 1998, by and among GENERAL SCANNING INC., a Massachusetts corporation ("Grizzly") and LUMONICS INC., an Ontario corporation ("Lynx"). WHEREAS, Lynx, Grizzly and a subsidiary of Lynx are entering into an Agreement for Merger and Reorganization of even date herewith (the "Merger Agreement," terms defined therein and not otherwise defined herein having the same meanings when used herein), which provides, among other things, for the merger of such subsidiary with and into Grizzly; and WHEREAS, Lynx has agreed, to induce Grizzly to enter into the Merger Agreement, to grant the Option (as hereinafter defined); NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. Grant of Option. Lynx hereby grants Grizzly an irrevocable option (the "Option") to purchase up to 3,391,656 shares (the "Lynx Shares") of common stock of Lynx (the "Lynx Common Stock") in the manner set forth below at a price of Can. $8.09 per share (the "Exercise Price"). 2. Exercise of Option. The Option may be exercised by Grizzly, in whole or in part, at any time or from time to time after the Merger Agreement becomes terminable by Grizzly under circumstances which could entitle Grizzly to payment of Specified Amounts under Article VIII of the Merger Agreement. In the event Grizzly wishes to exercise the Option, Grizzly shall deliver to Lynx a written notice (an "Exercise Notice") specifying the total number of the Lynx Shares it wishes to purchase. Each closing of a purchase of the Lynx Shares (a "Closing") shall occur at a place, on a date and at a time designated by Grizzly and reasonably acceptable to Lynx in an Exercise Notice delivered at least three business days prior to the date of the Closing. The Option shall terminate upon the earlier of: (i) the Effective Time; (ii) the termination of the Merger Agreement pursuant to Section 8.01 thereof (other than a termination in connection with which Grizzly is or may be entitled to the payment specified in Section 8.02 thereof); and (iii) one year following any termination of the Merger Agreement in connection with which Grizzly is or may be entitled to the payment specified in Section 8.02 thereof (or if, at the expiration of such one year period, the Option cannot be exercised by reason of any applicable judgment, decree, order, law or regulation, ten business days after such impediment to exercise shall have been removed or shall have become final and not subject to appeal, but in no event under this clause (iii) later than the second anniversary of the date hereof). Notwithstanding the foregoing, the Option may not be exercised if Grizzly is in willful breach of any of its representations or warranties, or in material breach of any of its covenants, contained in this Agreement or in the Merger Agreement. 3. Conditions to Closing. The obligation of Lynx to issue the Lynx Shares to Grizzly hereunder is subject to the conditions that (i) all waiting periods, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder ("HSR Act"), applicable to the issuance of the Lynx Shares hereunder shall have expired or have been terminated; (ii) all consents, approvals, orders or authorizations of, or registrations, declarations or filings with, any Federal, provincial, state or local administrative agency or commission or other Federal, provincial, state or local governmental authority or instrumentality or securities exchange, if any, required in connection with the issuance of the Lynx Shares hereunder shall have been obtained or made, as the case may be; (iii) no preliminary or permanent injunction or other order by any court of competent jurisdiction prohibiting or otherwise restraining such issuance shall be in effect; and (iv) Grizzly shall not be in material breach of any of its covenants under the Merger Agreement. 4. Closing. At any Closing, (a) Lynx will deliver to Grizzly a single certificate in definitive form representing the number of the Lynx Shares designated by Grizzly in its Exercise Notice, such certificate to be registered in the name of Grizzly and to bear the legend set forth in Section 11 of this Agreement, and (b) Grizzly will deliver to Lynx the aggregate price for the Lynx Shares so designated and being purchased by wire B-1 transfer of immediately available funds or certified check or bank check or by delivery of shares of Grizzly Common Stock (as defined in the Merger Agreement) valued for this purpose at the average closing sales price on their principal market over the ten trading days preceding such Closing. Upon delivery of an Exercise Notice, satisfaction of the conditions specified in Section 3 of this Agreement and tender of the aggregate price, Grizzly shall be deemed to be a holder of record of the Lynx Shares so deliverable. At any Closing at which Grizzly is exercising the Option in part, Grizzly shall present and surrender this Agreement to Lynx, and Lynx shall deliver to Grizzly an executed new agreement with the same terms as this Agreement evidencing the right to purchase the balance of the shares of the Lynx Common Stock purchasable hereunder. 5. Representations and Warranties of Lynx. Lynx represents and warrants to Grizzly that (a) Lynx is a corporation duly incorporated, validly existing and in good standing under the laws of the Province of Ontario and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by Lynx and the consummation by Lynx of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Lynx and no other corporate proceedings on the part of Lynx are necessary to authorize this Agreement or any of the transactions contemplated hereby, (c) this Agreement has been duly executed and delivered by Lynx and constitutes a valid and binding obligation of Lynx, and, assuming this Agreement constitutes a valid and binding obligation of Grizzly, is enforceable against Lynx in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and subject to usual equity principles, (d) Lynx has taken all necessary corporate action to authorize and reserve for issuance and to permit it to issue, upon exercise of the Option, and at all times from the date hereof through the expiration of the Option will have reserved, 3,391,656 unissued Lynx Shares and such other shares of the Lynx Common Stock or other securities which may be issued pursuant to Section 10 of this Agreement, all of which, upon their issuance, payment and delivery in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, and free and clear of all claims, liens, charges, encumbrances and security interests of any nature whatsoever (other than those created by or through Grizzly), (e) the execution and delivery of this Agreement by Lynx does not, and the performance of this Agreement by Lynx will not materially conflict with, or result in any material violation of, or material default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a lien, pledge, security interest or other encumbrance on assets pursuant to (any such conflict, violation, default, right of termination, cancellation or acceleration, loss or creation, a "Violation"), (A) any provision of the Articles of Organization or By-laws of Lynx or (B) any provisions of any loan or credit agreement, note, mortgage, indenture, lease, benefit plan or other agreement, obligation, instrument, permit, concession, franchise, license of or applicable to Lynx, or (C) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Lynx or its properties or assets, which Violation, in the case of each of clauses (B) and (C), individually or in the aggregate would prevent or materially delay the exercise by Grizzly of the Option or any other right of Grizzly under this Agreement, or be subject to any statute or regulation of the type referred to in Section 6.16 of the Merger Agreement or result in a "Distribution Date" or "Triggering Event" under any Lynx shareholder rights plan, (f) except as described in Section 4.04 of the Merger Agreement, the execution and delivery of this Agreement by Lynx does not, and the performance of this Agreement by Lynx will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, and (g) any shares of Grizzly Common Stock acquired by Lynx in connection with Grizzly's exercise of the Option will not be acquired by Lynx with a view to public distribution or resale in any manner which would be in violation of federal or state securities laws. 6. Representations and Warranties of Grizzly. Grizzly represents and warrants to Lynx that (a) each of Grizzly is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by Grizzly and the consummation by Grizzly of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grizzly and no other corporate proceedings on the part of Grizzly are necessary B-2 to authorize this Agreement or any of the transactions contemplated hereby, (c) this Agreement has been duly executed and delivered by Grizzly and constitutes a valid and binding obligation of Grizzly, and, assuming this Agreement constitutes a valid and binding obligation of Lynx, is enforceable against Grizzly in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and subject to usual equity principles, (d) the execution and delivery of this Agreement by Grizzly does not, and the performance of this Agreement by Grizzly will not, result in any Violation pursuant to, (A) any provision of the charter documents of Grizzly, (B) any provisions of any loan or credit agreement, note, mortgage, indenture, lease, or other agreement, obligation, instrument, permit, concession, franchise, license of or applicable to it or (C) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Grizzly or its properties or assets, which Violation, in the case of each of clauses (B) and (C), would, individually or in the aggregate have a material adverse effect on Grizzly's ability to consummate the transactions contemplated by this Agreement, (e) except as described in Section 3.04 of the Merger Agreement, the execution and delivery of this Agreement by Grizzly does not, and the performance of this Agreement by Grizzly will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority and (f) any Lynx Shares acquired upon exercise of the Option will not be, and the Option is not being, acquired by Grizzly with a view to public distribution or resale in any manner which would be in violation of federal, provincial or state securities laws. 7. Put Right. (a) Exercise of Put. At any time during which the Option is exercisable pursuant to Section 2 or would be exercisable but for the circumstances referred to in the parenthetical in Section 2(iii) of this Agreement (the "Repurchase Period"), upon demand by Grizzly, Grizzly shall have the right to sell to Lynx (or any successor entity thereof) and Lynx (or such successor entity) shall be obligated to repurchase from Grizzly (the "Put"), all or any portion of the Option, at the price set forth in subparagraph (i) below, or all or any portion of the Lynx Shares purchased by Grizzly pursuant hereto, at a price set forth in subparagraph (ii) below: (i) the difference between the "Market/Tender Offer Price" for shares of the Lynx Common Stock as of the date (the "Notice Date") notice of exercise of the Put is given to Lynx (defined as the higher of (A) the price per share offered as of the Notice Date pursuant to any tender or exchange offer or other Alternative Proposal which was made prior to the Notice Date and not terminated or withdrawn as of the Notice Date (the "Tender Price") and (B) the average of the closing prices of shares of the Lynx Common Stock on the Toronto Stock Exchange ("TSE") or the Nasdaq Stock Market for the five trading days immediately preceding the Notice Date (the "Market Price")), and the Exercise Price, multiplied by the number of Lynx Shares purchasable pursuant to the Option (or portion thereof with respect to which Grizzly is exercising its rights under this Section 7); (ii) the Exercise Price paid by Grizzly for the Lynx Shares acquired pursuant to the Option plus the difference between the Market/Tender Offer Price and the Exercise Price, multiplied by the number of Lynx Shares so purchased. For purposes of this clause (ii), the Tender Price shall be the highest price per share offered pursuant to a tender or exchange offer or other Alternative Proposal during the Repurchase Period. In determining the Market-Tender Offer Price, the value of consideration other than cash or stock as provided above shall be determined by a nationally recognized investment banking firm selected by Grizzly and reasonably acceptable to Lynx. (b) Payment and Redelivery of Option or Shares. In the event Grizzly exercises its rights under this Section 7, Lynx shall, within ten business days of the Notice Date, pay the required amount to Grizzly in immediately available funds and Grizzly shall surrender to Lynx the Option or the certificates evidencing the Lynx Shares purchased by Grizzly pursuant hereto, and Grizzly shall warrant that it owns such shares and that such shares are then free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever. B-3 8. Restrictions on Certain Actions. Lynx shall not adopt any Rights Agreement or shareholder rights plan in any manner which would cause Grizzly, if Grizzly has complied with its obligations under this Agreement, to become an "Acquiring Person" under such Rights Agreement or shareholder rights plan solely by reason of the beneficial ownership of the shares purchasable hereunder. 9. Registration Rights. (a) Lynx will, if requested by Grizzly at any time and from time to time within two years of the exercise of the Option, as expeditiously as possible prepare and file up to two registration statements under the Securities Act of 1933, as amended (the "Securities Act") (provided it has shares registered under the Exchange Act) or prospectuses under the Securities Act (Ontario) (the "Ontario Act") if such registration or the obtaining of a receipt for a prospectus is necessary in order to permit the sale or other disposition of any or all shares or other securities that have been acquired by or are issuable to Grizzly upon exercise of the Option in accordance with the intended method of sale or other disposition stated by Grizzly, including without limitation a "shelf" registration statement under Rule 415 under the Securities Act or any successor provision, or similar provision under the Ontario Act and related rules, regulations, rulings or policy statements, and Lynx will use its best efforts to qualify such shares or other securities under any applicable state or other provincial securities laws. Lynx will use reasonable efforts to cause each such registration statement to become effective and to obtain a (final) receipt for each such prospectus, to obtain all consents or waivers of other parties which are required therefor, and to keep such registration statement or prospectus effective for such period not in excess of 180 calendar days from the day such registration statement first becomes effective or the date of the (final) receipt for such prospectus as may be reasonably necessary to effect such sale or other disposition. The obligations of Lynx hereunder to file a registration statement or prospectus and to maintain its effectiveness may be suspended for up to 90 calendar days in the aggregate if the Board of Directors of Lynx shall have determined that the filing of such registration statement or prospectus or the maintenance of its effectiveness would require premature disclosure of material nonpublic information that would materially and adversely affect Lynx or otherwise interfere with or adversely affect any pending or proposed offering of securities of Lynx or any other material transaction involving Lynx. Subject to applicable law, any registration statement or prospectus prepared and filed under this Section 9, and any sale covered thereby, will be at Lynx's expense except for underwriting discounts or commissions, brokers' fees and the fees and disbursements of Grizzly's counsel related thereto. Grizzly will provide and be responsible for, in connection with indemnification provisions, all information reasonably requested by Lynx for inclusion in any registration statement or prospectus to be filed hereunder. If, during the time periods referred to in the first sentence of this Section 9, Lynx effects a registration under the Securities Act of , or qualifies a prospectus under the Ontario Act in respect of, the Lynx Common Stock for its own account or for any other stockholders of Lynx (other than on Form S-4 or Form S-8, or any successor form), it will allow Grizzly the right to participate in such registration or qualification, and such participation will not affect the obligation of Lynx to effect demand registration statements or prospectus for Grizzly under this Section 9; provided that, if the managing underwriters of such offering advise Lynx in writing that in their opinion the number of shares of the Lynx Common Stock requested to be included in such registration or qualification exceeds the number which can be sold in such offering, Lynx will include the shares requested to be included therein by Grizzly after the shares intended to be included therein by Lynx have been included and prior to any shares requested to be included by any third parties are included. In connection with any registration or qualification pursuant to this Section 9, Lynx and Grizzly will provide each other and any underwriter of the offering with customary representations, warranties, covenants, indemnification, and contribution in connection with such registration or qualification. Lynx shall provide to any underwriters such documentation (including certificates, opinions of counsel and "comfort" letters from auditors) as are customary in connection with underwritten public offerings as such underwriters may reasonably require. (b) If Lynx's securities of the same type as the Lynx Common Stock beneficially owned by Grizzly are then authorized for quotation or trading or listing on the TSE, Nasdaq National Market System, or any other securities exchange or automated quotations system, Lynx, upon the request of Grizzly, shall promptly file an application, if required, to authorize for quotation, trading or listing such shares of the Lynx Common Stock on B-4 such exchange or system and will use its reasonable efforts to obtain approval, if required, of such quotation, trading or listing as soon as practicable. (c) If shares of Grizzly Common Stock are delivered to exercise the Option, Grizzly will prepare appropriate registration statements and prospectuses, and attempt to obtain approvals of quotation, trading or listing, on the same basis as provided with respect to Lynx Common Stock in this Section. 10. Adjustment Upon Changes in Capitalization. (a) In the event of any change in the Lynx Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, exchange of shares or the like, the type and number of shares or securities subject to the Option, and the purchase price per share provided in Section 1 of this Agreement, shall be adjusted appropriately, and proper provision shall be made in the agreements governing such transaction so that Grizzly shall receive, upon exercise of the Option, the number and class of shares or other securities or property that Grizzly would have received in respect of the Lynx Common Stock if the Option had been exercised immediately prior to such event or the record date therefor, as applicable. In the event that any additional shares of Lynx Common Stock otherwise become outstanding after the date of this Agreement (other than pursuant hereto), the number of shares of Lynx Common Stock subject to the Option shall be increased to equal 19.9% of the number of shares of Lynx Common Stock then issued and outstanding. (b) In the event that Lynx shall enter in an agreement: (i) to consolidate with or merge into any person, other than Grizzly or another direct or indirect wholly-owned subsidiary of Grizzly, and shall not be the continuing or surviving corporation of such consolidation or merger; (ii) to permit any person, other than Grizzly or another direct or indirect wholly-owned subsidiary of Grizzly, to merge into Lynx and Lynx shall be the continuing or surviving corporation, but, in connection with such merger, the then- outstanding shares of the Lynx Common Stock shall be changed into or exchanged for stock or other securities of Lynx or any other person or cash or any other property or the outstanding shares of the Lynx Common Stock immediately prior to such merger shall after such merger represent less than 50% of the outstanding shares and share equivalents of the merged company; or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grizzly or another direct or indirect wholly-owned subsidiary of Grizzly, then, and in each such case, Lynx shall immediately so notify Grizzly, and the agreement governing such transaction shall make proper provisions so that upon the consummation of any such transaction and upon the terms and conditions set forth herein, Grizzly shall, upon exercise of the Option, receive for each Lynx Share with respect to which the Option has not been exercised an amount of consideration in the form of and equal to the per share amount of consideration that would be received by the holder of one share of the Lynx Common Stock less the Exercise Price (and, in the event of an election or similar arrangement with respect to the type of consideration to be received by the holders of the Lynx Common Stock, subject to the foregoing, proper provision shall be made so that the holder of the Option would have the same election or similar rights as would the holder of the number of shares of the Lynx Common Stock for which the Option is then exercisable. 11. Restrictive Legends. Each certificate representing shares of the Lynx Common Stock issued to Grizzly hereunder shall include a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. Certificates representing shares (i) as to which an opinion of counsel reasonably satisfactory to Lynx to the effect that such legend is not required under the Securities Act, or (ii) sold in a registered public offering pursuant to Section 9 of this Agreement shall not be required to bear the legend set forth in this Section 11. 12. Binding Effect; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as expressly provided for in this B-5 Agreement, neither this Agreement nor the rights or the obligations of either party hereto are assignable, except by operation of law, or with the written consent of the other party. Nothing contained in this Agreement, express or implied, is intended to confer upon any person other than the parties hereto and their respective permitted assigns any rights or remedies of any nature whatsoever by reason of this Agreement. 13. Specific Performance. The parties recognize and agree that if for any reason any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached, immediate and irreparable harm or injury would be caused for which money damages would not be an adequate remedy. Accordingly, each party agrees that, in addition to other remedies, the other party shall be entitled to an injunction restraining any violation or threatened violation of the provisions of this Agreement. In the event that any action should be brought in equity to enforce the provisions of this Agreement, neither party will allege, and each party hereby waives the defense, that there is adequate remedy at law. 14. Entire Agreement. This Agreement and the Merger Agreement (including the Exhibits and Schedules thereto) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof. 15. Further Assurances. Each party will execute and deliver all such further documents and instruments and take all such further action including obtaining necessary regulatory approvals and making necessary filings (including without limitation under the HSR Act and filings with the Toronto Stock Exchange) as may be necessary in order to consummate the transactions contemplated hereby (including the issuance, registration and listing of the Lynx Shares). 16. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. In the event any court or other competent authority holds any provision of this Agreement to be null, void or unenforceable, the parties hereto shall negotiate in good faith the execution and delivery of an amendment to this Agreement in order, as nearly as possible, to effectuate, to the extent permitted by law, the intent of the parties hereto with respect to such provision. Each party agrees that, should any court or other competent authority hold any provision of this Agreement or part hereof to be null, void or unenforceable, or order any party to take any action inconsistent herewith, or not take any action required herein, the other party shall not be entitled to specific performance of such provision or part hereof or to any other remedy, including but not limited to money damages, for breach hereof or of any other provision of this Agreement or part hereof as the result of such holding or order. 17. Notices. Any notice or communication required or permitted hereunder shall be in writing and either delivered personally, telegraphed or telecopied or sent by certified or registered mail, postage prepaid, and shall be deemed to be given, dated and received when so delivered personally, telegraphed or telecopied or, if mailed, five business days after the date of mailing to the address or telecopy number specified for the addressee in the Merger Agreement, or to such other address or addresses as such person may subsequently designate by notice given hereunder. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State without regard to any applicable conflicts of law rules. 19. Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same instrument. B-6 21. Expenses. Except as otherwise expressly provided herein or in the Merger Agreement, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses. 22. Amendments; Waiver. This Agreement may be amended by the parties hereto and the terms and conditions hereof may be waived only by an instrument in writing signed on behalf of each of the parties hereto, or, in the case of a waiver, by an instrument signed on behalf of the party waiving compliance. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. GENERAL SCANNING INC. /s/ Charles D. Winston By: _________________________________ Name: Charles D. Winston Title: President and Chief Executive Officer LUMONICS INC. /s/ Robert J. Atkinson By: _________________________________ Name: Robert J. Atkinson Title: Chairman B-7 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated October 27, 1998, by and among GENERAL SCANNING INC., a Massachusetts corporation ("Grizzly"), LUMONICS INC., an Ontario corporation ("Lynx") and GRIZZLY ACQUISITION CORP., a Massachusetts corporation and a wholly-owned subsidiary of Lynx ("Merger Sub"). WHEREAS, Grizzly, Lynx and Merger Sub are entering into an Agreement for Merger and Reorganization of even date herewith (the "Merger Agreement", terms defined therein and not otherwise defined herein having the same meanings when used herein), which provides, among other things, for the merger of Merger Sub with and into Grizzly; and WHEREAS, Grizzly has agreed, to induce Lynx and Merger Sub to enter into the Merger Agreement, to grant the Option (as hereinafter defined); NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. Grant of Option. Grizzly hereby grants Merger Sub an irrevocable option (the "Option") to purchase up to 2,517,673 shares (the "Grizzly Shares") of common stock of Grizzly (the "Grizzly Common Stock") and the associated Grizzly Rights in the manner set forth below at a price of U.S. $4.57 per share (the "Exercise Price"). 2. Exercise of Option. The Option may be exercised by Merger Sub, in whole or in part, at any time or from time to time after the Merger Agreement becomes terminable by Merger Sub under circumstances which could entitle Lynx or Merger Sub to payment of Specified Amounts under Article VIII of the Merger Agreement. In the event Merger Sub wishes to exercise the Option, Merger Sub shall deliver to Grizzly a written notice (an "Exercise Notice") specifying the total number of the Grizzly Shares it wishes to purchase. Each closing of a purchase of the Grizzly Shares (a "Closing") shall occur at a place, on a date and at a time designated by Merger Sub and reasonably acceptable to Grizzly in an Exercise Notice delivered at least three business days prior to the date of the Closing. The Option shall terminate upon the earlier of: (i) the Effective Time; (ii) the termination of the Merger Agreement pursuant to Section 8.01 thereof (other than a termination in connection with which Merger Sub is or may be entitled to the payment specified in Section 8.02 thereof); and (iii) one year following any termination of the Merger Agreement in connection with which Merger Sub is or may be entitled to the payment specified in Section 8.02 thereof (or if, at the expiration of such one year period, the Option cannot be exercised by reason of any applicable judgment, decree, order, law or regulation, ten business days after such impediment to exercise shall have been removed or shall have become final and not subject to appeal, but in no event under this clause (iii) later than the second anniversary of the date hereof). Notwithstanding the foregoing, the Option may not be exercised if Merger Sub is in willful breach of any of its representations or warranties, or in material breach of any of its covenants, contained in this Agreement or in the Merger Agreement. 3. Conditions to Closing. The obligation of Grizzly to issue the Grizzly Shares to Merger Sub hereunder is subject to the conditions that (i) all waiting periods, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder ("HSR Act"), applicable to the issuance of the Grizzly Shares hereunder shall have expired or have been terminated; (ii) all consents, approvals, orders or authorizations of, or registrations, declarations or filings with, any Federal, state or local administrative agency or commission or other Federal state or local governmental authority or instrumentality, if any, required in connection with the issuance of the Grizzly Shares hereunder shall have been obtained or made, as the case may be; (iii) no preliminary or permanent injunction or other order by any court of competent jurisdiction prohibiting or otherwise restraining such issuance shall be in effect; (iv) Merger Sub shall not be in material breach of any of its covenants under the Merger Agreement; and (v) the Toronto Stock Exchange shall have conditionally approved the listing (subject to its normal requirements) of the shares B-8 of Lynx Common Stock issuable under the Stock Option Agreement referred to in clause (ii) of the third paragraph of the Preamble to the Merger Agreement. 4. Closing. At any Closing, (a) Grizzly will deliver to Merger Sub a single certificate in definitive form representing the number of the Grizzly Shares designated by Merger Sub in its Exercise Notice, such certificate to be registered in the name of Merger Sub and to bear the legend set forth in Section 11 of this Agreement, and (b) Merger Sub will deliver to Grizzly the aggregate price for the Grizzly Shares so designated and being purchased by wire transfer of immediately available funds or certified check or bank check or by delivery of shares of Lynx Common Stock (as defined in the Merger Agreement) valued for this purpose at the average closing sales price on their principal market over the ten trading days preceding such Closing. Upon delivery of an Exercise Notice, satisfaction of the conditions specified in Section 3 of this Agreement and tender of the aggregate price, Merger Sub shall be deemed to be a holder of record of the Grizzly Shares so deliverable. At any Closing at which Merger Sub is exercising the Option in part, Merger Sub shall present and surrender this Agreement to Grizzly, and Grizzly shall deliver to Merger Sub an executed new agreement with the same terms as this Agreement evidencing the right to purchase the balance of the shares of the Grizzly Common Stock purchasable hereunder. 5. Representations and Warranties of Grizzly. Grizzly represents and warrants to Lynx and Merger Sub that (a) Grizzly is a corporation duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by Grizzly and the consummation by Grizzly of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grizzly and no other corporate proceedings on the part of Grizzly are necessary to authorize this Agreement or any of the transactions contemplated hereby, (c) this Agreement has been duly executed and delivered by Grizzly and constitutes a valid and binding obligation of Grizzly, and, assuming this Agreement constitutes a valid and binding obligation of Lynx and Merger Sub, is enforceable against Grizzly in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and subject to usual equity principles, (d) Grizzly has taken all necessary corporate action to authorize and reserve for issuance and to permit it to issue, upon exercise of the Option, and at all times from the date hereof through the expiration of the Option will have reserved, 2,517,673 unissued Grizzly Shares and such other shares of the Grizzly Common Stock or other securities which may be issued pursuant to Section 10 of this Agreement, all of which, upon their issuance, payment and delivery in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, and free and clear of all claims, liens, charges, encumbrances and security interests of any nature whatsoever (other than those created by or through Merger Sub), (e) the execution and delivery of this Agreement by Grizzly does not, and the performance of this Agreement by Grizzly will not materially conflict with, or result in any material violation of, or material default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a lien, pledge, security interest or other encumbrance on assets pursuant to (any such conflict, violation, default, right of termination, cancellation or acceleration, loss or creation, a "Violation"), (A) any provision of the Articles of Organization or By-laws of Grizzly or (B) any provisions of any loan or credit agreement, note, mortgage, indenture, lease, benefit plan or other agreement, obligation, instrument, permit, concession, franchise, license of or applicable to Grizzly, or (C) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Grizzly or its properties or assets, which Violation, in the case of each of clauses (B) and (C), individually or in the aggregate would prevent or materially delay the exercise by Merger Sub of the Option or any other right of Merger Sub under this Agreement, or be subject to Section 110D of Mass. Ann. Laws or result in a "Distribution Date" or "Triggering Event" under the Grizzly Rights Plan, (f) except as described in Section 3.04 of the Merger Agreement, the execution and delivery of this Agreement by Grizzly does not, and the performance of this Agreement by Grizzly will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, and (g) any shares of Lynx Common Stock acquired by Grizzly in connection with Lynx's exercise of the Option will not be acquired by Grizzly with a view to public distribution or resale in any manner which would be in violation of federal or state securities laws. B-9 6. Representations and Warranties of Lynx and Merger Sub. Lynx and Merger Sub each represents and warrants to Grizzly that (a) each of Lynx and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of Ontario and the Commonwealth of Massachusetts, respectively, and has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder, (b) the execution and delivery of this Agreement by Lynx and Merger Sub and the consummation by Lynx and Merger Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Lynx and Merger Sub and no other corporate proceedings on the part of Lynx and Merger Sub are necessary to authorize this Agreement or any of the transactions contemplated hereby, (c) this Agreement has been duly executed and delivered by Lynx and Merger Sub and constitutes a valid and binding obligation of Lynx and Merger Sub, and, assuming this Agreement constitutes a valid and binding obligation of Grizzly, is enforceable against Lynx and Merger Sub in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and subject to usual equity principles, (d) the execution and delivery of this Agreement by Lynx and Merger Sub does not, and the performance of this Agreement by Lynx and Merger Sub will not, result in any Violation pursuant to, (A) any provision of the charter documents of Lynx or Merger Sub, (B) any provisions of any loan or credit agreement, note, mortgage, indenture, lease, or other agreement, obligation, instrument, permit, concession, franchise, license of or applicable to them or (C) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Lynx or Merger Sub or their properties or assets, which Violation, in the case of each of clauses (B) and (C), would, individually or in the aggregate have a material adverse effect on Lynx or Merger Sub's ability to consummate the transactions contemplated by this Agreement, (e) except as described in Section 4.04 of the Merger Agreement, the execution and delivery of this Agreement by Lynx and Merger Sub does not, and the performance of this Agreement by Lynx and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority and (f) any Grizzly Shares acquired upon exercise of the Option will not be, and the Option is not being, acquired by Merger Sub with a view to public distribution or resale in any manner which would be in violation of federal or state securities laws. 7. Put Right. (a) Exercise of Put. At any time during which the Option is exercisable pursuant to Section 2 or would be exercisable but for the circumstances referred to in the parenthetical in Section 2(iii) of this Agreement or if the condition set forth in Section 3 (v) of this Agreement shall not have been satisfied (the "Repurchase Period"), upon demand by Merger Sub, Merger Sub shall have the right to sell to Grizzly (or any successor entity thereof) and Grizzly (or such successor entity) shall be obligated to repurchase from Merger Sub (the "Put"), all or any portion of the Option, at the price set forth in subparagraph (i) below, or all or any portion of the Grizzly Shares purchased by Merger Sub pursuant hereto, at a price set forth in subparagraph (ii) below: (i) the difference between the "Market/Tender Offer Price" for shares of the Grizzly Common Stock as of the date (the "Notice Date") notice of exercise of the Put is given to Grizzly (defined as the higher of (A) the price per share offered as of the Notice Date pursuant to any tender or exchange offer or other Alternative Proposal which was made prior to the Notice Date and not terminated or withdrawn as of the Notice Date (the "Tender Price") and (B) the average of the closing prices of shares of the Grizzly Common Stock on the New York Stock Exchange ("NYSE") or the Nasdaq Stock Market for the five trading days immediately preceding the Notice Date (the "Market Price")), and the Exercise Price, multiplied by the number of Grizzly Shares purchasable pursuant to the Option (or portion thereof with respect to which Merger Sub is exercising its rights under this Section 7); (ii) the Exercise Price paid by Merger Sub for the Grizzly Shares acquired pursuant to the Option plus the difference between the Market/Tender Offer Price and the Exercise Price, multiplied by the number of Grizzly Shares so purchased. For purposes of this clause (ii), the Tender Price shall be the highest price per share offered pursuant to a tender or exchange offer or other Alternative Proposal during the Repurchase Period. B-10 In determining the Market-Tender Offer Price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm selected by Lynx and reasonably acceptable to Grizzly. (b) Payment and Redelivery of Option or Shares. In the event Merger Sub exercises its rights under this Section 7, Grizzly shall, within ten business days of the Notice Date, pay the required amount to Merger Sub in immediately available funds and Merger Sub shall surrender to Grizzly the Option or the certificates evidencing the Grizzly Shares purchased by Merger Sub pursuant hereto, and Merger Sub shall warrant that it owns such shares and that such shares are then free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever. 8. Restrictions on Certain Actions. Grizzly shall not adopt any Rights Agreement or shareholder rights plan in any manner which would cause Merger Sub, if Merger Sub has complied with its obligations under this Agreement, to become an "Acquiring Person" under such Rights Agreement or shareholder rights plan solely by reason of the beneficial ownership of the shares purchasable hereunder. 9. Registration Rights. (a) Grizzly will, if requested by Merger Sub at any time and from time to time within two years of the exercise of the Option, as expeditiously as possible prepare and file up to two registration statements under the Securities Act of 1933, as amended (the "Securities Act") or prospectuses under the Securities Act (Ontario) (the "Ontario Act") if such registration or the obtaining of a receipt for a prospectus is necessary in order to permit the sale or other disposition of any or all shares or other securities that have been acquired by or are issuable to Merger Sub upon exercise of the Option in accordance with the intended method of sale or other disposition stated by Merger Sub, including without limitation a "shelf" registration statement under Rule 415 under the Securities Act or any successor provision, or similar provision under the Ontario Act and related rules, regulations, rulings or policy statements, and Grizzly will use its best efforts to qualify such shares or other securities under any applicable state or other provincial securities laws. Grizzly will use reasonable efforts to cause each such registration statement to become effective and to obtain a (final) receipt for each such prospectus, to obtain all consents or waivers of other parties which are required therefor, and to keep such registration statement or prospectus effective for such period not in excess of 180 calendar days from the day such registration statement first becomes effective or the date of the (final) receipt for such prospectus as may be reasonably necessary to effect such sale or other disposition. The obligations of Grizzly hereunder to file a registration statement or prospectus and to maintain its effectiveness may be suspended for up to 90 calendar days in the aggregate if the Board of Directors of Grizzly shall have determined that the filing of such registration statement or prospectus or the maintenance of its effectiveness would require premature disclosure of material nonpublic information that would materially and adversely affect Grizzly or otherwise interfere with or adversely affect any pending or proposed offering of securities of Grizzly or any other material transaction involving Grizzly. Subject to applicable law, any registration statement or prospectus prepared and filed under this Section 9, and any sale covered thereby, will be at Grizzly's expense except for underwriting discounts or commissions, brokers' fees and the fees and disbursements of Merger Sub's counsel related thereto. Merger Sub will provide and be responsible for, in connection with indemnification provisions, all information reasonably requested by Grizzly for inclusion in any registration statement or prospectus to be filed hereunder. If, during the time periods referred to in the first sentence of this Section 9, Grizzly effects a registration under the Securities Act of , or qualifies a prospectus under the Ontario Act in respect of, the Grizzly Common Stock for its own account or for any other stockholders of Grizzly (other than on Form S-4 or Form S-8, or any successor form), it will allow Merger Sub the right to participate in such registration or qualification, and such participation will not affect the obligation of Grizzly to effect demand registration statements or prospectus for Merger Sub under this Section 9; provided that, if the managing underwriters of such offering advise Grizzly in writing that in their opinion the number of shares of the Grizzly Common Stock requested to be included in such registration or qualification exceeds the number which can be sold in such offering, Grizzly will include the shares requested to be included therein by Merger Sub after the shares intended to be included therein by B-11 Grizzly have been included and prior to any shares requested to be included by any third parties are included. In connection with any registration or qualification pursuant to this Section 9, Grizzly and Merger Sub will provide each other and any underwriter of the offering with customary representations, warranties, covenants, indemnification, and contribution in connection with such registration or qualification. Grizzly shall provide to any underwriters such documentation (including certificates, opinions of counsel and "comfort" letters from auditors) as are customary in connection with underwritten public offerings as such underwriters may reasonably require. (b) If Grizzly's securities of the same type as the Grizzly Common Stock beneficially owned by Merger Sub are then authorized for quotation or trading or listing on the NYSE, Nasdaq National Market System, or any other securities exchange or automated quotations system, Grizzly, upon the request of Merger Sub, shall promptly file an application, if required, to authorize for quotation, trading or listing such shares of the Grizzly Common Stock on such exchange or system and will use its reasonable efforts to obtain approval, if required, of such quotation, trading or listing as soon as practicable. (c) If shares of Lynx Common Stock are delivered to exercise the Option, Lynx will prepare appropriate registration statements and prospectuses, and attempt to obtain approvals of quotation, trading or listing, on the same basis as provided with respect to Grizzly Common Stock in this Section. 10. Adjustment Upon Changes in Capitalization. (a) In the event of any change in the Grizzly Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, exchange of shares or the like, the type and number of shares or securities subject to the Option, and the purchase price per share provided in Section 1 of this Agreement, shall be adjusted appropriately, and proper provision shall be made in the agreements governing such transaction so that Merger Sub shall receive, upon exercise of the Option, the number and class of shares or other securities or property that Merger Sub would have received in respect of the Grizzly Common Stock if the Option had been exercised immediately prior to such event or the record date therefor, as applicable. In the event that any additional shares of Grizzly Common Stock otherwise become outstanding after the date of this Agreement (other than pursuant hereto), the number of shares of Grizzly Common Stock subject to the Option shall be increased to equal 19.9% of the number of shares of Grizzly Common Stock then issued and outstanding. (b) In the event that Grizzly shall enter in an agreement: (i) to consolidate with or merge into any person, other than Merger Sub or another direct or indirect wholly-owned subsidiary of Lynx, and shall not be the continuing or surviving corporation of such consolidation or merger; (ii) to permit any person, other than Merger Sub or another direct or indirect wholly-owned subsidiary of Lynx, to merge into Grizzly and Grizzly shall be the continuing or surviving corporation, but, in connection with such merger, the then- outstanding shares of the Grizzly Common Stock shall be changed into or exchanged for stock or other securities of Grizzly or any other person or cash or any other property or the outstanding shares of the Grizzly Common Stock immediately prior to such merger shall after such merger represent less than 50% of the outstanding shares and share equivalents of the merged company; or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Merger Sub or another direct or indirect wholly-owned subsidiary of Lynx, then, and in each such case, Grizzly shall immediately so notify Lynx, and the agreement governing such transaction shall make proper provisions so that upon the consummation of any such transaction and upon the terms and conditions set forth herein, Merger Sub shall, upon exercise of the Option, receive for each Grizzly Share with respect to which the Option has not been exercised an amount of consideration in the form of and equal to the per share amount of consideration that would be received by the holder of one share of the Grizzly Common Stock less the Exercise Price (and, in the event of an election or similar arrangement with respect to the type of consideration to be received by the holders of the Grizzly Common Stock, subject to the foregoing, proper provision shall be made so that the holder of the Option would have the same election or similar rights as would the holder of the number of shares of the Grizzly Common Stock for which the Option is then exercisable. B-12 11. Restrictive Legends. Each certificate representing shares of the Grizzly Common Stock issued to Merger Sub hereunder shall include a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. Certificates representing shares (i) as to which an opinion of counsel reasonably satisfactory to Grizzly to the effect that such legend is not required under the Securities Act, or (ii) sold in a registered public offering pursuant to Section 9 of this Agreement shall not be required to bear the legend set forth in this Section 11. 12. Binding Effect; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as expressly provided for in this Agreement, neither this Agreement nor the rights or the obligations of either party hereto are assignable, except by operation of law, or with the written consent of the other party. Nothing contained in this Agreement, express or implied, is intended to confer upon any person other than the parties hereto and their respective permitted assigns any rights or remedies of any nature whatsoever by reason of this Agreement. 13. Specific Performance. The parties recognize and agree that if for any reason any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached, immediate and irreparable harm or injury would be caused for which money damages would not be an adequate remedy. Accordingly, each party agrees that, in addition to other remedies, the other party shall be entitled to an injunction restraining any violation or threatened violation of the provisions of this Agreement. In the event that any action should be brought in equity to enforce the provisions of this Agreement, neither party will allege, and each party hereby waives the defense, that there is adequate remedy at law. 14. Entire Agreement. This Agreement and the Merger Agreement (including the Exhibits and Schedules thereto) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof. 15. Further Assurances. Each party will execute and deliver all such further documents and instruments and take all such further action including obtaining necessary regulatory approvals and making necessary filings (including without limitation under the HSR Act) as may be necessary in order to consummate the transactions contemplated hereby (including the issuance, registration and listing of the Grizzly Shares). 16. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. In the event any court or other competent authority holds any provision of this Agreement to be null, void or unenforceable, the parties hereto shall negotiate in good faith the execution and delivery of an amendment to this Agreement in order, as nearly as possible, to effectuate, to the extent permitted by law, the intent of the parties hereto with respect to such provision. Each party agrees that, should any court or other competent authority hold any provision of this Agreement or part hereof to be null, void or unenforceable, or order any party to take any action inconsistent herewith, or not take any action required herein, the other party shall not be entitled to specific performance of such provision or part hereof or to any other remedy, including but not limited to money damages, for breach hereof or of any other provision of this Agreement or part hereof as the result of such holding or order. 17. Notices. Any notice or communication required or permitted hereunder shall be in writing and either delivered personally, telegraphed or telecopied or sent by certified or registered mail, postage prepaid, and shall be deemed to be given, dated and received when so delivered personally, telegraphed or telecopied or, if mailed, five business days after the date of mailing to the address or telecopy number specified for the B-13 addressee in the Merger Agreement, or to such other address or addresses as such person may subsequently designate by notice given hereunder. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State without regard to any applicable conflicts of law rules. 19. Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same instrument. 21. Expenses. Except as otherwise expressly provided herein or in the Merger Agreement, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses. 22. Amendments; Waiver. This Agreement may be amended by the parties hereto and the terms and conditions hereof may be waived only by an instrument in writing signed on behalf of each of the parties hereto, or, in the case of a waiver, by an instrument signed on behalf of the party waiving compliance. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. GENERAL SCANNING INC. By: /s/ Charles D. Winston ______________________________ Name: Charles D. Winston Title: President and Chief Executive Officer LUMONICS INC. By: /s/ Robert J. Atkinson ______________________________ Name: Robert J. Atkinson Title: Chairman GRIZZLY ACQUISITION CORP. By: /s/ Robert J. Atkinson ______________________________ Name: Robert J. Atkinson Title: President B-14 ANNEX C LETTERHEAD OF NEEDHAM & COMPANY, INC. OCTOBER 27, 1998 The Board of Directors General Scanning Inc. 500 Arsenal Street Watertown, Massachusetts 02172 Gentlemen: We understand that Lumonics Inc. ("Lumonics"), General Scanning Inc. ("General Scanning") and a wholly owned subsidiary of Lumonics ("Acquisition Sub"), have entered into an Agreement and Plan of Merger dated October 27, 1998 (the "Merger Agreement") whereby Acquisition Sub will be merged with and into General Scanning and General Scanning will become a wholly owned subsidiary of Lumonics (the "Merger"). The terms of the Merger are set forth more fully in the Merger Agreement. Pursuant to the Merger Agreement, we understand that at the Effective Time (as defined in the Merger Agreement), each share of common stock, par value $.01 per share, of General Scanning will be converted into the right to receive 1.347 fully paid and nonassessable shares (the "Conversion Number") of common stock of Lumonics ("Lumonics Common Stock"). You have asked us to advise you as to the fairness, from a financial point of view, of the Conversion Number to the stockholders of General Scanning. Needham & Company, Inc., as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. We have acted as financial advisor to General Scanning in connection with the Merger and will receive a fee for our services, a substantial portion of which is contingent on the consummation of the Merger. In addition, General Scanning has agreed to indemnify us for certain liabilities arising from our role as financial advisor and out of the rendering of this opinion. For purposes of this opinion we have, among other things: (i) reviewed the Merger Agreement; (ii) reviewed certain publicly available information concerning General Scanning and Lumonics and certain other relevant financial and operating data of General Scanning and Lumonics made available from the internal records of General Scanning and Lumonics; (iii) reviewed the historical stock prices and trading volumes of General Scanning's and Lumonics' common stock; (iv) held discussions with members of senior management of General Scanning and Lumonics concerning their current and future business prospects; (v) reviewed certain financial forecasts and projections prepared by the respective managements of General Scanning and Lumonics; (vi) compared certain publicly available financial data of companies whose securities are traded in the public markets and that we deemed relevant to similar data for General Scanning and Lumonics; (vii) reviewed the financial terms of certain other business combinations that we deemed generally relevant; and (viii) performed and/or considered such other studies, analyses, inquiries and investigations as we deemed appropriate. In connection with our review and in arriving at our opinion, we have assumed and relied on the accuracy and completeness of all of the financial and other information publicly available or furnished to or otherwise reviewed by or discussed with us for purposes of rendering this opinion and have neither attempted to verify independently nor assumed responsibility for verifying any of such information. In addition, we have assumed, with your consent, that any material liabilities (contingent or otherwise, known or unknown) of General Scanning and Lumonics are as set forth in the consolidated financial statements of General Scanning and Lumonics, respectively. With respect to General Scanning's and Lumonics' financial forecasts provided to us by their respective managements, we have assumed for purposes of our opinion that such forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such C-1 managements, at the time of preparation, of the future operating and financial performance of General Scanning and Lumonics. We express no opinion with respect to such forecasts or the assumptions on which they were based. We have not assumed any responsibility for or made or obtained any independent evaluation, appraisal or physical inspection of the assets or liabilities of General Scanning and Lumonics. Further, our opinion is based on economic, monetary and market conditions as they exist and can be evaluated as of the date hereof. Our opinion as expressed herein is limited to the fairness, from a financial point of view, to the stockholders of General Scanning of the Conversion Number and does not address General Scanning's underlying business decision to engage in the Merger. Our opinion does not constitute a recommendation to any stockholder of General Scanning as to how such stockholder should vote on the proposed Merger. We are not expressing any opinion as to what the value of Lumonics Common Stock will be when issued to the stockholders of General Scanning pursuant to the Merger or the prices at which Lumonics Common Stock will actually trade at any time. In the ordinary course of our business, we may actively trade the equity securities of General Scanning for our own account or for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. This letter and the opinion expressed herein are provided at the request and for the information of the Board of Directors of General Scanning and may not be quoted or referred to or used for any purpose without our prior written consent, except that this letter may be disclosed in connection with any registration statement or proxy statement used in connection with the Merger so long as this letter is quoted in full in such registration statement or proxy statement. Based upon and subject to the foregoing, it is our opinion that as of the date hereof the Conversion Number is fair to the stockholders of General Scanning from a financial point of view. Very truly yours, Needham & Company, Inc. C-2 ANNEX D LETTERHEAD OF CIBC WOOD GUNDY SECURITIES INC. OCTOBER 27, 1998 The Board of Directors Lumonics, Inc. 105 Schneider Road Kanata, Ontario K2K 1Y3 To The Board of Directors: CIBC Wood Gundy Securities Inc. ("CIBCWG") understands that Lumonics Inc. ("Lumonics" or the "Company") is contemplating entering into a merger agreement (the "Merger Agreement") with General Scanning Inc. ("General Scanning") on the 27th day of October, 1998. The Merger Agreement, includes, among other things, an agreement by Lumonics and General Scanning to combine their business operations by consummating a transaction which would have a wholly-owned United States subsidiary of Lumonics merge with and into General Scanning, thus making General Scanning a wholly-owned subsidiary of Lumonics which in turn would be owned equally by its existing shareholders and the shareholders who presently own General Scanning. As part of this process, each issued and outstanding share of General Scanning common stock would be converted into the right to receive 1.347 shares of common stock of Lumonics (the foregoing is together referred to as the "Transaction"). The Board of Directors of the Company (the "Board") has retained CIBCWG to review the Transaction and to provide to the Board financial advice and an opinion (the "Fairness Opinion") that the Transaction is fair, from a financial point of view, to the common shareholders of the Company. CIBCWG'S ENGAGEMENT The Board initially contacted CIBCWG regarding potential transaction opportunities in December of 1996, and CIBCWG was formally engaged by the Company to provide strategic and financial advice under an agreement between the Company and CIBCWG (the "Engagement Agreement") dated January 29, 1997. As part of the Engagement Agreement, CIBCWG agreed to render a fairness opinion in connection with a prospective transaction involving the Company, if so requested. Fees payable to CIBCWG pursuant to the Engagement Agreement will cover services related to the Fairness Opinion, and CIBCWG will be reimbursed for all reasonable out-of-pocket expenses in connection therewith. In addition, Lumonics has agreed to indemnify CIBCWG in respect of certain liabilities that may arise out of its engagement. CIBCWG has consented to the inclusion of the Fairness Opinion in its entirety, together with a summary thereof, in the proxy circulars to be sent to the Company's and General Scanning's shareholders and to the filing thereof, if necessary, by the Company with the securities commissions or similar regulatory authorities in each province of Canada and with the SEC. CIBCWG'S CREDENTIALS CIBCWG is one of Canada's largest investment banking firms, with operations in all facets of corporate and government finance, mergers and acquisitions, equity and fixed income sales and trading and investment research. The Fairness Opinion expressed herein is the opinion of CIBCWG, and the form and content have been approved by a committee of its directors, each of whom is experienced in merger, acquisition, divestiture and valuation matters. CIBCWG is not an insider, associate or affiliate of the Company or to any other party to the Merger Agreement (each an "Interested Party"). CIBCWG has provided investment banking services to the Company D-1 in the past, including acting as lead manager in the underwriting of securities of the Company during the past 24 months. SCOPE OF REVIEW In connection with preparing and rendering the Fairness Opinion, CIBCWG has reviewed, and where it considered appropriate, relied upon (without verifying independently the completeness or accuracy of), or undertaken, among other things: (i) the Merger Agreement; (ii) annual reports for each of Lumonics and General Scanning for the fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the unaudited interim report for the six- month period ended June 30, 1998; (iii) the Annual Information Form dated April 29, 1998 for Lumonics; (iv) the Management Proxy Circular approved by the Directors of Lumonics on March 24, 1998; (v) the Form 10K of General Scanning for the year ended December 31, 1997; (vi) the Proxy Statement for the Annual Meeting of Stockholders of General Scanning dated March 12, 1998; (vii) discussions with members of the management of Lumonics and General Scanning concerning their current business operations, financial condition and results and prospects; (viii) the 1996 Consolidated Budget, 1997 Rolling Forecast, and 1998 Budget for Lumonics; (ix) the Strategic Business Plan, 1996-1999, for Lumonics; (x) Lumonics Audit Committee Minutes for meetings held on November 12, 1996, November 4, 1997, February 24, 1998 and April 29, 1998; (xi) segmented board-approved budgets for General Scanning for 1996, 1997, 1998 and 1999; (xii) internally segmented results for General Scanning for 1996, 1997 and year-to-date 1998; (xiii) General Scanning's 1998 Strategic Plan; (xiv) memo prepared by Ernst & Young LLP on October 13, 1998 regarding income-tax matters pertaining to the combined entity resulting from the Transaction; (xv) conversations with Milbank Tweed regarding certain risks raised by the pending patent litigation in which General Scanning is a defendant; (xvi) conversations with other professional advisors assisting Lumonics during its due-diligence process; (xvii) other publicly available information regarding Lumonics' and General Scanning's operations; (xviii) certain financial and stock market data of Lumonics, General Scanning and other companies in the laser-based advanced manufacturing systems industry; (xix) certain recent public and non-public transactions in the laser systems industry; (xx) a certificate dated the date hereof from senior officers of Lumonics as to the accuracy and completeness of the information provided to us in connection with the Company; and (xxi) such other information, financial studies, analyses and investigations and financial, economic and market criteria that we have deemed relevant. D-2 CIBCWG has not, to the best of its knowledge, been denied access by the Company to any information requested by CIBCWG. ASSUMPTIONS AND LIMITATIONS With the Board's approval and as provided for in the Engagement Agreement, CIBCWG has relied upon, and has assumed, the completeness, accuracy and fair presentation of all the financial and other information, data, advice, opinions and representations obtained by it from public sources, the Company, senior management of the Company and General Scanning and agents and advisors to the Company and General Scanning (collectively, the "Information"). Subject to the exercise of professional judgement and except as expressly described herein, we have not attempted to verify independently the completeness, accuracy or fair presentation of any of the Information. Senior officers of the Company have represented to CIBCWG in a certificate delivered as of the date hereof, among other things, that (i) the Information provided by the Company, any of its subsidiaries or any of its representatives or agents to CIBCWG relating to the Company, or any of its subsidiaries or the Transaction was, at the date the Information was provided to CIBCWG, and is, except as has been disclosed in writing to CIBCWG, complete, true and correct in all material respects, and did not, and does not, contain any untrue statement of a material fact in respect of the Company, any of its subsidiaries or the Transaction, and did not, and does not, omit to state a material fact in respect of the Company, any of its subsidiaries or the Transaction necessary to make the Information not misleading in light of the circumstances under which the Information was made or provided; and (ii) since the dates on which the Information was provided to CIBCWG, except as disclosed in writing to CIBCWG, or as publicly disclosed by the Company, there has been no material change, financial or otherwise, in the financial condition, assets, liabilities (contingent or otherwise), business, operations or prospects of the Company, any of its subsidiaries and no material change has occurred in the Information or any part thereof which would have, or which would reasonably be expected to have, a material effect on the Fairness Opinion. In preparing the Fairness Opinion, CIBCWG has made several assumptions, including that all of the conditions required to implement the Transaction will be met and that the representations and warranties in the Merger Agreement with respect to the Company, its subsidiaries and affiliates, the Transaction and General Scanning are accurate in all material respects. In addition, based on its discussions with Lumonics' U.S. legal counsel, CIBCWG has assumed that the potential damages arising from the pending patent litigation in which General Scanning is a defendant are not material. The Fairness Opinion is rendered on the basis of securities markets and economic, financial and general business conditions prevailing as at the date hereof. In its analyses and in preparing the Fairness Opinion, CIBCWG made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of CIBCWG or any party involved in the Transaction. The Fairness Opinion has been provided for the use of the Board and may not be used by any other person or relied upon by any other person other than the Board without the express prior written consent of CIBCWG. The Fairness Opinion is given as of the date hereof and CIBCWG disclaims any undertaking or obligation to advise the Board of any change in any fact or matter affecting the Fairness Opinion which may come or be brought to CIBCWG's attention after the date hereof. Notwithstanding and without limiting the foregoing, in the event that there is any material change in any fact or matter affecting the Fairness Opinion after the date hereof, CIBCWG reserves the right to change, modify or withdraw the Fairness Opinion. CIBCWG believes that its analyses must be considered as a whole and that selecting portions of the analyses or the facts considered by it, without considering all factors and analyses together, could create a D-3 misleading view of the process underlying the Fairness Opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Any attempt to do so could lead to undue emphasis on any particular factor or analysis. The Fairness Opinion is not and should not be construed as a recommendation to any holder of the Company's common shares as to whether to vote in favour of the Transaction. We understand that the Transaction is not subject to the formal valuation requirements under Ontario Securities Commission Policy Statement No. 9.1 and Quebec Securities Commission Policy StatementNo. Q-27. Accordingly, we were not engaged to prepare and have not prepared a formal valuation or appraisal of the common shares, assets or liabilities (contingent or otherwise) of the Company and the Fairness Opinion should not be construed as such. CONCLUSION Based upon and subject to the foregoing, it is our opinion that the Transaction is fair, from a financial point of view, to holders of the common shares of the Company. Yours very truly, CIBC WOOD GUNDY SECURITIES INC. D-4 ANNEX E LUMONICS DISSENTERS' RIGHTS In addition to any other right a Lumonics shareholder may have, when the continuance becomes effective, a registered Lumonics shareholder who complies with the dissent procedure under section 185 of the OBCA is entitled to be paid the fair value of the Lumonics Common Shares held by the shareholder in respect of which the shareholder dissents, determined as at the close of business on the day before the continuance resolution is adopted; provided that, notwithstanding section 185(6) of the OBCA, the written objection to the continuance resolution referred to in subsection 185(6) of the OBCA must be received by Lumonics by 5:00 p.m. (Ottawa time) on the Business Day preceding the Lumonics Special Meeting. The dissent procedures are summarized below. A shareholder may only exercise the right to dissent in respect of shares which are registered in that shareholder's name. Failure to comply strictly with the dissent procedures may result in the loss or unavailability of the right to dissent. The execution or exercise of a proxy does not constitute a written objection for the purposes of section 185 of the OBCA. Section 185 provides that a shareholder may only make a claim under that section with respect to all the shares of a class held by him on behalf of any one beneficial owner and registered in the shareholder's name. One consequence of this provision is that A SHAREHOLDER MAY ONLY EXERCISE THE RIGHT TO DISSENT UNDER SECTION 185 IN RESPECT OF SHARES WHICH ARE REGISTERED IN THAT SHAREHOLDER'S NAME. In many cases, shares beneficially owned by a non- registered holder are registered either: (i) in the name of an intermediary that the non-registered holder deals with in respect of the shares (such as banks, trust companies, securities dealers and brokers, trustees or administrators of self-administered RRSPs, RRIFs, RESPs and similar plans, and their nominees); or (ii) in the name of a clearing agency (such as CDS) of which the intermediary is a participant. Accordingly, a non-registered holder will not be entitled to exercise the right to dissent under section 185 directly. A non-registered holder who wishes to exercise the right to dissent should immediately contact the intermediary who the non-registered holder deals with in respect of the shares and either: (i) instruct the intermediary to exercise the right to dissent on the non-registered holder's behalf (which, if the shares are registered in the name of CDS or other clearing agency, would require that the share first be re-registered in the name of the intermediary); or (ii) instruct the intermediary to re-register the shares in the name of the non-registered holder, in which case the non-registered holder would have to exercise the right to dissent directly. A registered shareholder who wishes to invoke the provisions of section 185 of the OBCA must send to Lumonics a written objection to the continuance resolution (the "Notice of Dissent") by 5:00 p.m. (Toronto time) on the Business Day prior to the meeting. The sending of a Notice of Dissent does not deprive a registered shareholder of the right to vote on the continuance resolution but a vote either in person or by proxy against the continuance resolution does not constitute a Notice of Dissent. A vote in favor of the continuance resolution will deprive the registered shareholder of further rights under section 185 of the OBCA. Within ten days after the adoption of the continuance resolution by the shareholders, Lumonics is required to notify in writing each shareholder who has filed a Notice of Dissent (each, a "Dissenting Shareholder") and has not voted for the continuance resolution or withdrawn his objection that the continuance resolution has been adopted. A Dissenting Shareholder shall, within 20 days after he or she receives notice of adoption of the continuance resolution or, if he or she does not receive such notice, within 20 days after he or she learns that the continuance resolution has been adopted, send to Lumonics a written notice (the "Demand for Payment") containing his or her name and address, the number of Lumonics shares in respect of which he or she dissents, and a demand for payment of the fair value of such shares. Within 30 days after sending his Demand for Payment, the Dissenting Shareholder shall send the certificates representing the shares in respect of which he dissents to Lumonics or its transfer agent. Lumonics or its transfer agent shall endorse on the share certificates notice that the holder thereof is a Dissenting Shareholder under section 185 of the OBCA and shall forthwith return the share certificates to the Dissenting Shareholder. If a Dissenting Shareholder fails to send his or her share certificates, he or she has no right to make a claim under section 185 of the OBCA. E-1 After sending a Demand for Payment, a Dissenting Shareholder ceases to have any rights as a holder of the shares in respect of which he has dissented other than the right to be paid the fair value of such shares as determined under section 185 of the OBCA, unless: (i) the Dissenting Shareholder withdraws his or her Demand for Payment before Lumonics makes a written offer to pay (the "Offer to Pay"); (ii) Lumonics fails to make a timely Offer to Pay to the Dissenting Shareholder and the Dissenting Shareholder withdraws his Demand for Payment; or (iii) the directors of Lumonics revoke the continuance resolution, in all of which cases the Dissenting Shareholder's rights as a Shareholder are reinstated and the Dissenting Shareholder is entitled to present the endorsed share certificates to Lumonics or its transfer agent to be replaced with share certificates for the same number of shares at no fee. Not later than seven days after the later of the date on which the continuance is effective and the day Lumonics receives the Demand for Payment, Lumonics shall send to each Dissenting Shareholder who has sent a Demand for Payment, an Offer to Pay for the shares of the Dissenting Shareholder in respect of which he or she has dissented in an amount considered by the directors of Lumonics to be the fair value thereof, accompanied by a statement showing how the fair value was determined. Every Offer to Pay made to Dissenting Shareholders for shares of the same class shall be on the same terms. The amount specified in an Offer to Pay which has been accepted by a Dissenting Shareholder shall be paid by Lumonics, within ten days of the acceptance by the Dissenting Shareholder of the Offer to Pay, but an Offer to Pay lapses if Lumonics has not received an acceptance thereof within 30 days after the Offer to Pay has been made. If an Offer to Pay is not made by Lumonics or if a Dissenting Shareholder fails to accept an Offer to Pay, Lumonics may, within 50 days after the date on which the continuance is effective or within such further period as a court may allow, apply to the court to fix a fair value for the Lumonics shares of any Dissenting Shareholder. If Lumonics fails to so apply to the court, a Dissenting Shareholder may apply to the Ontario Court (General Division) for the same purpose within a further period of 20 days or within such further period as the court may allow. A Dissenting Shareholder is not required to give security for costs in any application to the court. On making an application to the court, Lumonics shall give to each Dissenting Shareholder who has sent to Lumonics a Demand for Payment and has not accepted an Offer to Pay, notice of the date, place and consequences of the application and of his right to appear and be heard in person or by counsel. All Dissenting Shareholders whose Lumonics shares have not been purchased by Lumonics shall be joined as parties to any such application to the court to fix a fair value and shall be bound by the decision rendered by the court in the proceedings commenced by such application. The court is authorized to determine whether any other person is a Dissenting Shareholder who should be joined as a party to such application. The court shall fix a fair value for the Lumonics shares of all Dissenting Shareholders and may in its discretion allow a reasonable rate of interest on the amount payable to each Dissenting Shareholder from the date upon which the continuance is effective until the date of payment of the amount ordered by the court. The final order of the court in the proceedings commenced by an application by Lumonics or a Dissenting Shareholder shall be rendered against Lumonics, payable by Lumonics and in favor of each Dissenting Shareholder. The cost of any application to a court by Lumonics or a Dissenting Shareholder will be in the discretion of the court. THE ABOVE IS ONLY A SUMMARY OF THE DISSENTING SHAREHOLDER PROVISIONS OF THE OBCA, WHICH ARE TECHNICAL AND COMPLEX. THE TEXT OF SECTION 185 OF THE OBCA APPEARS BELOW. IT IS SUGGESTED THAT A SHAREHOLDER OF LUMONICS WISHING TO EXERCISE A RIGHT TO DISSENT SHOULD SEEK LEGAL ADVICE, AS FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF THE OBCA MAY RESULT IN THE LOSS OR UNAVAILABILITY OF THE RIGHT TO DISSENT. E-2 SECTION 185 OF THE BUSINESS CORPORATIONS ACT (ONTARIO) 185. (1) RIGHTS OF DISSENTING SHAREHOLDERS. Subject to subsection (3) and to sections 186 and 248, if a corporation resolves to, (a) amend its articles under section 168 to add, remove or change restrictions on the issue, transfer or ownership of shares of a class or series of the shares of the corporation; (b) amend its articles under section 168 to add, remove or change any restriction upon the business or businesses that the corporation may carry on or upon the powers that the corporation may exercise; (c) amalgamate with another corporation under sections 175 and 176; (d) be continued under the laws of another jurisdiction under section 181; or (e) sell, lease or exchange all or substantially all of its property under subsection 184(3), a holder of shares of any class or series entitled to vote on the resolution may dissent. (2) IDEM. If a corporation resolves to amend its articles in a manner referred to in subsection 170(1), a holder of shares of any class or series entitled to vote on the amendment under section 168 or 170 may dissent, except in respect of an amendment referred to in, (a) clause 170(1)(a), (b) or (e) where the articles provide that the holders of shares of such class or series are not entitled to dissent; or (b) subsection 170(5) or (6). (3) EXCEPTION. A shareholder of a corporation incorporated before the 29th day of July, 1983 is not entitled to dissent under this section in respect of an amendment of the articles of the corporation to the extent that the amendment, (a) amends the express terms of any provision of the articles of the corporation to conform to the terms of the provision as deemed to be amended by section 277; or (b) deletes from the articles of the corporation all of the objects of the corporation set out in its articles, provided that the deletion is made by the 29th day of July, 1986. (4) SHAREHOLDER'S RIGHT TO BE PAID FAIR VALUE. In addition to any other right the shareholder may have, but subject to subsection (30), a shareholder who complies with this section is entitled, when the action approved by the resolution from which the shareholder dissents becomes effective, to be paid by the corporation the fair value of the shares held by the shareholder in respect of which the shareholder dissents, determined as of the close of business on the day before the resolution was adopted. (5) NO PARTIAL DISSENT. A dissenting shareholder may only claim under this section with respect to all the shares of a class held by the dissenting shareholder on behalf of any one beneficial owner and registered in the name of the dissenting shareholder. (6) OBJECTION. A dissenting shareholder shall send to the corporation, at or before any meeting of shareholders at which a resolution referred to in subsection (1) or (2) is to be voted on, a written objection to the resolution, unless the corporation did not give notice to the shareholder of the purpose of the meeting or of the shareholder's right to dissent. E-3 (7) IDEM. The execution or exercise of a proxy does not constitute a written objection for purposes of subsection (6). (8) NOTICE OF ADOPTION OF RESOLUTION. The corporation shall, within ten days after the shareholders adopt the resolution, send to each shareholder who has filed the objection referred to in subsection (6) notice that the resolution has been adopted, but such notice is not required to be sent to any shareholder who voted for the resolution or who has withdrawn the objection. (9) IDEM. A notice sent under subsection (8) shall set out the rights of the dissenting shareholder and the procedures to be followed to exercise those rights. (10) DEMAND FOR PAYMENT OF FAIR VALUE. A dissenting shareholder entitled to receive notice under subsection (8) shall, within twenty days after receiving such notice, or, if the shareholder does not receive such notice, within twenty days after learning that the resolution has been adopted, send to the corporation a written notice containing, (a) the shareholder's name and address; (b) the number and class of shares in respect of which the shareholder dissents; and (c) a demand for payment of the fair value of such shares. (11) CERTIFICATES TO BE SENT IN. Not later than the thirtieth day after the sending of a notice under subsection (10), a dissenting shareholder shall send the certificates representing the shares in respect of which the shareholder dissents to the corporation or its transfer agent. (12) IDEM. A dissenting shareholder who fails to comply with subsections (6), (10) and (11) has no right to make a claim under this section. (13) ENDORSEMENT ON CERTIFICATE. A corporation or its transfer agent shall endorse on any share certificate received under subsection (11) a notice that the holder is a dissenting shareholder under this section and shall return forthwith the share certificates to the dissenting shareholder. (14) RIGHTS OF DISSENTING SHAREHOLDER. On sending a notice under subsection (10), a dissenting shareholder ceases to have any rights as a shareholder other than the right to be paid the fair value of the shares as determined under this section except where, (a) the dissenting shareholder withdraws notice before the corporation makes an offer under subsection (15); (b) the corporation fails to make an offer in accordance with subsection (15) and the dissenting shareholder withdraws notice; or (c) the directors revoke a resolution to amend the articles under subsection 168(3), terminate an amalgamation agreement under subsection 176(5) or an application for continuance under subsection 181(5), or abandon a sale, lease or exchange under subsection 184(8), in which case the dissenting shareholder's rights are reinstated as of the date the dissenting shareholder sent the notice referred to in subsection (10), and the dissenting shareholder is entitled, upon presentation and surrender to the corporation or its transfer agent of any certificate representing the shares that has been endorsed in accordance with subsection (13), to be issued a new certificate representing the same number of shares as the certificate so presented, without payment of any fee. (15) OFFER TO PAY. A corporation shall, not later than seven days after the later of the day on which the action approved by the resolution is effective or the day the corporation received the notice referred to in subsection (10), send to each dissenting shareholder who has sent such notice, E-4 (a) a written offer to pay for the dissenting shareholder's shares in an amount considered by the directors of the corporation to be the fair value thereof, accompanied by a statement showing how the fair value was determined; or (b) if subsection (30) applies, a notification that it is unable lawfully to pay dissenting shareholders for their shares. (16) IDEM. Every offer made under subsection (15) for shares of the same class or series shall be on the same terms. (17) IDEM. Subject to subsection (30), a corporation shall pay for the shares of a dissenting shareholder within ten days after an offer made under subsection (15) has been accepted, but any such offer lapses if the corporation does not receive an acceptance thereof within thirty days after the offer has been made. (18) APPLICATION TO COURT TO FIX FAIR VALUE. Where a corporation fails to make an offer under subsection (15) or if a dissenting shareholder fails to accept an offer, the corporation may, within fifty days after the action approved by the resolution is effective or within such further period as the court may allow, apply to the court to fix a fair value for the shares of any dissenting shareholder. (19) IDEM. If a corporation fails to apply to the court under subsection (18), a dissenting shareholder may apply to the court for the same purpose within a further period of twenty days or within such further period as the court may allow. (20) IDEM. A dissenting shareholder is not required to give security for costs in an application made under subsection (18) or (19). (21) COSTS. If a corporation fails to comply with subsection (15), then the costs of a shareholder application under subsection (19) are to be borne by the corporation unless the court otherwise orders. (22) NOTICE TO SHAREHOLDERS. Before making application to the court under subsection (18) or not later than seven days after receiving notice of an application to the court under subsection (19), as the case may be, a corporation shall give notice to each dissenting shareholder who, at the date upon which the notice is given, (a) has sent to the corporation the notice referred to in subsection (10); and (b) has not accepted an offer made by the corporation under subsection (15), if such an offer was made, of the date, place and consequences of the application and of the dissenting shareholder's right to appear and be heard in person or by counsel, and a similar notice shall be given to each dissenting shareholder who, after the date of such first mentioned notice and before termination of the proceedings commenced by the application, satisfies the conditions set out in clauses (a) and (b) within three days after the dissenting shareholder satisfies such conditions. (23) PARTIES JOINED. All dissenting shareholders who satisfy the conditions set out in clauses (22)(a) and (b) shall be deemed to be joined as parties to an application under subsection (18) or (19) on the later of the date upon which the application is brought and the date upon which they satisfy the conditions, and shall be bound by the decision rendered by the court in the proceedings commenced by the application. (24) IDEM. Upon an application to the court under subsection (18) or (19), the court may determine whether any other person is a dissenting shareholder who should be joined as a party, and the court shall fix a fair value for the shares of all dissenting shareholders. E-5 (25) APPRAISERS. The court may in its discretion appoint one or more appraisers to assist the court to fix a fair value for the shares of the dissenting shareholders. (26) FINAL ORDER. The final order of the court in the proceedings commenced by an application under subsection (18) or (19) shall be rendered against the corporation and in favor of each dissenting shareholder who, whether before or after the date of the order, complies with the conditions set out in clauses (22)(a) and (b). (27) INTEREST. The court may in its discretion allow a reasonable rate of interest on the amount payable to each dissenting shareholder from the date the action approved by the resolution is effective until the date of payment. (28) WHERE CORPORATION UNABLE TO PAY. Where subsection (30) applies, the corporation shall, within ten days after the pronouncement of an order under subsection (26), notify each dissenting shareholder that is unable lawfully to pay dissenting shareholders for their shares. (29) IDEM. Where subsection (30) applies, a dissenting shareholder, by written notice sent to the corporation within thirty days after receiving a notice under subsection (28), may, (a) withdraw a notice of dissent, in which case the corporation is deemed to consent to the withdrawal and the shareholder's full rights are reinstated; or (b) retain a status as a claimant against the corporation, to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the corporation but in priority to its shareholders. (30) IDEM. A corporation shall not make a payment to a dissenting shareholder under this section if there are reasonable grounds for believing that, (a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or (b) the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities. (31) COURT ORDER. Upon application by a corporation that proposes to take any of the actions referred to in subsection (1) or (2), the court may, if satisfied that the proposed action is not in all the circumstances one that should give rise the rights arising under subsection (4), by order declare that those rights will not arise upon the taking of the proposed action, and the order may be subject to compliance upon such terms and conditions as the court thinks fit and, if the corporation is an offering corporation, notice of any such application and a copy of any order made by the court upon such application shall be served upon the Commission. (32) COMMISSION MAY APPEAR. The Commission may appoint counsel to assist the court upon the hearing of an application under subsection (31) if the corporation is an offering corporation. E-6 ANNEX F MASSACHUSETTS BUSINESS CORPORATION LAW, CHAPTER 156B 85. A stockholder in any corporation organized under the laws of Massachusetts which shall have duly voted to consolidate or merge with another corporation or corporations under the provisions of sections seventy-eight or seventy-nine who objects to such consolidation or merger may demand payment for his stock from the resulting or surviving corporation and an appraisal in accordance with the provisions of sections eighty-six to ninety-eight, inclusive, and such stockholder and the resulting or surviving corporation shall have the rights and duties and follow the procedure set forth in those sections. This section shall not apply to the holders of any shares of stock of a constituent corporation surviving a merger if, as permitted by subsection (c) of section seventy-eight, the merger did not require for its approval a vote of the stockholders of the surviving corporation. 86. If a corporation proposes to take a corporate action as to which any section of this chapter provides that a stockholder who objects to such action shall have the right to demand payment for his shares and an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall apply except as otherwise specifically provided in any section of this chapter. Except as provided in sections eighty-two and eighty-three, no stockholder shall have such right unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action. 87. The notice of the meeting of stockholders at which the approval of such proposed action is to be considered shall contain a statement of the rights of objecting stockholders. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock, and the directors may authorize the inclusion in any such notice of a statement of opinion by the management as to the existence or non-existence of the right of the stockholders to demand payment for their stock on account of the proposed corporate action. The notice may be in such form as the directors or officers calling the meeting deem advisable, but the following form of notice shall be sufficient to comply with this section: "If the action proposed is approved by the stockholders at the meeting and effected by the corporation, any stockholder (1) who files with the corporation before the taking of the vote on the approval of such action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) whose shares are not voted in favor of such action has or may have the right to demand in writing from the corporation (or, in the case of a consolidation or merger, the name of the resulting or surviving corporation shall be inserted), within twenty days after the date of mailing to him of notice in writing that the corporate action has become effective, payment for his shares and an appraisal of the value thereof. Such corporation and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts." 88. The corporation taking such action, or in the case of a merger or consolidation the surviving or resulting corporation, shall, within ten days after the date on which such corporate action became effective, notify each stockholder who filed written objection meeting the requirements of section eighty-six and whose shares were not voted in favor of the approval of such action, that the action approved at the meeting of the corporation of which he is a stockholder has become effective. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock. The notice shall be sent by registered or certified mail, addressed to the stockholder at his last known address in the records of the corporation. 89. If within twenty days after the date of the mailing of a notice under subsection (e) of section eighty-two, subsection (f) of section eighty-three, or section eighty-eight any stockholder to whom the corporation was F-1 required to give such notice shall demand in writing from the corporation taking such action, or in the case of a consolidation or merger from the resulting or surviving corporation, payment for his stock, the corporation upon which such demand is made shall pay to him the fair value of his stock within thirty days after the expiration of the period during which such demand may be made. 90. If during the period of thirty days provided for in section eighty-nine the corporation upon which such demand is made and any such objecting stockholder fail to agree as to the value of such stock, such corporation or nay such stockholder may within four months after the expiration of such thirty-day period demand a determination of the value of the stock of all such objecting stockholders by a bill in equity filed in the superior court in the county where the corporation in which such objecting stockholder held stock had or has its principal office in the commonwealth. 91. If the bill is filed by the corporation, it shall name as parties respondent all stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof. If the bill is filed by a stockholder, he shall bring the bill in his own behalf and in behalf of all other stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof, and service of the bill shall be made upon the corporation by subpoena with a copy of the bill annexed. The corporation shall file with its answer a duly verified list of all such other stockholders, and such stockholders shall thereupon be deemed to have been added as parties to the bill. The corporation shall give notice in such form and returnable on such date as the court shall order to each stockholder party to the bill by registered or certified mail, addressed to that last known address of such stockholder as shown in the records of the corporation, and the court may order such additional notice by publication or otherwise as it deems advisable. Each stockholder who makes demand as provided in section eighty-nine shall be deemed to have consented to the provisions of this section relating to notice, and the giving of notice by the corporation to any such stockholder in compliance with the order of the court shall be a sufficient service of process on him. Failure to give notice to any stockholder making demand shall not invalidate the proceedings as to other stockholders to whom notice was properly given, and the court may at any time before the entry of a final decree make supplementary orders of notice. 92. After hearing the court shall enter a decree determining the fair value of the stock of those stockholders who have become entitled to the valuation of and payment for their shares, and shall order the corporation to make payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto upon the transfer by them to the corporation of the certificates representing such stock if certificated or if uncertificated, upon receipt of an instruction transferring such stock to the corporation. For this purpose, the value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action. 93. The court in its discretion may refer the bill or any question arising thereunder to a special master to hear the parties, make findings and report the same to the court, all in accordance with the usual practice in suits in equity in the superior court. 94. On motion the court may order stockholder parties to the bill to submit their certificates or stock to the corporation for notation thereon of the pendency of the bill, and may order the corporation to note such pendency in its records with respect to any uncertificated shares held by such stockholder parties, and may on motion dismiss the bill as to any stockholder who fails to comply with such order. 95. The costs of the bill, including the reasonable compensation and expenses of any master appointed by the court, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to the bill, or any of them, in such manner as appears to be equitable, except that all costs of giving notice to stockholders as provided in this chapter shall be paid by the corporation. Interest shall be paid upon any award from the date of the vote approving the proposed corporate action, and the court may on application of any interested party determine the amount of interest to be paid in the case of any stockholder. F-2 96. Any stockholder who has demanded payment for his stock as provided in this chapter shall not thereafter be entitled to notice of any meeting of stockholders or to vote such stock for any purpose and shall not be entitled to the payment of dividends or other distribution on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the date of the vote approving the proposed corporate action) unless: (1) A bill shall not be filed within the time provided in section ninety; (2) A bill, if filed, shall be dismissed as to such stockholder; or (3) Such stockholder shall with the written approval of the corporation, or in the case of a consolidation or merger, the resulting or surviving corporation, deliver to it a written withdrawal of his objections to and an acceptance of such corporate action. Notwithstanding the provisions of clauses (1) to (3), inclusive, said stockholder shall have only the rights of a stockholder who did not so demand payment for his stock as provided in this chapter. 97. The shares of the corporation paid for by the corporation pursuant to the provisions of this chapter shall have the status of treasury stock or in the case of a consolidation or merger the shares or the securities of the resulting or surviving corporation into which the shares of such objecting stockholder would have been converted had he not objected to such consolidation or merger shall have the status of treasury stock or securities. 98. The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him. F-3 ANNEX G LUMONICS SHAREHOLDERS' RESOLUTIONS A. RESOLUTION Merger Agreement and Share Issuance Proposal BE IT RESOLVED THAT: 1. The adoption by Lumonics Inc. ("Lumonics") of an agreement and plan of merger attached as Annex A to the Joint Proxy Statement accompanying notice of this meeting (the "Merger Agreement") under which Lumonics' wholly-owned subsidiary, Grizzly Acquisition Corp., will be merged with and into General Scanning Inc. ("GSI") and GSI would become a wholly-owned subsidiary of Lumonics (the "Merger"), on the basis, upon the terms and subject to the conditions set out in the Merger Agreement, is hereby approved, authorized and confirmed; 2. The issuance by Lumonics of its common shares ("Lumonics Shares") upon the conversion of the shares of common stock of GSI ("GSI Shares") pursuant to the terms and subject to the conditions of the Merger Agreement and the assumption by Lumonics of the GSI stock options and warrants so that each such stock option and warrant shall become a right to purchase that number of Lumonics Shares on the basis, upon the terms and subject to the conditions set out in the Merger Agreement, be and the same is hereby authorized and approved; B. SPECIAL RESOLUTION Continuance BE IT RESOLVED AS A SPECIAL RESOLUTION THAT: 1. Lumonics be and the same is hereby authorized to apply for a certificate of continuance (the "Continuance") continuing Lumonics as a body corporate under the laws of the Province of New Brunswick, subject to the issuance of the certificate of continuance and without affecting the validity of Lumonics and the existence of Lumonics by or under its currently effective articles and by-laws, and any act done thereunder, and to give notice of such application to the Director under the Business Corporations Act (Ontario); C. RESOLUTION By-Law Confirmation BE IT RESOLVED THAT: 1. To take all such action as is required in order to amend its articles to conform to the Business Corporations Act (New Brunswick), By-Law No. 1, a General By-Law conforming to the requirements of the Business Corporations Act (New Brunswick) adopted by the Board of Directors of Lumonics is hereby approved and confirmed; D. SPECIAL RESOLUTION Name Change BE IT RESOLVED AS A SPECIAL RESOLUTION THAT: 1. To take all such action as is required in order to amend its articles to conform to the Business Corporations Act (New Brunswick), Lumonics be and the same is hereby authorized to take such action as is required in order to change its corporate name to "GSI Lumonics Inc." (the "Name Change"), such change to become effective upon the issuance of a certificate of continuance. Provided however that notwithstanding the authorization, approval and adoption of the foregoing resolutions by the shareholders of Lumonics, the Board of Directors of Lumonics, without further notice to or approval of the shareholders, may decide not to proceed with any or all of the transactions contemplated by the Merger Agreement including the Continuance, the By-Law Confirmation and Name Change or may revoke the foregoing resolutions at any time prior to the such transactions becoming effective. G-1 ANNEX H NEW BRUNSWICK NOUVEAU BRUNSWICK BUSINESS CORPORATIONS ACT LOI SUR LES CORPORATIONS COMMERCIALES FORM 7 FORMULE 7 ARTICLES OF CONTINUANCE STATUTS DE PROROGATION (SECTION 126) (ARTICLE 126) - -------------------------------------------------------------------------------- 1-Name of Corporation Raison sociale de la corporation GSI Lumonics Inc. - -------------------------------------------------------------------------------- 2-The classes and any maximum number Les categories et le nombre maximal of shares that the corporation is d'actions que la corporation peut authorized to issue and any maximum emettre ainsi que le montant maximal aggregate amount for which the share global pour lequel les actions may be offered including shares peuvent etre emises, y compris les without par value and/or with par actions sans valeur au pair ou avec value and the amount of par value. valeur au pair ou les deux et le montant de la valeur au pair. THE CORPORATION IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF COMMON SHARES WITHOUT PAR VALUE. - -------------------------------------------------------------------------------- 3-Restrictions, if any, on share transfersRestrictions, s'il y en a, au transfert d'actions None - -------------------------------------------------------------------------------- 4-Number (or minimum and maximum number) of directors Nombre (ou nombre minimum et maximum) des administrateurs MINIMUM OF FIVE (5) AND A MAXIMUM OF FIFTEEN (15) AS DETERMINED BY RESOLUTION OF THE BOARD OF DIRECTORS - -------------------------------------------------------------------------------- 5-Restrictions, if any, on businesses the corporation may carry on Restrictions, s'il y en a, a l'activite que peut exercer la corporation None - -------------------------------------------------------------------------------- 6-(1)If change of name effected, previous name (1) En cas de changement de raison sociale; indiquer la derniere en date. Lumonics Inc. (2)Details of incorporation (2)Details sur la constitution en corporation. CORPORATIONS ACT (ONTARIO), LETTERS PATENT DATED NOVEMBER 26, 1970, PRESENTLY GOVERNED BY THE BUSINESS CORPORATIONS ACT (ONTARIO) - -------------------------------------------------------------------------------- 7-Other provisions, if any Autres dispositions, le cas echeant SEE ATTACHED SCHEDULE "I" - -------------------------------------------------------------------------------- Date Signature Description of Office-Description du bureau - -------------------------------------------------------------------------------- FOR DEPARTMENT USE ONLY RESERVE A L'USAGE DU MINISTERE - -------------------------------------------------------------------------------- Corporation No.--N(degrees). de corporation Filed-Depose - -------------------------------------------------------------------------------- H-1 GSI LUMONICS INC. (hereinafter referred to as the "Corporation") THIS IS SCHEDULE "I" TO THE FOREGOING FORM 7 UNDER THE NEW BRUNSWICK BUSINESS CORPORATIONS ACT 1. PLACE OF SHAREHOLDER MEETINGS Notwithstanding subsections (1) and (2) of Section 84 of the Business Corporations Act, as from time to time in force, meetings of shareholders of the Corporation may be held outside New Brunswick at any location throughout the world, including without limitation, Ottawa, Boston, Toronto, New York, Vancouver, or Los Angeles. 2. PRE-EMPTIVE RIGHTS (A) Notwithstanding subsection (2) of Section 27 of the Business Corporations Act, as from time to time in force, but subject however to any rights arising under any unanimous shareholders agreements, the holders of equity shares of any class, in the case of the proposed issuance by the Corporation of, or the proposed granting by the Corporation of rights or options to purchase, its equity shares of any class of any shares or other securities convertible into or carrying rights or options to purchase its equity shares of any class, shall not as such, even if the issuance of the equity shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the unlimited dividend rights of such holders, have the pre-emptive right as provided by Section 27 of the Business Corporations Act to purchase such shares or other securities. (B) Notwithstanding subsection (3) of Section 27 of the Business Corporations Act, as from time to time in force, but subject however to any rights arising under any unanimous shareholders agreements, the holders of voting shares of any class, in case of the proposed issuance by the Corporation of, or the proposed granting by the Corporation of rights or options to purchase, its voting shares of any class or any shares or options to purchase its voting shares of any class, shall not as such, even if the issuance of the voting shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the voting rights of such holders, have the pre-emptive right as provided by Section 27 of the Business Corporations Act to purchase such shares or other securities. 3. BORROWING AUTHORITY The directors of the Corporation may from time to time, in such amounts and on such terms as deemed expedient: (a) borrow money upon the credit of the Corporation; (b) issue, reissue, sell or pledge debt obligations of the Corporation; and (c) mortgage, hypothecate, charge or pledge all or any of the currently owned or subsequently acquired real or personal, moveable or immoveable property of the Corporation, including book debts, rights, powers, franchises and undertakings of the Corporation, to secure any debt obligations or any money borrowed, or any other debt or liability of the Corporation. The foregoing powers may be delegated by the directors to such officers or directors of the Corporation to such extent and in such manner as determined by the directors from time to time. Nothing in this clause limits or restricts the borrowing of money by the Corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the Corporation. H-2 4. CUMULATIVE VOTING Subject to applicable law, there shall be no cumulative voting rights in favour of shareholders of the Corporation. 5. SHAREHOLDER PROPOSAL Subject to Section 89(5) of the Act, a proposal by a shareholder under Section 89 of the Act may include nominations for the election of directors if the proposal is signed by one or more holders of shares representing in the aggregate not less than 5% of the shares or 5% of the shares of a class of shares of the Corporation entitled to vote at the meeting to which the proposal is to be presented, in which case the Corporation shall set out the proposal in the notice of meeting in the same manner as provided for under Section 89(2) of the Act. H-3 GSI LUMONICS INC. BY-LAW NUMBER 1 A by-law relating generally to the regulation of the affairs of GSI LUMONICS INC. BE IT ENACTED AND IT IS HEREBY ENACTED as by-law Number 1 of GSI Lumonics Inc. (hereinafter called the "Corporation") as follows: DEFINITIONS 1. In this by-law and all other by-laws of the Corporation, unless the context otherwise specifies or requires: (a) "Act" means the Business Corporations Act, Statutes of New Brunswick, 1981, c. B-9.1, as from time to time amended, and every statute that may be substituted therefor and, in the case of such amendment or substitution, any reference in the by- laws of the Corporation shall be read as referring to the amended or substituted provisions therefor; (b) "articles" means the articles, as from time to time amended, of the Corporation; (c) "by-law" means any by-law of the Corporation from time to time in force and effect; (d) "director" means an individual occupying the position of director of the Corporation and "directors", "board of directors" and "board" includes a single director; (e) "unanimous shareholder agreement" means an agreement as described in subsection 99(2) of the Act or a declaration of a shareholder described in subsection 99(3) of the Act; (f) words importing the singular number only shall include the plural and vice versa; words importing the masculine gender shall include the feminine and neuter genders and vice versa; words importing persons shall include bodies corporate, corporations, companies, partnerships, syndicates, trusts and any number or aggregate of individuals; (g) the headings used in any by-law are inserted for reference purposes only and are not to be considered or taken into account in construing the terms or provisions thereof or to be deemed in any way to clarify, modify or explain the effect of any such terms or provisions; and (h) any term contained in any by-law which is defined in the Act shall have the meaning given to such term in the Act. REGISTERED OFFICE 2. The Corporation may from time to time by resolution of the board of directors change the location of the address of the registered office of the Corporation to another place within New Brunswick. CORPORATE SEAL 3. The Corporation may have one or more corporate seals which shall be such as the board of directors may adopt by resolution from time to time. DIRECTORS 4. Number and Powers. There shall be a board of directors consisting of such fixed number, or minimum and maximum number, of directors as may be set out in the articles or as may be determined as prescribed by the articles, or failing that, as specified by by-law. Subject to any unanimous shareholder agreement, the directors shall manage the business and affairs of the Corporation and may exercise all such powers and do all such acts and things as may be exercised or done by the Corporation and are not by the Act, the articles, the by-laws, any special resolution of the Corporation, any unanimous shareholder agreement or by statute expressly directed or required to be done in some other manner. H-4 5. Vacancies. If the number of directors is increased, the resulting vacancies shall be filled at a meeting of shareholders duly called for that purpose. Notwithstanding the provisions of paragraph 7 of this by-law and subject to the provisions of the Act, if a vacancy should otherwise occur in the board, the remaining directors, if constituting a quorum, may appoint a qualified person to fill the vacancy for the remainder of the term. In the absence of a quorum the remaining directors shall forthwith call a meeting of shareholders to fill the vacancy pursuant to subsection 69(2) of the Act. Where a vacancy or vacancies exist in the board, the remaining directors may exercise all of the powers of the board so long as a quorum remains in office. 6. Duties. Every director and officer of the Corporation in exercising his powers and discharging his duties shall (a) act honestly and in good faith; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, in the best interests of the Corporation. 7. Qualification. Every director shall be an individual nineteen (19) or more years of age and no one who is of unsound mind and has been so found by a court in Canada or elsewhere or who has the status of a bankrupt or who has been convicted of an offence under the Criminal Code, chapter C-34 of the Revised Statutes of Canada, 1970, as amended from time to time, or the criminal law of any jurisdiction outside of Canada, in connection with the promotion, formation or management of a corporation or involving fraud (unless three (3) years have elapsed since the expiration of the period fixed for suspension of the passing of sentence without sentencing or since a fine was imposed, or unless the term of imprisonment and probation imposed, if any, was concluded, whichever is the latest, but the disability imposed hereby ceases upon a pardon being granted) shall be a director. 8. Term of Office. A director's term of office shall be from the meeting at which he is elected or appointed until the annual meeting next following or until his successor is elected or appointed, or until, if earlier, he dies or resigns, or is removed or disqualified pursuant to the provisions of the Act. 9. Vacation of Office. The office of a director shall ipso facto be vacated if (a) he dies; (b) by notice in writing to the Corporation he resigns his office and such resignation, if not effective immediately, becomes effective in accordance with its terms; (c) he is removed from office in accordance with section 67 of the Act; or (d) he ceases to be qualified to be a director. 10. Election and Removal. (1) Directors shall be elected by the shareholders by ordinary resolution in general meeting on a show of hands unless a poll is demanded and if a poll is demanded such election shall be by ballot. All the directors then in office shall cease to hold office at the close of the meeting of shareholders at which directors are to be elected. A director if qualified, is eligible for re-election. (2) Subject to sections 65 and 67 of the Act, the shareholders of the Corporation may by ordinary resolution at an annual or a special meeting remove any director before the expiration of his term of office and may, by a majority of the votes cast at the meeting, elect any person in his stead for the remainder of his term. (3) Each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the number of votes attached to the shares held by him multiplied by the number of directors to be elected, and he may cast all such votes in favour of one candidate or distribute them among the candidates in any manner. H-5 (4) A separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting two (2) or more persons to be elected by a single resolution. (5) If a shareholder has voted for more than one candidate without specifying the distribution of his votes among the candidates, he shall be deemed to have distributed his votes equally among the candidates for whom he voted. (6) If the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled. (7) A retiring director shall retain office until the adjournment or termination of the meeting at which his successor is elected unless such meeting was called for the purpose of removing him from office as a director in which case the director so removed shall vacate office forthwith upon the passing of the resolution for his removal. 11. Validity of Acts. An act by a director or officer is valid notwithstanding an irregularity in his election or appointment or a defect in his qualification. MEETINGS OF DIRECTORS 12. Place of Meeting. Subject to the articles, meetings of directors may be held at any place within or outside New Brunswick as the directors may from time to time determine or as the person convening the meeting may give notice. A meeting of the directors may be convened by the chairman of the board (if any), the president or any director at any time. The secretary shall upon direction of any of the foregoing officers or director convene a meeting of the directors. 13. Notice. (1) Notice of the time and place of each meeting of the board shall be given in the manner provided in Section 6.3 to each director: (a) not less than three (3) days before the time when the meeting is to be held, if the notice is mailed, or (b) not less than twenty-four (24) hours before the time when the meeting is to be held if the notice is given personally or is delivered or is sent by any means of transmitted or recorded communication, such as facsimile transmission, voice-mail or electronic-mail, provided that meetings of the directors may be held at any time without notice if all the directors have waived notice. (2) For the first meeting of the board of directors to be held immediately following the election of directors at an annual or special meeting of the shareholders, no notice of such meeting need be given to the newly elected or appointed director or directors in order for the meeting to be duly constituted, provided a quorum of the directors is present. (3) A notice of a meeting of directors shall specify any matter referred to in subsection 73(2) of the Act that is to be dealt with at the meeting but, unless a by-law otherwise provides, need not otherwise specify the purpose of or the business to be transacted at the meeting. 14. Waiver of Notice. Notice of any meeting of the directors or any irregularity in any meeting or in the notice thereof may be waived by any director in writing or by telegram, cable, telex or facsimile transmission addressed to the Corporation or in any other manner, and such waiver may be validly given either before or after the meeting to which such waiver relates. The attendance of a director at a meeting of directors is a waiver of notice of the meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. H-6 15. Telephone Participation. A director may participate in a meeting of directors or of a committee of directors by means of such telephone or other communication facilities that permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means shall be deemed to be present at that meeting. 16. Adjournment. Any meeting of the directors may be adjourned from time to time by the chairman of the meeting, with the consent of the meeting, to a fixed time and place and no notice of the time and place for the continuance of the adjourned meeting need be given to any director if the time and place of the adjourned meeting is announced at the original meeting. Any adjourned meeting shall be duly constituted if held in accordance with the terms of the adjournment and a quorum is present thereat. The directors who formed a quorum at the original meeting are not required to form the quorum at the adjourned meeting. If there is no quorum present at the adjourned meeting, the original meeting shall be deemed to have terminated forthwith after its adjournment. 17. Quorum and Voting. Subject to the articles, a majority of directors shall constitute a quorum for the transaction of business at any meeting of directors. No business shall be transacted by the directors except at a meeting of directors at which a quorum of the board is present. Questions arising at any meeting of the directors shall be decided by a majority of votes cast. In case of an equality of votes, the chairman of the meeting shall not have a second or casting vote. Where the Corporation has only one director, that director may constitute a meeting. 18. Resolution in lieu of meeting. A resolution in writing, signed by all the directors or signed counterparts of such resolution by all the directors entitled to vote on that resolution at a meeting of directors or a committee of directors, is as valid as if it had been passed at a meeting of directors or committee of directors duly called, constituted and held. A copy of every such resolution or counterpart thereof shall be kept with the minutes of the proceedings of the directors or such committee of directors. 19. Deemed Consent of Director Present at Meeting. A director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken thereat unless he: (a) requests that his dissent be or his dissent is entered in the minutes of the meeting; (b) sends his written dissent to the secretary of the meeting before the meeting is terminated; or (c) sends his dissent by registered mail or delivers to the registered office of the Corporation immediately after the meeting is terminated. 20. Deemed Consent of Director Absent from Meeting. [Deleted] REMUNERATION OF DIRECTORS 21. Subject to the articles or any unanimous shareholder agreement, the remuneration to be paid to the directors shall be such as the board of directors shall from time to time determine and such remuneration shall be in addition to the salary paid to any officer of the Corporation who is also a member of the board of directors. The directors may also by resolution award special remuneration to any director undertaking any special services on the Corporation's behalf other than the routine work ordinarily required of a director by the Corporation. The confirmation of any such resolution or resolutions by the shareholders shall not be required. The directors shall also be entitled to be paid their travelling and other expenses properly incurred by them in connection with the affairs of the Corporation. H-7 SUBMISSION OF CONTRACTS OR TRANSACTIONS TO SHAREHOLDERS FOR APPROVAL 22. The directors in their discretion may submit any contract, act or transaction for approval, ratification or confirmation at any annual meeting of the shareholders or at any special meeting of the shareholders called for the purpose of considering the same and any contract, act or transaction that shall be approved, ratified or confirmed by resolution passed by a majority of the votes cast at any such meeting (unless any different or additional requirement is imposed by the Act or by the articles or any other by-law) shall be as valid and as binding upon the Corporation and upon all the shareholders as though it had been approved, ratified and/or confirmed by every shareholder of the Corporation. FOR THE PROTECTION OF DIRECTORS AND OFFICERS 23. No director or officer for the time being of the Corporation shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee of the Corporation or for joining in any receipt or act for conformity or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired by order of the board of directors for or on behalf of the Corporation or for the insufficiency or deficiency of any security in or upon which any of the moneys of or belonging to the Corporation shall be placed out or invested or for any loss or damage arising from the bankruptcy, insolvency or tortious act of any person, firm or corporation including any person, firm or corporation with whom or which any moneys, securities or effects of the Corporation shall be lodged or deposited or for any loss, conversion, misapplication or misappropriation of or any damage resulting from any dealings with any moneys, securities or other assets belonging to the Corporation or for any other loss, damage or misfortune whatever which may happen to the Corporation in the execution of the duties of his respective office of trust or in relation thereto, unless the same shall happen by or through his failure to exercise the powers and to discharge the duties of his office honestly, in good faith with a view to the best interests of the Corporation, and in connection therewith to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, provided that nothing herein contained shall relieve a director or officer from the duty to act in accordance with the Act or regulations made thereunder or relieve him from liability for a breach thereof. The directors for the time being of the Corporation shall not be under any duty or responsibility in respect of any contract, act or transaction whether or not made, done or entered into in the name or on behalf of the Corporation, except such as shall have been submitted to and authorized or approved by the board of directors. If any director or officer of the Corporation shall be employed by or shall perform services for the Corporation, the fact of his being a shareholder, director or officer of the Corporation shall not disentitle such director or officer or such firm or body corporate, as the case may be, from receiving proper remuneration for such services. INDEMNITIES TO DIRECTORS AND OTHERS 24. Subject to section 81 of the Act, except in respect of an action by or on behalf of the Corporation or Another Body Corporate (as hereinafter defined) to procure a judgement in its favour, the Corporation shall indemnify each director and officer of the Corporation and each former director and officer of the Corporation and each person who acts or acted at the Corporation's request as a director or officer of Another Body Corporate, and his heirs and legal representatives, against all costs, charges and expenses, including any amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation or Another Body Corporate, as the case may be, if (a) he acted honestly and in good faith with a view to the best interests of the Corporation; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. H-8 "Another Body Corporate" as used herein means a body corporate of which the Corporation is or was a shareholder or creditor. 25. Insurance. Subject to the limitations contained in the Act, the Corporation may purchase and maintain such insurance for the benefit of any person referred to in Section 24 as the board may, from time to time, determine. OFFICERS 26. Appointment of Officers. Subject to the articles or any unanimous shareholder agreement, the directors may appoint a chairman of the board, a chief executive officer, president and a secretary and, if deemed advisable, may also appoint one or more vice-presidents, a treasurer and one or more assistant secretaries and/or one or more assistant treasurers. None of such officers, except the chairman of the board, need be a director of the Corporation. Any two or more of such offices may be held by the same person. In case and whenever the same person holds the offices of secretary and treasurer he may, but need not, be known as the secretary-treasurer. The directors may from time to time designate such other offices and appoint such other officers, employees and agents as it shall deem necessary who shall have such authority and shall perform such functions and duties as may from time to time be prescribed by resolution of the directors. 27. Remuneration and Removal of Officers. Subject to the articles or any unanimous shareholder agreement, the remuneration of all officers, employees and agents appointed by the directors may be determined from time to time by resolution of the directors. The fact that any officer, employee or agent is a director or shareholder of the Corporation shall not disqualify him from receiving such remuneration as may be so determined. The directors may by resolution remove any officer, employee or agent at any time, with or without cause. 28. Duties of Officers may be Delegated. In case of the absence or inability or refusal to act of any officer of the Corporation or for any other reason that the directors may deem sufficient, the directors may delegate all or any of the powers of such officer to any other officer or to any director for the time being. 29. Chairman of the Board. The chairman of the board (if any) shall, if present, preside at all meetings of the directors. He shall sign such contracts, documents or instruments in writing as require his signature and shall have such other powers and duties as may from time to time be assigned to him by resolution of the directors. 30. Chief Executive Officer. The chief executive officer of the Corporation shall exercise general supervision over the business and affairs of the Corporation and such other duties as the board may specify from time to time. During the absence or disability of the president, or if no president has been appointed, the chief executive officer shall also have the powers and duties of that office. 31. President. The president of the Corporation shall be the chief operating officer and shall, subject to the authority of the Chief Executive Officer, exercise general supervision over the operations of the Corporation. During the absence or disability of the chief executive officer, or if no chief executive officer has been appointed, the president shall also have the powers and duties of that office. 32. Vice-President. The vice-president (if any) or, if more than one, the vice-presidents in order of seniority, shall be vested with all the powers and shall perform all the duties of the president in the absence or inability or refusal to act of the president. The vice-president or, if more than one, the vice-presidents in order of seniority, shall sign such contracts, documents or instruments in writing as require his or their signatures and shall also have such other powers and duties as may from time to time be assigned to him or them by resolution of the directors. 33. Secretary. The secretary shall give or cause to be given notices for all meetings of the directors or committees thereof (if any) and of shareholders when directed to do so, and shall have charge, subject to the provisions of paragraphs 34 and 55 hereof, of the records referred to in section 18 of the Act and of the H-9 corporate seal or seals (if any). He shall sign such contracts, documents or instruments in writing as require his signature and shall have such other powers and duties as may from time to time be assigned to him by resolution of the directors or as are incident to his office. 34. Treasurer. Subject to the provisions of any resolution of the directors, the treasurer (if any) shall have the care and custody of all the funds and securities of the Corporation and shall deposit the same in the name of the Corporation in such bank or banks or with such other depositary or depositaries as the directors may by resolution direct. He shall prepare, maintain and keep or cause to be kept adequate books of accounts and accounting records. He shall sign such contracts, documents or instruments in writing as require his signature and shall have such other powers and duties as may from time to time be assigned to him by resolution of the directors or as are incident to his office. He may be required to give such bond for the faithful performance of his duties as the directors in their uncontrolled discretion may require, but no director shall be liable for failure to require any such bond or for the insufficiency of any such bond or for any loss by reason of the failure of the Corporation to receive any indemnity thereby provided. 35. Assistant Secretary and Assistant Treasurer. The assistant secretary or, if more than one, the assistant secretaries in order of seniority, and the assistant treasurer or, if more than one, the assistant treasurers in order of seniority (if any), shall respectively perform all the duties of the secretary and treasurer, respectively, in the absence or inability to act of the secretary or treasurer as the case may be. The assistant secretary or assistant secretaries, if more than one, and the assistant treasurer or assistant treasurers, if more than one, shall sign such contracts, documents or instruments in writing as require his or their signatures respectively and shall have such other powers and duties as may from time to time be assigned to them by resolution of the directors. 36. Vacancies. If the office of chairman of the board, chief executive officer, president, vice-president, secretary, assistant secretary, treasurer, assistant treasurer, or any other office created by the directors pursuant to paragraph 26 hereof, shall be or become vacant by reason of death, resignation, removal or in any other manner whatsoever, the directors may, subject to paragraph 26 hereof, appoint another person to fill such vacancy. COMMITTEES OF DIRECTORS 37. The directors may from time to time appoint from their number one or more committees of directors consisting of one or more individuals and delegate to such committee or committees any of the powers of the directors except as provided in subsection 73(2) of the Act. Unless otherwise ordered by the directors, a committee of directors shall have power to fix its quorum, elect its chairman and regulate its proceedings. All such committees shall report to the directors as required by them. SHAREHOLDERS' MEETING 38. Annual Meeting. Subject to compliance with section 85 of the Act, the annual meeting of the shareholders shall be convened on such day in each year and at such time as the directors may by resolution determine. 39. Special Meetings. (1) Special meetings of the shareholders may be convened by order of the chairman of the board, the president or a vice- president or by the directors, to be held at such time and place as may be specified in such order. (2) In accordance with the articles, shareholders holding between them not less than ten percent (10%) of the issued shares of the Corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders. Such requisition shall state the business to be transacted at the meeting and shall be sent to each director and the registered office of the Corporation. H-10 (3) Except as otherwise provided in subsection 96(3) of the Act, it shall be the duty of the directors on receipt of such requisition, to cause such meeting to be called by the secretary of the Corporation. (4) If the directors do not, within twenty-one (21) days after receiving such requisition call such meeting, any shareholder who signed the requisition may call the meeting. 40. Place of Meetings. Meetings of shareholders of the Corporation shall be held at the registered office of the Corporation or at such other place within New Brunswick as the directors by resolution may determine. Notwithstanding the foregoing, a meeting of shareholders of the Corporation may be held outside New Brunswick if all the shareholders entitled to vote at that meeting so agree, and a shareholder who attends a meeting of shareholders held outside New Brunswick is deemed to have so agreed except when he attends the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully held. Notwithstanding either of the foregoing sentences, meetings of shareholders may be held outside New Brunswick at one or more places specified in the articles. 41. Notice. (1) Subject to the articles or a unanimous shareholder agreement, a printed, written or typewritten notice stating the day, hour, place of meeting, the general nature of the business to be transacted and, if special business is to be transacted thereat, stating (a) the nature of that business in sufficient detail to permit the shareholder to form a reasoned judgment thereon; and (b) the text of any special resolution to be submitted to the meeting, shall be sent to each person who is entitled to notice of such meeting and who on the record date for notice appears on the records of the Corporation or its transfer agent as a shareholder and to each director of the Corporation and the auditor of the Corporation, if any, personally, by sending such notice by prepaid mail or in such other manner as provided by by-law for the giving of notice, not less than twenty-one (21) days nor more than fifty (50) days before the meeting. If such notice is sent by mail it shall be addressed to the latest address of each such person as shown in the records of the Corporation or its transfer agent, or if no address is shown therein, then to the last address of each such person known to the secretary. (2) The auditor of the Corporation, if any, is entitled to attend any meeting of shareholders of the Corporation and to receive all notices and other communications relating to any such meeting that a shareholder is entitled to receive. 42. Waiver of Notice. A meeting of shareholders may be held for any purpose at any time and, subject to section 84 of the Act, at any place without notice if all the shareholders entitled to notice of such meeting are present in person or represented by proxy at the meeting (except where the shareholder attends the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called) or if all the shareholders entitled to notice of such meeting and not present in person nor represented by proxy thereat waive notice of the meeting. Notice of any meeting of shareholders or any irregularity in any such meeting or in the notice thereof may be waived by any shareholder, the duly appointed proxy of any shareholder, any directors or the auditor of the Corporation in writing, by telegram, cable, telex or facsimile addressed to the Corporation or by any other manner, and any such waiver may be validly given either before or after the meeting to which such waiver relates. 43. Omission of Notice. The accidental omission to give notice of any meeting to or the non-receipt of any notice by any person shall not invalidate any resolution passed or any proceeding taken at any meeting of shareholders. 44. Record Date. (1) The directors may by resolution fix in advance a date as the record date for the determination of shareholders (a) entitled to receive payment of a dividend; (b) entitled to participate in a liquidation distribution; or (c) for any other purpose except the right to receive notice of or to vote at a meeting of shareholders, H-11 but such record date shall not precede by more than fifty (50) days the particular action to be taken. (2) The directors may by resolution also fix in advance the date as the record date for the determination of shareholders entitled to receive notice of a meeting of shareholders, but such record date shall not precede by more than fifty (50) days or by less than twenty-one (21) days the date on which the meeting is to be held. (3) If no record date is fixed, (a) the record date for the determination of shareholders entitled to receive notice of a meeting of shareholders shall be (i) at the close of business on the day immediately preceding the day on which the notice is given; or (ii) if no notice is given, the day on which the meeting is held; and (b) the record date for the determination of shareholders for any purpose, other than that specified in subparagraph (a) above or to vote, shall be at the close of business on the day on which the directors pass the resolution relating thereto. 45. Voting. (1) Votes at meetings of the shareholders may be given either personally or by proxy. At every meeting at which he is entitled to vote, every shareholder present in person and every proxyholder shall have one (1) vote on a show of hands. Upon a poll at which he is entitled to vote, every shareholder present in person or by proxy shall (subject to the provisions, if any, of the articles) have one (1) vote for every share registered in his name. (2) Voting at a meeting of shareholders shall be by show of hands except where a ballot is demanded by a shareholder or proxyholder entitled to vote at the meeting. A shareholder or proxyholder may demand a ballot either before or after any vote by show of hands. In case of an equality of votes the chairman of the meeting shall not have a second or casting vote in addition to the vote or votes to which he may be entitled as a shareholder or proxyholder. (3) At any meeting, unless a ballot is demanded, a declaration by the chairman of the meeting that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact without proof of the number or proportion of votes recorded in favour of or against the motion. (4) In the absence of the chairman of the board, the president and every vice-president, the shareholders present entitled to vote shall choose another director as chairman of the meeting and if no director is present or if all the directors present decline to take the chair then the shareholders or proxyholders present shall choose one of their number to be chairman. (5) If at any meeting a ballot is demanded on the election of a chairman or on the question of adjournment or termination it shall be taken forthwith without adjournment. If a ballot is demanded on any other question or as to the election of directors it shall be taken in such manner and either at once or later at the meeting or at an adjourned meeting as the chairman of the meeting directs. The result of a ballot shall be deemed to be the resolution of the meeting at which the ballot was demanded. A demand for a ballot may be withdrawn. (6) Where a person holds shares as a personal representative, such person or his proxy is the person entitled to vote at all meetings of shareholders in respect of the shares so held by him. (7) Where a person mortgages or hypothecates his shares, such person or his proxy is the person entitled to vote at all meetings of shareholders in respect of such shares unless, in the instrument creating the mortgage or hypothec, he has expressly empowered the person holding the mortgage or hypothec to vote in respect of such shares, in which case, and subject to the articles, such holder or his proxy is the person entitled to vote in respect of the shares. H-12 (8) Where two or more persons hold the same share or shares jointly, any one of such persons present at a meeting of shareholders has the right, in the absence of the other or others, to vote in respect of such share or shares, but if more than one of such persons are present or represented by proxy and vote, they shall vote together as one on the share or shares jointly held by them. 46. Proxies. (1) A shareholder, including a shareholder that is a body corporate, entitled to vote at a meeting of shareholders may by means of a proxy appoint a proxyholder or one or more alternate proxyholders, none of whom are required to be a shareholder of the Corporation, which proxyholders shall have all the rights of the shareholder to attend and act at the meeting in the place and stead of the shareholder except to the extent limited by the proxy. (2) An instrument appointing a proxy shall be in writing and shall be executed by the shareholder or by his attorney authorized in writing or, if the shareholder is a body corporate, either under its seal or by an officer or attorney thereof, duly authorized. A proxy is valid only at the meeting in respect of which it is given or any adjournment thereof. (3) Unless the Act requires another form, an instrument appointing a proxyholder shall be in the form determined by the directors from time to time. 47. Time for Deposit of Proxies. The board may by resolution specify in a notice calling a meeting of shareholders a time, preceding the time of such meeting or an adjournment thereof by not more than 48 hours excluding Saturdays and holidays before which time proxies to be used at such meeting must be deposited. A proxy shall be acted upon only if, prior to the time so specified, it shall have been deposited with the Corporation or an agent thereof specified in such notice or, if no such time is specified in such notice, only if it has been received by the secretary of the Corporation or by the chairman of the meeting or any adjournment thereof prior to the time of voting. 48. The directors may from time to time make regulations regarding the depositing of proxies at some place or places other than the place at which a meeting or adjourned meeting of shareholders is to be held and for particulars of such proxies to be sent by means of wire or wireless or any other form of transmitted or recorded communication or in writing before the meeting or adjourned meeting to the Corporation or any agent of the Corporation for the purpose of receiving such particulars and providing that proxies so deposited may be voted upon as though the proxies themselves were deposited with the Corporation at the meeting or adjourned meeting and votes given in accordance with such regulations shall be valid and shall be counted. The chairman of any meeting of shareholders may, subject to any regulations made as aforesaid, in his discretion accept wire or wireless or any other form of transmitted or recorded or written communication as to the authority of any person claiming to vote on behalf of and to represent a shareholder notwithstanding that no proxy conferring such authority has been deposited with the Corporation, and any votes given in accordance with such communication accepted by the chairman of the meeting shall be valid and shall be counted. 49. Adjournment. (1) The chairman of the meeting may with the consent of the meeting adjourn any meeting of shareholders from time to time to a fixed time and place. If a meeting of shareholders is adjourned for less than sixty (60) days, it is not necessary to give notice of the adjourned meeting other than by announcement at the earlier meeting that is adjourned. If a meeting of shareholders is adjourned by one or more adjournments for an aggregate of sixty (60) days or more, notice of the adjourned meeting shall be given as for an original meeting. (2) Any adjourned meeting shall be duly constituted if held in accordance with the terms of the adjournment and a quorum is present at the opening thereat. The persons who formed a quorum at the original meeting are not required to form the quorum at the adjourned meeting. If there is no quorum present at the opening of the adjourned meeting, the original meeting shall be deemed to have terminated forthwith after its adjournment. Any business may be brought before or dealt with at any adjourned meeting which might have been brought before or dealt with at the original meeting in accordance with the notice calling the same. H-13 50. Quorum. All of the shareholders or holders of at least 20% of the shares entitled to vote at the meeting, whichever number be the lesser, personally present or represented by proxy, shall constitute a quorum of any meeting of shareholders or of any class of shareholders. No business shall be transacted at any meeting unless the requisite quorum be present at the time of the transaction of such business. If a quorum is not present at the time appointed for a meeting of shareholders or within such reasonable time thereafter as the shareholders present may determine, the persons present and entitled to vote may adjourn the meeting to a fixed time and place but may not transact any other business and the provisions of paragraph 38 of this by-law with regard to notice shall apply to such adjournment. 51. Resolution in Lieu of meeting. A resolution in writing signed by all the shareholders or signed counterparts of such resolution by all the shareholders entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of the shareholders duly called, constituted and held. A copy of every such resolution or counterpart thereof shall be kept with the minutes of the meetings of shareholders. 52. Telephone Participation. [deleted] SHARES AND TRANSFERS 53. Issuance. Subject to the articles, any unanimous shareholder agreement and to section 27 of the Act, shares in the Corporation may be issued at such times and to such persons or classes of persons and, subject to sections 23 and 24 of the Act, for such consideration as the directors may determine. 54. Certificates. Share certificates (and the form of stock transfer power on the reverse side thereof) shall (subject to compliance with section 47 of the Act) be in such form and be signed by such director(s) or officer(s) as the directors may from time to time by resolution determine. Such certificates shall be signed manually by at least one director or officer of the Corporation or by or on behalf of a registrar, transfer agent or branch transfer agent of the Corporation, and any additional signatures required on a share certificate may be printed or otherwise mechanically reproduced thereon. If a share certificate contains a printed or mechanically reproduced signature of a person, the Corporation may issue the share certificate notwithstanding that the person has ceased to be a director or an officer of the Corporation, and the share certificate is as valid as if he were a director or an officer at the date of its issue. 55. Registrar and Transfer Agent. The directors may from time to time by resolution appoint or remove one or more registrars and/or branch registrars (which may but need not be the same person) to keep the share register and/or one or more transfer agents and/or branch transfer agents (which may but need not be the same person) to keep the register of transfers, and (subject to section 48 of the Act) may provide for the registration of issues and the registration of transfers of the shares of the Corporation in one or more places and such registrars and/or branch registrars and/or transfer agents and/or branch transfer agents shall keep all necessary books and registers of the Corporation for the registration of the issuance and the registration of transfers of the shares of the Corporation for which they are so appointed. All certificates issued after any such appointment representing shares issued by the Corporation shall be countersigned by or on behalf of one of the said registrars and/or branch registrars and/or transfer agents and/or branch transfer agents, as the case may be. 56. Replacement of Share Certificates. The board or any officer or agent designated by the board may in its or his discretion direct the issue of a new share certificate in lieu of and upon cancellation of a share certificate that has been mutilated or in substitution for a share certificate claimed to have been lost, destroyed or wrongfully taken on payment of such fee, not exceeding $3.00, and on such terms as to indemnity, reimbursement of expenses and evidence of loss and of title as the board may from time to time prescribe, whether generally or in any particular case. H-14 DIVIDENDS 57. The directors may from time to time by resolution declare and the Corporation may pay dividends on the issued and outstanding shares in the capital of the Corporation subject to the Act and to the provisions (if any) of the articles of the Corporation. 58. Dividend Cheques. A dividend payable in cash shall be paid by cheque drawn on the Corporation's bankers or one of them to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at his recorded address, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all of such joint holders and mailed to them at their recorded address. The mailing of such cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Corporation is required to and does withhold. 59. Non-receipt of Cheques. In the event of non-receipt of any dividend cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement cheque for a like amount on such terms as to indemnity, reimbursement or expenses and evidence of non-receipt and of title as the board may from time to time prescribe, whether generally or in any particular case. 60. Record Date for Dividends and Rights. The board may fix in advance a date, preceding by not more than 50 days the date for the payment of any dividend or the date for the issue of any warrant or other evidence of the right to subscribe for securities of the Corporation, as a record date for the determination of the persons entitled to receive payment of such dividend or to exercise the right to subscribe for such securities. If no record date is so fixed, the record date for the determination of the persons entitled to receive payment of any dividend or to exercise the right to subscribe for securities of the Corporation shall be at the close of business on the day on which the resolution relating to such dividend or right to subscribe is passed by the board. 61. Unclaimed Dividends. Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Corporation. VOTING SECURITIES IN OTHER BODIES CORPORATE 62. All securities of any other body corporate carrying voting rights held from time to time by the Corporation may be voted at all meetings of shareholders, bondholders, debenture holders or holders of such securities, as the case may be, of such other body corporate in such manner and by such person or persons as the directors of the Corporation shall from time to time determine and authorize by resolution. The duly authorized signing officers of the Corporation may also from time to time execute and deliver for and on behalf of the Corporation proxies and/or arrange for the issuance of voting certificates and/or other evidence of the right to vote in such names as they may determine without the necessity of a resolution or other action by the directors. NOTICE 63. Method of giving notice. Any notice, communication or other document to be given by the Corporation to a shareholder, director, officer, or auditor of the Corporation under any provision of the Act, the Articles or by-laws shall be sufficiently given if delivered personally to the person to whom it is to be given or if delivered to his latest address as shown in the records of the Corporation or if mailed by prepaid ordinary mail or air mail in a sealed envelope addressed to him at his latest address as shown in the records of the Corporation or if sent to such person, at the latest applicable number for such person as shown in the records of the Corporation, by any means of wire or wireless or any other form of transmitted or recorded communication. The secretary may change the address on the records of the Corporation of any shareholder in accordance with any information believed by him to be reliable. A notice, communication or document so delivered shall be deemed to have been given when it is delivered personally or at the address aforesaid. A notice, communication H-15 or document so mailed shall be deemed to have been given on the day it is deposited in a post office or public letter box. A notice sent by any means of wire or wireless or any other form of transmitted or recorded communication shall be deemed to have been given on the day on which it is transmitted. 64. Shares registered in more than one name. All notices or other documents required to be sent to a shareholder by the Act, the regulations under the Act, the articles or the by-laws of the Corporation shall, with respect to any shares in the capital of the Corporation registered in more than one name, be given to whichever of such persons is named first in the records of the Corporation and any notice or other document so given shall be sufficient notice or delivery of such document to all the holders of such shares. 65. Persons becoming entitled by operation of law. Every person who by operation of law, transfer or by any other means whatsoever shall become entitled to any shares in the capital of the Corporation shall be bound by every notice or other document in respect of such shares which prior to his name and address being entered on the records of the Corporation shall have been duly given to the person or persons from whom he derives his title to such shares. 66. Deceased Shareholder. Any notice or other document delivered or sent by post or left at the address of any shareholder as the same appears in the records of the Corporation shall, notwithstanding that such shareholder be then deceased and whether or not the Corporation has notice of his decease, be deemed to have been duly served in respect of the shares held by such shareholder (whether held solely or with other persons) until some other person be entered in his stead in the records of the Corporation as the holder or one of the holders thereof and such service shall for all purposes be deemed a sufficient service of such notice or other document on his heirs, executors or administrators and all persons (if any) interested with him in such shares. 67. Signatures to Notices. The signature of any director or officer of the Corporation to any notice may be written, stamped, typewritten or printed or partly written, stamped, typewritten or printed. 68. Computation of Time. Where a given number of days' notice or notice extending over any period is required to be given under any provisions of the articles or by-laws of the Corporation, the day of service or posting of the notice shall, unless it is otherwise provided, be counted in such number of days or other period and such notice shall be deemed to have been given or sent on the day of service or posting. 69. Proof of Service. A certificate of any officer of the Corporation in office at the time of the making of the certificate or of a transfer officer of any transfer agent or branch transfer agent of shares of any class of the Corporation as to facts in relation to the mailing or delivery or service of any notice or other documents to any shareholder, director, officer or auditor or publication of any notice or other document shall be conclusive evidence thereof and shall be binding on every shareholder, director, officer or auditor of the Corporation, as the case may be. CHEQUES, DRAFTS, NOTES, ETC. 70. All cheques, drafts or orders for the payment of money and all notes, acceptances and bills of exchange shall be signed by such officer or officers or other person or persons, whether or not officers of the Corporation, and in such manner as the directors may from time to time designate by resolution. CUSTODY OF SECURITIES 71. (1) All securities (including warrants) owned by the Corporation shall be lodged (in the name of the Corporation) with a chartered bank or a trust company or in a safety deposit box or, if so authorized by resolution of the directors, with such other depositaries or in such other manner as may be determined from time to time by the directors. H-16 (2) All securities (including warrants) belonging to the Corporation may be issued and held in the name of a nominee or nominees of the Corporation (and if issued or held in the names of more than one nominee shall be held in the names of the nominees jointly with right of survivorship) and shall be endorsed in blank with endorsement guaranteed in order to enable transfer thereof to be completed and registration thereof to be effected. EXECUTION OF CONTRACTS, ETC. 72. Contracts, documents or instruments in writing requiring the signature of the Corporation may be signed by the chairman of the board, the chief executive officer, the president or a vice-president and the secretary or the treasurer and all contracts, documents and instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The board of directors shall have power from time to time by resolution to appoint any officer or officers, or any person or persons, on behalf of the Corporation either to sign contracts, documents and instruments in writing generally or to sign specific contracts, documents or instruments in writing. The corporate seal of the Corporation, if any, may be affixed to contracts, documents and instruments in writing signed as aforesaid or by any officer or officers, person or persons, appointed as aforesaid by resolution of the board of directors but any such contract, document or instrument is not invalid merely because the corporate seal, if any, is not affixed thereto. The term "contracts, documents or instruments in writing" as used in this by- law shall include deeds, mortgages, hypothecs, charges, conveyances, transfers and assignments of property real or personal, immovable or movable, agreements, releases, receipts and discharges for the payment of money or other obligations, conveyances, transfers and assignments of shares, share warrants, stocks, bonds, debentures or other securities and all paper writings. In particular without limiting the generality of the foregoing the chairman of the board, the chief executive officer, the president or a vice-president and the secretary or the treasurer shall have authority to sell, assign, transfer, exchange, convert or convey any and all shares, stocks, bonds, debentures, rights, warrants or other securities owned by or registered in the name of the Corporation and to sign and execute (under the seal of the Corporation or otherwise) all assignments, transfers, conveyances, powers of attorney and other instruments that may be necessary for the purpose of selling, assigning, transferring, exchanging, converting or conveying any such shares, stocks, bonds, debentures, rights, warrants or other securities. The signature or signatures of the chairman of the board, the chief executive officer, the president, a vice-president, the secretary, the treasurer an assistant secretary or an assistant treasurer or any director of the Corporation and/or of any other officer or officers, person or persons, appointed as aforesaid by resolution of the board of directors may, if specifically authorized by resolution of the directors, be printed, engraved, lithographed or otherwise mechanically reproduced upon any contracts, documents or instruments in writing or bonds, debentures or other securities of the Corporation executed or issued by or on behalf of the Corporation and all contracts, documents or instruments in writing or bonds, debentures or other securities of the Corporation on which the signature or signatures of any of the foregoing officers or persons authorized as aforesaid shall be so reproduced pursuant to special authorization by resolution of the directors shall be deemed to have been manually signed by such officers or persons whose signature or signatures is or are so reproduced and shall be as valid to all intents and purposes as if they had been signed manually and notwithstanding that the officers or persons whose signature or signatures is or are so reproduced may have ceased to hold office at the date of the delivery or issue of such contracts, documents or instruments in writing or bonds, debentures or other securities of the Corporation. H-17 AUDITOR 73. At each annual meeting of the shareholders of the Corporation an auditor may be appointed for the purpose of auditing and verifying the accounts of the Corporation for the then current year and his report shall be submitted at the next annual meeting of the shareholders. The auditor shall not be a director or an officer of the Corporation. Unless fixed by the meeting of shareholders at which he is appointed, the remuneration of the auditor shall be determined from time to time by the directors. FISCAL YEAR 74. The fiscal period of the Corporation shall terminate on such day in each year as the directors may from time to time by resolution determine. BORROWING 75. General Borrowing. The directors may from time to time: (a) borrow money upon the credit of the Corporation; (b) issue, reissue, sell or pledge debt obligations of the Corporation; (c) give a guarantee on behalf of the Corporation to secure performance of an obligation of any person; and (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Corporation, owned or subsequently acquired, to secure any obligation of the Corporation. The directors may from time to time authorize any director or directors, or officer or officers, of the Corporation, to make arrangements with reference to the money borrowed or to be borrowed as aforesaid, and as to the terms and conditions of the loan thereof, and as to the securities to be given therefor, with power to vary or modify such arrangements, terms and conditions and to give such additional securities for any moneys borrowed or remaining due by the Corporation as the directors of the Corporation may authorize, and generally to manage, transact and settle the borrowing of money by the Corporation. 76. Repeal of By-Laws. Upon this by-law coming into force, all prior by-laws presently in force other than by-laws relating to the borrowing powers of the Corporation are repealed provided that such repeal shall not affect the previous operation of such by-laws so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred or the validity of any contract or agreement made pursuant to any such by-laws prior to their repeal. All officers and persons acting under such by-laws so repealed shall continue to act as if appointed under the provisions of this by- law and all resolutions of the shareholders or board passed under such repealed by-laws shall continue to be good and valid except to the extent that they are inconsistent with this by-law or until amended or repealed. * * * * * * * * * * * * * * * * * * * * WITNESS the corporate seal of the Corporation this day of , 199 . _____________________________________ CHIEF EXECUTIVE OFFICER _____________________________________ PRESIDENT H-18 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. New Brunswick law generally permits a corporation to indemnify its directors and officers for all costs, charges and expenses incurred by the person in respect of any action or proceeding to which that person is made a party by reason of being a director or officer if the person (1) acted in good faith with a view to the best interests of the corporation and, (2) in the case of a criminal or administrative proceeding that is enforced by a monetary penalty, the person had reasonable grounds for believing his conduct was lawful. New Brunswick law generally requires a corporation to indemnify its directors and officers if the person is substantially successful on the merits of his defence of the action, the person fulfills (1) and (2) above, and is otherwise fairly and reasonably entitled to indemnity. The GSI Lumonics By-Law generally provides that the corporation is required to indemnify a director or officer against liability incurred in such capacity to the extent permitted or required by New Brunswick law. A policy of directors and officers' liability insurance is maintained by the Registrant which insures directors and officers of the Registrant and its subsidiaries for losses a result of claims based upon the acts or omissions as directors and officers of the Registrant. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of October 27, 1998, by and among the Registrant, Grizzly Acquisition Corp., New Grizzly Acquisition Corp. and General Scanning Inc. (attached as Annex A to the joint proxy statement/prospectus contained in this Registration Statement). Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules referred to in the Merger Agreement are omitted. The Registrant hereby undertakes to furnish supplementally a copy of any omitted Schedule to the Commission upon request. 3.1 -- Letters Patent of Lumonics Research Limited dated November 26, 1970, the Articles of Amendment of Lumonics Research Limited dated June 1, 1977, Articles of Amendment of Lumonics Research Limited dated June 11, 1980, Articles of Amendment of Lumonics Inc. dated July 10, 1980, Articles of Amendment of Lumonics Inc. dated January 3, 1984, Articles of Amendment of Lumonics Inc. dated May 1, 1984 and Articles of Amendment of Lumonics Inc. dated May 9, 1986. (5) 3.2 -- Articles of Continuance of the Registrant which will become effective upon completion of the merger (attached as Annex H to the joint proxy statement/prospectus contained in this Registration Statement). 3.3 -- By-Laws No. 13, 18 and 19 of the Registrant which will be replaced by By-Law No. 1 following the merger. (5) 3.4 -- By-Law No.1 of the Registrant which will become effective upon completion of the merger (attached as Annex H to the joint proxy statement/prospectus contained in this Registration Statement). 4.1 -- Specimen Certificate of common share of the Registrant. (5) 5.1 -- Form of Opinion of Stewart McKelvey Stirling Scales as to legality of the Registrant's common shares. (5)
II-1
EXHIBIT NUMBER DESCRIPTION ------- ----------- 5.2 -- Form of Opinion of Goodwin Procter & Hoar LLP as to certain tax matters. (5) 10.1 -- Line of Credit Agreement between the Registrant and CIBC dated April 8, 1998 and accepted April 15, 1998. (5) 10.2 -- Loan Agreement between Sumitomo Heavy Industries, Ltd. and the Registrant dated August 10, 1990. (5) 10.3 -- Amended and Restated Revolving Credit Agreement between General Scanning and The First National Bank of Boston dated as of December 28, 1995. (3)+ 10.4 -- Amendment to Amended and Restated Revolving Credit Agreement between General Scanning and the First National Bank of Boston dated July 25, 1997. (4)+ 10.5 -- Second Amendment to Amended and Restated Revolving Credit Agreement between General Scanning and the First National Bank of Boston dated November 28, 1997. (4)+ 10.6 -- Lease Agreement between JRF II Associates Ltd. Partnership and Lumonics Corporation dated September 24, 1991. (5) 10.7 -- Industrial Space Lease between Lumonics Corporation and The Travelers Insurance Company dated March 17, 1992. (5) 10.8 -- Lease Agreement between Lumonics Corporation and Sisilli dated June 1994. (5) 10.9 -- Lease dated August 10, 1989, as amended to date, between General Scanning and Arlington Center Garage and Service Corp. (1)+ 10.10 -- Lease dated February 24, 1989, as amended to date, between Ames Realty Trust Associates and Teradyne Laser Systems Inc. and General Scanning Inc. (1)+ 10.11 -- Lease dated July 31, 1996, as amended to date, between View Engineering, Inc. and Donald J. Devine as Trustee under the Donald J. Devine Trust Agreement. (2)+ 10.12 -- Lease dated March 24, 1995, as amended to date, between View Engineering, Inc. and Marjorie Lynn Landon. (2)+ 10.13 -- Lease dated July 15, 1997, as amended to date, between General Scanning and The Wilmington Realty Trust. (4)+ 10.14 -- 1998 Management Incentive Plan of the Registrant. (5) 10.15 -- 1998 Executive Management Incentive Plan of the Registrant. (5) 10.16 -- Severance Agreement between the Registrant and Robert J. Atkinson dated April 13, 1998. (5) 10.17 -- Severance Agreement between the Registrant and W. Scott Nix dated April 13, 1998. (5) 10.18 -- Severance Agreement between the Registrant and Michael W. Lupiano dated April 13, 1998. (5) 10.19 -- Severance Agreement between the Registrant and Patrick D. Austin dated April 13, 1998. (5) 10.20 -- Severance Agreement between the Registrant and John W. George dated April 13, 1998. (5) 10.21 -- Severance Agreement between the Registrant and Desmond J. Bradley dated April 13, 1998. (5) 10.22 -- Split Dollar Compensation Agreement dated September 13, 1997 between General Scanning and Charles D. Winston. (4)+ 10.23 -- Key Employee Retention Agreement between General Scanning and Charles Winston dated May 1, 1998 and amended October, 1998. (5)+ 10.24 -- Key Employee Retention Agreement between General Scanning and Linda Palmer dated May 1, 1997 and amended October 27, 1998. (5)+ 10.25 -- Key Employee Retention Agreement between General Scanning and Kurt Pelsue dated May 1, 1997 and amended October 27, 1998. (5)+
II-2
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.26 -- Key Employee Retention Agreement between General Scanning and Michael R. Kampfe dated May 1, 1997 and amended October 27, 1998. (5)+ 10.27 -- Key Employee Retention Agreement between General Scanning and Victor Sabella dated May 1, 1997 and amended October 27, 1998. (5)+ 10.28 -- Key Employee Retention Agreement between General Scanning and Joseph Verderber dated May 1, 1997 and amended October 27, 1998. (5)+ 10.29 -- Key Employee Retention Agreement between General Scanning and Gregory Baletsa dated May 1, 1998 and amended October 27, 1998. (5)+ 10.30 -- Key Employee Retention Agreement between General Scanning and Victor H. Woolley, dated May 1, 1997. (5)+ 10.31 -- Settlement Agreement dated June 12, 1998 between General Scanning and Robotic Vision Systems, Inc. (5)+ 21.1 -- Subsidiaries of the Registrant. (5) 21.2 -- Subsidiaries of General Scanning (4)+ 23.1 -- Consent of Ernst & Young LLP, independent chartered accountants. (5) 23.2 -- Consent of Arthur Andersen LLP, independent public accountants. (5) 23.3 -- Consent of Stewart McKelvey Stirling Scales (included in the opinion attached as Exhibit 5.1). 23.4 -- Consent of Goodwin Procter & Hoar LLP (included in the opinion attached as Exhibit 5.2). 24.1 -- Powers of Attorney (included on signature page). 99.1 -- Amended and Restated Stock Option Agreement dated October 27, 1998 by and among General Scanning Inc., Lumonics Inc. and Grizzly Acquisition Corp. (included as Annex B to the joint proxy statement/prospectus contained in this Registration Statement). 99.2 -- Stock Option Agreement dated October 27, 1998 by and among General Scanning Inc. and Lumonics Inc. (included as Annex B to the joint proxy statement/prospectus contained in this Registration Statement). 99.3 -- Form of Proxy for General Scanning common stock. (5) 99.4 -- Opinion of Needham & Company, Inc. (included as Annex C to the joint proxy statement/prospectus contained in this Registration Statement). 99.5 -- Opinion of CIBC Wood Gundy Securities, Inc. (included as Annex D to the joint proxy statement/prospectus contained in this Registration Statement). 99.6 -- 1981 Stock Option Plan of General Scanning Inc. (1)+ 99.7 -- 1992 Stock Option Plan of General Scanning Inc. (1)+ 99.8 -- 1995 Directors' Warrant Plan of General Scanning Inc. (1)+ 99.9 -- 1994 Executive Management Stock Option Plan of the Registrant. (5) 99.10 -- 1994 Key Employees and Directors Stock Option Plan of the Registrant. (5) 99.11 -- 1995 Employees and Directors Stock Option Plan of the Registrant. (5) 99.12 -- Consent of Needham & Company, Inc. (5) 99.13 -- Consent of CIBC Wood Gundy Securities, Inc. (5) 99.14 -- Consent of Charles D. Winston (5) 99.15 -- Consent of Richard B. Black (5) 99.16 -- Consent of Paul R. Ferrari (5) 99.17 -- Consent of Woodie C. Flowers (5)
- -------- (1) Incorporated by reference to General Scanning's registration statement on Form S-1, filed August 11, 1995 (33-95718) II-3 (2) Incorporated by reference to General Scanning's Current Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to General Scanning's Current Report on Form 10-Q for the quarter ended June 30, 1996. (4) Incorporated by reference to General Scanning's Current Report on Form 10- K, for the year ended December 31, 1997. (5) Filed herewith. + Material contract or additional exhibit of General Scanning that will be material to GSI Lumonics Inc. following completion of the merger. ITEM 22. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be in the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by other items of the applicable form. (2) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post effective amendment shall be deemed to be new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-4 (c) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (d) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not subject of and included in the registration statement when it became effective. (e) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the forgoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrants in successful defence of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ottawa, Province of Ontario, Canada on January 28, 1999. Lumonics Inc. By: /s/ Warren Scott Nix ------------------------------------ Warren Scott Nix President, Chief Executive Officer and Director /s/ Warren Scott Nix ------------------------------------ Warren Scott Nix, Authorized U.S. Representative POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints each of Warren Scott Nix and Desmond J. Bradley such person's true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such person and in such person's name, place and stead, in all and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent Registration Statement for the same offering which may be filed under Rule 462(b) of the Securities Act of 1933, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that any said attorney-in-fact and agent, or any substitute or substitutes of any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Warren Scott Nix President, Chief January 28, 1999 - ------------------------------------ Executive Officer Warren Scott Nix and Director (Principal Executive Officer) /s/ Desmond J. Bradley Vice President, January 28, 1999 - ------------------------------------ Finance and Desmond J. Bradley Administration, Chief Financial Officer (Principal Financial Officer) /s/ Robert J. Atkinson Chairman of the January 28, 1999 - ------------------------------------ Board of Directors Robert J. Atkinson /s/ Douglas C. Cameron Director January 28, 1999 - ------------------------------------ Douglas C. Cameron
II-6 Signature Title Date /s/ Charles J. Gardner, Q.C. Secretary and January 28, 1999 - ------------------------------------ Director Charles J. Gardner, Q.C. Director - ------------------------------------ Atsushi Naitoh Director - ------------------------------------ Dr. Peter Rose Director - ------------------------------------ Yukihito Takahashi /s/ Benjamin J. Virgilio Director January 28, 1999 - ------------------------------------ Benjamin J. Virgilio Director - ------------------------------------ William B. Waite
II-7 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of October 27, 1998, by and among the Registrant, Grizzly Acquisition Corp., New Grizzly Acquisition Corp. and General Scanning Inc. (attached as Annex A to the joint proxy statement/prospectus contained in this Registration Statement). Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules referred to in the Merger Agreement are omitted. The Registrant hereby undertakes to furnish supplementally a copy of any omitted Schedule to the Commission upon request. 3.1 -- Letters Patent of Lumonics Research Limited dated November 26, 1970, the Articles of Amendment of Lumonics Research Limited dated June 1, 1977, Articles of Amendment of Lumonics Research Limited dated June 11, 1980, Articles of Amendment of Lumonics Inc. dated July 10, 1980, Articles of Amendment of Lumonics Inc. dated January 3, 1984, Articles of Amendment of Lumonics Inc. dated May 1, 1984 and Articles of Amendment of Lumonics Inc. dated May 9, 1986. (5) 3.2 -- Articles of Continuance of the Registrant which will become effective upon completion of the merger (attached as Annex H to the joint proxy statement/prospectus contained in this Registration Statement). 3.3 -- By-Laws No. 13, 18 and 19 of the Registrant which will be replaced by By-Law No. 1 following the merger. (5) 3.4 -- By-Law No.1 of the Registrant which will become effective upon completion of the merger (attached as Annex H to the joint proxy statement/prospectus contained in this Registration Statement). 4.1 -- Specimen Certificate of common share of the Registrant. (5) 5.1 -- Form of Opinion of Stewart McKelvey Stirling Scales as to legality of the Registrant's common shares. (5) 5.2 -- Form of Opinion of Goodwin Procter & Hoar LLP as to certain tax matters. (5) 10.1 -- Line of Credit Agreement between the Registrant and CIBC dated April 8, 1998 and accepted April 15, 1998. (5) 10.2 -- Loan Agreement between Sumitomo Heavy Industries, Ltd. and the Registrant dated August 10, 1990. (5) 10.3 -- Amended and Restated Revolving Credit Agreement between General Scanning and The First National Bank of Boston dated as of December 28, 1995. (3)+ 10.4 -- Amendment to Amended and Restated Revolving Credit Agreement between General Scanning and the First National Bank of Boston dated July 25, 1997. (4)+ 10.5 -- Second Amendment to Amended and Restated Revolving Credit Agreement between General Scanning and the First National Bank of Boston dated November 28, 1997. (4)+ 10.6 -- Lease Agreement between JRF II Associates Ltd. Partnership and Lumonics Corporation dated September 24, 1991. (5) 10.7 -- Industrial Space Lease between Lumonics Corporation and The Travelers Insurance Company dated March 17, 1992. (5) 10.8 -- Lease Agreement between Lumonics Corporation and Sisilli dated June 1994. (5) 10.9 -- Lease dated August 10, 1989, as amended to date, between General Scanning and Arlington Center Garage and Service Corp. (1)+ 10.10 -- Lease dated February 24, 1989, as amended to date, between Ames Realty Trust Associates and Teradyne Laser Systems Inc. and General Scanning Inc. (1)+
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.11 -- Lease dated July 31, 1996, as amended to date, between View Engineering, Inc. and Donald J. Devine as Trustee under the Donald J. Devine Trust Agreement. (2)+ 10.12 -- Lease dated March 24, 1995, as amended to date, between View Engineering, Inc. and Marjorie Lynn Landon. (2)+ 10.13 -- Lease dated July 15, 1997, as amended to date, between General Scanning and The Wilmington Realty Trust. (4)+ 10.14 -- 1998 Management Incentive Plan of the Registrant. (5) 10.15 -- 1998 Executive Management Incentive Plan of the Registrant. (5) 10.16 -- Severance Agreement between the Registrant and Robert J. Atkinson dated April 13, 1998. (5) 10.17 -- Severance Agreement between the Registrant and W. Scott Nix dated April 13, 1998. (5) 10.18 -- Severance Agreement between the Registrant and Michael W. Lupiano dated April 13, 1998. (5) 10.19 -- Severance Agreement between the Registrant and Patrick D. Austin dated April 13, 1998. (5) 10.20 -- Severance Agreement between the Registrant and John W. George dated April 13, 1998. (5) 10.21 -- Severance Agreement between the Registrant and Desmond J. Bradley dated April 13, 1998. (5) 10.22 -- Split Dollar Compensation Agreement dated September 13, 1997 between General Scanning and Charles D. Winston. (4)+ 10.23 -- Key Employee Retention Agreement between General Scanning and Charles Winston dated May 1, 1998 and amended October, 1998. (5)+ 10.24 -- Key Employee Retention Agreement between General Scanning and Linda Palmer dated May 1, 1997 and amended October 27, 1998. (5)+ 10.25 -- Key Employee Retention Agreement between General Scanning and Kurt Pelsue dated May 1, 1997 and amended October 27, 1998. (5)+ 10.26 -- Key Employee Retention Agreement between General Scanning and Michael R. Kampfe dated May 1, 1997 and amended October 27, 1998. (5)+ 10.27 -- Key Employee Retention Agreement between General Scanning and Victor Sabella dated May 1, 1997 and amended October 27, 1998. (5)+ 10.28 -- Key Employee Retention Agreement between General Scanning and Joseph Verderber dated May 1, 1997 and amended October 27, 1998. (5)+ 10.29 -- Key Employee Retention Agreement between General Scanning and Gregory Baletsa dated May 1, 1998 and amended October 27, 1998. (5)+ 10.30 -- Key Employee Retention Agreement between General Scanning and Victor H. Woolley, dated May 1, 1997. (5)+ 10.31 -- Settlement Agreement dated June 12, 1998 between General Scanning and Robotic Vision Systems, Inc. (5)+ 21.1 -- Subsidiaries of the Registrant. (5) 21.2 -- Subsidiaries of General Scanning (4)+ 23.1 -- Consent of Ernst & Young LLP, independent chartered accountants. (5) 23.2 -- Consent of Arthur Andersen LLP, independent public accountants. (5) 23.3 -- Consent of Stewart McKelvey Stirling Scales (included in the opinion attached as Exhibit 5.1). 23.4 -- Consent of Goodwin Procter & Hoar LLP (included in the opinion attached as Exhibit 5.2). 24.1 -- Powers of Attorney (included on signature page).
EXHIBIT NUMBER DESCRIPTION ------- ----------- 99.1 -- Amended and Restated Stock Option Agreement dated October 27, 1998 by and among General Scanning Inc., Lumonics Inc. and Grizzly Acquisition Corp. (included as Annex B to the joint proxy statement/prospectus contained in this Registration Statement). 99.2 -- Stock Option Agreement dated October 27, 1998 by and among General Scanning Inc. and Lumonics Inc. (included as Annex B to the joint proxy statement/prospectus contained in this Registration Statement). 99.3 -- Form of Proxy for General Scanning common stock. (5) 99.4 -- Opinion of Needham & Company, Inc. (included as Annex C to the joint proxy statement/prospectus contained in this Registration Statement). 99.5 -- Opinion of CIBC Wood Gundy Securities, Inc. (included as Annex D to the joint proxy statement/prospectus contained in this Registration Statement). 99.6 -- 1981 Stock Option Plan of General Scanning Inc. (1)+ 99.7 -- 1992 Stock Option Plan of General Scanning Inc. (1)+ 99.8 -- 1995 Directors' Warrant Plan of General Scanning Inc. (1)+ 99.9 -- 1994 Executive Management Stock Option Plan of the Registrant. (5) 99.10 -- 1994 Key Employees and Directors Stock Option Plan of the Registrant. (5) 99.11 -- 1995 Employees and Directors Stock Option Plan of the Registrant. (5) 99.12 -- Consent of Needham & Company, Inc. (5) 99.13 -- Consent of CIBC Wood Gundy Securities, Inc. (5) 99.14 -- Consent of Charles D. Winston (5) 99.15 -- Consent of Richard B. Black (5) 99.16 -- Consent of Paul F. Ferrari (5) 99.17 -- Consent of Woodie C. Flowers (5)
- -------- (1) Incorporated by reference to General Scanning's registration statement on Form S-1, filed August 11, 1995 (33-95718) (2) Incorporated by reference to General Scanning's Current Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to General Scanning's Current Report on Form 10-Q for the quarter ended June 30, 1996. (4) Incorporated by reference to General Scanning's Current Report on Form 10- K, for the year ended December 31, 1997. (5) Filed herewith. + Material contract or additional exhibit of General Scanning that will be material to GSI Lumonics Inc. following completion of the merger. EX-3.1 2 LETTERS PATENT OF LUMONICS RESEARCH LIMITED EXHIBIT 3.1 Dated November 26, A.D. 1970 PROVINCE OF ONTARIO LETTERS PATENT Incorporating LUMONICS RESEARCH LIMITED RECORDED this 15th day of December A.D. 1970 as Number 9/1996 "E. F. Morton" E.F. Morton Recording Officer Seal PROVINCE OF ONTARIO BY THE HONOURABLE A.B.R. LAWRENCE, Minister of Financial and Commercial Affairs TO ALL TO WHOM THESE PRESENTS SHALL COME GREETING WHEREAS the Corporations Act provides that with the exceptions therein mentioned the Lieutenant Governor may in his discretion, by Letters Patent, issue a Charter to any number of persons, not fewer than three, of twenty-one or more years of age, who apply therefor, constituting them and any others who become shareholders or members of the corporation thereby created a corporation for any of the objects to which the authority of the Legislature extends; AND WHEREAS by the said Act it is further provided that the member of the Executive Council to whom the administration of this Act is assigned may in his discretion and under the Seal of his office have, use, exercise and enjoy any power, right or authority conferred by the said Act on the Lieutenant Governor; AND WHEREAS it has been made to appear that the persons herein named have complied with the conditions precedent to the issue of the desired Charter and that the said undertaking is within the scope of the said Act; NOW THEREFORE KNOW YE that, being the member of the Executive Council to whom the administration of this Act is assigned, I DO BY THESE LETTERS PATENT issue a Charter to the Persons hereinafter named that is to say: Bernard Shinder, Arnell Goldberg and Charles Gardner, Solicitors; and Elaine Gravelle and Lynda Panke, Secretaries; all of the City of Ottawa, in the Regional Municipality of Ottawa-Carleton and Province of Ontario; constituting them and any others who become shareholders of the Company hereby created a company under the name of LUMONICS RESEARCH LIMITED for the following objects, that is to say: 2 (a) TO design, produce, manufacture, supply, buy, sell, and deal in, install, maintain, operate, demonstrate, repair and carry out research with respect to all manner of electronic, electrical, magnetic or allied equipment, devices and things or other things capable of being used in connection with such electronic, electrical, magnetic or allied equipment, devices or things; and (b) TO purchase, lease or otherwise acquire, to hold, rent, operate, manage, develop or otherwise use and to sell, exchange or otherwise dispose of real property, improved or unimproved, and to mortgage the same; and to acquire, construct, operate, manage, sell or otherwise dispose of buildings and structures of all kinds; PROVIDED, however that it shall not be lawful for the Company hereby incorporated directly or indirectly to transact or undertake any business within the meaning of The Loan and Trust Corporations Act; THE AUTHORIZED CAPITAL of the Company to be divided into Four Hundred Thousand (400,000) non-voting preference shares with a par value of One dollar ($1) each and One Million (1,000,000) common shares without par value; provided that the common shares shall not be issued for a consideration exceeding in amount or value the sum of Five Hundred Thousand dollars ($500,000) or such greater amount as the board of directors of the Company deems expedient on payment to the Treasurer of Ontario of the fees payable on such greater amount and on the issuance by the Minister of a certificate of such payment; THE HEAD OFFICE of the Company to be situate at the said City of Ottawa; and THE FIRST DIRECTORS of the Company to be Bernard Shinder, Arnell Goldberg, Charles Gardner, Elaine Gravelle and Lynda Panke, hereinbefore mentioned; AND IT IS HEREBY ORDAINED AND DECLARED that the said non-voting preference shares (hereinafter called the "preference shares") shall have attached thereto the following: (1) The holders of the preference shares, in priority to the holders of the common shares and any other shares ranking junior to the preference shares, shall be entitled to receive and the Company shall pay thereon, as and when declared by the board of directors of the Company out of the moneys of the company properly applicable to the payment of dividends, fixed preferential non-cumulative cash dividends at the rate of five per cent (5%) per annum on the amounts from time to time paid thereon; the board of directors shall be entitled from time to time to declare part of the said 3 preferential non-cumulative cash dividend for any fiscal year notwithstanding that such dividend for such fiscal year shall not be declared in full; if within four (4) months after the expiration of any fiscal year of the Company the board of directors in its discretion shall not declare the said dividend or any part thereof on the said preference shares for such fiscal year, then the right of the holders of the said preference shares to such dividend or to any undeclared part thereof for such fiscal year shall be forever extinguished; the holders of the preference shares shall not be entitled to any dividends other than or in excess of the preferential non-cumulative cash dividends hereinbefore provided for; (2) Except with the consent in writing of the holders of all the preference shares outstanding, no dividends shall at any time be declared and paid upon or set aside for the common shares or any other shares of the Company ranking junior to the preference shares in any fiscal year unless and until the preferential non-cumulative cash dividend on all the preference shares outstanding in respect of such fiscal year has been declared and paid or set aside for payment; (3) In the event of the liquidation, dissolution or winding up of the Company or other distribution of assets of the Company among shareholders for the purpose of winding up its affairs, the holders of the preference shares shall be entitled to receive from the assets and property of the Company a sum equivalent to the amount paid up on the preference shares held by them respectively together with all declared and unpaid preferential non- cumulative cash dividends thereon before any amount shall be paid or any property or assets of the Company distributed to the holders of any common shares or shares of any other class ranking junior to the preference shares; after payment to the holders of the preference shares of the amounts so payable to them as above provided they shall not be entitled to share in any further distribution of the property or assets of the Company; (4) The Company may at any time or times purchase (if obtainable) for cancellation all or some of the preference shares outstanding from time to time either by private contract or by invitation for tenders addressed to all the holders of record of the preference shares outstanding at the lowest price at which in the opinion of the directors such shares are obtainable but not exceeding the amount paid up thereon plus costs of purchase and all declared and unpaid preferential non-cumulative cash dividends thereon; if upon any invitation for tenders under the provisions of this clause the Company shall receive tenders of preference shares at the same lowest price which the Company may be willing to pay in an aggregate number greater than the number for which the Company is prepared to accept tenders, the preference shares so tendered shall be 4 purchased as nearly as may be pro rata (disregarding fractions) according to the number of preference shares so tendered by each of the holders of preference shares who submitted tenders at the same lowest price; (5) The preference shares may, upon the Company's giving notice as hereinafter provided, be redeemed at any time at the option of the Company without the consent of the holders thereof on payment for each share to be redeemed of the amount paid up thereon together with all declared and unpaid preferential non-cumulative cash dividends thereon; (6) In any case of redemption of preference shares under the provisions of the last preceding clause (5) hereof, the Company shall, at least ten (10) days before the date specified for redemption, mail to each person who at the date of mailing is a registered holder of preference shares to be redeemed a notice in writing of the intention of the Company to redeem such preference shares; such notice shall be mailed in a prepaid letter addressed to each such shareholder at his address as it appears on the books of the Company or in the event of the address of any such shareholder not so appearing then to the last known address of such shareholder; provided, however, that accidental failure to give any such notice to one (1) or more of such shareholders shall not affect the validity of such redemption; such notice shall set out the redemption price and the date on which redemption is to take place and if part only of the shares held by such person is to be redeemed, the number of shares to be redeemed shall be set forth; on or after the date so specified for redemption the Company shall pay or cause to be paid to or to the order of the registered holders of the preference shares to be redeemed the redemption price thereof on presentation and surrender at the head office of the Company or any other place designated in such notice of the certificates representing the preference shares called for redemption; such preference shares shall thereupon be redeemed; if a part only of the shares represented by any certificate be redeemed a new certificate for the balance shall be issued at the expense of the Company; from and after the date specified in any such notice the holders of the preference shares called for redemption shall cease to be entitled to dividends and shall not be entitled to exercise any of the rights of shareholders in respect thereof unless payment of the redemption price shall not be made upon presentation of certificates in accordance with the foregoing provisions, in which case the rights of the shareholders shall remain unaffected; the Company shall have the right at any time after the mailing of notice of its intention to redeem any preference shares as aforesaid to deposit the redemption price of the preference shares so called for redemption or of such of the said shares represented by certificates as have not at the date of such deposit been surrendered by the holders thereof in connection with such redemption to a special account in any chartered bank or any trust company in Canada named in such notice to be paid without interest 5 to or to the order of the respective holders of such preference shares called for redemption upon presentation and surrender to such bank or trust company of the certificates representing the same and upon such deposit being made or upon the date specified for redemption in such notice, whichever is the later, the preference shares in respect whereof such deposit shall have been made shall be redeemed and the rights of the holders thereof after such deposit or such redemption date, as the case may be, shall be limited to receiving, without interest, their proportionate part of the total redemption price so deposited against presentation and surrender of the said certificates held by them respectively; (7) The holders of the preference shares shall have the right to elect annually one (1) member of the board of directors of the Company but (except as hereinafter specifically provided) shall not be entitled to vote at any meeting of the shareholders of the Company; the holders of the preference shares shall, however, be entitled to notice of meetings of shareholders called for the purpose of authorizing the dissolution of the Company or the sale of its undertaking or a substantial part thereof; (8) The authorization for an application for the issue of Supplementary Letters Patent to delete or vary any preference, right, condition, restriction, limitation or prohibition attaching to the preference shares or to create preference shares ranking in priority to or on a parity with the preference shares, in addition to the authorization by a special resolution, may be given by at least two-thirds (2/3) of the votes cast at a meeting of the holders of the preference shares duly called for that purpose; and (9) The common shares without par value shall rank junior to the preference shares and shall be subject in all respects to the preferences, rights, conditions, restrictions, limitations and prohibitions attaching to the preference shares and shall entitle the holders thereof to one (1) vote in respect of each common share held at all meetings of the shareholders of the Company. GIVEN under my hand and Seal of office at the City of Toronto in the said Province of Ontario this twenty-sixth day of November in the year of Our Lord one thousand nine hundred and seventy. "A. B. Lawrence" Ministry of Consumer and Commercial Ontario Relations - -------------------------------------------------------------------------------- Certificate of Amendment of Articles This is to certify that LUMONICS RESEARCH LIMITED incorporated or amalgamated on November 26, 1970 has, under section 190 of The Business Corporation Act, delivered the attached Articles of Amendment. These Articles of Amendment are effective on June 1, 1977. "Irene M. Bartello" Controller of Records Seal Companies Division File Number 239272 ARTICLES OF AMENDMENT OF LUMONICS RESEARCH LIMITED Incorporated on November 26, 1970 - ----------------- FILED JUN 11 '77 MINISTRY OF CONSUMER AND COMMERCIAL RELATIONS - ----------------- 1. The following is a certified copy of the resolution amending the articles of the Corporation: RESOLVED as a special resolution that the articles of the Corporation are hereby amended to increase the authorized capital of the Corporation be creating an additional 500,000 shares without par value, ranking on a parity with the existing 1,000,000 shares without par value of the Corporation; "provided, however, that the aggregate consideration for the issue of the said shares without par value shall not exceed in amount or value the sum of One Million Five Hundred Thousand ($1,500,000.00) Dollars or such greater amount as the board of directors of the Corporation by resolution determines, provided that such resolution shall not be effective until a certified copy thereof has been filed with the Minister of Consumer and Commercial Relations, all prescribed fees have been paid and the Minister has so certified." 2. The amendment has been duly authorized as required by subsection 2 of Section 189 of the Business Corporations Act. 3. The resolution authorizing the amendment was confirmed by the shareholders on the 4th day of May, 1977. 4. These articles are executed in duplicate for delivery to the Minister. CERTIFIED LUMONICS RESEARCH LIMITED, Per: "A. R. Buchanan" ---------------------------- President Per: "Bernard Shinder" ---------------------------- Secretary Ontario Corporation Number 239272 Ministry of Consumer and Commercial Ontario Relations CERTIFICATE THIS IS TO CERTIFY THAT THESE ARTICLES ARE EFFECTIVE ON JUNE 11, 1980 CONTROLLER OF RECORDS COMPANIES SERVICES BRANCH Trans. Code ------ C ------ LUMONICS INC. ARTICLES OF AMENDMENT OF NAME OF CORPORAITON LUMONICS RESEARCH LIMITED INCORPORATED/AMALGAMATED ON NOVEMBER 26, 1970 (Date of Incorporation/Amalgamation) 1. THE FOLLOWING IS A CERTIFIED COPY OF THE RESOLUTION AMENDING THE ARTICLES OF THE CORPORATION: BE IT RESOLVED THAT: The Articles of the Corporation be and the same are hereby amended to change the name of the Corporation to "LUMONICS INC." 2. THE AMENDMENT HAS BEEN DULY AUTHORIZED AS REQUIRED BY SUBSECTION 2, 3 AND 4 (AS APPLICABLE) OF SECTION 189 OF THE BUSINESS CORPORATIONS ACT. 3. THE RESOLUTION AUTHORIZING THE AMENDMENT WAS CONFIRMED BY THE SHAREHOLDERS OF THE CORPORATION ON MAY 13, 1980 4. THESE ARTICLES ARE EXECUTED IN DUPLICATE FOR DELIVERY TO THE MINISTER. CERTIFIED LUMONICS RESEARCH LIMITED -------------------------------------------------- (Name of Corporation) BY: "A. R. Buchanan" PRESIDENT -------------------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) (CORPORATE SEAL) "R. J. Atkinson" VICE-PRESIDENT -------------------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) Ontario Corporation Number 239272 Ministry of Consumer and Commercial Ontario Relations CERTIFICATE THIS IS TO CERTIFY THAT THESE ARTICLES ARE EFFECTIVE ON JULY 10, 1980 CONTROLLER OF RECORDS COMPANIES SERVICES BRANCH Trans. Code ---------- C ---------- ARTICLES OF AMENDMENT OF NAME OF CORPORATION LUMONICS INC. INCORPORATED/AMALGAMATED ON NOVEMBER 26, 1970 ------------------------------------- (Date of Incorporation/Amalgamation) 1. THE FOLLOWING IS A CERTIFIED COPY OF THE RESOLUTION AMENDING THE ARTICLES OF THE CORPORATION: WHEREAS the authorized capital of Lumonics Inc. (hereinafter called the "Company") includes 1.5 million common shares without par value of which 1,020,160 shares have been issued and are now outstanding as fully paid and non-assessable; AND WHEREAS the aggregate consideration for the issue of the common shares of the Company, without par value, shall not exceed in amount or value the sum of $1,500,000; AND WHEREAS it is considered advisable to subdivide the common shares without par value of the Company, issued and unissued, and to increase the authorized capital of the Company by the creation of 2 additional common shares without par value and to remove the limitation on the consideration for which the common shares without par value can be issued, all as hereinafter provided; NOW THEREFORE BE IT RESOLVED AS FOLLOWS: 1. The Articles of the Company are hereby amended by: (a) subdividing each of the common shares without par value of the capital of the Company, issued and unissued, into two (2) common shares without par value; (b) increasing the authorized capital of the Company by the creation of an additional 17,000,000 common shares without par value ranking on a parity in all respects with the 3,000,000 common shares resulting from the subdivision aforesaid; (c) deleting from the Articles incorporating the Company the following words: "provided, however, that the aggregate consideration for the issue of the said shares without par value shall not exceed in amount or value the sum of One Million Five Hundred Thousand Dollars ($1,500,000.00) or such greater amount as the board of directors of the Corporation, by resolution, determines, provided that such resolution shall not be effective until a certified copy thereof has been filed with the Minister of Consumer and Commercial Relations, all prescribed fees have been paid, and the Minister has so certified"; (d) declaring that the authorized capital of the Company shall consist of 20,000,000 common shares without par value of which 2,040,320 common shares without par value shall be outstanding as fully paid and non-assessable, and 190,500 non-voting preference shares with a par value of $1.00 each, of which 90,500 non-voting preference shares with a par value of $1.00 each shall be outstanding as fully paid and non-assessable. 2. THE AMENDMENT HAS BEEN DULY AUTHORIZED AS REQUIRED BY SUBSECTION 2, 3 AND 4 (AS APPLICABLE) OF SECTION 189 OF THE BUSINESS CORPORATIONS ACT. 3. THE RESOLUTION AUTHORIZING THE AMENDMENT WAS CONFIRMED BY THE SHAREHOLDERS OF THE CORPORATION ON JULY 9th, 1980 3 4. THESE ARTICLES ARE EXECUTED IN DUPLICATE FOR DELIVERY TO THE MINISTER. CERTIFIED LUMONICS INC. --------------------------------------- (Name of Corporation) BY: "A. R. Buchanan" PRESIDENT --------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) (CORPORATE SEAL) "R. J. Atkinson" SECRETARY --------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) Ontario Corporation Number 239272 Ministry of Consumer and Commercial Ontario Relations CERTIFICATE THIS IS TO CERTIFY THAT THESE ARTICLES ARE EFFECTIVE ON JANUARY 3, 1984 CONTROLLER OF RECORDS COMPANIES BRANCH Trans. Code ------- C ------- - ---------------------------------------------------------------------------- ARTICLES OF AMENDMENT 1. The present name of the corporation is: LUMONICS INC. 2. The name of the corporation is changed to (if applicable): 3. Date of incorporation/amalgamation: 26 November 1970 --------------------------------------------------------------------------- (Day, Month, Year) 4. The articles of the corporation are amended as follows: WHEREAS the authorized capital of the company includes twenty million common shares without par value; AND WHEREAS 3,930,222 of the said common shares are issued and outstanding as fully paid and non-assessable and 16,069,778 are unissued: NOW THEREFORE BE IT RESOLVED THAT: 2 The Articles of the company be amended to subdivide each of its issued and unissued common shares without par value into two common shares without par value. Any two officers of the company be, and they are, hereby authorized and directed on behalf of the company to deliver Articles of Amendment in duplicate to the Minister of Consumer and Commercial Relations and to assign and execute all documents and to do all things necessary or advisable in connection with the foregoing. 5. The amendment has been duly authorized as required by Sections 167 and 169 (as applicable) of the Business Corporations Act. 6. The resolution authorizing the amendment was approved by the shareholders/directors (as applicable) of the corporation on 19 December 1983 --------------------------------------------------------------------------- (Day, Month, Year) These articles are signed in duplicate. CERTIFIED LUMONICS INC. ------------------------------ (Name of Corporation) BY: "R. J. Atkinson" PRESIDENT & CEO ------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) (CORPORATE SEAL) "R. E. Hall" SECRETARY ------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) Ontario Corporation Number 239272 Ministry of Consumer and Commercial Ontario Relations CERTIFICATE THIS IS TO CERTIFY THAT THESE ARTICLES ARE EFFECTIVE ON MAY 1, 1984 CONTROLLER OF RECORDS COMPANIES BRANCH Trans. Code ------ C ------ - -------------------------------------------------------------------------------- ARTICLES OF AMENDMENT 1. The present name of the corporation is: LUMONICS INC. 2. The name of the corporation is changed to (if applicable): 3. Date of incorporation/amalgamation: 26 November 1970 --------------------------------------------------------------------------- (Day, Month, Year) 4. The articles of the corporation are amended as follows: (a) to delete from the Articles of the Corporation the objects for which the Corporation was created; (b) to amend the description of the Corporation's non-voting preference shares so as to delete any reference to the said shares having a par value; (c) to delete any restriction on the number of common shares and the number of preference shares that the Corporation may issue so that the authorized capital of the Corporation shall be divided into 2 an unlimited number of common shares and an unlimited number of non- voting preference shares; (d) to amend the Articles of the Corporation so as to provide for the Corporation to have a Board of Directors of not less than Five (5) and not more than Fifteen (15). (e) to authorize the Corporation to use its name in the French language. 5. The amendment has been duly authorized as required by Sections 167 and 169 (as applicable) of the Business Corporations Act. 6. The resolution authorizing the amendment was approved by the shareholders (as applicable) of the corporation on 30 April 1984 --------------------------------------------------------------------------- (Day, Month, Year) These articles are signed in duplicate. CERTIFIED LUMONICS INC. ----------------------------------------- (Name of Corporation) BY: "R. J. Atkinson" PRESIDENT ----------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) (CORPORATE SEAL) "R. E. Hall" SECRETARY ----------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) Ontario Corporation Number 239272 Ministry of Consumer and Commercial Ontario Relations CERTIFICATE THIS IS TO CERTIFY THAT THESE ARTICLES ARE EFFECTIVE ON MAY 9, 1986 CONTROLLER OF RECORDS COMPANIES BRANCH Trans. Code ------- C ------- - ---------------------------------------------------------------------------- ARTICLES OF AMENDMENT 1. The present name of the corporation is: LUMONICS INC. 2. The name of the corporation is changed to (if applicable): 3. Date of incorporation/amalgamation: 26 November 1970 --------------------------------------------------------------------------- (Day, Month, Year) 4. The articles of the corporation are amended as follows: by: cancelling all of the authorized non-voting preference shares of the Corporation, with the result that the authorized capital of the Corporation shall consist of an unlimited number of Common shares. 5. The amendment has been duly authorized as required by Sections 167 and 169 (as applicable) of the Business Corporations Act. 2 6. The resolution authorizing the amendment was approved by the shareholders/directors (as applicable) of the corporation on 8 May 1986 --------------------------------------------------------------------------- (Day, Month, Year) These articles are signed in duplicate. CERTIFIED LUMONICS INC. ------------------------------ (Name of Corporation) BY: "R. J. Atkinson" PRESIDENT & CEO ------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) (CORPORATE SEAL) "R. E. Hall" SECRETARY ------------------------------------- (SIGNATURE) (DESCRIPTION OF OFFICE) EX-3.3 3 BY-LAWS NO. 13, 18 AND 19 OF THE REGISTRANT EXHIBIT 3.3 BY-LAW NO. 13 ------------- A By-law relating generally to the transaction of the business and affairs of Lumonics Inc. CONTENTS -------- ONE - INTERPRETATION TWO - BUSINESS OF THE CORPORATION THREE - BORROWING AND DEBT OBLIGATIONS FOUR - DIRECTORS FIVE - COMMITTEES SIX - OFFICERS SEVEN - PROTECTION OF DIRECTORS, OFFICERS AND OTHERS EIGHT - SHARES NINE - LOANS TO SHAREHOLDERS, DIRECTORS OR EMPLOYEES TEN - DIVIDENDS AND RIGHTS ELEVEN - MEETINGS OF SHAREHOLDERS TWELVE - AUDITORS REPORTS AND FINANCIAL STATEMENTS THIRTEEN - NOTICES FOURTEEN - EFFECTIVE DATE BE IT ENACTED as a by-law of the Corporation as follows: SECTION ONE ----------- INTERPRETATION -------------- 1.01 Definitions - In this by-law and all other by-laws and special ----------- resolutions of the Corporation, unless the context otherwise requires: "Act" means The Business Corporation Act, (Ontario), and any Act that may be substituted therefore, as from time to time amended; "articles" means the Articles of Incorporation of the Corporation filed November, 26, 1970, as from time to time amended, supplemented or restated; "board" means the board of directors of the Corporation; "by-laws" means this by-law and all other by-laws and special by-laws of the Corporation from time to time in force and effect; "Corporation" means the corporation incorporated by articles under the Act and named; "non-business day" means Saturday, Sunday and any other day that is a holiday as defined in The Interpretation Act (Ontario); "meeting of shareholders" includes an annual or other general meeting of shareholders and a special meeting of shareholders; "special meeting of shareholders" includes a meeting of any class or classes of shareholders, as well as a special general meeting of shareholders; "recorded address" means, in the case of a shareholder, his address as recorded in the register of shareholders and, in the case of a director, officer, auditor or member of a committee of the board, his address as recorded in the records of the Corporation; "signing officer" means, in relation to any instrument, any person authorized to sign the same on behalf of the Corporation by section 2.04 of this by-law or by a resolution passed pursuant thereto; save as aforesaid, words and expressions defined in the Act have the same meanings when used herein; and words importing the singular number include the plural and vice versa; words importing the masculine gender include the feminine and neuter genders; and words importing persons include individuals, bodies corporate, partnerships, trusts and unincorporated organizations. SECTION TWO ----------- BUSINESS OF THE CORPORATION --------------------------- 2.01 Head Office - Until changed in accordance with the Act, the head office ----------- of the Corporation shall be at the City of Kanata, in the Regional Municipality of Ottawa-Carleton, in the Province of Ontario and at such location therein as the board may from time to time determine by resolution. 2.02 Corporate Seal - Until changed by resolution of the board, the -------------- corporate seal of the Corporation shall be in the form impressed hereon. 2 2.03 Financial Year - Until changed by resolution of the board, the -------------- financial year of the Corporation shall end on the last day of December in each year. 2.04 Execution of Instruments - Deeds, transfers, assignments, contracts, ------------------------ obligations, certificates and other instruments may be signed on behalf of the Corporation by the President or Vice-President together with the Treasurer. In addition, the board may from time to time direct by resolution the manner in which and the person or persons by whom any particular instrument or class of instruments may or shall be signed. Any signing officer may affix the corporate seal thereto. 2.05 Banking Arrangements - The banking business of the Corporation shall -------------------- be transacted with such banks, trust companies or other bodies corporate or organizations as may from time to time be designated by or under the authority of the board. Such banking business or any part thereof shall be transacted under such agreements, instructions and delegations of powers as the board may from time to time prescribe or authorize. 2.06 Voting Rights in Other Bodies Corporate - The signing officers of the --------------------------------------- Corporation may execute and deliver instruments of proxy and arrange for the issuance of voting certificates or other evidence of the right to exercise the voting rights attaching to any securities held by the Corporation. Such instruments, certificates or other evidence shall be in favour of such person or persons as may be determined by the officers signing or arranging for them. In addition the board may from time to time direct the manner in which and the person or persons by whom any particular voting rights or class of voting rights may or shall be exercised. 2.07 Witholding Information from Shareholders - No shareholder shall be ---------------------------------------- entitled to discovery of any information respecting any details or conduct of the Corporation's business which, in the opinion of the board, it would be inexpedient in the interests of the shareholders or the Corporation to communicate to the public. The board may from time to time determine whether and to what extent and at what time and place and under what conditions or regulations the accounts, records and documents of the Corporation or any of them shall be open to the inspection of shareholders and no shareholder shall have any right of inspecting any account, record or document of the Corporation except as conferred by the Act or authorized by the board or by resolution passed at a general meeting of shareholders. 3 SECTION THREE ------------- BORROWING AND SECURITIES ------------------------ 3.01 Borrowing Power - The board may from time to time, in such amounts and --------------- on such terms as it deems expedient: (a) borrow money on the credit of the Corporation; (b) issue, sell or pledge debt obligations (including bonds, debentures, notes or other similar obligations, secured or unsecured) of the Corporation; (c) charge, mortgage, hypothecate or pledge all or any of the currently owned or subsequently acquired real or personal, movable or immovable, property of the Corporation, including book debts, rights, powers, franchise and undertaking, to secure any debt obligations or any money borrowed, or other debt or liability of the Corporation; 3.02 Delegation - The board may from time to time delegate to such one or ---------- more of the directors and officers of the Corporation as may be designated by the board all or any of the powers conferred on the board by Section 3.01 to such extent and in such delegation. SECTION FOUR DIRECTORS 4.01 Number of Directors and Quorum - Until changed in accordance with ------------------------------ the Act, the board shall consist of eight (8) directors of whom five (5) shall constitute a quorum for the transaction of business. A majority of the directors shall be resident Canadians. 4.02 Qualification - At least two directors shall not be officers or ------------- employees of the Corporation or of any affiliate of the Corporation. No person shall be qualified for election or appointment as a director if he is an undischarged bankrupt, if he is mentally incompetent or incapable of managing his affairs, or if he has not attained 18 years of age. A director need not be a shareholder. 4.03 Consent - No election or appointment of a person as a director shall ------- be effective unless (a) he consents in writing to act as a director before his election or appointment or within 10 days thereafter, or (b) he was present at the meeting when he was elected or appointed and did not refuse at that meeting to act as a director. 4 4.04 Election and Term - The election of directors shall take place at ----------------- each annual meeting of shareholders and all the directors then in office shall retire but, if qualified, shall be eligible for re-election. The election may be by a show of hands or by a resolution of the shareholders unless a poll is required or demanded. If an election of directors is not held at the proper time, the directors shall continue in office until their successors are elected. 4.05 Removal of Directors - Subject to the provisions of the Act, the -------------------- shareholders, by resolution passed by a majority of the votes cast thereon at a meeting of shareholders called for that purpose, may remove any director before the expiration of his term of office and may elect any qualified person in his stead for the remainder of his term. 4.06 Vacation of Office - The office of a director shall be vacated upon ------------------ the occurrence of any of the following events (a) if a receiving order is made against him or if he makes an assignment under the Bankruptcy Act; (b) if an order is made declaring him to be a mentally incompetent person or incapable of managing his affairs; (c) if he shall be removed from office by resolution of the shareholders as provided in Section 4.05; or (d) if by notice in writing to the Corporation he resigns his office and such resignation, if not effective immediately, becomes effective in accordance with its terms. 4.07 Vacancies - If the number of directors is increased, the resulting --------- vacancies shall be filled at a meeting of shareholders duly called for that purpose. Subject to the provisions of the Act, if a vacancy shall otherwise occur in the board, the remaining directors if constituting a quorum may appoint a qualified person to fill the vacancy for the remainder of the term. In the absence of a quorum the remaining directors shall forthwith call a meeting of shareholders to fill the vacancy. 4.08 Action by the Board - The board shall manage or supervise the ------------------- management of the affairs and business of the Corporation. The powers of the board may be exercised by a meeting at which a quorum of directors is present and at which a majority of the directors are resident Canadians or by by-law or resolution consented to by the signatures of all the directors then in office if constituting a quorum, or by executive committee pursuant to Section 5.01 herein. Where there is a vacancy or vacancies in the board, the remaining directors may exercise all the powers of the board so long as a quorum of the board remains in the office. 5 4.09 Place of Meetings - Meetings of the board shall be held at the head ----------------- office of the Corporation or elsewhere in Ontario or, if the board so determines or all absent directors consent, at some place outside Ontario, but in any financial year of the Corporation a majority of the meetings of the board shall be held in Canada. 4.10 Meetings by Telephone - Where all the directors have consented --------------------- thereto, any director may participate in a meeting of the board by means of conference telephone or other communications equipment by means of which all persons participating in a meeting pursuant to this section shall be deemed to be present in person at the meeting. Any consent given hereunder shall be effective whether given before or after the meeting to which it relates. If a majority of the directors participating in a meeting held pursuant to this section are then in Canada the meeting shall be deemed to have been held in Canada. 4.11 Calling of Meetings - Meetings of the board shall be held from time ------------------- to time at such places (subject to Section 4.09) at such time and on such day as the board, the chairman of the board, the president or any two directors may determine. Notice of the time and place of every meeting so called shall be given in the manner provided in Section Thirteen to each director (a) not less than 48 hours before the time when the meeting is to be held if the notice is mailed, or (b) not less than 24 hours before the time when the meeting is to be held if the notice is given personally or is delivered or is sent by any means of transmitted or recorded communication; provided that no notice of a meeting shall be necessary if all the directors in office are present or if those absent waive notice of or otherwise consent to such meeting being held. 4.12 Attendance of Auditors - The Auditors of the Corporation shall be ---------------------- entitled to attend and be heard at meetings of the board on matters relating to their duties as auditors. 4.13 First Meeting of New Board - Provided a quorum of directors is -------------------------- present, each newly elected board may without notice hold its first meeting immediately following the meeting of shareholders at which such board is elected. 4.14 Regular Meetings - The board may appoint a day or days in any month or ---------------- months for regular meetings at a place and hour to be named. A copy of any resolution of the board fixing the place and time of regular meetings of the board shall be sent to each director 6 forthwith after being passed, but no other notice shall be required for any such regular meeting. 4.15 Chairman - The Chairman of the Board, if such an officer has been -------- elected and is present, otherwise the President or in his absence, a vice- president who is a director shall be chairman of any meeting of the board. If no such officer is present, the directors present shall choose one of their number to be chairman. 4.16 Votes to Govern - At all meetings of the board every question shall --------------- be decided by a majority of the votes cast on the question. In case of an equality of votes the chairman of the meeting shall be entitled to a second or casting vote. 4.17 Conflict of Interest - A director shall not be disqualified by reason -------------------- of his office from contracting with the Corporation or a subsidiary thereof. Subject to the provisions of the Act, a director shall not be reason only of his office be accountable to the Corporation or to its shareholders for any profit or gain realized from a contract or transaction in which he has an interest, and such contract or transaction shall not be voidable by reason only of such interest, provided that, if a declaration and disclosure of such interest is required by the Act, such declaration and disclosure shall have been made and, if required by the Act, the director shall have refrained from voting as a director on the contract or transaction and shall not have been counted in the quorum. 4.18 Remuneration and Expenses - The directors shall be paid such ------------------------- remuneration for their services as directors as may from time to time be authorized with the Act. The directors shall also be entitled to be reimbursed for travelling and other expenses properly incurred by them in attending meetings of the board or any committee thereof. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity and receiving remuneration therefor. SECTION FIVE ------------ COMMITTEES ---------- 5.01 Executive Committee - Whenever the board consists of more than six ------------------- directors the board may elect from among its number an executive committee to be composed of not fewer than three directors which committee may exercise all the powers of the board, 7 subject to any restrictions imposed from time to time by the board. A majority of the members of the executive committee shall be resident Canadians. 5.02 Transaction of Business - No business shall be transacted by the ----------------------- executive committee except at a meeting of its members at which a quorum of the committee is present and at which a majority of the members present are resident Canadians. The provisions of Sections 4.09 and 4.10 shall apply, with all changes required by the context, to meetings of the executive committee. 5.03 Audit Committee - The board shall elect annually from among its --------------- number an audit committee to be composed of not fewer than 3 directors, of whom a majority shall not be officers or employees of the Corporation or an affiliate of the Corporation to hold office until the next annual meeting of shareholders. The audit committee shall have the powers and duties provided in the Act. 5.04 Advisory Committees - The board may from time to time elect or ------------------- appoint such other committees as it may deem advisable, but the functions of any such committees shall be advisory only. 5.05 Procedure - Unless otherwise ordered by the board, each committee --------- shall have power to fix its quorum at not less than a majority of its members, to elect its chairman and to regulate its procedure. SECTION SIX ----------- OFFICERS -------- 6.01 Election or Appointment - From time to time the board shall elect or ----------------------- appoint a president and a secretary, and may elect or appoint one or more vice-presidents (to which title may be added words indicating seniority or function), a general manager, a treasurer and such other officers as the board may determine, including one or more assistants to any of the officers so elected or appointed. Subject to Section 6.02, the officers of the Corporation may but need not be directors and one person may hold more than one office. 6.02 Chairman of the Board - From time to time the board may elect or --------------------- appoint a chairman of the board who shall be a director and who shall not hold the office of secretary. If so elected or appointed, the chairman of the board shall, if present, preside at all 8 meetings of shareholders. In addition, the board may by special by-law, assign to him any of the powers and duties that are by any provisions of this by-law assigned to the president or any other officer of the Corporation, and he shall have such other powers and duties as the board may by such by-law prescribe. During the absence or disability of the chairman of the board, the president shall assume all his powers and duties. 6.03 President - The president shall be the chief executive officer of the --------- Corporation and, subject to the authority of the board, shall have general supervision of the affairs and business of the Corporation. Except when the board has elected or appointed a general manager or managing director, the president shall also have the powers and be charged with the duties of that office. 6.04 Vice-President - During the absence or disability of the president, -------------- his duties shall be performed and his powers exercised by the vice-president or, if there are more than one, by the vice-president designated from time to time by the board or the president. A vice-president shall have such other powers and duties as the board or the president may prescribe. 6.05 General Manager - If elected or appointed, the general manager shall --------------- have, subject to the authority of the board and the supervision of the president, general supervision of the affairs and business of the Corporation and the power to appoint and remove any and all employees and agents of the Corporation not elected or appointed by the board and to settle the terms of their employment and renumeration; and he shall have such other duties as the board or the president may prescribe. If and so long as the general manager is a director, he may but need not be known as the managing director. 6.06 Secretary - The secretary shall attend and be the secretary of all --------- meetings of the board, shareholders, directors and committees of the board and shall enter or cause to be entered in records kept for that purpose minutes of all proceedings thereat; he shall give or cause to be given, as and when instructed, all notices to directors, shareholders, auditors and members of committees of the board; he shall be the custodian of the stamp or mechanical device generally used for affixing the corporate seal of the Corporation and of all books, papers, records, documents and instruments belonging to the Corporation except when some other officer or agent has been appointed for the purpose; and he shall have such other duties as the board or the president may prescribe. 9 6.07 Treasurer - The treasurer shall keep proper accounting records in --------- compliance with the Act, and under the direction of the board, shall control the deposit of money, the safekeeping of securities and the disbursement of the funds of the Corporation; he shall render to the board whenever required an account of all his transactions as treasurer and of the financial position of the Corporation; and he shall have such other duties as the board or the president may prescribe. 6.08 Duties of Other Officers - The duties of all other officers of the ------------------------ Corporation shall be such as the terms of their engagement call for or as the board or the president may prescribe. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant, unless the board or the president otherwise directs. 6.09 Variation of Duties - From time to time the board may vary, add to or ------------------- limit the powers and duties of any officer. 6.10 Term of Office - The board may remove at its pleasure any officer of -------------- the Corporation, without prejudice to such officer's rights under any employment contract. Otherwise each officer elected or appointed by the board shall hold office until his successor is elected or appointed. 6.11 Terms of Employment and Remuneration - The terms of employment and ------------------------------------ the remuneration of officers elected or appointed by the board shall be settled by it from time to time. 6.12 Agents and Attorneys - The board shall have power from time to time -------------------- to appoint agents or attorneys for the Corporation in or out of Canada with such powers of management or otherwise (including the power to sub-delegate) as may be thought fit. 6.13 Fidelity Bonds - The board may require such officers, employees and -------------- agents of the Corporation as the board deems advisable to furnish bonds for the faithful discharge of their duties, in such form and with such surety as the board may from time to time prescribe. SECTION SEVEN ------------- PROTECTION OF DIRECTORS, OFFICERS AND OTHERS -------------------------------------------- 7.01 Limitation of Liability - No director or officer of the Corporation ----------------------- shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee, or for 10 joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired by order of the board for or on behalf of the Corporation, or for the insufficiency or deficiency of any security in or upon which any of the moneys of the Corporation shall be invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any of the moneys, securities or effects of the Corporation shall be deposited, or for any loss occasioned by any error of judgment or oversight on his part, or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto, unless the same are occasioned by his own willful neglect or default, provided that nothing herein shall relieve any director or officer of any liability imposed upon him by the Act. 7.02 Indemnity - Subject to the limitations contained in the Act, every --------- director and every officer of the Corporation and every other person who has undertaken or is about to undertake any liability on behalf of the Corporation or any body corporate controlled by it and his heirs, executors, administrators and other legal personal representatives shall, from time to time, be indemnified and saved harmless by the Corporation from and against: (a) any liability and all costs, charges and expenses that he sustains or incurs in respect of any action, suit or proceeding that is proposed or commenced against him in respect of anything done or permitted by him in respect of the execution of the duties of his office; and (b) all other costs, charges and expenses that he sustains or incurs in respect of the affairs of the Corporation. 7.03 Insurance - Subject to the limitations contained in the Act, the --------- Corporation may purchase and maintain such insurance for the benefit of its directors and officers as the board may from time to time determine. SECTION EIGHT ------------- SHARES ------ 8.01 Allotment - The board may from time to time allot or grant options to --------- purchase the whole or any part of the authorized and unissued shares of the Corporation, including any shares created by articles of amendment increasing or otherwise varying the 11 capital of the Corporation, in such manner and to such persons or class of persons as the board shall by resolution determine, provided that no share shall be issued unless it is fully paid as provided by the Act. 8.02 Commissions and Discounts - The board may from time to time authorize ------------------------- the payment of commissions or the allowance of discounts to persons in consideration of their subscribing or agreeing to subscribe, whether absolutely or conditionally, for shares in the Corporation, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for such shares, but no such commission or discount shall exceed 25 per cent of the amount of the subscription price. 8.03 Transfer Agents and Registrars - The board may from time to time by ------------------------------ resolution appoint a registrar to keep the register of securities and a transfer agent to keep the register of transfers and may also appoint one or more branch registers of security holders and one or more branch transfer agents to keep branch registers of transfers, but no one may be appointed both registrar and transfer agent. The board may at any time terminate the appointment of any transfer agent or registrar. 8.04 Registration of Transfer - Subject to the provisions of the Act, no ------------------------ transfer of shares shall be registered in a register of transfers or branch register of transfers except upon surrender of the certificate representing such shares with a transfer endorsed thereon or delivered therewith duly executed by the registered holder or by his attorney or successor duly appointed, together with such assurance or evidence of signature, identification and authority to transfer as the board may from time to time prescribe, and upon payment of all applicable taxes, compliance with such restrictions on transfer as are authorized by the articles and satisfaction of any lien referred to in Section 8.05. 8.05 Lien for Indebtedness - Except in the case of any class or series of --------------------- shares of the Corporation listed on a stock exchange, the Corporation shall have a lien on the shares registered in the name of a shareholder who is indebted to the Corporation, to the extent of such debt. 8.06 Non-recognition of Trusts - The Corporation shall be entitled to ------------------------- treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by statute, be bound to see to the execution of any trust, whether express, implied or constructive, in respect of any share or 12 to recognize any other claim to or interest in such share on the part of any person other than the registered holder thereof. 8.07 Share Certificates - Every holder of one or more fully paid shares of the ------------------ Corporation shall be entitled, without payment, to a share certificate stating the number and class or series of the shares held by him as shown by the register, and stating that such shares are fully paid. Share certificates shall be in such form as the board shall from time to time approve. They shall be signed in accordance with Section 2.04 and need not be under the corporate seal; provided that, unless the board otherwise orders, certificates representing shares in respect of which a transfer agent and/or registrar has been appointed shall not be valid unless countersigned by or on behalf of such transfer agent and/or registrar. The signature of one of the signing officers or, in the case of share certificates which are not valid unless countersigned by or on behalf of a transfer agent and/or registrar, the signatures of both signing officers may be mechanically reproduced in facsimile upon share certificates and every such facsimile signature shall for all purposes be deemed to be the signature of the officer whose signature it reproduces and shall be binding upon the Corporation. A share certificate executed as aforesaid shall be valid notwithstanding that one or both of the officers whose signature (whether manual or facsimile) appears thereon no longer holds office at the date of issue or delivery of the certificate. 8.08 Replacement of Share Certificates - The Board or any officer or agent --------------------------------- designated by the board may in its or his discretion direct the issue of a new share certificate in lieu of and upon cancellation of a share certificate that has been mutilated or in substitution for a share certificate that has been lost, apparently destroyed or wrongfully taken on payment of such fee, and on such terms as to indemnity, reimbursement of expenses and evidence of loss and of title as the board may from time to time prescribe, whether generally or in any particular case. 8.09 Joint Shareholders - If two or more persons are registered as joint ------------------ holders of any share, the Corporation shall not be bound to issue more than one certificate in respect thereof, and delivery of such certificates to one of such persons shall be sufficient delivery to all of them. Any one of such persons may give effectual receipts for the certificates issued in respect thereof or for any dividend, bonus, return of capital or other money payable or warrant issuable in respect of such share. 13 8.10 Deceased Shareholders - In the event of the death of a holder, or of one --------------------- of the joint holders, of any share, the Corporation shall not be required to make any entry in the register of shareholders in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Company and its transfer agent. SECTION NINE ------------ LOANS TO SHAREHOLDERS, DIRECTORS OR EMPLOYEES --------------------------------------------- 9.01 Loans to Shareholders, Directors or Employees - The Corporation may from --------------------------------------------- time to time: (a) make loans to bona fide full-time employees of the Corporation whether or not they are shareholders or directors, with a view to enabling them to purchase or erect dwelling houses for their own occupation, and may take from such employees mortgages or other security for the repayment of such loans; (b) provide, in accordance with a scheme for the time being in force, money by way of loan for the purpose of or subscription for shares of the Corporation by trustees, to be held by or for the benefit of bona fide employees of the Corporation, whether or not they are shareholders or directors; or (c) make loans to bona fide employees of the Corporation, other than directors, whether or not they are shareholders, with a view to enabling them to purchase or subscribe for shares of the Corporation to be held by them by way of beneficial ownership. SECTION TEN ----------- DIVIDENDS AND RIGHTS -------------------- 10.01 Cash Dividends - Subject to the provisions of the Act and the articles, -------------- the board may from time to time declare dividends payable to the shareholders according to their respective rights and interests in the Corporation. 10.02 Stock Dividends - For the amount of any dividend that the Board may --------------- lawfully declare payable in money, it may declare a stock dividend and issue therefor shares of the Corporation as fully paid. 14 10.03 Dividend Cheques - A dividend payable in cash shall be paid by cheque ---------------- drawn on the Corporation's bankers or one of them to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by ordinary mail, postage prepaid, to such registered holder at his address appearing on the register of shareholders, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all of such joint holders and mailed to them at the address appearing on the register of shareholders in respect of such joint holding, or to the first address so appearing if there are more than one. The mailing of such cheque as aforesaid, unless the same be not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Company is required to and does withhold. 10.04 Non-receipt of Cheques - In the event of non-receipt of any dividend ---------------------- cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement cheque for a like amount on such terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the board may from time to time prescribe, whether generally or in any particular case. 10.05 Record Date for Dividends and Rights - The board may fix in advance a ------------------------------------ date, preceding by not more than 31 days the date for the payment of any dividend or the date for the issue of any warrant or other evidence of right to subscribe for securities of the Corporation as a record date for the determination of the persons entitled to receive payment of such dividend or to exercise the right to subscribe for such securities. In every such case only such persons as shall be shareholders of record at the close of business on the record date so fixed shall be entitled to receive payment of such dividend or to exercise the right to subscribe for such securities and to receive the warrant or other evidence in respect of such right, notwithstanding the transfer or issue of any shares after the record date so fixed. 10.06 Unclaimed Dividends - Any dividend unclaimed after a period of 12 years ------------------- from the date on which the same has been declred to be payable shall be forfeited and shall revert to the Corporation. 15 SECTION ELEVEN -------------- MEETING OF SHAREHOLDERS ----------------------- 11.01 Annual Meetings - The annual meeting of shareholders shall be held at --------------- such time and on such day in each year as the board, the chairman of the board or the president may from time to time determine, for the purpose of receiving the reports and statements required by the Act to be laid before the annual meeting, electing directors, appointing auditors and fixing or authorizing the board to fix their remuneration, and for the transaction of such other business as may properly be brought before the meeting. 11.02 Special Meeting - The board, the chairman of the board or the president --------------- shall have power to call a special meeting of shareholders at any time. 11.03 Place of Meetings - Meetings of shareholders shall be held at the place ----------------- where the head office of the Corporation is located or at such other place or places outside Ontario as the articles may permit or, if the board shall so determine, at some other place in Ontario. 11.04 Notice of Meetings - Notice of the time and place of each meeting of ------------------ shareholders shall be given in the manner provided in Section Thirteen not less than 21 nor more than 50 days before the date of the meeting to each shareholder who at the close of business on the record date for notice is entered in the register of shareholders as the holder of one or more shares carrying the right to vote at the meeting. Notice of a special meeting of shareholders shall state the general nature of the business to be transacted at it. The auditors of the Corporation are entitled to receive all notices and other communications relating to any meeting of shareholders that any shareholder is entitled to receive. 11.05 Proxies and Information Circulars - Concurrently with giving notice of a --------------------------------- meeting of shareholders, management shall send by prepaid mail to each shareholder who is entitled to vote at such meeting at his latest address as shown on the records of the Corporation a form of proxy that complies with the Act for use at the meetings, together with an information circular prepared in accordance with the regulations to The Securities Act, 1978, as from time to time amended. 11.06 Record Date for Notice - The board may fix in advance a time and date as ---------------------- the record date, which record date shall not precede the date of any meeting of shareholders by more than 50 days nor less than 21 days, for the determination of the shareholders entitled to 16 notice of the meeting. If no such record date for notice is fixed by the board, the record date for notice shall be the day next preceding the day on which notice is given. 11.07 Meetings without Notice - A meeting of shareholders may be held without ----------------------- notice at any time and at any place permitted by the Act or the articles (a) if all the shareholders entitled to vote thereat are present in person or represented by proxy or if those not present or represented by proxy waive notice of or otherwise consent to such meeting being held, (b) if the auditors and the directors are present or waive notice of or otherwise consent to such meeting being held; and at such meeting any business may be transacted which the Corporation at a meeting of shareholders may transact. 11.08 Chairman, Secretary and Scrutineers - The president or, in his absence, ----------------------------------- the chairman of the board, if such an officer has been elected or appointed and is present, otherwise a vice-president who is a shareholder of the Corporation shall be chairman of any meeting of shareholders. If no such officer is present within 15 minutes from the time fixed for holding the meeting, the persons present and entitled to vote shall choose one of their number to be chairman. If the secretary of the Corporation is absent, the chairman shall appoint some person, who need not be a shareholder, to act a secretary of the meeting. If desired, one or more scrutineers, who need not be shareholders, may be appointed by a resolution or by the chairman with the consent of the meeting. 11.09 Persons Entitled to be Present - The only persons entitled to attend a ------------------------------ meeting of shareholders shall be those entitled to vote thereat, the auditors of the Corporation and others who, although not entitled to vote, are entitled or required under any provision of the Act or the articles or by-laws to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. 11.10 Quorum - A quorum for the transaction of business at any meeting of ------ shareholders shall be two (2) persons present in person, each being a shareholder entitled to vote thereat or a duly appointed proxy for an absent shareholder so entitled. 11.11 Right to Vote - At any meeting of shareholders every person shall be ------------- entitled to vote who, at the time of the taking of the vote (or, if there is record date for voting, at the close of business on such record date), is entered in the register of shareholders as the 17 holder of one or more shares carrying the right to vote at such meeting, subject to the provisions of the Act as to shares that have been mortgaged or hypothecated. 11.12 Record Date for Voting - The board may fix in advance a time and date as ---------------------- the record date, which record date shall not precede the date of any meeting of shareholders by more than 2 days, excluding non-business days, for the determination of the shareholders entitled to vote at the meeting. If no such record date for voting is fixed by the board the record date for voting shall be the time of the taking of the vote. The record date for voting at a meeting of shareholders shall be specified in the notice calling the meeting or in the information circular relating thereto. 11.13 Proxies - Every shareholder entitled to vote at a meeting of shareholders ------- may appoint a person, who need not be a shareholder, as his proxy to attend and act for him at the meeting in the manner, to the extent and with the power conferred by the instrument appointing him. An instrument appointing a proxy shall be in writing executed by or on behalf of the appointor and shall conform with the requirement of the Act. 11.14 Time for Deposit of Proxies - The board may fix in advance a time, --------------------------- preceding the time of any meeting or adjourned meeting of shareholders by not more than 48 hours, excluding non-business days, before which time instruments appointing proxies must be deposited. An instrument appointing a proxy shall be acted upon only if, prior to the time so fixed and specified in the notice calling the meeting or in the information circular relating thereto, it shall have been deposited with the Corporation or an agent thereof specified in such notice or information circular or if no such time is specified in such notice, unless it has been received by the secretary of the Corporation or by the Chairman of the meeting or any adjournment thereof prior to the time of voting. 11.15 Personal Representative - If the shareholder of record is deceased, his ----------------------- personal representative, upon filing with the secretary of the meeting sufficient proof of his appointment, shall be entitled to exercise the same voting rights at any meeting of shareholders as the shareholder of record would have been entitled to exercise if he were living and for the purpose of the meeting shall be considered a shareholder. If there is more than one personal representative, the provisions of Section 11.16 shall apply. 11.16 Joint Shareholders - If shares are held jointly by two or more persons, ------------------ any one of them present in person or represented by proxy at a meeting of shareholders may, in 18 the absence of the other or others, vote thereon; but if more than one of them shall be present in person or represented by proxy, they shall vote together as one of the shares jointly held by them. 11.17 Votes to Govern - At any meeting of shareholders every question shall, --------------- unless otherwise required by the articles or by-laws or by law, be determined by a majority of the votes cast on the question. In case of an equality of votes either upon a show of hands or upon a poll, the chairman of the meeting shall be entitled to a second or casting vote. 11.18 Show of Hands - Subject to the provisions of the Act, any question at a ------------- meeting of shareholders shall be decided by a show of hands unless a poll thereon is required or demanded as hereinafter provided. Upon a show of hands every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a poll thereon is so required or demanded, a declaration by the chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried and an entry to that effect in the minutes of the meeting shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of the said question, and the result of the vote so taken shall be the decision of the shareholders upon the said question. 11.19 Polls - On any question proposed for consideration at a meeting of ----- shareholders, and whether or not a show of hands has been taken thereon, the chairman may require or any person entitled to vote on the question may demand a poll thereon. A poll so required or demanded shall be taken in such manner as the chairman shall direct. A requirement or demand for a poll may be withdrawn at any time prior to the taking of the poll. Upon a poll each person present shall be entitled, in respect of the shares which he is entitled to vote at the meeting upon the question, to that number of votes provided by the Act or the articles, and the result of the poll so taken shall be the decision of the shareholders upon the said question. 11.20 Adjournment - The chairman at a meeting of shareholders may, with the ----------- consent of the meeting and subject to such conditions as the meeting may decide, adjourn the meeting from time to time and from place to place. 19 11.21 Action in Writing by Shareholders - Any by-law or resolution passed by --------------------------------- the directors may, in lieu of confirmation at a general meeting of shareholders, be confirmed and consented to in writing by all the shareholders entitled to vote at such meeting. Any resolution may be consented to by the signature of all the shareholders who would be entitled to vote at a meeting of shareholders duly called, constituted and held for the purpose of considering such resolution. SECTION TWELVE -------------- AUDITORS REPORTS AND FINANCIAL STATEMENTS ----------------------------------------- 12.01 Information at Annual Meeting - The directors shall lay before each ----------------------------- annual meeting of shareholders: (i) the financial statement required to be filed under The Securities Act, 1978, as from time to time amended and the regulations thereunder and (ii) the report of the auditor to the shareholders. 12.02 Auditor's Report - The report of the auditor to the shareholder shall be ---------------- read at the annual meeting and shall be open to inspection at the meeting by any shareholder. 12.03 Approval of Financial Statements - The financial statements shall be -------------------------------- approved by the board and the approval shall be evidenced by the signature at the front of the balance sheet by two of the directors duly authorized to sign, and the auditor's report shall be attached to and accompany the financial statement. 12.04 Mailing of Financial Statement - At least twenty-one (21) days before the ------------------------------ annual meeting of shareholders, the Corporation shall send by prepaid mail to each shareholder at his latest address as shown on the records of the Corporation a copy of the financial statement and a copy of the auditor's report. 12.05 Record Date for Financial Statements - The board may fix in advance a ------------------------------------ time and date as the record date, which record date shall not precede the annual meeting of shareholders by more than fifty (50) days nor less than twenty-one (21) days, for the determination of the shareholders entitled to receive the financial statement of the Corporation. If no such record date is fixed by the board, the record date shall be at the close of business on the day next preceding the day on which the financial statement is given or sent. 12.06 Mailing of Interim Financial Statements - The Corporation shall send by --------------------------------------- prepaid mail to each shareholder at his latest address as shown on the records of the 20 Corporation a copy of the interim financial statements required to be filed under The Securities Act, 1978, and the regulations thereunder, as from time to time amended, within sixty (60) days of the date to which it is made up. SECTION THIRTEEN ---------------- NOTICES ------- 13.01 Method of Giving Notices - Except as otherwise provided in this by-law, ------------------------ any notice (which term includes any communication or document) to be given, sent, delivered or served pursuant to the Act, the articles, by-laws or otherwise to a shareholder, director, officer, auditor or member of a committee of the board shall be sufficiently given if delivered personally to the person to whom it is to be given or if delivered to his recorded address or if mailed to him at his recorded address by prepaid air or ordinary mail, or if sent to him at his recorded address by any means of prepaid transmitted or recorded communication. A notice so delivered shall be deemed to have been given when deposited in a post office or public letter box; and a notice sent by any means of transmitted or recorded communication shall be deemed to have been given when dispatched or delivered to the appropriate communication company or agency or its representative for dispatch. The secretary may change or cause to be changed the recorded address of any shareholder, director, officer or auditor in accordance with any information believed by him to be reliable. 13.02 Notice of Joint Shareholders - If two or more persons are registered as ---------------------------- joint holders of any share, notice to one of such persons shall be sufficient notice to all of them. Any notice shall be addressed to all of such joint holders and the address to be used for the purpose of Section 13.01 shall be the address appearing on the register of shareholders in respect of such joint holding, or the first address so appearing if there are more than one. 13.03 Computation of Time - In computing the date when notice must be given ------------------- under any provision requiring a specified number of days' notice of any meeting or other event, the date of giving the notice shall be excluded and the date of the meeting or other event shall be included. 13.04 Omissions and Errors - The accidental omission to give any notice to any -------------------- shareholder, director, officer, auditor, or member of a committee of the board, or the non-receipt of any notice by any such person or any error in any notice not affecting the substance 21 thereof shall not invalidate any action taken at any meeting held pursuant to such notice or otherwise founded thereon. 13.05 Persons Entitled by Death or Operation of Law - Every person who, by --------------------------------------------- operations of law, transfer, death of a shareholder or any other means whatsoever, shall become entitled to any share shall be bound by every notice in respect of such share which shall have been duly given to a person from whom he derives his title to such share previously to his name and address being entered on the register of shareholders, whether such notice was given before or after the happening of the event upon which he became so entitled. 13.06 Waiver of Notice - Any shareholder (or his duly appointed proxy), ---------------- director, officer, auditor or member of a committee of the board may waive any notice required to be given to him under any provision of the Act, the articles, the by-laws or otherwise and such waiver, whether given before or after the meeting or other event of which notice is required to be given, shall cure any default in giving such notice. SECTION FOURTEEN ---------------- EFFECTIVE DATE -------------- 14.01 Effective Date - This by-law shall come into force when passed by the -------------- board, save that Sections 5.01, 6.02 and 8.02 shall not come into force until confirmed by the shareholders in accordance with the Act. 14.02 Repeal - By-laws numbered 6, 7, 8, 9 and 10 of the Corporation are ------ repealed from and after confirmation of this by-law by the shareholders in accordance with the Act. By-laws numbered 1, 2, 4, 5, 11 and 12 of the Corporation are repealed from and after the passing of this by-law by the board. Such repeal shall not affect the previous operation of any by-law so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under or the validity of any contract or agreement made pursuant to any such by-law prior to its repeal. All officers and persons acting under any by-law so repealed shall continue to act as if appointed under the provisions of this by-law and all resolutions with continuing effect of the board, shareholders or committees of the board passed under any repealed by-law shall continue to be good and valid except to the extent inconsistent with this by-law and until amended or repealed. 22 CONFIRMED by all the shareholders of the Corporation, as evidenced pursuant to the Act by their respective signatures hereto this day of "R. J. Atkinson" "A. R. Buchanan" - ---------------- ---------------- 23 EXHIBIT 3.2 BY-LAW NO. 18 ------------- A by-law relating generally to the registration of the business and affairs of LUMONICS INC. (the "Corporation") CONTENTS Article One Interpretation Article Two Directors Article Three Meetings of Directors Article Four Committees Article Five Officers Article Six Protection of Directors, Officers and Others Article Seven Meetings of Shareholders Article Eight Securities Article Nine Dividends and Rights Article Ten General Article Eleven Notices Article Twelve Effective Date RESOLVED as a by-law of the Corporation as follows: Article One INTERPRETATION 1.1 Definitions. In this by-law and in all other by-laws of the Corporation, unless the context otherwise requires: (a) "Act" means the Business Corporations Act, 1982, (Ontario) as amended ------------------------------- or re-enacted from time to time and includes the regulations made pursuant thereto; (b) "board" means the board of directors of the Corporation; (c) "by-laws" means all by-laws of the Corporation; (d) "director" means a director of the Corporation; (e) "non-business day" means Saturday, Sunday and any other day that is a holiday as defined in the Interpretation Act (Ontario); and ------------------ (f) "number of directors" means the number of directors provided for in the articles or, where a minimum or maximum number of directors is provided for in the articles, the number of directors determined by a special resolution or by a resolution of the board where it is empowered by special resolution to determine the number of directors or where no such resolution is passed, the number of directors named in the articles. 2 1.2 All terms used in the by-laws of the Corporation which are defined in the Act shall have the meanings given to such terms under the Act. 1.3 In all by-laws of the Corporation, the singular shall include the plural and the plural the singular and words importing gender include the masculine, feminine and neuter genders. 1.4 Headings used in the by-laws are for convenience of reference only and shall not affect the construction or interpretation thereof. 1.5 If any of the provisions contained in this by-law are inconsistent with those contained in the articles or an unanimous shareholder agreement, the provisions contained in the articles or unanimous shareholder agreement, as the case may be, shall prevail. Article Two DIRECTORS 2.1 Quorum. A quorum for the transaction of the business at any meeting of the board shall consist of a majority of the number of directors; provided that if the number of directors is less than three (3), a quorum for the transaction of business at any meeting of the board shall consist of the number of directors then in office. 2.2 Qualification. No person shall be qualified for election as a director if he is less than eighteen (18) years of age; if he is of unsound mind and has been so found by a court in Canada or elsewhere; if he is not an individual; or if he has the status of a bankrupt. A majority of the directors shall be resident Canadians provided that if the number of directors is fewer than three, at least one shall be a resident Canadian. 2.3 Election and Term. The election of directors shall take place at the first meeting of shareholders and at each succeeding annual meeting of shareholders at which an election of directors is required. A director not elected for an expressly stated term shall cease to hold office at the close of the first annual meeting following his election or appointment. If an election of directors is not held at the proper time, the incumbent directors shall continue in office until their successors are elected. 2.4 Removal of Directors. Subject to the provisions of the Act, the shareholders may, by ordinary resolution passed at an annual or special meeting, remove any director or directors from office and the vacancy created by such removal may be filled at the same meeting, remove any director or directors from office and the vacancy created by such removal may be filled at the same meeting, failing which it may be filled by the directors in accordance with Section 2.6 hereof. 3 2.5 Vacation of Office. A director ceases to hold office when he dies; he is removed from office by the shareholders; he ceases to be qualified for election as a director; or if a time is specified in such resignation, at the time so specified, whichever is later; provided that a director named in the articles is not permitted to resign his office unless at the time the resignation is to become effective, a successor is elected or appointed. 2.6 Vacancies. Subject to the provisions of the Act, if a quorum of directors remains in office, they may fill a vacancy among the directors, except a vacancy resulting from: (a) an increase in the number of directors otherwise than by a resolution of the directors where permitted; or (g) a failure to elect the number of directors required to be elected at any meeting of the shareholders. In the absence of a quorum of the board, or if there has been a failure to elect the required number of directors, the directors then in office shall forthwith call a special meeting of shareholders to fill the vacancy. If the directors fail to call such meeting or if there are no directors then in office, any shareholder may call the meeting. 2.7 Remuneration and Expenses. The directors shall be paid such remuneration for their services as the board may from time to time determine and shall also be entitled to be reimbursed for travelling and other expenses properly incurred by them in attending meetings of the board or any committee thereof. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity and receiving remuneration therefor. Article Three MEETINGS OF DIRECTORS 3.1 Canadian Majority. The board shall not transact business at a meeting other than filling a vacancy in the board unless a majority of the directors present or where the number of directors is less than three, one of the directors present, are resident Canadians, except where: (a) a resident Canadian director who is unable to be present approves in writing or by telephone or other communications facilities the business transacted at the meeting; and (a) a majority of resident Canadian directors would have been present had that director been present at the meeting. 3.2 Meetings by Telephone. If all the directors present at or participating in the meeting consent, a meeting of the board or of a committee of the board may be held by means of such telephone, electronic or other communications facilities as permit all persons participating in the meeting to communicate with each other simultaneously 4 and instantaneously, and a director participating in such a meeting by such means is deemed to be present at that meeting. Any such consent shall be effective whether given before or after the meeting to which it relates and may be given with respect to all meetings of the board and of committees of the board held while a director holds office. 3.3 Place of Meetings. Meetings of the board may be held at any place in or outside Ontario. In any financial year of the Corporation, a majority of the meetings of the board need not be held within Canada. 3.4 Calling of Meetings. Meetings of the board may be convened at any time by the president or any director upon notice given to all directors in accordance with Section 3.5. 3.5 Notice of Meeting. Notice of the time and the place of each meeting of the board shall be given in the manner provided in Section 11.1 to each director: (a) not less than forty-eight (48) hours before the time when the meeting is to be held, if the notice is mailed, or (b) not less than twenty-four (24) hours before the time the meeting is to be held if the notice is given personally or is delivered or is sent by any means of transmitted or recorded communication. 3.6 Waiver of Notice. A director may in any manner or at any time waive notice of or otherwise consent to a meeting of the board. Attendance of a director at a meeting of the board shall constitute a waiver of notice of that meeting except where a director attends for the express purpose of objecting to the transaction of any business on the grounds that the meeting has not been lawfully called. 3.7 First Meeting of a New Board. Provided a quorum of directors is present, each newly elected board may, without notice, hold its first meeting immediately following the meeting of shareholders at which such board is elected. 3.8 Adjourned Meeting. Notice of an adjourned meeting of the board is not required if the time and place of the adjourned meeting is announced at the original meeting. 3.9 Regular Meetings. The board may appoint a day or days in any month or months for regular meetings of the board at a place and hour to be named. A copy of any resolution of the board fixing the place and time of such regular meeting shall be sent to each director forthwith after being passed, but no other notice shall be required for any such regular meeting except where the Act requires the purpose thereof or the business to be transacted thereat to be specified. 5 3.10 Chairman. The chairman of any meeting of the board shall be the first mentioned of such of the following officers as have been appointed and who is a director and is present at the meeting; chairman of the board, managing director, president or a vice-president (in order of seniority). If no such officer is present, the directors present shall choose one of their number to be chairman. 3.11 Votes to Govern. At all meetings of the board, every question shall be decided by a majority of the votes cast on the question. In case of an equality of votes, the chairman of the meeting shall not be entitled to a second or casting vote. 3.12 One Director Meeting. Where the board consists of only one director, that director may constitute a meeting. 3.13 Deemed Consent of Director Present at Meeting. A director who is present at a meeting of directors or committee of directors is deemed to have consented to any resolution passed or action taken thereat unless he: (a) requests that his dissent be or his dissent is entered in the minutes of the meeting; (b) sends his written dissent to the secretary of the meeting before the meeting is terminated; or (c) sends his dissent by registered mail or delivers it to the registered office of the Corporation immediately after the meeting is terminated. A director who votes for or consents to a resolution is not entitled to dissent with respect to such resolution. 3.14 Deemed Consent of Director Absent from Meeting. A director who is not present at a meeting at which a resolution is passed or action taken is deemed to have consented thereto unless, within seven (7) days after he becomes aware of the resolution, he: (a) causes his dissent to be placed with the minutes of the meeting; or (b) sends his dissent by registered mail or delivers it to the registered office of the Corporation. Section Four COMMITTEES 4.1 Committee of Directors. The board may appoint from their number one or more committees of the board, however designated, and delegate to such committee of the board, however designated, and delegate to such committee any of the powers of the board except those which, under the Act, a committee of the board has no authority to exercise. A majority of the members of any such committee shall be resident Canadians. 6 4.2 Audit Committee. The board may constitute an audit committee composed of not fewer than three directors, a majority of whom shall not be officers or employees of the Corporation or any of its affiliates, and who shall hold office until the next annual meeting of the shareholders. The audit committee shall have the powers and duties provided in the Act. 4.3 Transaction of Business. The powers of a committee of the board may be exercised by a meeting at which a quorum is present or by resolution in writing signed by all members of such committee who would have been entitled to vote on that resolution at a meeting of the committee. Meetings of such committee may be held at any place within or outside Ontario. 4.4 Procedure. Unless otherwise determined by the board, each committee shall have power to fix its quorum at not less than a majority of its members, to elect its chairman and to regulate its procedure. To the extent that the board or the committee does not establish rules to regulate the procedure of the committee, the provisions of this by-law applicable to meetings of the board shall apply mutatis mutandis. Article Five OFFICERS 5.1 Appointment. The board may designate the officers of the Corporation and from time to time appoint a chairman of the board, managing director (provided he is resident Canadian), president, one or more vice-presidents (to which title may be added words indicating seniority or function, a secretary, a treasurer and such other officers as the board may determine, including one or more assistants to any of the officers so appointed. The board may specify the duties of and, in accordance with this by-law and subject to the provisions of the Act, delegate to such officers powers to manage the business and affairs of the Corporation. One person may hold more than one office and, except for the chairman of the board and the managing director, an officer need not be a director. 5.2 Chairman of the Board. If appointed, the board may assign to the chairman of the board any of the powers and duties that are by any provisions of this by-law assigned to the managing director or to the president and subject to the Act, such other powers and duties as the board may specify. The chairman of the board shall, when present, preside at all meetings of the board and shareholders. Subject to Sections 3.10 and 7.8, during the absence or disability of the chairman of the board, his duties shall be performed and his powers exercised by the first mentioned of the following officers then in office: the managing director, the president, or a vice-president (in order of priority). 7 5.3 Managing Director. If appointed, the managing director shall be the chief executive officer and, subject to the authority of the board, shall have general supervision of the business and affairs of the Corporation; and he shall have, subject to the provisions of the Act, such other powers and duties as the board may specify. During the absence or disability of the president, or if no president has been appointed, the managing director shall also have the powers and duties of that office. 5.4 President. If appointed, the president shall have general supervision of the business and affairs of the Corporation, subject to the direction and authority of the board, the chairman of the board and the managing director; and he shall have such other powers and duties as the board may specify. During the absence or disability of the managing director, or if no managing director has been appointed, the president shall also have the powers and duties of that office. In the absence of the appointment of the board as such, the president shall be the chief executive officer of the Corporation. Otherwise, the president shall be the chief operating officer of the Corporation. 5.5 Vice-President. The vice-president, or if more than one, the vice-presidents, in order of seniority as designated by the board, shall be vested with all the powers and perform all the duties of the president in his absence, inability or refusal to act except that he shall not preside at any meeting of the directors unless he is appointed to do so by the board. A vice-president shall have such powers and duties as the board or the chief executive officer may specify. 5.6 Secretary. The secretary shall attend and be the secretary of all meetings of the board, shareholders and committees of the board and shall enter or cause to be entered in records kept for that purpose minutes of all proceedings thereat; he shall give or cause to be given, as and when instructed, all notices to shareholders, directors, officers and auditors; he shall be the custodian of all books, papers, records, documents and instruments belonging to the Corporation, except when some other officer or agent has been appointed for that purpose; and he shall have such other powers and duties as the board or the chief executive officer may specify. 5.7 Treasurer. The treasurer shall keep or cause to be kept proper accounting records in compliance with the Act and shall be responsible for the deposit of money, the safekeeping of securities and the disbursement of the funds of the Corporation; he shall render to the board whenever required an account of all his transactions as treasurer and of the financial position of the Corporation; and he shall have such other powers and duties as the board or the chief executive officer may specify. 8 5.8 Powers and Duties of Other Officers. The powers and duties of all other officers shall be such as the terms of their engagement call for or as the board or the chief executive officer may specify. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant, unless the board or the chief executive officers otherwise directs. 5.9 Variation of Powers and Duties. Subject to the provisions of the Act, the board may from time to time vary, add to or limit the powers and duties of any officer. 5.10 Term of Office. The board, in its discretion, may remove any officer of the Corporation, without prejudice to such officer's rights under any employment contract. Otherwise, each officer appointed by the board shall hold office until his successor is appointed, except that the term of office of the chairman of the board or managing director shall expire when he ceases to be a director. 5.11 Agents and Attorneys. The board shall have the power from time to time to appoint agents or attorneys for the Corporation in or outside Ontario with such powers of management (including the powers to sub-delegate) as may be thought fit. 5.12 Fidelity Bonds. The board may require such officers, employees and agents of the Corporation as the board deems advisable to furnish bonds for the faithful discharge of their duties, in such form and with such surety as the board may, from time to time, prescribe. Article Six PROTECTION OF DIRECTORS, OFFICERS AND OTHERS 6.1 Limitation of Liability. No director and officer shall be liable for the acts, receipts, neglects or defaults of any other director, officer, employee or agent or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired for or on behalf of the Corporation, or for the insufficiency or deficiency of any security in or upon which any of the moneys of the Corporation shall be invested, or for any loss or damage arising from the bankruptcy, insolvency, or tortious acts of any person with whom any of the moneys, securities or effects of the Corporation shall be deposited, or for any loss occasioned by any error of judgment or oversight on his part, or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto, unless the same are occasioned by his own wilful neglect or default; provided that nothing herein shall relieve any director or officer from the duty to act in accordance with the Act or from liability for any breach thereof. 9 6.2 Indemnity. The Corporation shall indemnify and save harmless every director or officer, every former director or officer, and every person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor and his heirs and legal representatives, from and against all costs, charges, and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation or such body corporate; if (a) he acted honestly in good faith with a view to the best interests of the Corporation; and (j) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. 6.3 Insurance. Subject to the limitations contained in the Act, the Corporation may purchase and maintain such insurance for the benefit of any person referred to in Section 6.2 hereof as the board may, from time to time, determine. Article Seven MEETINGS OF SHAREHOLDERS 7.1 Annual Meetings. The annual meeting of shareholders shall be held at such time in each year and, subject to Section 7.3, at such place as the board, the chairman of the board, the managing director or the president may from time to time determine, for the purpose of considering the financial statements and reports required by the Act to be placed before the annual meeting, electing directors, appointing auditors and fixing or authorizing the board to fix their remuneration and for the transaction of such other business as may properly be brought before the meeting. 7.2 Special Meetings. The board, the chairman of the board, the managing director or the president shall have power to call a special meeting of shareholders at any time. 7.3 Place of Meeting. Meetings of shareholders shall be held at the place where the registered office of the Corporation is situate or, if the board shall so determine, at some other place within or outside of Ontario. 7.4 Notice of Meetings. Notice of the time and place of each meeting of shareholders (and of each meeting of shareholders adjourned for an aggregate of thirty (30) days or more) shall be given in the manner provided in Section 11.1 not less than ten (10) days and not more than fifty (50) days before the date of the meeting, to each 10 director, to the auditor and to each shareholder entitled to vote at the meeting. Notice of a meeting of shareholders called for any purpose other than consideration of the financial statements and auditor's report, election of directors and reappointment of the incumbent auditor shall state the nature of such business in sufficient detail to permit a shareholder to form a reasoned judgment thereon and shall state the text of any special resolution or by-law to be submitted to the meeting. A shareholder and any other person entitled to attend a meeting of shareholders may in any manner and at any time waive notice of or otherwise consent to a meeting of shareholders. Attendance of any such person at a meeting of shareholders shall constitute a waiver of notice of the meeting except where he attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. 7.5 List of Shareholders Entitled to Notice. For every meeting of shareholders, the Corporation shall prepare a list of shareholders entitled to receive notice of the meeting, arranged in alphabetical order and showing the number of shares held by each shareholder. If a record date for the meeting is fixed pursuant to Section 7.6, the shareholders listed shall be those registered at the close of business on such record date and such list shall be prepared not later than ten (10) days after such record date. If no record date is fixed, the list shall be prepared at the close of business on the day immediately preceding the day on which notice of the meeting is given or, where no such notice is given, the day on which the meeting is held and shall list all shareholders registered at such time. The list shall be available for examination by any shareholder: (a) during usual business hours at the registered office of the Corporation or at the place where the securities register is kept; and (k) at the place where the meeting is held. 7.6 Record Date for Notice. The board may fix in advance a date, preceding the date of any meeting of shareholders by not more than fifty (50) days and not less than twenty-one (21) days, for the determination of the shareholders entitled to notice of the meeting; and notice of any such record date shall be given not less than seven (7) days before such record date, by newspaper advertisement in the manner provided in the Act. If no record date is so fixed, the record date for the determination of the shareholders entitled to notice of the meeting shall be the close of business on the day immediately preceding the day on which the notice is given. 7.7 Meetings Without Notice. A meeting of shareholders may be held without notice at any time and place permitted by the Act: (a) if all the shareholders entitled to vote thereat are present in person or represented by proxy or if those not present or represented by proxy waive notice of or otherwise consent to such meeting being held; and 11 (b) if the auditors and the directors are present or waive notice of or otherwise consent to such meeting being held. At such a meeting any business may be transacted which the Corporation at a meeting of shareholders may transact. 7.8 Chairman, Secretary and Scrutineers. The chairman of any meeting of shareholders shall be the first mentioned of such of the following officers as have been appointed and who is present at the meeting: chairman of the board, managing director, president, or vice- president who is a shareholder. If no such officer is present within fifteen (15) minutes from the time fixed for holding the meeting, the persons present and entitled to vote shall choose one of their number to be chairman. If the secretary of the Corporation is absent, the chairman shall appoint some person, who need not be a shareholder, to act as secretary of the meeting. If desired, one or more scrutineers, who need not be shareholders, may be appointed by a resolution or by the chairman with the consent of the meeting. 7.9 Persons Entitled to be Present. The only persons entitled to be present at a meeting of shareholders shall be those entitled to vote thereat, the directors and auditor of the Corporation and others who, although not entitled to vote, are entitled or required under any provision of the Act, the articles or by-laws to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. 7.10 Quorum. A quorum for the transaction of business at any meeting of shareholders shall be one (1) shareholder present in person or represented by proxy. 7.11 Right to Vote. Subject to the provisions of the Act as to authorized representatives of any other body corporate, at any meeting of shareholders in respect of which the Corporation has prepared the list referred to in Section 7.5, every person who is named in such list shall be entitled to vote the voting shares shown thereon opposite his name except to the extent that such person has transferred any of his shares after the date on which the list is prepared or, where a record date has been fixed, after the record date and the transferee, upon producing properly endorsed certificates evidencing such shares or otherwise establishing that he owns such shares, demands at any time prior to the meeting that his name be included to vote the transferred shares at the meeting. In the absence of a list prepared as aforesaid in respect of a meeting of shareholders, every person shall be entitled to vote at the meeting who, at the time, is entered in the securities register as the holder of one or more shares carrying the right to vote at such meeting. 7.12 Proxies. Every shareholder entitled to vote at a meeting of shareholders may appoint a proxy holder, or one or more alternate proxy holders, who need not be shareholders, to attend and act at the meeting in the manner and to 12 the extent authorized and with the authority conferred by the proxy. A proxy shall be in writing executed by the shareholder or his attorney and shall conform with the requirements of the Act. 7.13 Time for Deposit of Proxies. The board may specify in a notice calling a meeting of shareholders a time, preceding the time of such meeting by not more than forty-eight (48) hours exclusive of non-business days, before which time proxies to be used at such meeting must be deposited. A proxy shall be acted upon only if, prior to the time so specified, it shall have been deposited with the Corporation or an agent thereof specified in such notice or, if no such time is specified in such notice, unless it has been received by the secretary of the Corporation or by the chairman of the meeting or any adjournment thereof prior to the time of voting. 7.14 Joint Shareholders. If two (2) or more persons hold shares jointly, any one of them present in person or represented by proxy at a meeting of shareholders may, in the absence of the other or others, vote the shares; but if two (2) or more of those persons are present in person or represented by proxy to vote, they shall vote as one the shares jointly held by them. 7.15 Votes to Govern. At any meeting of shareholders every question shall, unless otherwise required by law, be determined by a majority of the votes cast on the question. In the case of an equality of votes either upon a show of hands or upon a poll, the chairman of the meeting shall not be entitled to a second or casting vote. 7.16 Show of Hands. Subject to the provisions of the Act, any question at a meeting of shareholders shall be decided by a show of hands unless a ballot thereon is required or demanded as hereinafter provided. Upon a show of hands, every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the chairman of the meeting as to the result of the vote upon the question and an entry to that effect in the minutes of the meeting shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of such question, and the result of the vote so taken shall be the decision of the shareholders upon such question. 7.17 Ballots. On any question proposed for consideration at a meeting of shareholders, and whether or not a show of hands has been taken thereon, any shareholder or proxy holder entitled to vote at the meeting may demand a ballot. A ballot so demanded shall be taken in such manner as the chairman shall direct. A demand for a ballot may be withdrawn at any time prior to the taking of the ballot. The result of the ballot so taken shall be the decision of the shareholders upon the question. 13 7.18 Resolution in Writing. A resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of the shareholders unless a written statement with respect to the subject matter of the resolution is submitted by a director or the auditor in accordance with the Act. Article Eight SECURITIES 8.1 Registration of Transfer. Subject to the provisions of the Act, no transfer of shares shall be registered in a securities register except upon presentation of the certificate representing such shares with a transfer endorsed thereon or delivered therewith duly executed by the registered holder or by his attorney or successor duly appointed, together with such reasonable assurance or evidence of signature, identification and authority to transfer as the board may from time to time prescribe, upon payment of all applicable taxes and any fees prescribed by the board, upon compliance with such restrictions on transfer as are authorized by the articles and upon satisfaction of any lien referred to in Section 8.4. 8.2 Transfer Agents and Registrars. The board may from time to time appoint a registrar to maintain the securities register and a transfer agent to maintain the register of transfers and may also appoint one or more branch registrars to maintain branch securities registers and one or more branch transfer agents to maintain branch registers of transfers, but one person may be appointed both registrar and transfer agent. The board may at any time terminate any such appointment. 8.3 Lien on Shares. The Corporation has a lien on any share or shares registered in the name of a shareholder or his legal representative for any debt of that shareholder to the Corporation. 8.4 Enforcement of Lien. The lien referred to in Section 8.3 may be enforced by any means permitted by law and: (a) where the share or shares are redeemable pursuant to the articles of the Corporation, by redeeming such share or shares and applying the redemption price to the debt; (b) subject to the Act, by purchasing the share or shares for cancellation for a price equal to the book value of such share or shares and applying the proceeds to the debt; (c) by selling the share or shares to any third party whether or not such party is at arm's length to the Corporation, and including, without limitation, any officer or director of the Corporation, for the best price which the directors consider to be obtainable for such share or shares; or 14 (d) by refusing to register a transfer of such share or shares until the debt is paid. 8.5 Security Certificates. Every holder of securities of the Corporation shall be entitled, at his option, to a security certificate, or to a non-transferable written acknowledgment of his right to obtain a security certificate, stating the number and designation, class or series of securities held by him as shown on the securities register. Security certificates and acknowledgments of a securities holder's rights to a security certificate, respectively, shall be in such form as the board may from time to time approve. Any security certificate shall be signed in accordance with Section 10.1. A security certificate shall be signed manually by at least one director or officer of the Corporation or by or on behalf of the transfer agent and/or registrar. Any additional signatures required may be printed or otherwise mechanically reproduced. A security certificate executed as aforesaid shall be valid notwithstanding that one of the directors or officers whose facsimile signature appears thereon no longer holds office at the date of issue of the certificate. 8.6 Replacement of Security Certificates. The board, any officer or any agent designated by the board may in its or his discretion direct the issue of a new security certificate in lieu of and upon cancellation of a certificate that has been mutilated. In the case of a security certificate claimed to have been lost, destroyed or wrongfully taken, the board shall issue a substitute security certificate if so requested before the Corporation has notice that the security has been acquired by a bona fide purchaser. The issuance of the substitute security certificate shall be on such reasonable terms as to indemnity, reimbursement of expenses and evidence of loss and of title as the board or the officer or the agent designated by the board responsible for such issuance may from time to time prescribe, whether generally or in any particular case. 8.7 Joint Shareholders. If two (2) or more persons are registered as joint holders of any security, the Corporation shall not be bound to issue more than one certificate in respect thereof, and delivery of such certificate to one of such persons shall be sufficient delivery to all of them. Any one of such persons may give effectual receipts for the certificate issued in respect thereof or for any dividend, bonus, return or capital or other money payable or warrant issuable in respect of such security. 8.8 Deceased Security Holders. In the event of the death of a holder, or of one of the joint holders, of any security, the Corporation shall not be required to make any entry in the securities register in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Corporation and its transfer agents. 15 Article Nine DIVIDENDS AND RIGHTS 9.1 Dividends. Subject to the provisions of the Act, the board may from time to time by resolution declare and the Corporation may pay dividends to the shareholders according to their respective rights and interests in the Corporation. Dividends may be paid in money or property, subject to the restrictions on the declaration and payment thereof under the Act, or by issuing fully paid shares of the Corporation or options or rights to acquire fully paid shares of the Corporation. 9.2 Dividend Cheques. A dividend payable in cash shall be paid by cheque drawn on the Corporation's bankers or one of them to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at his recorded address, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all such joint holders and mailed to them at their recorded address. The mailing of such cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Corporation is required to and does withhold. 9.3 Non-Receptor Cheques. In the event of a non-receipt of any dividend cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement cheque for a like amount on such terms as indemnity, reimbursement of expenses and evidence of non-receipt and of title as the board may from time to time prescribe, whether generally or in any particular case. 9.4 Record Date for Dividends and Rights. The board may fix in advance a date as a record date for the determination of the persons entitled to receive payment of dividends and to subscribe for securities of the Corporation, provided that such record date shall not precede by more than fifty (50) days the particular action to be taken. Notice of any such record date shall be given not less than seven (7) days before such record date, by newspaper advertisement in the manner provided in the Act, unless notice of the record date is waived by every holder of a share of the class or series affected whose name is set out in the securities register at the close of business on the day the directors fix the record date. If the shares of the Corporation are listed for trading on one or more stock exchanges in Canada, notice of such record date shall also be sent to such stock exchanges. Where no record date is fixed in advance as aforesaid, the record date for the determination of the persons entitled to receive payment of any dividend or to exercise the right to subscribe for securities of the Corporation shall be at the close of business on the day on which the resolution relating to such dividend or right to subscribe is passed by the board. 16 9.5 Unclaimed Dividends. Any dividend unclaimed after a period of six (6) years from the date on which it has been declared to be payable shall be forfeited and shall revert to the Corporation. Article Ten GENERAL 10.1 Execution of Instruments. Contracts, documents and other instruments in writing may be signed on behalf of the Corporation by such person or persons as the board may from time to time by resolution designate. In the absence of an express designation as to the persons authorized to sign either contracts, documents or instruments in writing generally or to sign specific contracts, documents or instruments in writing, any one of the directors or officers of the Corporation may sign contracts, documents or instruments in writing on behalf of the Corporation. The corporate seal, if any, of the Corporation may be affixed to any contract, obligation or instrument in writing requiring the corporate seal of the Corporation by any person authorized to sign the same on behalf of the Corporation. The phrase "contracts, documents and other instruments in writing" as used in this provision shall include deeds, mortgages, hypothecs, charges, conveyances, transfers and assignments of property, real or personal, immovable or movable, agreements, releases, receipts and discharges for the payment of money or other obligations, conveyances, transfers and assignments of securities, all paper writings, all cheques, drafts or orders for the payment of money and all notes, acceptances and bills of exchange. 10.2 Voting rights in Other Corporations. All securities carrying voting rights of any other corporation held from time to time by the Corporation may be voted at any and all meetings of shareholders, bond holders, debenture holders or holders of other securities (as the case may be) of such other corporation and in such manner as the board may from time to time determine. Any person or persons authorized to sign on behalf of the Corporation may also from time to time execute and deliver for and on behalf of the Corporation proxies and/or arrange for the issuance of voting certificates and/or other evidence of the right to vote in such names as they may determine. 10.3 Financial Year. The first financial year of the Corporation shall terminate on a date determined or to be determined by the directors of the Corporation and thereafter on the anniversary date thereof in each year, until changed by resolution of the directors of the Corporation. Article Eleven NOTICES 11.1. Method of Giving Notices. Any notice (which term includes any communication or document) to be sent pursuant to the Act, the 17 articles, the by-laws or otherwise to a shareholder, director, officer or to the auditor shall be sufficiently given if delivered personally to the person to whom it is to be given or if delivered to his recorded address or if mailed to him at his recorded address by prepaid ordinary mail or if sent to him at his recorded address by any means of prepaid transmitted or recorded communication. A notice so delivered shall be deemed to have been sent when it is delivered personally or to the recorded address as aforesaid; a notice so mailed shall be deemed to have been given when deposited in a post office or public letter box and shall be deemed to have been received on the fifth business day after so depositing; and a notice so sent by any means of transmitted or recorded communications shall be deemed to have been sent when dispatched by the Corporation if it uses its own facilities and otherwise when delivered to the appropriate communication company or agency or its representative for dispatch. The secretary may change or cause to be changed the recorded address of any shareholder, director, officer or auditor in accordance with any information believed by him to be reliable. 11.2 Notice to Joint Shareholders If two (2) or more persons are registered as joint holders of any share, any notice may be addressed to all of such joint holders but notice addressed to one or such persons shall be sufficient notice to all of them. 11.3 Computation of Time. In computing the date when notice must be given under any provisions requiring a specified number of days' notice of any meeting or other event, both the date of sending the notice and the date of the meeting or other event shall be excluded. 11.4 Undelivered Notices. If any notice sent to a shareholder pursuant to Section 11.1 is returned on three (3) consecutive occasions because the shareholder cannot be found, the Corporation shall not be required to give any further notice to such shareholder until he informs the Corporation in writing of his new address. 11.5 Omissions and Errors. The accidental omission to send any notice to any shareholder, director, officer or to the auditor or the non-receipt of any notice by any such person or any error in any notice not affecting the substance thereof shall not invalidate any action taken at any meeting held pursuant to such notice or otherwise founded thereon. 11.6 Persons Entitled by Operation of Law. Every person who, by operation of law, transfer or any other means whatsoever, shall become entitled to any share, shall be bound by every notice in respect of such share which shall have been duly sent to the shareholder from whom he derives his title to such share prior to his name and address being entered on the securities register (whether such notice was given before or after the happening of the event upon which he became so entitled). 18 11.7 Deceased Shareholders. Any notice duly sent to any shareholder shall be deemed to have been duly served in respect of the shares held by the shareholder (whether held solely or with other persons), notwithstanding that such shareholder is then deceased and whether or not the Corporation has notice of his death, until some other person is entered in his stead in the securities register of the Corporation as the holder or as one of the holders thereof and such service shall for all purposes be deemed a sufficient service of notice to his heirs, executors or administrators and all persons, if any, interested with him in such shares. 11.8 Waiver of Notice. Any shareholder (or his duly appointed proxy holder) director, officer or auditor may at any time waive any notice, or waive or abridge the time for any notice, required to be given to him under any of the provisions of the Act, the regulations thereunder, the articles, the by-laws or otherwise and such waiver or abridgement shall cure any default in the giving or in the time of such notice, as the case may be. Any such waiver or abridgement shall be in writing except a waiver of notice of a meeting of shareholders or of the board which may be given in any manner. 11.9 Execution of Notices. The signature of any director or officer of the Corporation to any notice may be written, stamped, typewritten or printed or partly written, stamped, typewritten or printed. 11.10 Proof of Service. A certificate of any officer or director of the Corporation in office at the time of making of the certificate or of an agent of the Corporation as to facts in relation to the sending of any notice to any shareholder, director, officer or auditor or publication of any notice shall be conclusive evidence thereof and shall be binding on every shareholder, director, officer or auditor of the Corporation, as the case may be. Article Twelve EFFECTIVE DATE 12.1 Effective Date. Upon this by-law coming into force, By-Law No. 3, 15, 16 and 17A of the Corporation is repealed, provided that such by-law shall not affect the previous operation of such by-law so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under the validity of any contract or agreement made pursuant to any such by-law prior to its repeal. All officers and persons acting under any by-law so repealed shall continue to act as if appointed under the provisions of this by-law and all resolutions of the shareholders or board with continuing effect passed under such repealed by-laws shall continue good and valid except to the extent inconsistent with this by-law and until amended or repealed. 19 BE IT RESOLVED THAT By-Law No.18 be and the same is hereby confirmed without amendment. The foregoing resolution is hereby signed by the sole shareholder of the Corporation, this 17th day of August, 1989. SHI ACQUISITION CORP. Per: "Y. Takashi" ---------------------- Y. Takashi EXHIBIT 3.2 BY-LAW AUTHORIZING BORROWING AND PLEDGING LUMONICS INC. - -------------------------------------------------------------------------------- (Name of Company) Incorporated under The Business Corporations Act, 1982 (Ontario) ----------------------------------- (Name of Act) BE IT AND IT IS HEREBY ENACTED as a By-law of the Company as follows: BY-LAW NO. 19 1. That the Directors of the Company may from time to time: (a) borrow money upon the credit of the Company by obtaining loans or advances or by way of overdraft or otherwise; (b) issue, sell or pledge securities of the Company including bonds, debentures, debenture stock, for such sums on such terms and at such prices as they may deem expedient; (c) assign, transfer, convey, hypothecate, mortgage, pledge, charge or give security in any manner upon all or any of the real or personal, moveable or immoveable property, rights, powers, choses in action, or other assets, present or future, of the Company to secure any such securities or other securities of the Company or any money borrowed or to be borrowed or any obligations or liabilities as aforesaid or otherwise of the Company heretofore, now or hereafter made or incurred directly or indirectly or otherwise; and (d) without in any way limiting the powers herein conferred upon the Directors, give security or promises to give security, agreements, documents and instruments in any manner or form under the Bank Act or otherwise to secure any money borrowed or to be borrowed or any obligations or liabilities as aforesaid or otherwise of the Company heretofore, now or hereafter made or incurred directly or indirectly or otherwise. 2. That any or all of the foregoing powers may from time to time be delegated by the Directors to any one or more of the directors or officers of the Company. 1 3. That this By-law shall remain in force and be binding upon the Company as regards any person acting on the faith thereof until such person has received written notification from the Company that this By-law has been repealed or replaced. ENACTED this 10th day of April 1990. CERTIFICATE I hereby certify that the foregoing is a true copy of a By-law of LUMONICS INC. ---------------------------------------------------------------------- (Name of Company) (hereinafter called the "Company") duly enacted by the Directors of the Company; that the said By-law was duly confirmed and sanctioned by the Shareholders in the manner required by law; and that the said By-law is now in full force and effect. WITNESS my hand and seal of the Company this 10th day of April 1990. {Corporate Seal} ___________________________ Secretary Charles J. Gardner 2 To THE TORONTO-DOMINION BANK IN CONSIDERATION of The Toronto-Dominion Bank (hereinafter called the "Bank") dealing with or continuing to deal with the undersigned (hereinafter called the "Customer") in the operation of the account of the Customer in the course of its banking business the Customer agrees as follows: Waiver of Protest 1. The Customer hereby waives presentment, protest and notice of dishonour on all bills of exchange, promissory notes, cheques, orders for payment of money, securities, notes, and other instruments all of which are hereinafter called "instruments" which have been or may be handed to the Bank, either for discount, deposit, collection or acceptance on account of the Customer or which may come into the possession of the Bank in connection with any business and the Customer shall be liable to the Bank in respect thereof as if the same were presented protested and notice of dishonor given in the usual way. Use of Agents 2. That any and all instruments which the Bank does now or shall hereafter hold on account of the Customer, the Bank may send for collection to any branch of the Bank or to any other bank, company, person or persons that the Bank may think fit, at sole risk of the Customer, and such other branch or bank, company, person or persons shall be deemed the agents of the Customer and the Bank will not be responsible or liable for the same until the cash therefor shall have been actually received by the Bank at its branch where the Customer's account is maintained. In case of any and all instruments discounted with or hypothecated to the Bank by the Customer or forwarded by the Bank for collection for or in respect of which an instrument or other negotiable paper or evidence of payment is remitted to the Bank in settlement, the Customer shall be liable to the Bank on such remittance as if actually endorsed by the Customer and if same is not paid according to the tenor thereof the Bank shall be entitled to charge the same to the account of the Customer. Assignment of 3. The Customer hereby transfers and assigns to the Bank all Claim the claims of the Customer against the drawees of all and any instruments discounted or deposited with the Bank and in the event of any such instruments being refused acceptance, the Customer hereby authorizes the Bank to take in the name of the Customer at any time any proceedings for collection of the amount of such unaccepted instruments as the Bank may see fit. Charges to 4. (a) The Bank may charge against the account of the Account Customer at or after maturity all instruments accepted or signed by the Customer and made payable at the Bank, and also after dishonor all unpaid instruments made, accepted or endorsed by the Customer, together with all charges and costs properly incurred in connection therewith which now are or may hereafter be the property of the Bank. The Customer agrees that no charging of unpaid instruments as provided herein, shall be deemed to amount to payment of such instruments, and that notwithstanding such charging all the rights and remedies that the Bank may have against all parties thereto shall be preserved. Should any instruments received by the Bank for the account of the Customer be lost or stolen or otherwise disappear from any cause whatsoever other than negligence on the part of the Bank the Bank may charge the same to the account of the Customer. (b) The endorsement of the Customer of any instruments shall be deemed and held as guaranteeing the authenticity of all endorsements thereon and guaranteeing to supply any necessary missing endorsements, even if such guarantees be not expressed. By virtue of such guarantee the Customer shall return to the Bank the amount of such instruments so guaranteed, if owing to the nature of any endorsements or its being forged or unauthorized, it would appear that such payment was improperly made, or if any necessary missing endorsements are not supplied within a reasonable time. (c) The Customer agrees to reimburse the Bank the amount required to pay the Bank's costs properly incurred to recover any indebtedness of the Customer to the Bank, and such costs may in the Bank's discretion if not otherwise paid, be charged by the Bank against the account of the Customer. (d) The Bank may make a service charge at the usual rate for the operation of the said account and may debit the account of the Customer from time to time with the amount of such charge. The rate of such charge may be ascertained upon inquiry by the Customer. (e) The Customer hereby promises to pay on demand any overdraft which the Bank in its absolute discretion may permit against the account of the Customer together with interest thereon at the interest rate charged by the Bank from time to time for overdrafts. 3 Confirmation of 5. (a) Upon receipt from the Bank from time to time of Balance statements of the Customer's account, together with instruments and vouchers for amounts charged to the said account as appearing in the said statements, the Customer will forthwith examine the said instruments, vouchers and statements and immediately notify the Bank in writing of any errors in or objections to the said instruments, vouchers and statements, and if the Customer has not so notified the Bank of any such errors or objections at the expiration of thirty days from the date of delivery of said instruments, vouchers and statements to the Customer, or at the expiration of thirty days from the date of mailing thereof if the Customer has instructed the Bank to mail the instruments, vouchers and statements, the Customer agrees that the balance shown in the said statements shall be accepted as correct all the said instruments and vouchers acknowledged as authentic and the Bank released from all claims by the Customer in respect of any and every item in the said statements and to accept the Bank's records as conclusive proof of the correctness and authenticity of all such statements and the items so recorded therein and of the date of the aforesaid delivery or mailing. (b) Nothing herein contained shall preclude the Customer from later objecting to any unauthorized or forged endorsement of the payee provided notice in writing is given to the bank forthwith after the Customer has acquired knowledge thereof. Authority to 6.(a) (i) The Bank is hereby requested and authorized to mail statements, forward by ordinary mail, not insured, monthly statements, etc. instruments and vouchers of the account of the Customer. (ii) The Bank is hereby requested and authorized to forward by ordinary mail, not insured, any instruments that are dishonoured upon presentation and returned unpaid. (if paragraph 6 (b) Should any such statements, instruments and vouchers in not required - the mail be lost, stolen or destroyed, the Customer hereby delete. If part agrees to hold the Bank free from all liability and to only required indemnify and save the Bank harmless from any loss, claim or delete either demand made upon the Bank and to accept the records of the 6 (a)(i) or (ii)) Bank as conclusive proof of the correctness and authenticity of the items or entries so recorded therein. THIS AGREEMENT shall apply to all accounts operated by the Customer at any of the branches or offices of the Bank, except where the Bank is notified in writing to the contrary. Dated at Ottawa this 10 day of April 1990. LUMONICS INC. WITNESS: "Patricia Riddell" Per: "J. Hugh MacDiarmid" (SEAL) ------------------ --------------------- J. Hugh MacDiarmid - President "Patricia Riddell" Per: "Colin R. Avery" (SEAL) ------------------ -------------------- Colin R. Avery - Treasurer Per: (SEAL) ______________________ -------------------- Signature of Customer NOTE: If the Customer is a corporation, the corporate seal must be affixed. 4 TO THE TORONTO-DOMINION BANK We are carrying on business under the trade name of INTEROPTICS and have no partners therein. In consideration of the Bank opening an account in the above name or continuing so long as the Bank shall see fit the account heretofore opened in the said trade name, we agree that we are and will be liable and responsible to the Bank for all transactions, obligations and liabilities heretofore and/or hereafter entered into or incurred in the said trade name, for every promissory note, bill of exchange, draft, cheque, receipt, agreement, pledge, assignment, security, document or other writing, made, drawn, accepted, endorsed or signed in the said trade name by the officer or person or officers or persons authorized by us to sign in respect of the said account. The trade name has been registered at Toronto on the 2nd day of April, 1990. SIGNED, SEALED AND DELIVERED at Ottawa this 10th day of April, A.D. 1990. LUMONICS INC. Per: "J. Hugh MacDiarmid" -------------------------------- J. Hugh MacDiarmid - President Per: "Colin R. Avery" -------------------------------- Colin R. Avery - Treasurer (Corporate Seal) 5 EX-4.1 4 STOCK CERTIFICATE EXHIBIT 4.1 [LOGO OF LUMONICS APPEARS HERE] [PICTURE APPEARS HERE] LUMONICS INC. INCORPORATED UNDER THE LAWS OF THE PROVINCE OF ONTARIO, CANADA CONSTITUTEE EN VERTU DES LOIS DE LA PROVINCE D'ONTARIO CANADA --------------------- CUSIP 549901 10 6 --------------------- THIS CERTIFIES THAT CECI ATTESTE QUE - -------------------------------------------------------------------------------- SPECIMEN is the registered holder of - -------------------------------------------------------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES ACTIONS ENTIEREMENT LIBEREES SANS WITHOUT PAR VALUE IN THE CAPITAL OF VALEUR AU PAIR DU CAPITAL DE LUMONICS INC. ENGLISH: transferable only on the books of the Corporation in person or by duly authorized attorney upon the surrender of this certificate properly endorsed. This certificate shall not be valid until countersigned by the Transfer Agent and Registrar of the Corporation. In Witness Whereof the Corporation has caused this certificate to be signed by its duly authorized officers, FRENCH TRANSLATION: transferables seulement dans les livres de la Corporation par le detenteur en personne ou par son procureur dument autorise sur production et remise de ce certificat doment endosse. Ce certificat ne sera valide que s'il est contresigne par l'agent de transfert et registraire de la Corporation. En foi de quoi la Corporation a fait signer le present certificat par ses officiers doment autorises, Le Secretaire /s/ Charles Gardner --------------------------- Secretary Le President du conseil et chef de la direction /s/ Robert Atkinson ------------------------------------ Chairman and Chief Executive Officer THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE AT THE PRINCIPAL OFFICE OF MONTREAL TRUST COMPANY OF CANADA, IN TORONTO. LES ACTIONS REPRESENTEES PAR CE CERTIFICAT SONT TRANSFERABLES AU BUREAU PRINCIPAL DE COMPAGNIE MONTREAL TRUST DU CANADA, A TORONTO. Countersigned and registered Contresigne et inscrit MONTREAL TRUST COMPANY OF CANADA Toronto COMPAGNIE MONTREAL TRUST DU CANADA Transfer Agent and Registrar Agent de trasfert et registraire By Par - ----------------------------------------------- Authorized Officer - Offcier autorise - --------------------- SHARES ACTIONS - --------------------- - --------------------- C00424 - --------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. AVIS: LA SIGNATURE DE CE TRANSFERT DOIT CORRESPONDRE EN TOUS POINTS AU NOM PORTE A LA FACE DE CE CERTIFICAT SANS Y RIEN CHANGER, AJDUTER OU RETRANCHER. THERE ARE RIGHTS, CONDITIONS, RESTRICTIONS AND LIMITATIONS ATTACHING TO THE SHARES REPRESENTED BY THIS CERTIFICATE AND THE FULL TEXT THEREOF IS OBTAINABLE ON DEMAND AND WITHOUT FEE FROM THE CORPORATION. LES ACTIONS REPRESENTEES PAR CE CERTIFICAT COMPORTENT DES DROITS, CONDITIONS, RESTRICTIONS ET LIMITATIONS DONT LE TEXTE INTEGRAL PEUT ETRE OBTENU, SANS FRAIS, SUR DEMANDE ADRESSEE A LA CORPORATION. For value received, the undersigned hereby sells, assigns and transfers unto Pour valeur recue, le soussigne vend, cede et transporte, par les presentes, a ----------------------- PLEASE INSERT SOCIAL INSURANCE INDIQUER LE NUMERO D'ASSURANCE NUMBER OF TRANSFEREE SOCIALE DU CESSIONNAIRE -----------------------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - -------------------------------------------------------------------------Actions of the Capital Stock represented by the du Capital-actions representees par within certificate, and does hereby ce titre et constitue par les irrevocably constitute an appoint: presentes: - -------------------------------------------------------------------------------- Attorney to transfer the said Stock on son mandataire irrevocable, avec the Books of the within named Corporation plein droit de delegation des with full power of substitution in the pouvoirs conferes, pour le transfert premises. du present titre au registre officiel des actions. Date______________________________________ Signature ______________________________________________________________________ Witness Temoin _________________________________________________________________________ EX-5.1 5 OPINION OF STEWART MCKELVEY STIRLING SCALES EXHIBIT 5.1 [LETTERHEAD OF STEWART McKELVEY STIRLING SCALES] [] , 1999 Lumonics Inc. 105 Schneider Road Kanata, Ontario K2K 1Y3 Dear sirs: We have acted as New Brunswick counsel to Lumonics Inc. in connection with the continuation of Lumonics Inc. to New Brunswick as GSI Lumonics, Inc. (the "Corporation") and the registration of up to [] common shares of the Corporation under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-4 (the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") on [] to be issued to the holders of common shares of General Scanning Inc. upon the amalgamation (the "Amalgamation") of the [wholly owned subsidiary of the Corporation] ("Subco") and General Scanning Inc. ("GSI") pursuant to an Amended and Restated Merger Agreement dated [], 1999 (the "Amalgamation Agreement") among the Corporation, Subco and GSI. For the purposes of this opinion, we have reviewed an executed copy of the Amalgamation Agreement. We have also: (a) reviewed the proposed articles of continuance and by-laws of the Corporation; (b) reviewed and assumed the completeness of the corporate records and minutes of corporate proceedings of the Corporation; (c) assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as copies, whether facsimile, photostatic, certified or otherwise and the authenticity of the originals of all such documents; (d) examined such statues and have considered such questions of law and have made such other investigations as we have deemed necessary for the purpose of the opinions expressed below; (e) assumed that the transactions contemplated by the Amalgamation Agreement will be completed in a timely manner. 2 As to certain questions of fact material to this opinion, we have relied upon a certificate of an officer of the Corporation, a copy of which has been delivered to you herewith. Our opinion is subject to the following: (a) that the approval of the shareholders of the Corporation for the continuation of the Corporation under the laws of New Brunswick and the adoption of the by-laws of the Corporation is obtained, that articles of continuance, continuing the Corporation under the laws of New Brunswick, are filed with the Director under the New Brunswick Business Corporations Act, all applicable filing fees are paid and a Certificate of Continuance for the Corporation is issued by the said Director; (b) that the Amalgamation Agreement is duly executed and delivered by each of the Corporation, Subco and GSI; and (c) that all approvals and filings necessary under the laws of the State of Massachusetts in connection with the Amalgamation and the transactions contemplated therein are obtained or made and all step necessary to the completion and effectiveness of the Amalgamation are fulfilled. The opinions set forth herein are limited to the laws of the Province of New Brunswick and we express no opinion as to the laws of any other jurisdiction. Based upon the foregoing, we are of the opinion that the Shares, are duly authorized and upon issuance therefor in accordance with the Amalgamation Agreement, will be validly issued as fully paid and non-assessable. We consent to your filing of this opinion as an exhibit to the Registration Statement and to the reference to our name in the section of the Registration Statement entitled "Legal Matters". Yours truly, STEWARD McKELVEY STIRLING SCALES EX-5.2 6 OPINION OF GOODWIN PROCTER & HOAR Exhibit 5.2 [LETTERHEAD OF GOODWIN, PROCTER & HOAR LLP] , 1999 General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Ladies and Gentlemen: We have acted as counsel to General Scanning Inc. (the "Company"), a Massachusetts corporation, in connection with the proposed merger (the "Merger") of New Grizzly Acquisition Corp. ("Sub"), a Massachusetts corporation and a wholly-owned subsidiary of Lumonics Corporation ("Lumonics US"), a Michigan corporation, with and into the Company pursuant to the Amended and Restated Agreement and Plan of Merger by and among the Company, Sub, Grizzly Acquisition Corp. ("Old Sub"), a Massachusetts corporation, and Lumonics Inc. ("Lumonics"), an Ontario corporation, dated as of October 27, 1998 (the "Merger Agreement"). At your request, we are rendering our opinion concerning certain federal income tax consequences of the Merger. Capitalized terms contained herein and not otherwise defined herein have the same meanings given such terms in the Merger Agreement. For purposes of the opinion set forth below, we have reviewed and relied upon the Merger Agreement, the Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") of the Company and Lumonics included in the Registration Statement on Form S-4, file number 333- , as amended (the "Registration Statement"), filed by Lumonics with the Securities and Exchange Commission in connection with the issuance in the Merger of shares of Lumonics's common stock, and such other documents, records and instruments as we have deemed necessary or appropriate as a basis for our opinion. In addition, in rendering our opinion we have relied upon certain statements, representations and warranties made by the Company, Lumonics, Lumonics US, Old Sub, and Sub (including, without limitation, those contained in certain certified representations and in the Proxy Statement/Prospectus, the Registration Statement and those contained in or made pursuant to the Merger Agreement), which we have neither investigated nor verified. We have assumed that such statements, representations and warranties are true, correct, complete and not breached and will continue to be so through the date of the Merger (the "Closing Date"), and that no actions that are inconsistent with such statements, representations and warranties will be taken. We also have assumed that all representations made "to the best knowledge of" any person(s) or party(ies) or with similar qualification are and will be true, correct and complete as if made without such qualification. In addition, we have assumed that (i) the Merger will be consummated in accordance with the Merger Agreement and as described in the Proxy Statement/Prospectus and Registration Statement (including satisfaction of all covenants and conditions to the obligations of the parties without amendment or waiver thereof); (ii) the Merger will qualify as a merger under the applicable laws of The Commonwealth of Massachusetts; (iii) each of the Company, Lumonics, Lumonics US and Sub will comply with all reporting obligations with respect to the Merger required under the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury regulations thereunder; and (iv) the Merger Agreement and all other documents and instruments referred to therein or in the Proxy Statement/Prospectus and Registration Statement are valid and binding in accordance with their terms. Any inaccuracy in, or breach of, any of the aforementioned statements, representations, warranties and assumptions or any change after the date hereof in applicable law could adversely affect our opinion. No ruling has been (or will be) sought from the Internal Revenue Service by the Company, Lumonics, Lumonics US or Sub as to the federal income tax consequences addressed in this opinion. General Scanning Inc. , 1999 Page 2 * * * * Based upon and subject to the foregoing, it is our opinion, under currently applicable United States federal income tax law, that: (1) the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; and (2) the statements in the Proxy Statement/Prospectus set forth under the caption "United States Federal Income Tax Consequences," to the extent such information constitutes matters of law, summaries of legal matters, or legal conclusions, have been reviewed by us and are accurate in all material respects. * * * * No opinion is expressed as to any matter not specifically addressed above including, without limitation, satisfaction of Section 367 of the Code and the related Treasury regulations. We are unable to opine as to satisfaction of Section 367 of the Code and the related Treasury regulations due to certain factual and legal uncertainties. No opinion is expressed as to the tax consequences of any of the transactions under any foreign, state, or local tax law. Furthermore, our opinion is based on current federal income tax law and administrative practice, and we do not undertake to advise you as to any changes after the Closing Date in federal income tax law or administrative practice that may affect our opinion unless we are specifically retained to do so. This opinion is provided to you solely in connection with the filing of the Registration Statement and may not be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our name in the section entitled "United States Federal Income Tax Consequences" in the Proxy Statement/Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, Goodwin, Procter & Hoar LLP EX-10.1 7 LINE OF CREDIT AGREEMENT DATED 4/8/1998 EXHIBIT 10.1 Commercial Banking Centre 50 O'Connor Street [LOGO OF CIBC APPEARS HERE] Suite 1024 Ottawa, Ontario K1P 6L2 April 8, 1998 Lumonics Inc. 105 Schneider Road KANATA, Ontario K2Y 1Y3 Attention: Mr. Desmond Bradley, Vice President, Finance & Administration Dear Mr. Bradley, We, Canadian Imperial Bank of Commerce ("CIBC"), are pleased to establish the following Credits for you, our customer. CREDIT A: OPERATING LINE Credit Limit: $27,000,000. Description and Rate: A revolving demand credit, for general business purposes, having the following parts: (1) Canadian dollar loans and overdrafts and L/C Acceptances. The Interest Rate is as follows: Prime Rate. (2) U.S. dollar loans and overdrafts and L/C Acceptances. The Interest Rate is as follows: U.S. Base Rate. If we sign an L/C Acceptance, the available Credit Limit will be reduced by the amount of the L/C Acceptance. (3) Canadian dollar or foreign currency L/Cs. L/Cs may not have terms to expiry of more than 12 months. Fees are CIBC's standard L/C fees (currently .60% per year), minimum $150, plus out of pocket expenses. Our standard L/C documentation is also required. If there is a drawing under any L/C, we will pay it by drawing on your Operating Account, unless you have made other arrangements with us. (4) Canadian dollar B/As. The stamping fee is the Commerce Acceptance Rate minus .5%. (5) U.S. dollar LIBOR loans. Interest is payable at the LIBO Rate for the loan term, plus .5% per year. (6) Up to $27,000,000 of this facility may be sub-credited to CIBC London, England in order to accommodate the credit requirements of Lumonics Gmbh. and Lumonics Ltd. by way of Deutschmark and Sterling advances and/or Letters of Credit. Advances to the wholly owned subsidiaries will be secured by the Full Liability Guarantee of Lumonics Inc. CREDIT B: CORPORATE VISA. Credit Limit: $950,000. for Lumonics Inc. and/or Lumonics Optics Group. Documentation: Our standard VISA documentation. CREDIT C: CORPORATE PURCHASE CARD. Credit Limit: $300,000. Documentation: Our standard documentation. CREDIT D: CHEQUE CREDIT Credit Limit: $350,000. Description: You may negotiate cheques at our Kanata Branch(es) in a total face amount each day of up to the Credit Limit of this Credit. 2 COVENANTS Covenants: You will ensure that: Current Ratio: Your Current Ratio is not at any time less than 2:1. Debt to Effective Equity Ratio: Your Debt to Effective Equity Ratio does not at any time exceed 1.5:1. Interest Coverage Ratio: Your Interest Coverage Ratio is not at any time less than 2:1. Minimum Shareholders' Equity: The Minimum Shareholders' Equity is not at any time less than $150,000,000. Capital Expenditures: Your total capital expenditures for fixed or capital assets in the current fiscal year do not exceed $20,000,000, without our prior consent. (This amount includes expenditures made by all subsidiaries.) Negative Pledge: There is no Lien on any of your present or future assets, and that you do not assign any right to any income, without our prior consent (which consent will not be unreasonably withheld), except for the four exceptions below, namely: (a) a Purchase Money Lien; (b) a Lien existing on an asset when it was acquired; (c) a renewal or replacement of a Purchase Money Lien or a Lien referred to in (b) above, so long as the principal amount secured by the Lien does not increase; or (d) a Normal Course Lien. Other: ASSET DISPOSALS: The customer will not sell, lease, assign or otherwise dispose of any material capital assets, whether now owned or hereafter acquired, other than (a) in the normal course of business and (b) with an aggregate value of $5,000,000 or less in any fiscal year without the Bank's prior consent. ACQUISITIONS. The customer will advise the Bank, in advance, of any intentions to acquire other business interests should the investment exceed U.S.$10,000,000 or the Canadian dollar equivalent. 3 REPORTING REQUIREMENTS Reporting Requirements: (1) Within 45 days of the end of each fiscal quarter, financial statements for that fiscal quarter. (2) Within 90 days of each fiscal year-end, financial statements for that fiscal year on an audited basis. OTHER PROVISIONS Calculations: The calculations made under the "Covenants" and "Reporting Requirements" sections of this Agreement are to be done on an consolidated basis. Default Interest Rate: Currently 21% per year. Next Scheduled Review Date: May 31, 1998 Standard Credit Terms: The attached Schedule - Standard Credit Terms forms part of this Agreement. Please indicate your acceptance of these terms by returning a signed copy of this Agreement. If we do not receive a signed copy by April 30, 1998 then this offer will expire. Upon acceptance, this Agreement replaces the existing credit agreement between you and CIBC. Outstanding amounts (and security) under that Agreement will be covered by this Agreement. Yours truly, CANADIAN IMPERIAL BANK OF COMMERCE by: "JA Gagnon" ------------ Anthony Gagnon Director Phone no.: 613 564-8627 Fax no.: 613 563-9600 4 Acknowledgement: The undersigned certifies that all information provided to CIBC is true, and acknowledges receipt of a copy of this Agreement (including any Schedules referred to above). Accepted this 15th day of April , 1998 . ------ ------- ------ LUMONICS INC. By: "Des Bradley" Name: Des Bradley Title: Chief Financial Officer ----------------------------------- ----------------------------------- ___________________________________ LUMONICS INC. By: Name: Title: _____________________________________ _____________________________________ 5 Lumonics Inc. [LOGO OF CIBC APPEARS HERE] Form 6326-95/06 (WP51CRED) SCHEDULE - STANDARD CREDIT TERMS ARTICLE 1 - GENERAL 1.1 INTEREST RATE. You will pay interest on each Credit at nominal rates per year equal to: (a) for amounts above the Credit Limit of a Credit or a part of a Credit or the Overall Credit Limit, as described in section 1.4, or for amounts that are not paid when due, the Default Interest Rate, and (b) for any other amounts, the rate specified in this Agreement. 1.2 VARIABLE INTEREST. Each variable interest rate provided for under this Agreement will change automatically, without notice, whenever the Prime Rate or the U.S. Base Rate, as the case may be, changes. 1.3 PAYMENT OF INTEREST. Interest is calculated on the daily balance of the Credit at the end of each day. Interest is due once a month, unless the Agreement states otherwise. Unless you have made other arrangements with us, we will automatically debit your Operating Account for interest amounts owing. If your Operating Account is in overdraft and you do not deposit to the account an amount equal to the monthly interest payment, the effect is that we will be charging interest on overdue interest (which is known as compounding). Unpaid interest continues to compound whether or not we have demanded payment from you or started a legal action, or get judgment, against you. 1.4 DEFAULT INTEREST. To determine whether Default Interest is to be charged, the following rules apply: (a) Default Interest will be charged on the amount that exceeds the Credit Limit of any particular Credit. That will happen even if the Overall Credit Limit has not been exceeded. (b) If there are several parts of a Credit, Default Interest will be charged if the Credit Limit of a particular part is exceeded. For example, if Credit A's limit is $250,000, and the limit of one part is $100,000 and the limit of that part is exceeded by $25,000, Default Interest will be charged on that $25,000 excess, even if the total amount outstanding under Credit A is less than $250,000. (c) To determine if the Overall Credit Limit has been exceeded, the outstanding principal amount of each Credit is totalled, and any amounts in foreign currency are converted to Canadian dollars. If that total exceeds the Overall Credit Limit, Default Interest will be charged on that excess amount. For example, if there are three Credits, each with a Credit Limit of $100,000 and an Overall Credit Limit of $250,000, if each of those Credits is at $90,000, they are each under their own Credit Limits, but the Overall Credit Limit has been exceeded by $20,000, and Default Interest will be charged on that excess amount. 1.5 FEES. You will pay CIBC's fees for each Credit as out lined in the Letter. You will also reimburse us for all reasonable fees (including legal fees) and out-of-pocket expenses incurred in registering any security, and in enforcing our rights under this Agreement or any security. We will automatically debit your Operating Account for fee amounts owing. 1.6 OUR RIGHTS RE DEMAND CREDITS. At CIBC, we believe that the banker-customer relationship is based on mutual trust and respect. It is important for us to know all the relevant information (whether good or bad) about your business. CIBC is itself a business. Managing risks and monitoring our customers' ability to repay is critical to us. We can only continue to lend when we feel that we are likely to be repaid. As a result, if you do something that jeopardizes that relationship, or if we no longer feel that you are likely to repay all amounts borrowed, we may have to act. We may decide to act, for example, because of something you have done, information we receive about your business, or changes to the economy that affect your business. Some of the actions that we may decide to take include requiring you to give us more financial information, negotiating a change in the interest rate or fees, or asking you to get further accounting assistance, put more cash into the business, provide more security, or produce a satisfactory business plan. It is important to us that your business succeeds. We may, however, at our discretion, demand immediate repayment of any outstanding amounts under any demand Credit. We may also, at any time and for any cause, cancel the unused portion of any demand Credit. Under normal circumstances, however, we will give you 30 days' notice of any of these actions. 1.7 PAYMENTS. If any payment is due on a day other than a Business Day, then the payment is due on the next Business Day. 1.8 APPLYING MONEY RECEIVED. If you have not made payments as required by this Agreement, or if you have failed to satisfy any term of this Agreement (or any other agreement you have that relates to this Agreement), or at any time before default but after we have given you appropriate notice, we may decide how to apply any money that we receive. This means that we may choose which Credit to apply the money against, or what mix of principal, interest, fees and overdue amounts within any Credit will be paid. 1.9 INFORMATION REQUIREMENTS. We may from time to time reasonably require you to provide further information about your business. We may require information from you to be in a form acceptable to us. 1.10 INSURANCE. You will keep all your business assets and property insured (to the full insurable value) against loss or damage by fire and all other risks usual for property such as yours (plus for any other risks we may reasonably require). If we request, these policies will include a loss payee clause (and if you are giving us mortgage 6 security, a mortgagee clause). As further security, you assign all insurance proceeds to us. If we ask, you will give us either the policies themselves or adequate evidence of their existence. If your insurance coverage for any reason stops, we may (but do not have to) insure the property. We will automatically debit your Operating Account for these amounts. Finally, you will notify us immediately of any loss or damage to the property. 1.11 ENVIRONMENTAL. You will carry on your business, and maintain your assets and property, in accordance with all applicable environmental laws and regulations. If (a) there is any release, deposit, discharge or disposal of pollutants of any sort (collectively, a "Discharge") in connection with either your business or your property, and we pay any fines or for any clean-up, or (b) we suffer any loss or damage as a result of any Discharge, you will reimburse CIBC, its directors, officers, employees and agents for any and all losses, damages, fines, costs and other amounts (including amounts spent preparing any necessary environmental assessment or other reports, or defending any lawsuits) that result. If we ask, you will defend any lawsuits, investigations or prosecutions brought against CIBC or any of its directors, officers, employees and agents in connection with any Discharge. Your obligation to us under this section continues even after all Credits have been repaid and this Agreement has terminated. 1.12 CONSENT TO RELEASE INFORMATION. We may from time to time give any credit or other information about you to, or receive such information from, (a) any financial institution, credit reporting agency, rating agency or credit bureau, (b) any person, firm or corporation with whom you may have or propose to have financial dealings, and (c) any person, firm or corporation in connection with any dealings you have or propose to have with us. You agree that we may use that information to establish and maintain your relationship with us and to offer any services as permitted by law, including services and products offered by our subsidiaries when it is considered that this may be suitable to you. 1.13 OUR PRICING POLICY: Fees, interest rates and other charges for your banking arrangements are dependent upon each other. If you decide to cancel any of these arrangements, you will have to pay us any increased or added fees, interest rates and charges we determine and notify you of. These increased or added amounts are effective from the date of the changes that you make. 1.14 PROOF OF DEBT. This Agreement provides the proof, between CIBC and you, of the credit made available to you. There may be times when the type of Credit you have requires you to sign additional documents. Throughout the time that we provide you credit under this Agreement, our loan accounting records will provide complete proof of all terms and conditions of your credit (such as principal loan balances, interest calculations, and payment dates). 1.15 RENEWALS OF THIS AGREEMENT. This Agreement will remain in effect for your Credits for as long as they remain unchanged. We have shown a Next Scheduled Review Date in the Letter. If there are no changes to the Credits this Agreement will continue to apply, and you will not need to sign anything further. If there are any changes, we will provide you with either an amending agreement, or a new replacement Letter, for you to sign. 1.16 CONFIDENTIALITY: The terms of this Agreement are confidential between you and CIBC. You therefore agree not to disclose the contents of this Agreement to anyone except your professional advisors. 1.17 PRE-CONDITIONS. You may use the Credits granted to you under this Agreement only if: (a) we have received properly signed copies of all documentation that we may require in connection with the operation of your accounts and your ability to borrow and give security; (b) all the required security has been received and registered to our satisfaction; (c) any special provisions or conditions set forth in the Letter have been complied with; and (d) if applicable, you have given us the required number of days notice for a drawing under a Credit. 1.18 NOTICES. We may give you any notice in person or by telephone, or by letter that is sent either by fax or by mail. 1.19 USE OF THE OPERATING LINE. You will use your Operating Line only for your business operating cash needs. You are responsible for all debits from the Operating Account that you have either initiated (such as cheques, loan payments, pre-authorized debits, etc.) or authorized us to make. Payments are made by making deposits to the Operating Account. You may not at any time exceed the Credit Limit. We may, without notice to you, return any debit from the Operating Account that, if paid, would result in the Credit Limit being exceeded, unless you have made prior arrangements with us. If we pay any of these debits, you must repay us immediately the amount by which the Credit Limit is exceeded. 1.20 FOREIGN CURRENCY CONVERSION. If this Agreement includes foreign currency Credits, then currency changes may affect whether either the Credit Limit of any Credit or the Overall Credit Limit has been exceeded. (a) See section 1.4 for the general rules on how Default Interest is calculated. (b) To determine the Overall Credit Limit, all foreign currency amounts are converted to Canadian dollars, even if the Credit Limits of any particular Credits are quoted directly in a foreign currency (such as U.S. dollars). No matter how the Credit Limit of a particular Credit is quoted, therefore, currency fluctuations can affect whether the Overall Credit Limit has been exceeded. For example, if Credits X and Y have Credit Limits of C$100,000 and US$50,000, respectively, with an Overall Credit Limit of C$175,000, if Credit X is at C$90,000 and Credit Y is at US$45,000, Default Interest will be charged only if, after converting the US dollar amount, the Overall Credit Limit is exceeded. (c) Whether the Credit Limit of a particular Credit has been exceeded will depend on how the Credit Limit is quoted, as described below. (d) If the Credit Limit is quoted as, for example, the U.S. dollar equivalent of a Canadian dollar amount, daily exchange rate fluctuations may affect whether that Credit Limit has been exceeded. If, on the other hand, the Credit Limit is quoted in a foreign currency (for example, directly in US dollars), whether that Credit Limit has been exceeded is determined by reference only to the closing balance of that Credit in that currency. (e) For example, assume an outstanding balance of a Credit on a particular day of US$200,000. If the Credit Limit is stated as "the US dollar equivalent of C$275,000", then whether the Credit Limit of that Credit has been exceeded will depend on the value of the Canadian dollar on that day. If the conversion calculations determine that the outstanding balance is under the Credit Limit, a drop in the value of the Canadian dollar the next day (without any change in the balance) may have the effect of putting that Credit over its Credit Limit. If, on the other hand, the Credit Limit is stated as "US$200,000", the Credit Limit is not exceeded, and a drop in the value of the dollar the next day will not change that (although 7 the Overall Credit Limit may be affected). (f) Conversion calculations are done on the closing daily balance of the Credit. The conversion factor used is the mid-point between the buying and selling rate offered by CIBC for that currency on the conversion date. ARTICLE 2 - BANKERS' ACCEPTANCES 2.1 DEFINITIONS. In this Article, the following terms have the following meanings: "Bankers' Acceptance" or "B/A" means a Canadian dollar Draft that we have accepted under this Agreement. "Commerce Acceptance Rate" means the variable reference rate that we declare from time to time as our stamping or acceptance fee for Drafts accepted by us. "Draft" means, at any time, a blank bill of exchange within the meaning of the Bills of Exchange Act drawn by the Customer on us (in satisfactory form), but before we have accepted it. 2.2 AVAILABILITY. B/As are available only with terms to maturity of between 30 and 180 days. 2.3 MINIMUM ISSUE AMOUNT. You will present Drafts for acceptance in a minimum amount of $1 million. We can change this minimum amount at any time by 30 days' prior written notice. 2.4 REQUIRED NOTICE. You may either obtain a new advance by issuing a B/A stamped by CIBC (including a rollover of an existing B/A) or you may convert an amount outstanding under another Credit to issuance of a B/A on the following terms. You must give us notice (in the form we require, including, when applicable, the date of acceptance, the amount and the maturity date). Notice must be given by 10:00 a.m. (local time where the CIBC Branch/Centre is located) on the Business Day prior to the requested date of issuance. You must also give us any other notice required by the Letter. 2.5 SPECIAL CONDITIONS. (a) DRAFT CONDITIONS. You will deliver to us the Drafts that you want us to issue. Each Draft must (i) be in a whole multiple of C$100,000, (ii) be dated the date of delivery (which will be the same date as the requested date you notified us); (iii) mature on a Business Day; and (iv) be presented to the CIBC Branch/Centre for acceptance by 12:00 noon on the date of delivery (unless you have made prior arrangements in writing with us). (b) MATURITY LIMITATION. The maturity date of a Draft submitted to us for acceptance may not (i) be after a scheduled or mandatory final maturity or termination date for that Credit or (ii) conflict, in our opinion, with any scheduled or mandatory repayment for that Credit. (c) CONVERSION-TO-LOAN LIMITATION. You may only convert a B/A into a loan otherwise allowed under this Agreement if the total of "A" plus "B" is less than Prime Rate existing on that maturity date, where: "A" is the annual discount rate quoted at 9:30 a.m. (Toronto time) by the Toronto office of Wood Gundy Inc. as the discount rate at which it would purchase a bankers' acceptance issued by CIBC having a term to maturity of 30 days, and "B" is the annual stamping or acceptance rate applicable to a Draft accepted by us under this Agreement, as determined on the maturity date of that B/A. In making these calculations, each of "A" and "B" is expressed as a percentage. 2.6 STAMPING FEE. When we accept a Draft under this Agreement, you will pay us a stamping fee, on the date of acceptance, in the amount as set out in the Letter. The stamping fee will be calculated on the face amount of that Draft for the number of days to maturity based on a 365 day year. 2.7 REIMBURSEMENT. B/As are negotiable instruments that are purchased in financial markets at a discount. Market forces determine what the discount amount for B/As is at any particular time. At maturity, the holder of a B/A redeems it from CIBC. We then pay the holder the face amount. You will, therefore, reimburse us at the maturity date for the face amount of all B/As that we have accepted for you, unless you convert those amounts to another Credit (assuming all proper notice has been given). If you do not reimburse us or convert those amounts to another Credit, we may convert them to any type of loan (if available) under any Credit. 2.8 SIGNATURES AND SAFEKEEPING. All Drafts must either be signed by a properly authorized signing officer or bear a mechanically reproduced facsimile signature of that officer (subject to any prior written arrangements with us). Each Draft and B/A bearing a facsimile signature of that officer will be as binding on you as if it had been manually signed by that officer. This applies even for individuals who may no longer be authorized or otherwise be an officer at any time. You will compensate us for any loss or expense relating to any Draft or B/A that we deal with under this Agreement. We need only exercise the same degree of care in safekeeping executed Drafts delivered to us for future acceptance as if they were CIBC's property and we were keeping them at the place at which they are to be held. 2.9 CREDIT CANCELLATION. If your B/A Credit is terminated for any reason, we may require you to pay us immediately on demand the appropriate reimbursement amount for each B/A then outstanding. We will calculate the reimbursement amount in accordance with standard practice in the banking industry in Canada. After making this payment, (a) you will have no further liability for that B/A, and (b) we will (i) become the sole party liable under the B/A, and (ii) compensate you if you have to pay anyone else under that B/A. 2.10 WAIVER. You will not claim any days of grace for the payment of a B/A. You waive any defence to payment which might otherwise exist if for any reason a B/A is held by us in our own right at its maturity. 2.11 OBLIGATIONS ABSOLUTE. Your obligations for Drafts and B/As are unconditional and irrevocable. You will perform your obligations strictly in accordance with the provisions of this Agreement including, among other things, (a) any lack of validity or enforceability of a Draft accepted by us as a B/A, and (b) the existence of a claim, set-off, defence or other right which you may have against the holder of a B/A, CIBC or another person. ARTICLE 3 - LIBO RATE PROVISIONS 3.1 DEFINITIONS. In this Agreement, the following terms have the following meanings: "LIBO Rate" for any LIBOR Period means a rate of interest per year equal to the rate at which we are prepared to offer, as at 11:00 a.m. (London, England time) on the second LIBOR Business Day 8 before the start of that LIBOR Period, deposits to leading banks in London, England interbank eurocurrency market in an amount of U.S. dollars similar to the amount of the applicable LIBOR Loan and for a deposit period comparable to that LIBOR Period; except that, if we do not receive proper or timely notice as required below but we permit your request, then the LIBOR Rate for such LIBOR Period means the rate of interest per year as determined by us (in our absolute discretion) and offered to you and immediately accepted by you. "LIBOR Business Day" means a Business Day on which U.S. dollar transactions can be carried out between leading banks in the interbank eurocurrency market in London, England and between CIBC and other leading banks in New York City. "LIBOR Loan" means a Fixed Rate Loan in U.S. dollars in whole multiples of US$1,000,000 on which interest is calculated by reference to a LIBO Rate. "LIBOR Period" means the period selected by you in accordance with this Agreement for computing interest from time to time on a LIBOR Loan. 3.2 AVAILABILITY. LIBOR Loans are available only in whole multiples of US$1,000,000 each, for terms of one to six months. 3.3 REQUIRED NOTICE. (a) You may draw down or roll over a LIBOR Loan, or convert another type of Credit under this Agreement to a LIBOR Loan, or repay a LIBOR Loan, but only as provided in this Article. Any such action must be done on a LIBOR Business Day. Also, you must give notice (in the form we require) to the CIBC Branch/Centre before 10:00 a.m. (local time where the CIBC Branch/Centre is located). The notice must be given on the third LIBOR Business Day before the requested date of drawdown, rollover, conversion or repayment. You may roll over or convert an existing LIBOR Loan only on the expiry of its LIBOR Period. (b) If we do not receive proper or timely notice as required by the preceding paragraph, we may (but we are not obliged to) decide what you are permitted to do for that LIBOR Loan. We may, on the other hand, simply roll over an existing LIBOR Loan at the end of its LIBOR Period for a new LIBOR Loan with a new LIBOR Period determined by us. 3.4 MATURITY LIMITATION. The expiry date of a LIBOR Period for any LIBOR Loan may not (a) be after a scheduled or required maturity or termination date for that Credit or (b) conflict, in our opinion, with any scheduled or mandatory repayment for that Credit. 3.5 REPAYMENTS. You may only repay all (but not part) of a LIBOR Loan, and only on the last day of the LIBOR Period for that LIBOR Loan. 3.6 INTEREST CALCULATION AND PAYMENT. Interest at a LIBO Rate will be calculated on the daily balance of each LIBOR Loan for the actual number of days elapsed, on the basis of a 360 day year. You will pay interest on each LIBOR Loan in arrears at the end of each LIBOR Period. If a LIBOR Period is greater than three months, you will pay interest at the end of each three month period during that LIBOR Period, except that overdue interest will be payable immediately on demand. Overdue amounts in respect of a LIBOR Loan (including any overdue interest) may at our option be either converted to another type of loan (if available) under any Credit or considered to be a LIBOR Loan for one or more LIBOR Periods as we may determine. 3.7 INTEREST ACT. Each nominal rate of interest referenced to a LIBO Rate, expressed as an annual rate for purposes of the Interest Act (Canada), is that rate multiplied by the actual number of days in the calendar year in which the rate is to be ascertained, and divided by 360. 3.8 LACK OF LIBO RATE. At any time before the start of any LIBOR Period, we might determine that (a) by reason of circumstances affecting the London, England interbank eurocurrency market generally, adequate and fair means do not exist for determining the LIBO Rate applicable for that LIBOR Period, or (b) deposits in U.S. dollars are not in the ordinary course of business available to CIBC in that market for deposit periods comparable to that LIBOR Period in a total amount similar to that LIBOR Loan bearing interest at a rate no greater than the LIBO Rate applicable to that LIBOR Loan. If we do, then from and after that date, you may not roll over any existing LIBOR Loan at the end of its LIBOR Period, or obtain any new LIBOR Loan. Our determination of any events under this paragraph will be conclusive. 3.9 ILLEGALITY. If at any time we determine in good faith that any legal requirement or any official directive or request (whether or not having the force of law) by a central bank or other governmental authority will make it unlawful or impossible for us to make, maintain or fund any LIBOR Loan, we will notify you accordingly. Upon receiving such a notice, you will either (a) on the last day of the LIBOR Period of any LIBOR Loan, if we can continue to maintain that loan, or (b) immediately, if we cannot legally maintain that loan, (1) pay us in full the then outstanding principal amount of each such LIBOR Loan, together with all accrued interest, or (2) convert that loan into another type of loan allowed under this Agreement. For clarification, upon a payment or conversion of a LIBOR Loan made under this section in the middle of its LIBOR Period, you will immediately on demand compensate us as provided elsewhere in this Agreement. Our determination of any matters under this paragraph will be conclusive. ARTICLE 4 - DEFINITIONS 4.1 DEFINITIONS. In this Agreement, the following terms have the following meanings: "Base Rate Loan" means a U.S. dollar loan on which interest is calculated by reference to the U.S. Base Rate. "Business Day" means any day (other than a Saturday or a Sunday) that the CIBC Branch/Centre is open for business. "CIBC Branch/Centre" means the CIBC branch or banking centre noted on the first page of this Agreement, as changed from time to time by agreement between the parties. "Credit" means any credit referred to in the Letter, and if there are two or more parts to a Credit, "Credit" includes reference to each part. "Credit Limit" of any Credit means the amount specified in the Letter as its Credit Limit, and if there are two or more parts to a Credit, "Credit Limit" includes reference to each such part. "Current Assets" are cash, accounts receivable, inventory and other assets that are likely to be converted into cash, sold, exchanged or expended in the normal course of business within one year or less, 9 excluding amounts due from related parties. "Current Liabilities" means debts that are or will become payable within one year or one operating cycle, whichever is longer, excluding amounts due to related parties, and which will require Current Assets to pay. They usually include accounts payable, accrued expenses, deferred revenue and the current portion of long-term debt. "Current Ratio" means the ratio of Current Assets to Current Liabilities. "Debt to Effective Equity Ratio" means the ratio of X to Y, where X is the total of all liabilities, less all Postponed Debt, and Y is the total Shareholders' Equity, plus all Postponed Debt, less (i) amounts due from/investments in related parties and (ii) Intangibles. "Default Interest Rate", unless otherwise defined in the Letter, means the Standard Overdraft Rate. "Intangibles" means assets of the business that have no value in themselves but represent value. They include such things as copyright, patents and trademarks; franchises; licences; leases; research and development costs; and deferred development costs. "Interest Coverage Ratio" means the ratio of earnings before interest and taxes to interest expense. "Letter" means the letter agreement between you and CIBC to which this Schedule and any other Schedules are attached. "Letter of Credit" or "L/C" means a documentary or stand-by letter of credit, a letter of guarantee, or a similar instrument in form and substance satisfactory to us. "L/C Acceptance" means a draft (as defined under the Bills of Exchange Act (Canada)) payable to the beneficiary of a documentary L/C which the L/C applicant or beneficiary, as the case may be, has presented to us for acceptance under the terms of the L/C. "Lien" includes a mortgage, charge, lien, security interest or encumbrance of any sort on an asset, and includes conditional sales contracts, title retention agreements, capital trusts and capital leases. "Minimum Shareholders' Equity" means the total Shareholders' Equity, minus (a) amounts due from/investments in related parties, and the value of all Intangibles, plus (b) all Postponed Debt. "Normal Course Lien" means a Lien that (a) arises by operation of law or in the ordinary course of business as a result of owning any such asset (but does not include a Lien given to another creditor to secure debts owed to that creditor) and (b), taken together with all other Normal Course Liens, does not materially affect the value of the asset or its use in the business. "Operating Account" means the account that you normally use for the day-to-day cash needs of your business, and may be either or both of a Canadian dollar and a U.S. dollar account. "Postponed Debt" means any debt owed by you that has been formally postponed to CIBC. "Prime Rate" means the variable reference rate of interest per year declared by CIBC from time to time to be its prime rate for Canadian dollar loans made by CIBC in Canada. "Prime Rate Loan" means a Canadian dollar loan on which interest is calculated by reference to Prime Rate. "Purchase Money Lien" means a Lien incurred in the ordinary course of business only to secure the purchase price of an asset, or to secure debt used only the finance the purchase of the asset. "Shareholders' Equity" means paid-in capital, retained earnings and attributed or contributed surplus. "Standard Overdraft Rate" means the variable reference interest rate per year declared by CIBC from time to time to be its standard overdraft rate on overdrafts in Canadian or U.S. dollar accounts maintained with CIBC in Canada. "U.S. Base Rate" means the variable reference interest rate per year as declared by CIBC from time to time to be its base rate for U.S. dollar loans made by CIBC in Canada. 10 April 8, 1998 Lumonics Inc. 105 Schneider Road KANATA, Ontario K2Y 1Y3 Attention: Mr. Desmond Bradley, VIce President, Finance & Administration Dear Mr. Bradley, Re: Foreign Exchange Transactions --------------------------------- In addition to the facilities provided to you as set out in our term sheet dated April 8, 1998 CIBC would be pleased to discuss accommodating your foreign exchange hedging needs from time to time on an uncommitted basis. Each transaction in that regard would be on terms as we would negotiate and would be subject to completion of such documentation as CIBC may require. Although neither you nor CIBC would be committed in advance to enter into any such transaction, our current credit guidelines in respect of such transactions with you are as follows: Credit usage or exposure (as determined and measured by CIBC in accordance with its standard policy in effect from time to time) for all such outstanding transactions may not in total exceed US$3,500,000 ------------ (the "Credit Limit"). Generally, no such transaction may have a term exceeding 12 months, however, they may be allowed as long as the total credit usage or exposure for those transactions is at all times less US$3,500,000 (the ------------ "Credit Limit"). Lumonics Inc. April 8, 1998 We are pleased to have the opportunity to accommodate your financial risk management requirements. Yours truly Canadian Imperial Bank of Commerce by: /s/ "JA Gagnon" ------------------ Anthony Gagnon Director Phone no: 613 564-8627 Fax no: 613 563-9600 2 EX-10.2 8 LOAN AGREEMENT DATED 8/10/1990 EXHIBIT 10.2 LOAN AGREEMENT This Agreement is made 10th day of August, 1990 between: Sumitomo Heavy ---- ------ Industries, Limited a corporation organized under the laws of Japan, having its principal office at 2-1, Ohtemachi 2-chome, Chiyoda-du, Tokyo, Japan (hereafter referred to as "the Lender") and Lumonics Inc., a corporation organized under the laws of the Province of Ontario, Canada, having its principal office at 105 Schneider Road, Kanata, Ontario, Canada (hereafter referred to as "the Borrower"). ARTICLE 1: AMOUNT OF LOAN The Lender agrees to lend to the Borrower, subject to the terms and conditions of this agreement, a principal amount of Japanese Yen 2,000,000,000 (Japanese Yen Two Billion only). ARTICLE 2: DISBURSEMENT The Lender shall disburse the principal amount described in Article 1 in two drawdowns as per Annex A. ARTICLE 3: REPAYMENT The Borrower shall repay the Loan to the Lender in the installments and on the dates specified in the amortization schedule set out in Annex B. If a due date falls on a bank holiday, repayment shall be made on the following banking day of the said holiday. ARTICLE 4: PREPAYMENT Notwithstanding the stipulations mentioned above, if and when the Lender acknowledges that the Borrower has sufficient financial surplus to repay the outstanding loan made pursuant to this Agreement, the Borrower may accelerate the repayment of the principal and interest of the loan in accordance with a revised schedule of principal and interest payments mutually agreed upon between the Lender and the Borrower. ARTICLE 5: INTEREST The interest rate for the Loan, payable in arrears, shall be 6.3% per annum. The first payment date is to be October 31st, 1990 and subsequent interest payments shall be due and payable semiannually. The amount of interest is to be calculated on the basis of a 365 day year. If an interest payment date falls on a bank holiday, the payment shall be made on the following banking day of the said holiday. ARTICLE 6: INDEMNITY The Borrower shall pay interest as indemnity if it fails to perform any obligation by each due date. In such cases, the interest rate is to be 14% per annum of the amount which should have been paid to the Lender. The calculation of the interest is to be based on a 365 day year. ARTICLE 7: COLLATERAL Should the Borrower submit any mortgage to a third party, the Borrower shall obtain the prior written approval of Lender. ARTICLE 8: APPLICABLE LAW This loan agreement shall be governed by and construed in accordance with the laws of Japan. ARTICLE 9: OTHERS This Agreement shall be based on the loan to be warranted to the Lender by the Export-Import Bank of Japan. Payments of interest are to be made without the deduction of Canadian withholding taxes. However, if the second loan disbursement of the Export-Import Bank of Japan is delayed from June 27, 1991, the Lender will raise a fund to cover the delayed period until the Export-Import Bank disbursement is made. If this happens, the Lender holds a right to adjust the lending rate to cover the funding cost. For and on behalf of For and on behalf of Lumonics Inc. Sumitomo Heavy Industries, Ltd. "C. Avery" "F. Miyazaki" - ---------- ------------- C. Avery F. Miyazaki ANNEX A Drawdown Schedule First drawdown JPY 50,000,000 August 30th, 1990 Second drawdown JPY 1,500,000,000 June 27th, 1991 Interest payment schedule October 31, 1990 April 30, 1996 April 30, 1991 October 31, 1996 October 31, 1991 April 30, 1997 April 30, 1992 October 31, 1997 November 2, 1992 April 30, 1998 April 30, 1993 November 2, 1998 November 1, 1993 April 30, 1999 May 2, 1994 November 1, 1999 October 31, 1994 May 1, 2000 May 1, 1995 October 31, 2000 October 31, 1995 ANNEX B Amortization Schedule
Installment Due Date Amount Number 1. April 30, 1996 JPY 200,000,000 2. October 31, 1996 JPY 200,000,000 3. April 30, 1997 JPY 200,000,000 4. October 31, 1997 JPY 200,000,000 5. April 30, 1998 JPY 200,000,000 6. November 2, 1998 JPY 200,000,000 7. April 30, 1999 JPY 200,000,000 8. November 1, 1999 JPY 200,000,000 9. May 1, 2000 JPY 200,000,000 10. October 31, 2000 JPY 200,000,000
EX-10.6 9 LEASE AGREEMENT DATED 9/24/1991 EXHIBIT 10.6 UNITED MORTGAGE AND REALTY REAL ESTATE DEVELOPMENT AND MORTGAGE BANKING LEASE AGREEMENT --------------- THIS LEASE, made this 24/th/ day of September, 1991 by and between J.R.F. II ASSOCIATES LIMITED PARTNERSHIP, (A Michigan Limited Partnership) of 19786 Haggerty Road, Suite #104, Livonia, Michigan 48152 the Lessor hereinafter "Landlord") and LUMONICS CORPORATION, 12163 Globe Road, Livonia, MI 48150 the Lessee (hereinafter "Tenant"). For and in consideration of the covenants, agreements, and conditions hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the following described premises (hereinafter "Leased Premises") situated in the CITY of LIVONIA, WAYNE County, Michigan: Consisting of 29,391 or 57.1% of Total Building sq. ft., commonly known as 19776 Haggerty road, Livonia, ----- ----------------------- MI 48152 - -------- SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF for the term of Seven (7) years from and after the date of possession as provided in rider paragraph 12. NOTE: ADDENDUM AND EXHIBITS "A", "B","C", AND "C-1" ARE ATTACHED AND MADE PART OF THIS LEASE. 1. RENT (a) Tenant covenants and agrees to pay to Landlord as Annual Rent for the Leased Premises the sum of *SEE PARAGRAPH 1(g) BELOW ($XXXX) DOLLARS, payable in advance on the first day of each month in equal monthly installments, without notice of demand from Landlord. Rent to begin to accrue on date of occupancy. (b) Tenant covenants and agrees to pay as Additional Rent his proportionate share of all taxes levied against and insurance premiums incurred by the J.R.F. II ASSOCIATES LIMITED PARTNERSHIP relating to 19776 Haggerty Road. Tenant's proportionate share of said taxes and insurance premiums is defined as that part of all real, property taxes, general assessments, and special assessments levied against and of all insurance premiums incurred by the J.R.F. II Associates Limited Partnership. Special assessments shall be defined as those levied on or after the date of this lease, and not prior special assessments levied prior to date of Lease, including unpaid installments thereon which bears the same ratio to all such taxes and insurance as the total square footage of the Leased Premises bears to the total leasable square footage of the J.R.F. II Associates Limited Partnership. Tenant covenants and agrees to pay the Additional Rent, without notice or demand from Landlord and without abatement, deduction, or offset, in advance on the first day of each month in equal monthly installments in an amount estimated by the Landlord. (See Rider Paragraph 1) Upon receipt of all tax bills, assessment bills, and insurance bills attributable to any calendar year during the term hereof, Landlord shall furnish Tenant with a written statement of the actual amount of Tenant's proportionate share of the taxes and insurance for such year. If the total amount paid by Tenant under this paragraph for any calendar year shall be less than the actual amount due from Tenant for such year, as shown on such statement, Tenant shall pay the Landlord the difference between the amount paid by Tenant and the actual amount due, such deficiency to be paid within Ten (10) days after demand therefor by Landlord; and if the total amount paid by Tenant hereunder for any such calendar year shall exceed the actual amount due from Tenant, such excess shall be credited against the next installment of taxes and insurance due from Tenant to landlord hereunder. For the calendar years in which this Lease commences and terminates, Tenant's liability for its proportionate share of taxes and insurance shall be prorated on the basis of the number of days of said calendar years for which the term of the Lease is in effect. Prior to or at the commencement of the Lease and from time to time thereafter throughout the term hereof, Landlord shall notify Tenant in writing of Landlord's estimate of Tenant's monthly installments due hereunder. (c) In addition to Tenant's proportionate share of insurance premiums which Tenant agrees to pay as Additional Rent pursuant to paragraph 1(b) of this Lease, Tenant further agrees that it will pay that part of any increase in insurance premiums which is attributable to or caused by the nature of the business conducted by the Tenant in the Leased Premises or the character of Tenant's occupancy, whether or not Landlord has consented to the same. Such increase in premiums shall be paid to landlord in the same manner as the Additional Rent provided for in paragraph 1(b) above. (d) Tenant covenants and agrees to pay to Landlord Tenant's proportionate share of all costs and expenses of every kind and nature paid or incurred by Landlord in operating, repairing, replacing and maintaining all areas, facilities, and building used in the maintenance and operation of the J.R.F. II Associates Limited Partnership Lease year = Calendar year including by way of illustration and not of limitation all driveways, parking lots, sidewalks and lawns. Such costs and expenses shall include, but not be limited to cleaning, lighting, snow removal, line painting and landscaping. Tenant covenants and agrees to pay his proportionate share of such cost and expenses in advance on the first day of each month in equal monthly installments in an amount estimated by Landlord. Within Ninety (90) days after the end of each Lease Year or partial Lease Year, Landlord shall furnish Tenant with a statement of the actual amount of Tenant's proportionate share of such costs and expenses for such period. If the total amount paid by Tenant under this paragraph for any calendar year shall be less than the actual amount due from Tenant for such year as shown on such statement, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual amount due, such deficiency to be paid within Thirty (30) days after the furnishing of each such statement; and if the total amount paid by Tenant hereunder for any such calendar year shall exceed such actual amount due from Tenant for such calendar year, such excess shall be credited against the installment due from Tenant to landlord under this section. Prior to or at the commencement of the term of this Lease and from time to time thereafter throughout the term hereof, Landlord shall notify Tenant in writing of Landlord's estimate of Tenant's monthly installments due hereunder. (e) Taxes, Insurance, Common Area Maintenance currently is $2.50 per square foot. (f) Payments of Rent and Additional Rent shall be made to Landlord at 19786 Haggerty Road, #104, Livonia, MT 48152, or at such places as the Landlord may from time to time designate. 2 (g) 1/st/ year 320,361.90 Per Mo 26,696.83 Plus Taxes, Insurance Common Area Maintenance 32,819.95 per mo. Total Due. 2/nd/ year 320,361.90 Per Mo 26,696.83 Plus Taxes, Insurance Common Area Maintenance 32,819.95 per mo. Total Due. 3rd year: 320,361.90 Per Mo 26,696.83 Plus Taxes, Insurance Common Area Maintenance 32,819.95 per mo. Total Due. 4th year: 320,361.90 Per Mo 26,696.83 Plus Taxes, Insurance Common Area Maintenance 32,819.95 per mo. Total Due. 5th year: 320,361.90 Per Mo 26,696.83 Plus Taxes, Insurance Common Area Maintenance 32,819.95 per mo. Total Due. 6th year: 293,910.00 Per Mo 24,492.50 Plus Taxes, Insurance Common Area Maintenance 30,615.63 per mo. Total Due. 7th year: 293,910.00 Per Mo 24,492.50 Plus Taxes, Insurance Common Area Maintenance 30,615.63 per mo. Total Due. 2. ASSIGNMENT. Tenant covenants and agrees not to assign or transfer this Lease or pledge or mortgage same or any interest therein or to sublet the premises or any part thereof without the written consent of Landlord. Any assignment, transfer, pledge, mortgage, or subletting without the written consent of Landlord shall give Landlord the right to terminate this Lease and re-enter and repossess the Leased Premises. Lessor shall not withhold such consent unreasonably. 3. BANKRUPTCY AND INSOLVENCY. The Tenant agrees that if the estate created hereby shall be taken in execution, or by other process of law, or if the Tenant shall be declared bankrupt or insolvent, according to law, or any receiver be appointed for the business and property of the Tenant, or if any assignment shall be made of the Tenant's property for the benefit of creditors, then and in such event this Lease may be terminated at the option of the Landlord. 4. RIGHT TO MORTGAGE. The Landlord reserves the right to subject and subordinate the Lease at all times to the lien of any mortgage or mortgages now or hereafter placed upon the Landlord's interest in the said premises and on the land and buildings of which the said premises are a part of upon any buildings hereafter erected on the land. The Tenant covenants and agrees to execute and deliver upon demand such further instrument or instruments subordinating this Lease to the lien of any such mortgage or mortgages as shall be desired by the Landlord and by any mortgagees or proposed mortgagees, and hereby irrevocably appoints the Landlord the attorney-in-fact for the Tenant to execute and deliver any such instrument or instruments for and in the name of the Tenant. (a) Tenant further specifically acknowledges that upon its/their acceptance of possession of the leased premises all improvements and the space required to be furnished by the Landlord pursuant to the terms of this lease and any addendums hereto, have been completed by Landlord in all respects. *SEE ADDENDUM ATTACHED Tenant agrees to execute a separate estoppel certificate and subordination agreement at the request of the Landlord within 10 days after it accepts possession which certificate certifies: (1) That it has accepted possession of the demised premises pursuant to the terms of the within lease. (2) That the improvements and space required to be furnished by, Landlord pursuant to the lease have been completed in all respects. 3 (3) That Landlord has fulfilled all of its duties of an inducement nature, and the above lease is in full force and effect and free from default of either party. (4) That the above lease has not been modified, altered or amended. (5) That said lease commences on ..................... 19 ...., and the rental obligation commences on the date of possession and expires seven (7) years thereafter. .........., 19 .... . The primary lease term expires ............................. 19 .... . (6) The date of the lease, lessee and lessors name and the premises covered by the lease. (See Rider-Paragraph 4) Any other fact which is true and correct as of that date and is covered by the terms of the lease. (b) Tenant further agrees to execute and deliver to Landlord a certificate of Capital Expenditures on said leased premises at the request of Landlord in the form and substance required by the Economic Development Corporation, any or present or future lender of Landlord or any other third party which requires same from Landlord. (c) Tenant also agrees to furnish to Landlord within 10 days any other statements or certificates which may be required by the present or any future lender for the project, which statements or certificates shall include a current financial statement. 5. USE AND OCCUPANCY. It is understood and agreed between the parties hereto that said premises during the continuance of this Lease shall be used and occupied for OFFICE/WAREHOUSE/ASSEMBLY and any other use or uses consistent with or incidental to this use and for no other purpose in violation of any law, municipal ordinance or regulation, and that on any breach of this agreement, the landlord may at his option forthwith re-enter and repossess the Leased Premises without discharging Tenant's contractual duty to pay rent and additional rent. 6. FIRE It is understood and agreed that if the premises hereby leased are damaged or destroyed in whole or in part by fire or other casualty during the term hereof, the Landlord will repair and restore the same to good tenantable condition with reasonable dispatch and that the rent herein provided for shall abate entirely in case the entire premises are untenantable and pro- rated for the portion rendered untenantable, in case a part only is untenantable, until the same shall be restored to a tenantable condition; provided, however, that if the Tenant shall fail to adjust his own insurance or to remove his damaged goods, wares, equipment, or property within a reasonable time, and as a result thereof the repairing and restoration is delayed, there shall be no abatement of rental during the period of such resulting delay, and provided further and there shall be no abatement of rental if such fire or other cause damaging or destroying the Leased Premises shall result from the negligence or willful act of the Tenant, his agents, or employees, and provided further that if the Tenant shall use any part of the building of which they are a part, and it shall be destroyed to the extent of more than one-half of the value thereof, the Landlord may, at his option, terminate this Lease forthwith by a written notice to the Tenant. 7. REPAIRS. The Landlord, after receiving written notice from the Tenant and having reasonable opportunity thereafter to obtain the necessary workmen, agrees to keep in good order and repair the roof and the outer wall(s) of the premises but not frames, windows or any of the appliances or appurtenances of said doors or window castings, window frames and windows, or any attachment thereto or attachments to said building or premises used in connection therewith. 8. INSURANCE. The Tenant agrees to indemnify and hold harmless the Landlord from any liability for damages to any person or property in, on or about said Leased Premises from any cause whatsoever; said tenant will procure and keep in effect during the term hereof public 4 liability and property damage insurance for the benefit of the Landlord in the sum of TWO MILLION/no---($2,000,000.00) DOLLARS for damages resulting to one person and ONE MILLION DOLLARS/no--- ($1,000,000.000)) DOLLARS for damages resulting from any one casualty, and TWO MILLION DOLLARS /no ---($2,000,000.00) DOLLARS property damage insurance resulting from any one occurrence. Tenant shall deliver within 10 days from move-in said policies to the Landlord and upon Tenant's failure to do so the Landlord may at his option obtain such insurance and the cost thereof shall be paid as additional rent due and payable upon the next ensuing rent day. 9. REPAIRS AND ALTERATIONS. Except as provided in paragraph 7. hereof, the Tenant further covenants and agrees that he will, at his own expense, during the continuation of this Lease, keep the said premises and every part thereof in as good repair and at the expiration of the term yield and deliver up the same in like condition as when taken, reasonable use and wear thereof and damage by the elements excepted. The Tenant shall not make any alterations, additions, or improvements to said premises without the Landlord's written consent, and all alterations, additions, or improvements made by either of the parties hereto upon the premises, except movable office furniture and trade fixtures put in at the expense of the Tenant, shall be the property of the Landlord, and shall remain upon and be surrendered with the premises at the termination of this Lease, without molestation or injury. (See Rider-Paragraphs 5 & 7) The Tenant covenants and agrees that, since the Leased Premises consist of only a part of a structure owned or controlled by the Landlord, the Landlord may enter the Leased Premises at reasonable time and install or repair pipes, wires and other appliances or make any repairs deemed by the Landlord essential to the use and occupancy of other parts of the Landlord's building. 10. FIRE INSURANCE. Landlord shall maintain and keep in force at all times during the term of this Lease a policy or policies of fire insurance to the extent of at least Eighty (80%) percent of the insurable value of the demised premises. If permitted without additional charge, landlord shall cause to be endorsed on its fire insurance, and any extended coverage policy or policies, the waiver of right of subrogation. Any policy of fire insurance maintained by landlord on the entire building of which the demised premises are a part shall be deemed to satisfy the requirement of this paragraph if such policy is in an amount equal to at least Eighty (80%) percent of the insurance value of the entire building. (See Rider - Paragraph 8) 11. EMINENT DOMAIN. If the whole or any part of the premises hereby leased shall be taken by any public authority under the power of eminent domain, then the term of this Lease shall cease on the part so taken from the day the possession of that part shall be required for any public purpose, and the rent shall be paid up to that day. If more than Fifty (50%) percent of the square footage of the Leased Premises is so taken by any public authority, then the Tenant shall have the right either to cancel this Lease and declare the same null and void as of the day that possession of that part is required for any public purpose, or to continue in the possession of the remainder of the Leased Premises under the terms and conditions herein provided except that the rent shall be reduced in proportion to the amount of the premises taken; provided, however, that Tenant must exercise this right within Thirty (30) days after the date that part of the premises are so taken. (See Rider - Paragraph 9) 12. RESERVATION. The Landlord reserves the right to free access at all times to the roof of said Leased Premises. The Tenant shall not erect any structures for storage or any aerial, or use the roof for any purpose without the consent in writing of the Landlord. 5 13. CARE OF PREMISES. The Tenant shall not perform any acts or carry on any practices which may injure the building or be a nuisance or menace to other tenants in the building and shall keep premises under his control (including adjoining drives, streets, alleys, or yards) clean and free from rubbish, dirt, and under penalty of forfeiture and damages, promptly comply with all lawful laws, orders, regulations, or ordinance of all municipal, County and State authorities affecting the premises hereby leased and the cleanliness, safety, occupation and use of same. 14. OUTSIDE STORAGE. There shall be no outside storage of any kind whatsoever without the prior express written consent of Landlord. 15. CONDITION OF PREMISES. The Tenant further acknowledges that he has examined the Leased Premises prior to the making of this Lease, and knows the condition thereof, and that no representations as to the condition or state of repairs thereof have been made by the Landlord, or his agent, which are not herein expressed, and the Tenant hereby accepts the Leased Premises in their present condition at the date of the execution of this Lease. (See Rider - Paragraph 5) 16. ACTS OF OTHER TENANTS. The Landlord shall not be responsible or liable to the Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any part of the premises adjacent to or connected with the premises hereby leased or any part of the building of which the Leased Premises are a part or for any loss or damage resulting to the Tenant or his property from bursting, stoppage or leaking of water, gas, sewer or steam pipes. 17. RE-RENTING. The Tenant hereby agrees that for a period commencing Ninety (90) days prior to the termination of this Lease, the Landlord may show the premises to prospective Tenants. 18. HOLDING OVER. It is hereby agreed that in the event of the Tenant herein holding over after the termination of this Lease, thereafter the tenancy shall be from month to month in the absence of a written agreement to the contrary. 19. UTILITIES. The Tenant will pay all charges made against said Leased Premises for gas, water, heat and electricity during the continuance of this Lease, as the same shall become due. 20. ADVERTISING DISPLAY. It is further agreed that all signs and advertising displayed in and about the premises shall be such only as to advertise the business carried on upon said premises, and that the Landlord shall control the character and size thereof, and that no sign shall be displayed excepting such as shall be approved in writing by the Landlord, and that no awning shall be installed or used on the exterior of said building unless approved in writing by the Landlord. 21. ACCESS TO PREMISES. The Landlord shall have the right to enter upon the Leased Premises at all reasonable hours for the purpose of inspecting the same. If the Landlord deems any repairs necessary, he may demand that the Tenant make the same and if the Tenant refuses or neglects forthwith to commence such repairs and complete the same with reasonable dispatch, the Landlord may make or cause to be made such repairs and shall not be responsible to the Tenant for any loss or damage that may accrue to his stock or business by reason thereof, and if the Landlord makes or causes to be made such repairs, the Tenant agrees that he will forthwith 6 on demand pay to the Landlord the cost thereof with interest at Seven (7%) percent per annum, and if he shall make default in such payment the Landlord shall have the remedies provided in paragraph 6 hereof. 22. RE-ENTRY. In case any rent shall be due and unpaid or if default be made in any of the covenants herein contained, or if said Leased Premises shall be deserted or vacated, then, it shall be lawful for the Landlord, his certain attorney, heirs, representatives and assigns, to re-enter into, repossess the said premises from the Tenant and to remove and put out each and every occupant without discharging Tenant's contractual duty to pay rent and additional rent. 23. QUITE ENJOYMENT. The Landlord covenants that the Tenant, on payment of all aforesaid installments and performing all the covenants aforesaid, shall and may peacefully and quietly have, hold, and enjoy the said demised premises for the term aforesaid. 24. EXPENSES. In the event that the Landlord shall, during the period covered by this Lease, obtain possession of said premises by re-entry, summary proceedings, or otherwise, the Tenant hereby agrees to pay the Landlord the expense incurred in obtaining possession of said premises, and also all expenses and commissions which may be paid in and about the letting of the same, and all other damages, including, but not limited to, damages from breach of Tenant's covenant to pay rent and additional rent. 25. REMEDIES NOT EXCLUSIVE. It is agreed that each and every one of the rights, remedies and benefits provided by this Lease shall be cumulative, and shall not be exclusive of any of said rights, remedies and benefits, or of any other rights, remedies and benefits allowed by law. 26. WAIVER. One or more waivers of any breach of a covenant or condition by the Landlord shall not be construed as a waiver of a further breach of the same covenant or condition. 27. DELAY OF POSSESSION. It is understood that if the Tenant shall be unable to enter in and occupy the premises hereby leased at the time above provided, by reason of the said premises not being ready for occupancy, or by reason of the holding over of any previous occupant of said premises, or as a result of any cause or reason beyond the direct control of the Landlord, the Landlord shall not be liable in damages to the Tenant therefore, but during the period the Tenant shall be unable to occupy said premises at hereinbefore provided, the rental therefor shall be abated and the Landlord is to be the sole judge as to when the premises are ready for occupancy. 28. NOTICES. Whenever under this Lease a provision is made for notice of any kind it shall be deemed sufficient notice and service thereof if such notice to the Tenant is in writing addressed to the Tenant at his last known post office address or at the leased premises and deposited in the mail with postage prepaid and if such notice to the Landlord is in writing addressed to the last known post office address of the Landlord and deposited in the mail with postage prepaid. Notice need be sent to only one Tenant or Landlord where the Tenant or Landlord is more than one person. 29. OPTION TO RENEW.**SEE ATTACHED ADDENDUM 30. It is agreed that in the Lease the word "he" shall be used as synonymous with the words "she," "it," and "they," and the word "his" synonymous with the words "hers," "its," and "their". 7 31. The covenants, conditions, and agreements made and entered into by the parties hereto are declared binding on their respective heirs, successors, representatives and assigns. 32. The Landlord herewith acknowledges the receipt of Thirty One Thousand / no --- ($31,000.00) DOLLARS, which he is to retain as security for the faithful performance of all of the covenants, conditions, and agreements of this Lease, but in no event shall the Landlord be obligated to apply the same upon rents or other charges in arrears or upon damages for the Tenant's failure to perform the said covenants, conditions, and agreements. The Landlord may so apply the security at his option; and the Landlord's right to the possession of the premises for non-payment of rent or for any other reason shall not in any event be affected by reason of the fact that the Landlord holds this security. The said sum if not applied toward the payment of rent in arrears or toward the payments of this Lease is to be returned to the Tenant when this Lease is terminated, according to these terms, and in no event, is the said security to be returned until the Tenant has vacated the premises and delivered possession to the Landlord. See Rider Paragraph 10 In the event that the Landlord repossesses himself of the said premises because of the Tenant's default or because of the Tenant's failure to carry out the covenants, conditions, and agreements of this Lease, the Landlord may apply the said security upon all damages suffered to the date of said repossession and may retain the said security to apply upon such damages as may be suffered or shall accrue thereafter by reason of the Tenant's default or breach. The Landlord shall not be obligated to keep the said security as a separate fund, but may mix the said security with his own funds. (See Paragraph 10 of Rider for additional security deposit provisions.) 33. Tenant hereby agrees not to look to the mortgagee in possession, or successor in title to the property, for accountability for any security deposit required by the Landlord hereunder, unless said sums have actually been received by said mortgagee as security for the Tenant's performance of this lease. WITNESSES J.R.F. II ASSOCIATES LIMITED PARTNERSHIP A Michigan Limited Partnership /s/ "Ann J. Silver" By: /s/ "Gerald W. Jardine" - -------------------- --------------------------- /s/ "Mark Griffin" Gerald W. Jardine - -------------------- Its: General Partner "LANDLORD" LUMONICS CORPORATION A Michigan Corporation /s/ "Ann J. Silver" By: /s/ "Stephen G. Whisnen" - ------------------------ --------------------------- /s/ "Mark Griffin" Stephen G. Whisnen - ------------------------ Its: Vice President - Operation "TENANT" __________________________________________ INDIVIDUALLY 8 STATE OF MICHIGAN COUNTY OF OAKLAND On this 24/th/ day of September, A.D., 1991, before me, a Notary Public in and for the County and State above written, personally appeared Gerald W. Jardine, General Partner of J.R.F. II ASSOCIATES LIMITED PARTNERSHIP (A Michigan Limited Partnership) and acknowledged that he executed same as His free act and deed on behalf of the Partnership. FURTHER, that the said Gerald W. Jardine signed in the presence of the witnesses, and that the witnesses signed at the request of the said Gerald W. Jardine in his presence and in the presence of each other. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. /s/ "Frank Ioli" ------------------------------------ Notary Public, county of ___________ State of Michigan. My Commission Expires: _____________ Frank Ioli Notary Public, Oakland County, Michigan My Commission Expires March 29, 1995. STATE OF MICHIGAN COUNTY OF OAKLAND On this _______________ day of ______________________ , A.D., 19__, before me, a Notary Public in and for the County and State above written, personally appeared ________________________________ , of ________________________ and acknowledge that he executed same as ______ free act and deed on behalf of the ___________________. FURTHER, that the said ________________________ signed in the presence of the witnesses, and that the witnesses signed at the request of the said ______________________. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ____________________________________ Notary Public, County of ___________ State of Michigan. My Commission Expires: _____________ 9 ADDENDUM TO LEASE DATED SEPTEMBER 24, 1991 Between "GWJ" "SGW" LUMONICS CORPORATION AND J.R.F. II ASSOCIATES LIMITED PARTNERSHIP (A Michigan Limited Partnership) "O P T I O N" Two (2) - Five (5) year options at five (5%) percent or C.P.I. per year over the base year, whichever is the lesser. Base year to be defined in this case as Year number 6. LUMONICS CORPORATION J.R.F. II ASSOCIATES LIMITED PARTNERSHIP A Michigan Limited Partnership "Stephen G. Whisner" "Gerald W. Jardine" - ------------------------------- -------------------------- By: Stephen G. Whisner By: Gerald W. Jardine Its: Vice President-Operations Its: General Partner Witnessed: "Ann J. Silver" "Ann J. Silver" "Mark Griffin" "Mark Griffin" RIDER TO LEASE Dated: 24 September, 1991 BETWEEN LUMONICS CORPORATION, AS TENANT AND J.R.F. II ASSOCIATES LIMITED PARTNERSHIP (A Michigan Limited Partnership) 1. As stated in Paragraph 1. (b) of said Lease, Tenant's proportionate share, for purposes of computing tenants share of taxes, insurance, assessments, common area maintenance, and other expenses chargeable to tenant pursuant to the Lease terms shall be 57.1% of the total cost of such items for the building occupied by tenant (computed as follows: Tenant's square footage = 29,391 divided by total building size of 51,433). 2. Tenant shall have the first right to expand to any space in the same building they occupy of Haggerty Tech Center which becomes available during the lease term or any extension thereof upon the same economic terms as are then applicable to the subject premises, being the same rent then applicable to the other part of the building rented by Lumonics Corporation. 3. Tenant shall have parking for eighty (80) cars, including reserved parking spaces marked for LUMONICS adjacent to building totaling fifteen (15) spaces. 4. With reference to Paragraph 4. of the Lease, before this lease goes into effect the parties shall execute the subordination attornment and non- disturbance agreement attached as Exhibit C & C-1. Any future mortgage shall require a similar agreement. 4.(a) Paragraph 4. (a) shall provide that Tenant shall inspect its premises and tenant finishes prior to its taking occupancy and execute the required Tenant Acceptance Letter and Subordination, Attornment, and Non-Disturbance Agreement upon execution of Lease, however Landlord agrees that Tenant shall have from Landlord a one year builders warranty on the new leasehold improvements. Tenant shall use its best efforts to advise Landlord of any punch list items within thirty (30) days of occupancy, but the warranty shall last for all items becoming known within one year of occupancy which will be the obligation of Landlord to repair, and Landlord agrees to promptly cause such corrections or repairs to be done. "GWJ" "SGW" ----- ----- 5. With respect to paragraphs 7. and 9. of the Lease, Landlord agrees that Tenant shall not be responsible for any repairs which are covered by warranty from a sub-contractor, supplier or manufacturer and which are in fact taken care of at the expense of that third party and not at Landlord's expense. 6. Paragraph 6. of Lease shall provide that in event of the amount of damage specified therein, Tenant shall also have the right to terminate the Lease at its option. 7. With reference to Paragraph 9., Landlord agrees to provide advance notice of its entry for repairs when possible and further agrees to cause the least disturbance possible to Tenants operation. 8. Waiver of Subrogation. Each party hereto waives rights of --------------------- subrogation against other party, both for itself and its insurer, for any loss or damage which could be insured against by a fire and extended coverage and/or contents insurance policy. Each party agrees to notify its insurer of this waiver and waiver of subrogation. 9. Regarding Paragraph 11, Tenant may also terminate Lease if such taking renders the remaining available space inadequate or inappropriate for Tenants purposes or uses prior to such taking. In the event of any taking, each party hereto shall retain the right to claim and recover its own separate damages. 10. After the Lease has been in effect for a period of three (3) years without any material default by Tenant, Landlord shall refund the security deposit to Tenant with interest thereon from date of receipt in the amount earned by the deposit in an account mutually approved by Landlord and Tenant. 11. Tenant shall supply Landlord with name and address of resident agent at time of execution of Lease. "GWJ" "SGW" 12. Landlord agrees to lend its best efforts to promptly complete all Tenant finishes to make the leased premises available to Tenant at the earliest possible date. Tenant shall have possession of leased premises no later than February 15th, 1992, and its surrender of 12163 Globe Road, Livonia, MI to Landlord. This time may be extended by Landlord in the event of an occurrence over which Landlord has no control. (For example: a fire, strike, material shortages, act of God, such as wind or lightning damage, and the like). LUMONICS CORPORATION J.R.F. II ASSOCIATES LIMITED PARTNERSHIP (A Michigan Limited Partnership) "Stephen G. Whisner" "Gerald W. Jardine" - --------------------------------- --------------------------- By: Stephen G. Whisner By: Gerald W. Jardine Its: Vice President-Operations Its: General Partner Witnessed: "Ann J. Silver" "Ann J. Silver" "Mark Griffin" "Mark Griffin" EXHIBIT "C" TENANT ACCEPTANCE LETTER Date: September 24, 1991 TO: The Mutual Benefit Life Insurance Company 520 Broad Street Newark, New Jersey 07101 and TO: J.R.F. ASSOCIATES & J.R.F. II ASSOCIATES LIMITED PARTNERSHIP 19786 Haggerty Road #104 Livonia, MI 48152 ("Borrower") Re: Commitment # 1867 (MBL) Gentlemen: Respecting that certain lease dated September 24, 1991, with Borrower as ------------------ Landlord, Lumonics Corporation ("Tenant") hereby certifies that it has -------------------- unconditionally accepted possession of the premises described in said lease, and said lease is in full force and effect and has not been modified, supplemented or amended in any way, and that the date of commencement of the term of the lease was December 25, 1991 and the end of the term will be December 31, 1998 ----------------- ----------------- unless sooner terminated as therein provided. Tenant further certifies that all terms and conditions to be performed by the Landlord under said lease have been satisfied and that on this date there are no existing defenses or offsets which Tenant has against the full enforcement of said lease by Landlord. Tenant is in occupancy of the leased premises and there is on-going full operation of Tenant's business at the leased premises being conducted by Tenant during normal business hours. "Occupancy" means actual physical occupancy by means of the presence of --------- personnel. "Occupancy" does not occur when the leased premises are uninhabited during normal business hours (the presence on the leased premises during normal business hours of security or maintenance personnel alone does not constitute occupancy) merely because rent continues to be paid and there exists a valid lease, whether or not there is a clause requiring continued operation of the business. "GWJ" "SGW" "On-going full operation of Tenant's business" means: -------------------------------------------- On-going, visible and bona fide use of the leased premises, during normal business hours, by Tenant as general offices. "On-going full operation of Tenant's business" shall not be deemed to occur merely because there is occupancy together with: a. promises of early commencement of on-going full operation of Tenant's business; or b. a valid "continuous operation" requirement in the lease, and Tenant's continuing to pay required rent. Rent of $ 26,696.83 per month is now being paid, and no more than one month's ----------- rent has been paid in advance. The above rental amount is (check one): X The full base rent due under the lease. --- ___ A reduced rent due for a limited time, but full base rent of $ ___ per month will commence with the rent installment due __________, 19__. Tenant further agrees not to look to the Mutual Benefit Life Insurance Company ("Mutual"), whether as mortgagee, mortgagee in possession or successor in title to the property, for accountability for any security deposit required by the Landlord under said lease or interest therein if Tenant is entitled to same under the lease or at law, unless such sums have actually been received by Mutual as cash security for Tenant's performance of this lease. Tenant's lease shall be assigned by Landlord to Mutual, under a Collateral Assignment of Leases form, as collateral security for a mortgage loan being given to Landlord by Mutual. This Assignment form requires Landlord to not thereafter modify, terminate or accept surrender of the lease, nor to reduce, abate or accept prepayment of more than one month's rent, without Mutual's prior written consent. Tenant acknowledges said agreements and restrictions and hereby agrees to also be bound by them. Tenant will not assign or sublease its leasehold without Mutual's written consent. Tenant hereby waives actual notice of said assignment to Mutual, the within document being agreed to constitute such notice. LUMONICS CORPORATION, ("TENANT") -------------------------------- By: "Stephen G. Whisner" ----------------------------- Its: Stephen G. Whisner Vice-President-Operations EXHIBIT "C-1" SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE AGREEMENT THIS AGREEMENT made and entered into as of the ___________ day of ________, 199__, by and between THE MUTUAL BENEFIT LIFE INSURANCE COMPANY, a New Jersey mutual life insurance company, having its principal office at 520 Broad Street, Newark, New Jersey 07102 ("Mortgagee"), and Lumonics Corp., whose mailing address is 19776 Haggerty Road, Livonia, MI 48152 ("Tenant"). RECITALS: WHEREAS, Mortgagee, holds a Mortgage (the "Mortgage") encumbering certain real property located in Wayne County, Haggerty Tech Centre (the "Premises"); and WHEREAS, Tenant entered into a lease with J.R.F. II ASSOCIATES LIMITED PARTNERSHIP (the "Landlord") for a portion of the Premises (the "Leased Premises") said lease being dated _______________________ as amended by ______________________________, said lease and Amendment to Lease hereinafter collectively referred to as the "Lease"; and WHEREAS, Tenant and Mortgagee desire hereby to establish certain rights, safeguards, obligations and priorities with respect to their respective interest by means of the following non-disturbance, attornment and subordination agreements. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and in consideration of One Dollar ($1.00) by each of the parties hereto paid to the other, receipt of which is hereby acknowledged, the parties do hereby covenant and agree as follows: 1. The Lease is and shall be subject and subordinate to the Mortgage insofar as it affects the Premises of which the Leased Premises forms a part, and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of the principal sum secured thereby and interest thereon. "GWJ" "SGW" 2. In the event it should become necessary to foreclose the Mortgage, the Mortgagee will not join the Tenant under the Lease in summary or foreclosure proceedings so long as the Tenant is not in default under any of the terms, convenants or conditions of the Lease. 3. In the event that the Mortgagee shall succeed to the interest of the Landlord under the Lease, the Mortgagee agrees to be bound to the Tenant under all of the terms, covenants and conditions of the Lease, and the Tenant agrees, from and after such event, to attorn to the Mortgagee and/or any purchaser at any foreclosure sale of the Premises, all rights and obligations under the Lease to continue as though the interest of Landlord had not terminated or such foreclosure proceedings had not been brought, and the Tenant shall have the same remedies against the Mortgagee for the breach of an agreement contained in the Lease that the Tenant might have had against the Landlord if the Mortgagee had not succeeded to the interest of the Landlord; provided, however, that the Mortgagee shall not be: (a) liable for any act or omission of any prior landlord (including the Landlord); or (b) subject to any offsets or defenses which the Tenant might have against any prior landlord (including the Landlord) relating to matters occurring prior to the acquisition of title by mortgagee, its successors and assigns; or (c) bound by any rent or additional rent which the Tenant might have paid for more than the current month to any prior landlord (including the Landlord); or (d) bound by any amendment or modification of the Lease made without its consent; or (e) liable for the return of any security deposit not actually received. 4. Notwithstanding anything to the contrary hereinabove contained, any interest of the Tenant in an option to purchase all or any part of the Premises contained in the Lease is specifically subordinated to the rights of the first Mortgagee under the terms of the Mortgage and such option shall not be binding upon the first Mortgagee, its successors or assigns. 5. Notwithstanding anything to the contrary hereinabove contained, to the extent the provisions of the Mortgage dealing with application of casualty insurance proceeds and condemnation proceeds may be inconsistent with corresponding provisions of the Lease, the provisions of the Mortgage shall be controlling. "GWJ" "SGW" 6. Mortgagee does not intend hereby to waive or negate any covenant or agreement in said Lease which provides Landlord an option to cancel independent of any default on the part of Tenant. 7. This Agreement may not be modified other than by an Agreement in writing, signed by the parties hereto or by their respective successors in interest. 8. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns and to no other persons. 9. It is expressly understood and agreed that this Agreement shall supersede, to the extent inconsistent herewith, any provisions of the Lease relating to the subordination of the Lease and interest and estates created thereby to the lien or charge of the Mortgage. 10. This Agreement shall be governed by and construed in accordance with the laws of the state in which the property is located. 11. The parties hereto agree to execute and deliver, in recordable form if necessary, any and all further documents and instruments reasonably requested by any party hereto or any title insurance company to give effect to the terms and provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed these presents the day and year first above written. TENANT: LUMONICS CORPORATION By: __________________________ Its: _________________________ ATTEST: ________________________ Its: ___________________ MORTGAGEE: THE MUTUAL BENEFIT LIFE INSURANCE COMPANY By: __________________________ Its: _________________________ ATTEST: ________________________ Its:____________________ STATE OF COUNTY OF I, the undersigned, a Notary Public in and for the State and County, DO HEREBY CERTIFY that , whose name as an officer of the is signed to the foregoing Subordination, Attornment and Non-Disturbance Agreement and who is known to me and known to be such officer, acknowledged before me on this day under oath, that, being informed of the contents of the said Agreement, he, as such officer, and with full authority, executed the same voluntarily for and as the act of said Company. Given under my hand and seal of office. _______________________________ Notary Public (Seal) My Commission Expires: STATE OF NEW JERSEY COUNTY OF ESSEX I, the undersigned, a Notary Public in and for the State and County, DO HEREBY CERTIFY that whose name as an officer of The Mutual Benefit Life Insurance Company is signed to the foregoing SUBORDINATION, ATTORNMENT and NON-DISTURBANCE AGREEMENT and who is known to me and known to be such officer, acknowledged before me on this day under oath, that, being informed of the contents of the said Agreement, he, as such officer, and with full authority, executed the same voluntarily for and as the act of said Company. Given under my hand and seal of office. _______________________________ Notary Public (Seal) My Commission Expires: U M R UNITED MORTGAGE & REALTY DEVELOPMENT CO., L.L.C. REAL ESTATE DEVELOPMENT AND MORTGAGE BANKING 22260 HAGGERTY ROAD - SUITE 130 - NORTHVILLE, MI 48167 - (248) 305-9980 - FAX (248) 305-9986 November 4, 1998 Mr. John George - Vice President Lumonics Corporation 19776 Haggerty Road Livonia, MI 48152 RE: LUMONICS LEASE EXTENSION Dear John: Pursuant to our conversation of October 26, 1998, it is agreed and understood that JFR II Associates Limited Partnership, will extend their lease with Lumonics to June 30, 1999, under the same terms and conditions as the existing lease. Lumonics will vacate the building on or before June 30, 1999. Beginning July 1, 1999, Lumonics will continue to pay landlord, rent and all common area maintenance, utilities, taxes and insurance (TIM) charges for a period of nine months. TIM charges will be whatever the costs are at that time. In the event landlord leases any part of Lumonics' space, Lumonics' rent and TIM charges would be prorated based on the square footage that is being leased. In any event, it is agreed and understood by the parties hereto, that Lumonics will continue to pay all rent and TIM charges until March 31, 2000 unless the vacant space is leased in full, otherwise the rent and TIM will be prorated as stated above. John if the terms and conditions stated above meet with your approval, please sign and date three copies and return two copies to me. Very truly yours, "Gerald W. Jardine" Gerald W. Jardine Page 1 of 2 November 6, 1998 All the above terms and conditions are agreed to by the parties hereto. "Ruth J. Czarnecki" LUMONICS CORPORATION - ------------------------------ Witness Ruth J. Czarnecki "Michelle L. Anderson" By: "John W. George" - ------------------------------ --------------------------------- Witness Michelle L. Anderson John W. George Date: November 12, 1998 Its: Vice-President, Customer Support -- "Karen Anheuser" JRF 2 Associates Limited Partnership - ------------------------------ Witness Karen Anheuser "Pamela Thrift" By: "Gerald W. Jardine" - ------------------------------ --------------------------------- Witness Pamela Thrift Gerald W. Jardine Date: November 6, 1998 Its: General Partner - Page 2 of 2 BUILDING #3 - HAGGERTY TECH CENTRE 51,433 Square Feet EXHIBIT "A" LUMONICS CORPORATION 29,391 SQUARE FEET NOT DRAWN TO SCALE "GWJ" "SGW" ----- ----- NOTE: This exhibit will suffice until architects space plan is completed at which time will become Exhibit "B". EXHIBIT "B" PHYSICAL REQUIREMENTS
WORK SQUARE CEILING GENERAL AREA FEET HEIGHT COMMENTS ---- ------ ------ -------- SALES 9,000 . General Sales 8' - 10' - 3,500 SF - 3 private executive offices. . Demo Lab 14' - 16' - 5,500 SF - 10 private demo areas - Next to Assembly area and Customer Service. - 6" concrete floor covered with vinyl tile or colored epoxy sealant. - 80 foot candles of light. - 240/36 and 110 outlets. LOBBY, CORP, ROOMS, SUPPORT 3,000 8' - 10' . Lobby 8' - 10' - A moderately upscale statement, but not pretentious. Primarily to serve sales. Secondarily to serve customer service. - Visitors bathrooms and coat rooms included or nearby. . Conference Rooms 8' - 10' - 2 private rooms. - Primarily to serve Sales. Secondarily to serve Customer Service. . Other Support 8' - 10' - Copy room and library next to Sales.
EXHIBIT "B" (CONTINUED) PHYSICAL REQUIREMENTS
WORK SQUARE CEILING GENERAL AREA FEET HEIGHT COMMENTS - ---- ------ ------- -------- CUSTOMER SERVICE 4,500 . General customer service 8' - 10' - Next to Sales - 2 private executive offices. . classroom 8' - 10' - 2 private rooms. GENERAL ACCOUNTING/PURCHASING 2,000 8' - 10' - 1 private executive office. ENGINEERING 2,000 8' - 10' - All open office. CAFETERIA 500 8' - 10' - All Open. - Accessible to shop as well as office areas. ASSEMBLY/WAREHOUSE 10,000 . Parts Warehouse 14' - 16' - 1,500 SF. Private area. - Private room. . Assembly 14' - 16' - 1 private executive office. - 1 private shop office. - 6" scaled concrete floor. - 1800 amps, 240/480 volts, 3 phase secondary service. - dock high doors. - Fire suppression only as required by code.
EX-10.7 10 INDUSTRIAL SPACE LEASE DATED 3/17/1992 EXHIBIT 10.7 INDUSTRIAL SPACE LEASE FOR LUMONICS CORPORATION -------------------- DATED: March 30, 1992 -------------- LEASE INDEX
Page ---- ARTICLE I. BASIC TERMS Section 1.1 A. Address of Landlord.................................. 1 B. Address of Tenant.................................... 1 C. Premises............................................. 1 D. Building............................................. 1 E. Guarantor (s)........................................ 1 F. Lease Term........................................... 1 G. Lease Year........................................... 1 H. Rent................................................. 2 I. Base Rent............................................ 2 J. Security Deposit..................................... 2 K. Tenant's Proportionate Share......................... 2 L. Permitted Uses....................................... 2 M. Broker(s)............................................ 2 Section 1.2 Effect of Reference to Basic Terms................... 2 ARTICLE II. GRANT AND TERM Section 2.1 Premises............................................. 2 Section 2.2 Term................................................. 2 Section 2.3 Possession........................................... 2 ARTICLE III. RESERVATIONS BY LANDLORD Section 3.1 Roof, Walls, Utilities, etc.......................... 3 Section 3.2 Other Reservations................................... 3 ARTICLE IV. RENT Section 4.1 Base Rent............................................ 3 Section 4.2 Increased Real Estate Taxes.......................... 4 Section 4.3 Fire and Extended Coverage Insurance Premiums........ 5 Section 4.4 Heating, Ventilation and Air Conditioning Maintenance 5 Section 4.5 Common Area Expenses................................. 5 Section 4.6 Payment of Additional Rent........................... 7 Section 4.7 Service Charge....................................... 7 ARTICLE V. USE Section 5.1 Purpose.............................................. 7 Section 5.2 Prohibition of Use................................... 7 ARTICLE VI. UTILITIES AND SERVICES Section 6.1 Utilities and Services............................... 8
Page ---- ARTICLE VII. QUIET ENJOYMENT Section 7.1 Quiet Enjoyment........................................ 8 ARTICLE VIII. ASSIGNMENT AND SUBLETTING Section 8.1 Assignment and Subletting.............................. 8 ARTICLE IX. DAMAGE OR DESTRUCTION Section 9.1 Restoration............................................ 8 Section 9.2 Termination of Lease; Abatement of Rent................ 9 ARTICLE X. LANDLORD'S RIGHTS Section 10.1 Landlord's Rights...................................... 9 ARTICLE XI. HOLDING OVER Section 11.1 Holding Over........................................... 10 ARTICLE XII. SIGNS AND ADVERTISEMENTS Section 12.1 Signs and Advertisements............................... 10 ARTICLE XIII. MORTGAGE AND TRANSFER Section 13.1 Mortgage and Transfer.................................. 11 ARTICLE XIV. EMINENT DOMAIN Section 14.1 Eminent Domain......................................... 11 ARTICLE XV. LANDLORD'S INABILITY TO PERFORM Section 15.1 Landlord's Inability to Perform........................ 11 ARTICLE XVI. BANKRUPTCY OR INSOLVENCY Section 16.1 Bankruptcy or Insolvency............................... 12 ARTICLE XVII. COMMON AREAS Section 17.1 Common Areas........................................... 16 ARTICLE XVIII. COMPLETION AND ACCEPTANCE OF PREMISES, MAINTENANCE AND CARE Section 18.1 Completion and Acceptance.............................. 16 Section 18.2 Maintenance and Repair by Tenant....................... 16 Section 18.3 Maintenance and Repair by Landlord..................... 17
Page ---- ARTICLE XIX. LANDLORD'S RIGHT TO CURE Section 19.1 Landlord's Option to Cure; Reimbursement by Tenant................................................ 17 ARTICLE XX. ALTERATIONS AND ADDITIONS, MECHANICS' LIENS Section 20.1 Alterations and Additions.............................. 18 Section 20.2 Mechanics' Liens....................................... 18 ARTICLE XXI. INSURANCE Section 21.1 Public Liability, Property Damage, Insurance........... 18 Section 21.2 Fire and Extended Coverage Insurance................... 19 Section 21.3 Mutual Subrogation..................................... 19 Section 21.4 Indemnification of Landlord............................ 19 ARTICLE XXII. USE OF COMMON AREAS BY TENANT Section 22.1 Use of Common Areas.................................... 20 ARTICLE XXIII. DEFAULT AND REMEDIES Section 23.1 Defaults............................................... 20 Section 23.2 Remedies Cumulative.................................... 22 Section 23.3 No Waiver.............................................. 22 Section 23.4 No Reinstatement....................................... 22 Section 23.5 Default Under Other Leases............................. 22 ARTICLE XXIV. DEFINITION OF LANDLORD Section 24.1 Landlord Means Owner................................... 22 ARTICLE XXV. NOTICES SECTION 25.1 Notices................................................ 23 ARTICLE XXVI. SECURITY DEPOSIT SECTION 26.1 Security Deposit....................................... 23 ARTICLE XXVII. SUBORDINATION OR SUPERIORITY SECTION 27.1 Subordination or Superiority........................... 23 ARTICLE XXVIII. MISCELLANEOUS Section 28.1 Persons Bound.......................................... 24 Section 28.2 Partial Invalidity..................................... 24 Section 28.3 Captions............................................... 24 Section 28.4 No Option.............................................. 24 Section 28.5 Brokers................................................ 25
Page ---- Section 28.6 Waiver Of Jury......................................... 25 Section 28.7 Tenant's Statement..................................... 25 Section 28.8 Estoppel Certificate................................... 25 Section 28.9 Short Form Lease....................................... 25 Section 28.10 Time of Essence........................................ 25 Section 28.11 Relationship of Parties................................ 26 Section 28.12 Law Applicable......................................... 26 Section 28.13 Guarantee.............................................. 26 ARTICLE XXIX. RIDER Section 29.1 Rider.................................................. 26 ARTICLE XXX. ENTIRE AGREEMENT Section 30.1 Entire Agreement....................................... 26
PROPERTY NO. _____ INDUSTRIAL SPACE LEASE ---------------------- (Single Building Project) THIS LEASE, made as of the 17/th/ day of March, 1992, by and between the ------ ----------- TRAVELERS INSURANCE COMPANY, a Connecticut Corporation, hereinafter called "Landlord", and Lumonics Corporation, a(n) Michigan Corporation, hereinafter -------------------- -------------------- called "Tenant"; ARTICLE I - BASIC TERMS - ----------------------- 1.1 A. Address of Landlord: ------------------- The Travelers Insurance Company ------------------------------- c/o Welsh Companies, Inc. ------------------------- 11200 W. 78/th/ Street ---------------------- Eden Prairie, MN 55344 ---------------------- or such other address as may from time to time be designated by Landlord in writing. B. Address of Tenant: ----------------- Lumonics Corporation -------------------- 6690 Shady Oak Road ------------------- Eden Prairie, MN 55344 ---------------------- or such other address as may from time to time be designated by Tenant in writing. C. Premises. Approximately 69,034 square feet of space in the Building -------- ------ as shown on Exhibit "A" attached hereto. D. Building. The Building in which the Premises are located, the common -------- address of which is 6680-6690 Shady Oak Road, Eden Prairie, MN 55344. ------------------------------------------------ The legal description of the parcel of land on which the building is situated is attached as Exhibit "B". E. Guarantor(s). ----------- F. Lease Term. The period of time commencing on April 1, 1992 (the ---------- ------------- "Commencement Date") and expiring on March 31, 1999, unless sooner -------------- terminated as set forth herein. G. Lease Year. That twelve (12) month period commencing on the ---------- Commencement Date and ending on the twelve-month anniversary of the Commencement Date and each consecutive twelve-month period thereafter during the Lease Term. -1- H. Rent. All sums, moneys or payments required to be paid by Tenant to ----- Landlord pursuant to this Lease, whether designated as "Base Rent", "Additional Rent", or otherwise. I. Base Rent. $2,059,992.00 for the Lease Term, payable as follows: See ---------- ------------- Section 31.1 of Lease Rider 1. $ ______ per annum ($ _____ per month) for the period from _____ through _______________; 2. $ ______ per annum ($ _____ per month) for the period from _____ through______________; J. Security Deposit: $19,387.00. ---------------- ---------- K. Tenant's Proportionate Share: See Rider. ---------------------------- --------- L. Permitted Uses: Office/Warehouse/Manufacturing -------------- ------------------------------ M. Broker(s): Welsh Companies, Inc. --------- -------------------- 1.2 Effect of Reference to Basic Terms. Each reference in this Lease to any ---------------------------------- of the Basic Terms contained in Section 1.1 shall be construed to incorporate into such reference all of the definitions set forth in Section 1.1. ARTICLE II - GRANT AND TERM - -------------------------- 2.1 Premises. In consideration of the rents, convenants, agreements and -------- conditions hereinafter provided to be paid, kept, performed and observed, Landlord leases to the Tenant and Tenant hereby hires from Landlord the Premises described in Section 1.1 (C). 2.2 Term. Tenant shall have and hold the Premises for and during the Lease ---- Term described in Section 1.1 (F), subject to the payment of the Rent and to the full and timely performance by Tenant of the convenants and conditions hereinafter set forth. 2.3 Possession. Except as otherwise expressly provided herein (or by written ---------- instrument signed by Landlord), Landlord shall deliver possession of the Premises to Tenant on or before the Commencement Date in their condition as of the execution and delivery hereof, reasonable wear and tear excepted. If Landlord gives possession prior to the Commencement Date, such occupancy shall be subject to all the terms and conditions of this Lease. If Landlord shall be unable to deliver possession of the Premises on the Commencement Date by reason of the fact that work required -2- to be done by Landlord hereunder, if any, has not been completed for any reason, because a prior tenant has failed to deliver up possession of the Premises, or for any other cause beyond the control of Landlord, Landlord shall not be subject to any liability for the failure to give possession on said date, nor shall the validity of this Lease or the obligations of Tenant hereunder be in any way affected. Under such circumstances, unless the delay is the fault of Tenant, Rent and other charges hereunder shall not commence until the later of the date possession of the Premises is given or the Commencement Date. ARTICLE III - RESERVATIONS BY LANDLORD - -------------------------------------- 3.1 Roof, Walls, Utilities, etc. Landlord accepts and reserves the roof and --------------------------- exterior walls of the Building, and further reserves the right to place, install, maintain, carry through, repair and replace such utility lines, pipes, wires, appliances, tunneling and the like in, over, through and upon the Premises as may be reasonably necessary or advisable for the servicing of the Premises or any other portions of the Building or the parcel of land described in Exhibit "B". 3.2 Other Reservations. Notwithstanding any provision in this Lease to the ------------------ contrary, it is agreed that Landlord reserves the right, without invalidating this Lease or modifying any provision thereof, at any time, and from time to time, (i) to make alterations, changes, and additions to the Building, (ii) to add additional areas to the Building and/or to exclude areas therefrom, (iii) to construct additional buildings and other improvements, (iv) to remove or relocate the whole or any part of any building or other improvement, so long as such changes do not negatively impact tenants use or economic value of the Premises. It is further understood that the existing layout of the Building, and any appurtenant walks, roadways, parking areas, entrances, exits, and other improvements shall not be deemed to be a warranty, representation or agreement on the part of Landlord that same will remain exactly as presently built, it being understood and agreed that Landlord may change the number, dimensions and locations of the walks, buildings and parking spaces a Landlord shall deem proper. All such common areas shall at all times be subject to the exclusive control and management of Landlord. ARTICLE IV - RENT - ----------------- 4.1 Base Rent. Tenant covenants to pay without notice, deduction, set-off or --------- abatement to Landlord the Base Rent specified in Section 1.1 (l) in lawful money of the United States in equal consecutive monthly installments in advance on the first day of each and every month during the Lease Term. Rent for any partial month shall be prorated on a per diem basis. Rent shall be payable to Landlord -------- at Landlord's address shown at Section 1.1 -3- (A) above or such other place as Landlord may designate from time to time in writing. Tenant shall pay the first full month's Base Rent upon execution of this Lease. All payments of Rent shall be made without deduction, set off, discount or abatement in lawful money of the United States. 4.2 Real Estate Taxes. During the Lease Term or any renewals, extensions or ----------------- holding over, Tenant shall pay to Landlord, as Additional Rent, Tenant's Proportionate Share of all real property taxes (including extraordinary and/or special assessments) which may be levied or assessed by any lawful authority against the Building and the parcel of land described in Exhibit "B" during any and each Lease Year. In addition, Tenant shall pay to Landlord prior to delinquency all taxes assessed against the value of any improvements made by Tenant, or of any machinery, equipment, fixtures, inventory or other personal property or assets of Tenant contained in the Premises or related to Tenant's use of the Premises. A tax bill or true copy thereof submitted by Landlord to Tenant shall be conclusive evidence of the amount of taxes assessed or levied, as well as of the items taxed. If a tax or excise on rents or other tax, however described, is levied or assessed against Landlord on account of or measured by, in whole or in part, the Rent expressly reserved under this and any other leases or leasehold interests in the Building, as a substitute for or addition to, in whole or in part, taxes assessed or imposed on the Premises, the Building or the parcel of land described in Exhibit "B", such tax or excise on rents or other tax shall be included as a part of the real property taxes covered hereby, but only to the extent of the amount thereby which is lawfully assessed or imposed as a direct result of Landlord's ownership of this Lease or of the Rent accruing under this Lease, or of the other leases or leasehold interests in the Building. The above described taxes to be paid by Tenant shall be estimated by Landlord, and 1/12/th/ of such estimated taxes for each Lease Year shall be paid monthly on the first day of each and every month during the Lease Term in addition to Base Rent. An annual accounting to include a copy of the paid tax bills shall be made promptly after receipt by Landlord of such tax bills for each Lease Year at which time Tenant shall pay any additional tax due or Landlord shall apply any overpayment made by Tenant as a credit toward the next Lease Year's tax obligations of Tenant or at the end of the Lease Term shall return any such overpayments to Tenant provided Tenant has no Rent then due to Landlord, whichever event is applicable. In any event, upon notice by Landlord, Tenant shall pay any additional tax due with the next monthly installment of Base Rent. Landlord shall have the same rights and remedies for Tenant's failure to pay real estate taxes as Landlord has for Tenant's failure to pay Base Rent. If some method or type of taxation shall replace the current method of assessment of real estate taxes, in whole or part, or the type hereof, or if additional types of taxes are -4- imposed upon the Premises, the Building or the parcel of land described in Exhibit "B", or if Landlord is required to supplement real estate taxes due to legal limits imposed thereon, Tenant agrees that Tenant shall pay an equitable share of the same as Additional Rent computed in a fashion consistent with the method of computation herein provided, to the end that Tenant's share thereof shall be, to the maximum extent practicable, comparable to that which Tenant would bear under the foregoing provisions. If the Lease Term shall commence or end during a tax calendar year (tax calendar year shall mean each annual period for which ad valorem real estate ---------- taxes are assessed and levied) of which only part is included in the Lease Term, the amount of such Additional Rent shall be equitably prorated to cover only the period of time within the tax calendar year during which the Lease shall be in effect. All references herein to Real Estate Taxes for a particular tax calendar year shall be deemed to refer to the Real Estate Taxes levied, assessed or otherwise imposed for such tax calendar year without regard to when such Real Estate Taxes are payable. 4.3 Fire and Extended Coverage Insurance Premiums. During the Lease Term or --------------------------------------------- any renewal, extension, or holding over thereof, Tenant shall pay to Landlord as Additional Rent, as part of Common Area Expenses, Tenant's Proportionate Share of the cost of the premium for the fire and extended coverage insurance described in Section 21.2. 4.4 Heating, Ventilation and Air Conditioning Maintenance. During the Lease ----------------------------------------------------- Term or any renewal, extension, or holding over thereof, in the event Landlord elects to enter into service and maintenance agreements for the heating, ventilation and air conditioning systems as more fully described in Section 18.2, Tenant shall pay to Landlord, as Additional Rent, as part of Common Area Expenses, Tenant's Proportionate Share of Landlord's cost and expense of such service and maintenance agreements and repairs to the heating, ventilating and air conditioning equipment and controls servicing the Premises. Landlord shall not enter into a maintenance and service agreement if tenant provides Landlord with a maintenance and service plan acceptable to Landlord. 4.5 Common Area Expenses. During the Lease Term or any renewal, extension or -------------------- holding over thereof Tenant will pay to Landlord, as Additional Rent, Tenant's Proportionate Share of the Common Area Expenses pertaining to the Building and the parcel of land described in Exhibit "B", as defined below. For the purpose of this Section 5.5 the term "Common Area Expenses" means Landlord's total costs and expenses incurred in owning, operating, maintaining and repairing the common facilities hereinafter defined, including but without limitation by enumeration, costs for all electricity, gas, water or fuel used in connection with the operation, maintenance, use and repair of the common facilities; the amount paid for all electricity furnished to the common -5- facilities to light the parking lots or for any other purpose; the amount paid for all labor and/or wages and other payments including costs to Landlord of workers' compensation and disability insurance, payroll taxes, welfare and fringe benefits made to janitors employees, contractors and subcontractors of Landlord involved in the operation and maintenance of the common facilities; managerial, administrative, and telephone expenses related to operation and maintenance of the common facilities; the total charges of and independent contractors employed in the care, operation, maintenance, cleaning and landscaping; the amount paid for all supplies, tools, replacement parts of components, equipment and necessities which are occasioned by everyday wear and tear; the amount paid for premiums for all insurance required from time to time by Landlord or Landlord's mortgagees and the pro-rata costs of machinery and equipment purchased or leased by Landlord to perform its common area maintenance obligations. To the extent that Landlord elects to provide services which are not separately metered or directly billed to Tenant, such as water and trash hauling, the costs of such services shall be included in Common Area Expenses. Common Area Expenses shall not, however, include interest on debt, capital retirement of debt, depreciation, costs properly chargeable to the capital account, except for capital expenditures which reduce other operating expenses or such capital expenditures that are required by changes in any governmental law or regulation in which case such expenditures, plus interest on the unamortized principal investment at ten percent (10%) per annum, shall be amortized over the life of the improvements, and such costs shall be directly chargeable by Landlord to Tenant in Tenant's Proportionate Share. Suitable adjustments in Common Area Expenses incurred shall be made in the determination of Tenant's Proportionate Share for any period during the Lease Term which is less than a full calendar year. Payments by Tenant on account of Tenant's Proportionate Share of such Common Area Expenses shall be made monthly and at the time and in the fashion herein provided for the payment of Base Rent. The amounts to be so paid to Landlord shall be an amount from time to time estimated by Landlord to be sufficient to cover, in the aggregate, a sum equal to Tenant's Proportionate Share of such Common Area Expenses for each calendar year during the Lease Term. Promptly after the end of each calendar year during the Lease Term, Landlord shall submit to Tenant a reasonably detailed accounting of Common Area Expenses for such calendar year, and Landlord shall certify to the accuracy thereof. If payments theretofore made for such calendar year by Tenant exceed Tenant's Proportionate Share of Common Area Expenses, according to such statement, Landlord shall credit the amount of overpayment against subsequent obligations of Tenant (or refund such overpayment, if the Lease Term had ended and Tenant has no -6- further obligation to Landlord); but, if Tenant's Proportionate Share of Common Area Expenses is greater than payments theretofore made on account for such period, Tenant shall make suitable payment to landlord promptly after being so advised by Landlord but in no event later than the date on which the next monthly installment of Base Rent is due. 4.6 Payment of Additional Rent. In addition to the Base Rent, all other -------------------------- payments to be made by Tenant pursuant to this Lease shall be deemed to be and shall become additional rent hereunder (hereinafter sometimes referred to as "Additional Rent"), whether or not the same be designated as such and Landlord shall have the same remedies for failure to pay the same as for non-payment of Base Rent. Any Additional Rent payable by Tenant pursuant to this Lease shall be paid upon billing by Landlord or at the time and in the manner as may otherwise be provided in this Lease. 4.7 Service Charge. Tenant's failure to make any monetary payment required of -------------- Tenant hereunder within ten (10) days of the due date thereof shall, result in the imposition of a service charge for such late payment in the amount of one and one-half percent (1 1/2%) of the amount due for each month or fraction thereof (or such lesser percentage as may be the maximum amount permitted by law) from the date due until paid. ARTICLE V - USE - --------------- 5.1 Purpose. The Premises hereby leased shall be used by and/or at the ------- sufferance of Tenant only for the non-residential purposes set forth in Section 1.1 (L) above and for no other purposes. Tenant shall, at Tenant's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders and requirements in effect during the Lease Term or any part thereof regulating the use by Tenant of the Premises. Tenant shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance, or will tend to unreasonably disturb other tenants in the Building. 5.2 Prohibition of Use. If use of the Premises should at any time during the ------------------ Lease Term be prohibited by law or ordinance or other governmental regulation, or prevented by injunction, this Lease shall not be thereby terminated, nor shall Tenant be entitled by reason thereof to surrender the Premises or to any abatement or reduction in rent, nor shall the respective obligations of the parties hereto be otherwise affected. -7- ARTICLE VI - UTILITIES AND SERVICES - ----------------------------------- 6.1 Utilities and Services. Tenant shall contract in its own name and timely ---------------------- pay for all charges for electricity, gas, water, fuel, sewer charges, telephone, trash hauling, and any other services or utilities used in, servicing or assessed against the Premises, unless otherwise herein expressly provided, and shall indemnify, defend and save Landlord harmless from and against any liability or damages on such account. ARTICLE VII - QUIET ENJOYMENT - ----------------------------- 7.1 Quiet Enjoyment. Landlord covenants that Tenant, on paying the Rent herein --------------- provided and keeping, performing and observing the covenants, agreements and conditions herein required of Tenant, shall peaceably and quietly hold and enjoy the Premises for the Lease Term subject, however, to the terms and conditions of this Lease. ARTICLE VIII - ASSIGNMENT AND SUBLETTING - ---------------------------------------- 8.1 Assignment and Subletting. Tenant shall not assign or hypothecate this ------------------------- Lease nor sublet or otherwise transfer its interest in all or any part of the Premises without the prior written consent of Landlord which consent shall not be unreasonably withheld. If Tenant wishes to assign this Lease or sublet all or any part of the Premises it shall give notice in writing (by certified mail or by personal delivery) of such intention to Landlord, furnishing Landlord with a copy of the proposed assignment or sublease document and with full information as to the identity and financial status of the proposed assignee or subtenant. Thereupon, Landlord shall have, within thirty (30) days of receipt of such notice, the right to terminate this Lease or to approve or reject such assignment or subletting by written notice to Tenant. If no such response is given, Landlord shall be deemed to have elected to approve the assignment or subletting. If such assignment or subletting is so approved and the rents under such an assignment or sublease are greater than the rents provided for herein, then Landlord shall have the further option either (a) to convert the assignment or sublease into a prime lease and receive all of the rents, in which case Tenant will be relieved of further liability hereunder and under the proposed assignment or sublease; or (b) to require Tenant to remain liable under this Lease, in which event Tenant shall be entitled to retain one-half of such excess rents. ARTICLE IX - DAMAGE OR DESTRUCTION - ---------------------------------- 9.1 Restoration. If the Premises or the Building or any part thereof is ----------- damaged by fire or other casualty, cause or condition whatsoever as to be substantially untenantable and Landlord shall -8- determine not to restore said Premises or Building, Landlord may, by written notice to Tenant given within sixty (60) days after such damage, terminate this Lease as of the date of the damage. If this Lease is not terminated as above provided and if the Premises are made partially or wholly untenantable as aforesaid, Landlord, at its expense, shall restore the same with reasonable promptness to the condition in which Landlord furnished the Premises to Tenant at the commencement of the term of this Lease as to those items that were provided at Landlord's expense without any reimbursement by Tenant. Landlord shall be under no obligation to restore any alterations, improvements or additions to the Premises made by Tenant or paid for by Tenant, including, but not limited to, any of the initial tenant finish done or paid for by Tenant or any subsequent changes, alterations or additions made by Tenant. 9.2 Termination of Lease: Abatement of Rent. If, as a result of fire or other --------------------------------------- casualty, cause or condition whatsoever the Premises are made partially or wholly untenantable and, if Landlord has not given the sixty (60) day notice above provided for and fails within one hundred twenty (120) days after such damage occurs to eliminate substantial interference with Tenant's use of the Premises or substantially to restore same, Tenant may terminate this Lease as of the end of said one hundred twenty (120) days by written notice to Landlord given not later than five (5) days after expiration of said one hundred twenty (120) day period. If the Premises are rendered totally untenantable but this Lease is not terminated, all Rent shall abate from the date of the fire or other relevant cause or condition until the Premises are ready for occupancy and reasonably accessible to Tenant. If a portion of the Premises untenantable, Rent shall be prorated on a per diem basis and apportioned in accordance with the --- ---- portion of the Premises which is usable by Tenant until the damaged part is ready for Tenant's occupancy. In all cases, due allowance shall be made for reasonable delay caused by adjustment of insurance loss, strikes, labor difficulties or any cause beyond Landlord's reasonable control. For the purposes of this Lease, the Premises shall be considered tenantable so long as and to the extent that the Premises are occupied. In any event, Tenant shall be responsible for the removal, or restoration, when applicable, of all its damaged property and debris from the Premises, up request by Landlord, or reimburse Landlord for the cost of removal. ARTICLE X - LANDLORD'S RIGHTS - ----------------------------- 10.1 Landlord's Rights. Landlord reserves the following rights: ----------------- (a) To change the name of the Building without notice or liability to tenant; -9- (b) During the last ninety (90) days of the Lease Term or any renewal or extension thereof, or at any time if Tenant has vacated the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for re-occupancy; so long as said work does not adversely effect the utility of the Premises, does not unreasonably interfere with Tenants use of the Premises and does not alter the layout of the Premises without first obtaining Tenants permission, which shall not be unreasonably withheld; (c) To exhibit the Premises to others and to display "For Lease" signs on the Premises during the last six months of the Lease Term or any renewal or extension thereof; so long as the "For Lease" sign does not obstruct existing signs or cause an unsafe situation; (d) To remove abandoned or unlicensed vehicles and vehicles that are unreasonably interfering with the use of the parking lot by others and charge the responsible tenant for the expense of removing said vehicles; (e) To take any and all measures, including making inspections, repairs, alterations, additions and improvements to the Premises or to the Building as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or Landlord's interests, or as may be necessary or desirable in the operation thereof. Landlord shall give prior notice to Tenant when possible except in the case of an emergency and shall attempt not to unreasonably interfere with Tenants use of the Premises. Landlord may enter upon the Premises for the purpose of exercising any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of Tenant's use or possession and without being liable in any manner to Tenant. ARTICLE XI - HOLDING OVER - ------------------------- 11.1 Holding Over. In the event of a holding over by Tenant after expiration or ------------ termination of this Lease without the consent in writing of Landlord, Tenant shall be deemed a tenant at sufferance and shall pay rent for such occupancy at the rate of 150% of the last-current Base Rent and Additional Rent, prorated for the entire holdover period, plus all attorneys' fees and expenses incurred by Landlord in enforcing its rights hereunder, plus any other damages occasioned by such holding over. Except as otherwise agreed, any holding over with the written consent of Landlord shall constitute Tenant a month-to-month tenant. ARTICLE XII - SIGNS AND ADVERTISMENTS - ------------------------------------- 12.1 Signs and Advertisements. Tenant shall not put upon nor permit to be put ------------------------ upon any part of the Premises or the Building, any signs, billboards or advertisements whatever in any location or any form without the prior written consent of Landlord. -10- ARTICLE XIII - MORTGAGE AND TRANSFER - ------------------------------------ 13.1 Mortgage and Transfer. Landlord shall have the right to transfer, --------------------- mortgage, pledge or otherwise encumber, assign and convey, in whole or in part, the Premises, the Building, the parcel of land described in Exhibit "B", this Lease, and all or any part of the rights now or hereafter existing and all rents and amounts payable to Landlord under the provisions hereof. Nothing herein contained shall limit or restrict any such rights. ARTICLE XIV - EMINENT DOMAIN - ---------------------------- 14.1 Eminent Domain. If the Premises or such substantial part thereof as -------------- reasonably renders the remainder unfit for the intended uses shall be taken by any competent authority under the power of eminent domain or be acquired for any public or quasi-public use or purpose, the Lease Term shall cease and terminate upon the date when the possession of said Premises or the part thereof so taken shall be required for such use or purpose and without apportionment of the award and Tenant shall have no claim against Landlord for the value of the then unexpired Lease Term. If any condemnation proceeding shall be instituted in which it is sought to take any part of the Building or to change the grade of any street or alley adjacent to the Building and such taking or change of grade makes it necessary or desirable to remodel the Building to conform to the changed grade, Landlord shall have the right to terminate this Lease after having given written notice of termination to Tenant not less than ninety (90) days prior to the date of termination designated in the notice. In either of said events, Rent at the then current rate shall be apportioned as of the date of the termination. No money or other consideration shall be payable by Landlord to Tenant for the right of termination and Tenant shall have no right to share in any condemnation award or in any judgment for damages cause by any taking or the change of grade. The condemnation award shall be paid to and be the sole property of Landlord whether the award shall be made as compensation as diminuation of the value of the leasehold estate or the fee of the Premises or otherwise. Nothing in this Section shall preclude an award being made to Tenant for or depreciation to and cost of removal of Tenant's equipment or fixtures, or Tenant's relocation expenses. ARTICLE XV - LANDLORD'S INABILITY TO PERFORM - -------------------------------------------- 15.1 Landlord's Inability to Perform. If, by reason of inability to obtain and ------------------------------- utilize labor, materials or supplies; circumstances directly or indirectly the result of a state of war or national or local emergency; any laws, rules, orders, regulations or requirements of any governmental authority now or hereafter in force; strikes or riots; accident in, damage to -11- or the making of repairs, replacements, or improvements to the Premises or any of the equipment thereof; or by reason of any other cause beyond the reasonable control of Landlord, Landlord shall be unable to perform or shall be delayed in the performance of any covenant to supply any service, such nonperformance or delay in performance shall not render Landlord liable in any respect for damages to either person or property, constitute a total or partial eviction, constructive or otherwise, work an abatement of rent or relieve Tenant from the fulfillment of any covenant or agreement contained in this Lease. ARTICLE XVI - BANKRUPTCY OR INSOLVENCY - -------------------------------------- 16.1 Bankruptcy or Insolvency. The following shall apply in the event of the ------------------------ bankruptcy or insolvency of Tenant: (a) If a petition is filed by, or an order for relief is entered against, Tenant under Chapter 7 of the Bankruptcy Code, and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, the election or assignment, or both, may be made only if all of the terms and conditions of subparagraph (b) and (d) below are satisfied. If the trustee fails to elect to assume this Lease for the purpose of assigning it within sixty (60) days after his appointment, this Lease will be deemed to have been rejected. Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee, and this Lease will be canceled. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive. (b) If Tenant files a petition for reorganization under Chapter 11 or 13 of the Bankruptcy Code or a proceeding that is filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13 proceeding and Tenant's trustee or Tenant as a debtor-in-possession fails to assume this Lease within sixty (60) days from the date of filing of the petition or conversion, the trustee or the debtor-in possession will be deemed to have rejected this Lease. Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee, and this Lease will be cancelled. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: -12- (i) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance, as defined in this subparagraph (b), that: (a) The trustee will cure all monetary defaults under this Lease within ten (10) days from the date of the assumption; and (b) The trustee will cure all non-monetary defaults under this Lease within thirty (30) days from the date of the assumption. (ii) The trustee or the debtor-in-possession has compensated Landlord, or had provided to Landlord adequate assurance, as defined in this subparagraph (b), that within ten (10) days from the date of the assumption Landlord will be compensated for any pecuniary loss it incurred arising from the default of Tenant, the trustee, or the debtor-in-possession as recited in Landlord's written statement of pecuniary loss sent to the trustee or the debtor-in-possession. (iii) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the further performance of each of Tenant's obligations under the Lease; provided, however, that: (a) the trustee or debtor-in-possession will also deposit with Landlord, as security for the timely payment of Rent, an amount equal to three months' Base Rent and other monetary charges accruing under this Lease. (b) If not otherwise required by the terms of this Lease, the trustee or the debtor-on-possession will also pay in advance, on each day that the Base Rent is payable, one- twelfth (1/12) of Tenant's annual obligations under the Lease for all Additional Rent as defined in the Lease. (c) From and after the date of assumption of this Lease, the trustee or debtor-in-possession will pay the annual Base Rent payable under this Lease in advance in equal monthly installments on each day that the Base Rent is payable. (d) The obligations imposed upon the trustee or the debtor-in- possession will continue for Tenant after the completion of bankruptcy proceedings. -13- (iv) Landlord has determined that the assumption of the Lease will not: (a) Breach any provision in any other lease, mortgage, financing agreement, or other agreement by which Landlord is bound relating to the building; or (b) Disrupt, in Landlord's judgment, the tenant mix of the Building or any other attempt by Landlord to provide a specific variety of tenants in the Building that, in Landlord's judgment, would be most beneficial to all of the tenants of the Building and would enhance the image, reputation, and profitability of the Building. (v) For purposes of this subparagraph (b), "adequate assurance" means that: (a) Landlord will determine that the trustee or the debtor-in- possession has, and will continue to have, sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that the trustee or the debtor-in-possession will have sufficient funds to fulfill Tenant's obligations under this Lease and to keep the Premises properly staffed with sufficient employees to conduct a fully operational, actively promoted business on the Premises; and (b) An order will have been entered segregating sufficient cash payable to Landlord and/or a valid and perfected first lien and security interest will have been granted in property of Tenant, trustee, or debtor-in-possession that is acceptable for value and kind to Landlord, to secure to Landlord the obligation of the trustee or debtor-in- possession to cure the monetary or non-monetary defaults under this Lease within the time periods set forth above. (c) In the event that this lease is assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession under the provisions of this subparagraph (b) and, thereafter, Tenant is either adjudicated a bankrupt or files a subsequent petition for arrangement under chapter II of the Bankruptcy Code, then Landlord may terminate, at its option, this -14- Lease and all Tenant's rights under it, by giving written notice of Landlord's election to terminate. (d) If the trustee or the debtor-in-possession has assumed the Lease, under the terms of subparagraphs (a) or (b) above, and elects to assign Tenant's interest under this Lease or the estate created by that interest to any other person, that interest or estate may be assigned only of Landlord acknowledges in writing that the intended assignee has provided adequate assurance, as defined in this subparagraph (b) (V), of future performance of all of the terms, covenants, and condition of this Lease to be performed by Tenant. (i) For the purposes of this Article XVI, "adequate assurance of future performance" means that Landlord has ascertained that each of the following conditions has been satisfied: (a) The assignee has submitted a current financial statement, audited by a certified public accountant, that shows a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by the assignee of Tenant's obligations under this Lease; (b) If requested by Landlord, the assignee will obtain guarantees, in form and substance satisfactory to Landlord, from one or more persons who satisfy Landlord's standards of creditworthiness; (c) Landlord has obtained all consents or waivers from any third party required under any lease, mortgage, financing arrangement, or other agreement by which Landlord is bound, to enable Landlord to permit the assignment; (d) When, pursuant to the Bankruptcy Code, the trustee or the debtor- in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Premises, the charges will not be less than the Base Rent as defined in this Lease and other monetary obligations of Tenant, including Additional Rent as defined herein. -15- (e) Neither Tenant's interest in the Lease nor any estate of Tenant created in the Lease will pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, or otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant, unless Landlord consents in writing to the transfer. Landlord's acceptance of Rent or any other payments from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, the need to obtain Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's interest under this Lease without that consent. ARTICLE XVII - COMMON AREAS - --------------------------- 17.1 Common Areas. The term "Common Areas" means all the areas of the Building ------------ or the parcel of land described in Exhibit "B" not intended for renting and, instead, designed for the common use and benefit of Landlord and all or substantially all of the tenants, their employees, agents, customers and invitees. The Common Areas include, but not by way of limitation, parking lots, rail spurs, truck courts, landscaped and vacant areas, driveways, walks and curbs with facilities appurtenant to each as such areas may exist from time to time. Landlord shall operate and maintain the Common Areas, the cost of which shall be reimbursed by Tenant to Landlord as provided for herein. Landlord hereby grants to Tenant the non-exclusive revocable use of the Common Areas by Tenant, Tenant's employees, agents, customers and invitees, which use shall be subject at all times to such reasonable, uniform and non-discriminatory rules and regulations as may from time to time be established by Landlord. ARTICLE XVIII - COMPLETION AND ACCEPTANCE OF PREMISES MAINTENANCE AND CARE - -------------------------------------------------------------------------- 18.1 Completion and Acceptance. Tenant acknowledges that it will examine the ------------------------- Premises before taking possession hereunder. Unless Tenant furnishes Landlord with a notice in writing specifying any defect in the construction of the Premises within ten (10) days after taking possession, such taking of possession shall be conclusive evidence as against Tenant that at the time thereof the Premises were in good order and satisfactory condition. 18.2 Maintenance and Repair by Tenant. Tenant shall be responsible for all -------------------------------- maintenance and repair to the Premises of -16- whatsoever kind or nature that is not hereinafter set forth specifically as the obligation of Landlord. Tenant shall take good care of the Premises and fixtures, and keep them in good repair and free from filth, overloading, danger of fire or any pest or nuisance, and repair any damage or breakage done by Tenant or Tenant's agents, employees or invitees, including damage done to the Building by Tenant's equipment or installations. Tenant shall be responsible for the repair and replacement of all glass and plate glass on the Premises. Tenant shall furnish and pay for the upkeep, maintenance, repair and periodic servicing of the heating, ventilation and air conditioning system servicing the Premises, except that Landlord, at Landlord's option, may elect to enter into a service contract for the heating, ventilation and air conditioning equipment for periodic inspection of such equipment and if Landlord so elects, Tenant shall pay as Additional Rent, as part of Common Area Expenses, Tenant's Proportionate Share of the cost and expense of the service and inspection provided pursuant to such contract. At the end of the Lease Term or any renewal thereof, Tenant shall quit and surrender the Premises broom clean in as good condition as when received by Tenant, normal wear and tear excepted. In the event Tenant fails to maintain the Premises as provided for herein Landlord shall have the right, but not the obligation, to perform such maintenance as is required of Tenant in which event Tenant shall promptly reimburse Landlord for its cost in providing such maintenance or repairs together with a ten percent (10%) charge for Landlord's overhead. There shall be no overhead charge in connection with the servicing of the heating, air conditioning and ventilation equipment if Landlord has elected to provide such service under this Section. 18.3 Maintenance and Repair by Landlord. During the Lease Term, Landlord shall ---------------------------------- keep and maintain the roof, exterior walls (excluding glass or plate glass), gutters and downspouts of the Building in good condition and repair, the cost of which shall be reimbursed by Tenant to Landlord as provided in Section 17.1 hereof. Landlord shall be under no obligation and shall not be liable for any failure to make repairs that are Landlord's responsibility herein until and unless Tenant notifies Landlord in writing of the necessity therefor, in which event Landlord shall have a reasonable time thereafter to make such repairs. Landlord reserves the right to the exclusive use of the roof and exterior walls of the Building which Landlord is so obligated to maintain and repair. If any portion of the Premises which Landlord is obligated to maintain or repair is damaged by the negligence of Tenant, its agents, employees or invitees, then repairs necessitated by such damage shall be paid for by Tenant. ARTICLE XIX - LANDLORD'S RIGHT TO CURE - -------------------------------------- 19.1 Landlord's Option to Cure: Reimbursement by Tenant. Landlord may, but -------------------------------------------------- shall not be obligated to, cure any default by -17- Tenant (specifically including, but not by way of limitation, Tenant's failure to obtain insurance, make repairs, or satisfy lien claims); and whenever Landlord so elects, all costs and expenses paid by Landlord in curing such default, including without limitation reasonable attorneys' fees, shall be deemed Additional Rent and shall be due on the next rent date after such payment, together with interest (except in the case of said attorneys' fees) at the highest rate then payable by Tenant in the state in which the Premises are located or in the absence of such a maximum rate at the rate of eighteen percent (18%) per annum, from the date of the advance to the date of repayment by Tenant to Landlord. ARTICLE XX - ALTERATIONS AND ADDITIONS, MECHANICS' LIENS - -------------------------------------------------------- 20.1 Alterations and Additions. Tenant shall not make any alterations, ------------------------- improvements, or additions to the Premises without the prior written consent and approval of plans therefor by Landlord. Alterations, improvements or additions so made by either of the parties upon the Premises, except movable furniture and equipment placed in the Premises at the expense of Tenant, shall be the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof at the termination of this Lease, without disturbance, molestation, injury or damage, unless Landlord elects to require Tenant to remove such alterations or improvements from the Premises. In the event damage to the Premises or the Building shall be caused by moving said furniture and equipment in or out of the Premises, said damage shall be promptly repaired at the cost of Tenant. 20.2 Mechanics' Liens. Tenant shall not cause or permit any mechanics' liens ---------------- or other liens to be placed upon the Premises or the Building or the parcel of land described in Exhibit "B" during the Lease Term, and in case of the filing of any such lien or claim therefor, Tenant shall promptly discharge same; provided, however, that Tenant shall have the right to contest the validity or amount of any such lien upon its prior posting of security with Landlord, which security, in Landlord's sole reasonable judgment, must be adequate to pay and discharge any such lien in full plus Landlord's reasonable estimate of its legal fees and other expenses. Tenant agrees to pay all legal fees and other costs incurred by Landlord because of any mechanics' or other liens attributable to Tenant being placed upon the Premises, the Building or the parcel of land described in Exhibit "B". ARTICLE XXI - INSURANCE - ----------------------- 21.1 Public Liability and Property Damage Insurance. Tenant covenants and ---------------------------------------------- agrees to procure from companies satisfactory to Landlord and to maintain on the Premises at all times during the Lease Term, or any renewal, extension, or holding over thereof, at -18- its own cost, a policy or policies of comprehensive public liability and property damage insurance, insuring Landlord, Landlord's property manager and Tenant, as their respective interests may appear, against all claims for personal injury, including death, and property damage, including use thereof, with not less than $2,000,000.00 combined single limit for both bodily injury and property damage. Such policy or policies of insurance shall contain a provision for not less than thirty (30) days prior written notice to Landlord and any mortgagee of Landlord in the event of cancellation or material modification of the terms and conditions thereof. Such insurance may be provided under a blanket policy, provided that an endorsement naming Landlord and Landlord's property manager as additional insureds is attached thereto. In addition to the foregoing, Tenant shall maintain insurance against such other perils and in such amounts as Landlord may from time to time reasonably require. 21.2 Fire and Extended Coverage Insurance. Landlord shall, throughout the Lease ------------------------------------ Term, or any renewal, extension, or holding over thereof, maintain fire and extended coverage insurance on the property owned by Landlord located on the Premises in such amounts and with such deductibles as Landlord shall reasonably determine. Landlord shall not in any way or manner insure any property of Tenant or any property that may be in the Premises but not owned by Landlord. 21.3 Mutual Subrogation. Landlord and Tenant do each hereby release the other ------------------ from any and all liability or responsibility (to the other or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage to property caused by fire, any of the extended coverage perils or any other insured peril, even if such fire or other casualty shall have been caused by the fault or negligence of the other party or anyone for whom such party may be responsible, provided, however, that this lease shall be applicable and in force and effect only with respect to loss or damage occurring during such time as Landlord's and Tenant's policies shall contain a clause or endorsement to the effect only that any such release shall not adversely affect or impair said policies or prejudice the right of the releaser to recover thereunder. Landlord and Tenant each agree that its policies will include such a clause or endorsement. Tenant shall comply with all insurance regulations so the lowest fire, lightning, explosion, extended coverage and liability insurance rates may be obtained; and nothing shall be done or kept in or on the Premises by Tenant which will cause an increase in the premium for any such insurance on the Premises or on the Building of which the Premises are a part or on any contents located therein, over the rate usually obtained for the proper use of the Premises permitted by this Lease or which will cause cancellation of any such insurance. 21.4 Indemnification of Landlord. Tenant shall indemnify and defend Landlord --------------------------- and save it harmless from and against any and all loss (including loss of rents payable by -19- Tenant or other tenants) and against all claims, actions, damages, liability and expenses in connection with loss of life, bodily and personal injury or damage to the Building arising from any occurrence in, upon or at the Premises or any part thereof (including without limitation computer data loss), or occasioned wholly or in part by any act or omission of Tenant, its agents, contractors, employees, servants, licensees, concessionaires or invitees or by anyone permitted to be on the Premises by Tenant. Tenant assumes all risks of and Landlord shall not be liable for injury to person or damage to property resulting from the condition of the Premises or from the bursting or leaking of any and all pipes, utility lines, connections, or air conditioning or heating equipment in, on or about the Premises, or from water, rain or snow which may leak into, issue or flow from any part of the Building. Tenant agrees, at all times, to defend, indemnify and hold Landlord harmless against all actions, claims, demands, costs, damages or expenses of any kind which may be brought or made against Landlord or which Landlord may pay or incur by reason of Tenant's occupancy of the Premises or its negligent performance of or failure to perform any of its obligations under this Lease. In case Landlord shall without fault on its part, be made a party to any litigation commenced by or against Tenant, then Tenant shall defend, indemnify, defend and hold Landlord harmless and shall pay all costs, expenses and reasonable attorneys' fees incurred by or on behalf of Landlord in connection with such litigation. ARTICLE XXII - USE OF COMMON AREAS BY TENANT - -------------------------------------------- 22.1 Use of Common Areas. Tenant shall not use any part of the Building ------------------- exterior to the Premises or the parcel of land described in Exhibit "B" for outside storage. No trash, crates, pallets, or refuse shall be permitted anywhere outside of the Building by Tenant except in enclosed metal containers to be located as directed by Landlord. Tenant shall not park any trucks or trailers, loaded or empty, except in front of the docks on the concrete apron provided for such purposes. Tenant shall not park or permit parking of vehicles overnight anywhere about the Building's parking areas without the prior written consent of Landlord. ARTICLE XXIII - DEFAULT AND REMEDIES - ------------------------------------ 23.1 Defaults. In the event: -------- (a) Tenant shall at any time fail to pay any item of Rent when due; or (b) Tenant shall fail to keep, perform or observe any other covenant, agreement, condition or undertaking hereunder and shall fail to remedy such default within ten (10) days after written notice thereof has been -20- mailed by Landlord to Tenant; or if such default is one that will take longer than ten (10) days to remedy, Tenant fails to commence curing such default within ten (10) days and/or fails diligently to pursue such cure to completion; or (c) The Premises shall be vacated or abandoned by Tenant; Landlord shall have the right, without further notice or demand, to re- enter and take exclusive possession of the Premises, with or without force or legal process, and to refuse to allow Tenant to enter the same or have possession thereof; to change the locks on the doors to the Premises; take possession of any furniture or other property in or upon the Premises (Tenant hereby waiving the benefit of all exemptions by law), sell the same at public or private sale without notice and apply the proceeds thereof to the costs of sale, payment of damages and payment of the Rent due under this Lease; all without being liable to Tenant for any damages or to any prosecution therefor; and (i) As agent of Tenant to relet the Premises for the balance of the Lease Term or for a shorter or longer term and receive the rents therefor, applying them first to the payment of the expense of such reletting and, second, to the payment of damages suffered to the Premises and Rent due and to become due under this Lease, Tenant remaining liable for and hereby agreeing to pay Landlord and deficiency; or (ii) To cancel and terminate the remaining Lease Term, re-enter and take possession of the Premises free of this Lease and thereafter this Lease shall be null and void and the rent in such case shall be apportioned and paid on and up to the date of such entry. Thereafter both parties shall be released and relieved from and of any and all obligations thereafter to accrue hereunder. Tenant shall be liable for all loss and damage resulting from such breach or default; or (iii) To treat such default as an anticipatory breach of this Lease and, as liquidated damages for such default, be entitled to the difference, if any, between the some which, at the time of such termination for anticipatory breach represents the then present worth (computed at seven percent per year) of the excess aggregate Rent payable hereunder that would have accrued over the balance of the Lease Term (including extensions) had such Lease Term not been prematurely terminated, over the aggregate market rental value of the Premises over the Lease Term (including -21- renewals) that the Lease would have run had it not been prematurely terminated. 23.2 Remedies Cumulative. All rights and remedies provided in this Lease for ------------------- Landlord's protection shall be cumulative and in addition to any other rights and remedies provided by law. Landlord shall be entitled to recover from Tenant its reasonable attorneys' fees incurred in enforcing its rights hereunder. 23.3 No Waiver. A waiver by Landlord of a breach or default by Tenant under the --------- terms and conditions of this Lease shall not be construed to be a waiver of any subsequent breach or default or of any other term or condition of this Lease, and the failure of Landlord to assert any breach or to declare a default by Tenant shall not be construed to constitute a waiver thereof so long as such breach or default continues unremedied. 23.4 No Reinstatement. No receipt of money by Landlord from Tenant after the ---------------- termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the Lease Term or affect any such notice, demand or suit. 23.5 Default Under Other Leases. A default under this Lease shall, at -------------------------- Landlord's option, be deemed a default under any other leases between Landlord and Tenant for space in the Building. Likewise, a default under any other such lease between Landlord and Tenant shall, at Landlord's option, be deemed a default under this Lease. ARTICLE XXIV - DEFINITION OF LANDLORD - ------------------------------------- 24.1 Landlord Means Owner. The term "Landlord" as used in this Lease, so far -------------------- as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Premises, and in the event of any transfer or transfers of the title to such fee, Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, shall be paid to Tenant. -22- ARTICLE XXV - NOTICES - --------------------- 25.1 Notices. Except as otherwise herein provided, whenever by the terms of ------- this Lease notice shall or may be given either to Landlord or to Tenant, such notice shall be in writing and shall be deemed to have been properly served if hand-delivered or sent by certified mail, return receipt requested, postage prepaid, to Landlord at the place where Rent is payable and to Tenant at the Premises. The date of such hand-delivery or mailing shall be deemed the date of service. ARTICLE XXVI - SECURITY DEPOSIT - ------------------------------- 26.1 Security Deposit. Tenant herewith deposits with Landlord the sum set --------------- forth in Section 1.1 (J) as security for the performance by Tenant of every covenant and condition of this Lease. Said deposit may be commingled with other funds of Landlord and shall bear no interest. If Tenant shall default with respect to any covenant or condition of this Lease, Landlord may apply the whole or any part of such security deposit to the payment of any sum in default or any sum which Landlord may be required to spend by reason of Tenant's default. This includes, but is not limited to, applying the security deposit first to any restoration and/or cleanup costs necessary over and above normal wear and tear of the vacated space. It is understood that the security deposit is not to be considered as the last month's Base Rent under this Lease. Should Tenant comply with all of the covenants and conditions of this Lease, the security deposit or any balance thereof shall be returned to Tenant after the expiration of the Lease Term. ARTICLE XXVII - SUBORDINATION OR SUPERIORITY - -------------------------------------------- 27.1 Subordination or Superiority. If the mortgagee or trustee named in any ---------------------------- first mortgage or first trust deed hereafter made shall agree that, if it becomes the owner of the Premises by foreclosure or deed in lieu of foreclosure, it will recognize the rights and interests of Tenant under this Lease and not disturb Tenant's use and occupancy of the Premises if and so long as Tenant is not in default under this Lease (which agreement may, at such mortgagee's option, require attornment by Tenant), then all or a portion of the rights and interests of Tenant under this Lease shall be subject and subordinate to such first mortgage or first trust deed and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof. Any such mortgagee or trustee may elect that, instead of making this Lease subject and subordinate to its first mortgage or first trust deed, the rights and interests of Tenant under this Lease shall have priority over the lien of its mortgage or trust deed. Tenant agrees that it will, within ten (10) days after demand in writing, execute and deliver whatever -23- instruments may be required, either to make this Lease subject and subordinate to such a mortgage or trust deed, or to give this Lease priority over the lien of the mortgage or trust deed, whichever alternative may be elected by the mortgagee or trustee. If Tenant fails to execute and deliver any such instrument, Tenant does hereby make, constitute and irrevocably appoint Landlord as its attorney in fact, in its name, place and stead so to do. ARTICLE XXVIII - MISCELLANEOUS - ------------------------------ 28.1 Persons Bound. The agreements, covenants and conditions of this Lease ------------- shall be binding upon and inure to the benefit of the heirs, legal representatives, successors and assigns of each of the parties hereto, except that no assignment, encumbrance or subletting by Lessee, unless permitted by the provisions of this Lease, without the written consent of Landlord, shall vest any right in the assignee, encumbrancee or sublessee of Tenant. If there be more than one Tenant herein named, the provisions of this lease shall be applicable to and binding upon such Tenants jointly and severally, as well as their heirs, legal representatives, successors and assigns. 28.2 Partial Invalidity. If any term, covenant, condition or provision of this ----------------- Lease or the application thereof to any person or circumstance shall, to any extent be invalid, unenforceable or violate a party's legal rights, then such term, covenant, condition or provision shall be deemed to be null and void and unenforceable, however, all other provisions of this Lease, or the application of such term or provision to persons or circumstances other than those to which such forms of provision is held invalid, unenforceable or violative of legal rights, shall not be affected thereby, and each and every other term, condition, covenant and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 28.3 Captions. The headings and captions used throughout this Lease are for -------- convenience and reference only and shall in no way be held to explain, modify, amplify, or aid in the interpretation, construction or meaning of any provisions in this Lease. The words "Landlord" and "Tenant" wherever used in this Lease shall be construed to mean plural where necessary, and the necessary grammatical changes required to make the provisions hereof apply either to corporations, partnerships or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. 28.4 No Option. Submission of this instrument for examination does not --------- constitute a reservation of or option for the Premises. This instrument does not become effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. -24- 28.5 Brokers. Tenant represents that it has dealt directly with and only with ------- the broker or brokers set forth at Item 1.1 (M) of Basic Terms, and that Tenant knows of no other broker who negotiated this Lease or is entitled to any commission or fee in connection herewith. Tenant covenants and agrees to pay, hold harmless, defend and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or agent pertaining to Tenant's having entered into this Lease. 28.6 Waiver of Jury. Landlord and Tenant agree that, to the extend permitted -------------- by law, each shall and hereby does waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease. 28.7 Tenant's Statement. Tenant shall furnish to Landlord, within ten (10) ------------------ days after written request therefor from Landlord, a copy of Tenant's then most recent audited and certified financial statement. It is mutually agreed that Landlord may deliver a copy of such statements to any mortgagee or prospective mortgagee of Landlord, or any prospective purchaser of the Property but otherwise Landlord shall treat such statements and information contained therein as confidential. 28.8 Estoppel Certificate. Tenant shall at any time and from time to time upon -------------------- not less than ten (10) days prior written request from Landlord, execute, acknowledge and deliver to Landlord, in form reasonably satisfactory to Landlord and/or Landlord's, mortgagee, a written statement certifying (if true) that Tenant has accepted the Premises, that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), that Landlord is not in default thereunder, the date to which Rent has been paid in advance, if any, and such other accurate certifications as may reasonably be required by Landlord or Landlord's mortgagee, agreeing to give copies to any mortgagee of Landlord of all notices by Tenant to Landlord and agreeing to afford Landlord's mortgagee a reasonable opportunity to cure any default of Landlord. It is intended that any such statement delivered pursuant to this Section may be relied upon by any prospective purchaser or mortgagee of the Premises and their respective successors and assigns. 28.9 Short Form Lease. This Lease shall not be recorded, but the parties ---------------- agree, at the request of either of them, to execute a Short Form Lease for recording, containing the names of the parties, the legal description and the Lease Term. 28.10 Time of Essence. Time is of the essence of this Lease, and all --------------- provisions herein relating thereto shall be strictly construed. -25- 28.11 Relationship of Parties. Nothing contained herein shall be deemed or ----------------------- construed by the parties hereto, or by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture, by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. 28.12 Law Applicable. This Lease shall be construed and enforced in accordance -------------- with the laws of the state where the Premises are located. 28.13 Guarantee. In the event a guarantee is executed in connection with this - ----- --------- Lease, said guarantee shall be deemed a part of this Lease. ARTICLE XXIX - RIDER - -------------------- 29.1 Rider. Rider consisting of 5 pages, with paragraphs numbered 31.1 ----- ---- ----- through 45.1 consecutively, is attached hereto and made a part hereof. ---- ARTICLE XXX - ENTIRE AGREEMENT - ------------------------------ 30.1 Entire Agreement. This Lease contains the entire agreement between the ---------------- parties and no modification of this Lease shall be binding upon the parties unless evidenced by an agreement in writing signed by Landlord and Tenant after the date hereof. If there be more than one Tenant named herein, the provisions of this Lease shall be applicable to and binding upon such Tenants jointly and severally. IN WITNESS WHEREOF, the parties have signed triplicate counterparts hereof as of the date and year hereinabove set forth. TENANT LANDLORD LUMONICS CORPORATION THE TRAVELERS INSURANCE COMPANY, a Michigan Corporation a Connecticut Corporation By: "Jerry D. Warden" ____________________ -------------------------------- Its: Jerry D. Warden, Director By: "R.H. Schmidt" Attest: "Arthur Burrows" -------------------- -------------------------------- Robert H. Schmidt Its: Arthur Burrows, Assistant Secretary Its: President Attest: ____________________ Its: ____________________ VP Finance & Admin. -26- RIDER TO INDUSTRIAL SPACE LEASE DATED MARCH 30, 1992 BY AND BETWEEN THE TRAVELERS INSURANCE COMPANY, LANDLORD AND LUMONICS CORPORATION, TENANT The following changes are made to the referenced Lease, which additions shall supersede any inconsistent provision in such Lease: 31.1 Base Rent --------- 1. $232,644.00 per annum ($19,387.00 per month) for the period from April 1, 1992, through March 31, 1994. 2. $310,656.00 per annum ($25,888.00 per month) for the period from April 1, 1994, through March 31, 1997. 3. $331,368.00 per annum ($27,614.00 per month) for the period from April 1, 1997, through March 31, 1999. 32.1 Tenant's Proportionate Share ---------------------------- It is acknowledged that the Building is located on a single tax parcel made up of two buildings known as 6700-6750 Shady Oak Road and 6680-6690 Shady Oak Road, Eden Prairie, Minnesota, consisting of a total of 208,244 square feet and legally described on Exhibit "B". Tenant's proportionate share shall be as follows: A. Real Estate Taxes: Real estate taxes shall be prorated over the entire 208,244 square feet. Tenant's proportionate share is 33.15%. B. All Other Prorated Expenses: These expenses shall be based on Tenant's proportionate share of the building expenses for the building at 6680-6690 Shady Oak Road, Eden Prairie, Minnesota. Common Area for the Building is shown on Exhibit "C". Tenant's proportionate share is 100%. -27- 33.1 Tenant Improvements ------------------- A. Landlord shall construct those improvements in Premises desired by Tenant all in accordance with the instructions of Tenant ("Tenant Improvements"). Tenant shall, on or before May 15, 1992, advise Landlord of its desired Tenant Improvements and Landlord shall thereafter cause all necessary architectural and mechanical plans, drawings and specifications, ("Plans") to be prepared for the construction of Tenant Improvements. Plans shall be subject to Landlord's and Tenant's written approval. Once approved, Plans shall not be changed without Landlord's and Tenant's written consent. B. Landlord shall contribute toward the cost of constructing Tenant Improvements an amount up to Sixty Six Thousand and 00/100 ($66,000.00) ("Improvement Allowance"). Tenant shall pay all costs of constructing Tenant Improvements which exceed the Improvement Allowance ("Excess Costs"). Tenant shall pay Excess Costs to Landlord prior to the commencement of construction of Tenant Improvements; C. If completion of the Tenant Improvements is delayed as a result of: i. Tenant's request for materials, finishes or installation that require significant lead times; ii. The performance by Tenant or any person, firm or corporation employed by Tenant and the completion of any work by Tenant or said person, from or corporation; or iii. Any other act or omission by Tenant or its agents including, but not limited to, requests for changes in Plans; the payment of Rent shall not be affected or deferred on account of such delay. Landlord shall use reasonable efforts to complete Tenant Improvements as soon as practical. 34.1 Cash Payment ------------ Landlord shall provide Tenant with $50,000.00 cash to be used by Tenant in any way Tenant shall see fit. Said payment shall be made to Tenant within thirty (30) days of the Lease Commencement Date. 35.1 Common Area Expenses -------------------- With respect to 1992, Tenant shall be required to pay to Landlord during the Lease Term and in the manner provided in Lease Agreement (except as provided below) the lesser of: -2- 35.1 Common Area Expenses (Cont'd) A. Tenant's Proportionate Share of the actual Common Area Expenses pertaining to the Building; and B. an amount equal to the product of $.65 and the net rentable area of the Premises. For the calendar years 1993 and thereafter, Tenant shall pay, as Additional Rent the lesser of: i. One hundred four percent (104%) of the Additional Rent payable in the immediately prior calendar year; and ii. an amount equal to One hundred percent (100%) of Tenant's Proportionate Share of the Common Area Expenses pertaining to the Building. All property insurance expenses, water and sewer expenses and real estate tax expenses are not subject to the above stated 4% annual escalation limit and shall be charged to Tenant based on tenant's prorata share as set forth in the Lease. 36.1 Lease Contingency ----------------- This Lease is contingent upon Landlord terminating the existing Lease with Retail Holdings for the space at 6680 Shady Oak Road, Eden Prairie, Minnesota, effective April 1, 1992. Landlord shall notify Tenant in writing when said Lease termination is finalized. This Lease shall be null and void if said Lease Termination is not finalized by April 8, 1992. 37.1 Termination of Existing Lease ----------------------------- Upon commencement of this Lease Agreement on April 1, 1992, the existing Lease for Tenants space at 6690 Shady Oak Road, Eden Prairie, MN, dated March 16, 1984, and amended November 6, 1985, October 31, 1988, and September 5, 1991, shall terminate and have no further force or effect. 38.1 Right to Sublease Space ----------------------- Landlord hereby grants Tenant the Right to Sublease a portion of the Premises to Retail Holdings for a sixty (60) day period commencing on April 1, 1992, and terminating May 31, 1992. 39.1 Special Assessments Section 4.2 shall be amended to provide as follows: ------------------- In the event there are extraordinary or special assessments levied against the Building or Project of which the Building is a part, Landlord shall elect to pay such extraordinary or special assessments over the longest period of time possible, as set by Hennepin County or the City of Eden Prairie, and shall include in Taxes only these extraordinary or special assessments accruing during the Lease Term. -3- 40.1 Common Area Expense ------------------- No Capital Expenses will be considered Common Area Expenses and passed through to Tenant. 41.1 Prohibition of Use Section 5.2 of Lease Agreement shall be modified to ------------------ provide as follows: A. If the prohibition of the use of the Premises is the result of the particular use or intensity of use of the Premises by Tenant, the Lease shall not be terminated; B. subject to Landlord's right to contest the enforcement of such prohibition by appropriate legal proceedings, if the use of the Premises for office, warehousing and light manufacturing generally is prohibited, Tenant may, as its sole remedy, terminate this Lease, effective upon the issuance of the final order of a government or court of competent jurisdiction prohibiting the use thereof (unless Landlord contests such order and the effect of Landlord's contest is to stay the enforcement of such order). Thereafter, neither Landlord not Tenant shall be liable to the other pursuant to this Lease Agreement. 42.1 Restoration ----------- If the Premises or Building or any part thereof is damaged by fire or other casualty to the extent that the cost of repair is less than thirty percent (30%) of the fair market value of the Premises or twenty percent (20%) of the fair market value of the Building immediately prior to such damage or destruction, and such damage or destruction was caused by any event required to be covered by insurance hereunder, then Landlord shall, at Landlord's sole cost, repair such damage, as soon as reasonably possible, and this Lease shall continue in full force and effect. The time period of "Sixty (60) days" shall be changed to "Forty-five (45) days" 43.1 Termination of Lease: Payment of Rent -------------------- The time period of "Sixty (60) days" shall be changed to "Forty-five (45) days" and two references to "One hundred Twenty (120) days" shall be changed to "Ninety (90) days". 44.1 Eminent Domain -------------- Any award made as compensation for the loss or removal of or damage to Tenant's trade fixtures and removable personal property shall belong to the Tenant, so long as the receipt of such award does not reduce the award that would be payable to the Landlord on the taking of the Leasehold and Fee Estate and Landlord's improvements constructed thereon. Tenant shall not receive any award for the taking of its Leasehold Estate. -4- 45.1 Common Area - Parking ----------- Tenant shall be entitled to approximately 140 parking stalls as shown on Exhibit "C" of this Lease. The area outlined shall constitute common area of the building. TENANT: LUMONICS CORPORATION LANDLORD: THE TRAVELERS (a Michigan Corporation) INSURANCE COMPANY (a Connecticut Corporation) BY: "R.H. Schmidt" BY: "Jerry D. Warden" ------------------------ ------------------------- ITS: President ITS: Jerry D. Warden, Director ------------------------ ------------------------- DATE: 3/31/92 DATE: April 2, 1992 ------------------------ ------------------------- -5- EXHIBIT "A" [MAP APPEARS HERE] -6- EXHIBIT "B" LEGAL DESCRIPTION ----------------- LOT 1, BLOCK 1, SHADY OAK INDUSTRIAL PARK THIRD ADDITION, ACCORDING TO THE PLAT THEREOF ON FILE AND OF RECORD IN THE OFFICE OF THE COUNTY RECORDER, IN AND FOR HENNEPIN COUNTY, MINNESOTA. -3- EXHIBIT "C" [MAP APPEARS HERE] -4- STATE OF Illinois ) -------- ) COUNTY OF Dupage ) ------ Before me, a Notary Public in and for said County and State, on this day, personally appeared Jerry D. Warden and Arthur Burrows to me know to be the --------------- -------------- identical persons who subscribed the name of THE TRAVELERS Insurance COMPANY, a --------- Connecticut corporation to the foregoing instrument as its Director and - ----------- -------- Assistant Secretary who, being by me duly sworn, did state that they are the Director and Assistant Secretary of said corporation, that the seal affixed to - -------- said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed by them on behalf of said corporation by authority of its Board of Directors, and said Director and Assistant Secretary acknowledged to me that they executed the same for the uses, purposes, and consideration therein set forth and in the capacity therein stated as their free and voluntary act and deed as the free and voluntary act and deed of said corporation. Given under my hand and seal of office this 2 day of April, 1992. - ----- - ------------------------------- "Official Seal" Patricia A. Donahue Notary Public State of Illinois My Commission Expires 8/25/92 - ------------------------------- "Patricia A. Donahue" -------------------- Patricia A. Donahue Notary Public My Commission Expires: August 25, 1992 - --------------- -5- (TENANT CORPORATE ACKNOWLEDGMENT) STATE OF Minnesota ) --------- ) ss. COUNTY OF Hennepin ) -------- On this 31st day of March, 1992, before me appeared Robert H. Schmidt, to ---- ----------- ----------------- me personally known, who being by me duly sworn, did say that (he) (she) is the President of Lumonics Corporation, the corporation that executed the within and - --------- -------------------- foregoing instrument and that said instrument was signed in behalf of said corporation by authority of its Board of Directors, and said President --------- acknowledged said instrument to be the free act and deed of said corporation. "Carol S. Woodson" ------------------ Notary Public Hennepin County -------- My commission expires: April 5, 1996 - ------------- ------------------------------------ Seal Carol S. Woodson Notary Public-Minnesota Hennepin County My Commission Expires April 5, 1996 ------------------------------------ -6- EX-10.8 11 LEASE AGREEMENT DATED AUGUST 1994 EXHIBIT 10.8 ================================ GOODRICH-BAAS & ASSOCIATES ================================ A California Corporation LUMONICS/SEAGATE SISILLI LEASE/PURCHASE OUTLINE COUNTER OFFER DATED: JUNE 8, 1994 LEASE / PURCHASE OUTLINE 6/8/94 LUMONICS / SEAGATE SISILLI COUNTER OFFER REFERENCE: Lease offer from Lumonics dated June 8, 1994. OWNER / LESSOR: Seagate Sisilli BUYER / LESSEE: Lumonics PROPERTY: 130 Lombard Street, Seagate Business Park, Oxnard, California 44,268 sq ft usable and rentable free standing building. TERM OF LEASE: Ten (10) years. LEASE START DATE: August 1, 1994 OCCUPANCY: Upon completion of Tenant Improvements. LEASE RATE: Base lease rate to be $21,250 per month, NNN RENT ABATEMENT: A. Three (3) months free rent for Lessee Improvement construction. B. Three (3) months after construction period. (during this period Lessee to pay NNN charges.) C.P.I.: Annual C.P.I. increases not to exceed 5%. DEPOSITS: First month's rent and security deposit of $21,250. Total of $42,500 to be paid at Lease execution. IMPROVEMENTS: Building to be "AS IS", including Security and Phone Systems, built-in Work Stations, Conference Table and Furniture. Lessee to pay for additional improvements. All improvements to be permitted, approved by Lessor and the proper agency prior to construction. OPTIONS: Lessee to have option to purchase at end of the 18th month of the Lease. Option to be exercise sixty (60) days prior and close escrow thirty (30) days. PURCHASE PRICE: $2,800,000, price to be increased by 5% per annum, prorated until close of escrow. Page 1 of 2 GOODRICH-BAAS & ASSOCIATES -------------------------- LEASE / PURCHASE OUTLINE 6/8/94 LUMONICS / SEAGATE SISILLI COUNTER OFFER FIRST RIGHT OF REFUSAL: Lessee to have First Right of Refusal on the purchase of the property after the Option period has expired for the term of the lease. CANCELLATION Lessee shall have until August 1, 1994 to cancel the CLAUSE: Lease in the event the contingencies under the current purchase agreement on their existing building are not satisfied. Lessor to have the right to enter into a lease/sales transaction until the end of the thirty day period. Lessee to have first right of refusal for this time frame with a 2 day response. LEASE TYPE: N.N.N. Tenant to pay for taxes, bonds, insurance, utilities, janitorial, and interior and exterior maintenance. AGENTS: Owner / Lessor - Goodrich-Baas & Associates, Ralph & Garnet Baas Buyer / Lessee - Daum, Mike & Melinda Walsh. COMMISSION: Per signed agreement with owner. Paid one-half at Lease execution and one-half at base rent start. Purchase commission paid at close of escrow, less lease commissions paid. Split 50% /50% between brokers listed. This is an outline of the lease / purchase provisions only and not a binding agreement. Only the terms of an executed lease will legally bind the parties. The terms of this outline are valid for 5 days from its date of issue. OWNER / LESSOR: BUYER / LESSEE SEAGATE SISILLI LUMONICS BY "C. Vincent Sisilli" BY ______________________________ ---------------------------------- DATE 6 - 8 -94 DATE ____________________________ ------------------------------- OWNER'S AGENT BUYER'S AGENT BY "Ralph Baar" BY ______________________________ ---------------------------------- DATE 6 - 8 - 94 DATE ____________________________ ------------------------------- Page 2 of 2 GOODRICH-BAAS & ASSOCIATES -------------------------- AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (Do not use this form for Multi-Tenant Property) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, June 14, 1994, is made by and between C. Vincent and Patricia L. Sisilli, as Individuals ("LESSOR") and Lumonics Corporation, a Michigan Corporation ("LESSEE"), collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 130 S. Lombard Street, Oxnard located in the County of Ventura, State of California and generally described as (describe briefly the nature of the property) approximately 44,268 square foot building located on approximately 98,812 square feet of ML zoned Land. ("PREMISES"). See Paragraph 2 for further provisions.) 1.3 TERM: Ten (10) years and zero months ("ORIGINAL TERM") commencing August 1, 1994 ("COMMENCEMENT DATE") and ending July 31, 2004 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: August 1, 1994 ("EARLY POSSESSION DATE"). (See Paragraph 3.2 and 3.3 for further provisions.) 1.5 BASE RENT $ 21,250.00 per month ("BASE RENT"), payable on the first day of each month commencing February 1, 1995 (See paragraph 4 for further provisions.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $ 21,250.00 as Base Rent for the period February 1995 1.7 SECURITY DEPOSIT: $ 21,250.00 ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: administrative, manufacturing and sale of laser equipment and related uses ( See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the ("BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Goodrich Baas and Associates represents [X] Lessor exclusively (LESSOR'S BROKER"); [_]both Lessor and Lessee, and DAUM Commercial Real Estate Services represents [X] Lessee exclusively (LESSEE'S BROKER"); [_]both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by ("GUARANTOR"). (See Paragraph 37 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49.1 through 54 and Exhibits A all which constitute a part of this lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, convenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Page 1 Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set worth in Paragraph 1.1 Lessee was the owner of occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Page 2 Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United states, without offset of deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise. Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions, Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (A) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental Page 3 authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use of presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (B) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (C) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents, and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) Page 4 environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registration, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspection shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, window, doors, plate glass, skylights landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control, Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. Page 5 (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (iv) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (A) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of the Lease as extended does not exceed $25,000. (B) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities. (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessee may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (C) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor Page 6 shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgement that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP REMOVAL; SURRENDER; AND RESTORATION. (A) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of the Lessor and remain upon and be surrendered by Lessee with the Premises. (B) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (C) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (A) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as in additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured Page 7 person or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall not, however limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (B) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (A) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U. S. Department of Labor Consumer Price Index of All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in paragraph 9.1(c). (B) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for he next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss (C) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (D) TENANT'S IMPROVEMENT. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is Page 8 the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lender, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated an/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, Page 9 and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION 9.1 DEFINITIONS. (A) "PREMISES PARTIAL DAMAGE". Shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (B) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (C) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (D) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (E) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the forgoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that Page 10 there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either party. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under paragraph 13), Lessor may at Lessor's option, either; (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority, this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercise such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term of provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (A) In the event of damage described in Paragraph 9.2 (Partial Damage-Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises if impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. Page 11 (B) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent of $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments make by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (A) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof. Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any Page 12 overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (B) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 DEFINITION OF "REAL PROPERTY TAXES". As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishing, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor, if any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a Page 13 reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease of Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater and twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NEW WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or Page 14 performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default to Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease. Lessor may proceed directly against Lessee any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. Initial Landlord Tenant "VS" "PS" "JHS" (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition, and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. Initial Landlord Tenant "VS" "PS" "JHS" (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value an/or adjustment structure for property similar to the Premises as then constituted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease, this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a Page 15 sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or until the Breach has been cured, against Lessor, for any such rents and other charges so paid sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent . (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor or Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. Page 16 (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (I) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor stature thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (I) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and that portion of the leasing commission paid by Lessor Page 17 applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1 (b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1 (b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lese, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Page 18 Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area are not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $ _________________) for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Unless Lessor and Brokers have otherwise agreed in writing Lessor further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) or any Option subsequently granted which is substantially similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired hand an Option Page 19 herein granted to Lessee been exercised, or (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 at to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorney's fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of Page 20 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. Page 21 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at low or in equality. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both convenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessor agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof of Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraphs 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISCLOSURE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or decline rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or Page 22 not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure with ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused Page 23 portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any than existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment of Lessee of the rent for the Premises and the observance and performance of all of the convenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew the Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1. hereof, and cannot be voluntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (I) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice therof is given Lessee) or (iii) during the time Lessee Page 24 is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, form time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount of sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. Page 25 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. Page 26 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVISED THIS LEASE AN EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION FO THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTIVE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THE LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE, IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Oxnard, CA Executed at Camarillo, CA ------------------------------- ------------------------ on 6 - 21 - 94 on 6 / 21 /94 ------------------------------- ------------------------ by LESSOR: by LESSEE: C. Vincent and Patricia L. Sisilli Lumonics Corporation - ------------------------------------------ ------------------------------------ as Individuals a Michigan Corporation - ------------------------------------------ ------------------------------------ By "C. Vincent Sisilli" By "James H. Scaroni" --------------------------------------- --------------------------------- Name Printed: C. Vincent Sisilli Name Printed: James H. Scaroni ---------------------------- ---------------------- Title: an Individual Title: General Manager ------------------------------------ ----------------------------- By "Patricia L. Sisilli" By _________________________________ --------------------------------------- Name Printed: Patricia L. Sisilli Name Printed: _____________________ ----------------------------- Title: an Individual Title: _____________________________ ----------------------------------- Address: 31610 Broad Beach Road Address: 3629 Vista Mercado ---------------------------------- --------------------------- Malibu, CA 90265 Camarillo, CA 93010 - ------------------------------------------ ------------------------------------ Tel. No. ( ) Fax No. ( ) Tel. No. ( 805) 987-2211Fax No. ( ) ---------------------------------- -----------------------------
FORM 204N-R12/91 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687- 8777. Fax. No. (213) 687-8616. (C)Copyright 1990 - By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. Page 27 ADDENDUM TO STANDARD INDUSTRIAL LEASE DATED June 14, 1994 BY AND BETWEEN C. Vincent. and Patricia L. Sisilli (as Lessor) and Lumonics Corporation (as Lessee) 51. OPTION TO PURCHASE (a) Lessor does hereby grant to Lessee an option to purchase the Premises and the Lessor's interest under this Lease, upon the terms and conditions herein set forth. (b) Lessee must exercise the option to purchase, if it is to be exercised at all, during the period from December 1, 1995 to December 31, 1995, ---------------- ----------------- hereinafter referred to as the "Option Period". (c) In order to exercise the option to purchase herein granted, Lessee must give written notice of the exercise of the option to Lessor and Lessor must receive the same during the Option Period, time being of the essence, and if not so given and received, this option shall automatically expire. At the same time the option is exercise, Lessee must deliver to Lessor a cashier's check for 25,000.00 payable to Continental Lawyers Title Company, to be part of the - --------- --------------------------------- purchase price. (d) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (e) If Lessee shall exercise the option to purchase during the Option Period, the transfer of title to Lessee and the payment of the purchase price to Lessor shall occur on February 28, 1996, and until that time the terms of this ----------------- lease shall remain in full force and effect. (f) The purchase price to be paid by Lessee to Lessor for the Premises, if Lessee exercises its option to purchase, shall be $2,800,000.00 value at 8/1/94 ----------------------------- increased at five percent (5%) per annum prorated to the close of escrow date - ----------------------------------------------------------------------------- (g) Within ten (10) days of the date the option to purchase is exercised, Lessor and Lessee shall give instructions to consummate the sale to Continental Lawyers Title Company, who shall act as escrow holder, on the normal - --------------------------------- and usual escrow forms then used by such escrow holder, as follows: (i) Escrow shall close on the date previously called for in paragraph (e) of this Addendum; (ii) Lessor shall deposit the check referred to in paragraph (c) of this Addendum into escrow upon opening thereof, with the balance of the purchase price to be deposited into escrow one day prior to the close of escrow; (iii) Lessor shall convey to lessee title to the Premises subject only to mortgages and deeds of trust of record (the debt that such instruments secure shall constitute a credit against the purchase price), and easements, subsurface mineral rights and restrictions of record. Any other liens and encumbrances shall be removed prior to close of escrow at the expense of Lessor. (iv) Escrow fees shall be shared equally; (v) Interest, if any, and rents will be prorated to the close of escrow; (vi) The cost of a standard title insurance policy to be issued to lessee shall be paid by Lessor; (vii) The parties agree to execute any additional instructions as are normal and usual; (viii) All real estate transfer taxes shall be paid by Lessor. OPTION TO PURCHASE INITIALS "JHS" --------- "VS" "PS" --------- ADDENDUM TO STANDARD LEASE DATED June 14, 1994 -------------------------------------------------------- BY AND BETWEEN C. Vincent. and Patricia L. Sisilli (as Lessor) ------------------------------------- and Lumonics Corporation (as Lessee) ----------------------------------------------------------------- 52. RIGHT OF FIRST REFUSAL TO PURCHASE - -- (a) Lessors shall not, at any time prior to the expiration of the term of this Lease, or any extension thereof, sell the Premises, or any interest therein, without first giving written notice thereof to Lessee, which notice is hereinafter referred to as "Notice of Sale". (b) The Notice of Sale shall include the exact and complete terms of the proposed sale and shall have attached thereto a photocopy of bona fide offer and counteroffer, if any, duly executed by both Lessor and the prospective purchaser. (c) For a period of ten (10) business days after receipt by Lessee of the Notice of Sale, Lessee shall have the right to give written notice to Lessor of Lessee's exercise of Lessee's right to purchase the Premises, or the interest proposed to be sold, on the same terms, price and conditions as set forth in the Notice of Sale. In the event that Lessor does not receive written notice of Lessee's exercise of the right herein granted within said ten (10) day period, there shall be a conclusive presumption that Lessee has elected not to exercise Lessee's right hereunder, and Lessor may sell the Premises, or the interest proposed to be sold, on the same terms set forth in the Notice of Sale. (d) In the event that Lessee declines to exercise its right of first refusal after receipt of the Notice of Sale, and, thereafter, Lessor and the prospective purchaser modify by more than 5%, (i) the sales price, (ii) the amount of down payment, or (iii) interest charged, or in the event that the sale is not consummated within 160 days of the date of the Notice of Sale, then Lessee's right of first refusal shall reapply to said transaction as of the occurrence of any of the aforementioned events. DAUM HAZARDOUS SUBSTANCES Commercial Real Estate Services & AMERICAN DISABILITIES ACT 53. NOTICE TO OWNERS, BUYERS AND TENANTS REGARDING HAZARDOUS SUBSTANCES AND ----------------------------------------------------------------------- UNDERGROUND STORAGE TANKS ------------------------- Comprehensive Federal, state and local regulations have recently been enacted to control the use, storage, handling, clean-up, removal and disposal of hazardous and toxic wastes and substances. Extensive legislation has also been adopted with regard to underground storage tanks. As real estate licensees, we are not experts in the area of hazardous substances and we encourage you to consult with your legal counsel with respect to your rights and liabilities with regard to hazardous substances laws and regulations and to obtain technical advice with regard to the use, storage, handling, clean-up, removal or disposal of hazardous substances from professionals, such as a civil engineer, geologist or other persons with experience in these matters to advise you concerning the property. We also encourage you to review the past uses of the property, which may provide information as to the likelihood of the existence of hazardous substances or storage tanks on the property. DAUM Commercial Real Estate Services will disclose any knowledge is actually possesses with respect to the existence of hazardous substances or underground storage tanks on the property. DAUM Commercial Real Estate Services has not made any investigations or obtained reports regarding the property, unless so indicated in a separate document signed by DAUM Commercial Real Estate Services. DAUM Commercial Real Estate Services makes no representation or warranty regarding the existence or non-existence of hazardous substances or underground storage tanks on the property. With regard to the sale of real property, recently enacted California Health and Safety Code Section 25359.7 provides that any owner of non-residential real property who knows, or has reasonable cause to believe, that any release of hazardous substances has come to be located on or beneath real property, shall, prior to the sale of real property, give written notice of that condition to the buyer of the real property. Failure of the owner to provide written notice when required shall subject the owner to actual damages and other remedies provided by the law. In addition, where the owner has actual knowledge of the presence of any hazardous substance and knowingly and willfully fails to provide written notice to the buyer, the owner is liable for a civil penalty not to exceed $5,000 for each separate violation. With regard to leases of real property, Section 25359.7 of the California Health and Safety Code provides that any lessee of real property who knows, or has reasonable cause to believe, that any release of hazardous substances has come to be located on or beneath the real property shall, upon discovery by the lessee of the presence or suspected presence of a hazardous substance release, give notice of that condition to the owner of the real property. Failure of the lessee to provide written notice as required to the owner shall make the lease voidable at the discretion of the owner. The Health and Safety Code provides that if the lessee has actual knowledge of the presence of any hazardous substance release and knowingly or willfully fails to provide written notice as required to the owner, the lessee is liable for civil penalty not to exceed $5000 for each violation. As used in the notice, the term "hazardous substances" is used in the broadest sense and includes all hazardous and toxic materials, substances, or waste as defined by applicable Federal, state and local laws and regulations and includes, but is not limited to petroleum products, paints and solvents, PCBs, asbestos, pesticides and other substances. Hazardous substances may be found on any type of real property, improved or unimproved, occupied or vacant. NOTICE TO OWNERS, BUYERS AND TENANTS REGARDING THE "AMERICAN WITH DISABILITIES - ------------------------------------------------------------------------------ ACT" ---- Legislation known as the "Americans with Disabilities Act" ("ADA") was recently adopted and may affect The Property and/or its intended use. As real estate licensees, we are not experts in the legal or technical aspects of ADA as it may pertain to you. We encourage you to consult your legal counsel, architect and/or other professionals with appropriate experience with regard to your rights or obligations for compliance with ADA. DAUM Commercial Real Estate Services make no representation or warranty regarding the compliance or non-compliance of The Property under ADA. By "C. Vincent Sisilli" "Patricia L. Sisilli" Dated 6-21-94 -------------------------------------------- ------------- Lessor By "James H. Scaroni" Dated 6/21/94 -------------------------------------------- ------------- Lessee ADDENDUM TO STANDARD LEASE DATED June 14, 1994 ----------------------------------------------------------------- BY AND BETWEEN C. Vincent. and Patricia L. Sisilli (as Lessor) ----------------------------------------------------- and Lumonics Corporation (as Lessee) ----------------------------------------------------------------- 54. RIGHT OF FIRST REFUSAL TO PURCHASE Lot 46 consisting of 87,120 square - --- feet of land. (a) Lessors shall not, at any time prior to the expiration of the term of this Lease, or any extension thereof, sell the Premises, or any interest therein, without first giving written notice thereof to Lessee, which notice is hereinafter referred to as "Notice of Sale". (b) The Notice of Sale shall include the exact and complete terms of the proposed sale and shall have attached thereto a photocopy of bona fide offer and counteroffer, if any, duly executed by both Lessor and the prospective purchaser. (c) For a period of three (3) business days after receipt by Lessee of the Notice of Sale, Lessee shall have the right to give written notice to Lessor of Lessee's exercise of Lessee's right to purchase the Premises, or the interest proposed to be sold, on the same terms, price and conditions as set forth in the Notice of Sale. In the event that Lessor does not receive written notice of Lessee's exercise of the right herein granted within said ten (10) three (3) day period, there shall be a conclusive presumption that Lessee has elected not to exercise Lessee's right hereunder, and Lessor may sell the Premises, or the interest proposed to be sold, on the same terms set forth in the Notice of Sale. RENT ADJUSTMENT(S) ADDENDUM TO STANDARD LEASE Dated June 14, 1994 --------------------------------------------------------------- By and Between (Lessor) C. Vincent and Patricia L. Sisilli --------------------------------------- (Lessee) Lumonics Corporation --------------------------------------- Property Address: 130 S. Lombard Street, Oxnard ----------------------------------------------------- Paragraph 50. -- A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment periods(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. COST OF LIVING ADJUSTMENT(S) (COL) (a) On (Fill in COL Adjustment Date(s) August 1, 1995 and each anniversary ----------------------------------- date thereafter ________________________________________________________________ - ---- the monthly rent payable under paragraph 1.5 ("Base Rent") ofthe attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPIW (Urban Wage Earners and Clerical Workers) or [X] CPIU (All Urban Consumers), for (Fill in Urban Area): Los --- Angeles, Long Beach, Riverside, All items (1982-1984 = 100), herein referred to - ------------------------------ as "C.P.I." (b) The monthly rent payable in accordance with paragraph Al(a) of the Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph Al(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to (select. one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 (Base Month") or [ ] (Fill in Other "Base Month"):_______________________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (d) Said increase not to exceed 5% per annum. [ ] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) (a) On (Fill in MRV Adjustment Date(s): __________________________________ ________________________________________________________________________________ the monthly rent payable underparagraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: RENT ADJUSTMENTS(S) Page 1 of 2 1) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: i) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or ii) Both Lessor and Lessee shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest in value shall then become the MRV. The costs of the third appraisal will be split equally between the parties. 2) In any event, the new MRV shall not be less than the rent payable for the month immediately preceding the date for rent adjustment. b) Upon the establishment of each New Market Rental Value as described in paragraph All: 1) the monthly rental sum so calculated for each term as specified in paragraph All(a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph Al(a) above and 2) the first month of each Market Rental Value term as specified in paragraph All(a) shall become the new "Base Month" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph Al(b). [ ] III. FIXED RENTAL ADJUSTMENTS(S) (FRA) The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s): The New Base Rental shall Be: _____________________________ $_____________________________ _____________________________ $_____________________________ _____________________________ $_____________________________ _____________________________ $_____________________________ B. NOTICE: Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the attached Lease. RENT ADJUSTMENTS(S) Page 2 of 2 DAUM ADDENDUM Commercial Real Estate Services ADDENDUM TO STANDARD INDUSTRIAL SINGLE TENANT LEASE NET DATED JUNE 14, 1994 BY AND BETWEEN C. VINCENT AND PATRICIA L. SISILLI (AS INDIVIDUALS) AS LESSOR AND LUMONICS CORPORATION (A MICHIGAN CORPORATION) AS LESSEE ________________________________________________________________________________ 49.1 RENTAL ABATEMENT: ----------------- A. Lessee shall have the months of August, September and October 1994, as a free rent construction improvement and fixturization period. B. Lessee shall have the months of November and December 1994 and January 1995 free of rent. Lessee shall pay the NNN charges during this period. 49.2 LEASEHOLD IMPROVEMENTS: ----------------------- Notwithstanding Paragraph 2.2 to the contrary, Lessor shall deliver the premises to Lessee in AS/IS condition including: A. Security System B. Built in work stations C. Conference table and furniture D. 2000 AMP 277/480 Volt 3 Phase power E. Automatic vent system in manufacturing area F. High pile storage capacity sprinkler system in warehouse area 49.3 LESSEE'S IMPROVEMENTS: ---------------------- Notwithstanding Paragraph 7.3 to the contrary, Lessee at Lessee's sole cost and expense shall be allowed to make modifications to the existing improvements and construct additional office, lab, engineering and manufacturing areas with Lessor's prior consent with all required permits and constructed by licensed contractors. Goodrich Baas and Associates shall have the right to bid on the improvement work, however, the choice of the contractor shall be up to Lumonics Corporation. "JHS" "VS" "PS" ----- --------- 49.4 CANCELLATION CLAUSE: -------------------- Lessee shall have until August 1, 1994 to cancel the Lease in the event the contingencies under the current purchase agreement on their existing building are not satisfied. Lessor to have the right to enter into a lease/sales transaction until August 1, 1994. Lessee to have first right of refusal for this time frame with a 2-day response. Such notice of a lease/sale shall include the exact and complete terms of the proposed lease/sale and shall have attached thereto a copy of a bonafide offer and counteroffer, if any, duly executed by both Lessor and the prospective Lessee/Purchaser. 49.5 CONDITION: ---------- Reference paragraph 2.2 of the lease, prior to the commencement date of the lease Lessor shall remove the following items: A. Phone system B. Furniture in Executive Office C. Paint, solvents and debris in the warehouse DAUM ADDENDUM Commercial Real Estate Services ADDENDUM TO STANDARD INDUSTRIAL SINGLE TENANT LEASE NET DATED JUNE 14, 1994 BY AND BETWEEN C. VINCENT AND PATRICIA L. SISILLI (AS INDIVIDUALS) AS LESSOR AND LUMONICS CORPORATION (A MICHIGAN CORPORATION) AS LESSEE - -------------------------------------------------------------------------------- D. Antique cutter in the lobby (Lessee may want to keep this item in place and will notify Lessor prior to August 1, 1994 whether or not to remove this item) 49.6 INSPECTION: ---------- Reference paragraph 6.4, Lessor shall give Lessee at least 48 hours prior notice before entering the premises. 49.7 INSURANCE: --------- Reference paragraph 8.3(b) Rental Value insurance, if this type coverage is not currently part of the Lessor's insurance package, Lessee shall not pay for this additional insurance. 49.8 REAL PROPERTY TAXES: ------------------- Reference paragraph 10, Lessee shall pay the Assessment District Bonds with the semi-annual tax bill. 49.9 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING: ------------------------------------------------------------ Reference paragraph 12.2, any rent premium for the sublease of this building shall be split on a 50/50 basis between the Lessor and Lessee. The rent premium shall be determined by adding the then base rent, Lessees tenant improvement amortization, carrying cost, sublease commissions and sublease concessions. 49.10 SIGNS: ----- Reference paragraph 34, Lessee shall be allowed to install any sign in accordance with the Northfield/Seagate specific plan and CC&R's and approved by the City of Oxnard. RENT ADJUSTMENT(S) ADDENDUM TO STANDARD LEASE Dated June 14, 1994 -------------------------------------------------------------------- By and Between (Lessor) C. Vincent and Patricia L. Sisilli -------------------------------------------------- (Lessee) Lumonics Corporation -------------------------------------------------- Property Address: 130 S. Lombard Street, Oxnard ---------------------------------------------------------- Paragraph 50. --- A. REAL ADJUSTMENTS: The monthly rent for each month of the adjustment periods(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. COST OF LIVING ADJUSTMENT(S) (COL) (a) On (Fill in COL Adjustment Date(s) August 1, 1995 and each anniversary ----------------------------------- date thereafter ________________________________________________________________ - ---- the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [_] CPIW (Urban Wage Earners and Clerical Workers) or [X] CPIU (All Urban Consumers), for (Fill in Urban Area): Los --------- Angeles, Long Beach, Riverside. All items (1982-1984=100), herein referred to as - ------------------------------ "C.P.I." (b) The monthly rent payable in accordance with paragraph Al(a) of the Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph Al(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to (select. one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 (Base Month") or [_] (Fill in Other "Base Month"): _________________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (d) Said increase not to exceed 5% per annum. [_] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) (a) On (Fill in MRV Adjustment Date(s): __________________________________ ________________________________________________________________________________ the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: RENT ADJUSTMENTS(S) Page 1 of 2 1) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: i) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or ii) Both Lessor shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest in value shall then become the MRV. The costs of the third appraisal will be split equally between the parties. 2) In any event, the new MRV shall not be less than the rent payable for the month immediately preceding the date for rent adjustment. b) Upon the establishment of each New Market Rental Value as described in paragraph AII: 1) the monthly rental sum so calculated for each term as specified in paragraph AII(a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph Al(a) above and 2) the first month of each Market Rental Value term as specified in paragraph AII(a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph AI(b). [_] III. FIXED RENTAL ADJUSTMENTS(S) (FRA) The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s): The New Base Rental shall Be: ----------------------------------- $---------------------------- ----------------------------------- $---------------------------- ----------------------------------- $---------------------------- ----------------------------------- $---------------------------- B. NOTICE: Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the attached Lease. RENT ADJUSTMENTS(S) INITIALS: Page 2 of 2 "JHS" ---------- "VS""PS" -------- EX-10.14 12 1998 MANAGEMENT INCENTIVE PLAN EXHIBIT 10.14 CONFIDENTIAL ------------ LUMONICS 1998 MANAGEMENT INCENTIVE PLAN (MIP) PURPOSE - ------- . To promote the One Lumonics spirit. . To motivate senior managers to accomplish pre-determined operational/productivity/ profitability objectives which successfully support our business plan. . To provide additional incentive in order to respond to competitive market requirements. . To reinforce the Company's Strategic Business Plan (SBP) by allowing managers to participate in the Company's financial success. POLICY - ------ To utilize a financial incentive plan as an effective management tool to attract, retain, motivate, and guide managers and employees. Such objectives can best be accomplished through a program that provides rewards in direct relationship to the successful performance of approved business plans. The plan is designed to clearly reward attainment of operational objectives in alignment with the Lumonics SBP. ELIGIBILITY - ----------- All senior managers who are in good standing and who are not included in a sales commission program are eligible to participate in this program. Any employee hired after January 1 in a plan year will receive a pro-rata payout that will be based upon the time he/she was employed by Lumonics during the year. Employee must be an active employee as of December 31 of the plan year in order to be eligible for payout. As a minimum, employees must have been employed by December 1 of the plan year. EFFECTIVE DATE AND DURATION - --------------------------- The effective date of the commencement of the Management Incentive Plan is January 1, 1998. While it is Lumonics' intention to continue this plan on an annual basis, the continuation or enhancement of this program is not guaranteed. Lumonics reserves the right to amend, alter, or discontinue the program at any - ------------------------------------------------------------------------------ time, for any reason, without notice. - ------------------------------------ ADMINISTRATION - -------------- The overall administration of this program will be the responsibility of the Vice President-Human Resources. Final approval of the plan will be by the Chief Executive Officer (CEO). In an effort to emphasize and promote "One Lumonics", payouts under the plan will focus on Lumonics Inc. performance. Annual performance objectives will be based on Lumonics' annual operating budget approved by the Board of Directors. In order to ensure linkage with Lumonics Inc. performance, and to reinforce the necessity of Lumonics Inc. overall profitability and performance, an entry gate will be established for each year. Lumonics performance must meet or exceed the entry gate objective before any payout can be made. Lumonics reserves the right, at its sole discretion, to increase or decrease individual or group payouts. Any such increase/decrease requires the approval of the CEO. All payouts will occur by mid-March of the following fiscal year, subject to audit and approval of fiscal year financial results. Appropriate payroll and employment taxes will be withheld on all payments. PARTICIPATION IN THE MIP - ------------------------ Three (3) employee categories have been established: Category 1 - PGM's Category 2 - Senior Staff Category 3 - Entity Department Heads/Product Line Managers At the beginning of each year, incentive plan payout targets will be set by category as a percentage of base salary. Annual salary for MIP purposes is defined as the employee's base salary in effect on 1 July. Any employee who has been absent for any reason during the calendar year for an extended period of time may receive a pro-rata payout which will be based upon the time of their active employment. EX-10.15 13 1998 EXECUTIVE MANAGEMENT INCENTIVE PLAN Exhibit 10.15 Confidential ------------ LUMONICS 1998 EXECUTIVE INCENTIVE PLAN PURPOSE - ------- . To promote the One Lumonics spirit. . To motivate senior managers to accomplish pre-determined operational/productivity/ profitability objectives which successfully support our business plan. . To provide additional incentive in order to respond to competitive market requirements. . To reinforce the Company's Strategic Business Plan (SBP) by allowing managers to participate in the Company's financial success. POLICY - ------ To utilize a financial incentive plan as an effective management tool to attract, retain, motivate, and guide senior managers. Such objectives can best be accomplished through a program that provides rewards in direct relationship to the successful performance of approved business plans. The plan is designed to clearly reward attainment of operational objectives in alignment with the Lumonics SBP. ELIGIBILITY - ----------- All executives who are in good standing and who are not included in a sales commission program are eligible to participate in this program. Any employee hired after January 1 in a plan year will receive a pro-rata payout that will be based upon the time he/she was employed by Lumonics during the year. Employee must be an active employee as of December 31 of the plan year in order to be eligible for payout. As a minimum, employees must have been employed by December 1 of the plan year. EFFECTIVE DATE AND DURATION - --------------------------- The effective date of the commencement of the Executive Incentive Plan is January 1, 1998. While it is Lumonics' intention to continue this plan on an annual basis, the continuation or enhancement of this program is not guaranteed. Lumonics reserves the right to amend, alter, or discontinue the program at any - ------------------------------------------------------------------------------ time, for any reason, without notice. - ------------------------------------ ADMINISTRATION - -------------- The overall administration of this program will be the responsibility of the Vice President-Human Resources. Final approval of the plan will be by the Compensation Committee of the Board of Directors. In an effort to emphasize and promote "One Lumonics", payouts under the plan will focus on Lumonics Inc. performance. Annual performance objectives will be based on Lumonics' annual operating budget approved by the Board of Directors. In order to ensure linkage with Lumonics Inc. performance, and to reinforce the necessity of Lumonics Inc. overall profitability and performance, an entry gate will be established for each year. Lumonics performance must meet or exceed the entry gate objective before any payout can be made. Lumonics reserves the right, at its sole discretion, to increase or decrease individual or group payouts. Any such increase/decrease requires the approval of the Compensation Committee. All payouts will occur by mid-March of the following fiscal year, subject to audit and approval of fiscal year financial results. Appropriate payroll and employment taxes will be withheld on all payments. At the beginning of each year, incentive plan payout targets will be set for each executive as a percentage of base salary. Annual salary for Executive Incentive Plan purposes is defined as the employee's base salary in effect on 1 January. Any employee who has been absent for any reason during the calendar year for an extended period of time may receive a pro-rata payout which will be based upon the time of their active employment. NOTE: This exhibit will suffice until architects space plan is completed at which time it will become Exhibit "B". EXHIBIT "B" PHYSICAL REQUIREMENTS
WORK SQUARE CEILING GENERAL AREA FEET HEIGHT COMMENTS - ---- ------ ------- -------- SALES 9,000 . General Sales 8' - 10' - 3,500 SF - 3 private executive offices. . Demo Lab 14' - 16' - 5,500 SF - 10 private demo areas. - Next to Assembly area and Customer Service. - 6" concrete floor covered with vinyl tile or colored epoxy sealant. - 80 foot candles of light. - 240/436 and 110 outlets. LOBBY, CORP. ROOMS, SUPPORT 3,000 8' - 10' . Lobby 8' - 10' - A moderately upscale statement, but not pretentious. Primarily to serve sales. Secondarily to serve customer service. - Visitors bathrooms and coat rooms included or nearby. . Conference Rooms 8' - 10' - 2 private rooms. - Primarily to serve Sales. Secondarily to serve Customer Service. . Other Support 8' - 10' - Copy room and library next to Sales.
EXHIBIT "B" (CONTINUED) PHYSICAL REQUIREMENTS
WORK SQUARE CEILING GENERAL AREA FEET HEIGHT COMMENTS - ---- ------ ------- -------- CUSTOMER SERVICE 4,500 . General Customer Service 8' - 10' - Next to Sales. - 2 private executive offices. . Classrooms 8' - 10' - 2 private rooms. GENERAL ACCOUNTING/PURCHASING 2,000 8' - 10' - 1 private executive office. ENGINEERING 2,000 8' - 10' - All open office. CAFETERIA 500 8' - 10' - All open. - Accessible to shop as well as office areas. ASSEMBLY/WAREHOUSE 10,000 . Parts Warehouse 14' - 16' - 1,500 SF. Private area. - Private room. . Assembly 14' - 16' - 1 private executive office. - 1 private shop office. - 6" scaled concrete floor. - 80 foot candles of light. - 1800 amps, 240/480 volts, 3 phase secondary service. - 2 dock high doors. - Fire suppression only as required by code.
EX-10.16 14 SEVERANCE AGREEMENT BETWEEN ROBERT J. ATKINSON EXHIBIT 10.16 PERSONAL AND CONFIDENTIAL Date: April 13, 1998 Mr. Robert J. Atkinson c/o Lumonics 105 Schneider Road Kanata, ON K2K 1Y3 Dear Mr. Atkinson: Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 2 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). 3 (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(q)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Period" means a period of 24 consecutive months commencing on the first day of the month following the Date of Termination. Provided if Termination takes place within 24 months of the first occurrence of a Change of Control, "Payment Period" shall mean a period of 36 consecutive months commencing on the first day of the month following the Date of Termination. 4 (l) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. (m) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (n) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (o) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (p) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (q) "Total Compensation" means the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 5 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take- over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from January 1, 1998 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 7 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ----------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services, provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 8 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the attention of the Chairman of the Board or President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board or President of the Company and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9 If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, LUMONICS INC. by: ________________________________________ Member of the Board of Directors and Chairman of the Compensation Committee by: ________________________________________ Member of the Board of Directors Agreed to this ____ day of ____________, 19___ _________________________________________ Signature _________________________________________ Print Name _________________________________________ Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to two times your Total Compensation. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, then you shall be entitled to an amount equal to three times your Total Compensation; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.17 15 SEVERANCE AGREEMENT BETWEEN W. SCOTT NIX EXHIBIT 10.17 PERSONAL AND CONFIDENTIAL Date: April 13, 1998 Mr. Warren Scott Nix c/o Lumonics 130 Lombard Street Oxnard, CA 93030 Dear Mr. Nix: Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 2 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). 3 (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(q)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Period" means a period of 24 consecutive months commencing on the first day of the month following the Date of Termination. Provided if Termination takes place within 24 months of the first occurrence of a Change of Control, "Payment Period" shall mean a period of 36 consecutive months commencing on the first day of the month following the Date of Termination. 4 (l) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. (m) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (n) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (o) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (p) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (q) "Total Compensation" means the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 5 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take-over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from January 1, 1998 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 7 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non-appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ---------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services, provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 8 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the attention of the Chairman of the Board or President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board or President of the Company and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9 If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, LUMONICS INC. by: __________________________________________ Member of the Board of Directors and Chairman of the Compensation Committee by: __________________________________________ Chairman Agreed to this ______ day of _____________, 19____ _____________________________________________ Signature _____________________________________________ Print Name _____________________________________________ Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to two times your Total Compensation. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, then you shall be entitled to an amount equal to three times your Total Compensation; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.18 16 SEVERANCE AGREEMENT BETWEEN MICHAEL W. LUPIANO EXHIBIT 10.18 PERSONAL AND CONFIDENTIAL Date: April 13, 1998 Mr. Michael W. Lupiano c/o Lumonics 105 Schneider Road Kanata, ON K2K 1Y3 Dear Mr. Lupiano: Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 2 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). 3 (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(r)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Factor" means the number of complete years, subject to a minimum of 12 and a maximum of 24, that you have been a full time employee of the Company. (l) "Payment Period" means the period of time commencing on the first day of the month following the Date of Termination and continuing for that number of months equal to the Payment Factor. 4 (m) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. (n) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (o) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (p) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (q) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (r) "Total Compensation" means 1/12th of the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 5 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take- over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from January 1, 1998 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 7 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non-appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 ----------------------- in your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 8 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the attention of the Chairman of the Board or President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived ------------- or discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board or President of the Company and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 9 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, LUMONICS INC. by: ______________________________________________ Member of the Board of Directors and Chairman of the Compensation Committee by: ______________________________________________ Chairman Agreed to this ______ day of _____________, 19 ______ _____________________________________________________ Signature _____________________________________________________ Print Name _____________________________________________________ Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to your Total Compensation multiplied by the Payment Factor. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, the Payment Factor shall be increased by 12; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.19 17 SEVERANCE AGREEMENT BETWEEN PATRICK D. AUSTIN EXHIBIT 10.19 PERSONAL AND CONFIDENTIAL Date: April 13, 1998 Mr. Patrick D. Austin c/o Lumonics 130 Lombard Street Oxnard, CA 93030 Dear Mr. Austin: Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 2 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). 3 (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(r)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Factor" means the number of complete years, subject to a minimum of 12 and a maximum of 24, that you have been a full time employee of the Company. (l) "Payment Period" means the period of time commencing on the first day of the month following the Date of Termination and continuing for that number of months equal to the Payment Factor. 4 (m) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. (n) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (o) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (p) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (q) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (r) "Total Compensation" means 1/12th of the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 5 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take- over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from January 1, 1998 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 7 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ----------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 8 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the attention of the Chairman of the Board or President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board or President of the Company and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 9 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, LUMONICS INC. by: ________________________________________ Member of the Board of Directors and Chairman of the Compensation Committee by: ________________________________________ Chairman Agreed to this _____ day of _____________, 19__________ ________________________________________ Signature ________________________________________ Print Name ________________________________________ Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to your Total Compensation multiplied by the Payment Factor. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, the Payment Factor shall be increased by 12; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.20 18 SEVERANCE AGREEMENT BETWEEN JOHN W. GEORGE EXHIBIT 10.20 PERSONAL AND CONFIDENTIAL Date: April 13, 1998 Mr. John W. George c/o Lumonics 19776 Haggerty Road Livonia, MI 48152-1016 Dear Mr. George: Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 2 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). 3 (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(r)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Factor" means the number of complete years, subject to a minimum of 12 and a maximum of 24, that you have been a full time employee of the Company. (l) "Payment Period" means the period of time commencing on the first day of the month following the Date of Termination and continuing for that number of months equal to the Payment Factor. 4 (m) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. (n) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (o) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (p) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (q) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (r) "Total Compensation" means 1/12th of the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 5 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take-over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from January 1, 1998 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 7 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ----------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 8 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the attention of the Chairman of the Board or President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board or President of the Company and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 9 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, LUMONICS INC. by: _______________________________________ Member of the Board of Directors and Chairman of the Compensation Committee by: _______________________________________ Chairman Agreed to this ____ day of ______, 19____ ____________________________________ Signature ____________________________________ Print Name ____________________________________ Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to your Total Compensation multiplied by the Payment Factor. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, the Payment Factor shall be increased by 12; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.21 19 SEVERANCE AGREEMENT BETWEEN DESMOND J. BRADLEY EXHIBIT 10.21 PERSONAL AND CONFIDENTIAL Date: April 13, 1998 Mr. Desmond J. Bradley c/o Lumonics 105 Schneider Road Kanata, ON K2K 1Y3 Dear Mr. Bradley: Lumonics recognizes that uncertainties relating to job security could result in the resignation or possible distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Company wishes to clarify certain arrangements that will apply in the event your employment by the Company is terminated, especially in circumstances relating to a Change of Control. In particular, the Company believes it important, should a proposal be received that could result in a change in the ownership of the Company, that your employment with the Company or its affiliates be continued during the pendency of such proposal and that you be able to assess and advise the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. Therefore, this letter agreement ("Agreement") sets forth the severance and termination benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated without Cause either prior to or following a Change of Control. Please note that this Agreement revokes and supersedes all other prior agreements between you and the Company dealing with the benefits to be given to you in the event your employment with the Company is terminated without Cause either prior to, or following, a Change of Control. 2 1. Definitions ----------- 1.1 For the purposes of this Agreement only, the term: (a) "Base Salary" means your annual salary in effect prior to the date of delivery of a Notice of Termination (without regard to any reduction in that salary in the sixty days prior to the date of delivery of such Notice). (b) "Beneficial Owner of Shares" means a Person who has any beneficial interest in or control or direction over the Shares or has a right to control or direct voting or disposition of Shares held in a trust or has the right to acquire any beneficial interest in Shares, whether issued or unissued conditionally or unconditionally, within sixty days whether by exercise of an option, warrant, right, subscription privilege, agreement, revocation or a trust or otherwise. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means (i) the wilful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or (ii) the wilful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For the purposes of this definition, no act, or failure to act, on your part, shall be considered "wilful" unless done or omitted to be done by you and without reasonable belief that such action or omission was in, or not opposed to, the best interests of the Company. (e) "Change of Control" means any one of the following events: (i) any Person or group of Persons, other than Sumitomo Heavy Industries Ltd. or its affiliates, acting jointly and in concert, becomes the Beneficial Owner, directly or indirectly, of thirty percent or more of the Shares but not including any Person whose ownership of such a percentage of Shares results solely from a share repurchase by the Company, or a subsidiary thereof (unless such Person or Persons substantially purchase any additional Shares). 3 (ii) a Person or group of Persons acting jointly and in concert, who is the registered owner or Beneficial Owner of five percent or greater of the Shares (a) indicates in an information circular sent to shareholders of the Company or otherwise indicates in writing, that such Person or Persons intends to nominate, or (b) at a meeting of the Company's shareholders nominates, individuals for election to the Board who have not been approved by the Board and who, if elected, would constitute a majority of the members on the Board who are not full-time employees of the Company or its subsidiaries and a majority of such nominees are so elected. (iii) the Company ceases to control in fact, directly or indirectly, all or substantially all of the assets employed in carrying on the business of the Company. (f) "Company" means Lumonics Inc. and includes any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution or form of business combination. (g) "Compensation Type Benefit" means the benefits referred to in paragraph 1(r)(c) of this agreement. (h) "Date of Termination" means the date specified in Section 6 of this Agreement. (i) "Disability" means your inability to perform your duties for a period of six consecutive months or for a total of eight months in any period of twelve consecutive months. (j) "Notice of Termination" means a notice given in accordance with this Agreement. (k) "Payment Factor" means the number of complete years, subject to a minimum of 12 and a maximum of 24, that you have been a full time employee of the Company. (l) "Payment Period" means the period of time commencing on the first day of the month following the Date of Termination and continuing for that number of months equal to the Payment Factor. 4 (m) "Person" or "Persons" means and include any individual, corporation, partnership, unincorporated organization or syndicate or association, trust, trustee, executor, administrator or other legal representative other than the Company, a subsidiary of the Company or any employee benefit plans, sponsored by the Company or a subsidiary of the Company. (n) "Retirement" means Termination on or after your normal retirement date, including early retirement with your written consent. (o) "Shares" means the issued and outstanding Common Shares in the Capital Stock of the Company. (p) "Successor" means any Person that concurrently with or subsequent to a Change of Control succeeds to, or has the practicability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase, of Shares, or substantially all of its assets. (q) "Termination" means Termination by the Company without cause of your employment with the Company including Constructive Termination and excluding Termination because of your death, Disability or Retirement. (r) "Total Compensation" means 1/12th of the total of the following: (a) your Annual Base Salary for the year in which Termination occurs; plus (b) an amount equal to the average of your target bonus for the year in which Termination occurs and the actual bonuses paid or payable to you for each of the previous two years; plus (c) an amount equal to the annual additional cost to the Company of any other compensation type benefits which you are entitled to receive for the year in which Termination occurs including but not limited to automobile allowance (including insurance and repair allowance), health benefits and retirement savings plan allowance. 5 2. Agreement to Provide Services: Right to Terminate ------------------------------------------------- 2.1 Except as otherwise provided in paragraph 2.2 below, the Company or you may terminate your employment at any time. 2.2 In the event a take-over bid (as defined in Securities Act (Ontario) (the "Act") is made by a Person or Persons acting jointly and in concert (utilized herein as defined in the Act) in respect of any securities of the Company prior to the first occurrence of a Change of Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement) until the earliest of (a) one hundred and twenty days after the commencement of such take-over bid, or (b) such take- over bid has been abandoned or ended, or (c) the first occurrence of a Change of Control. 3. Term of the Agreement --------------------- 3.1 This Agreement shall commence on the date hereof and shall continue to be in effect for a minimum period of three years to be calculated from January 1, 1998 and shall, automatically be extended for additional periods of one year unless at least ninety days prior to the expiration of the then current period, the Company or you shall have given written notice that this Agreement shall not be extended. 3.2 It is further provided that notwithstanding paragraph 3.1 this Agreement shall continue to be in effect for a minimum period of twenty-four months from the first occurrence of a Change of Control. 4. Termination Benefits -------------------- 4.1 You shall be entitled to the benefits provided in Schedule "A" hereof in the event of Termination. 5. Notice of Termination --------------------- 5.1 Any purported Termination, at any time, by the Company or by you shall be communicated by written Notice of Termination to the other party hereto and shall indicate with reasonable particularity reasons for such Termination. 6 6. Date of Termination ------------------- 6.1 "Date of Termination" shall mean: (a) if your employment is terminated by the Company for Cause, the date specified in the Notice of Termination; (b) if you terminate your employment, the date specified in the Notice of Termination which shall not be earlier than sixty days after the date on which the Notice of Termination is given; or (c) if your employment is terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall not be earlier than sixty days after the date on which the Notice of Termination is given. 7. Payment ------- 7.1 The amount of any payment that you are entitled to pursuant to this Agreement shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination. 7.2 Any amounts payable to you pursuant to this Agreement shall be paid to you as follows: (a) 50% of the amount payable shall be paid to you thirty days after the Date of Termination; (b) the balance of the amount payable to you shall be paid in equal consecutive monthly instalments which shall be payable, without interest, on the first day of each month during the Payment Period. 8. Additional Rights ----------------- 8.1 You agree that the benefits to which you are entitled under the provisions of this Agreement are in lieu of and replace any statutory entitlements to notice of termination or termination pay in lieu of notice and severance pay and are in lieu of and replace any common law entitlements to notice of termination or pay in lieu thereof and you waive all your rights under any applicable statute or at common law to reasonable notice. 7 8.2 You agree that in the event you decide to exercise any recourse provided to you by any applicable statute, by so doing you waive your right to any of the benefits which you may be entitled to under this Agreement. You also agree to reimburse the Company forthwith for the entire cost to the Company of any such benefit paid to you prior to the exercise by you of such recourse. 9. Successors: Binding Agreement ----------------------------- 9.1 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors or heirs. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to a beneficiary designated by you in writing or barring such designation to your estate. 10. Fees and Expenses ----------------- 10.1 The Company shall pay, to a maximum of $5,000 in your local currency, the reasonable legal and accounting fees and related expenses actually incurred by you in connection with (a) your seeking general taxation and financial advice with respect to the receipt of payments hereunder or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement provided however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 10.2 Following Termination, the Company shall pay, to a maximum of $15,000 in ----------------------- your local currency, the reasonable fees and related expenses actually incurred by you in connection with individual career, executive consulting and employment search services provided the Company has approved, in advance, the consulting organization(s) retained by you to provide this service. 8 11. General ------- 11.1 Confidentiality/Non-Competition Notwithstanding any provision of this ------------------------------- Agreement, any provision governing an obligation of confidentiality on your part to the Company or an obligation not to compete with the Company that is contained in any other agreement that you may have with the Company shall continue to be of full force and effect. 11.2 Taxes and Other Amounts All payments to be made to you under this ----------------------- Agreement shall be subject to required withholding of income tax and other amounts under federal, provincial and local legislation. 11.3 Survival The respective obligations of and benefits afforded to the -------- Company and you as provided in this Agreement that have accrued shall survive the subsequent termination of this Agreement. 11.4 Notice For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employed, to the address set forth below his/her signature provided that all notices of the Company shall be directed to the attention of the Chairman of the Board or President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11.5 Miscellaneous No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing signed by you, by the Chairman of the Board or President of the Company and by the Chairman of the Compensation Committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario. 9 11.6 Severance The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11.7 Counterparts This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, LUMONICS INC. by:____________________________________ Member of the Board of Directors and Chairman of the Compensation Committee by:____________________________________ Chairman Agreed to this ____ day of ______, 19____ _________________________________________ Signature _________________________________________ Print Name __________________________________________ Address 10 SCHEDULE "A" ------------ (Termination Benefits) You are entitled to: 1. an amount equal to your Total Compensation multiplied by the Payment Factor. Provided that: (a) if Termination takes place within 24 months of the first occurrence of a Change of Control, the Payment Factor shall be increased by 12; and (b) the Company may, at its option, elect to continue to provide you, during the Payment Period with any of the Compensation Type Benefits. If the Company makes such election, the amount payable to you pursuant to this Agreement shall be reduced by the increased cost to the Company during the Payment Period of providing you with each Compensation Type Benefit that is to be continued. 2. The immediate vesting, on the Date of Termination, of all options previously granted to you by the Company that have not then vested, provided that all such options shall expire 6 months after the Date of Termination. EX-10.23 20 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1998 EXHIBIT 10.23 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company"), and Charles Winston of Weston, Massachusetts (the ------- "Employee") -------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 9 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Channel in Control" shall mean a Change in Control which -------- ------- -- ------- shall have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than ---------- -------- an Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -------------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (l) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 of ------ -- ----------- this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 and ----------------- shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized: Not an Employment Contract. -------------------------------------------------------------- In order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) ----------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - ------ pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- ------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ --- shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all -------- ------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced ------- Amount") such that the receipt of Subject Payments - ------ -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ----- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date: Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above-referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ------------ any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors: Binding Agreement. ------------------- --------- 8.1 Assumption and Performance of Agreement. The Company will require that --------------------------------------- any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Charles Winston 10 Cart Path Road Weston, MA 02193 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes: Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ Linda Palmer ----------------------------------- Title: Vice President, Human Resources THE EMPLOYEE /s/ Charles Winston -------------------------------------- Name: Charles Winston EX-10.24 21 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.24 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company"), and Linda Palmer of North Andover, Massachusetts ------- (the "Employee") -------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 1 year, employed by the Company; the Employee's experience and knowledge the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which shall -------- ------ -- ------- have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than ---------- -------- an Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -- ----------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as -------- --- amended. (1) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 ------ -- ----------- of this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 and ---- -- --------- shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized: Not an Employment Contract. --------------------------------------------------------------------- In order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) --------- ---- ------ (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - ------ pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- ------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ --- shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all -------- ------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced ------- Amount") such that the receipt of Subject Payments - ------ -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ---- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date; Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above-referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ----------- any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors; Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require that --------------------------------------- any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Linda Palmer 80 Woodcrest Drive North Andover, MA 01845 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes; Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: Kent Worley --------------------------------- Title: Vice President THE EMPLOYEE /s/ Linda Palmer ------------------------------------ Name: Linda Palmer EX-10.25 22 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.25 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company"), and Kurt Pelsue of Wayland, Massachusetts (the --------- "Employee") - ---------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 21 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which -------- ------ -- ------- shall have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than ---------- -------- an Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -- ----------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (1) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 ------ -- ----------- of this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 50 long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 ------- --------- and shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized: Not an Employment Contract. -------------------------------------------------------------------- In order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Emp1oyee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee ---------------------- the payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) ----------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - -------- pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") ------- -------- would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following ------ --- provisions shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of --------- -------- all taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Subject Payments ------- ------- -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ----- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date; Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ------------ any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors; Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require --------------------------------------- that any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Kurt Pulse 55 Sherman Bridge Road Wayland, MA 01778 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes; Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ C.D. Winston ---------------------------- Title: President THE EMPLOYEE /s/ Kurt Pelsue 7/7/97 -------------------------------- Name: Kurt Pelsue [LETTERHEAD OF GENERAL SCANNING INC. APPEARS HERE] To: Kurt Pelsue From: Charles D. Winston Re: Key Employee Retention Agreement Date: June 27, 1997 Kurk, AMENDMENT TO KEY EMPLOYEE RETENTION AGREEMENT Reference is hereby made to that certain Key Employee Retention Agreement (the "Original Agreement") dated May 1, 1997 by and between General Scanning Inc., a Massachusetts corporation (the "Company") and Kurt Pelsue of Wayland, Massachusetts (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Merger dated of October 27, 1998 (the "Merger Agreement") with Lumonics Inc. ("Lumonics") and a wholly owned subsidiary of Lumonics ("Merger Sub ), pursuant to which Merger Sub shall merge with and into the Company and the Company shall thereupon be a wholly owned subsidiary of Lumonics; and WHEREAS, the consummation of the transactions contemplated by the Merger Agreement are expected to benefit the Company and the Employee; and WHEREAS, the execution of this Amendment to the Original Agreement (the "Amendment") is a condition to the obligations of Lumonics and Merger Sub to close the transactions contemplated by the Merger Agreement. NOW THEREFORE, the Company and the Employee hereby agree as follows; 1. Section 1(f) of the Original Agreement is hereby amended by adding the following language at the end of the section: "Notwithstanding any provisions of this Agreement to the contrary, a merger of the Company with or into Lumonics Inc., a corporation organized under the laws of Ontario ("Lumonics"), or any Person which is a subsidiary or other affiliate of Lumonics shall not be deemed to be a Change in Control for purposes of this Agreement." 2. A new Section 14 is hereby added to the Original Agreement as follows "14. Severance. Notwithstanding anything to the contrary contained --------- in this Agreement, in the event there has been no Change in Control and the Employee's employment by the Company is terminated for any reason other than (x) for Cause or (y) upon the Employee's death or (z) by the Employee without Good Reason, the Company shall pay to the Employee an amount equal to the sum of (i) the Employee's annual base salary as in effect immediately prior to the termination and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the last three (3) fiscal years immediately preceding the termination. In the event of termination of the Executive pursuant to this provision, the Employee shall continue to receive continued coverage for one (1) year under any then existing health, medical, and disability insurance. In the event that the terms of the above- referenced plans do not permit the continuation of Employee thereunder after termination of employment, the Company shall pay to the Employee amounts reasonably calculated to permit the Employee to obtain similar coverage outside of such plans. the severance payment provided for in this Section 14 (i) shall not apply in the event the Employee receives any payment pursuant to Section 5 hereof, (ii) shall be paid by the Company notwithstanding any termination of this Agreement, (iii) shall not be subject to the provisions of Section 5, including the Gross-Up Payment and the reduction in amount based upon obtaining other employment during the Mitigation Period, and (iv) shall be paid in lieu of any further salary payments or severance benefits to the Employee for periods subsequent to termination of employment with the Company." 3. The parties hereby ratify and confirm that they continue to be bound by the terms and provisions of the Original Agreement which, except as expressly modified hereby, shall continue in full force and effect. 4. Any term used herein and not defined shall have the meaning ascribed to such term in the Original Agreement whether or not a Change in Control (which may be referenced in such definition) has occurred. 2 IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Company and by the Employee as of October 27, 1998. GENERAL SCANNING INC. By: /s/ C.D. Winston ----------------------------- Name: C.D. Winston Title: President and CEO EMPLOYEE: /s/ Kurt Pelsue -------------------------------- Name 3 EX-10.26 23 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.26 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company" and Michael Kampfe of Chestnut Hill, Massachusetts ------- (the "Employee" -------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 13 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 50 long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which -------- ------ -- ------- shall have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than ---------- -------- an Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -- ----------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as -------- --- amended. (1) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 ------ -- ----------- of this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 and ----------------- shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized; Not an Employment Contract. -------------------------------------------------------------- In order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) ----------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - -------- pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- -------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ --- shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all - --------- -------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced ------- Amount") such that the receipt of Subject Payments - ------- -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ----- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date; Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above-referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ----------- any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors; Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require that --------------------------------------- any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributes, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Michael Kampfe 74 Hilltop Road Chestnut Hill, MA 02167 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes; Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ Charles Winston ------------------------------ Title: President THE EMPLOYEE /s/ Michael Kampfe ---------------------------------- Name: Michael Kampfe AMENDMENT TO KEY EMPLOYEE RETENTION AGREEMENT Reference is hereby made to that certain Key Employee Retention Agreement (the "Original Agreement") dated May 1, 1997 by and between General Scanning Inc., a Massachusetts corporation (the "Company") and Michael R. Kampfe of Watertown, Massachusetts (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Merger dated as of October 27, 1998 (the "Merger Agreement") with Lumonics Inc. ("Lumonics") and a wholly owned subsidiary of Lumonics ("Merger Sub"), pursuant to which Merger Sub shall merge with and into the Company and the Company shall thereupon be a wholly owned subsidiary of Lumonics; and WHEREAS, the consummation of the transactions contemplated by the Merger Agreement are expected to benefit the Company and the Employee; and WHEREAS, the execution of this Amendment to the Original Agreement (the "Amendment") is a condition to the obligations of Lumonics and Merger Sub to close the transactions contemplated by the Merger Agreement. NOW THEREFORE, the Company and the Employee hereby agree as follows: 1. Section 1(f) of the Original Agreement is hereby amended by adding the following language at the end of the section: "Notwithstanding any provisions of this Agreement to the contrary, a merger of the Company with or into Lumonics Inc., a corporation organized wider the laws of Ontario ("Lumonics"), or any Person which is a subsidiary or other affiliate of Lumonics shall not be deemed to be a Change in Control for purposes of this Agreement." 2. A new Section 14 is hereby added to the Original Agreement as follows: "14. Severance. Notwithstanding anything to the contrary contained in --------- this Agreement, in the event there has been no Change in Control and the Employee's employment by the Company is terminated for any reason other than (x) for Cause or (y) upon the Employee's death or (z) by the Employee without Good Reason, the Company shall pay to the Employee an amount equal to the sum of (i) the Employee's annual base salary as in effect immediately prior to the termination and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the last three (3) fiscal years immediately preceding the termination. In the event of termination of the Executive pursuant to this provision, the Employee shall continue to receive continued coverage for one (1) year any then existing health, medical, and disability insurance. In the event that the terms of the above- referenced plans do not permit the continuation of Employee thereunder after termination of employment, the Company shall pay to the Employee amounts reasonably calculated to permit the Employee to obtain similar coverage outside of such plans. The severance payment provided for in this Section 14 (i) shall not apply in the event the Employee receives any payment pursuant to Section 5 hereof, (ii) shall be paid by the Company notwithstanding any termination of this Agreement, (iii) shall not be subject to the provisions of Section 5, including the Gross-Up Payment and the reduction in amount based upon obtaining other employment during the Mitigation Period, and (iv) shall be paid in lieu of any further salary payments or severance benefits to the Employee for periods subsequent to termination of employment with the Company." 3. The parties hereby ratify and confirm that they continue to be bound by the terms and provisions of the Original Agreement which, except as expressly modified hereby, shall continue in full force and effect. 4. Any term used herein and not defined shall have the meaning ascribed to such term in the Original Agreement whether or not a Change in Control (which may be referenced in such definition) has occurred. 2 IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Company and by the Employee as of October 1998. GENERAL SCANNING INC. By: /s/ C.D. Winston ---------------------------- Name: C.D. Winston Title: President & CEO EMPLOYEE: /s/ Michael R. Kampfe ------------------------------- Name: 3 To: C. Winston CC: Linda Palmer From: M. Kampfe Date: October 26, 1998 Subject: AMENDMENT TO KEY RETENTION AGREEMENT As I indicated yesterday I am prepared to support this merger of equals by signing a document that excludes it from the "change of control" referred to in the May 1, 1997 Key Employee Retention Agreement. I do have two concerns that I would like to have incorporated in this amendment. 1. Section 14 Severance makes no reference to bonus payments. Let me suggest that a modification be made to indicate that one of the following be added after "base salary": . And bonus calculated at 40% of base salary . And bonus equal to pay outs made in 1998 or an average of the last three years which ever is higher I am unaware of issues that might be raised by other officers. If changes are made which benefit them similar benefits should also be afforded to me. Thank you. EX-10.27 24 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.27 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company"), and Victor Sabella of North Andover, --------- Massachusetts (the "Employee") --------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 5 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 50 long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which -------- ------ -- ------- shall have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than ---------- -------- an Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -------------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (1) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 ------ -- ----------- of this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 50 long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 ------- --------- and shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized; Not an Employment Contract. ------------------------------------------------------------------- In order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) ----------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - -------- pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- -------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all - --------- -------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after- tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Subject Payments ------- ------- -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ----- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date; Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above-referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ------------ any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the provision to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors; Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require --------------------------------------- that any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Victor Sabella 30 Spring Hill Road North Andover, MA 01845 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes; Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ C.D. Winston ------------------------------ Title: President THE EMPLOYEE /s/ Victor Sabella ---------------------------------- Name: Victor Sabella AMENDMENT TO KEY EMPLOYEE RETENTION AGREEMENT Reference is hereby made to that certain Key Employee Retention Agreement (the "Original Agreement") dated May 1, 1997 by and between General Scanning Inc., a Massachusetts corporation (the "Company") and Victor Sabella of N. Andover, Massachusetts (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Merger dated as of October 27, 1998 (the "Merger Agreement") with Lumonics Inc. ("Lumonics") and a wholly owned subsidiary of Lumonics ("Merger Sub"), pursuant to which Merger Sub shall merge with and into the Company and the Company shall thereupon be a wholly owned subsidiary of Lumonics; and WHEREAS, the consummation of the transactions contemplated by the Merger Agreement are expected to benefit the Company and the Employee; and WHEREAS, the execution of this Amendment to the Original Agreement (the "Amendment") is a condition to the obligations of Lumonics and Merger Sub to close the transactions contemplated by the Merger Agreement. NOW THEREFORE, the Company and the Employee hereby agree as follows: 1. Section 1(f) of the Original Agreement is hereby amended by adding the following language at the end of the section: "Notwithstanding any provisions of this Agreement to the contrary, a merger of the Company with or into Lumonics Inc., a corporation organized under the laws of Ontario ("Lumonics"), or any Person which is a subsidiary or other affiliate of Lumonics shall not be deemed to be a Change in Control for purposes of this Agreement." 2. A new Section 14 is hereby added to the Original Agreement as follows: "14. Severance. Notwithstanding anything to the contrary contained in --------- this Agreement, in the event there has been no Change in Control and the Employee's employment by the Company is terminated by either the Company or the Employee for any reason other than (x) by the Company for Cause or (y) upon the Employee's death or (z) by the Employee without Good Reason, the Company shall pay to the Employee an amount equal to the sum of (i) the Employee's annual base salary as in effect immediately prior to the termination and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the last three (3) fiscal years immediately preceding the termination; provided, however, that if such termination of employment occurs --------- ------- within one year following the consummation of the merger transaction contemplated by the Merger Agreement, the Company shall pay the Employee the above-referenced severance amount notwithstanding that the Employee terminated his employment without Good Reason. In the event of termination of the Executive pursuant to this provision, the Employee shall continue to receive continued coverage for one (1) year under any then existing health, medical, and disability insurance. In the event that the terms of the above-referenced plans do not permit the continuation of Employee thereunder after termination of employment, the Company shall pay to the Employee amounts reasonably calculated to permit the Employee to obtain similar coverage outside of such plans. The severance payment provided for in this Section 14 (i) shall not apply in the event the Employee receives any payment pursuant to Section 5 hereof, (ii) shall be paid by the Company notwithstanding any termination of this Agreement, (iii) shall not be subject to the provisions of Section 5' including the Gross-Up Payment and the reduction in amount based upon obtaining other employment during the Mitigation Period, and (iv) shall be paid in lieu of any further salary payments or severance benefits to the Employee for periods subsequent to termination of employment with the Company. 3. The parties hereby ratify and confirm that they continue to be bound by the terms and provisions of the Original Agreement which, except as expressly modified hereby, shall continue in full force and effect. 4. Any term used herein and not defined shall have the meaning ascribed to such term in the Original Agreement whether or not a Change in Control (which may be referenced in such definition) has occurred. 2 IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Company and by the Employee as of October 27, 1998. GENERAL SCANNING INC. By: /s/ C.D. Winston ------------------------- Name: C.D. Winston Title: President & CEO EMPLOYEE: Victor Sabella ---------------------------- Name: 3 EX-10.28 25 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.28 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company"), and Joseph Verderber of Weston, Massachusetts ------- (the "Employee") -------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 6 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which shall -------- ------ -- ------- have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than an ---------- -------- Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -- ----------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as -------- --- amended. (1) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 ------ -- ----------- of this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 and ----------------- shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized: Not an Employment Contract. In -------------------------------------------------------------- order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) --------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - ------ pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- ------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ --- shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all -------- ------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced ------- Amount") such that the receipt of Subject Payments - ------ -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ---- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date: Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above-referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ----------- any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors: Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require that --------------------------------------- any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Joseph Verderber 72 Chestnut Street Weston, MA 02193 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes: Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ Charles Winston ------------------------------------ Title: President THE EMPLOYEE /s/ Joseph A. Verderber 6/16/97 --------------------------------------- Name: Joseph A. Verderber GP&H Draft 10/23/98 AMENDMENT TO KEY EMPLOYEE RETENTION AGREEMENT Reference is hereby made to that certain Key Employee Retention Agreement (the "Original Agreement") dated May 1, 1997 by and between General Scanning Inc., a Massachusetts corporation (the "Company") and Joseph A. Verdeber of Weston, Massachusetts (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Merger dated as of October __, 1998 (the "Merger Agreement") with [Lynx] and [Merger Sub], a wholly owned subsidiary of [Lynx), pursuant to which Merger Sub shall merge with and into the Company and the Company shall thereupon be a wholly owned subsidiary of [Lynx]; and WHEREAS, the consummation of the transactions contemplated by the Merger Agreement are expected to benefit the Company and the Employee; and WHEREAS, the execution of this Amendment to the Original Agreement (the "Amendment") is a condition to the obligations of [Lynx] and Merger Sub to close the transactions contemplated by the Merger Agreement. NOW THEREFORE, the Company and the Employee hereby agree as follows: 1. Section 1(f) of the Original Agreement is hereby amended by adding the following language at the end of the section: "Notwithstanding any provisions of this Agreement to the contrary, a merger of the Company with or into Lumonics Inc., a corporation organized under the laws of Canada, or Lumonics Corporation, a corporation organized under the laws of Michigan (together, "Lumonics") or any Person which is a subsidiary or other affiliate of Lumonics shall not be deemed to be a Change in Control for purposes of this Agreement." 2. The parties hereby ratify and confirm that they continue to be bound by the terms and provisions of the Original Agreement which, except as expressly modified hereby, shall continue in full force and effect. 3. Any term used herein and not defined shall have the meaning ascribed to such term in the Original Agreement. IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Company and by the Employee as of October 27, 1998. GENERAL SCANNING INC. By: /s/ C.D. Winston ----------------------- Name: C.D. Winston Title: President and CEO EMPLOYEE: /s/ Joseph A. Verderber -------------------------- Name: Special Retention Agreement For Joseph A. Verderber Reference is made to the Key Employee Retention Agreement (the Agreement) dated May 1, 1997 between General Scanning Inc. (GSI) and Joseph A. Verderber (JAV). Reference is also made to "Amendment to Key Employee Retention Agreement" (the Waiver) dated October 27, 1998, which provides that a merger with or into Lumonics would not be considered a Change of Control for the purposes of the Agreement. In return for executing the Waiver, GSI hereby grants to JAV the following rights and entitlements in the event that a business combination (the Merger) between GSI and Lumonics does occur: 1) GSI will provide employment in the merged Company ("GSI Lumonics") for JAV for at least one year from the date of Merger. 2) That employment will be at not less than the total annual compensation currently in place for JAV, including incentive earnings opportunities. 3) That employment will be at an appropriate level of responsibility commensurate with the GSI employment experience of JAV. 4) On or after the one-year anniversary of the Merger, either GSI Lumonics or JAV may opt to terminate JAV's employment with GSI Lumonics. In the event of such termination by either party, JAV will be entitled to a Severance Payment as defined below. There will be a Basic Severance Amount equal to the sum of one year's base salary (at the rate in effect at the time of the signing of the Waiver or at the time of the Termination, whichever is higher) plus an amount equal to the average of the annual bonuses paid to JAV in the three fiscal years preceding the date of the Waiver. In addition, GSI Lumonics will, at its expense, maintain JAV on the benefits program in existence at the time of the Termination for a twelve-month period if the Severance Payment is accepted as a twelve-month "salary continuation" program, or for 24 months if the Severance Payment is accepted as a twenty- four month "continuation program" at half salary. The choice of the twelve- month, twenty-four month, or lump sum settlement shall be JAV's. 5) In the event that GSI Lumonics opts to terminate JAV's employment before the one year anniversary of the Merger, GSI Lumonics will add to the "one year" base salary an amount equal to one month's salary for every month or portion thereof by which the Termination precedes that anniversary. In signing this document, JAV pledges that he will not voluntarily terminate his employment with GSI Lumonics for at least one year from the date of the Merger. JAV further pledges that he will positively and actively support the transition from GSI's independence to its participation in the merged Company. /s/ Joseph A. Verderber /s/ Charles D. Winston - ------------------------------- ------------------------------- Joseph A. Verderber for General Scanning Inc. Charles D. Winston 10/27/98 10/27/98 - ------------------------------- ------------------------------- Date Date Witnessed by [SIGNATURE APPEARS HERE] ---------------------------------------------------- EX-10.29 26 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.29 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company"), and Gregory Baletsa of Andover, Massachusetts ------- (the "Employee") -------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 12 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which shall -------- ------ -- ------- have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in the control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale of disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than ---------- -------- an Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -- ----------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as -------- --- amended. (1) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 of ------ -- ----------- this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May ----------------- 1, 1997 and shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized: Not an Employment Contract. In ----------------------------------------------------------------- order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) --------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - ------ pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- -------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ --- shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all -------- ------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced ------- Amount") such that the receipt of Subject Payments - ------ -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ---- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date: Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ----------- any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors: Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require that --------------------------------------- any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Gregory Baletsa 27 Brady Loop Andover, MA 01810 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes: Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ Charles Winston --------------------------------------- Title: President THE EMPLOYEE /s/ Gregory S. Baletsa ------------------------------------------ Name: Gregory Baletsa AMENDMENT TO KEY EMPLOYEE RETENTION AGREEMENT Reference is hereby made to that certain Key Employee Retention Agreement (the "Original Agreement") dated May 1, 1997 by and between General Scanning Inc., a Massachusetts corporation (the "Company") and Gregory S. Baletsa of ___________________, Massachusetts (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Merger dated as of October 27, 1998 (the "Merger Agreement") with Lumonics Inc. ("Lumonics") and a wholly owned subsidiary of Lumonics ("Merger Sub"), pursuant to which Merger Sub shall merge with and into the Company and the Company shall thereupon be a wholly owned subsidiary of Lumonics; and WHEREAS, the consummation of the transactions contemplated by the Merger Agreement are expected to benefit the Company and the Employee; and WHEREAS, the execution of this Amendment to the Original Agreement (the "Amendment") is a condition to the obligations of Lumonics and Merger Sub to close the transactions contemplated by the Merger Agreement. NOW THEREFORE, the Company and the Employee hereby agree as follows: 1. Section 1(f) of the Original Agreement is hereby amended by adding the following language at the end of the section: "Notwithstanding any provisions of this Agreement to the contrary, a merger of the Company with or into Lumonics Inc., a corporation organized under the laws of Ontario ("Lumonics"), or any Person which is a subsidiary or other affiliate of Lumonics shall not be deemed to be a Change in Control for purposes of this Agreement." 2. A new Section 14 is hereby added to the Original Agreement as follows: "14. Severance. Notwithstanding anything to the contrary contained --------- in this Agreement, in the event there has been no Change in Control and the Employee's employment by the Company is terminated by either the Company or the Employee for any reason other than (x) by the Company for Cause or (y) upon the Employee's death or (z) by the Employee without Good Reason, the Company shall pay to the Employee an amount equal to the sum of (i) the Employee's annual base salary as in effect immediately prior to the termination and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the last three (3) fiscal years immediately preceding the termination; provided, however, that if such termination of employment occurs --------- ------- within six months following the consummation of the merger transaction contemplated by the Merger Agreement, the Company shall pay the Employee the above-referenced severance amount notwithstanding that the Employee terminated his employment without Good Reason. In the event of termination of the Executive pursuant to this provision, the Employee shall continue to receive continued coverage for one (1) year under any then existing health, medical, and disability insurance. In the event that the terms of the above-referenced plans do not permit the continuation of Employee thereunder after termination of employment, the Company shall pay to the Employee amounts reasonably calculated to permit the Employee to obtain similar coverage outside of such plans. The severance payment provided for in this Section 14 (i) shall not apply in the event the Employee receives any payment pursuant to Section 5 hereof, (ii) shall be paid by the Company notwithstanding any termination of this Agreement, (iii) shall not be subject to the provisions of Section 5, including the Gross-Up Payment and the reduction in amount based upon obtaining other employment during the Mitigation Period, and (iv) shall be paid in lieu of any further salary payments or severance benefits to the Employee for periods subsequent to termination of employment with the Company." 3. The parties hereby ratify and confirm that they continue to be bound by the terms and provisions of the Original Agreement which, except as expressly modified hereby, shall continue in full force and effect. 4. Any term used herein and not defined shall have the meaning ascribed to such term in the Original Agreement whether or not a Change in Control (which may be referenced in such definition) has occurred. 2 IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Company and by the Employee as of October 27, 1998. GENERAL SCANNING INC. By: /s/ C.D. Winston ----------------------- Name: C.D. Winston Title: President & CEO EMPLOYEE: /s/ Gregory S. Baletsa -------------------------- Name: 3 EX-10.30 27 KEY EMPLOYEE RETENTION AGREEMENT DATED 5/1/1997 EXHIBIT 10.30 KEY EMPLOYEE RETENTION AGREEMENT THIS AGREEMENT dated May 1, 1997, by and between GENERAL SCANNING INC., a Massachusetts corporation having its principal place of business in Watertown, Massachusetts (the "Company" and Victor Woolley of Milton, Massachusetts (the ------- "Employee") - --------- WITNESSETH THAT: WHEREAS, the Employee has been for approximately 2 years, employed by the Company; the Employee's experience and knowledge of the affairs of the Company are valuable to the Company; and the Company considers it essential to the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. For purposes of this Agreement, the definitions of ------------- capitalized terms used in this Agreement are as follows: (a) "Acquiring Person" shall mean any Person who acquires a beneficial --------- ------ ownership of twenty percent (20%) or more of the outstanding voting securities of the Company, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date. (b) "Approved Change in Control" shall mean a Change in Control which shall -------- ------ -- ------- have been approved, and/or recommended to the Company's shareholders, by a majority of the Continuing Directors. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under ---------- ----- the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. ----- (e) "Cause" for termination of the Employee's employment by the Company, ----- after any Change in Control, shall mean any of the following: (i) The willful and continued failure by the Employee to perform the Employee's duties with the Company, which failure continues for more than ten (10) days after written notice given to the Employee pursuant to -2- a vote of at least two-thirds of the Continuing Directors, such vote to set forth in reasonable detail the nature of such failure; (ii) The willful engaging by the Employee in gross misconduct which is demonstrably and materially injurious to the Company, financially or otherwise; or (iii) Conviction of the Employee by a court of competent jurisdiction of, or the Employee's pleading nolo contendere to, any criminal offense involving dishonesty or breach of trust or any felony or crime of moral turpitude; provided that, for purposes of clauses (i) and (ii) of this definition, no act - -------- or failure to act on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's act, or failure to act, was in the best interest of the Company. (f) A "Change in Control" shall have occurred if any of the following ------ -- ------- conditions has been satisfied: (i) Continuing Directors constitute two-thirds or less of the membership of the Board; (ii) any Acquiring Person becomes a Beneficial Owner of the Company's voting securities; (iii) there is a change in control of the Company that must be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule, or form under the Exchange Act; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company, or an agreement for the sale or disposition by the Company of substantially all of the Company assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (h) "Company" shall have the meaning specified in the preamble and shall ------- include any successor to its business and/or assets. (i) "Continuing Director" shall mean any member of the Board, other than an ---------- -------- Acquiring Person, (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is elected to succeed a Continuing Director by a majority of the then Continuing Directors or who is nominated by a majority of the then Continuing Directors. -3- (j) "Date of Termination" shall have the meaning described in Section 6.2 ---- -- ----------- of this Agreement. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (l) "Good Reason" for termination by the Employee of his/her employment ---- ------ shall mean the occurrence of any of the following acts by the Company, or failures of the Company to act, unless (for any act or failure to act described in paragraphs (i), (v), or (vi) below) such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination or (in the case of paragraph (iii) below) such act is not objected to in writing by the Employee within four months after notification of the Company's intention to take the action contemplated by paragraph (iii): (i) The assignment to the Employee of any duties inconsistent with the Employee's status as an executive of the Company or a material alteration, adverse to the Employee, in the nature, scope or status of the Employee's responsibilities, title, authorities, powers, functions or duties normally exercised by an executive in such capacity, unless such change in title, duties, responsibilities, etc. is by mutual written agreement of the parties to this Agreement; (ii) A reduction by the Company in the Employee's annual base salary as in effect on the date of this Agreement or as it may be increased, except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; (iii) The fact that the Company requires the Employee to be based anywhere other than within 25 miles of the offices where the Employee was based on the date of the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's present business travel obligations; (iv) The failure by the Company, without the Employee's consent, to pay to the Employee any portion of the Employee's current compensation (or to pay to the Employee 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, or a material breach by the Company of any other provision of this Agreement, which breach continues for more than fourteen days following written notice given by the Employee to the Company, such written notice to set forth in reasonable detail the nature of such breach; (v) The failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation; -4- (vi) The failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee prior to the Change in Control, including without limitation as applicable use of an automobile, coverage of membership dues, provision of services, and benefits under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control; (vii) The failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (viii) Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6.1 of this Agreement (notwithstanding that, for purposes of this Agreement, no such purported termination shall be effective); provided that (A) the Employee's right to terminate his/her employment for Good - -------- Reason shall not be affected by the Employee's incapacity due to physical or mental illness; and (B) the Employee'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 under this Agreement. (m) "Notice of Termination" shall have the meaning stated in Section 6.1 of ------ -- ----------- this Agreement. (n) "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. (o) "Potential Change in Control" has occurred if one of the following --------- ------ -- ------- conditions is satisfied: (i) The Company enters into an agreement which would result in a Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions which would constitute a Change in Control; (iii) Any Person becomes the direct or indirect Beneficial Owner of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding securities, other than any existing Beneficial Owner on May 1, 1997 so long as any such existing Beneficial Owner does not (either individually or as a participant in any group of affiliates or associates, as such terms are defined in Rule 12b-2 under the -5- Exchange Act) acquire additional shares of the Company's Common Stock representing more than 1% of the total outstanding Common Stock on the Record Date; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (p) "Severance Payments" shall mean those payments described in Section 5 --------- -------- of this Agreement. 2. Term of Agreement. This Agreement shall commence as of May 1, 1997 and ----------------- shall continue through April 30, 1998, provided that, commencing on May 1, 1998, and on each subsequent May 1, the term of this Agreement automatically shall be extended for one additional year unless, not later than the preceding December 31, the Company or the Employee shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such May 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the last day of the month in which such Change in Control occurred. 3. The Company's Covenants Summarized; Not an Employment Contract. -------------------------------------------------------------- In order to induce the Employee to remain in the employ of the Company and in consideration of the Employee's covenants set forth in Section 4, the Company agrees, under the conditions described in this Agreement, to pay the Employee the Severance Payments described in Section 5 of this Agreement and the other payments and benefits described in the event the Employee's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall be deemed to have been a termination of the Employee's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Employee and the Company, the Employee shall not have any right to be retained in the employ of the Company. 4. Employee's Covenants. The Employee agrees that, subject to the terms -------------------- and conditions of this Agreement, the Employee will remain in the employ of the Company until the earliest of (i) the date of a Change in Control which is not an Approved Change in Control, (ii) the first anniversary of the date of an Approved Change in Control, (iii) the date of termination by the Employee of his/her employment for Good Reason, by reason of death or Retirement, or (iv) the termination by the Company of the Employee's employment for any reason. -6- 5. Severance Payments. ------------------ 5.1 Basic Severance Amount. The Company shall pay the Employee the ---------------------- payments described as follows in this Section 5, upon the payment date specified in Section 5.3 after the termination of the Employee's employment following a Change in Control during the term of this Agreement, unless the termination is (i) by the Company for Cause, (ii) by reason of death, or (iii) by the Employee without Good Reason. The Employee's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Employee with Good Reason if the Employee's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company, the consummation of which will constitute a Change in Control or if the Employee terminates his/her employment with Good Reason prior to a Change in Control if the circumstances or event which constitutes Good Reason occurs at the direction of such Person. (a) In lieu of any further salary payments or severance benefits to the Employee for periods subsequent to the Date of Termination, the Company shall pay to the Employee a lump sum severance payment, in cash, equal to four times the sum of (i) the Employee's annual base salary as in effect either, whichever is higher, (A) immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or (B) immediately prior to the Change in Control and (ii) the average of the amounts paid as an annual bonus to the Employee with respect to the three fiscal years immediately preceding either, whichever is higher, (A) the occurrence of the event or circumstances upon which the Notice of Termination is based or (B) the Change in Control. (b) In lieu of any further life, disability, accident and health insurance benefits due the Employee, the Company shall pay to the Employee a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Employee is eligible to receive such benefits immediately prior to the Notice of Termination for a period of four years commencing on the Date of Termination. (The sum of the payments which the Employee may become entitled to receive pursuant to the preceding paragraph (a) and this paragraph (b), as computed prior to any Gross-up Payment which may become due in respect thereof pursuant to Section 5.2 below, shall be referred to in this Section 5.1 as the "Severance Base Amount".) --------------------- (c) Notwithstanding the foregoing provisions of this Section 5.1, in the event of an Approved Change in Control, the payments which the Employee shall become entitled to received pursuant to this Section 5.1 shall be reduced to the higher of (i) an aggregate amount (which, when added together with all other compensation required to be taken into account pursuant to Section 280G -7- of the Code) equal to $1.00 less than the aggregate severance payments which would result in any portion thereof becoming subject to the excise tax imposed under Section 280G of the Code, or (ii) 50% of the Severance Base Amount; provided that (A) in the event that the Employee obtains other full-time - -------- employment within two years after the Date of Termination (the "Mitigation ---------- Period"), the aggregate severance payment to which the Employee is entitled - ------ pursuant to this paragraph (c) shall be reduced by the amount of base salary payable to the Employee as compensation for such new employment for the remaining portion of the Mitigation Period following the commencement date of such new employment; (B) in the event that the Employee shall reach age 65 during the Mitigation Period, the aggregate severance payment to which the Employee would be entitled pursuant to the preceding provisions of this paragraph (c) shall be reduced to the percentage thereof obtained by dividing the number of days in the Mitigation Period prior to the Employee's 65th birthday by 730; but (C) in no event shall the aggregate severance payment to which the Employee shall become entitled pursuant to this paragraph (c) be reduced below 25% of the Severance Base Amount. 5.2 Tax Gross-Up. Anything in this Agreement to the contrary ------------ notwithstanding and except as provided in Section 5.1(c) or as set forth in paragraph (b) of this Section 5.2, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.2) (a "Subject Payment") would be subject ------- ------- to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the following provisions ------ --- shall be applicable: (a) The Employee shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Employee of all -------- ------- taxes (including any interest or penalties imposed with respect to such taxes), including without limitation any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-up Payment, the Employee retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Subject Payments. (b) Notwithstanding the foregoing paragraph (a), if it shall be determined that the Employee is entitled to a Gross-up Payment, but that the Employee, after taking into account the Subject Payments and the Gross-up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Employee resulting from an elimination of the Gross-up Payment and a reduction of the Subject Payments, in the aggregate, to an amount (the "Reduced ------- Amount") such that the receipt of Subject Payments - ------ -8- would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Employee and the Subject Payments, in the aggregate, shall be reduced to the Reduced Amount. (c) All determinations required to be made under this Section 5.2, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Company (the "Accounting ---------- Firm") which shall provide detailed supporting calculations both to the Company - ----- and the Employee within fifteen (15) business days of the receipt of notice from the Employee that there has been a Subject Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for any Acquiring Person, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. 5.3 Payment Date; Estimated Payments. -------------------------------- (a) The Company shall make the payments provided for in Section 5.1 not later than the fifth (5th) day following the Date of Termination. (b) Any Gross-up Payment, as determined pursuant to Section 5.3, shall be paid by the Company to the Employee within five (5) days of the receipt of the Accounting Firm's determination. (c) If the Company has been unable fully to determine the amounts of payments due pursuant to Section 5.1, the Company shall pay to the Employee on such day an estimate, as determined by the Employee, of the minimum amount of such payments to which the Employee is clearly entitled. The Company shall pay the remainder of such payments, together with interest at the rate provided in Section 1274(d) of the Code, as soon as the amount is determined, but no later than the thirtieth (30th) day after the Date of Termination. (d) In the event that (i) the amount of the estimated payments exceeds the amount the Company subsequently determines to have been due, or (ii) the amount of severance payment paid to the Employee pursuant to Section 5.1(c) shall exceed by virtue of proviso (A) to Section 5.1(c) the amount of aggregate severance payment to which the Employee is entitled, then (in the case of either of the preceding clauses (i) or (ii)) such excess shall constitute a loan by the Company to the Employee, payable on the fifth (5th) business day after demand by the Company, together with interest at the rate provided in the above-referenced section of the Code. -9- 6. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 6.1 Notice of Termination. 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 Employee's employment under the provision so indicated. 6.2 Date of Termination. The term "Date of Termination," with respect to ------------------- ---- -- ------------ any purported termination of the Employee's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination. In the case of termination by the Company, the date shall not be less than thirty (30) days after the date such Notice of Termination is given, except in the case of a termination for Cause. In the case of termination by the Employee, the date shall not be less than fifteen (15) days nor more than sixty (60) days after the date such Notice of Termination is given. 6.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order of decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 6.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 6.3 above, the Company shall continue to pay the Employee the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 6.3 above. Amounts paid under this Section 6.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 7. No Mitigation. If the Employee's employment by the Company is ------------- terminated during the term of this Agreement, the Employee is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Employee by the Company pursuant to Section 5 or Section 6.4 above. -10- Further, the amount of any payment or benefit provided for in Section 5 or Section 6.4 above (except to the extent specifically set forth in the proviso to Section 5.1(c) above) shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 8. Successors; Binding Agreement. ----------------------------- 8.1 Assumption and Performance of Agreement. The Company will require that --------------------------------------- any successor to the business and/or its assets must expressly assume and agree to perform this Agreement as if no such succession had taken place. Failure to do so shall entitle the Employee to compensation from the Company in the same amount and on the same terms to which the Employee would be entitled if the Employee were to terminate his/her employment for Good Reason after a Change in Control, except that the effective date for the succession shall be the Date of Termination. 8.2 Successors. This Agreement shall inure to the benefit of and be ---------- enforceable by the Employee's personal or legal representative, executor, administrator, successors, heirs, distributees, devisees and legatees. If the Employee shall die while any amount would still be payable to him (excluding amounts which, by their own terms, terminate upon the death of the Employee) if the Employee had continued to live, all such amounts, unless otherwise provided in the Agreement, shall be paid in accordance with the terms of this Agreement to the executor, personal representative or administrator of the Employee's estates. 9. 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 certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance with the Agreement, except that notice of change of address shall be effective only upon actual receipt: If to the Company: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attn: Chairman of the Board -11- If to the Employee: Victor Woolley 287 Hillside Street Milton, MA 02186 10. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such is agreed to in writing and signed by the Employee and such officer of the Company as may be specifically designated by the Board. Except as expressly provided in this Agreement, no waiver by any party at of a breach by the other party of, or 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. No agreements or representations with respect to the subject matter of this Agreement have been made by any party which are not expressly set forth in this Agreement. This Agreement shall be construed as an instrument executed under seal. Ml references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for in this Agreement shall be paid (subject to Section 5.2) net of any applicable withholding required under federal, state or local law and any additional withholding to which the Employee has agreed. The obligations of the Company under Sections 5, 6, 7 and 12 of this Agreement shall survive the expiration of the term of this Agreement. 11. Enforceability. 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. 12. Settlement of Disputes; Arbitration. All claims by the Employee 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 Employee in writing and shall set forth the specific reasons for the denial and the specific provision of this Agreement relied upon. 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. Judgment may be entered on the arbitrator's award in any court having jurisdiction. However, the Employee shall be entitled to seek specific performance of the Employee'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. 13. Applicable Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. -12- IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company and by the Employee as of the date first written above. GENERAL SCANNING INC. By: /s/ Charles Winston ------------------------------- Title: President THE EMPLOYEE /s/ Victor Woolley ---------------------------------- Name: Victor Woolley EX-10.31 28 SETTLEMENT AGREEMENT DATED 6/12/1998 EXHIBIT 10.31 SETTLEMENT AGREEMENT (the "Settlement Agreement") dated June 12, 1998 by and among the parties and with reference to the facts listed and set forth below: 1. Parties ------- The parties to this Settlement Agreement (the "Parties") are: 1. General Scanning Inc., a Massachusetts corporation ("GSI") 2. Robotic Vision Systems, Inc., a Delaware corporation ("RVSI") 2. Background Facts ---------------- A. On or about August 27, 1996, GSI acquired View Engineering, Inc. ("View"). B. On or about August 5, 1996, RVSI filed an action in the United States District Court for the Eastern District of New York, bearing USDC Case No. 96-3884 claiming, among other matters, that GSI improperly obtained proprietary information from RVSI for the purpose of acquiring View and thwarting RVSI's attempts to acquire View (the "New York Action"). GSI has denied all such claims. C. Prior to the commencement of the New York Action, on or about March 24, 1995 View filed a complaint against RVSI in the United States District Court for the Central District of California, bearing USDC Case No. 95-1882. D. On or about October 31, 1995 RVSI filed a complaint against View for patent infringement in the United States District Court for the Central District of California, bearing USDC Case No. 95-7441. E. On or about April 1, 1996 RVSI filed a complaint against View for patent infringement in the United States District Court for the Central District of California, bearing USDC Case No. 96-2288. F. The actions and disputes referred to in paragraphs C, D and E above, including, without limitation, the claims of infringement and liabilities stemming therefrom, are outside the scope of this Settlement Agreement, and shall not be affected by this Settlement Agreement. G. The Parties desire to resolve, settle and release and discharge each other, from and to terminate the litigation of the New York Action; and to resolve differences with respect to the subject of the New York Action by RVSI's acquisition from GSI of an exclusive license and a non-competition agreement, all as more particularly set forth herein. Accordingly, the Parties hereby each agree to perform the provisions of this Settlement Agreement as set forth beginning in Section 3 below. 3. GSI License. ----------- GSI hereby grants to RVSI a paid-up worldwide license (with the right to sub-license to others subject to the terms and 2 conditions of this Settlement Agreement) for a term of ten (10) years, to the exclusion of all others, including GSI (except as provided in Section 4 hereof), to use solely in the Prohibited Business Activity (as defined in Section 4(a)) all of GSI's 2-dimensional and 3-dimensional laser scanning technology, including without limitation all of its patents, patent applications, unpatented inventions, know how, designs, computer programs, source and object codes, processes, formulas, mask works, trade secrets and other confidential and proprietary information including, without limitation, all parts lists, product specifications, drawings, business records (including, without limitation, contracts with suppliers), customer lists and all other intangible property to the extent presently used or contemplated to be used, either indirectly or directly, by GSI in the Prohibited Business Activity, together with all improvements, modifications, enhancements and changes thereto developed after the date hereof by GSI for or useable in the Prohibited Business Activity (hereinafter, collectively, the "GSI Intellectual Property"). As to any patent comprising part of the GSI Intellectual Property, the duration of the license granted under this Section 3 shall be co-extensive with the life of the patent (which may be before or beyond the expiry of ten years from the date hereof). The exclusive license granted hereby (i) may be terminated by GSI by notice to RVSI during any period of time that there is a default in payment (continuing for 15 days after written notice) under the Note (as hereinafter defined) and (ii) may be terminated by 3 GSI in the event RVSI is adjudicated bankrupt or voluntarily files a petition for relief under Federal or state bankruptcy laws. 4. Non-Competition. --------------- (a) Except as set forth in Sections 6, 10.1, 10.5 and 10.10 hereof, GSI agrees that, for a period of ten (10) years from and after the date hereof, GSI shall not knowingly engage in any aspect of the business of providing systems and products for inspection of semiconductor packages and wafers including but not limited to the inspection of mark defect, package defect, leads, pins, balls, bumps, wafer defects (solely at the ball or bump attach inspection process step and for final pre-shipment inspection), and all other present and future device interconnection methods on all present and future semiconductor packages and wafers (such business being hereinafter referred to as the "Prohibited Business Activity"), either directly or indirectly, whether as a principal, agent, independent contractor, consultant, employer or advisor or in any other position or capacity, or, directly or indirectly, knowingly facilitate the efforts of any person or entity to engage in any aspect of the Prohibited Business Activity, or acquire a direct or indirect ownership interest in or otherwise conduct (whether as stockholder, partner, investor, joint venturer, or as owner of any other type of interest), in any Prohibited Business Activity; provided, however, that this clause shall not prohibit (i) GSI from being the owner of up to 1% of any class of outstanding securities of any entity other 4 than RVSI if such class of securities is publicly traded; (ii) GSI's capability to perform package visual inspection of semiconductor components or wafers integrated with and marked by GSI's manufactured laser markers, laser trimmers and memory repair; (iii) GSI's sales of metrology systems using applications (including wafers) implemented on GSI's Voyager series of general purpose measurement systems and successor functionally equivalent systems which do not have handling automation systems for the Prohibited Business Activity; and (iv) beam steering technology, components and subsystems outside the Prohibited Business Activity, and within the Prohibited Business Activity so long as GSI's Activities are limited to normal beam steering technology, component and subsystems specification performance assistance which activities shall not be deemed to be "knowing facilitation." (b) GSI recognizes that the covenants of GSI contained in this Section are an essential part of this Agreement and that, but for the agreement of GSI to comply with such covenants, RVSI would not have entered into this Agreement. GSI acknowledges and agrees that such GSI covenant not to compete is necessary to RVSI's business and RVSI if GSI engages in the Prohibited Business Activity. Injunctive relief shall be available to RVSI for breach of GSI's covenants set forth in this Section. (c) The covenants of GSI contained in this Section may be terminated by GSI by notice to RVSI during any period of time that there is a default in payment (continuing for 15 days after written notice) under the Note. 5. RVSI Payment ------------ In consideration for the grant by GSI of the exclusive license referred to in Section 3 and the non-competition covenant set forth in Section 4(a), RVSI hereby pays to GSI an aggregate of three million seven hundred fifty thousand dollars ($3,750,000), $2,250,000 of which shall be represented by a five-year subordinated promissory note of RVSI in the principal amount of $2,250,000 payable to GSI in the form set forth in Schedule 5 hereof (the "Note") and $1,500,000 of which shall be represented by such number of shares of common stock, par value $.01 per share, of RVSI ("Common Stock") having a value of $1,500,000, valued for this purpose at the average of the per share closing prices for the ten trading days ending on the day preceding the date of this Settlement Agreement (delivery of the certificate representing the RVSI Stock shall be made within three business days of the date hereof). Payment of the Note shall be subordinated to the outstanding indebtedness of RVSI for money borrowed (whether outstanding on the date hereof or hereafter incurred) (collectively "Senior Indebtedness"). Upon the request of any holder of Senior Indebtedness, GSI agrees to enter into a subordination agreement with such holder in customary form. 6. Non-Assumption of Liabilities ----------------------------- Liabilities pertaining to GSI's engagement in the Prohibited Business Activity existing prior to the date of this Settlement Agreement, as well as those liabilities which shall be incurred by GSI engaging in those activities subsequent to the date of this Settlement Agreement sanctioned by Section 10.5 hereof, are not being transferred to RVSI nor are any such liabilities being assumed by RVSI. GSI shall retain and satisfy 6 all such liabilities (whether incurred on or before the date of this Agreement) including, without limitation, all ongoing warranty and service obligations (including the purchase and sale of spare parts). RVSI agrees that it shall not knowingly interfere with GSI in its satisfaction of such obligations. For the existing GSI Model 880-300 backlog, GSI agrees, within twenty (20) days from the date of this Settlement Agreement, to provide written information to RVSI as to such backlog and that RVSI may contact GSI's customers with the objective of having such customers purchase a substitute RVSI system in lieu of the GSI model 880-300. 7. REPRESENTATIONS AND WARRANTIES OF EACH PARTY -------------------------------------------- Each Party represents and warrants to the other as of the date of this Agreement as follows: A. Authority, Validity; Absence of Conflicts. Each Party has all ----------------------------------------- requisite power, authority and capacity to enter into this Agreement and all other agreements, certificates and documents contemplated hereby to which such Party is to be a signatory, to consummate the transactions contemplated hereby and to perform such Party's obligations hereunder or thereunder. This Agreement has been duly authorized, executed and delivered by such Party and constitutes the valid and legally binding agreement and obligation of such Party, enforceable against such Party in accordance with its terms. No approval of the shareholders of such Party is required for its execution, 7 delivery and performance of this Agreement. Upon execution and delivery of the agreements, certificates or other documents contemplated hereby to be executed by such Party, such agreements, certificates or documents will be enforceable against such Party in accordance with their respective terms. The execution and delivery by such Party of this Agreement does not, and the execution and delivery by such Party of the agreements, certificates and other documents contemplated hereby and the consummation by such Party of the transactions contemplated hereby will not, violate any provision of, result in the acceleration of any obligation under or constitute a default under, any loan agreement, indenture, lease, mortgage, deed of trust, financing statement, contract, instrument or any other commitment or agreement of any kind to which such Party is a signatory or is otherwise bound (other than with respect to RVSI as set forth in Section 11.3). 8. REPRESENTATIONS OF GSI ---------------------- GSI represents and warrants to RVSI as follows: 8.1 Ownership of GSI Intellectual Property. To the best of its -------------------------------------- knowledge, GSI owns the GSI Intellectual Property free and clear of all liens, claims and encumbrances other than the license granted to RVSI pursuant to Section 3. 8.2 Purchase of RVSI Stock. GSI is the sole purchaser of the RVSI ---------------------- Stock, and acknowledges that the RVSI Stock has not been registered under the Securities Act. GSI further 8 represents that it is acquiring the RVSI Stock for investment purposes only and not with a view to a public distribution thereof. 8.3 No Prior Assignment of Intellectual Property. With the exception -------------------------------------------- of the license granted to RVSI pursuant to Section 3(a), it has not licensed (nor shall it license) any other person to use any GSI Intellectual Property in the Prohibited Business Activity. 9. REPRESENTATIONS OF RVSI ----------------------- RVSI represents and warrants to GSI as follows: 9.1 Valid Issuance. The RVSI Stock has been duly authorized and, -------------- upon issuance in accordance with the terms hereof, such RVSI Stock will be validly issued, fully paid and non-assessable. 9.2 Binding Obligation. The Note has been duly authorized and, upon ------------------ issuance, shall constitute the legal, valid and binding obligation of RVSI enforceable in accordance with its terms. 10. COVENANTS OF GSI ---------------- 10.1. Consignment Shipment. In furtherance of the exclusive worldwide -------------------- license granted to RVSI pursuant to Section 3(a) hereof, GSI agrees to ship on a consignment basis, at GSI's expense, to RVSI at its office in Hauppauge, Long Island, approximately thirty (30) calendar days after the date hereof, 9 for inspection, evaluation, education and review purposes the following GSI systems: one model 880-200 with handler one model 880-300 with handler (in whatever the current, most advanced condition available) one model 890 with handler (delivery, 60-90 days) Such systems shall be shipped at GSI's expense and shall be returned to GSI within three years at RVSI's expense. GSI shall conduct its standard factory acceptance tests for each of the consigned systems excluding the model 880-300. At its expense, GSI shall provide standard one year warranty service for each of the consigned systems (other than the model 880-300), including payment of travel expenses. For the balance of the consignment period, GSI shall provide service on the consigned machines (other than unique features and software of model 880-300) at RVSI's expense, including payment of travel expenses, in accordance with the provisions of Section 10.2. RVSI shall afford GSI reasonable access to the consigned systems to the extent necessary for GSI to provide warranty service to others (on reasonable advance notice and during normal business hours). 10.2. Access to Personnel. In furtherance of the exclusive ------------------- worldwide license granted to RVSI pursuant to Section 3(a) hereof, GSI at its expense agrees to provide to RVSI, on reasonable advance notice (in the case of in-person or face-to-face contact) and during normal business hours, during the 12 month period commencing on the date hereof access to GSI 10 technical, engineering and marketing personnel (to the extent still employed by GSI) knowledgeable as to the Prohibited Business Activity and the GSI Intellectual Property in an amount equivalent to one man year of such persons' time (e.g. 20 hours per week access to two employees for twelve months or the equivalent) to enable RVSI to better understand the GSI Intellectual Property licensed to it (travel expenses shall be paid for by RVSI). If RVSI desires access to such employees beyond one man year or beyond the expiration of such 12 month period, it shall compensate GSI for the time of such employees at an amount equal to (i) in the case of up to the first additional man year, 50% of the direct hourly wages of such employees plus travel expenses and (ii) thereafter equal to 150% of the direct hourly wages of such employees plus travel expenses. Within fifteen (15) calendar days of the date hereof, GSI agrees to provide RVSI with a list of such technical, engineering and marketing personnel, including phone numbers and business addresses (which list shall include at least two engineering and two marketing and sales personnel). RVSI and GSI shall establish a mutually approved voucher system for GSI personnel provided pursuant to this Section 10.2. 10.3. Right to Offer Employment. GSI agrees that RVSI, within the six ------------------------- month period commencing on the date hereof, shall have the right to offer employment to any employee of GSI who at any time, within the twelve month period preceding the date hereof, was employed primarily in the Prohibited Business 11 Activity. GSI agrees that any such employee, at such employee's discretion, may accept employment with RVSI even if he or she has a pre-existing employment contract with GSI or a subsidiary thereof. Nothing herein shall affect the obligations of any such person under pre-existing non-disclosure or confidentiality agreements with GSI. 10.4 Additional Documents. From time to time upon request by RVSI, -------------------- GSI, at its own expense, shall execute and deliver to RVSI all further writings and documents as RVSI may reasonably request for the purposes of evidencing and recording the license under Section 3(a). 10.5 Permitted Sales. Subsequent to the date of this Agreement, the --------------- Parties agree that, regardless of the provisions of Section 3 and Section 4 of this Agreement, GSI shall be permitted to make the following sales of semi- conductor inspection systems in the Prohibited Business Activity: (1) to the purchasers under firm purchase orders accepted prior to the date of this Settlement Agreement, for the purchase of 5 Model 890 systems. (2) To Shinkawa, 3 Model 880-200 systems under purchase orders accepted prior to the date of this Settlement Agreement. (3) To Shinkawa, under purchase orders accepted for units to be shipped by GSI prior to DEc. 5, 1998, additional Model 880-200 systems at substantially the same price as those units under Section 10.5(2) above. 12 (4) Within 90 days from the date of this Agreement, at the option of GSI, GSI may sell and RVSI shall purchase up to 20 complete sets of Atrium handlers for the model 880-200 system at a price of $5,000 per set. (5) GSI shall permitted to fill purchase orders for ICOS lead inspection based systems accepted by the date of this Settlement Agreement by the Real Tech Division of GSI. Other than the sale of systems referred to above in this Section and sales of spare parts (exclusive of system upgrades unless furnished pursuant to a firm purchase order accepted by the date hereof), as contemplated by Section 6 above, GSI agrees that, after the date hereto, it shall not sell any system or equipment for use in the Prohibited Business Activity. GSI agrees that RVSI may contact all purchasers named above subsequent to the date hereof. With respect to any ICOS lead inspection inventory (exclusive of demonstration, engineering or used units) physically held by the Reel Tech Division on the date hereof and not subject to firm purchase orders, GSI shall provide RVSI with a list of such ICOS lead inspection inventory, including model numbers and quantities within twenty days of the date of hereof. RVSI shall have the option, on notice to GSI, either to purchase such ICOS inventory of Reel Tech at Reel Tech's cost or permit Reel Tech to incorporate such ICOS inventory into Reel Tech products and then sell such products 10.6 Copies of Purchase Orders. Within 30 days of request by RVSI, ------------------------- GSI shall provide to RVSI copies of all purchase orders (inclusive of equipment performance guarantees) relating to sales in the Prohibited Business Activity of its semiconductor package inspection machines and systems prior to the date of this Settlement Agreement, as well as all sales of systems pursuant to Section 10.5. 10.7 Sale of Scanner Heads. At RVSI's option, upon reasonable prior --------------------- notice during the two year period commencing on the date hereof, GSI agrees to sell to RVSI scanner heads for use solely in the Prohibited Business Activity, at GSI's direct cost plus 45%, in such reasonable quantities as RVSI may specify from time to time, including any available upgrades and product improvements. 10.8 Vision Modules. Subsequent to the date hereof, the Parties -------------- agree to negotiate in good faith and use their best efforts to enter into a supply agreement for the sale by RVSI of vision modules to GSI for use by GSI's Reel Tech Division for inspection of laser markings. 10.9 Periodic Reports. On a monthly basis, GSI shall provide RVSI ---------------- with a detailed written report of service calls in the preceding calendar month identifying the customer, model and nature of service call (to the extent GSI is still providing service). 10.10 Supply Contracts. As to those agreements which require GSI to ---------------- supply semiconductor package inspection machines 14 and systems to shinkawa and other third parties subsequent to the date of this Settlement Agreement, which GSI cannot terminate, RVSI will have the option either to assume GSI's obligations and liabilities thereunder or agree to allow GSI to complete said existing agreements in accordance with their terms. GSI covenants that it shall not extend the term, or permit the term to be extended, of any existing sales or distribution agreement it has with third parties for the sale of semiconductor package inspection machines and systems included in the Prohibited Business Activity. 11. COVENANTS OF RVSI ----------------- 11.1 Registration Statement. Within thirty (30) days following the ---------------------- date of this Agreement, RVSI file a registration statement on Form S-3 under the Securities Act covering the RVSI Stock and shall thereafter use its best efforts to have such registration statement declared effective. RVSI shall provide a draft of the proposed Form S-3 to GSI within twenty (20) days following the date of this Agreement. 11.2 Non-Competition. --------------- (a) RVSI agrees that RVSI shall not knowingly engage in any aspect of the business of providing systems and products for use in solder paste inspection business (except that RVSI may engage in solder paste inspection on components or wafers on an integrated system for ball attach) or post placement verification on pre-reflow PCBs (except that RVSI may engage in vision 15 guided component placement of any kind) and with respect to post-reflow PCBs RVSI shall not use the GSI Intellectual Property ("Precluded Business Activity"), either directly or indirectly, whether as a principal, agent, independent contractor, consultant, employer or advisor or in any other position or capacity, or, directly or indirectly, knowingly facilitate the efforts of any person or entity to engage in any aspect of the Precluded Business Activity, or acquire a direct or indirect ownership interest in or otherwise conduct (whether as stockholder, partner, investor, joint venturer, or as owner of any other type of interest), in any Precluded Business Activity; provided, however, that this clause shall not prohibit RVSI from being the owner of up to 1% of any class of outstanding securities of any entity if such class of securities is publicly traded. At any time subsequent to three (3) years from the date hereof, by notice to GSI, RVSI may notify GSI that it intends to enter into a business competitive with the Precluded Business Activity. In such event, RVSI's covenant contained in this Section shall expire and lapse on the second anniversary of such notice. (b) RVSI recognizes that the covenants of RVSI contained in this Section are an essential part of this Agreement and that, but for the agreement of RVSI to comply with such covenants, GSI would not have entered into this Agreement. RVSI acknowledges and agrees that such RVSI covenant not to compete is necessary to ensure the continuation of GSI's solder paste inspection and post placement business and the reputation of such business and that irrevocable harm and damage will be done to 16 such business and GSI if RVSI competes with either or both of them. Injunctive relief shall be available to GSI for breach of RVSI's covenants set forth in this Section. 11.3 Issuance of Additional Common Stock. The consent of the banks ----------------------------------- that are parties to RVSI's multi-bank credit agreement is required for RVSI's incurrence of the indebtedness represented by the Note. If the consent of said banks is not obtained by the close of business on June 19, 1998, RVSI agrees with GSI that, in exchange for the Note, it shall issue to GSI such number of shares of Common Stock as have a value of $2,250,000, valued in the manner set forth in Section 5 of this Settlement Agreement. Such shares of Common Stock shall be acquired by GSI in accordance with Section 8.2 and shall entitled to the benefit of Section 11.1. 12. NON-DISPARAGEMENT ----------------- There shall be no disparagement by either Party against the other Party or any business run by either such Party. 13. DELIVERY OF MUTUAL RELEASES --------------------------- The Parties, concurrently with the delivery of this Settlement Agreement, shall each execute and deliver to the other a release, in the forms set forth on Schedules 13A and B hereto, releasing each other from all claims in connection with the New York Action other than such agreements and covenants as are set forth in this Settlement Agreement. 17 14. PRESS RELEASE ------------- The Parties agree to cooperate with respect to the issuance of a joint press release, in the form attached, to be issued as promptly as practicable following the date of this Settlement Agreement but in no event prior to 8 a.m., New York City time, on Monday, June 15, 1998 or later than 9 a.m., New York City time, on Monday, June 15, 1998. 15. SURVIVAL -------- The covenants of the Parties shall survive the execution and delivery of this Settlement Agreement. 16. ENTIRE AGREEMENT ---------------- This Settlement Agreement and its exhibits and documents executed pursuant hereto, contains and sets forth the entire understanding between the Parties with respect to its subject matter, and there are no representations, promises, warranties, covenants or undertakings other than those expressly set forth herein. Each Party hereto expressly disclaims having entered into this agreement by reason of any promise, statement, representation, warranty, covenant or undertaking other than those expressly set forth herein. This agreement supersedes any and all previous agreements and understandings between the Parties hereto with respect to this subject matter. All previous agreements between the Parties (if any), whether oral or written, are merged in this agreement. It is expressly understood and 18 agreed that this agreement may not be altered, amended, modified or otherwise changed in any respect whatsoever except by a writing duly executed by the Parties or their authorized representatives. The Parties acknowledge and agree that they will make no claim at any time or place that this agreement has been orally altered or modified in any respect whatsoever. This agreement is not effective until it has been fully executed and delivered by all the Parties. 17. NOTICES ------- Any notice required or permitted to be sent hereunder shall be sufficient if sent by any form of mail requiring a signed receipt, by next day courier service, or by fax, addressed as follows: If to GSI: General Scanning Inc. 500 Arsenal Street Watertown, MA 02172 Attention: President If to RVSI: Robotic Vision Systems, Inc. 5 Shawmut Road Canton, MA 02021 Attention: President with a copy to Ira Roxland, Esq., Cooperman Levitt Winikoff Lester & Newman, P.C., 800 Third Avenue, New York, New York 10022; fax number (212) 755-2839. 19 18. EQUITABLE REMEDIES ------------------ The parties explicitly agree that the equitable remedies of specific performance and injunctive relief should be available remedies in the event of a breach of any provision of this Agreement. 19. COUNTERPARTS ------------ This Settlement Agreement and all documents executed in connection therewith, may be executed in one or more counterparts, each of which shall constitute a duplicate of the original, and which together shall constitute one document. 20. GOVERNING LAW ------------- This Settlement Agreement shall be interpreted pursuant to the laws of the State of New York, without reference to that state's conflict of laws provisions. 21. REQUEST FOR SEALING OF RECORD ----------------------------- RVSI agrees not to oppose any request GSI makes to the court to seal the record of proceedings in the New York Action. 22. DISMISSAL OF NEW YORK ACTION AND RESOLUTION OF DISPUTES ------------------------------------------------------- The Parties agree to dismiss the New York Action with prejudice by filing a stipulation in the form set forth in Schedule 22 hereto; provided, -------- however, that the dismissal of the New York Action shall be contingent upon the - ------- United States 20 District Court for the Eastern District of New York (Hon. John Gleeson) retaining jurisdiction over the New York Action for purposes of enforcing this Settlement Agreement. The Parties further agree that all disputes arising out of this Settlement Agreement or the performance thereof, shall be resolved by such court and the parties consent to the exclusive jurisdiction of such court for such purposes. 21 IN WITNESS WHEREOF, the Parties hereto have executed this Settlement Agreement as of the date first above written. GENERAL SCANNING INC. ROBOTIC VISION SYSTEMS, INC. By: /s/ Charles D. Winston By: /s/ Pat V. Costa ------------------------------- ---------------------------- Charles D. Winston Pat V. Costa President and Chief President and Chief Executive Officer Executive Officer 22 Schedule 5 PROMISSORY NOTE $2,250,000 June 12, 1998 For value received, the undersigned, Robotic Vision Systems, Inc., a Delaware corporation ("Payor"), hereby promises to pay to General Scanning Inc., a Massachusetts corporation (the "Holder"), the principal sum of $2,250,000 ("Principal Sum") together with interest on the unpaid portion of said Principal Sum at a fluctuating interest rate equal to the prime rate of interest (as reported in The Wall Street Journal), with interest only payable quarter-annually on the 12/th/ day of March, June, September and December in each year, commencing September 12, 1998. Installments of principal in the amount of $281,250 each, shall be payable quarter-annually commencing on September 12, 2001. All amounts owing under this Note shall be due and payable on June 12, 2003. This Promissory Note is the promissory note of Payor referred to in that certain Settlement Agreement dated June 12, 1998 between Payor and Holder, and is subject to all the terms and conditions of said Settlement Agreement. The Holder may accelerate the maturity of this Note upon the failure, continued for fifteen days after notice, of Payor to make any payment due under this Note. This Note shall be governed by the laws of the State of New York. The United States District Court for the Eastern District of New York shall have exclusive jurisdiction in any action, suit or proceeding to enforce this Note. Should this note be placed with an attorney for collection, Payor agrees to pay reasonable attorneys' fees and costs of collection. Payor hereby waives presentment, dishonor, notice of dishonor, protest and any other notice of non-payment. ROBOTIC VISION SYSTEMS, INC. By: /s/ Pat V. Costa -------------------------- Pat V. Costa President Schedule 13 RELEASE ------- KNOW THAT Robotic Vision Systems, Inc. ("RVSI") in consideration of ten dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, for itself, and its parents, subsidiaries, assigns, successors and employees (collectively, "Releasors"), hereby releases and discharges General Scanning Inc. ("GSI" or "Releasee"), its parents, subsidiaries, assigns, successors, officers, directors and employees from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever in law, admiralty or equity which against Releasee and its parents, subsidiaries, assigns, successors, officers, directors or employees, Releasors, ever had, or now have, for, upon, or by reason of, any matter, cause or thing whatsoever from the beginning of the world to the date of this Release, relating to or arising out of, directly or indirectly, the claims, transactions and events alleged in the action filed in the United States District Court for the Eastern District of New York entitled Robotic Vision Systems, Inc. v. General Scanning Inc., CV-96-3884 (JG). - ----------------------------------------------------- RVSI represents and warrants that Releasors have not assigned or otherwise transferred any of the foregoing claims against Releasee, its parents, subsidiaries, assigns, successors, officers, directors or employees to any party or entity which is not a signatory to this Release. This Release may not be changed orally. This Release shall be interpreted and governed by the laws of the State of New York, without regard for that state's choice of law provisions. IN WITNESS WHEREOF, RVSI has set its hand and seal this 12 day of June, 1998. ROBOTIC VISION SYSTEMS, INC. By: /s/ Pat V. Costa -------------------- Name: Pat V. Costa Title: President 2 NEWS RELEASE ------------ Contact: Fran Crecco General Scanning Inc. 617-924-1010 Ext. 205 Robotic Vision Systems Inc. GENERAL SCANNING AND ROBOTIC VISION SYSTEMS SETTLE VIEW ACQUISITION LITIGATION NEW YORK, NY: June 15, 1998: - General Scanning Inc. (Nasdaq: GSCN) and Robotic Vision Systems, Inc. ("RVSI", Nasdaq: ROBV) today jointly announced execution of a settlement of RVSI's claims arising out of General Scanning's acquisition of View Engineering, Inc. in August 1996 ("View"). RVSI claimed that General Scanning used improperly obtained information in connection with the acquisition. General Scanning denied all such claims. Under the agreed upon settlement, General Scanning has agreed not to compete for ten years in the inspection of interconnect leads of semiconductor packages as described below. Under the settlement, General Scanning licenses to RVSI its 2D and 3D vision technology solely and exclusively for RVSI's use in the inspection of leads, pins, balls, bumps and other present and future device interconnection leads. In consideration for the technology license and non-competition agreement, RVSI agreed to pay General Scanning $3.75 million. RVSI's remaining patent suit against General Scanning is unaffected by the current settlement. To the extent this news release discusses financial projections, information or expectations about either company's products or markets, or otherwise makes statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These and other risks are detailed in the companies' Annual Reports on Form 10-K with respect to their respective most recent fiscal years and the Quarterly Reports on Form 10-Q with respect to their respective most recent fiscal quarters. General Scanning, headquartered in Watertown, MA, develops and manufactures a broad line of laser systems for a wide range of applications in the electronics, semiconductor, medical, automotive and aircraft industries. In addition, General Scanning produces a line of laser subsystems and components which are used in General Scanning's own systems as well as sold to other manufacturers of laser systems. General Scanning also designs and manufactures under ISO 9001 certification a line of thermal printers for leading medical instrument and photo/graphic arts companies. Robotic Vision Systems... Approved By: Approved By: Robotic Vision Systems Inc. General Scanning Inc. /s/ [SIGNATURE ILLEGIBLE] /s/ Charles D. Winston - ------------------------------ ----------------------------- Title: CEO Title: CEO EX-21.1 29 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 LUMONICS INC. SUBSIDIARIES AS AT DECEMBER 31, 1998 LOCATION Lumonics Inc. Canada (corporate office, Kanata and Optics) DIRECT SUBSIDIARIES, 100% OWNED BY LUMONICS INC. Lumonics Corporation US (Livonia, Oxnard, Eden Prairie and Phoenix) Lumonics Limited UK (Rugby and Hull) Lumonics Systems(s) Pte Ltd Singapore Lumonics GmbH Germany Lumonics Hungary Trade Company Limited by Shares Hungary Lumonics (Barbados) Inc. Barbados 1248988 Ontario Inc. Canada Lumonics do Brasil Limitada Brazil INDIRECT SUBSIDIARIES, 100% OWNED BY LUMONICS INC. Lumonics SARL France - - owned directly by Lumonics Limited Lumonics FSC Corporation Barbados - - owned directly by Lumonics Corporation EX-23.1 30 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS We consent to the reference to our firm under the captions "Experts" and "Business of Lumonics--Selected Financial Data", and to the use of our report dated February 9, 1998 in the Registration Statement on Form S-4, and related Prospectus of Lumonics Inc. /s/ Ernst & Young Chartered Accountants Ottawa, Canada January 28, 1999 EX-23.2 31 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated February 2, 1998, and to all references to our Firm included in or made a part of this registration statement. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts January 28, 1999 EX-99.3 32 FORM OF PROXY FOR GENERAL SCANNING COMMON STOCK EXHIBIT 99.3 PRELIMINARY PROXY CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY GENERAL SCANNING INC. 500 Arsenal Street, Watertown, MA 02472 Proxy for Special Meeting of Stockholders to be held on , 1999 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned hereby constitutes and appoints Charles D. Winston and Victor H. Wooley and each of them, as Proxies of the undersigned, with full power of substitution, to vote all shares of Common Stock of General Scanning Inc. (the "Company") held of record by the undersigned as of the close of business on , 1999, on behalf of the undersigned at the Special Meeting of Stockholders (the "Special Meeting") to be held at the offices of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts, 02109 at local time, on , , 1999, and at any adjournments or postponements thereof. When properly executed, this proxy will be voted in the manner directed herein by the undersigned shareholder(s). If no direction is given, this proxy will be voted FOR Proposal 1. In their discretion, the Proxies are each authorized to vote upon such other business as may properly come before the Special Meeting and any adjournments or postponements thereof. A stockholder wishing to vote in accordance with the Board of Directors' recommendations need only sign and date this proxy and return it in the enclosed envelope. Please vote and sign on other side and return promptly in the enclosed envelope. See Reverse Side [X] PLEASE MARK VOTES AS IN THIS EXAMPLE 1. To consider and vote upon a proposal to approve the Amended and Restated Agreement and Plan of Merger, dated as of October 27, 1998 (the "Merger Agreement"), by and among the Company, Lumonics Inc. and New Grizzly Acquisition Corp. [_] FOR [_] AGAINST [_] ABSTAIN 2. To consider and act upon any other matters that may properly be brought before the Special Meeting and at any adjournments or postponements thereof. The undersigned hereby acknowledge(s) receipt of a copy of the accompanying Notice of Special Meeting of Stockholders and the Joint Proxy Statement and Prospectus with respect thereto and hereby revoke(s) any proxy or proxies heretofore given. This proxy may be revoked at any time before it is exercised. Dated: NOTE: Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. ------------------------- Signature ------------------------- Signature EX-99.9 33 1994 EXECUTIVE MANAGEMENT STOCK OPTION PLAN EXHIBIT 99.9 LUMONICS INC. (THE "COMPANY") STOCK OPTION GRANTED TO ____________________________________ (THE "OPTIONEE") Subject to the following terms and conditions, the Company hereby grants to the "Optionee" on May 11, 1994 (the "Date of Grant"), the right and option (the "Option) to purchase from the Company ____________ Common Shares of the Company without nominal or par value (the "Option Shares"), at a purchase price for each of the Option Shares of Four Dollars ($4.00) (the "Options Price"). 1. Purchase of Shares ------------------ Subject to the provisions hereof, this Option shall be exercisable at any time or from time to time by the Optionee giving a written notice in accordance with the provisions of Paragraph 14 hereof and in the form attached hereto as Schedule "A". Such notice shall specify the number of Option Shares in respect of which this Option is being exercised and shall accompanied by payment in full, in cash or by certified cheque, of the purchase price for the number of Options Shares specified therein. Only full shares may be specified. Upon any such exercise of this Option as aforesaid, the Company shall forthwith cause the transfer agent and registrar of the Company to issue a stock certificate or certificates in the name of the Optionee or, if applicable, a trustee or legal representative, representing in the aggregate such number of Option Shares as the Optionee shall have then paid for and as are specified in such notice writing. 2. Exercise Period --------------- Twenty-five percent (25%) of the total number of Option Shares shall vest and will become exercisable on each of the first, second, third and fourth anniversaries of the Date of Grant; provided that subject to Section 6, in no event shall this Option be exercisable so long as the Company is a Private Company. For the purpose of this Option the Company shall be deemed to be a Private Company if it has not completed an initial public offering of its Common Shares by way of a final prospectus filed pursuant to the securities laws of the Province of Ontario and such other jurisdictions as the Board of Directors of the Company may determine (the "IPO"). Any portion of this Option that becomes exercisable pursuant to this paragraph shall be exercisable in whole or in part, at any time or from time to time up to, but not after, the 10th anniversary of the Date of Grant or 6 years from the date of the IPO, whichever is sooner (the "Exercise Period"). 3. Termination of Employment ------------------------- The following shall apply in the event that the employment of the Optionee is terminated on a date prior to the expiration of the Exercise Period (the "Termination Date"). (i) If the cause of termination is the voluntary retirement or dismissal for cause of the Optionee and on the Termination Date the Company is a Private Company, this Option shall terminate as at such date. If on the Termination Date the Company has ceased to be a Private Company, this Option shall terminate 30 days following such date prior to which date the Optionee may exercise all or any part of this Option that has vested and is exercisable in accordance with the provisions of Paragraph 2 hereof. (ii) If the cause of termination is the death of the Optionee or is other than the voluntary retirement or dismissal for cause of the Optionee and on the Termination Date the Company: (a) is a Private Company, this Option shall terminate as at such date: or (b) has ceased to be a Private Company, the Option in respect of all unexercised Option Shares whether or not vested shall be deemed to be exercisable for a period of 120 days following the Termination Date, after which period this Option shall terminate. 4. Termination ----------- If, at the closing of business on December 31, 1998, the Company is a Private Company, this Option shall terminate as at such date. 5. Bonus ----- The Company shall pay the Optionee or the Optionee's estate a bonus (the "Bonus") within 90 days of the occurrence of either, but not both, of the following events (the "Bonus Event"): (i) the employment of the Optionee by the Company is terminated on a date prior to the expiration of the Exercise Period if the cause of termination is the death of the Optionee or is other than the voluntary retirement or dismissal for cause of the Optionee and on such Termination Date the Company is a Private Company; (ii) the Company is a Private Company as at the close of business on December 31, 1998. The Bonus shall be calculated as at the last day of the last completed fiscal quarter of the Company (the "Calculation Date") and shall be equal to the Adjusted Share Value per Share of the Company's Common Shares multiplied by: (a) If the Bonus Event is as set out in sub-paragraph (i) the number of Option Shares in respect of which the Optionee's Option could have been exercised if, on the Termination Date, the Company had ceased to be a Private Company; (b) If the Bonus Event is as set out in sub-paragraph (ii) an amount equal to the total number of Option Shares. For the purpose of this Section "Adjusted Share Value Per Share" shall be equal to: (A) - ($218,000) x B) - $3.89 --------------------- C where: A is total shareholders equity of the Company (including retained earnings) as at the Calculation Date; B is the number of fiscal quarters of the Company from but excluding December 31, 1993 to and including the Calculation Date; and C is the number of outstanding Common Shares of the Company outstanding on the Calculation Date. In the event of a subdivision, redivision, consolidation or change of the Common Shares of the Company into a greater or lesser number of shares, the definition of "Adjusted Share Value Per Share" as set out herein shall be amended to reflect such change. In the event of a dispute arising out of the paragraph 5, the matter shall be determined by the Company's auditors whose decision shall be binding on all parties. 6. Initial Public Offering ----------------------- The Optionee shall have the right, together with other shareholders of the Company, to participate in any secondary offering that forms part of the IPO. The maximum number of shares the Optionee may sell in any such offering shall be 25% of the Options Shares. Accordingly, for this purpose only, and notwithstanding Paragraph 2, 25% of the Option Shares shall be deemed to be vested and exercisable on the same date on which the completion of any such IPO occurs; provided that nothing in this Paragraph 6 shall be construed as accelerating the vesting date of the balance of the Option Shares which are the subject matter of this Option. 7. No Obligation to Purchase ------------------------- Nothing herein contained or done pursuant hereto shall obligate the Optionee to purchase and/or pay for any Option Shares except those Option Shares in respect of which the Optionee shall have exercised this Option in the manner herein provided. 8. Reorganization and Recapitalization ----------------------------------- In the event of any subdivision, redivision or change of the Common Shares of the Company at any time prior to the Expiry Date into a greater number of shares, the Company shall deliver at the time of any exercise thereafter of this Option such additional number of shares as would have resulted from such subdivision, redivision or change is such exercise of this Option had been prior to the date of such subdivision, redivision or change. In the event of any consolidation or change of the Common Shares of the Company at any time prior to the Expiry Date into a lesser number of shares, the number of shares deliverable by the Company on any exercise thereafter of this Option shall be reduced to such number of shares as would have resulted from such consolidation or change if such exercise of this Option had been prior to the date of such consolidation or change. 9. Administration -------------- The Compensation Committee of the Board of Directors of the Company (the "Committee") shall have the power to interpret and construe the terms and conditions of this Option. Any determination by the Committee shall be final and conclusive on all persons affected thereby, unless otherwise determined by the Board of Directors, and in any such event such determination of the Board of Directors shall be final and conclusive. 10. Employment Non-Contractual -------------------------- Nothing is this Option shall be construed as conferring upon the Optionee any right to continue in the service of the Company or any subsidiary of the Company. 11. Rights as a Shareholder ----------------------- The Optionee shall not have any rights as a shareholder with respect to any Options Shares issuable upon exercise of this Option until this Option has been validly exercised and the purchase price for such Option Share has been paid in full. 12. Nontransferability ------------------ This Option may not be assigned or transferred. This Option will be exercisable during the lifetime of the Optionee only by the Optionee. In the event of the death of an Optionee, the legal personal representative(s) of the deceased Optionee may exercise all or part of this Option in accordance with the provisions of Paragraph 3(ii) hereof. 13. Release of Rights Under Long Term Incentive Plan ------------------------------------------------ In consideration of the Option hereby granted the Optionee hereby surrenders to the Company all of the Optionee's rights under the Company's Long Term Incentive Plan and the Optionee hereby releases and discharges the Company from all claims and demands of the Optionee arising from or with respect to the said plan. 14. Notices ------- All written notices to be given by the Optionee to the Company may be delivered personally or by registered mail postage prepaid addressed as follows: Lumonics Inc. Attn: Corporate Secretary 105 Schneider Road Kanata, Ontario K2K 1Y3 The foregoing address shall be deemed to be changed upon any change in premises of the executive offices of the Company. 15. Corporate Action ---------------- Nothing contained herein shall be construed so as to prevent the Company or any subsidiary of the Company from taking corporate action which is deemed by the Company or the subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Option. 16. Government Regulation --------------------- The Company's obligation to issue and deliver Common Shares under this Option is subject to: (a) the satisfaction of all requirements under applicable securities law in respect thereof and obtaining all regulatory approvals as the Company shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof, including shareholder approval, if required; (b) the admission of such Common Shares to listing on any stock exchange on which Common Shares may then be listed; and (c) the receipt from the Optionee of such representations, agreements and undertakings as to future dealings in such Common Shares as the Company determines to be necessary or advisable in order to safeguard against the violation of the securities law of any jurisdiction. In this connection, the Company shall take all reasonable steps to obtain such approvals and registrations as may be necessary for the issuance of such Common Shares in compliance with applicable securities law and for the listing of such Common Shares on any stock exchange on which such Common Shares are then listed. 17. Amendment and Discontinuance ---------------------------- The Committee shall have the right to amend or modify this Options or to terminate this Option at any time without notice provided that the Optionee's right are not thereby materially adversely affected and subject to any approvals required under the applicable rules of any stock exchange upon which the Common Shares of the Company are or may be listed. 18. Governing Law ------------- This Option shall be governed by and construed in accordance with the laws of the Province of Ontario. IN WITNESS WHEREOF the Company has caused this Option to be executed by its duly authorized officer as of the 11th day of May, 1994. LUMONICS INC. Per: "R.J. Atkinson" ---------------------------- Chairman and Chief Executive Office I hereby acknowledge receipt of this stock option granted to me as of the ______ of _______ and agree to be bound by the terms hereof. By:___________________ Optionee SCHEDULE "A" ------------ ELECTION TO PURCHASE TO: The Corporate Secretary of Lumonics Inc. Pursuant to the terms of the stock option granted to me on May 11, 1994 (the "Date of Grant"), I hereby elect to purchase ______________ Common Shares of Lumonics Inc. which were the subject of such stock option. Enclosed is payment in full of the Option Price for the number of shares indicated above. ______________________________ (Printed Name) Dated: ______________________________ Signature) NOTE: This election must be received by Lumonics Inc. no later than the end of the Exercise Period. ................................................................................ PLEASE TYPE OR PRINT THE FOLLOWING: Name as it will appear on share certificate: ________________________________ Residence Address: _______________________________ ________________________________ ................................................................................ DO NOT WRITE IN THE FOLLOWING SECTION: Date election form received: _______________________ Approval to issue share certificate for ___________ Common Shares authorized by: Date: _____________________ __________________________________________________ (Corporate Secretary or other Authorized Official) EX-99.10 34 1994 KEY EMPLOYEES AND DIRECTORS STOCK OPTION PLAN EXHIBIT 99.10 STOCK OPTION UNDER THE LUMONICS INC. STOCK OPTION PLAN FOR KEY EMPLOYEES AND DIRECTORS __________________________________________ Name of Optionee This stock option is awarded pursuant to, and shall be governed by, the terms of the Lumonics Inc. Stock Option Plan for Key Employees and Directors (the "Plan"). A copy Plan is attached as Schedule "A". Subject to the following terms and conditions, the Company hereby grants to ______________________________ (the "Optionee") on September 1, 1994 (the "Date of Grant"), the right and option the purchase from the Company _________________ Common Shares of the Company without nominal or par value ("Option Shares"), at a purchase price for each Option Shares of Seven Dollars ($7.00) (the "Option Price"). 1. Period of Exercise ------------------ The Optionee may purchase the Option Shares in the amounts, and at the times, set out in paragraph 4(d) of the Plan. Any portion of this Option which becomes exercisable pursuant to the foregoing shall be exercisable in whole or in part at any time or from time to time. On the expiration of the Exercise Period as defined in the Plan, the Option hereby granted shall forthwith expire and terminate and be of no further force or effect whatsoever as to such of the Option Shares in respect of which the Option hereby granted has not then been exercised. 2. Purchase of Shares ------------------ Subject to the provisions of the Plan, the Option hereby granted shall be exercisable (at any time or from time to time as aforesaid) by the Optionee giving a written notice in accordance with the provisions of Paragraph 5 hereof and in the form attached hereto as Schedule "B". Such notice shall specify the number of Option Shares in respect of which this Option is being exercised and shall be accompanied by payment in full of the purchase price for the number of Option Shares specified therein. Upon any such exercise of this Option as aforesaid, the Company shall forthwith cause the transfer agent and registrar of the Company to issue a stock certificate or certificates in the name of the Optionee, or, if applicable, a trustee or legal representative, representing in the aggregate such number of Option Shares as the Optionee shall have then paid for and as specified in such notice in writing. 3. No Obligation to Purchase ------------------------- Nothing herein contained or done pursuant hereto shall obligate the Optionee to purchase and/or pay for any Option Shares except those Option Shares in respect of which the Optionee shall have exercised his Option to purchase hereunder in the manner hereinabove provided. 4. Release of Rights Under Long Term Incentive Plan ------------------------------------------------ In consideration of the Option hereby granted the Optionee hereby surrenders to the Company all of the Optionee's rights under the Company's Long Term Incentive Plan and the Optionee hereby releases and discharges the Company from all claims and demands of the Opitonee arising from or with respect to the said plan. 5. Notices ------- All written notices to be given by the Optionee to the Company may be delivered personally or by registered mail postage prepaid addressed as follows: Lumonics Inc. Attn: Corporate Secretary 105 Schneider Road Kanata, Ontario K2K 1Y3 The foregoing address shall be deemed to be changed upon any change in premises of the executive offices of the Company. IN WITNESS WHEREOF the Company has caused this grant of option to be executed by its duly authorized officer as of the 1st day of September, 1994. LUMONICS INC. Per: "R.J. Atkinson" ------------------------------ Chairman and Chief Executive Officer I hereby acknowledge receipt of the Stock Option granted to me as of the 1st day of September, 1994 pursuant to the terms of the Lumonics Inc. Stock Option Plan for Key Employees and Directors and agree to be bound by the terms of the said Plan and the terms hereof. By: _________________ Employee SCHEDULE A ---------- LUMONICS INC. STOCK OPTION PLAN FOR KEY EMPLOYEES AND DIRECTORS 1. Purpose ------- Lumonics Inc. 1994 Stock Option Plan for Key Employees and Directors (the "Plan") is intended to retain, and reward highly qualified employees and directors who will be motivated to contribute to the success of Lumonics Inc. and its subsidiaries (the "Company") and encouraged to purchase Common Shares of the Company (the "Common Shares"). The Plan shall come into force effective September 1, 1994. 2. Number of Common Shares to be Offered ------------------------------------- Stock options granted under the Plan ("Options" or "Option") shall be for the purchase of Common Shares, without nominal or par value, of the Company ("Option Shares" or "Option Share"). The maximum number of Common Shares that will be reserved for issuance and issued under this Plan shall not exceed 1,300,000 shares. The following restrictions shall also apply to this Plan as well as all other plans or stock option agreements to which the Company may be a party: (i) the aggregate number of Option Shares reserved for issuance pursuant to options granted to Insiders shall not exceed ten percent (10%) of the Outstanding Issue; (ii) Insiders shall not be issued, within any one year period, a number of Option Shares which exceeds ten percent (10%) of the Outstanding Issue; (iii) no Insider together with such Insider's Associates shall be issued, within any one year period, a number of Option Shares which exceeds five percent (5%) of the Outstanding Issue; and (iv) the number of Option Shares reserved for issuance pursuant to options to any one participant shall not exceed five percent (5%) of the Outstanding Issue. For the purpose of this Plan: "Associate" has the meaning assigned by the Securities Act (Ontario), as amended from time to time: "Insider" means: (i) an insider of the Company as defined by the Securities Act (Ontario) as amended from time to time, other than a person who falls within such definition solely by virtue of being a director or senior officer of a subsidiary of the Company; and (ii) an Associate of any person who is an insider by virtue of Clause (i) of this definition; and "Outstanding Issue" means the number of Common Shares of the Company that are outstanding immediately prior to any issuance of Options under this Plan or any issuance of Option Shares, as the case may be, excluding Option Shares issued pursuant to the Plan during the preceding one year period. Upon the expiration, surrender or termination, in whole or in part, of an unexercised Option, the Option Shares subject to such unexercised Option shall be available for other Options to be granted from time to time. 3. Administration -------------- The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee") who shall be appointed by and serve at the pleasure of the Board of Directors (the "Board"). The Committee shall have full power and authority, subject to the terms of the Plan, to grant Options on behalf of the Company; to designate the individuals who are to be granted Options (the "Optionees" or "Optionee"); to set the date of grant, the number of Option Shares to be granted pursuant to each Option; and the other terms and conditions of the Options; and otherwise to interpret and construe the terms of the Plan. Any determination by the Committee shall be final and conclusive unless otherwise determined by the Board and, in any such event, such determination of the Board shall be final and conclusive. The day-to-day administration of the Plan may be delegated to such officers and employees of the Company as the Committee in its sole discretion shall determine. 4. Terms and Conditions of Options - -- ------------------------------- (a) Individuals Eligible to Receive Options. The individuals eligible to receive Options shall be confined to such employees (including contract employees) and directors of the Company as shall be determined from time to time by the Committee and who shall not be participants in the Company's Long Term Incentive Plan. In making such determination, the Committee shall consider the duties and responsibilities of the individual, his or her present and potential contribution to the success of the Company, and such other factors as the Committee shall deem relevant in accomplishing the purposes of the Plan. Participation in the Plan shall be entirely voluntary and any decision by any individual not to participate shall not affect such individual's employment with the Company. (b) Grant of Options. From time to time the Committee or the Board of Directors shall grant Options on behalf of the Company under the Plan. (c) Option Price. The purchase price ("Option Price") for an Option Share shall be the Market Price per Common Share as the date of grant provided in no event shall the Option Price be less than Seven Dollars ($7.00) (Canadian). "Market Price" per Common Share at any date shall be the closing price of the Common Shares on The Toronto Stock Exchange (the "Exchange") (or if the Common Shares are not then listed or posted for trading on the Exchange, on such stock exchange in Canada on which such shares are listed and posted for trading as may be selected for such purpose by the Committee) on the trading date immediately preceding the date of grant. In the event that the Common Shares are not listed and posted for trading on any stock exchange in Canada, the market price shall be the last trading price of the Common Shares on National Association of Securities Dealers Quotations Systems ("NASDAQ") on the trading day immediately preceding the date of grant. In the event that the Common Shares are not trading on NASDAQ, the market price shall be determined by the Committee in its sole discretion. (d) Exercise Period. Twenty-five percent (25%) of the total number of Option Shares shall vest and will become exercisable on each of the first, second, third and fourth anniversaries of the Date of Grant; provided that in no event shall this Options be exercisable so long as the Company is a Private Company. For the purpose of this Option the Company shall be deemed to be a Private Company if it has not competed an initial public offering of its Common Shares by way of a final prospectus filed pursuant to the securities laws of Province of Ontario and such other jurisdictions as the Board of Directors of the Company may determine (the "IPO"). Any portion of this Option that becomes exercisable pursuant to this paragraph shall be exercisable in whole or in part, at any time or from time to time up to, but not after, the 10th anniversary of the Date of Grant or 6 years from the date of the IPO, whichever is sooner (the "Exercise Period"). (e) Methods of Payment. Payment for purchase of Option Shares shall be made in cash or by certified cheque. Only full shares shall be issued under the Plan. (f) Termination of Employment. The following shall apply in the event that the employment of an Optionee is terminated on a date prior to the expiration of the Exercise Period ("Termination Date"). (i) If the cause of termination is the voluntary retirement or dismissal for cause of the Optionee and on the Termination Date the Company is a Private Company, the Optionee's Option shall terminate as at such date. If on the Termination Date the Company has ceased to be a Private Company, such Option shall terminate 30 days following such date prior to which date the Optionee may exercise all or any part of the Option that has vested and is exercisable in accordance with the provisions of Section 4(d) hereof. (ii) If the cause of termination is the death of the Optionee or is other than voluntary retirement or dismissal for cause of the Optionee and on the Termination Date the Company: (a) is a Private Company, the Option shall terminate as at such date; or, (b) has ceased to be a Private Company the Option shall terminate 120 days following such date prior to which date the Optionee may exercise all or any part of the Option that is exercisable in accordance with the provisions of Section 4(d) hereof. (g) Termination. If, at the closing of business on December 31, 1998, the Company has not ceased to be a Private Company, all Options shall terminate as at such date. (h) Transferability. An Option may not be assigned or transferred. Each Option will be exercisable during the lifetime of the Optionee only by the Optionee. In the event of the death of an Optionee, the legal personal representative(s) of the deceased Optionee may exercise, within a period of 120 days from the date of death, such portion of the Opionee's Option that would have been exercisable by the Optionee on the date of death in accordance with the provisions of Section 4(d) hereof. (i) Reorganization and Recapitalization. In the event of any subdivision, redivision or change of the Common Shares of the Company at any time prior to the expiration of the Exercise Period into a greater number of shares, the Company shall deliver at the time of any exercise thereafter of the Option hereby granted such additional number of shares as would have resulted from such subdivision, redivision or change if such exercise of the Option hereby granted had been prior to the date of such subdivision, redivision or change. In the event of any consolidation or change of the Common Shares of the Company at any time prior to the expiration of the Exercise Period into a lesser number of shares, the number of shares deliverable by the Company on any exercise thereafter of the Option hereby granted shall be reduced to such number of shares as would have resulted from such consolidation or change if such exercise of the Option hereby granted had been prior to the date of such consolidation or change. 5. Bonus ----- The Company shall pay the Optionee or the Optionee's estate a bonus (the "Bonus") within 90 days of the occurrence of either, but not both, of the following events (the "Bonus Event"): (i) the employment of the Optionee by the Company is terminated on a date prior to the expirations of the Exercise Period if the cause of the termination is the death of the Optionee or is other than the voluntary retirement or dismissal for cause of the Optionee and on such Termination Date the Company is a Private Company; (ii) the Company is Private Company as at the close of business on December 31, 1998. The Bonus shall be calculated as at the last day of the last completed fiscal quarter of the Company (the "Calculation Date") and shall be equal to the Adjusted Share Value per Share of the Company's Common Shares multiplied by: (a) If the Bonus Event is as set out sub-paragraph (i) the number of Option Shares in respect of which the Optionee's Option could have been exercised if, on the Termination Date, the Company had ceased to be a Private Company; (b) If the Bonus Event is as set out in sub-paragraph (ii) an amount equal to the total number of Option Shares. For the purpose of this Section "Adjusted Share Value Per Share" shall be equal to: (A) - ($218,000) x B) - $3.89 --------------------- C where: A is total shareholders equity of the Company (including retained earnings) as at the Calculation Date; B is the number of fiscal quarters of the Company from but excluding December 31, 1993 to and including the Calculation Date: and C is the number of outstanding Common Shares of the Company outstanding on the Calculation Date. In the event of a subdivision, redivision, consolidation or change of the Common Shares of the Company into a greater or lesser number of shares, the definition of "Adjusted Share Value Per Share" as set out herein shall be amended to reflect such change. In the event of a dispute arising out of the paragraph 5, the matter shall be determined by the Company's auditors whose decision shall be binding on all parties. 6. Amendment and Discontinuance ---------------------------- The Committee shall have the right to amend or modify this Plan or to terminate this Plan at any time without notice provided that an Optionee's rights are not thereby materially adversely affected and subject to any approvals required under the applicable rules of any stock exchange upon which the Common Shares of the Company are or may be listed. 7. Employment Non-Contractual -------------------------- Nothing in this option shall be construed as conferring upon the Optionee any right to continue in the service of the Company or any subsidiary of the Company. 8. Rights as a Shareholder ----------------------- The Optionee shall not have any rights as a shareholder with respect to any Option Shares issuable upon exercise of this Option until this Option has been validly exercised and the purchase price for such Option Share has been paid in full. 9. Nontransferability ------------------ The Optionee's rights under this option are not assignable or transferable by the Optionee during the Optionee's lifetime and are exercisable during the Optionee's lifetime only by the Optionee. 10. Corporate Action ---------------- Nothing contained herein shall be construed so as to prevent the Company or any subsidiary of the Company from taking corporate action which is deemed by the Company or the subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Option. 11. Government Regulation --------------------- The Company's obligation to issue and deliver Common Shares under this Option is subject to: (a) the satisfaction of all requirements under applicable securities law in respect thereof and obtaining all regulatory approvals as the Company shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof, including shareholder approval, if required; (b) the admission of such Common Shares to listing on any stock exchange on which Common Shares may then be listed; and (c) the receipt from the Optionee of such representations, agreements and undertakings as to future dealings in such Common Shares as the Company determines to be necessary or advisable in order to safeguard against the violation of the securities law of any jurisdiction. In this connection, the Company shall take all reasonable steps to obtain such approvals and registrations as may be necessary for the issuance of such Common Shares in compliance with applicable securities law and for the listing of such Common Shares on any stock exchange on which such Common Shares are then listed. 12. Approvals --------- This Plan shall be subject to acceptance by The Toronto Stock Exchange (the "Exchange") in compliance with all conditions imposed by the Exchange. Any Options granted prior to such acceptance shall be conditional upon such acceptance being given and any conditions complied with and no such Options may be exercised unless such acceptance is given and such conditions are complied with. 13. Governing Law ------------- This Plan and any Options granted hereunder shall be governed by and interpreted in accordance with the laws of the Province of Ontario. SCHEDULE B ---------- STOCK OPTION PLAN FOR KEY EMPLOYEES AND DIRECTORS ELECTION TO PURCHASE TO: The Corporate Secretary of Lumonics Inc. Pursuant to the terms of the stock option granted to me as of the September 1, 1994 (the "Date of Grant"), I hereby elect to purchase _____________ Common Shares of Lumonics Inc. which were the subject of such stock option. I understand that such purchase is subject to all of the terms and conditions of the Lumonics Inc. Stock Option Plan for Key Employees and Directors. Enclosed is payment in full of the Option Price for the number of shares indicated above. ___________________________________ (Printed Name) Dated: ___________________________________ Signature) NOTE: This election must be received by Lumonics Inc. no later than the end of the Exercise Period. ................................................................................ PLEASE TYPE OR PRINT THE FOLLOWING: Name as it will appear on share certificate: _______________________________ Residence Address: ________________________________ _______________________________ ................................................................................ DO NOT WRITE IN THE FOLLOWING SECTION: Date election form received: ___________________ Approval to issue share certificate for ___________ Common Shares authorized by: Date: ___________________ __________________________________________________ (Corporate Secretary or other Authorized Official) EX-99.11 35 1995 EMPLOYEES AND DIRECTORS STOCK OPTION PLAN EXHIBIT 99.11 SCHEDULE A ---------- LUMONICS INC. 1995 STOCK OPTION PLAN FOR EMPLOYEES AND DIRECTORS - -------------------------------------------------------------------------------- 1. Purpose ------- Lumonics Inc. 1995 Stock Option Plan for Employees and Directors (the "Plan") is intended to retain, and reward highly qualified employees and directors who will be motivated to contribute to the success of Lumonics Inc. and its subsidiaries (the "Company") and encouraged to purchase Common Shares of the Company (the "Common Shares"). The Plan shall come into force effective September 29th, 1995. 2. Number of Common Shares to be Offered ------------------------------------- Stock options granted under the Plan ("Options" or "Option") shall be for the purchase of Common Shares, without nominal or par value, of the Company ("Option Shares" or "Option Share"). The maximum number of Common Shares that will be reserved for issuance and issued under this Plan shall not exceed 1,906,000 shares. The following restrictions shall also apply to this Plan as well as all other plans or stock option agreements to which the Company may be a party: (i) the aggregate number of Option Shares reserved for issuance pursuant to options granted to Insiders shall not exceed ten percent (10%) of the Outstanding Issue; (ii) Insiders shall not be issued, within any one year period, a number of Option Shares which exceeds ten percent (10%) of the Outstanding Issue; (iii) no Insider together with such Insider's Associates shall be issued, within any one year period, a number of Option Shares which exceeds five percent (5%) of the Outstanding Issue; and (iv) the number of Option Shares reserved for issuance pursuant to options to any one participant shall not exceed five percent (5%) of the Outstanding Issue. 2 For the purpose of this Plan: "Associate" has the meaning assigned by the Securities Act (Ontario), as amended from time to time: "Insider" means: (i) an insider of the Company as defined by the Securities Act (Ontario) as amended from time to time, other than a person who falls within such definition solely by virtue of being a director or senior officer of a subsidiary of the Company; and (ii) an Associate of any person who is an insider by virtue of Clause (i) of this definition; and "Outstanding Issue" means the number of Common Shares of the Company that are outstanding immediately prior to any issuance of Options under this Plan or any issuance of Option Shares, as the case may be, excluding Option Shares issued pursuant to the Plan during the preceding one year period. Upon the expiration, surrender or termination, in whole or in part, of an unexercised Option, the Option Shares subject to such unexercised Option shall be available for other Options to be granted from time to time. 3. Administration -------------- The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee") who shall be appointed by and serve at the pleasure of the Board of Directors (the "Board"). The Committee shall have full power and authority, subject to the terms of the Plan, to grant Options on behalf of the Company; to designate the individuals who are to be granted Options (the "Optionees" or "Optionee"); to set the date of grant, the number of Option Shares to be granted pursuant to each Option; and the other terms and conditions of the Options; and otherwise to interpret and construe the terms of the Plan. Any determination by the Committee shall be final and conclusive unless otherwise determined by the Board and, in any such event, such determination of the Board shall be final and conclusive. The day-to-day administration of the Plan may be delegated to such officers and employees of the Company as the Committee in its sole discretion shall determine. 3 4. Terms and Conditions of Options ------------------------------- (a) Individuals Eligible to Receive Options. The individuals eligible to receive Options shall be confined to such employees (including contract employees) and directors of the Company as shall be determined from time to time by the Committee. In making such determination, the Committee shall consider the duties and responsibilities of the individual, his or her present and potential contribution to the success of the Company, and such other factors as the Committee shall deem relevant in accomplishing the purposes of the Plan. Participation in the Plan shall be entirely voluntary and any decision by any individual not to participate shall not affect such individual's employment with the Company. (b) Grant of Options. From time to time the Committee or the Board of Directors shall grant Options on behalf of the Company under the Plan. (c) Option Price. The purchase price ("Option Price") for an Option Share shall be the Market Price per Common Share as at the date of grant. "Market Price" per Common Share at any date shall be the closing price of the Common Shares on The Toronto Stock Exchange (the "Exchange") (or if the Common Shares are not then listed or posted for trading on the Exchange, on such stock exchange in Canada on which such shares are listed and posted for trading as may be selected for such purpose by the Committee) on the trading date immediately preceding the date of grant. In the event that the Common Shares are not listed and posted for trading on any stock exchange in Canada, the market price shall be the last trading price of the Common Shares on National Association of Securities Dealers Quotations Systems ("NASDAQ") on the trading day immediately preceding the date of grant. In the event that the Common Shares are not trading on NASDAQ, the market price shall be determined by the Committee in its sole discretion. (d) Exercise Period. An Option may be exercised at any time or from time to time within such period as the Committee shall determine (the "Exercise Period"), but in no event shall such Exercise Period be greater than 10 years from the date of grant. The Committee may, but shall not be required to, impose such conditions on the exercise of an Option as the Committee deems appropriate. (e) Methods of Payment. Payment for purchase of Option Shares shall be made in cash or by certified cheque. Only full shares shall be issued under the Plan. 4 (f) Termination of Employment. The following shall apply in the event that the employment of an Optionee is terminated on a date prior to the expiration of the Exercise Period ("Termination Date"). For purposes of the Plan, the transfer of an Optionee to a different position or office within the Company shall not be considered a termination. (i) If the cause of termination is the voluntary retirement or dismissal for cause of the Optionee, the Optionee's Option shall terminate on the Termination Date. Provided that the Chief Executive Officer of the Company may extend such period for up to 30 days following the Termination Date prior to which date the Optionee may exercise all or any part of the Optionee's Option that has vested and is exercisable in accordance with the provisions of Section 4(d) hereof. (ii) If the cause of termination is other than the death, voluntary retirement or dismissal for cause of the Optionee, the Optionee's Option shall terminate 60 days following the Termination Date prior to which date the Optionee may exercise all or any part of the Optionee's Option that has vested and is exercisable in accordance with the provisions of Section 4(d) hereof. The Chief Executive Officer of the Company may extend such period for up to an additional 30 days. (iii) If the cause of termination is the death of the Optionee, the Optionee's Option shall terminate six (6) months following the Termination Date prior to which date the legal personal representative(s) of the deceased Optionee may exercise such portion of the Optionee's Option that has vested and is exercisable in accordance with the provisions of Section 4(d) hereof. Notwithstanding the provisions of this paragraph (f), in no event may an Option be exercised after the expiration of the Exercise Period. (g) Transferability. An Option may not be assigned or transferred. Each Option will be exercisable during the lifetime of the Optionee only by the Optionee. In the event of the death of an Optionee, the legal personal representative(s) of the deceased Optionee may exercise, within the period set out in Section 4(f)(ii) hereof, such portion of the Optionee's Option that would have been exercisable by the Optionee on the date of death in accordance with the provisions of Section 4(d) hereof. 5 (h) Reorganization and Recapitalization. In the event of any subdivision, redivision or change of the Common Shares of the Company at any time prior to the expiration of the Exercise Period into a greater number of shares, the Company shall deliver at the time of any exercise thereafter of the Option hereby granted such additional number of shares as would have resulted from such subdivision, redivision or change if such exercise of the Option hereby granted had been prior to the date of such subdivision, redivision or change. In the event of any consolidation or change of the Common Shares of the Company at any time prior to the expiration of the Exercise Period into a lesser number of shares, the number of shares deliverable by the Company on any exercise thereafter of the Option hereby granted shall be reduced to such number of shares as would have resulted from such consolidation or change if such exercise of the Option hereby granted had been prior to the date of such consolidation or change. 5. Amendment and Discontinuance ---------------------------- The Committee shall have the right to amend or modify this Plan or to terminate this Plan at any time without notice provided that an Optionee's rights are not thereby materially adversely affected and subject to any approvals required under the applicable rules of any stock exchange upon which the Common Shares of the Company are or may be listed. 6. Employment Non-Contractual -------------------------- Nothing in this option shall be construed as conferring upon the Optionee any right to continue in the service of the Company or any subsidiary of the Company. 7. Rights as a Shareholder ----------------------- The Optionee shall not have any rights as a shareholder with respect to any Option Shares issuable upon exercise of this Option until this Option has been validly exercised and the purchase price for such Option Share has been paid in full. 8. Nontransferability ------------------ The Optionee's rights under this option are not assignable or transferable by the Optionee during the Optionee's lifetime and are exercisable during the Optionee's lifetime only by the Optionee. 9. Corporate Action ---------------- 6 Nothing contained herein shall be construed so as to prevent the Company or any subsidiary of the Company from taking corporate action which is deemed by the Company or the subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Option. 10. Government Regulation --------------------- The Company's obligation to issue and deliver Common Shares under this Option is subject to: (a) the satisfaction of all requirements under applicable securities law in respect thereof and obtaining all regulatory approvals as the Company shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof, including shareholder approval, if required; (b) the admission of such Common Shares to listing on any stock exchange on which Common Shares may then be listed; and (c) the receipt from the Optionee of such representations, agreements and undertakings as to future dealings in such Common Shares as the Company determines to be necessary or advisable in order to safeguard against the violation of the securities law of any jurisdiction. In this connection, the Company shall take all reasonable steps to obtain such approvals and registrations as may be necessary for the issuance of such Common Shares in compliance with applicable securities law and for the listing of such Common Shares on any stock exchange on which such Common Shares are then listed. 11. Approvals --------- This Plan shall be subject to acceptance by The Toronto Stock Exchange (the "Exchange") in compliance with all conditions imposed by the Exchange. Any Options granted prior to such acceptance shall be conditional upon such acceptance being given and any conditions complied with and no such Options may be exercised unless such acceptance is given and such conditions are complied with. 7 12. Governing Law ------------- This Plan and any Options granted hereunder shall be governed by and interpreted in accordance with the laws of the Province of Ontario. 13. Additional Information for Quebec Residents ------------------------------------------- The following information will be provided to Individuals Eligible to Receive Options who are residents of the Province of Quebec at the time that they are granted Options pursuant to the Plan: (a) There is no minimum sum to be collected under the Plan and the Company proposes to use the proceeds of the Plan for general corporate purposes; (b) No changes have occurred among the senior executives of the Company since the last annual meeting of shareholders other than as disclosed in a Schedule that will be attached; (c) There has been no transfer of the securities of the Company that resulted in a material change in control of the Company since the last meeting of shareholders of the Company other than as disclosed in a Schedule that will be attached; (d) All other material facts in respect of the Company or the securities offered under the Plan that are necessary to enable an informed decision have been made public; and (e) A copy of the most recent audited financial statements of the Company will be attached. LUMONICS INC. By: ____________________________ Authorized Officer SCHEDULE B ---------- 1995 STOCK OPTION PLAN FOR EMPLOYEES AND DIRECTORS ELECTION TO PURCHASE TO: The Corporate Secretary of Lumonics Inc. Pursuant to the terms of the stock option granted to me as of the_______day of_________, 19__, I hereby elect to purchase_____ Common Shares of Lumonics Inc. which were the subject of such stock option. I understand that such purchase is subject to all of the terms and conditions of the Lumonics Inc. 1995 Stock Option Plan for Employees and Directors. Enclosed is payment in full of the Option Price for the number of shares indicated above. ___________________________________ (Printed Name) Dated: ___________________________________ Signature) NOTE: This election must be received by Lumonics Inc. no later than the end of the Exercise Period. ................................................................................ PLEASE TYPE OR PRINT THE FOLLOWING: Name as it will appear on share certificate: ________________________________ Residence Address: ________________________________________ ________________________________________ ................................................................................ DO NOT WRITE IN THE FOLLOWING SECTION: Date election form received:_________________________ Approval to issue share certificate for________Common Shares authorized by: Date:__________________ ________________________________________________ (Corporate Secretary or other Authorized Official) EX-99.12 36 CONSENT OF NEEDHAM & COMPANY, INC. EXHIBIT 99.12 CONSENT OF NEEDHAM & COMPANY, INC. We hereby consent to the inclusion in the Proxy Statement and Management Information Statement/Prospectus of General Scanning Inc. and Lumonics Inc. ("Joint Proxy Statement/Prospectus") forming part of this Registration Statement on Form S-4 of our opinion dated October 27, 1998 to the Board of Directors of General Scanning Inc. attached as Annex C to the Joint Proxy Statement/Prospectus and to the references to our opinion under the captions "Summary--Opinions of Financial Advisor" and "The Merger--Background of the Merger," "--Recommendation of the Board of Directors of General Scanning; Reasons for the Merger," and "--Opinion of General Scanning's Financial Advisor." In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 and the rules and regulations of the Securities and Exchange Commission thereunder, nor do we thereby admit that we are experts with respect to any part of such Registration Statement within the meaning of the term "experts" as used in the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. /s/ Needham & Company, Inc. Needham & Company, Inc. January 28, 1999 EX-99.13 37 CONSENT OF CIBC WOOD GUNDY SECURITIES, INC. EXHIBIT 99.13 CONSENT OF CIBC WOOD GUNDY SECURITIES INC. We hereby consent to the inclusion in the Proxy Statement and Management Information/Prospectus of Lumonics Inc. and General Scanning Inc. ("Joint Proxy Statement/Prospectus") forming part of this Registration Statement on Form S-4 of our opinion dated October 27, 1998 to the Board of Directors of Lumonics Inc., attached as Annex D to the Joint Proxy Statement/Prospectus and to the references to our opinion under the captions "Summary--Opinions of Financial Advisors" and "The Merger--Background of the Merger," "--Recommendation of the Board of Directors of Lumonics; Reasons for the Merger," and "--Opinion of Lumonics' Financial Advisor." In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 and the rules and regulations of the Securities and Exchange Commission thereunder, nor do we thereby admit that we are experts with respect to any part of such Registration Statement within the meaning of the term "experts" as used in the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. (signed) CIBC Wood Gundy Securities Inc. January 28, 1999 EX-99.14 38 CONSENT OF CHARLES D. WINSTON Exhibit 99.14 CONSENT TO SERVE AS A DIRECTOR I hereby agree to serve as a Director of GSI Lumonics Inc. following the merger of General Scanning Inc. and Lumonics Inc. I also agree to the inclusion of the references to me in Lumonics' Registration Statement on Form S-4, as may subsequently be amended, and any prospectus included therein as a person who has agreed to serve as a director of GSI Lumonics. January 27, 1999 /s/ Charles D. Winston EX-99.15 39 CONSENT OF RICHARD B. BLACK Exhibit 99.15 CONSENT TO SERVE AS A DIRECTOR I hereby agree to serve as a Director of GSI Lumonics Inc. following the merger of General Scanning Inc. and Lumonics Inc. I also agree to the inclusion of the references to me in Lumonics' Registration Statement on Form S-4, as may subsequently be amended, and any prospectus included therein as a person who has agreed to serve as a director of GSI Lumonics. January 27, 1999 /s/ Richard B. Black EX-99.16 40 CONSENT OF PAUL F. FERRARI Exhibit 99.16 CONSENT TO SERVE AS A DIRECTOR I hereby agree to serve as a Director of GSI Lumonics Inc. following the merger of General Scanning Inc. and Lumonics Inc. I also agree to the inclusion of the references to me in Lumonics' Registration Statement on Form S-4, as may subsequently be amended, and any prospectus included therein as a person who has agreed to serve as a director of GSI Lumonics. January 27, 1999 /s/ Paul F. Ferrari EX-99.17 41 CONSENT OF WOODIE C. FLOWERS Exhibit 99.17 CONSENT TO SERVE AS A DIRECTOR I hereby agree to serve as a Director of GSI Lumonics Inc. following the merger of General Scanning Inc. and Lumonics Inc. I also agree to the inclusion of the references to me in Lumonics' Registration Statement on Form S-4, as may subsequently be amended, and any prospectus included therein as a person who has agreed to serve as a director of GSI Lumonics. January 27, 1999 /s/ Woodie C. Flowers -----END PRIVACY-ENHANCED MESSAGE-----