GSI GROUP INC (Form: 10-Q, Received: 05/06/2014 16:16:41)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-35083

GSI Group Inc.

(Exact name of registrant as specified in its charter)


New Brunswick, Canada		98-0110412
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

125 Middlesex Turnpike Bedford, Massachusetts, USA		01730
(Address of principal executive offices)		(Zip Code)

(781) 266-5700

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

As of April 28, 2014, there were 34,184,520 of the Registrant’s common shares, no par value, issued and outstanding.

GSI GROUP INC.

TABLE OF CONTENTS


Item No.		Page No.

PART I — FINANCIAL INFORMATION			1

ITEM 1.	FINANCIAL STATEMENTS		1

	CONSOLIDATED BALANCE SHEETS (unaudited)		1

	CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)		2

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)		3

	CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)		4

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)		5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26

ITEM 4.	CONTROLS AND PROCEDURES		26

PART II — OTHER INFORMATION			27

ITEM 1.	LEGAL PROCEEDINGS		27

ITEM 1A.	RISK FACTORS		27

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		27

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		27

ITEM 4.	MINE SAFETY DISCLOSURES		27

ITEM 5.	OTHER INFORMATION		27

ITEM 6.	EXHIBITS		28

SIGNATURES			29

EXHIBIT INDEX			30

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GSI GROUP INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars or shares)

(Unaudited)


	March 28, 2014			December 31, 2013
ASSETS
Current Assets
Cash and cash equivalents	$	31,741		$	60,980
Accounts receivable, net of allowance of $682 and $575, respectively		61,314			48,552
Inventories		63,834			58,290
Income taxes receivable		5,455			5,715
Deferred tax assets		8,786			6,351
Prepaid expenses and other current assets		4,872			5,134
Assets of discontinued operations		16,135			16,088

Total current assets		192,137			201,110
Property, plant and equipment, net		31,448			31,303
Deferred tax assets		497			519
Other assets		11,957			9,426
Intangible assets, net		102,763			65,293
Goodwill		115,182			71,156

Total assets	$	453,984		$	378,807

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt	$	7,500		$	7,500
Accounts payable		26,572			24,361
Income taxes payable		535			1,018
Deferred tax liabilities		214			214
Accrued expenses and other current liabilities		21,875			22,288
Liabilities of discontinued operations		7,336			6,398

Total current liabilities		64,032			61,779
Long-term debt		129,125			64,000
Deferred tax liabilities		4,389			—
Income taxes payable		8,018			5,596
Other liabilities		4,750			5,029

Total liabilities		210,314			136,404

Commitments and Contingencies (Note 13)
Stockholders’ Equity:
Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 34,173 and 33,991, respectively		423,856			423,856
Additional paid-in capital		25,659			25,383
Accumulated deficit		(199,930	)		(200,913	)
Accumulated other comprehensive loss		(6,341	)		(6,342	)

Total GSI Group Inc. stockholders’ equity		243,244			241,984
Noncontrolling interest		426			419

Total stockholders’ equity		243,670			242,403

Total liabilities and stockholders’ equity	$	453,984		$	378,807

The accompanying notes are an integral part of these consolidated financial statements.

GSI GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars or shares, except per share amounts)

(Unaudited)


	Three Months Ended
	March 28, 2014			March 29, 2013
Sales	$	79,133		$	75,071
Cost of sales		47,028			44,440

Gross profit		32,105			30,631

Operating expenses:
Research and development and engineering		5,857			5,816
Selling, general and administrative		19,618			18,689
Amortization of purchased intangible assets		1,744			2,236
Restructuring and acquisition related costs		818			2,428

Total operating expenses		28,037			29,169

Income from operations		4,068			1,462
Interest income (expense), net		(837	)		(898	)
Foreign exchange transaction gains (losses), net		(19	)		1,219
Other income (expense), net		581			369

Income from continuing operations before income taxes		3,793			2,152
Income tax provision		937			403

Income from continuing operations		2,856			1,749
Income (loss) from discontinued operations, net of tax		(1,866	)		369

Consolidated net income		990			2,118
Less: Net income attributable to noncontrolling interest		(7	)		(36	)

Net income attributable to GSI Group Inc.	$	983		$	2,082


Earnings per common share from continuing operations:
Basic	$	0.08		$	0.05
Diluted	$	0.08		$	0.05
Earnings (loss) per common share from discontinued operations:
Basic	$	(0.05	)	$	0.01
Diluted	$	(0.05	)	$	0.01
Earnings per common share attributable to GSI Group Inc.:
Basic	$	0.03		$	0.06
Diluted	$	0.03		$	0.06
Weighted average common shares outstanding—basic		34,227			33,983
Weighted average common shares outstanding—diluted		34,669			34,271

The accompanying notes are an integral part of these consolidated financial statements.

GSI GROUP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands of U.S. dollars)

(Unaudited)


	Three Months Ended
	March 28, 2014			March 29, 2013
Consolidated net income	$	990		$	2,118
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax ⁽¹⁾		(63	)		(5,694	)
Pension liability adjustments, net of tax ⁽²⁾		64			949

Total other comprehensive income (loss)		1			(4,745	)

Total consolidated comprehensive income (loss)		991			(2,627	)
Less: Comprehensive (income) attributable to noncontrolling interest		(7	)		(36	)

Comprehensive income (loss) to GSI Group Inc.	$	984		$	(2,663	)

⁽¹⁾	The tax effect on this component of comprehensive income was nominal for the three months ended March 28, 2014 and $1.3 million for the three months ended March 29, 2013.

⁽²⁾	The tax effect on this component of comprehensive income was not material for all periods presented. See Note 4 for the total amount of pension liability adjustments reclassified out of accumulated other comprehensive loss.

The accompanying notes are an integral part of these consolidated financial statements.

GSI GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)


	Three Months Ended
	March 28, 2014			March 29, 2013
Cash flows from operating activities:
Consolidated net income	$	990		$	2,118

Less: Loss (income) from discontinued operations, net of tax		1,866			(369	)

Income from continuing operations		2,856			1,749
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:
Depreciation and amortization		4,829			5,259
Provision for inventory		465			840
Share-based compensation		1,439			1,531
Deferred income taxes		(1,990	)		(981	)
Earnings from equity investment		(573	)		(361	)
Non-cash interest expense		233			253
Non-cash restructuring and acquisition related charges		171			(414	)
Other non-cash items		204			607
Changes in assets and liabilities which (used) provided cash, excluding effects from businesses purchased or classified as held for sale:
Accounts receivable		(4,919	)		(4,370	)
Inventories		1,449			(452	)
Prepaid expenses, income taxes receivable and other current assets		388			146
Accounts payable, accrued expenses, income taxes payable and other current liabilities		(2,519	)		2,335
Other non-current assets and liabilities		763			138

Cash provided by operating activities of continuing operations		2,796			6,280
Cash used in operating activities of discontinued operations		(1,299	)		(1,672	)

Cash provided by operating activities		1,497			4,608


Cash flows from investing activities:
Purchases of property, plant and equipment		(972	)		(1,605	)
Acquisition of business, net of cash acquired		(92,360	)		(82,653	)
Proceeds from the sale of property, plant and equipment		38			—

Cash used in investing activities of continuing operations		(93,294	)		(84,258	)
Cash used in investing activities of discontinued operations		(617	)		(110	)

Cash used in investing activities		(93,911	)		(84,368	)


Cash flows from financing activities:
Borrowings under revolving credit facility		70,000			60,000
Repayments of long-term debt and revolving credit facility		(4,875	)		(6,875	)
Payments for debt issuance costs		(712	)		(145	)
Payments of withholding taxes from stock-based awards		(1,371	)		(639	)
Capital lease payments		(246	)		(233	)
Excess tax benefits from stock-based awards		160			—
Other financing activities		235			—

Cash provided by financing activities of continuing operations		63,191			52,108
Cash provided by financing activities of discontinued operations		—			—

Cash provided by financing activities		63,191			52,108


Effect of exchange rates on cash and cash equivalents		(16	)		(1,799	)

Decrease in cash and cash equivalents		(29,239	)		(29,451	)
Cash and cash equivalents, beginning of period		60,980			65,788

Cash and cash equivalents, end of period	$	31,741		$	36,337

Supplemental disclosure of cash flow information:
Cash paid for interest	$	489		$	378
Cash paid for income taxes		1,026			449
Income tax refunds received		—			3

The accompanying notes are an integral part of these consolidated financial statements.

GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF March 28, 2014

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

GSI Group Inc. and its subsidiaries (collectively referred to as the “Company”) design, develop, manufacture and sell precision photonic and motion control components and subsystems to Original Equipment Manufacturers (OEM’s) in the medical equipment and advanced industrial technology markets. Our highly engineered enabling technologies include laser sources, scanning and beam delivery products, medical visualization and informatics solutions, optical data collection and machine vision technologies and precision motion control products. We specialize in collaborating with OEM customers to adapt our component and subsystem technologies to deliver highly differentiated performance in their applications.

The accompanying unaudited interim consolidated financial statements have been prepared in U.S. dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary for a fair presentation of the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

The interim consolidated financial statements include the accounts of the Company and its 50% owned joint venture, Excel Laser Technology Private Limited (“Excel SouthAsia JV”) which is reported as discontinued operations in the Company’s consolidated statements of operations . Intercompany transactions and balances have been eliminated. During the second quarter of 2013, the Company’s ownership percentage in a privately held company located in the United Kingdom, Laser Quantum Ltd. (“Laser Quantum”) increased from approximately 25% to 41% as a result of a share buy-back program by Laser Quantum. The Company continues to record the results of this entity under the equity method as it does not have a controlling interest in the entity.

The Company’s unaudited interim financial statements are prepared on a quarterly basis ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

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, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of sales and expenses during the reporting periods. The Company evaluates its estimates based on historical experience, current conditions and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which they are deemed to be necessary. Actual results could differ significantly from those estimates.

Reclassifications

As discussed in Note 2, the Company classified the Scientific Lasers business as held for sale beginning in the first quarter of 2014. As a result, certain prior period information included in the consolidated financial statements has been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 provides guidance on determining when disposals can be presented as discontinued operations. ASU 2014-08 requires that only disposals representing a strategic shift in operations should be presented as discontinued operations. A strategic shift may include a disposal of a major line of business, major equity method investment or a major part of an entity. Additionally, ASU 2014-08 requires expanded disclosures regarding discontinued operations. This standard is effective prospectively for reporting periods beginning after December 15, 2014. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.

Accounting for the Cumulative Translation Adjustment

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 provides clarification regarding whether ASC 810-10, “Consolidation – Overall” or ASC 830-30, “Foreign Currency Matters—Translation of Financial Statements,” applies to the release of cumulative translation adjustments into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity. The revised standard is effective for reporting periods beginning after December 15, 2013. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

Presentation of Unrecognized Tax Benefits

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit or a portion of an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

2. Discontinued Operations

On January 31, 2014, the Company signed a letter of intent to sell certain assets and liabilities of its Scientific Lasers business, sold under the Continuum brand name, for $7.5 million in cash, subject to successful completion of confirmatory due diligence by the potential acquirer, entry into a definitive agreement and customary closing conditions. In addition, the agreement includes contingent consideration of up to $3.0 million based on the achievement of certain 2014 revenue targets. In the first quarter of 2014, the Company’s Board of Directors committed to a plan to sell the Scientific Lasers business. The Company determined that the asset held-for-sale criteria were satisfied and began to account for the Scientific Lasers business as discontinued operations in the first quarter of 2014, which was previously included in our Laser Products segment.

In May 2013, the Company consummated the sale of certain assets and liabilities of the Semiconductor Systems business to Electro Scientific Industries, Inc. (“ESI”) for $8.6 million in cash, net of selling costs.

The major components of the assets and liabilities of discontinued operations as of March 28, 2014 and December 31, 2013, respectively, are as follows (in thousands):


	March 28, 2014		December 31, 2013
Accounts receivable, net	$	4,927	$	5,361
Inventories		7,441		8,454
Prepaid and other current assets		2,012		247
Other assets		1,755		2,026

Assets of discontinued operations	$	16,135	$	16,088


Accounts payable	$	2,303	$	2,393
Accrued expenses and other current liabilities		2,991		2,295
Other liabilities		2,042		1,710

Liabilities of discontinued operations	$	7,336	$	6,398

The following table presents the operating results which are reported as discontinued operations in the Company’s consolidated statements of operations (in thousands):


	Three Months Ended
	March 28, 2014			March 29, 2013
Sales from discontinued operations	$	4,016		$	15,130
Income (loss) from discontinued operations before income taxes	$	(2,851	)	$	204
Income (loss) from discontinued operations, net of tax	$	(1,866	)	$	369

The income (loss) from discontinued operations includes a $1.6 million fair value write-down of the Scientific Lasers business to its estimated fair value less costs to sell.

3. Business Combinations

On March 14, 2014, the Company acquired 100% of the outstanding stock of JADAK LLC, JADAK Technologies Inc. and Advance Data Capture Corporation (together, “JADAK”), a North Syracuse, New York-based provider of optical data collection and machine vision technologies to OEM medical device manufacturers, for $93.5 million in cash, subject to customary working capital adjustments. The Company expects the addition of JADAK will enable the Company to offer a broader range of highly engineered enabling technologies to leading medical equipment manufacturers. Acquisition-related costs are included in restructuring and acquisition related costs in the consolidated statements of operations. Acquisition related costs are as follows (in thousands):


	Three Months Ended		Cumulative Costs
	March 28, 2014		March 28, 2014
Acquisition-related costs	$	650	$	957

The acquisition of JADAK has been accounted for as a business combination. The allocation of the purchase price is preliminary and is based upon a valuation of assets and liabilities acquired. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of JADAK and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date). The purchase price allocation is preliminary and the primary areas of the purchase price allocation that are not yet finalized relate to the final settlement of working capital, inventory valuation, intangible assets, income taxes, and the amount of residual goodwill.

Based upon a preliminary valuation, the total purchase price was allocated as follows (in thousands):


	Purchase Price Allocation
Cash	$	1,140
Accounts receivable		7,929
Inventory		7,856
Property and equipment		904
Intangible assets		40,512
Other assets		1,980
Goodwill		44,026

Total assets acquired		104,347


Accounts payable		3,067
Other liabilities		2,031
Deferred tax liabilities		4,389

Total liabilities assumed		9,487

Total purchase price		94,860
Less cash acquired		(1,140	)


Total purchase price, net of cash acquired	$	93,720

As of March 28, 2014, the working capital adjustments had not been finalized and were estimated to be an additional cash payment of $1.4 million. The preliminary fair value of intangible assets is comprised of the following dollar amounts (in thousands):


	Estimated Fair Value		Weighted Average Amortization Period
Customer relationships	$	24,136		20 years
Developed technology		11,129		10 years
Trademarks and trade names		2,129		10 years
Backlog		1,631		1 year
Non-compete covenant		1,487		5 years

Total	$	40,512

The preliminary purchase price allocation resulted in $44.0 million of goodwill and $40.5 million of identifiable intangible assets, $60.3 million of which are expected to be deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flow potential attributable to: (i) JADAK’s ability to develop and market new products and technologies, (ii) JADAK’s ability to develop relationships with new customers, and (iii) expected sales synergies from cross-selling current and future product offerings of both JADAK and the Company to OEM customers.

The operating results of JADAK have been included in our consolidated statement of operations since the acquisition date. JADAK has contributed $2.2 million to sales and a $0.1 million loss to income from continuing operations since the acquisition date. The pro forma information for all periods presented below includes the effects of business combination accounting resulting from the acquisition of JADAK, including amortization charges from acquired intangible assets, interest expense on borrowings in connection with the acquisition, earn-out expenses, and the related tax effects as though the acquisition had been consummated as of the beginning of 2013. These pro forma results exclude the impact of transaction costs and the related tax effects included in the historical results. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2013.


	Three Months Ended
	March 28, 2014		March 29, 2013
Sales	$	90,164	$	86,846
Income from continuing operations	$	3,237	$	978
Earnings per share - Basic	$	0.09	$	0.03
Earnings per share - Diluted	$	0.09	$	0.03

4. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) is as follows (in thousands):


	Total accumulated other comprehensive income (loss)			Foreign currency translation adjustments			Pension liability
Balance at December 31, 2013		(6,342	)		1,353			(7,695	)
Other comprehensive loss		(108	)		(63	)		(45	)
Amounts reclassified from other comprehensive loss (1)		109			—			109

Balance at March 28, 2014	$	(6,341	)	$	1,290		$	(7,631	)

(1)	The amounts reclassified from other comprehensive loss were included in selling, general and administrative expenses in the consolidated statement of operations.

5. Earnings per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. For diluted earnings per common share, the denominator also includes the dilutive effect of outstanding restricted stock units determined using the treasury stock method. For periods in which net losses are generated, the dilutive potential common shares are excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive. Dilutive effects of contingently issuable shares are included in the weighted average dilutive share calculation when the contingencies have been resolved.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):


	Three Months Ended
	March 28, 2014			March 29, 2013
Numerators:
Consolidated net income	$	2,856		$	1,749
Less: income attributable to noncontrolling interest		(7	)		(36	)

Income from continuing operations		2,849			1,713
Income (loss) from discontinued operations		(1,866	)		369

Net income attributable to GSI Group Inc.	$	983		$	2,082


Denominators:
Weighted average common shares outstanding—basic		34,227			33,983
Dilutive potential common shares		442			288

Weighted average common shares outstanding—diluted		34,669			34,271

Antidilutive common shares excluded from above		87			373

Basic Earnings (Loss) per Common Share:
From continuing operations	$	0.08		$	0.05
From discontinued operations	$	(0.05	)	$	0.01
Basic earnings (loss) per share attributable to GSI Group Inc.	$	0.03		$	0.06

Diluted Earnings (Loss) per Common Share:
From continuing operations	$	0.08		$	0.05
From discontinued operations	$	(0.05	)	$	0.01
Diluted earnings (loss) per share attributable to GSI Group Inc.	$	0.03		$	0.06

Common Stock Repurchases

In October 2013, the Company’s Board of Directors authorized a share repurchase plan under which the Company may repurchase outstanding shares of the Company’s common stock up to an aggregate amount of $10.0 million. The shares may be repurchased from time to time, at the Company’s discretion, based on ongoing assessment of the capital needs of the business, the market price of the Company’s common stock, and general market conditions. Shares may also be repurchased through an accelerated stock purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common stock to be purchased when the Company would otherwise be prohibited from doing so under insider trading laws. The share repurchase plan does not obligate the Company to acquire any particular amount of common stock. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. As of December 31, 2013, the Company has cumulatively repurchased 50 thousand shares of its common stock in the open market for a weighted average share price of $10.49 per share. There were no share repurchases during the three months ended March 28, 2014.

6. Fair Value Measurements

ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

•

Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access.

•

Level 2: Observable inputs other than those described in Level 1.

•

Level 3: Unobservable inputs.

The Company’s cash equivalents are investments in money market accounts, which represent the only asset the Company measures at fair value on a recurring basis. The Company determines the fair value of our cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

The following table summarizes the fair values of our financial assets as of March 28, 2014 (in thousands):


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	1,380	$	1,380	$	—	$	—

The following table summarizes the fair values of our financial assets as of December 31, 2013 (in thousands):


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	3,078	$	3,078	$	—	$	—

See Note 9 to Consolidated Financial Statements for discussion of the estimated fair value of the Company’s outstanding debt.

7. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The Company tests its goodwill balances annually as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The Company performed its annual goodwill impairment test at the beginning of the second quarter of 2013 and noted no impairment of goodwill.

The following table summarizes changes in goodwill for the three months ended March 28, 2014 (in thousands):


Balance at beginning of the period	$	71,156
Goodwill acquired from JADAK acquisition		44,026

Balance at end of period	$	115,182

Goodwill acquired from the JADAK acquisition is reflected in the Medical Technologies segment. Goodwill by reportable segment as of March 28, 2014 is as follows (in thousands):


	Reportable Segment									Total
	Laser Products			Medical Technologies			Precision Motion			Total
Goodwill	$	132,954		$	87,591		$	26,291		$	246,836
Accumulated impairment of goodwill		(102,461	)		(12,147	)		(17,046	)		(131,654	)

Total	$	30,493		$	75,444		$	9,245		$	115,182

Goodwill by reportable segment as of December 31, 2013 is as follows (in thousands):


	Reportable Segment									Total
	Laser Products			Medical Technologies			Precision Motion			Total
Goodwill	$	132,954		$	43,565		$	26,291		$	202,810
Accumulated impairment of goodwill		(102,461	)		(12,147	)		(17,046	)		(131,654	)

Total	$	30,493		$	31,418		$	9,245		$	71,156

Intangible Assets

Intangible assets as of March 28, 2014 and December 31, 2013, respectively, are summarized as follows (in thousands):


	March 28, 2014							December 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Patents and acquired technologies	$	79,675	$	(57,674	)	$	22,001	$	68,500	$	(56,327	)	$	12,173
Customer relationships		79,737		(25,821	)		53,916		55,585		(24,340	)		31,245
Customer backlog		2,900		(1,346	)		1,554		1,269		(1,269	)		—
Non-compete covenant		1,487		(16	)		1,471		—		—			—
Trademarks and trade names		15,517		(4,723	)		10,794		13,378		(4,530	)		8,848

Amortizable intangible assets		179,316		(89,580	)		89,736		138,732		(86,466	)		52,266

Non-amortizable intangible assets:
Trade names		13,027		—			13,027		13,027		—			13,027

Totals	$	192,343	$	(89,580	)	$	102,763	$	151,759	$	(86,466	)	$	65,293

All definite-lived intangible assets are amortized either on a straight-line basis or an economic benefit basis over their remaining useful life. Amortization expense for customer relationships, customer backlog, non-compete covenant, definite-lived trademarks, trade names and other intangibles is included in operating expenses in the accompanying consolidated statements of operations. Amortization expense for patents and acquired technologies is included in cost of goods sold in the accompanying consolidated statements of operations. Amortization expense is as follows (in thousands):


	Three Months Ended
	March 28, 2014		March 29, 2013
Amortization expense – cost of sales	$	1,301	$	1,251
Amortization expense – operating expenses		1,744		2,236

Total amortization expense	$	3,045	$	3,487

Estimated amortization expense for each of the five succeeding years and thereafter as of March 28, 2014 is as follows (in thousands):


Year Ending December 31,	Cost of Sales		Operating Expenses		Total
2014 (remainder of year)	$	4,849	$	8,481	$	13,330
2015		4,804		9,292		14,096
2016		3,379		9,231		12,610
2017		2,890		8,255		11,145
2018		1,362		7,362		8,724
Thereafter		4,717		25,114		29,831

Total	$	22,001	$	67,735	$	89,736

8. Supplementary Balance Sheet Information

The following tables provide the details of selected balance sheet items as of the periods indicated (in thousands):

Inventories


	March 28, 2014		December 31, 2013
Raw materials	$	39,152	$	34,749
Work-in-process		9,724		9,744
Finished goods		12,023		10,682
Demo and consigned inventory		2,935		3,115

Total inventories	$	63,834	$	58,290

Accrued Expenses and Other Current Liabilities


	March 28, 2014		December 31, 2013
Accrued compensation and benefits	$	7,288	$	8,624
Accrued warranty		3,310		3,315
Customer deposits		670		551
Other		10,607		9,798

Total	$	21,875	$	22,288

Accrued Warranty


	Three Months Ended
	March 28, 2014			March 29, 2013
Balance at beginning of the period	$	3,315		$	2,204
Provision charged to cost of sales		481			257
Acquisition related warranty accrual		90			998
Use of provision		(571	)		(366	)
Foreign currency exchange rate changes		(5	)		(53	)

Balance at end of period	$	3,310		$	3,040

9. Debt

Debt consisted of the following (in thousands):


	March 28, 2014		December 31, 2013
Senior Credit Facilities – term loan	$	40,625	$	42,500
Senior Credit Facilities – revolving credit facility		96,000		29,000

Total Senior Credit Facilities	$	136,625	$	71,500

Senior Credit Facilities

The Company’s amended and restated senior secured credit agreement (the “Amended and Restated Credit Agreement”) provides for a $50.0 million, 5-year, term loan facility due in quarterly installments of $1.9 million beginning in January 2013 and a $75.0 million, 5-year, revolving credit facility (collectively, the “Senior Credit Facilities”) that matures in December 2017. Quarterly installments due in the next twelve months amount to $7.5 million and are classified as a current liability in the consolidated balance sheet. On February 10, 2014, the Company entered into a fourth amendment (the “Fourth Amendment”). The Fourth Amendment increases the revolving credit facility commitment under the Amended and Restated Credit Agreement by $100 million from $75 million to $175 million and resets the accordion feature to $100 million for future expansion. In March, 2014, the Company made a $70.0 million drawdown on the credit facility to fund the JADAK acquisition. During the three months ended March 28, 2014, the Company incurred $0.7 million in deferred financing costs related to the Fourth Amendment.

The Company is required to satisfy certain financial and non-financial covenants under the Amended and Restated Credit Agreement. The Company is in compliance with these covenants as of March 28, 2014.

Fair Value of Debt

As of March 28, 2014 and December 31, 2013, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of the same maturity.

10. Share-Based Compensation

The table below summarizes activities relating to restricted stock units issued and outstanding under the 2010 Incentive Award Plan during the three months ended March 28, 2014:


	Restricted Stock Units (In thousands)			Weighted Average Grant Date Fair Value
Unvested at December 31, 2013		809		$	10.20
Granted		295		$	12.32
Vested		(292	)	$	11.02
Forfeited		—		$	—

Unvested at March 28, 2014		812		$	10.68

Expected to vest as of March 28, 2014		786

The total fair value of restricted stock units that vested during the three months ended March 28, 2014 was $3.6 million based on the market price of the underlying stock on the day of vesting.

The table below summarizes share-based compensation expense recorded in income from continuing operations in the consolidated statements of operations (in thousands):


	Three Months Ended
	March 28, 2014		March 29, 2013
Selling, general and administrative	$	1,356	$	1,470
Research and development and engineering		50		34
Cost of sales		33		27
Restructuring and acquisition related costs		46		—

Total share-based compensation expense	$	1,485	$	1,531

The expense recorded during each of the three months ended March 28, 2014 and March 29, 2013 includes $0.5 million related to deferred stock units granted to the members of the Company’s Board of Directors, pursuant to the Company’s 2010 Incentive Award Plan. The expense associated with the respective deferred stock units was recognized in full on the respective date of grant, as the deferred stock units were fully vested and non-forfeitable on the date of grant.

As noted in Note 3, on March 14, 2014, the Company acquired 100% of the outstanding stock of JADAK. In addition to the total purchase price, the Company granted restricted stock units in an aggregate of 180,000 shares to the four former owner-managers of JADAK and are intended to be employment inducement awards. These restricted stock units are performance based awards and will vest after two years if certain financial targets have been achieved.

11. Income Taxes

The Company determines its estimated annual effective tax rate at the end of each successive interim period based on facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period. The tax effect of significant unusual items is reflected in the period in which they occur. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 27% in the determination of the estimated annual effective tax rate.

The Company’s reported effective tax rate on income from continuing operations of 24.7% for the three months ended March 28, 2014 differs from the expected Canadian statutory rate of 27% primarily due to income earned in jurisdictions with varying tax rates and losses in jurisdictions with a valuation allowance which are not benefitted in the income tax provision in the current period. The Company’s reported effective tax rate on income from continuing operations for the three months ended March 29, 2013 of 18.7%, differs from the current period effective tax rate due to the impact of beneficial discrete items in the prior year comparable period.

The Company maintains a valuation allowance on some of its deferred tax assets in certain jurisdictions. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.

In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the remaining valuation allowance currently in place on its deferred tax assets. A release would be reported as a reduction to income tax expense without any impact on cash flows in the quarter in which it is released.

On September 13, 2013, the IRS released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (the “Code”), regarding the deduction and capitalization of expenditures related to tangible property. In addition, the IRS proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These final and proposed regulations will be effective for the Company’s fiscal year ending December 31, 2014. The Company is in the process of reviewing the regulations and the related impact on its consolidated financial statements.

12. Restructuring and Acquisition Related Costs

The following table summarizes restructuring and acquisition related expenses in the accompanying consolidated statements of operations (in thousands):


	Three Months Ended
	March 28, 2014		March 29, 2013
2011 restructuring	$	28	$	937
2013 restructuring		—		418
Germany restructuring		—		7

Total restructuring charges	$	28	$	1,362


Acquisition charges	$	703	$	1,066
JADAK earn-out costs		87		—

Total acquisition related charges	$	790	$	1,066


Total restructuring and acquisition related costs	$	818	$	2,428

Total acquisition related charges include professional fees and expenses recognized under earn-out agreements in connection with the acquisition of JADAK.

2011 Restructuring

In November 2011, the Company announced a strategic initiative (“2011 restructuring”), which aimed to consolidate operations to reduce our cost structure and improve operational efficiency. As part of this initiative, the Company eliminated facilities through consolidation of certain manufacturing, sales and distribution facilities and exit of Semiconductor and Laser Systems businesses. The Company substantially completed the 2011 restructuring program by the end of 2013.

Rollforward of Accrued Expenses Related to Restructuring

The following table summarizes the accrual activities, by component, related to the Company’s restructuring plans recorded in the accompanying consolidated balance sheets (in thousands):


	Total			Severance			Facility			Depreciation			Other
Balance at December 31, 2013	$	1,272		$	585		$	648		$	—		$	39
Restructuring charges		28			(15	)		(96	)		125			14
Cash payments		(491	)		(256	)		(192	)		—			(43	)
Non-cash write-offs and other adjustments		(125	)		—			—			(125	)		—

Balance at March 28, 2014	$	684		$	314		$	360		$	—		$	10

In accordance with the guidance in ASC 420, “Exit or Disposal Cost Obligations,” the Company records lease termination accruals based on market estimates, including the time period for which facilities will remain vacant, sublease terms, sublease rates and discount rates. The Company reviews prior estimates and current market data available to determine the appropriate value of these liabilities at period end.

13. Commitments and Contingencies

Leases

The Company leases certain equipment and facilities under operating and capital lease agreements. Excluding the leases acquired as part of the JADAK acquisition, there have been no material changes to the Company’s leases through March 28, 2014 from those discussed in Note 16 to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Future minimum lease payments under the existing leases for JADAK are as follows (in thousands):


Year Ending December 31,	Leases
2014 (remainder of year)	$	550
2015		845
2016		776
2017		800
2018		833
Thereafter		8,862

Total	$	12,666

Purchase Commitments

Excluding JADAK’s purchase commitments, there have been no material changes to the Company’s purchase commitments from those discussed in Note 16 to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. As of March 28, 2014, JADAK had unconditional commitments primarily for inventory purchases of $7.2 million. These purchase commitments are expected to be incurred as follows: $6.8 million in the remainder of 2014, and $0.4 million in 2015.

Legal Proceedings

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon its financial condition or results of operations but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon its financial condition or results of operations.

Guarantees and Indemnifications

In the normal course of its operations, the Company executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business dispositions, sale of assets, sale of products and operating leases. Additionally, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. Certain of our officers and directors are also party to an indemnification agreement with the Company. These indemnification agreements provide, among other things, that the director and officer shall be indemnified to the fullest extent permitted by applicable law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such officer or director in connection with any proceeding by reason of his or her relationship with the Company. In addition, the indemnification agreements provide for the advancement of expenses incurred by such director or officer in connection with any proceeding covered by the indemnification agreement, subject to the conditions set forth therein and to the extent such advancement is not prohibited by law. The indemnification agreements also set out the procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims for which indemnification is sought, the procedures for enforcement of indemnification rights, the limitations on and exclusions from indemnification, and the minimum levels of directors’ and officers’ liability insurance to be maintained by the Company.

14. Segment Information

The Company evaluates the performance of, and allocates resources to, its segments based on sales, gross profit and operating profit. The Company’s reportable segments have been identified based on commonality of end markets, customers, applications and technologies amongst the Company’s individual product lines, which is consistent with the Company’s operating structure.

We operate in three reportable segments: Laser Products, Medical Technologies, and Precision Motion. The reportable segments and their principal activities consist of the following:

Laser Products

Our Laser Products segment designs, manufactures and markets photonics-based solutions to customers worldwide. The segment serves highly demanding photonics-based applications such as industrial material processing, and medical and life science imaging and laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The business sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Medical Technologies

Our Medical Technologies segment designs, manufactures and markets a range of medical grade technologies, including visualization solutions, imaging informatics products, optical data collection and machine vision technologies, thermal printers, and light and color measurement instrumentation to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Precision Motion

Our Precision Motion segment designs, manufactures and markets optical encoders, air bearing spindles and precision machined components to customers worldwide. The vast majority of the segment’s product offerings are sold into the electronics, industrial and, to a lesser extent, the medical markets. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Reportable Segment Financial Information

Sales, gross profit, gross profit margin and operating income by reportable segments are as follows (in thousands):


	Three Months Ended
	March 28, 2014			March 29, 2013
Sales
Laser Products	$	41,860		$	38,164
Medical Technologies		22,367			23,557
Precision Motion		14,906			13,350

Total	$	79,133		$	75,071


	Three Months Ended
	March 28, 2014			March 29, 2013
Gross Profit
Laser Products	$	17,013		$	15,507
Medical Technologies		8,889			9,463
Precision Motion		6,416			5,768
Corporate, Shared Services and Unallocated		(213	)		(107	)

Total	$	32,105		$	30,631


	Three Months Ended
	March 28, 2014			March 29, 2013
Gross Profit Margin
Laser Products		40.6	%		40.6	%
Medical Technologies		39.7	%		40.2	%
Precision Motion		43.0	%		43.2	%
Total		40.6	%		40.8	%

	Three Months Ended
	March 28, 2014			March 29, 2013
Operating Income
Laser Products	$	7,124		$	4,693
Medical Technologies		(117	)		1,445
Precision Motion		2,643			2,014
Corporate, Shared Services and Unallocated		(5,582	)		(6,690	)

Total	$	4,068		$	1,462

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report on Form 10-Q. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to, expectations regarding the sale of the Continuum Scientific Lasers business; anticipated financial performance; expected liquidity and capitalization; expectations regarding our medical markets strategy and the impact on shareholder value; drivers of revenue growth; management’s plans and objectives for future operations, expenditures and product development and investments in research and development; business prospects; potential of future product releases; anticipated sales performance; industry trends; market conditions; changes in accounting principles and changes in actual or assumed tax liabilities; expectations regarding tax exposure; anticipated reinvestment of future earnings; anticipated expenditures in regard to the Company’s benefit plans; future acquisitions and dispositions and anticipated benefits from prior acquisitions; anticipated outcomes of legal proceedings and litigation matters; and anticipated use of currency hedges. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following: economic and political conditions and the effects of these conditions on our customers’ businesses and level of business activity; our significant dependence upon our customers’ capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate and successfully commercialize our innovations; delays in our delivery of new products; our reliance upon third party distribution channels subject to credit, business concentration and business failure risks beyond our control; fluctuations in our quarterly results, and our failure to meet or exceed our expected financial performance; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our information technology systems; changes in interest rates, credit ratings or foreign currency exchange rates; risk associated with our operations in foreign countries; disruptions to our manufacturing operations as a result of natural disasters; our increased use of outsourcing in foreign countries; our failure to comply with local import and export regulations in the jurisdictions in which we operate; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business; our ability to make divestitures that provide business benefits; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors’ products; disruptions in the supply of or defects in raw materials, certain key components or other goods from our suppliers; production difficulties and product delivery delays or disruptions; our failure to comply with various federal, state and foreign regulations; changes in governmental regulation of our business or products; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our ability to utilize our net operating loss carryforwards and other tax attributes; fluctuations in our effective tax rates; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; volatility in the market price for our common shares; our dependence on significant cash flow to service our indebtedness and fund our operations; our ability to access cash and other assets of our subsidiaries; the influence of certain significant shareholders over our business; provisions of our articles of incorporation may delay or prevent a change in control; our significant existing indebtedness may limit our ability to engage in certain activities; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company’s operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 under the heading “Risk Factors.” In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements.

Accounting Period

GSI Group Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “our”) interim financial statements are prepared on a quarterly basis ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

Business Overview

We design, develop, manufacture and sell precision photonic and motion control components and subsystems to Original Equipment Manufacturers (“OEMs”) in the medical equipment and advanced industrial technology markets. We specialize in collaborating with OEM customers to adapt our component and subsystem technologies to deliver highly differentiated performance in their applications. On March 14, 2014, we acquired JADAK LLC, JADAK Technologies Inc. and Advance Data Capture Corporation (together, “JADAK”), a North Syracuse, New York-based provider of optical data collection and machine vision technologies to OEM medical device manufactures, for $93.5 million in cash, subject to certain customary working capital adjustments. The JADAK business line is reported as part of our Medical Technologies segment.

We operate in three reportable segments: Laser Products, Medical Technologies, and Precision Motion. The reportable segments and their principal activities consist of the following:

Strategy

Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:

•

broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions;

•

driving sustainable and predictable profitable growth by improving our business mix to increase medical sales, maintain industrial sales and reduce microelectronics sales as a percentage of total revenue;

•

upgrading our existing operations to drive profitable growth through our continuous improvement productivity and customer satisfaction programs, and through strategic divestitures and expanding our business through strategic acquisitions;

•

strengthening our strategic position in medical technologies, lasers, and precision motion technology platforms, through continual investment in differentiated new products and solutions;

•

leveraging our breath of product offerings with numerous shared customers to strengthen key customer relationships, increase our penetration of key customers, and drive increased sales; and

•

attracting, retaining, and developing talented and motivated employees.

Significant Events and Updates

Acquisition of JADAK On March 14, 2014, we completed the acquisition of JADAK, a North Syracuse, New York-based provider of optical data collection and machine vision technologies to OEM medical device manufacturers, for $93.5 million in cash, subject to customary closing working capital adjustments. The addition of the JADAK technology platforms expands our portfolio of highly-differentiated enabling technologies. JADAK provides data collection and machine vision solutions to its customers, which primarily consist of OEM medical device manufacturers. JADAK’s products are based on technologies that include barcode components and scanners, machine vision cameras, RFID technology, magnetic stripe readers, portable platforms and associated software. JADAK’s products are highly engineered, application-specific components that are developed and manufactured to meet the extremely high performance and quality requirements of major medical OEMs. JADAK’s products are used in medical equipment to increase safety and reduce medical errors by verifying patient identity, validating the specified therapy or function and enhancing the accuracy of the medical procedure.

Discontinued Operations

On January 31, 2014, we signed a letter of intent to sell certain assets and liabilities of our Scientific Lasers business, sold under the Continuum brand name, for $7.5 million in cash, subject to successful completion of due diligence by the potential acquirer, entry into a definitive agreement, and customary closing conditions. In addition, the agreement includes contingent consideration of up to $3.0 million based on the achievement of certain 2014 revenue targets. We expect to sell this business by the end of 2014. We began accounting for this business as discontinued operations in the first quarter of 2014 and all prior year income statement, balance sheet, and cash flow information presented has been revised to reflect the results of this business as discontinued operations.

Results of Operations for the Three Months Ended March 28, 2014 Compared with the Three Months Ended March 29, 2013

The following table sets forth our unaudited results of operations as a percentage of sales for the periods indicated:


	Three Months Ended
	March 28, 2014			March 29, 2013
Sales		100.0	%		100.0	%
Cost of sales		59.4			59.2

Gross profit		40.6			40.8

Operating expenses:
Research and development and engineering		7.4			7.7
Selling, general and administrative		24.9			24.9
Amortization of purchased intangible assets		2.2			3.0
Restructuring and acquisition related costs		1.0			3.3

Total operating expenses		35.5			38.9

Income from operations		5.1			1.9
Interest income (expense), net		(1.0	)		(1.2	)
Foreign exchange transaction gains (losses), net		(0.0	)		1.6
Other income (expense), net		0.7			0.5

Income from continuing operations before income taxes		4.8			2.8
Income tax provision		1.2			0.5

Income from continuing operations		3.6			2.3
Income (loss) from discontinued operations, net of tax		(2.4	)		0.5

Consolidated net income		1.2			2.8
Less: Net income attributable to noncontrolling interest		0.0			0.0

Net income attributable to GSI Group Inc.		1.2	%		2.8	%

Overview of Financial Results

Total sales for the three months ended March 28, 2014 increased 5.4% compared to the three months ended March 29, 2013. Our JADAK acquisition accounted for a 2.9% increase year over year. In addition, foreign currency exchange rates favorably impacted our sales by 1.1% during the three months ended March 28, 2014. Excluding the impact of the JADAK acquisition and changes in foreign exchange rates, total sales for the three months ended March 28, 2014 increased 1.4% compared to the prior year comparable period. Our organic sales growth is summarized as follows:


	Three Months Ended Percentage Change
Reported growth		5.4	%
Less: Change attributable to JADAK acquisition		2.9	%
Less: Change due to foreign currency		1.1	%

Organic growth		1.4	%

The organic growth in our sales for the three months ended March 28, 2014 compared to the prior year comparable period was attributable to growth in all Laser Products and Precision Motion product lines. The increase in sales of Lasers Products segment was primarily attributable to an increase in sales volume across our product portfolio as a result of an increase in capital spending in the industrial and medical markets.

The growth in our Precision Motion segment was also driven by increases in sales volumes across our product portfolio, as a result of increases in capital spending in industrial and medical markets, and a new design win with a large Medical OEM.

The decrease in sales in our Medical Technologies segment was driven by a decline in sales in our visualization solutions and imaging informatics product lines as we experienced lower sales volume related to dual sourcing at an OEM customer that began in 2013.

From an end market standpoint, we continued to focus on our strategic growth investments, increasing our sales attributable to advanced industrial markets and medical markets. The acquisition of JADAK in March 2014 was aligned with this strategy and drove a significant increase in our end market sales into the medical markets. We believe this strategy will help drive more predictable and sustainable sales growth over the long term and consequently increase shareholder value.

Income from operations for the three months ended March 28, 2014 increased $2.6 million, or 178.2%, to $4.1 million from the prior year comparable period. This increase was primarily attributable to an increase in gross profit of $1.5 million as a result of higher sales, a $1.6 million reduction in restructuring and acquisition related costs as a result of the completion of various restructuring programs, and a $0.5 million decrease in amortization of intangibles and acquisition fair value adjustments compared to the three months ended March 29, 2013. These were partially offset by an increase in selling, general and administrative (“SG&A”) expenses of $0.9 million, which was related to investments the Company is making to accelerate our progress on our strategic objectives. Diluted earnings per share (“Diluted EPS”) from continuing operations of $0.08 in the three months ended March 28, 2014 increased $0.03 from the prior year comparable period primarily due to increase in income from operations, offset by a foreign currency loss in the current period compared to foreign currency gains in the prior year comparable period.

Sales

The following table sets forth sales by segment for the periods noted (dollars in thousands):


	Three Months Ended
	March 28, 2014		March 29, 2013		Increase (Decrease)			Percentage Change
Laser Products	$	41,860	$	38,164	$	3,696			9.7	%
Medical Technologies		22,367		23,557		(1,190	)		(5.1	%)
Precision Motion		14,906		13,350		1,556			11.7	%

Total	$	79,133	$	75,071	$	4,062			5.4	%

Laser Products

Laser Products segment sales for the three months ended March 28, 2014 increased by $3.7 million, or 9.7%, compared to the prior year comparable period. We experienced revenue growth in all product lines, primarily attributable to an increase in capital spending in the industrial and medical markets.

Medical Technologies

Medical Technologies segment sales for the three months ended March 28, 2014 decreased by $1.2 million, or 5.1%, compared to the prior year comparable period. The JADAK acquisition accounted for $2.2 million of the increase in sales year over year. The acquisition of JADAK partially offset the impact of a significant decline in sales volume in our visualization solutions and imaging informatics products related to dual sourcing at an OEM customer that began in 2013.

Precision Motion

Precision Motion segment sales for the three months ended March 28, 2014 increased by $1.6 million, or 11.7%, compared to the prior year comparable period. This increase was driven by increases in sales volumes across our product portfolio, as a result of increases in capital spending in industrial and medical markets, and further compounded by a new design win with a large Medical OEM.

Gross Profit and Gross Profit Margin

The following table sets forth the gross profit and gross profit margin for each of our reportable segments for the periods noted (dollars in thousands):


	Three Months Ended
	March 28, 2014			March 29, 2013
Gross profit:
Laser Products	$	17,013		$	15,507
Medical Technologies		8,889			9,463
Precision Motion		6,416			5,768
Corporate		(213	)		(107	)

Total	$	32,105		$	30,631

Gross profit margin:
Laser Products		40.6	%		40.6	%
Medical Technologies		39.7	%		40.2	%
Precision Motion		43.0	%		43.2	%
Total		40.6	%		40.8	%

Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, headcount, inventory obsolescence and warranty expenses.

Laser Products

Laser Products segment gross profit for the three months ended March 28, 2014 increased $1.5 million, or 9.7%, compared to the prior year comparable period primarily due to Laser Products sales growth. Gross profit margin of our Laser Products remained consistent year over year as a result of our continuous improvement initiatives to lower our production costs in 2014, offset by sales mix.

Medical Technologies

Medical Technologies segment gross profit for the three months ended March 28, 2014 decreased $0.6 million, or 6.1%, compared to the prior year comparable period. The JADAK acquisition accounted for $0.8 million increase in gross profit year over year. Excluding the impact of JADAK, gross profit decreased by $1.4 million primarily as a result of a decline in sales volume in our visualization solutions and imaging informatics product lines. Medical Technologies segment gross profit margin was 39.7% for the three months ended March 28, 2014, compared with a gross profit margin of 40.2% for the prior year comparable period. The 0.5 percentage point decrease in gross profit margin was primarily related to the JADAK acquisition. Gross profit margin excluding JADAK is consistent with the prior year comparable period. Included in gross profit for the three months ended March 28, 2014 and March 29, 2013 was the amortization of our inventory fair value step-up and amortization of developed technology of $0.6 million and $0.9 million, respectively.

Precision Motion

Precision Motion segment gross profit for the three months ended March 28, 2014 increased $0.6 million, or 11.2%, compared to the prior year comparable period. The increase was primarily due to an increase in sales volume. Precision Motion segment gross profit margin remained consistent with the prior year comparable period.

Operating Expenses

The following table sets forth operating expenses for the periods noted (in thousands):


	Three Months Ended
	March 28, 2014		March 29, 2013
Research and development and engineering	$	5,857	$	5,816
Selling, general and administrative		19,618		18,689
Amortization of purchased intangible assets		1,744		2,236
Restructuring and acquisition related costs		818		2,428

Total	$	28,037	$	29,169

Research and Development and Engineering Expenses

Research and development and engineering (“R&D”) expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects. R&D expenses were $5.9 million, or 7.4% of sales, during the three months ended March 28, 2014, compared with $5.8 million, or 7.7% of sales, during the prior year comparable period. The increase in R&D expenses as a result of the JADAK acquisition was largely offset by a decrease in R&D project spending primarily due to the timing of such spending.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, and executive management. SG&A expenses were $19.6 million, or 24.9% of sales, during the three months ended March 28, 2014, compared with $18.7 million, or 24.9% of sales, during the prior year comparable period. SG&A expenses increased in terms of total dollars due to the addition of JADAK’s SG&A expenses, and an increase in employee compensation expense, as a result of investments the Company is making to accelerate our progress on our strategic objectives.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets, excluding the amortization for developed technologies included in cost of sales, was $1.7 million, or 2.2% of sales, during the three months ended March 28, 2014, compared with $2.2 million, or 3.0% of sales, during the prior year comparable period. The decrease, in terms of total dollars and as a percentage of sales, was related to the decrease in amortization of acquired intangible assets as part of the NDS acquisition, partially offset by the amortization of acquired intangible assets as a result of the JADAK acquisition.

Restructuring and Acquisition Related Costs

We recorded restructuring and acquisition related costs of $0.8 million during the three months ended March 28, 2014, compared with $2.4 million during the prior year comparable period. During the three months ended March 28, 2014, we recognized acquisition related costs associated with our JADAK acquisition of $0.8 million. During the three months ended March 29, 2013, we recognized $1.4 million restructuring expenses and $1.0 million acquisition related costs associated with our NDS acquisition.

Operating Income by Segment

The following table sets forth operating income by segment for the periods noted (in thousands):


	Three Months Ended
	March 28, 2014			March 29, 2013
Operating Income
Laser Products	$	7,124		$	4,693
Medical Technologies		(117	)		1,445
Precision Motion		2,643			2,014
Corporate, shared services and unallocated		(5,582	)		(6,690	)

Total	$	4,068		$	1,462

Laser Products

Laser Products operating income for the three months ended March 28, 2014 increased by $2.4 million, or 51.8%, primarily due to an increase in gross profit of $1.5 million as a result of increased sales and a decrease in restructuring and acquisition related costs. The decrease in restructuring and acquisition related costs primarily relates to the relocation of our laser scanners product line in early 2013.

Medical Technologies

Medical Technologies operating income for the three months ended March 28, 2014 decreased by $1.6 million, or 108.1%, compared to the prior year comparable period. The decrease was primarily due to a decrease in gross profit of our visualization solutions and imaging informatics products as well as the timing of the NDS acquisition.

Precision Motion

Precision Motion operating income for the three months ended March 28, 2014 increased by $0.6 million, or 31.2%, compared to the prior year comparable period. The increase was primarily due to an increase in gross profit across our product lines.

Corporate, Shared Services and Unallocated

Corporate, shared services and unallocated costs primarily represent costs of corporate functions that are not allocated to the operating segments, including certain restructuring and all acquisition related costs. These costs for the three months ended March 28, 2014 decreased compared to the prior year comparable period due to lower restructuring costs and savings from prior restructurings. The Company recorded restructuring and other costs of $0.7 million during the three months ended March 28, 2014, compared to $1.2 million in the prior year comparable period.

Other Income and Expense Items

The following table sets forth other income and expense items for the periods noted (dollars in thousands):


	Three Months Ended
	March 28, 2014			March 29, 2013
Interest income (expense), net	$	(837	)	$	(898	)
Foreign exchange transaction gains (losses), net		(19	)		1,219
Other income (expense), net		581			369

Total	$	(275	)	$	690

Interest Income (Expense), Net

Interest income (expense) remained relatively consistent to the prior year comparable period. The weighted average interest rate on the Senior Credit Facilities was 3.42% and 2.89% during the three months ended March 28, 2014 and March 29, 2013, respectively. Included in net interest expense was non-cash interest expense of $0.2 million for both the current year and prior year comparable period, related to amortization of deferred financing costs on our debt.

Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses), net, were less than ($0.1) million net losses for the three months ended March 28, 2014, compared to $1.2 million net gains for the prior year comparable period due to changes in the U.S. Dollar against the British Pound, Yen and Euro. The U.S. Dollar was relatively flat for the three months ended March 28, 2014.

Other Income (Expense), Net

Other income (expense), net, was $0.6 million for the three months ended March 28, 2014, compared to $0.4 million for the prior year comparable period. Increase in other income (expense), net is primarily related to the increase in the ownership percentage for our equity investment in Laser Quantum.

Income Taxes

The effective tax rate for the three months ended March 28, 2014 was 24.7% compared to 18.7% for the prior year comparable period. The effective tax rates for the three months ended March 28, 2014 and March 29, 2013 differ from the Canadian statutory rate of 27.0% and 25%, respectively, primarily due to income earned in jurisdictions with varying tax rates and losses in jurisdictions with a valuation allowance which are not benefited in the income tax provision and the impact of discrete items reducing the tax provision for the period. For the three months ended March 28, 2014, we recognized $0.7 million net tax benefit associated with uncertain tax position upon expiration of statutes of limitations. In the three months ended March 29, 2013, we recorded a $0.7 million favorable impact from a correction of a prior period error.

Discontinued Operations

Income (loss) from discontinued operations, net of tax, was ($1.9) million and $0.4 million during the three months ended March 28, 2014 and March 29, 2013, respectively. The substantial decrease compared with the prior year comparable period is primarily due to the sale of the Semiconductor Systems business in May 2013 and $1.6 million pre-tax fair value write-down of the Scientific Lasers business to its estimated fair value less cost to sell. Excluding the impact of the fair value write-down, the pre-tax loss related to the Scientific Lasers business was $1.2 million during the three months ended March 28, 2014.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of our debt and related interest expense. Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs for the foreseeable future, including at least the next 12 months. The availability of borrowings under our revolving credit facility provides an additional potential source of liquidity should it be required. In addition, we may seek to raise additional capital, which could be in the form of bonds, convertible debt or equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Amended and Restated Credit Agreement.

Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, and market changes in general. See “Risks Relating to Our Common Shares and Our Capital Structure” included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. We cannot assure you that applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary.

As of March 28, 2014, $17.4 million of our $31.7 million cash and cash equivalents was held by our subsidiaries outside of Canada and the United States. Generally, our intent is to use cash held in these foreign subsidiaries to fund our local operations or acquisitions. However, in certain instances, we have identified excess cash for which we may repatriate and we have established deferred tax liabilities for the expected tax cost. Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries.

In October 2013, the Company’s Board of Directors authorized a share repurchase plan under which the Company may repurchase outstanding shares of the Company’s common stock up to an aggregate amount of $10.0 million. The shares may be repurchased from time to time, at the Company’s discretion, based on ongoing assessment of the capital needs of the business, the market price of the Company’s common stock, and general market conditions. Shares may also be repurchased through an accelerated stock purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common stock to be purchased when the Company would otherwise be prohibited from doing so under insider trading laws. The share repurchase plan does not obligate the Company to acquire any particular amount of common stock. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. The Company expects to fund the share repurchase through cash on hand and future cash flow from operations. As of December 31, 2013, the Company repurchased 50 thousand shares of its common stock for an aggregate amount of $0.5 million on the open market for a weighted average price of $10.49 per share. There have been no share repurchases to date in 2014.

Amended and Restated Credit Agreement

In December 2012, we entered into an amended and restated senior secured credit agreement (the “Amended and Restated Credit Agreement”), consisting of a $50.0 million, 5-year term loan facility and a $75.0 million, 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in December 2017. On February 10, 2014, we entered into a fourth amendment to the Amended and Restated Credit Agreement (the “Fourth Amendment”). The Fourth Amendment increased the revolving credit facility commitment under the Amended and Restated Credit Agreement by $100 million from $75 million to $175 million and resets the accordion feature to $100 million for future expansion. Additionally, the Fourth Amendment increased the maximum permitted consolidated leverage ratio financial covenant from 2.75 to 3.00.

As of March 28, 2014, we had outstanding term loans of $40.6 million and revolving loans of $96.0 million outstanding under the Senior Credit Facilities.

The Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum allowed leverage ratio, and a minimum required fixed charge coverage ratio (as defined in the Amended and Restated Credit Agreement). The following table summarizes these financial covenant requirements and our compliance as of March 28, 2014:


	Requirement		Actual
Maximum consolidated leverage ratio		3.00		2.24
Minimum consolidated fixed charge coverage ratio		1.50		4.92

Cash Flows for the Three Months Ended March 28, 2014 and March 29, 2013

The following table summarizes our cash and cash equivalent balances, cash flows from continuing operations and unused and available funds under our revolving credit facility for the periods indicated (dollars in thousands):


	Three Months Ended
	March 28, 2014			March 29, 2013
Net cash provided by operating activities of continuing operations	$	2,796		$	6,280
Net cash used in investing activities of continuing operations	$	(93,294	)	$	(84,258	)
Net cash provided by financing activities of continuing operations	$	63,191		$	52,108

	March 28, 2014			December 31, 2013
Cash and cash equivalents	$	31,741		$	60,980
Unused and available funds under revolving credit facility	$	79,000		$	46,000

Operating Cash Flows

Cash provided by continuing operations was $2.8 million for the three months ended March 28, 2014, compared to $6.3 million for the prior year comparable period. Cash provided by continuing operations for the three months ended March 28, 2014 decreased $3.5 million from the prior year comparable period due to a $2.6 million decrease in cash flow related to working capital. In the three months ended March 28, 2014, we had a net cash outflow of $2.5 million related to the timing of employment compensation payments, as well as cash payments associated with the Medical Device Tax, higher income tax payments, and vendor payments. In the three months ended March 29, 2013, we had a net cash inflow of $2.3 million from increases in accounts payable, accrued expenses, income taxes payable and other current liabilities related to timing.

Cash used in operating activities of discontinued operations was $1.3 million for the three months ended March 28, 2014, compared to $1.7 million from the prior year comparable period. Cash used in operations of discontinued operations for the three months ended March 28, 2014, was primarily due to net losses from our Scientific Lasers business.

Investing Cash Flows

Net cash used in investing activities of our continuing operations was $93.3 million during the three months ended March 28, 2014, compared to $84.3 million used during the three months ended March 29, 2013. Cash used in investing activities for the three months ended March 28, 2014 was primarily due to cash consideration paid for the JADAK acquisition in March 2014 and $1.0 million in capital expenditures.

Cash outflows from investing activities of continuing operations during the three months ended March 29, 2013 were primarily related to cash consideration paid for the NDS acquisition in January 2013 and $1.6 million in capital expenditures.

Cash used in investing activities of discontinued operations was $0.6 million for the three months ended March 28, 2014, compared to $0.1 million from the prior year comparable period. Cash used in investing activities of discontinued operations for the three months ended March 28, 2014 was primarily related to purchases of property, plant and equipment of $0.6 million.

Financing Cash Flows

Cash provided by financing activities of continuing operations was $63.2 million during the three months ended March 28, 2014, consisting of $70.0 million of borrowings under our revolving credit facility to fund the JADAK acquisition, offset by $1.9 million of contractual term loan payments, $3.0 million of optional repayments of borrowings under our revolving credit facility and $0.7 million fees paid in connection with the Fourth Amendment. The Company also made payroll tax payments on stock-based awards of $1.4 million.

Cash used in financing activities of continuing operations was $52.1 million during the three months ended March 29, 2013, consisting of $60.0 million of borrowings under our revolving credit facility to fund the NDS acquisition, offset by contractual repayments on our term loan of $1.9 million, optional repayments of borrowings under our revolving credit facility of $5.0 million and $0.1 million bank fees. The Company also made payroll tax payments on stock-based awards of $0.6 million in the three months ended March 29, 2013.

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

Our contractual obligations primarily consist of the principal and interest associated with our debt, operating and capital leases, purchase commitments and pension obligations. Such contractual obligations are described in our Management’s Discussion and

Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Excluding leases and purchase commitments in the ordinary course of business acquired as a result of the JADAK acquisition and the $70.0 million drawdown on our credit facility to fund the JADAK acquisition, through March 28, 2014, we have not entered into any material new or modified contractual obligations since the end of the fiscal year ended December 31, 2013. The following table summarizes contractual obligations at March 28, 2014 related to JADAK (in thousands):


Contractual Obligations	Total		2014 (remainder of year)		2015-2016		2017-2018		Thereafter
Leases (1)	$	12,666	$	550	$	1,621	$	1,633	$	8,862
Purchase commitments (2)		7,165		6,758		407		—		—

Total	$	19,831	$	7,308	$	2,028	$	1,633	$	8,862

(1)	These amounts primarily represent the gross amounts due for facilities that are leased.

(2)	Purchase commitments represent unconditional purchase obligations as of March 28, 2014.

Off-Balance Sheet Arrangements

The Company has an equity method investment in a privately held company located in the United Kingdom, Laser Quantum Ltd. Group (“Laser Quantum”). The Company has an ownership interest of approximately 41% in the Laser Quantum Ltd. Group business. We continue to recognize our share of the earnings of this entity under the equity method.

Through March 28, 2014, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.

Critical Accounting Policies and Estimates

The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes to our critical accounting policies through March 28, 2014 from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Recent Accounting Pronouncements

See Note 1 to Consolidated Financial Statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk exposures are foreign currency exchange rate fluctuation and interest rate sensitivity. During the three months ended March 28, 2014, there have been no material changes to the information included under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of March 28, 2014, the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 28, 2014.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the fiscal quarter ended March 28, 2014 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

The Company’s risk factors are described in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes in the risks affecting the Company since the filing of such Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

List of Exhibits

See the Company’s SEC filings on Edgar at: http://www.sec.gov/ for all Exhibits.

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed

Herewith

2.1

Equity Purchase Agreement dated March 14, 2014, between by and among GSI Group Inc., GSI Group Corporation, JADAK, LLC, JADAK Technologies, Inc., Advanced Data Capture Corporation.

8-K

10.1

02/18/14

3.1

Certificate and Articles of Continuance of the Registrant, dated March 22, 1999.

S-3

333-180098

3.1

03/14/12

3.2

Articles of Amendment of the Registrant, dated May 26, 2005.

S-3

333-180098

3.1

03/14/12

3.3

By-Laws of the Registrant, as amended

10-Q

000-25705

3.2

04/13/10

3.4

Articles of Reorganization of the Registrant, dated July 23, 2010.

8-K

000-25705

3.1

07/23/10

3.5

Articles of Amendment of the Registrant, dated December 29, 2010.

8-K

000-25705

3.1

12/29/10

10.1

Fourth Amendment to Amended and Restated Credit Agreement, dated as of February 10, 2014, by and among GSI Group Corporation, NDS Surgical Imaging, LLC, GSI Group Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto.

8-K

001-35083

10.1

02/14/14

10.2

Restricted Stock Unit Inducement Award Grant Notice.

S-8

333-194557

99.1

03/14/14

10.3

Lease agreement, dated as of May 31, 2013, by and between JADAK, LLC and Hancock Park Development, LLC.

31.1

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document.

101.DEF

XBRL Definition Linkbase Document.

101.LAB

XBRL Labels Linkbase Document.

101.PRE

XBRL Presentation Linkbase Document.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at March 28, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the three months ended March 28, 2014 and March 29, 2013, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 28, 2014 and March 29, 2013, (iv) Consolidated Statements of Cash Flows for the three months ended March 28, 2014 and March 29, 2013, and (v) Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GSI Group Inc. (Registrant)


Name	Title	Date

/s/ John A. Roush	Director, Chief Executive Officer	May 6, 2014
John A. Roush

/s/ Robert J. Buckley	Chief Financial Officer	May 6, 2014
Robert J. Buckley

EXHIBIT INDEX

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed

Herewith

2.1

Equity Purchase Agreement dated March 14, 2014, between by and among GSI Group Inc., GSI Group Corporation, JADAK, LLC, JADAK Technologies, Inc., Advanced Data Capture Corporation.

8-K

10.1

02/18/14

3.1

Certificate and Articles of Continuance of the Registrant, dated March 22, 1999.

S-3

333-180098

3.1

03/14/12

3.2

Articles of Amendment of the Registrant, dated May 26, 2005.

S-3

333-180098

3.1

03/14/12

3.3

By-Laws of the Registrant, as amended

10-Q

000-25705

3.2

04/13/10

3.4

Articles of Reorganization of the Registrant, dated July 23, 2010.

8-K

000-25705

3.1

07/23/10

3.5

Articles of Amendment of the Registrant, dated December 29, 2010.

8-K

000-25705

3.1

12/29/10

10.1

8-K

001-35083

10.1

02/14/14

10.2

Restricted Stock Unit Inducement Award Grant Notice.

S-8

333-194557

99.1

03/14/14

10.3

Lease agreement, dated as of May 31, 2013, by and between JADAK, LLC and Hancock Park Development, LLC.

31.1

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document.

101.DEF

XBRL Definition Linkbase Document.

101.LAB

XBRL Labels Linkbase Document.

101.PRE

XBRL Presentation Linkbase Document.

Exhibit 10.3

STANDARD PROPERTY LEASE


Landlord:		HANCOCK PARK DEVELOPMENT, LLC

Tenant:		JADAK, LLC

Building Location:		William Barry Boulevard Lot No. 1B Section A – Hancock Park

		Town of Cicero, New York

TABLE OF CONTENTS


ARTICLE 1 - Premises, Construction and Use of Premises			4
1.01 - Premises			4
1.02 - Construction of Premises			4
1.03 - Use of the Premises			4

ARTICLE 2 - Term of Lease			5
2.01 - Initial Term			5
2.02 - Construction Not Completed			5
2.03 - Renewal Term(s)			6
2.04 - Surrender of Premises			6

ARTICLE 3 - Rent			6
3.01 - Rent			6
3.02 - Payment of Rent			7
3.03 - Absolute Net Lease			8
3.04 - Payment of Additional Rent			8
3.05 - Past Due Rent			8
3.06 - Lease Year			9

ARTICLE 4 - Utilities			9
4.01 - Utilities			9

ARTICLE 5 - Insurance and Indemnification			9
5.01 - Tenant’s Insurance			9
5.02 - Landlord’s Insurance			10
5.03 - Subrogation			11
5.04 - Tenant’s Payment of Insurance Premiums			11
5.05 - Increase in Fire Insurance Premiums			12
5.06 - Indemnification and Hold Harmless			12

ARTICLE 6 - Taxes, Parking and Operating Expenses			13
6.01 - Payment of Taxes, Assessments, Etc.			13
6.02 – Parking			13
6.03 - Operating Expenses			13

ARTICLE 7 - Repairs and Maintenance			15
7.01 - Repairs and Maintenance of the Premises by Tenant			15
7.02 - Repairs by Landlord			15
7.03 - Standard for Repairs			15
7.04 – Landlord Warranty			16

ARTICLE 8 - Alterations and Improvements			16
8.01 - Alterations and Improvements			16

ARTICLE 9 - Damage by Fire, Etc.			16
9.01 - Restoration of Premises			16
9.02 - Restoration During Last Two Years			17

ARTICLE 10 - Eminent Domain			18
10.01 - Eminent Domain			18
10.02 - Termination of Lease			18
10.03 - Abatement in Event of Partial Taking			18
10.04 - Rights of Tenant to Award			18

ARTICLE 11 - Bankruptcy and Default Provisions			19
11.01 - Conditional Limitations			19


11.02 - Landlord’s Remedies			19
11.03 - Landlord’s Self-Help			21

ARTICLE 12 - Mechanic’s Liens			21
12.01 - Mechanic’s Liens			21

ARTICLE 13 - Mortgages, Assignments, Subleases and Transfers of Tenant’s Interest			21
13.01 - Limitation of Tenant’s Rights			21
13.02 - Effect of Landlord’s Consent			22

ARTICLE 14 - Compliance with Governmental Orders, Etc.			22
14.01 - Tenant to Comply			22
14.02 - Failure to Comply			23
14.03 - ADA Compliance			23

ARTICLE 15 - Subordination to Mortgages			23
15.01 - Subordination to Mortgages			23

ARTICLE 16 - Inspection of Premises			23
16.01 - Inspection of Premises by Landlord			23

ARTICLE 17 - Notice and Certificates			24
17.01 - Notices and Certificates			24
17.02 - Certificates			24

ARTICLE 18 - Covenant of Quiet Enjoyment			24
18.01 - Covenant of Quiet Enjoyment			24

ARTICLE 19 - Miscellaneous Provisions			25
19.01 - Holdover			25
19.02 - Limitation on Landlord’s Personal Liability			25
19.03 - Force Majeure			26
19.04 - Attornment by Tenant			26
19.05 - Landlord May Pay Tenant’s Obligations			26
19.06 - Indemnification by Tenant			26
19.07 - Effect of Captions			26
19.08 - Tenant Authorized to Do Business in New York			26
19.09 - Execution in Counterparts			27
19.10 - Memorandum of Lease			27
19.11 - Law Governing Jurisdiction and Venue, Effect and Gender			27
19.12 - Complete Agreement			27
19.13 - Loss of Property and Water Damage			27
19.14 - Security Agreement			27
19.15 - No Representations by Landlord			27
19.16 - Lease Binding			27
19.17 - Amendments			28
19.18 - Arbitration			28
19.19 - Rights of Parties			28
19.20 - Invalidity of Particular Provisions			28
19.21 - Execution of Lease by Landlord			28
19.22 - Relationship of the Parties			28
19.23 - Assignment of Rents			29
19.24 - Environmental Covenants			29
19.25 - Tenant’s Right of First Refusal			30
19.26 - INTENTIONALLY DELETED			30
19.27 - Tenant’s Signage on the Building			30
19.28 - INTENTIONALLY DELETED			30
19.29 - Brokerage			30

STANDARD PROPERTY LEASE

AGREEMENT made this 31st day of May, 2013 by and between the following parties:

Landlord :

HANCOCK PARK DEVELOPMENT, LLC , a New York limited liability company having its office at 225 Greenfield Parkway, Suite 202, Liverpool, New York 13088

Tenant :

JADAK, LLC , a New York Limited Liability Company having a principal office at 7279 William Barry Boulevard, North Syracuse, New York 13212

W I T N E S S E T H :

ARTICLE 1

Premises, Construction and Use of Premises

1.01 - Premises

Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, that certain parcel of land containing approximately 6.725 acres (the “Land”) and approximately 55,000 rentable square feet of space in a one story, single tenant building (the “Building”), 15,000 rentable square feet of which (the “Original Premises”) is presently used and occupied by Tenant pursuant to the terms of that certain Standard Property Lease dated December 21, 2006 between Landlord and Tenant (the “2006 Lease”), and 40,000 rentable square feet of which (the “Expansion Premises”) to be constructed and owned by Landlord on the Land owned by Landlord located in the Hancock Air Park (the “Park”) on Taft Road in the Town of Cicero, County of Onondaga and State of New York as more fully described in the legal description attached hereto and made a part hereof as Exhibit “A” and as shown on the site plan annexed hereto and made a part hereof as Exhibit “B”, subject to liens, encumbrances, easements, covenants and restrictions of record, (the Original Premises and the Expansion Premises are hereinafter referred to together as the “Premises”).

1.02 - Construction of Premises

(a) Landlord shall, at its sole cost and expense (except as otherwise stated in this Lease), (i) construct the Expansion Premises for Tenant’s use and occupancy using new construction materials in accordance with the Base Building Specifications identified on Exhibit “C” attached hereto and made a part hereof, and (ii) renovate the Original Premises in accordance with the plan therefor attached hereto as Exhibit “C-1” (collectively, “Landlord’s Work”).

(b) Tenant shall, at its sole cost and expense, improve the Expansion Premises and the Original Premises accordance with the plans and specifications identified on Exhibit “D” attached hereto and made a part hereof (“Tenant’s Work”).

1.03 - Use of the Premises

The Premises shall be used and occupied as a general office and light assembly facility and for any other lawful purpose. Tenant agrees that it will not knowingly conduct or permit to be conducted on the Premises any unlawful act. Tenant agrees to comply with the “Protective Covenants and Restrictions” for the Hancock Air Park attached hereto and made a part hereof as Exhibit E-1, and with those other rules and regulations set forth in Exhibit E-2, and, provided

Tenant has prior written notice, with such reasonable modifications thereof and additions thereto as Landlord may hereafter from time to time make for the Building, the Land on which the Building is located, the parking areas and the common areas within the Park, if any.

ARTICLE 2

Term of Lease

2.01 - Initial Term

The initial term of this Lease shall be fifteen (15) years commencing on the Term Commencement Date as defined in paragraph 2.02 hereof and ending fifteen (15) years after the Term Commencement Date. If the initial term commences on a date other than the first day of a month, the initial term shall expire at the end of the day fifteen (15) years and zero (0) months from the first day of the month following the month in which the initial term commenced. If the initial term commences on the first day of a month, the initial term shall expire at the end of the day fifteen (15) years and zero (0) months from the last day of the preceding month.

2.02 - Construction Not Completed

If construction of the Expansion Premises and the renovation of the Original Premises is not completed on the date hereof, the initial term of this Lease shall commence on the date which is first day of the calendar month following the later to occur of (i) the date of which the Expansion Premises are Ready for Occupancy (as defined below), and (ii) the date on which the Landlord’s Work with respect to the Original Premises is completed; provided however, that if Tenant takes possession of the Premises earlier than the date so determined, the term of this Lease shall commence upon the date Tenant first conducts business in the Premises (the date as so determined is hereinafter referred to as the “Term Commencement Date”).

The parties agree to execute and deliver a written Stipulation of Term of Lease in the form attached hereto and made a part hereof as Exhibit “F” to be prepared by Landlord expressing the commencement and termination dates of the initial term hereof within thirty (30) days after such dates have been determined, it being hereby agreed that the expiration date of this Lease shall always be the last day of a calendar month.

The Premises shall be deemed “Ready for Occupancy” on the date that there is delivered to Tenant a statement in writing by Landlord certifying that the following conditions have been fulfilled:

(a) That the Landlord has substantially completed all of Landlord’s Work described in Exhibit “C” hereto annexed. Substantially completed shall mean that Tenant may commence the installation of its fixtures and equipment without significant interference from Landlord’s workmen and that facilities shall have been installed in the Premises to insure reasonable security of said fixtures and equipment.

(b) That adequate facilities exist for safe and convenient access to and egress from the Expansion Premises by persons for the purposes of readying the Expansion Premises for the conduct of Tenant’s business therein.

(c) That a Certificate of Occupancy or Temporary Certificate of Occupancy has been issued by the building inspector having jurisdiction for the Premises allowing occupancy of the Expansion Premises; provided, however that this condition shall be deemed satisfied if the Certificate is not available due solely to Tenant’s failure to complete Tenant’s Work in the Expansion Premises, if any.

Landlord agrees that Tenant shall have the right to enter the Expansion Premises at least thirty (30) days prior to the date on which such Expansion Premises are Ready for Occupancy, at its sole risk, cost and expense, to install its telecommunications, computer systems, furniture systems and otherwise prepare the Expansion Premises for the conduct of Tenant’s business therein.

Notwithstanding anything to the contrary herein, Tenant shall have the right at any time up until the date that is sixty (60) days after the Term Commencement Date to notify Landlord in writing of “punch list” items relating to Landlord’s Work that require correction. Landlord will correct such items to the reasonable satisfaction of Tenant within sixty (60) days from its receipt of any such notice.

2.03 - Renewal Term(s)

Tenant is hereby granted the option of extending the initial term of this Lease for two (2) consecutive periods of five (5) years each (each such five (5) year period being herein referred to as a “renewal term”) upon the condition that, at the date of Tenant’s exercise of its option with respect to each such renewal term, and at the date of commencement of each such renewal term, there is no default by Tenant in the performance of its obligations under this Lease as to which a notice of default has been given to Tenant and which is then continuing. In the event that Tenant desires to exercise its option to so extend the term of this Lease, written notice of Tenant’s exercise of its option shall be given to the Landlord at least six (6) months prior to that date upon which, but for the exercise of said option, the term of this Lease would otherwise expire. Each such renewal term shall be upon the same terms and conditions set forth in this Lease, except that there shall be no option to extend the term of this Lease beyond the second (2nd) renewal term herein set forth and except that the annual Base Rent for each such renewal term shall be as set forth in paragraphs 3.01(g) and 3.01(h) hereof.

2.04 - Surrender of Premises

At the expiration or earlier termination of the term of this Lease, Tenant shall surrender the Premises in good condition and broom clean, reasonable wear and tear and damage by fire or casualty excepted. All leasehold improvements shall at Landlord’s option remain in the Premises including, but without limitation, carpeting, wall covering, heating, ventilating and air-conditioning equipment, and lighting and plumbing fixtures, but not including Tenant’s furniture systems, computer and telecommunications equipment (to the extent removable without causing material damage to the Premises), moveable trade fixtures and equipment.

ARTICLE 3

Rent

3.01 - Rent

Tenant shall pay to Landlord at the address of Landlord set forth at the beginning of this Lease, or at such other place that may be designated by Landlord, without any offset or defense and without any prior demand therefor, as Base Rent during the term of this Lease:

(a) commencing on the date on which the Expansion Premises are Ready for Occupancy (as defined in paragraph 2.02 above) and continuing thereafter until the Landlord’s Work with respect to the Original Premises is completed, the sum of Five Hundred Eighty-One Thousand Six Hundred Twenty-Five and 00/100 Dollars ($581,625.00) per year (being 75% of the annual rate of $14.10 per rentable square foot) payable in equal consecutive monthly installments of Forty-Eight Thousand Four Hundred Sixty-Eight and 75/100 Dollars ($48,468.75) each; and

(b) commencing on the Term Commencement Date and continuing thereafter until the last day of the thirty-sixth (36 ^th ) month of the term, the sum of Seven Hundred Seventy-Five Thousand Five Hundred and 00/100 Dollars ($775,500.00) per year (being at the annual rate of $14.10 per rentable square foot) payable in equal consecutive monthly installments of Sixty-Four Thousand Six Hundred Twenty-Five and 00/100 Dollars ($64,625.00) each;

(c) commencing on the first day of the thirty-seventh (37 ^th ) month of the initial term and continuing thereafter through the end of the sixtieth (60 ^th ) month of the initial term, the sum of Eight Hundred Thirty-Three Thousand Two Hundred Fifty and 00/100 Dollars ($833,250.00) per year (being at the annual rate of $15.15 per rentable square foot) payable in equal consecutive monthly installments of Sixty-Nine Thousand Four Hundred Thirty-Seven and 50/100 Dollars ($69,437.50) each;

(d) commencing on the first day of the sixty-first (61 ^st ) month of the initial term and continuing thereafter through the end of the one hundred eighth (108 ^th ) month of th initial term, the sum of Eight Hundred Eighty Thousand and 00/100 Dollars ($880,000.00) per year (being at the annual rate of $16.00 per rentable square foot) payable in equal consecutive monthly installments of Seventy-Three Thousand Three Hundred Thirty-Three and 33/100 Dollars ($73,333.33) each;

(e) commencing on the first day of the one hundred ninth (109 ^st ) month of the initial term and continuing thereafter through the end of the one hundred forty-fourth (144 ^th ) month of the initial term, the sum of Nine Hundred Twenty-Six Thousand Seven Hundred Fifty and 00/100 Dollars ($926,750.00) per year (being at the annual rate of $16.85 per rentable square foot) payable in equal consecutive monthly installments of Seventy-Seven Thousand Two Hundred Twenty-Nine and 17/100 Dollars ($77,229.17) each;

(f) commencing on the first day of the one hundred forty-fifth (145 ^th ) month of the initial term and continuing thereafter through the end of the one hundred eightieth (180 ^th ) month and the expiration of the initial term, the sum of Nine Hundred Seventy-Six Thousand Two Hundred Fifty and 00/100 Dollars ($976,250.00) per year (being at the annual rate of $17.75 per rentable square foot) payable in equal consecutive monthly installments of Eighty-One Thousand Three Hundred Fifty-Four and 17/100 Dollars ($81,354.17) each;

(g) if Tenant timely exercises its option to extend the initial term by the first renewal term, then the rent for such first renewal term shall be the sum of Nine Hundred Seventy-Six Thousand Two Hundred Fifty and 00/100 Dollars ($976,250.00) per year (being at the annual rate of $17.75 per rentable square foot) payable in equal consecutive monthly installments of Eighty-One Thousand Three Hundred Fifty-Four and 17/100 Dollars ($81,354.17) each; and

(h) if Tenant timely exercises its option to extend the initial term by the second renewal term, then the rent for such second renewal term shall be the sum of Nine Hundred Seventy-Six Thousand Two Hundred Fifty and 00/100 Dollars ($976,250.00) per year (being at the annual rate of $17.75 per rentable square foot) payable in equal consecutive monthly installments of Eighty-One Thousand Three Hundred Fifty-Four and 17/100 Dollars ($81,354.17) each.

3.02 – Rent Adjustment

(a) General Concept: Landlord and Tenant will share the benefit or risk with respect to the cost of construction and interest rate fluctuation. There will be an assumed construction amount, interest rate and lease rental rates as set forth in Section 3.01 above. The rental rates will decrease if the construction cost is under budget. The rental rates will decrease if the interest rate is lower than budget. Conversely, the rental rates will increase if the construction cost is over budget or if the interest rate is higher than budgeted. The rental rates may increase or decrease if there is a mix of increase or decrease in construction cost or interest rate. The Landlord’s profit in the first year is set at a fixed minimum no matter what the final rental rate is determined to be.

(b) Specific Pro Forma Amounts:

Construction Budget – The budget amount for the hard cost of construction in total is $5,500,000. This covers the cost to construct the building which includes contractor General Conditions, Construction Manager Fee, Tenant Allowance to fit-up interiors to the new building and modify the existing building, and a contingency. All soft costs are to be paid by the Landlord with no risk sharing by the Tenant.

Hard Cost Construction Budget Total Amount - $5,500,000 which includes:

Contingency - $250,000

Tenant Allowance - $1,150,000

Construction Manager Fee - $175,000

Landlord First Year Profit - $180,000

Permanent Loan Interest Rate – 4.75%

Permanent Loan Amortization Schedule – 20 Years (240 months)

A debt service constant will be calculated based on the 240 month amortization schedule and the permanent loan interest rate as stated by the Mortgagee at the time the permanent loan becomes effective. The debt service constant will be multiplied by the amount of the hard cost of construction above or below $5,500,000. The result will be the annual increase or decrease in the rental rates stated in paragraph 3.01 above. By way of illustration and example only:

Example 1 – Change in Construction Cost:

Interest Rate – 4.75%

Amortization Schedule – 240 Months

Debt Service Constant - .07755

Hard Cost of Construction above Budget - $100,000

Annual Rent Increase above each of the stated rental rates - $7,755

Example 2 – Change in Interest Rate:

Interest Rate – 4.5%

Amortization Schedule – 240 Months

Debt Service Constant - .07592

Hard Cost of Construction on Budget - $5,500,000

Annual Rent Decrease below each of the stated rental rates - $8,965

3.03 - Payment of Rent

Each monthly installment of rent herein provided to be paid by Tenant to Landlord shall be paid in advance, on the first day of each month, by check, draft, or like instrument payable to the order of Landlord or such other person, firm or corporation as shall have been designated in writing by Landlord to receive such payment from time to time during the term of this Lease, without any set-off or deduction whatsoever. Rent for any period less than a full calendar month shall be apportioned based on the number of days in that month.

3.04 - Absolute Net Lease

This is an absolute net Lease and Landlord shall not be required to provide any services, or do any act or thing with respect to the Premises except as expressly herein provided, and the rent reserved herein shall be paid to Landlord without any claim on the part of Tenant for diminution, set-off or abatement and nothing shall suspend, abate or reduce any rent to be paid by Tenant hereunder except as otherwise specifically provided in this Lease. Tenant shall be responsible for the payment of any sales or use taxes now or hereafter imposed upon the annual rent or additional rent payable by Tenant under this Lease provided such sales or use tax is not an income tax.

3.05 - Payment of Additional Rent

Any additional rent payable hereunder by Tenant shall be paid by Tenant to Landlord within ten (10) business days after receipt by Tenant of notice (monthly or at such other time (not more frequently than monthly) as Landlord shall determine from time to time) of the amount thereof, or, at Landlord’s election, such additional rent shall be paid as follows: during each full lease year the reasonably estimated amount of additional rent to be owed by Tenant for such lease year shall be paid monthly and Tenant, upon notice from Landlord, shall pay any excess of the actual amount of additional rent over such estimated amount for such full lease year (or receive credit if the estimated amount paid exceeds the actual amount of additional rent).

3.06 - Past Due Rent

If during the term of this Lease, Tenant shall fail to pay the monthly rent or additional rent or any other charge hereunder within ten (10) days after the same is due and payable, Tenant shall pay to Landlord, as liquidated damages for such late payment and in addition to such fixed monthly rent, additional rent or any other charge, without notice or demand by Landlord, a sum equal to five percent (5%) of the amount thereof. Nothing contained in this paragraph 3.05 shall be construed to be a limitation of or in substitution of Landlord’s rights and remedies under Article 12 of this Lease.

3.07 - Lease Year

The expression “Lease Year” as used herein means twelve (12) consecutive calendar months, the first Lease Year to begin on the first day of the first full month of the term of this Lease. If the first Lease Year begins on a day other than January 1, Landlord may adjust the Lease Year to coincide with a calendar year for billing of additional rent.

ARTICLE 4

Utilities

4.01 - Utilities

Tenant shall continue to pay for all gas, water, electricity and other utility services used or consumed in connection with the Original Premises. Beginning on the date Tenant first takes occupancy of the Expansion Premises and continuing thereafter throughout the term of this Lease, Tenant shall pay for all gas, water, electricity and other utility services used or consumed in connection with the Premises. Such payments shall be made directly by Tenant to the utility company, municipality or other entity providing such utilities, and shall be made on or before the date such payments are due.

ARTICLE 5

Insurance and Indemnification

5.01 - Tenant’s Insurance

At all times during the term of this Lease, Tenant shall at Tenant’s sole cost and expense keep in full force and effect as a minimum, the following insurance coverages for the mutual benefit of Landlord and Tenant as their respective insurable interests may appear:

(a) A policy of comprehensive general public liability and property damage insurance including independent contractors, broad form property damage, personal injury and blanket contractual liability endorsements under which Landlord is named as an additional insured with a combined single limit with respect to each occurrence or each claim in an amount not less than $2,000,000 in the aggregate for bodily or personal injury, death or damage to property, and umbrella liability in the amount of $5,000,000. While Tenant is moving its furniture, fixtures and equipment in or out of the Premises, Tenant shall require its moving contractors to carry the same insurance coverages as required by this Lease naming Tenant and Landlord as additional insureds.

(b) A policy against fire and other casualty on the personal property owned by the Tenant on the Premises on a “special cause of loss” form sufficient to provide 100% replacement value of such personal property located in or on the Premises. Such policy shall contain a replacement cost endorsement and a clause pursuant to which the insurance carrier waives all rights of subrogation against the Landlord with respect to losses payable under the policy.

(c) A Worker’s Compensation policy providing statutory benefits for Tenant’s employees and employer’s liability coverage with a limit in an amount not less than that which is required by law.

(d) Protective liability insurance insuring Landlord and Tenant against any liability which may arise on account of alterations, additions, improvements or construction for tenant’s improvements, with a minimum limit of $2,000,000 with respect to each occurrence or each claim for injury to or death of any one person and damage to property.

(e) Such other insurance and in such amounts as may from time to time be reasonably required by Landlord against other insurable hazards, which at the time are commonly insured against for premises similarly situated, due regard being given to the type of building, its construction, use and occupancy. Tenant shall also carry insurance on the Tenant’s inventory, furniture and fixtures, leasehold improvements and operating equipment.

All insurance coverages that Tenant is required to maintain under this Lease shall name Landlord as an additional insured and shall be effected under a valid and enforceable policy issued by reputable insurers licensed and permitted to do business in the State of New York in which the Building is located, and rated in Best’s Insurance Guide, as having a general policyholder rating of “A” and a financial rating of at least Class VIII. Tenant shall cause certificates evidencing the issuance of such policies to be delivered to Landlord before occupancy of the Premises and at least ten (10) days prior to the expiration of such policies evidencing their renewal. Each certificate shall set forth the coverages that Tenant is required to maintain under this Lease and shall be non-cancellable with respect to Landlord without ten (10) days written notice to Landlord. In the event that Tenant shall not have delivered such certificate(s) to Landlord as required above, Landlord may obtain such insurance as it may reasonably require to protect its interest. The cost for such policies shall be paid by Tenant to Landlord as additional rent upon demand.

Any loss under any such policies shall be adjusted with the insurance company by Tenant and the proceeds of such insurance shall be payable to Landlord and to Landlord’s first mortgagee if the policy so provides, as their respective insurable interests may appear. Each such policy shall contain a provision that no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the Landlord or the Landlord’s mortgagee the amount of any loss sustained and shall contain an agreement by the insurer that such policy shall not be canceled without at least thirty (30) days prior written notice to the Landlord, Tenant and any mortgagee to whom a loss thereunder may be payable.

5.02 - Landlord’s Insurance

Landlord shall obtain and keep in full force and effect at Landlord’s expense (except as otherwise provided herein) during the Lease term a minimum of the following insurance coverages for the mutual benefit of Landlord and Tenant of their respective insurable interests may appear:

(b) A Workers’ Compensation policy providing statutory benefits for Landlord’s employees, if any, and employers’ liability coverage in an amount of not less than that required by law.

(c) A policy against fire and other casualty on the Building and Premises and personal property owned by Landlord on a “special cause of loss” form sufficient to provide 100% replacement value of such real and personal property. Such policy shall contain a

replacement cost endorsement (being the cost of replacing all such buildings on the Premises exclusive of the costs of excavation and footings below the lowest grade level) and a clause pursuant to which the insurance carrier waives all rights of subrogation against the Tenant with respect to losses payable under the policy. Such full replacement cost shall be determined from time to time (but not more frequently than once in every twelve (12) calendar months) by an appraiser, architect or other person or firm designated by Landlord. Any loss under any such policy shall be adjusted with the insurance company by Landlord and the proceeds of such insurance shall be payable to Landlord, Tenant and to Landlord’s first mortgagee if the policy so provides, as their respective insurable interests may appear. Each such policy shall contain a provision that no act or omission of Landlord shall affect or limit the obligation of the insurance company to pay the Tenant or the Landlord’s mortgagee the amount of any loss sustained and shall contain an agreement by the insurer that such policy shall not be canceled without at least thirty (30) days prior written notice to the Landlord, Tenant and any mortgagee to whom a loss thereunder may be payable.

(d) Protective liability insurance insuring Tenant and Landlord against any liability which may arise on account of alterations, additions, improvements or construction performed by the Landlord on the Premises during the Lease term, in an amount of not less than $2,000,000 combined single limit with respect to each occurrence or each claim for injury to or death of any one person and damage to property.

All insurance coverages that Landlord is required to maintain under this Lease shall be effected under valid and enforceable policies issued by reputable insurers licensed and permitted to do business in the State of New York in which the Building is located, and rated in Best’s Insurance Guide as having a General policyholder rating of “A” and a financial rating of at least Class VIII. Upon written request of the Tenant, Landlord shall cause certificates evidencing the issuance of such policies to be delivered to Tenant upon occupancy of the Premises and at least ten (10) days prior to expiration of such policies evidencing their renewal.

Tenant shall be responsible for the prompt and proper investigation of all accidents and injuries that occur or could have a bearing on the liability of the Landlord. Tenant shall investigate all accidents immediately and thoroughly with particular attention given to all pertinent facts leading up to, during and following the occurrence. Copies of any and all accident investigations shall be sent from Tenant to Landlord within 24 hours after the occurrence.

5.03 - Subrogation

Each party hereto hereby waives on behalf of the insurers of such party’s property any and all claim or right of subrogation of any such insurer against the other party hereto for loss of or damage to the property so insured other than loss or damage resulting from the willful act of the other party, it being understood, however, (a) that such waiver shall be ineffective as to any insurer whose policy does not authorize such waiver, (b) that it shall be the obligation of each party seeking the benefit of the foregoing waiver to request the other party (i) to submit copies of its insurance, and (ii) in case such waiver is not so authorized by any such policy, to procure an express waiver from the insurer thereunder, any additional charge for such waiver to be paid by the party requesting the benefit of such waiver, and (c) that neither party shall be liable to the other party under clause (b) hereof except for willful failure to comply with any request pursuant to said clause (b).

5.04 - Tenant’s Payment of Insurance Premiums

Tenant shall reimburse Landlord for the premiums paid by Landlord for the casualty and liability insurance carried by Landlord as set forth in paragraph 5.02 above applicable solely to the Building and the Land and their operation although part of a blanket policy or policies, such payment to be made by Tenant within fifteen (15) days after Tenant has received Landlord’s demand therefor which demand will be accompanied by a copy of the paid premium invoice from Landlord’s insurance agent or insurer for which reimbursement is sought.

5.05 - Increase in Fire Insurance Premiums

Tenant shall not do or suffer to be done, or keep or suffer to be kept, anything in, upon or about the Premises which will contravene Landlord’s policies insuring against loss or damage by fire or other hazards, or which will prevent Landlord from procuring such policies from companies acceptable to Landlord or which will in any way cause an increase in the insurance rates upon any portion of the Building. If the Tenant violates any prohibition provided for in the first sentence of this paragraph, Landlord may, without notice to Tenant, correct the same at Tenant’s expense. Tenant shall pay to Landlord as additional rent forthwith upon demand the amount of any increase in premiums for insurance resulting from any violation of the first sentence of this paragraph, even if Landlord shall have consented to the doing of or the keeping of anything on the Premises which constituted such a violation (but payment of such additional rent shall not entitle Tenant to violate the provisions of the first sentence of this paragraph).

5.06 - Indemnification and Hold Harmless

If any damage on the Premises or to the land on which the Building is located or to Building or to any equipment or appurtenance therein (whether belonging to Landlord or to other tenants or to occupants of the Building) results from the action or neglect of the Tenant, its employees, agents or invitees, then Tenant shall be liable therefore and Landlord, at its option, may repair such damage and Tenant shall upon demand of Landlord reimburse Landlord for all reasonable costs of such repairs and damage to the extent resulting from the action or neglect of Tenant.

Tenant covenants with Landlord that Landlord shall not be liable for any damage or liability of any kind from any injury to or death of persons or damage to property of Tenant or any other person during the term of this Lease from any cause whatsoever, by reasons of use, occupancy and enjoyment of the Premises by Tenant or any person thereof or holding under Tenant, and that Tenant does hereby indemnify Landlord (and such other persons as are in privity of estate with Landlord) and save it harmless from and against any and all claims, actions, damages, liability and expense in connection with loss of life, personal injury and/or damage to property arising from or out of any occurrence in, upon or at the Premises, or the occupancy or use by Tenant of the Premises or any part thereof, or occasioned wholly or in part by any act or omission of Tenant, its agents, contractors, employees, servants, lessees or concessionaires, or on account of any such real or claimed damage or injury and from all liens, claims and demands arising out of the use of the Premises and its facilities, for any repairs or alterations which Tenant may make upon said Premises, but Tenant shall not be liable for damage or injury occasioned by the negligence of Landlord and its agents, servants or employees.

Landlord covenants with Tenant that Tenant shall not be liable for any damage or liability of any kind from any injury to or death of persons or damage to property of Landlord or any other person during the term of this Lease, from any cause whatsoever, by reason of the presence or activities on the Premises by Landlord or its designated agents, servants or employees for any reason whatsoever, and that Landlord will indemnify and save harmless Tenant from all liability whatsoever, on account of any such real or claimed damage or injury and from all liens, claims and demands arising out of Landlord’s or Landlord’s designated agents, servants or employees presence or activities on the Premises, but Landlord shall not be liable for damage or injury occasioned by the negligence of Tenant and its designated agents, servants or employees.

This obligation to indemnify and hold harmless shall include reasonable legal and investigation costs and all other reasonable costs, expenses and liabilities from the first notice that any claim or demand is to be made or may be made.

Each party shall procure an appropriate clause in, or endorsement on, each of its policies for fire or extended coverage insurance covering the Premises or the Building or personal property, fixtures or equipment located thereon or therein, pursuant to which the insurance company waives subrogation or consents to a waiver of right of recovery against the other party, and each party, hereby agrees that it will not make any claim against or seek to recover from the other party for any loss or damage to its property or the property of others covered by such fire or extended coverage insurance.

ARTICLE 6

Taxes, Parking and Operating Expenses

6.01 - Payment of Taxes, Assessments, Etc.

Tenant shall pay directly to the taxing jurisdiction before any fine, penalty, interest or cost may be added thereto or become due or be imposed by operation of law for the non-payment thereof, all real estate taxes (or payments in lieu thereof), assessments, water and sewer rents, rates and charges, and other governmental charges, general and special, ordinary and extraordinary, unforeseen or foreseen, of any kind and nature whatsoever which at any time during the term of this Lease may be assessed, levied, imposed upon, or grow or become due and payable out of or in respect to, or become a lien on, the Premises or any part thereof or any improvements or appurtenances thereto (all such taxes, assessments, water and sewer rents, rates and charges, and other governmental charges being hereinafter referred to as “Impositions”), provided, however, that any Imposition levied or assessed against the Expansion Premises which relates to a fiscal period of the taxing authority a part of which period is included within the term of this Lease and a part of which is included in a period of time prior to the Term Commencement Date or after the expiration of the term of this Lease, shall be adjusted between Landlord and Tenant as of the Term Commencement Date or the expiration of the term of this Lease, as the case may be, so that Tenant shall pay that portion of such Imposition which relates to that part of such fiscal period included within the term of this Lease, and Landlord shall pay the remainder thereof. If Landlord is unable to arrange for the taxing authority(ies) to forward the tax bill(s) directly to Tenant, Landlord shall forward tax bills to Tenant promptly upon receipt and Tenant shall provide Landlord with a copy of such receipted bill following payment.

Nothing herein contained shall require Tenant to pay municipal, state or federal income taxes assessed against Landlord, municipal, state or federal capital levy, estate, succession, inheritance or transfer taxes of Landlord or corporation franchise taxes imposed upon any corporate owner of the fee of the Premises; provided, however, that if at any time during the term of this Lease the methods of taxation prevailing at the Term Commencement Date shall be altered so as to cause the whole or any part of the taxes, assessments, levies, impositions or charges now or hereafter levied, assessed or imposed on real estate and the improvements thereon to be levied, assessed and imposed, wholly or partially as a capital levy, or otherwise, on the rents received therefrom then all such taxes, assessments, levies, impositions or charges, shall be deemed to be included within the term “Impositions” for the purposes hereof, and Tenant shall pay and discharge the same as herein provided in respect to the payment of Impositions.

The certificate, invoice or bill of an appropriate official designated by law to make or issue the same or to receive payment of any Imposition or non-payment of such Imposition shall be prima facie evidence that such Imposition is due and unpaid at the time of the making or issuance of such certificate, invoice or bill.

Landlord shall use its best efforts to seek, apply for and obtain any and all real estate tax abatement and/or incentive programs that are or may in the future during the term of this Lease be applicable to the Premises, including but without limitation, Section 485-b of the Real Property Tax Law, and Empire Zone status.

6.02 - Parking

Landlord shall provide to Tenant such parking spaces in the parking area to be developed for the Building as may be required by the Town of Cicero based on the Premises containing approximately 55,000 rentable square feet.

6.03 - Operating Expenses

(a) Tenant shall, at its sole cost and expense, operate, manage and maintain the Building and the Land upon which the Building is located, including the landscaped areas and the parking area in accordance with accepted principles of sound management and accounting practices as applied for first-class office buildings, including, without limitation:

(i) janitorial labor and supplies;

(ii) maintenance, snowplowing, ice removal, repair, replacement and engineering labor and supplies;

(iii) Intentionally Deleted;

(iv) window cleaning;

(v) painting;

(vi) security;

(vii) trash removal;

(viii) Intentionally Deleted;

(ix) gas and other fuels, water;

(x) landscaping and lawn care; and

(xi) parking lot resurfacing.

It is understood that the Tenant is the sole occupant of the Building and responsible for all the Operating Expenses, Impositions (as defined in paragraph 6.01 above), and for all utility charges for the Building (as provided in paragraph 4.01, and the Land upon which the Building is located and the parking areas for the Building.

Notwithstanding anything to the contrary, the following expenses shall be excluded from Operating Expenses:

(a) expenses for any capital improvement made to the Building which do not reduce Operating Expenses;

(b) expenses for repairs or other work occasioned by an insured fire or other insured casualty;

(c) expenses incurred in leasing or procuring new tenants, including commissions and fees for legal services and advertising;

(d) legal expenses incurred in enforcing the terms and conditions of any lease;

(e) interest or amortization payments on any mortgage or obligation in the nature of a mortgage;

(f) expenses incurred in connection with the maintenance and operation of any pay parking area;

(g) land rent or ground lease payments, if any;

(h) costs of refinancing;

(i) interest or penalties incurred by Landlord’s late payments;

(j) cost of art work;

(k) net income taxes;

(l) capital tax, succession tax, transfer tax, franchise tax, gift or estate tax;

(m) costs actually reimbursed through the proceeds of insurance;

(n) repairs incurred during the first Lease Year or for items subject to a longer warranty, during the warranty coverage period exclusive of those items subject to normal wear and tear and damage caused by Tenant, its agents, contractors or employees;

(o) Roof and sidewalk repairs during the initial term except those caused by Tenant, its agents, contractors or employees;

(p) Intentionally Deleted; and

(q) Repairs or other costs resulting from the negligence or willful misconduct of Landlord, its agents, contractors or employees during the warranty coverage period.

ARTICLE 7

Repairs and Maintenance

7.01 - Repairs and Maintenance of the Premises by Tenant

Throughout the term of this Lease, Tenant at its sole cost and expense will take good care of the Premises and will keep the same neat, clean, free of debris, in good order and repair, and make all necessary non-structural repairs thereto, interior and exterior, ordinary and extraordinary, including replacement of plate glass. In addition, Tenant shall, at its cost and expense, be responsible to repair, maintain and replace all specialty equipment installed by Tenant. When used in this Article 7, the term “repairs” shall include all necessary replacements, repairs, alterations, interior and exterior painting, additions and betterments to the Premises and the ceilings, floor coverings, lighting fixtures and plumbing, heating, ventilating, air conditioning, sprinkler, electric and sewage systems, facilities, appliances, parking areas and driveways (including repaving thereof), and landscaped areas, and repair, maintenance and/or replacement of Tenant’s specialty equipment associated with the conduct of Tenant’s business in the Premises. Tenant shall also keep the Premises free from any infestation of insects, rodents, bugs or other animals. All repairs made by Tenant shall be at least equal in quality and class to the condition of the Premises when Tenant first conducted its business therein. Landlord shall have the right, at Tenant’s sole cost and expense, to repair any damage to the Building or to the parking area for the Building caused by Tenant, its contractors or employees.

7.02 - Repairs by Landlord

Landlord shall maintain the Building in good repair and in a safe, clean and first-rate condition (other than those obligations assumed by Tenant under this Lease, and except for damage caused by or repairs or replacements necessitated by Tenant, its agents, employees or contractors), including but not limited to maintaining, repairing and replacing, as necessary, all structural portions of the Building, and all service systems for the Building, including but without limitation, the roof membrane, the roof structure, foundation, air-conditioning, heating, plumbing, electrical and sewage systems, exterior windows, the structural framing and soundness of the exterior and interior walls of the Building.

7.03 - Standard for Repairs

The necessity for and adequacy of repairs pursuant to paragraphs 7.01 and 7.02 above shall be measured by the standard which is appropriate for buildings, equipment, systems and appliances of similar construction and class. Any and all fixtures, equipment, and furnishings owned by Landlord and situated in the Premises including replacements thereof shall be and remain the property of Landlord and shall remain in the Premises at the expiration or earlier termination of this Lease.

7.04 – Landlord Warranty

Landlord shall warranty to Tenant against damage, destruction and/or defect to any and all portions of the Building, structural and non-structural, for a period of one (1) year from the Term Commencement Date, except that the roof of the Expansion Premises shall have a fifteen (15) year warranty, the roof of the Original Premises shall have a warranty until December 31, 2021, and further except: (a) latent defects, which Landlord shall warranty for the Term of this Lease; (b) any building components that generally have greater than a one (1) year warranty, in which case, Landlord shall warranty said components for a commercially reasonable period of time, not to be less than one (1) year; (c) normal wear and tear; and (d) damage or destruction caused by the negligent acts or omissions of Tenant or its agents.

ARTICLE 8

Alterations and Improvements

8.01 - Alterations and Improvements

Following the Term Commencement Date, Tenant may, at its option during the term of this Lease without the written approval of Landlord, move or alter movable partitioning, furnishings, and electrical lighting, provided the electrical lighting is not disconnected from its power source, within the Premises at its sole cost and expense as may be required in Tenant’s sole determination by the business conducted therein. Tenant shall not make any other alteration to the Premises without first obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. All such alterations, improvements and replacements which require the prior written consent of Landlord shall remain the property of Tenant and may be removed from the Premises at any time during the term or at the termination of Tenant’s occupancy hereunder, provided that any damage caused by such removal shall be repaired by Tenant. Tenant may at its option elect not to remove any or all of such improvements, installations or replacements in which case the same shall become the property of Landlord upon Tenant’s surrender of the Premises; provided, however, that Landlord may require Tenant to remove any such additions, installations or replacements by written notice from Landlord to Tenant received by Tenant within fifteen (15) days prior to the expiration of the term of this Lease if such additions, installations or replacements are structural or substantial. Tenant agrees that any and all alterations, additions, or replacements shall be made in compliance with the building codes and ordinances, laws and regulations applicable to the Premises. Should a building or other permit or permits be required by Tenant to accomplish any improvements, installations or replacements provided for in this paragraph, Landlord will execute, at Tenant’s expense, any necessary documents which are consistent with the terms of this Lease. With respect to any approvals to be given by Landlord or with respect to any supervision which may be required of Landlord under this paragraph, Tenant shall reimburse Landlord for Landlord’s reasonable out-of-pocket expenses.

ARTICLE 9

Damage by Fire, Etc.

9.01 - Restoration of Premises

The parties hereto mutually agree that if the Premises are partially or totally destroyed or damaged by fire or other hazard, then Landlord shall repair and restore same as soon as is reasonably practicable to substantially the same condition in which such Premises were in before such damage; provided that, if the insurance proceeds collected by Landlord for its own account (and not retained by any mortgagee as a consequence of such destruction or damage) are less than ninety percent (90%) of the estimated cost of such repairs and restoration, Landlord shall not be obligated to commence or perform such repairs and restorations, and this Lease upon

notice by Landlord to Tenant shall at the option of Landlord terminate, unless Tenant undertakes (in form and upon terms satisfactory to Landlord) to pay the difference between such estimated cost and such insurance proceeds.

If however, the Premises are completely destroyed or so damaged that Landlord cannot reasonably restore or rebuild the Premises in six (6) months to their original condition, then Landlord shall not be required to rebuild or restore and this Lease shall be terminable by either party hereto by serving written notice upon the other. In any event, if repairs have not been commenced within sixty (60) days from the date of said destruction or damage, this Lease may be immediately terminated by Tenant serving written notice upon Landlord, but in no event may Tenant terminate this Lease after such repairs have been commenced by Landlord so long as Landlord diligently proceeds to complete same.

In the event the improvements erected or to be erected upon the Premises are completely or partially destroyed or so damaged by fire or other hazard that they cannot reasonably be used by Tenant or can only be partially used by Tenant and this Lease is not terminated as above provided, then rent and additional rent shall abate in proportion to the amount of the premises that is being used until the premises is rendered entirely usable.

9.02 - Restoration During Last Two Years

Anything in paragraph 9.01 to the contrary notwithstanding, if, within the two (2) years prior to the expiration of the initial term, or if the casualty occurs in a renewal term, within the two (2) years prior to the expiration of such renewal term, the Premises shall be damaged or destroyed by fire or otherwise, and the estimated cost shall be equal to or exceed 50% of the replacement cost of the Premises, Landlord shall be under no obligation to repair or restore the Premises and the Lease shall terminate (and the Tenant shall not be entitled to any portion of the insurance proceeds, all of which shall become the property of Landlord) unless Tenant at its sole election shall notify Landlord in writing within thirty (30) days after such destruction or damage that Tenant elects to enter into a modification of this Lease and, within thirty (30) days after receipt of such written notice by Landlord, Landlord and Tenant enter into a modification to this Lease by the terms of which the term of this Lease shall be extended five (5) years beyond the end of the initial term (or renewal term if such damage or destruction occurs during a renewal term) upon the same terms and conditions except that the rent effective upon the date of such modification agreement shall be, and Tenant covenants and agrees to pay, an amount equal to the rent payable in the first renewal term if the damage occurs in the last two (2) years of the initial term, an amount equal to the rent payable in the second renewal term if the damage occurs in the last two (2) years of the first renewal term and, if the damage occurs in the last two (2) years of the second renewal term, an amount equal to the product resulting from multiplying the rent in effect at the date of the occurrence of such damage or destruction by the percentage (which shall in no event be less than 100%) found by dividing the Index (as defined below) for the calendar month in which the damage or destruction occurred by the Index for the calendar month in which falls the Term Commencement Date under this Lease, said rent to be payable as the rent in equal monthly installments thereafter.

The “Index” is defined to mean the “Consumer Price Index for All Urban Consumers, All Items, U.S. City Average, 1982-1984=100, of the United States Department of Labor’s Bureau of Labor Statistics in effect and generally published for the calendar month in which falls the beginning of such renewal term. If the aforesaid Price Index shall no longer be published or if any of the separate components utilized to compute the Index are altered or removed after the date of this Lease, then another price index generally recognized as authoritative and computed as nearly as practicable in the same manner as the Index, shall be substituted by agreement of the parties, it being intended by the parties that as consistent a basis as is possible be utilized for making any calculations herein required. During any period while the determination of such dispute is pending, the fixed monthly rent then in effect shall continue to be paid by Tenant, provided that the fixed monthly rent as finally determined shall be effective from the beginning of the five (5) year extended term as provided in paragraph 9.02 above, and any deficiency owing by Tenant from the commencement of such term shall be paid promptly by Tenant upon final determination of the dispute.

ARTICLE 10

Eminent Domain

10.01 - Eminent Domain

In the event that the Premises, or any part thereof, shall be taken by exercise of the right of condemnation or eminent domain or by agreement between Landlord and those authorized to exercise such right (collectively herein referred to as “Condemnation Proceedings”), Landlord shall be entitled to collect from any condemnor the entire award that may be made in any such proceeding, without deduction therefrom for any estate hereby vested in or owned by Tenant, subject to Tenant’s rights as set forth in this Article 10.

Tenant agrees to execute any and all further documents that may be required in order to facilitate collection by Landlord of any and all such awards. Tenant, in cooperation with Landlord, shall have the right to participate in any condemnation proceedings only for the purpose of protecting Tenant’s interest hereunder.

10.02 - Termination of Lease

If, at any time during the term of this Lease, title to the whole or materially all of the Premises shall be taken in Condemnation Proceedings, this Lease shall terminate and expire on the date on which Tenant is deprived of possession thereby and the fixed monthly rent and all other amounts provided to be paid by Tenant hereunder shall be apportioned and paid to such date.

10.03 - Abatement in Event of Partial Taking

Except as herein otherwise specifically provided, if title to less than the whole or materially all of the Premises shall be taken as aforesaid and the remaining portion of the Premises satisfies Tenant’s requirements in Tenant’s reasonable discretion, this Lease shall continue, but the rent thereafter payable by Tenant shall be apportioned and reduced from the date of such partial taking by an amount equal to the proportion of the total square footage of building area that is so taken.

Any rent becoming due and payable hereunder between the date of any such partial taking and the date of determination of the amount of the rent reduction, if any, to be made in respect hereof shall be paid at the rate theretofore payable hereunder; provided, however, that after such determination Landlord, within (10) days after request, shall pay to Tenant an amount equal to the amount by which any rent theretofore paid by Tenant for such period shall exceed the amount of the monthly rent for such period as so reduced or Tenant, at its election, may deduct such amount from any subsequent monthly installment or installments of rent payable hereunder.

10.04 - Rights of Tenant to Award

Tenant shall not be entitled to share in any award or awards made in any Condemnation Proceedings for the taking of the Premises or any part thereof, or for consequential damages or for the taking of any appurtenances to the Premises or rights in, under or above any streets, or for the taking of space, or rights therein, below the surface of, or above, the Premises and Tenant shall have no claim for the value of any unexpired term of this Lease and no right or claim to any part of any award on account thereof and Tenant hereby waives and releases any such claim or right. Notwithstanding the foregoing to the contrary, Tenant shall be entitled to that portion of the award allocable to its personal property, alterations and improvements, business interruption and relocation expenses.

ARTICLE 11

Bankruptcy and Default Provisions

11.01 - Conditional Limitations

This Lease and the Lease term are subject to the limitation that if, at any time prior to or during the Lease term, any one or more of the following events (herein called an “event of default”) shall occur, that is to say:

(a) If Tenant shall make an assignment for the benefit of its creditors, or

(b) If the leasehold estate hereby created shall be taken on execution or by other process of law, or

(c) If any petition shall be filed against Tenant in any court, whether or not pursuant to any statute of the United States or of any State, in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, and Tenant shall thereafter be adjudicated bankrupt, or such petition shall be approved by the court, or the court shall assume jurisdiction of the subject matter and if such proceedings shall not be dismissed with ninety (90) days after the institution of the same; or if any such petition shall be so filed by the Tenant; or

(d) If in any proceedings a receiver or trustee be appointed for Tenant’s property, and such receivership or trusteeship shall not be vacated or set aside within ninety (90) days after the appointment of such receiver or trustee; or

(e) If Tenant shall vacate or abandon the Premises and permit the same to remain unoccupied or closed for business for more than thirty (30) days; or

(f) If Tenant shall fail to pay any installment of the rent, or additional rent or any part thereof when the same shall become due and payable, and such failure shall continue for ten (10) days after written notice thereof from Landlord is received or refused by Tenant; or

(g) If Tenant shall fail to pay any other charge required to be paid by Tenant hereunder, and such failure shall continue for ten (10) days after written notice thereof from Landlord is received or refused by Tenant; or

(h) If Tenant shall fail to perform or observe any other requirement of this Lease (not hereinbefore in this paragraph specifically referred to) on the part of Tenant to be performed or observed, and such failure shall continue for thirty (30) days after written notice thereof from Landlord is received or refused by Tenant (unless such failure cannot be cured within thirty (30) days after written notice from Landlord to Tenant in which event the Tenant shall not be in default if Tenant commences to cure the failure within the thirty [30]day period and proceeds diligently thereafter to effect a cure within not more than ninety [90] days);

then, upon the happening of any one or more of the aforementioned events of default, and the expiration of the period of time prescribed in any such notice of default, Landlord may give Tenant a written notice (hereinafter called “Notice of Termination”) of Landlord’s intention to end the term of the Lease at the expiration of ten (10) days from the date of such Notice of Termination, and at the expiration of such ten (10) days, this Lease and the term hereof, as well as all of the right, title and interest of Tenant hereunder, shall wholly cease and expire in the same manner and with the same force and effect as if the date of expiration of such ten (10) day period were the date originally specified herein for the expiration of the Lease and the Lease term, and Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall remain liable as hereinafter provided.

11.02 - Landlord’s Remedies

(a) If this Lease shall be terminated as provided in paragraph 11.01 above, Landlord or Landlord’s agents or employees may immediately or at any time thereafter re-enter the Premises and remove therefrom the Tenant, its agents, employees, servants, licensees, and any

subtenants and other persons, firms or corporations, and all or any of its or their property therefrom, whether by summary dispossess proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damages therefor, and repossess and enjoy said Premises, together with all alterations, additions and improvements thereto.

(b) In case of any such termination, re-entry or dispossess by summary proceedings or otherwise, the rents and all other charges required to be paid up to the time of such termination, re-entry or dispossess, shall be paid by Tenant and Tenant shall also pay to Landlord all reasonable expenses which Landlord may then or thereafter incur for legal expenses, attorneys’ fees, brokerage commissions and all other costs reasonably paid or incurred by Landlord for restoring the Premises to good order and condition and for altering and otherwise preparing the same for reletting. Landlord may, at any time and from time to time, relet the Premises, in whole or in part, for any rental then obtainable either in its own name or as agent of Tenant, for a term or terms which, at Landlord’s option, may be for the remainder of the then current term of this Lease or for any longer or shorter period. Landlord agrees to exercise reasonable diligence to mitigate any damages it incurs as a result of Tenant’s breach.

(c) If this Lease is terminated as aforesaid, Tenant nevertheless covenants and agrees, notwithstanding any entry or re-entry by Landlord whether by summary proceedings, termination or otherwise, to pay and be liable for on the days originally fixed herein for the payment thereof, amounts equal to the several installments of fixed monthly rent and additional rent as they would under the terms of this Lease become due if this Lease had not been terminated or if Landlord had not entered or re-entered as aforesaid, whether the Premises are relet or remain vacant in whole or in part for a period less than the remainder of the Lease term or for the whole thereof, but in the event the Premises are relet by Landlord, Tenant shall be entitled to a credit in the net amount of rent received by Landlord in reletting the Premises after deduction of all expenses and costs incurred or paid as aforesaid in reletting the Premises and in collecting the rent in connection therewith. As an alternative, at the election of Landlord, Tenant shall pay to Landlord as damages, such a sum as at the time of such termination represents the amount of the excess, if any, of the then present value of the total fixed monthly rent and additional rent and other benefits which would have accrued to Landlord under this Lease for the remainder of the then current term if the Lease had been fully complied with by Tenant over and above the then present rental value of the Premises for the balance of said term.

(d) Tenant hereby expressly waives, so far as permitted by law, the service of any notice of intention to re-enter provided for in any statute, or of the institution of legal proceedings to that end, and Tenant, for and on behalf of itself and all persons claiming through or under Tenant, also waives any and all right of redemption or re-entry or repossession under present or future laws including specifically but without limitation Section 761 of the New York Real Property Actions and Proceedings Law including any amendments hereafter made thereto, and any and all right to restore the operation of this Lease. In case Tenant shall be dispossessed by a judgment or by warrant of any court or judge by or in case of any expiration or termination of this Lease, Landlord and Tenant, so far as permitted by law, hereby waive and will waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of said Premises or any claim of injury or damage. The terms “enter”, “re-enter”, “entry”, or re-entry, as used in this Lease are not restricted to their technical legal meaning.

(e) No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No waiver of any breach shall affect or alter this Lease, but each and every covenant, agreement, term and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof.

(f) In the event of any breach or threatened breach by Tenant of any of the covenants, agreements, terms or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise.

(g) Each right and remedy of Landlord provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise.

11.03 - Landlord’s Self-Help

In addition to Landlord’s rights to self-help set forth elsewhere in this Lease, if Tenant at any time fails to perform any of its obligations under this Lease in a manner reasonably satisfactory to Landlord, Landlord shall have the right, but not the obligation, upon giving Tenant at least five (5) days prior written notice of its election to do so (in the event of an emergency, however, no such prior notice shall be required), to perform such obligations on behalf of and for the account of Tenant. In such event, Landlord’s costs and expenses incurred in connection therewith shall be paid by Tenant as additional rent immediately following Landlord’s demand therefor, with interest thereon from the date Landlord performs such work at the rate of one percent (1%) above the Prime Rate (or such other rate as may be used in place of Prime Rate to reflect the rate charged the bank’s best companies) as announced from time to time by JP Morgan Chase Bank. The performance by Landlord of any such obligation shall not constitute a release of Tenant therefrom or a waiver of Tenant’s failure to perform same.

ARTICLE 12

Mechanic’s Liens

12.01 - Mechanic’s Liens

Tenant agrees to pay when due all sums of money that may become due for or purporting to be due for any labor, services, materials, supplies or equipment alleged to have been furnished or to be furnished to or for Tenant in, upon or about the Premises and/or Landlord’s interest therein.

If any mechanic’s liens shall be filed against the Premises based upon any act of Tenant or anyone claiming through Tenant, the Tenant shall forthwith commence such action by bonding, deposit, payment or otherwise as will remove or satisfy such lien within fifteen (15) business days.

However, nothing in this Article 13 shall be deemed or construed as (a) Landlord’s consent to any person, firm or corporation for the performance of any work or services or the supply of any materials to the Premises or any improvement thereon, or (b) giving Tenant or any other person, firm or corporation any right to contract for or to perform or supply any work, services or materials that would permit or give rise to a lien against the Premises or any part thereof.

ARTICLE 13

Mortgages, Assignments, Subleases and

Transfers of Tenant’s Interest

13.01 - Limitation of Tenant’s Rights

During the term of this Lease, neither this Lease nor the interest of Tenant in this Lease or in any sublease or in any rentals under any sublease, shall be sold, assigned, transferred, mortgaged, pledged, hypothecated or otherwise disposed of, whether by operation of law or otherwise, nor shall the Premises be sublet, without the prior written consent of the Landlord in each instance, which shall not be unreasonably withheld or delayed. However, Landlord agrees that it will consent to an assignment or sublease to an entity that is a parent or subsidiary of Tenant or an entity under common control of the Tenant

It is understood and agreed between the parties that, should Tenant request Landlord’s consent to a proposed assignment of this Lease or a subletting of all or any portion of the Premises, Landlord will, in addition to any other requirements which may be imposed as conditions to Landlord’s consent, require that Tenant execute and deliver to Landlord an agreement whereby Tenant obligates itself, as additional rent, to pay over to Landlord the amount, if any, of all rent, additional rent and any other consideration paid by such assignee or sublessee to Tenant pursuant to such assignment or sublease which is in excess of the rent and additional rent due and payable from time to time from Tenant to Landlord pursuant to this Lease.

No consent by Landlord to an assignment of this Lease and no assignment made as hereafter permitted, shall be effective until there shall have been obtained and delivered to Landlord (a) an agreement, in recordable form, executed by Tenant and the proposed assignee, wherein and whereby such assignee assumes due performance of the obligations on Tenant’s part to be performed under this Lease to the end of the term hereof and (b) a written consent to such assignment by the holder of any fee or leasehold mortgage to which this Lease is then subject if so required by the terms of such fee or leasehold mortgage.

Notwithstanding the assumption by such assignee of due performance, Tenant shall continue to be fully responsible for the due performance of Tenant’s obligations hereunder in the same manner and to the same extent as if no such assignment had been made.

Any assignment, mortgage, pledge, sublease or hypothecation of this Lease, or of the interest of Tenant hereunder, without full compliance with any and all requirements set forth in this Lease shall be a breach of this Lease and a default hereunder.

13.02 - Effect of Landlord’s Consent

Any consent by Landlord to a sale, assignment, mortgage, pledge, hypothecation, or transfer of this Lease shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from the requirement of obtaining the prior written consent of Landlord to any further sale, assignment, mortgage, pledge, hypothecation, or other transfer of this Lease. In instances where the consent of Landlord is required hereunder to any proposed assignment or sublease of this Lease, or to the mortgaging, pledging or hypothecation of this Lease, contemporaneously with the request of Tenant therefor Tenant shall submit, in writing, information reasonably sufficient to enable Landlord to decide with respect thereto.

With respect to any of the consents requested by Tenant under the provisions of this Article 13, whether or not the Landlord shall have consented thereto, Tenant shall pay to the Landlord all reasonable counsel fees and other out-of-pocket expenses incurred by the Landlord in connection therewith.

ARTICLE 14

Compliance with Governmental Orders, Etc.

14.01 - Tenant to Comply

Tenant, at its own expense, shall promptly execute and comply with all statutes, ordinances, rules, orders, regulations and requirements of the federal, state and local governments and of any and all other departments and bureaus applicable to the Premises for the correction, prevention and abatement of all nuisances, violations or other grievances in, upon, or connected with the Premises (herein referred to as “Government Orders”) during the term of this Lease and shall also comply promptly with and execute all rules, orders and regulations of the Board of Fire Underwriters, rating boards and insurance companies for the prevention of fires and liability risks, except to the extent relating to Landlord’s Work or the negligence or willful misconduct of Landlord, its employees, agents or controllers, which issues should be the responsibility of Landlord. Tenant agrees at its expense to furnish and maintain in good order an adequate number and type of fire extinguishers on the Premises at all times.

14.02 - Failure to Comply

In case Tenant shall fail or neglect to comply with the aforementioned Government Orders or in case Tenant shall fail or neglect to make any necessary repairs as herein required of Tenant, then Landlord or its agents may enter the Premises and make said repairs and comply with any and all of the said Government Orders at the cost and expense of the Tenant, and in case of Tenant’s failure to pay therefor within five business days after notice from Landlord of the amount of said cost and expense, the said cost and expense shall be added to the next month’s rent installment and be due and payable as such, or Landlord may deduct the same from any balance remaining in Landlord’s hands. This provision is in addition to the right of the Landlord to terminate this Lease by reason of default on the part of Tenant.

14.03 – ADA Compliance

Landlord warrants and represents to Tenant that upon completion, the Premises will be in compliance with the applicable requirements of the Americans With Disabilities Act of 1990.

ARTICLE 15

Subordination to Mortgages

15.01 - Subordination to Mortgages

This Lease and all rights of the Tenant hereunder are and shall be automatically subject and subordinate to the lien of any mortgages which may now or hereafter affect the Premises and to all renewals, modifications, consolidations, replacements and extensions thereof. Although it is the intent of the parties that no further instrument of subordination shall be necessary to effect the foregoing and that the provisions for subordination shall be self-operative, Tenant agrees that it will, upon demand, execute and deliver such instruments to effect more fully such subordination of this Lease to the lien of any mortgage or mortgages that shall be requested by Landlord or any mortgagee or proposed mortgagee provided that such mortgagee execute an agreement not to disturb Tenant’s use and occupancy in a form reasonably acceptable to Tenant.

Tenant will not do, suffer or permit any act, happening or occurrence or any condition to occur or remain which has been caused by Tenant which may be prohibited under the terms or provisions of any mortgage to which this Lease is subject or which will create a default thereunder except that Tenant shall not be obligated to pay the principal indebtedness or any installment thereof or interest thereon.

ARTICLE 16

Inspection of Premises

16.01 - Inspection of Premises by Landlord

Landlord shall have the right to enter the Premises at all reasonable business hours and upon a reasonable prior notice to Tenant for the purpose of:

(a) inspecting the same;

(b) making any repairs to the Premises and performing any work therein that may be required to be performed by Landlord under this Lease and which will not unreasonably interfere with the operation of Tenant’s business or that may be necessary by reason of Tenant’s default under the terms of this Lease which continues beyond any applicable period of notice and opportunity to cure;

(d) exhibiting the Premises (within one year prior to the expiration of the term of this Lease) to prospective tenants.

Nothing in this Lease shall imply any duty upon the part of Landlord to do any such work which, under any of the provisions of this Lease, Tenant may be required to perform and the performance thereof by Landlord shall not constitute a waiver of Tenant’s default.

ARTICLE 17

Notice and Certificates

17.01 - Notices and Certificates

Any notice, statement, certificate, request or demand required or permitted to be given in this Lease shall be in writing sent by FedEx, UPS or other recognized national overnight courier providing for a receipt upon delivery, or by registered or certified mail, postage prepaid, return receipt requested, addressed, as the case may be, to Landlord at the address shown at the beginning of this Lease or to Tenant at the address shown at the beginning of this Lease, or to such other addresses as Landlord or Tenant shall have previously designated in the manner herein provided. Such notice, statement, certificate, request or demand shall be deemed to have been given on the date sent via overnight courier or mailed as aforesaid in any post office or branch post office regularly maintained by the United States Government, except for notice of change of address or revocation of a prior notice, which shall only be effective upon receipt.

At any time or times when Tenant’s interest herein shall be vested in more than one person, firm or corporation , jointly, in common or in severalty, a notice given by Landlord to any one such person, firm or corporation shall be conclusively deemed to have been given to all such persons, firms or corporations. Any notice by Tenant pursuant to the provisions hereof, shall be void and ineffective unless signed by all such persons, firms and corporations, unless all such persons, firms and corporations shall have previously given notice to Landlord, signed by each of them, designating and authorizing one or more of them to give notice to Landlord hereunder and such notice shall then be unrevoked by any prior notice to Landlord.

17.02 - Certificates

Each party agrees that from time to time upon not less than ten (10) days prior notice from the other, to deliver to the person or persons as the party making the request shall designate in such notice, a statement in writing certifying (a) that this Lease is unmodified and in full force and effect and contains the full agreement between the parties (or, if there have been modifications or additional agreements, that the Lease is in full force and effect, as modified, and identifying the modifications thereof or additional agreements), (b) the dates to which the base rent, additional rent and other charges due under the Lease have been paid, and (c) that, insofar as the party making the statement knows, the other party is not in default under any provision of this Lease and has performed all of the obligations to be performed by such other party to date thereunder (or, if the party making the statement has knowledge of any default or of any unperformed obligations, a statement of the nature thereof).

ARTICLE 18

Covenant of Quiet Enjoyment

18.01 - Covenant of Quiet Enjoyment

Tenant, subject to the terms and provisions of this Lease, and upon payment of the rent and observing, keeping and performing all of the terms and provisions of this Lease on its part to be observed, kept and performed, shall lawfully, peaceably and quietly have, hold and enjoy the Premises during the term hereof on and after the Term Commencement Date without hindrance

or ejection by any persons lawfully claiming under Landlord; but it is understood and agreed that this covenant, and any and all other covenants of the Landlord contained in this Lease, shall be binding upon Landlord and its successors only with respect to breaches occurring during its and their respective ownership of Landlord’s interest hereunder.

ARTICLE 19

Miscellaneous Provisions

19.01 - Holdover

Should the Tenant continue to occupy the Premises after the expiration of the term hereof or after a forfeiture incurred, whether with or against the consent of the Landlord, such tenancy shall be from month-to-month and such month-to-month tenancy shall be under all the terms, covenants and conditions of this Lease except its term, and except that the rent during such month-to-month tenancy shall be one hundred ten percent (110%) of the rent payable in the last month of the initial term or the renewal term expired, as the case may be. Either party may terminate such month-to-month tenancy by giving to the other party thirty (30) days written notice of its intent to terminate.

19.02 - Limitation on Landlord’s Personal Liability

(a) It is understood and agreed that Tenant shall look solely to the estate and property of the Landlord in the Premises (including but not limited to reasonable or other amounts paid to Landlord by Tenant) for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) requiring the payment of money by the Landlord in the event of any default or breach by the Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by the Landlord and any other obligation of Landlord created by or under this Lease and no other property or assets of the Landlord or its members, partners, beneficiaries or co-tenants shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies.

(b) The term “Landlord”, as used in this Lease, so far as the covenants and agreements 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 Premises and Lease and in the event of any transfer or transfers of the title to the said Lease and/or the Premises, Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor), including each of its partners or members, shall be automatically freed and relieved from and after the date of such transfer and conveyance of all liability with respect to the performance of any covenants and agreements on the part of the Landlord contained in this Lease thereafter to be performed, and it shall be deemed and construed without further agreement that such grantee or transferee has assumed and agreed to be bound by all of the covenants and agreements in this Lease to be performed on the part of Landlord, and the Landlord or the grantor shall turn over to grantee all monies, if any, then held by Landlord or such grantor on behalf of Tenant and shall assign to such grantee all right, title and interest of Landlord or such grantor in and to such sums held by Landlord under the terms, covenants and conditions of said Lease.

(c) Notwithstanding anything to the contrary in this Lease, in the event that title to the Land or Building (or any portion of either) is transferred in connection with the exercise by any lender to a Landlord (such Landlord being hereinafter referred to as the “Claim Party”) of such lender’s rights with respect to the Land or Building (or any portion of either), a claim by Tenant against the Claim Party for monetary damages which arises prior to such transfer shall survive such transfer and Tenant shall have the continuing right to collect from the Claim Party (including any assets of the Claim Party) amounts due under any related monetary judgment, regardless of whether such monetary judgment was entered before or after such transfer.

19.03 - Force Majeure

The period of time during which either party is prevented or delayed in the performance of the making of any improvements or repairs or fulfilling any obligation under this Lease other than the payment of the rent or additional rent required to be paid by Tenant under this Lease, due to unavoidable delays caused by fire, catastrophe, strikes or labor trouble, civil commotion, Acts of God or the public enemy, governmental prohibitions or regulations or inability to obtain materials by reason thereof, or other causes beyond such party’s reasonable control, shall be added to such party’s time for performance thereof, and such party shall have no liability by reason thereof.

19.04 - Attornment by Tenant

If at any time during the term of this Lease, the Landlord hereunder shall be the holder of a leasehold estate covering premises which include the Premises and if such leasehold estate shall be canceled or otherwise terminated prior to the expiration date thereof and prior to the expiration of the term of this Lease or in the event of the surrender thereof whether voluntary, involuntary or by operation of law, the Tenant shall make full and complete attornment to the lessor of such leasehold estate for the balance of the term of this Lease, upon the same covenants and conditions as are contained herein so as to establish direct privity between such lessor and the Tenant and with the same force and effect as though this Lease was made directly from such lessor to the Tenant. The Tenant shall make all rent payments thereafter directly to such lessor.

19.05 - Landlord May Pay Tenant’s Obligations

All costs and expenses which Tenant assumes or agrees to pay under the provisions of this Lease shall at Landlord’s election be treated as additional rent and, in the event of non-payment, Landlord shall have all the rights and remedies herein provided for in case of non-payment of rent or of a breach of covenant. If Tenant shall default in making any payment required to be made by Tenant (other than the payment of rent as provided by Article 3 above) or shall default in performing any term, covenant or condition of this Lease on the part of the Tenant to be performed which shall involve the expenditure of money by Tenant, Landlord at Landlord’s option may, but shall not be obligated to, on behalf of Tenant, expend such sum as may be reasonably necessary to perform and fulfill such term, covenant or condition, and any and all sums so expended by Landlord, with interest thereon at the rate of one and one-half percent (1 ¹ ⁄ ₂ %) per month from the date of such expenditure, shall be deemed additional rent, and shall be repaid by Tenant to Landlord on demand, but no such payment or expenditure by Landlord shall be deemed a waiver of Tenant’s default nor shall it affect any other remedy of Landlord by reason of such default.

19.06 - Indemnification by Tenant

In case Landlord (and such other persons as are in privity of estate with Landlord) shall, without fault on its part, be made a party to any litigation commenced by or against Tenant, then Tenant agrees to protect and hold Landlord harmless and to pay all costs, expenses, and reasonable attorney’s fees incurred or paid by Landlord in connection with such litigation. Tenant also agrees to pay all costs, expenses and reasonable attorneys fees that may be incurred or paid by Landlord in enforcing the covenants and agreements in this Lease.

19.07 - Effect of Captions

The captions or legends on this Lease are inserted only for convenient reference or identification of the particular paragraphs. They are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Lease, or any paragraph or provision thereof.

19.08 - Tenant Authorized to Do Business in New York

Tenant represents and covenants that it is and throughout the term of this Lease shall be authorized to do business in the State of New York.

19.09 - Execution in Counterparts

This Lease may be executed in one or more counterparts, any one or all of which shall constitute but one agreement.

19.10 - Memorandum of Lease

At the request of either party, the other party agrees to promptly execute a Memorandum of Lease in recordable form pursuant to Section 291-c of the Real Property Law of the State of New York.

19.11 - Law Governing, Effect and Gender

This Lease shall be construed in accordance with the laws of the State of New York and shall be binding upon the parties hereto and their respective legal representatives, successors and assigns except as expressly provided otherwise. Use of the neuter gender shall be deemed to include the masculine and feminine, as the sense requires. Any reference to successors and assigns of Tenant is not intended to constitute a consent to any assignment by Tenant but has reference only to those instances in which Landlord may later give consent to a particular assignment as required by the provisions of Article 13 hereof.

19.12 - Complete Agreement

This Lease contains and embraces the entire agreement between the parties hereto and it or any part of it may not be changed, altered, modified, limited, terminated, or extended orally or by any agreement between the parties unless the same is expressed in writing, signed and acknowledged by the parties hereto, their legal representatives, successors or assigns.

19.13 - Loss of Property and Water Damage

Landlord shall not be responsible to Tenant for any loss or theft of property in or from the Premises, or for any loss or theft or damage of or to any property left with any employee of Landlord, however occurring. Landlord shall not be liable for any damages caused by water, rain, snow or ice, or by breakage, stoppage or leakage of water, gas, sewer or other pipes or conduits, or in, upon, about or adjacent to the Premises, or the buildings upon the Premises, unless caused by the negligence of Landlord, its employees, agents or contractors or if caused by a warranty from Landlord.

19.14 - Security Agreement - INTENTIONALLY OMITTED.

19.15 - No Representations by Landlord

Landlord and Landlord’s agents have made no representations or promises with respect to the Premises except as herein expressly set forth, and no right, easements, or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease.

19.16 - Lease Binding

All covenants in this Lease which are binding upon Tenant shall be construed to be equally applicable to and binding upon Tenant’s agents, employees and others claiming the right to be in the Premises through or under Tenant. If more than one individual, firm or corporation shall join as Tenant, the singular context shall be construed to be plural wherever necessary, and the covenants of Tenant shall be the joint and several obligations of each party signing as Tenant; and, when the parties signing as Tenant; and, when the parties signing as Tenant are partners, it shall be the joint and several obligations of the firm and of the individual members thereof.

19.17 - Amendments

The parties hereto mutually agree that so long as a mortgage or any extension thereof shall be a lien upon the Premises they will not reduce the rents from that provided for in this Lease, provide for payments of rents prior to the time herein provided for, nor terminate said Lease prior to the end of the term, except as otherwise provided in this Lease, without first obtaining the consent of the mortgage in writing, and that any such proposed modifications or termination without said mortgagee’s consent shall not be void as against said mortgagee.

19.18 - Arbitration

Any controversy or claims arising or relative to any matter in connection with this Lease, with reference to which this Lease shall expressly provide that this paragraph governs, shall be settled by arbitration in the City of Syracuse, New York, in accordance with the rules of the American Arbitration Association or its successor organization, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction hereof.

19.19 - Rights of Parties

Either Landlord or Tenant may from time to time at its option exercise any or all of its rights or remedies which it may have at law, in equity or under this Lease; and nothing contained herein, and no exercise of any rights or remedies under this Lease, at law or in equity shall be construed as in any way abridging or waiving any such rights or remedies; and any consent, waiver, compromise or indulgence by one party hereto of or under any of the provisions of this Lease, or as to any breach or default hereunder by the other party hereto, shall not constitute or be construed as a waiver of such party’s right to enforce strict interpretation and performance of the conditions and terms hereof at all other times.

19.20 - Invalidity of Particular Provisions

If any term or provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.

19.21 - Execution of Lease by Landlord

The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises and this document becomes effective and binding only upon the execution and delivery hereof by Landlord and by Tenant. All negotiations, considerations, representations and understandings between Landlord and Tenant are incorporated herein and may be modified or altered only by an agreement in writing between Landlord and Tenant, and no act or omission of any employee or other agent of Landlord shall alter, change or modify any of the provisions hereof.

19.22 - Relationship of the Parties

Nothing contained herein shall be deemed or construed by the parties hereto nor by any third party as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent nor any other provision herein contained, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than Landlord and Tenant.

19.23 - Assignment of Rents

With reference to any assignment by Landlord of Landlord’s interest in this Lease, or the rents payable hereunder, conditional in nature or otherwise, which assignment is made to the holder of a ground lease or mortgage on the Premises or the Building or the land underlying the Building, Tenant agrees:

(a) that the execution thereof by Landlord, and the acceptance thereof by the ground lessor or the mortgagee, shall not be treated as an assumption by such ground lessor or mortgagee of any of the obligations of Landlord hereunder, unless the ground lessor or mortgagee shall, by notice sent to Tenant, specifically elect otherwise; and

(b) that except as aforesaid, such ground lessor or mortgagee shall be treated as having assumed Landlord’s obligations hereunder only upon a foreclosure of such mortgage and the taking of possession of the Premises, or, in the case of a ground lessor, the express, written assumption of Landlord’s position hereunder by such ground lessor.

Where a party acquires the Landlord’s interest in property (whether land only, or land and buildings) which includes the Premises, and simultaneously leases the same back, such acquisition shall not be treated as an assumption of Landlord’s position hereunder, and this Lease shall thereafter be subject and subordinate to such lease-back.

19.24 - Environmental Covenants

(a) Tenant will, at all times comply with, and will not violate in connection with the rental, use, maintenance or operation of its business within the Premises, and Landlord will, at all times comply with and will not violate, in connection with Landlord’s performance of its obligations under this Lease, any applicable federal, state, county, or local statutes, laws, regulations, rules, ordinances, codes, licenses and permits of any governmental authorities having jurisdiction relating to environmental matters and any amendments or extensions thereof, including, without limitation: (i) the Clean Air Act, the Federal Water Control Pollution Act of 1972; (ii) the Resource Conservation and Recovery Act of 1976; (iii) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980; (iv) the Toxic Substances Control Act; (v) the New York State Environmental Conservation Law; (vi) the New York State Public Health Law; and (vii) all other applicable environmental requirements.

(b) Without limiting the generality of paragraph 19.24(a) above, Tenant and Landlord, each to the extent that said party is obligated to perform its respective obligations under this Lease, (i) will operate the Premises and will at all times receive, handle, use, store, treat, and dispose of all hazardous or toxic substances, petroleum products and waste in strict compliance with all applicable environmental, health, or safety statutes, ordinances, orders, rules, regulations or governmental requirements; and, except as otherwise provided for herein, (ii) will remove from and off the Premises all hazardous or toxic substances, petroleum products and waste contamination in compliance with all applicable laws, rules and regulations.

(c) Except as provided for herein, neither Tenant nor Landlord will cause any hazardous or toxic materials, substances, pollutants or contaminants to be released into the environment, or deposited, discharged placed or disposed of at, or near, the Premises.

(d) Tenant and Landlord will, immediately upon receipt of notice of any violation of any of the matters referred to in paragraphs 19.24(a) through 19.24(c) above relating to the Premises or its use, deliver a copy of same to the other.

(e) Each party expressly acknowledges and agrees that it will reimburse, defend, indemnify and hold the other party harmless from and against any and all liabilities, claims, damages, penalties, expenditures, losses or charges (including, but not limited to, all costs of investigation, monitoring, legal fees, fines, penalties, remedial response, removal, restoration or permit acquisition) which may now or in the future, be undertaken, suffered, paid, awarded, assessed, or otherwise incurred as a result of:

(i) any contamination on, above or under the Premises at any time during the term of the Lease which exists as a result of the acts or failure to act by the indemnifying party, its employees, contractors or lessees; or,

(ii) any investigation, monitoring, cleanup, removal, restoration, remedial response or remedial work undertaken on the Premises by or on behalf of Landlord or Tenant at any time during the term of the Lease which is necessitated by an act or failure to act by the indemnifying party, its employees, contractors or lessees.

(f) Tenant and Landlord acknowledge and agree that the termination or expiration of the Lease shall not relieve or release them of any legal liability and responsibility they would otherwise have as the user of, or provider of services to, respectively, the Premises whether by way of damages, penalties, remedial actions or otherwise for any adverse effects or consequences resulting at any time from Tenant’s failure to comply with the provisions of this paragraph 19.24 during the term of the Lease.

(g) Tenant shall pay all costs, expenses, fines, penalties, or damages that may be imposed on Landlord or Tenant by reason of Tenant’s failure to comply with the provisions of this paragraph 19.24, and, at Tenant’s sole cost and expense, Tenant shall indemnify, defend and hold Landlord and Landlord’s third party contractor harmless (including legal fees and expenses) from and against any actions, claims, and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Landlord.

19.25 - Tenant’s Right of First Refusal

During the term of this Lease, so long as Tenant shall not be in default, Tenant shall have the right of first refusal with respect to the purchase of the Building containing the Premises (hereinafter called the “Property”). If during the term, Landlord desires to sell the Property and Landlord receives a purchase offer in writing from a bona fide third party satisfactory to Landlord (the “Purchase Offer”), Landlord shall notify the Tenant, which notice shall make reference to this Lease, and shall also provide to the Tenant an accurate and complete photocopy of the Purchase Offer. Tenant shall then have thirty (30) business days commencing with the next business day following actual receipt of such notice from Landlord within which to exercise its right of first refusal to purchase the Property upon the terms and conditions contained in the Purchase Offer. Notice of the Tenant’s election to exercise its right of first refusal shall be timely if said notice is personally delivered to Landlord at the address set forth at the beginning of this Lease or deposited with the United States Postal Service certified mail, return receipt requested, on or before the expiration of the thirty (30) business day period as set forth above. If the Tenant fails to timely exercise its right of first refusal, then Tenant agrees to execute and deliver, upon request of Landlord in connection with the closing of the sale as contemplated in the Purchase Offer, a recordable acknowledgment of the termination of its right of first refusal under this paragraph 19.25. In the event, however, that Tenant fails to exercise its right of first refusal and the contemplated sale to the third party pursuant to the Purchase Offer fails to close for any reason by the date set for the closing in the Purchase Offer, then Tenant’s right of first refusal under this paragraph 19.25 shall be and remain in full force and effect to the extent of the unexpired term of this Lease and any future purchase offer for the Property shall be subject to such right of first refusal.

19.26 - Tenant’s Option To Expand the Building – Intentionally Deleted

19.27 - Tenant’s Signage on the Building

Landlord agrees that Tenant shall have the right to place its identification sign(s) on the exterior of the Building to the extent that such signage is permitted by the applicable codes, rules and regulations of the Town of Cicero and the Hancock Air Park. Prior to the erection of any exterior sign, Tenant shall submit the design, location and method of installation thereof for the approval of Landlord, which approval shall not be unreasonably withheld.

19.28 - Tenant’s Guarantor – Intentionally Deleted

19.29 - Brokerage

Landlord and Tenant each warrants to the other that it has had no dealing with any broker or agent in connection with this Lease. Landlord agrees to hold harmless and indemnify Tenant

from and against any and all costs, expense or liability (including attorneys’ fees) for any compensation, commissions and charges claimed by any broker in connection with this Lease arising from or out of the acts or omissions of Landlord. Tenant agrees to hold harmless and indemnify Landlord from and against any and all costs, expense or liability (including attorneys’ fees) for any compensation, commissions and charges claimed by any broker in connection with this Lease arising from or out of the acts or omissions of Tenant.

19.30 – 2006 Lease

Landlord and Tenant agree that the 2006 Lease shall remain in full force and effect until the date on which the Expansion Premises is Ready for Occupancy (as defined in paragraph 2.02 above). Upon such date, the 2006 Lease shall be deemed to be terminated and of no further force and effect and the rights, duties and obligations of Landlord and Tenant shall be governed and controlled by this Lease.

IN WITNESS WHEREOF , the parties hereto have executed this Lease Agreement on the date first above written. The Individuals signing on behalf of a principal warrant that they have the authority to bind the principal.


				LANDLORD:
				HANCOCK PARK DEVELOPMENT, LLC

				By:
Witness				Gary J. Malfitano, Member

				TENANT:
				JADAK, LLC

				By:
Witness				Name:
				Title:

TABLE OF EXHIBITS


EXHIBIT A		Legal Description

EXHIBIT B		Site Plan

EXHIBIT C		Identification of Plans and Specifications for Construction of the Premises to be Completed by the Landlord

EXHIBIT D		Identification of Plans and Specifications for Improvements to the Premises to be Completed by the Tenant

EXHIBIT E-1		Hancock Air Park Protective Covenants and Restrictions

EXHIBIT E-2		Additional Rules and Regulations

EXHIBIT F		Stipulation of Term of Lease

EXHIBIT G		Guaranty of Lease – INTENTIONALLY DELETED

EXHIBIT A

Legal Description

EXHIBIT B

Site Plan

EXHIBIT C

Identification of Plans and Specifications for Construction

of the Expansion Premises to be Completed by the Landlord

Drawings by Macknight Architects, LLP dated May 22, 2013 and labeled as Drawing Numbers:

T-1

T-2

A101

A102

A105

A105.1

A201

A301

A401.1

A401.2

A401.3

A402.2

A402.3

A402.4

A403.1

A404.2

A405.1

A406.1

A501

A503

A701

EXHIBIT D

Identification of Plans and Specifications for Improvements

to the Premises to be Completed by the Tenant

Telephone, data, cable TV systems – purchase and installation

Wi Fi wiring

Interior signage

Furniture systems - purchase and installation, including the cost to energize the furniture systems

EXHIBIT E

ADDITIONAL RULES AND REGULATIONS

(a) Tenant shall occupy and use the Premises during the term for uses set forth in Paragraph 1.03 above and no other purpose whatsoever.

(b) Tenant shall not exhibit, sell, or offer for sale on the Premises or in the Building any article or thing except those articles and things essentially connected with the stated use of the Premises by the Tenant without the prior written consent of Landlord.

(c) Tenant will not make or permit to be made any use of the Premises or any part thereof which would violate any of the covenants, agreements, terms, provisions and conditions of this Lease or which directly or indirectly is forbidden by public law, ordinance or governmental regulation, now or hereafter enacted, or which may be dangerous to life, limb, the environment or property, or which may invalidate or increase the premium cost of any policy of insurance carried on the Building or covering its operation, or which will suffer or permit the Premises or any part thereof to be used in any manner including storage therein which, in the judgment of Landlord, shall in any way impair or tend to impair the character, reputation or appearance of the Building as a high quality office building, or which will impair or interfere with or tend to impair or interfere with any of the services performed by Landlord for the Building. Further, Tenant shall not use or permit the use of the Premises in any manner which would violate any law, rule or regulation relating to the environment and to the extent Tenant does so, Tenant shall defend and indemnify Landlord from and against any claims, causes of actions, fines, penalties or the like which may arise from that use.

(d) Tenant shall not display, inscribe, print, paint, maintain or affix on any place in or about the Building any sign, notice, legend, direction, figure or advertisement, except at the doors of the Premises and on the Directory Board, and then only such name(s) and matter, and in such color, size, style, place and materials, as shall first have been approved by the Landlord. The listing of any name other than that of Tenant, whether at the doors of the Premises, on the Building directory, or otherwise, shall not operate to vest any right or interest in the Lease or in the Premises, it being expressly understood that any such listing is a privilege extended by Landlord revocable at will by written notice to Tenant.

(e) Tenant shall not use the name of the Building for any purposes other than that of the business address of Tenant, and shall never use any picture or likeness of the Building in any circulars, notices, advertisements, or correspondence without Landlord’s consent.

(f) No additional locks or similar devices shall be attached to any door or window without Landlord’s written consent. No keys for any door other than those provided by the Landlord shall be made. If more than two keys for one lock are desired, Landlord will provide the same upon payment by Tenant. All keys must be returned to Landlord at the expiration or termination of this Lease.

(g) All persons entering or leaving the Building between the hours of 6 p.m. and 8:00 a.m., Monday through Friday, or at any time on Saturdays, Sundays or holidays, may be required to do so under such reasonable regulations as Landlord may impose so long as they do not prohibit Tenant’s permitted use of the Premises. Landlord may exclude or expel any peddler.

(h) The design floor loading capacity for the Building is 100 pounds per square foot average. Tenant shall not overload any floor. Landlord reasonably may direct the time and manner of delivery, routing, and removal of all items that are delivered to the Building for Tenant’s use and may specify the location of safes and other heavy articles.

(i) Unless Landlord gives advance written notice, Tenant shall not install or operate any steam or internal combustion engine, machinery, heating device or air-conditioning apparatus in or about the Premises, or carry on any mechanical business therein, or use the Premises for housing accommodations or lodging or sleeping purposes, or use any illumination other than electric light, or use or permit to be brought into the Building any flammable fluids

such as gasoline, kerosene, naphtha, benzene and solvents, or any explosives, radioactive materials or other articles deemed extra-hazardous to life, limb or property except in a manner which would not violate any ordinance or regulation or any condition imposed by the standard fire insurance policy issued for office buildings in the County of Onondaga, or do or permit anything to be done, or keep or permit anything to be kept, in the Premises, which would increase the fire or other casualty insurance rate on the Building or the property therein, or which would result in insurance companies of good standing refusing to insure the Building or any such property in amounts reasonably satisfactory to Landlord. Tenant shall not use the Premises for any illegal or immoral purpose. Notwithstanding the foregoing, Tenant may install a refrigerator and microwave cooking device, and upon the prior written approval of Landlord which will not be unreasonably withheld or delayed, Tenant may install additional air conditioning equipment, which shall be operated and maintained at the sole cost of Tenant.

(j) Tenant shall cooperate fully with Landlord to assure the effective operation of the Building’s air-conditioning system, including the closing of blinds and drapes.

(k) Tenant shall not contract for any work or service which might involve the employment of labor incompatible with the Building employees or employees of contractors doing work or performing services by or on behalf of Landlord.

(l) The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by Tenant or used for any purpose other than for ingress to and egress from its Premises. The halls, passages, exits, entrances, elevators, stairways and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant’s business unless such persons are engaged in illegal activities. No tenant and no employees or invitees of any tenant shall go upon the roof or into the mechanical rooms of the Building.

(m) Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Office Park by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought in or kept in or about the Premises or the Building.

(n) With respect to the Premises, Tenant shall see that the doors, and windows, if operable, are closed and securely locked before leaving the Building and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant’s employees leave the Building.

EXHIBIT F

STIPULATION OF TERM OF LEASE

AGREEMENT made and entered into as of this day of , 2013 between HANCOCK PARK DEVELOPMENT, LLC, a New York limited liability company having its principal place of business at 225 Greenfield Parkway, Suite 202, Liverpool, New York 13088 (“Landlord”) and JADAK, LLC a Limited Liability Company organized and existing under the laws of the State of New York having an office at 7279 William Barry Boulevard, North Syracuse, New York 13212 (“Tenant”).

RECITALS:

A. Pursuant to a certain Standard Property Lease entered into between Landlord and Tenant dated as of , 2013 (hereinafter, together with the amendments hereto, if any, described in Paragraph B of this Recital, called the “Lease”), Landlord leased to Tenant the Premises described on Exhibits “A” and “B” annexed thereto, to wit, the premises designated “Premises” in the Lease.

B. The Lease has not been modified or amended, except by:

C. Pursuant to 2.02 of the Lease, Landlord and Tenant agreed to execute and deliver to each other, an agreement setting forth, the date on which the term of the Lease commenced (hereinafter called, and in the Lease defined as, the “Term Commencement Date”), the expiration date of the initial term, and the commencement and expiration dates of the renewal periods (as such terms are defined in the Lease).

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

1. The Premises required to be constructed and finished by Landlord in accordance with the terms of the Lease have been satisfactorily completed by the Landlord.

2. The Premises have been delivered to and accepted by Tenant and are presently occupied by Tenant. The Premises contain 55,000 rentable square feet of space.

3. The date of the commencement of the initial term of the Lease is , 20 and the expiration date is , 20 , subject however to the terms and provisions of the Lease. The first Lease Year shall commence on , 20 and expire on , 20 .

4. The annual rent payable under paragraph 3.01 of the Lease for the initial term shall be .

5. Nothing in the Agreement is intended to change or modify the rights of the parties under this Lease.

IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be executed as of the day and year first above-written.


				LANDLORD:
				HANCOCK PARK DEVELOPMENT, LLC

				By:
Witness				Thomas R. Kennedy, Member

				TENANT:
				JADAK, LLC

				By:
Witness				Name:
				Title:

EXHIBIT G

GUARANTY OF LEASE

INTENTIONALLY OMITTED

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, John A. Roush, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of GSI Group Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2014

/s/ John A. Roush

John A. Roush

Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Robert J. Buckley, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of GSI Group Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2014

/s/ Robert J. Buckley

Robert J. Buckley

Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GSI Group Inc. (the “Company”) on Form 10-Q for the period ended March 28, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Roush, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John A. Roush

John A. Roush

Chief Executive Officer

May 6, 2014

This Certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, or incorporated by reference into any of the Company’s filings with the Securities and Exchange Commission by implication or by any reference in any such filings to the Report.

A signed original of this written statement required by Section 906 has been provided to GSI Group Inc. and will be retained by GSI Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GSI Group Inc. (the “Company”) on Form 10-Q for the period ended March 28, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Buckley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert J. Buckley

Robert J. Buckley

Chief Financial Officer

May 6, 2014

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