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Restructured GSI Group exits Chapter 11

26 Jul 2010

Eight months after filing for bankruptcy protection, the GSI group of companies specializing in photonics technologies emerges with debts reduced by more than $100 million.

The US-based GSI Group has emerged from Chapter 11 bankruptcy proceedings, following a complex restructuring of unsustainable debts relating to its 2008 acquisition of Excel Technology.

The large umbrella group of companies includes Lumonics Lasers, Spectron Lasers and others under the GSI brand, as well as Synrad, Cambridge Technology, Continuum Lasers and many more as part of its Excel Technology subsidiary.

“Today marks a new beginning for [GSI],” said Michael Katzenstein, GSI’s chief restructuring officer and the man who has been finalizing the company’s debt-refinancing efforts. Acknowledging that the restructuring had been “a long and difficult process”, Katzenstein added: “We have strengthened our balance sheet, reduced our debt and created a structure that will allow us to grow our business and build on our industry position.”

Following the restructure, GSI’s debts now stand at $107 million, relating to senior secured notes due 2014. GSI said that the company’s shareholders prior to the restructure had retained 86.1 percent ownership of GSI. This follows a complex set of agreements, including the mortgage of real estate owned by the Excel subsidiaries Synrad, Control Laser and Photo Research.

Descent into debt
In November 2009, GSI Group entered Chapter 11 protection, owing more than $210 million relating to senior loan notes due 2013. The debt stemmed from loans originally taken on to fund GSI’s $360 million acquisition of the Excel Technologies group in August 2008 – prior to that, GSI had liquid assets of more than $183 million and no debt on its balance sheet.

One member of GSI’s new management team has openly described that acquisition as “overpriced”, blaming the previous executive directors for their financial mismanagement.

Following the Excel acquisition, GSI Group failed to file any subsequent quarterly earnings results, and said in late 2008 that it would need to file amended financial statements for the first two fiscal quarters of 2008 because of errors relating to sales made by GSI’s semiconductor systems business unit.

After CFO Robert Bowen left the company on October 28, 2008, GSI received enquiring letters from the US Securities & Exchange Commission (SEC) about its late filings. Then it received notice from its senior creditors warning that the non-filing of its quarterly report may breach the terms of the $210 million debt.

Meanwhile, the Nasdaq exchange placed GSI Group on a list of non-compliant companies, owing to the late filing of its results, and the company was forced to state its cash position publicly – which at the time stood at approximately $70 million.

In February 2009, things began to look better for the company: GSI’s senior creditors agreed not to take any action over the late filing of financial results, on the understanding that GSI would bring in a financial advisor with immediate effect, while Nasdaq granted an extension for the company to comply with its rules.

But with its investigation into the erroneous semiconductor systems revenues now extending to transactions dating back to 2004, GSI was still unable to file any quarterly results. Then in May 2009, the SEC launched a formal investigation into the accounting mistakes, while the Nasdaq continued to threaten GSI with de-listing.

Next, a potential restructuring deal appeared to be within sight, with GSI announcing that its senior creditors had agreed in principle to reduce the outstanding debt to $95 million – in exchange for an 80 percent equity share in the company. At this point, the GSI share price had sunk to new lows – prompting another de-listing threat from the Nasdaq in September 2009 after the company traded at less than $1 for 30 consecutive days.

After more than a year without filing any quarterly results, GSI was finally de-listed by Nasdaq and placed on the “Pink Sheets” over-the-counter exchange instead. At this point Stephen Bershad, one of GSI’s major shareholders, requested that the company’s senior management team call a special meeting to elect a new board of directors.

Overpriced acquisition
In a proxy statement urging shareholders to replace the existing board with a new team, Bershad openly accused the executive team at the time of mismanaging GSI’s cash and capital structure, “including spending approximately $160 million of its cash and incurring hundreds of millions of dollars in debt for an overpriced acquisition”.

The proxy statement also noted that, since the Excel acquisition, GSI Group’s market capitalization had plummeted from $325 million to just $31 million, while the company had been without a CFO for more than a year.

Shortly afterwards, the GSI management took the decision to enter the company into Chapter 11 bankruptcy proceedings. Now, following the final restructuring efforts led by Katzenstein, five existing members of the GSI board of directors have resigned, while Bershad was one of seven new directors selected to serve on the company’s board.

Sergio Edelstein, GSI’s CEO since 2006, described the ill-fated Excel acquisition as "transformational" for GSI at the time. As it turned out, he was correct - although not in the manner that was expected. Following the subsequent bankruptcy proceedings, Edelstein resigned his positions at the company and all its affiliates on May 25. According to SEC filings, Edelstein’s severance package included 12 months’ salary ($520,000) and a lump sum of $259,000.

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