LASR (GSI GROUP) – ANALYSIS AND BREAKDOWN OF WHAT WENT INTO OUR DECISION TO BUY LASR

Posted By admin on Jan 28, 2011 | 0 comments

(Some of the prices that appear below are pre-reverse split prices)

We initiated our position in LASR during the first quarter of 2010 at 2.55 per share. It is trading close to $12 as of 1-28-11. We have been scaling out of the position throughout January. The following is the research, reasons and facts that compelled us to make this our largest position:

What appears below is from our current research report with respect to LASR. LASR was, at one point, our largest holding. We have been taking profits on the position since the beginning of this month. I am still very bullish on the stock and wouldn't hesitate for a second to recommend it for investment. I feel it will eventually be bought out by a larger company at a price that will, at a minimum, be double of where we are now. However, we are micro-cap investors, and this stock has gotten way out of my comfort zone. Add to this the fact that we are discovering new opportunities that we need to allocate capital into.

What is missing from the research report below is the step by step process of what made us get into and continue scaling into LASRD. Although the company was in bankruptcy, at no time did we have any doubt that the company would come out of bankruptcy with shareholder value intact.

Here is a summary of what took place from beginning to end:

- In 2008, near the peak of the market GSI Group (LASR) acquired a company by the name of Excel Technology for $32 per share or $360 million.

- The acquisition of Excel was partly paid for through the issuance of long-term debt securities, as well as cash.

- In December of 2008, GSI Group announced that they had some errors in accounting. The prior financial statements they had issued could no longer be relied upon. This caused investors to jump ship and begin losing faith in the company. Shares plummeted as investors could not come up with a way to value the company given that their financial numbers were no longer reliable.

- In late 2009 things began to unravel very quickly, as GSI Group was delisted for failing to provide the necessary filings to remain on the Nasdaq.

- In late 2009 the company was forced to file for CH. 11 bankruptcy as a result of their continued delayed filings and the subsequent breach of agreement with Noteholders.

- Stephen Bershad became involved with GSI Group in 2009. Stephen Bershad is an industry veteran and former CEO of Axsys Technologies.

- Stephen Bershad began acquiring large percentages of GSI Group in the open market throughout 2009.

- Stephen Bershad met with GSI Group's management on numerous occasions in an effort to present a different point of view with the restructuring of GSI Group.

- Once it became clear to Mr. Bershad that GSI Group's management did not have the best interest of shareholders in mind he proceeded to form an "equity committee" to preserve shareholder interests in the face of irresponsible management.

- It was revealed in bankruptcy hearings during the first half of 2010 that GSI Group continued to generate cash and was exceeding expectations with respect to top and bottom line numbers.

- As the bankruptcy hearings proceeded, it became abundantly clear that current management of GSI Group only had their own interests in mind. They were essentially a group of tyrants who had completely disregarded their fiduciary duty to shareholders.

- Eventually, creative means of financing were employed (rights offering at $1.80 per share) to reduce the principal of the notes and preserve shareholder equity.

- The equity committee won...GSI management lost. Shareholder equity was preserved and has prospered in the face of continued improvement in the fundamentals for GSI Group.

Even with all these points, it is still a cliff notes version of what went on with GSI Group. The manner in which Stephen Bershad and his team handled this should be a lesson to all activists, special situation investors and fund managers of the right way to go about preserving shareholder equity and ousting management without destroying the companies ongoing business.

Our involvement with GSI Group began in early 2010. We began to study the company, their acquisition of Excel and the subsequent bankruptcy. Once we saw the Bershad was heavily involved and had every intention of preserving shareholder equity, we felt comfortable enough to become involved in the investment.

A rights offering was made during the middle of 2010 at $1.80 per share. We participated in the rights offering, which amounted to "free money" for all participating shareholders as the stock traded at a heavy premium to the $1.80 price throughout 2010. I believe the lowest it got at any point after the rights offering was $2.05.

I am not the type of investor to get caught up in all the details and dissect the numbers through and through. There were key elements at work here. They were as follows:

- A veteran activist involved in an attempt to keep shareholders afloat

- A company that kept generating revenues and cash during the entire restructuring process

- A management that was clearly incompetent

- An activist that put a lot of his money where his mouth was, investing millions into the company

- A stock price that was telling a different story than the bankruptcy that was hitting the headlines

- A complicated situation that market participants misunderstood

As general as these key points are, they are rare to find. Opportunities like GSI Group do not come around very often. I am glad we were able to participate to the extent that we were. Still holding a small position. And always on the lookout for the next GSI Group.

What appears below is from our current investment report to members:

CURRENT POSITIONS: REPORT

We initiated LASR during the first quarter of 2010 for both our own accounts and client accounts based on the following factors:

-Substantial shareholder activism taking place in the form of an equity committee

-It was our belief that the equity committee would succeed in preserving shareholder equity -

-Stephen Bershad – an accomplished industry veteran - was leading the equity committee after investing a substantial amount of his own funds into GSI Group Inc.

- The primary cause of the bankruptcy was the debt taken on as result of the acquisition of Excel Technology at the peak of the market. Subsequently, debt holders were cooperative in initiating a plan to reduce the debt in exchange for equity.

- The company had failed to provide the required financial filings to the SEC for a period of years. This caused the stock to trade at a further substantial discount.

- Although financial filings for the company were unavailable, it was our belief that the company was growing revenues and generating cash throughout the bankruptcy proceedings, which turned out to be indeed the case.

- Technically, the company had formed a very solid base and seemed to be under accumulation.

- The company was engulfed by uncertainty with all but a few investors willing to accumulate below $1 per share for fear of the bankruptcy dissolving their equity completely. Again, this was another reason the company, despite the facts pointing strongly towards shareholder equity being preserved, was trading at a steep discount.

Current Outlook For LASR:

:

The company has increased in value substantially since we initiated the position during the first quarter of 2010. We have been adding as the company moved up, with our last addition taking place in July of 2010.

We continue to believe that LASR represents a good investment at current levels. However, the margin of safety, anywhere above $3 per share, has been greatly diminished. The stock will be susceptible to market fluctuations and has increasingly become correlated to the market averages. This trait will only increase as the stock continues moving forward in price.

The company continues to remain undervalued at current levels, due primarily to the fact that it is listed on the pink sheets. This will change in 2011, when the company should be listed once again on the Nasdaq, which will make it more accessible to institutions and allow individual investors to look upon the stock more favorably.

From a fundamental standpoint, the company continues to grow revenues and the bottomline. The company is cash flow positive, with an increasing reserve of cash on the balance sheet.

With the recent management changes and with Bershad leading the company, as Chairman of the Board, we feel that over the long-term...given a favorable market environment, LASR continues to have substantial upside. The eventuality here is heavily slanted towards LASR being bought out by a larger company.

1-4-11 Update LASR – We have started taking profits on a portion of our position in LASR for all accounts. This is due to a number of reasons. Before outlining those reasons, our opinion on the name remains very favorable and believe that, at current valuations, the stock is nowhere near realizing its full value. The reasons for reducing the position from full/heavy allocation to small is as follows:

-Market cap is exceeding the point that we are comfortable investing in given our methodology

- The company will be more susceptible to market fluctuations, as the correlation with the market will only grow given the market cap

- While we believe that January will be a positive month for the market, there is a seasonal tendency for things to get choppy past January. We believe that LASR will be susceptible to this choppiness

We have done considerably well investing in LASR and believe that taking profits on a portion of the position is warranted. We will be holding onto a small sized position for the time being.

***END***

With all this said, we are holding onto 3 positions currently (with a 4th about to be released shortly) that we have done the same type of research into and that we plan on sitting on while they produce gains that are similar to what we experienced in LASR. We do our homework, profits follow. Become a member here.