GT Seeks to Void 'Oppressive and Burdensome' Agreements With Apple, Outlines Sapphire Wind Down Process

[The Monkey]

Seriously though. If GT is able to force renegotiation with Apple while discharging debt in Chapter 11, stock could take a swing. Only has to hit $2 to make me a happy boy.

Or, much more likely, the shares are canceled even if the entity emerges as a going concern, which itself is unlikely.

Very few of us have the resources or information to do well investing in bankrupt stocks. If you're posting here about wanting to do so, that almost by definition means you shouldn't.

 

[MyopicPaideia]

the contract is BS but they signed it. I wouldn't be surprised if they won though. A contract that makes you produce product at a certain rate, forces you to not sell it except to Apple, and gives Apple the ability to not buy it (and you still can't sell it to anyone else) is a recipe to bankrupt a company. Especially since Apple could call back their loans if GTs cash fell below a certain level which was certain to happen as they had to pay the bills but weren't selling their product to anyone and still had to produce it in hopes Apple would buy it

Yeah, I would agree with you if it was a simple supplier contract, and GTAT was using their own money to start up operations...but that's just not the case. Apple paid for all of those furnaces, and it is Apple's building that houses the production facilities.

I personally don't think it is unfair, burdensome, or oppressive to protect a nearly half billion dollar investment to insert clauses that prevent your own money from being used to create products that could then be sold to direct competitors, or to require a certain level of performance as a requirement to trigger an obligation to buy the product.

Basically what has happened, at least it appears to be so, is that GTAT burned through all of Apple's money without meeting their obligations under the contract, and now have no feasible way to meet those obligations that would trigger Apple to be obligated to buy the product from them, so they are screwed, and now they are trying to get the contract completely voided in bankruptcy court because they don't want to or can't pay back all of Apple's money they used up in the process.

While it is most certainly true that Apple has no blind obligation to buy the product, and that under said contract GTAT is forbidden to sell it to anyone else in the case that Apple doesn't buy it, it is almost certain that Apple WOULD HAVE BEEN obligated to buy under the contract if GTAT triggered the activation of that clause by fulfilling the requisite performance clauses.

It is also highly likely that there was a provision for the nullification of the exclusivity clause should GTAT fulfill the performance requirements in full, but Apple doesn't fulfill their obligation to then purchase.

That would protect Apple's significant investment from being used against it while at the same time giving GTAT the security that as long as they fulfilled their obligations under the contract, that they would be able to sell it.

Don't tell me that is oppressive or burdensome.

Then again, I could be totally wrong, and GTAT's executives could have wrecklessly dove in head first at the thought of instantly doubling or tripling the company's size working with Apple.

It actually seems more like Apple is the one being scammed here, not the other way around.

 

[dubels]

Apple is a bully and arrogant. They're like the guy yelling at the gate agent at an airport, "Do you know who I am?!"
Like businesses should kiss their feet because it's a big contract.

Yeah Apple is really a big bully, how dare they loan all that money for this companies growth and require them to be exclusive so they don't fund competitor growth! How dare they not buy from them because they didn't meet yield requirements!? Stop being childish. Apple is a huge corporation, if it just rolled over it wouldn't be where it is today. It looks like Apple is going to take a huge loss if this GTAT gets their way in Chapter 11.

I hope the Apple attorneys drafted bankruptcy protection clauses the secured their loans in the equipment and facilities they paid for. Executory contracts that do not benefit the debtor can be thrown out but secured debts need to be dealt with and give Apple voting rights in the CH 11 plan.

 

[anonymous82]

Apple is a bully and arrogant. They're like the guy yelling at the gate agent at an airport, "Do you know who I am?!"
Like businesses should kiss their feet because it's a big contract.

Proof? Otherwise don't make yourself look ...

 

[The Monkey]

Then please, further enlighten us armchair lawyers and expound on your comment. Be certain to list law, case precedents and sources. (not being sarcastic, very serious and interested)

Why? It's really easy to do a few quick searches and figure this stuff out. This isn't some big conspiracy; this isn't a "scam." It's a company seeking protection in bankruptcy. It happens all the time. And a major part of that is reworking the extant agreements under which the company can no longer perform. We can all speculate about the reasons for bankruptcy (incl. that GTAT would have gone tits up last year if not for Apple's infusion of cash). But that doesn't change that it's in Chapter 11 now and behaving accordingly.

 

[HobeSoundDarryl]

Edit: I figured my 160 million figure was wrong...

Yes, the number according to this https://forums.macrumors.com/threads/1797685/ was $160 THOUSAND. If it was million, it would be a very different picture. But $160K is almost nothing in CEO lifestyle money.

I also run a business. I enter into client engagements that I never see as "burdensome" or "oppressive" going in. But sometimes they can become that based on how the engagement evolves.

I have no clue what happened here. But I know if my company was somewhat locked into an exclusive with a big company and I had a lot of dependency on receiving $139M payment that was withheld, I'd very likely feel a great "burden" pretty quickly. And if the exclusivity part of the engagement had my hands somewhat tied that there appeared to be no better options than killing my company, I'd consider that pretty "oppressive" too.

That's not necessarily painting Apple as the villain here; I also suspect that this is a GT biting-off-more-than-they-could-chew scenario. But I don't automatically assume that all of the blame must be on the one party not named Apple. Instead, I suspect the cause if we ever get the facts will be different than an evil CEO conspiring to bilk Apple out of a few hundred million dollars so he could bankrupt his company, kill his reputation and income and remaining stock share value and ride off into the sunset with the tin parachute of a $160K stock sale in September.

 

[CWallace]

Understood, but every possible way this could go bad, appears to lead to GTAT's doom. The only way they make out is if everything goes perfectly It just seems like a bad deal to me, perhaps only because in hindsight, it's all gone to hell. They're even putting their IP on the line that could end up with competitors. Even if they meet milestones, Apple has zero commitment to purchase. They state that the production and processing are difficult (even short power fluctuations could damage the sapphire boule), that they have little experience manufacturing the sapphire and nothing even remotely of this scale. Oy.

Yes, the significant risk was with GTAT in this relationship.

I agree with HobeSoundDarryl's comment that this sounds like a "swing for the fences" move by the CEO and senior management / Board of Directors. If it had been successful, they would have significantly grown their business overall and diversified it beyond just being a supplier of sapphire furnaces (where I imagine they face competition - perhaps foreign competition with better economics and competitive positions - that could have in the long run been just as much a threat to their continued existence as an operating entity.

 

[The Monkey]

People are getting way too hung up on the words "burdensome" and "oppressive." These are terms of art.

 

[Solomani]

Or, much more likely, the shares are canceled even if the entity emerges as a going concern, which itself is unlikely.

Very few of us have the resources or information to do well investing in bankrupt stocks. If you're posting here about wanting to do so, that almost by definition means you shouldn't.

Hehe. Yeah now I see MacRumors has become a place for investment advice too.

Getting financial advise from MR…. is just as entertaining as those MacRumor posts from OPs that say "I have relationship problems with my GF! It goes like this…. so guys, what should I do???"

 

[rsocal]

This. 1000 times this.

Absolutely!!!

 

[castlerock]

if it was so "burdensome & oppressive" to be a supplier for Apple, outside of going into an agreement with Apple in the first place, why would the CEO take almost $160K of stock value out of the company if its agreement with Apple created no value?

It doesn't create value anymore. It was a valuable agreement when GTAT thought Apple was actually going to buy their product and pay them. Now that Apple withheld the payment (we still don't know why, AFAIK, but likely due to not meeting a production target), they want to get out of their contracts because there is no business model in having a bunch of equipment producing a product that you can't sell to anyone else.

So in other words, not only do GTAT's contracts with Apple have zero value to GTAT now, they are actually an extremely expensive burden for which they get nothing in return. Their duty to their shareholders was to get out of the contract in whatever way was possible- apparently going BK made the most sense.

 

[dubels]

Then please, further enlighten us armchair lawyers and expound on your comment. Be certain to list law, case precedents and sources. (not being sarcastic, very serious and interested)

Really no need to list case precedents since it is a crucial part of bankruptcy law. Executory contracts, ones that still have obligations to be completed by both parties, can be assumed or rejected with the approval of the court. Executory contracts are generally only allowed to be assumed if they are of benefit to the debtor. This is why counsel for GTAT used the language burdensome and oppressive. The Monkey is dead on with them being terms of art.

Since you wanted the statue here it is: 11 US §365(a). In this case, it would be the debtor in possession and not a trustee unless a trustee is appointed in the CH11 case. (Trustees have this power in CH7). If you really want to see how it all works together with a rejection read through 11 US §365 and §502(g). Since you are not paying my lawyer fees you can figure out the rest yourself or rely on these armchair lawyers, some of which are spot on.

 

[The Monkey]

So in other words, not only do GTAT's contracts with Apple have zero value to GTAT now, they are actually an extremely expensive burden for which they get nothing in return. Their duty to their shareholders was to get out of the contract in whatever way was possible- apparently going BK made the most sense.

Not exactly. The duty now runs to creditors, which arguably started even prior to the bankruptcy.

 

[TT D'arby]

Once assets are provisioned and cast to shareholders we'll have a better understanding of the legal ramifications from Apple's underwriters. I predict the wind-down to complete later than agreed by the courts but we'll see. I'm curious where the spell-out of the financial disclosure architecture lies.

 

[castlerock]

Not exactly. The duty now runs to creditors, which arguably started even prior to the bankruptcy.

You obviously have no idea what you're talking about. http://cdn.macrumors.com/vb/images/smilies/smile.png

Good day.

 

[macduke]

So at what point is Apple going to step in and buy them out? The daily news surrounding this is a circus that is spinning out of control.

 

[UnfetteredMind]

Yes, the significant risk was with GTAT in this relationship.

I agree with HobeSoundDarryl's comment that this sounds like a "swing for the fences" move by the CEO and senior management / Board of Directors. If it had been successful, they would have significantly grown their business overall and diversified it beyond just being a supplier of sapphire furnaces (where I imagine they face competition - perhaps foreign competition with better economics and competitive positions - that could have in the long run been just as much a threat to their continued existence as an operating entity.

Agreed. Another bit from the risks section, and it has come true:

Servicing our debt, including our repayment obligations to Apple, and other payment obligations requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

Our ability to make scheduled payments or to refinance our obligations under the Prepayment Agreement with Apple (if not recouped through delivery of sapphire material) or our 2017 notes and 2020 notes and any other indebtedness depends on our future performance and available cash, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt, our other repayment obligations and/or make necessary capital expenditures (particularly if there were to be a default under either or all of the MDSA or the Prepayment Agreement, 2017 notes or 2020 notes that would accelerate the payments due thereunder). If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt or repayment obligations.

Our Prepayment Agreement with Apple contains certain "trigger events" which would require that we repay the full amount advanced to us through such time, including "trigger events" related to maintaining adequate financial metrics such as cash holdings. Payment of these amounts may require the use of substantial amounts of our cash and if we do not have such cash (or cannot timely raise sufficient amounts) to make this payment, we would be in default, which would likely cause a cross default under our other debt obligations (including our convertible notes). Our obligation to repay the Prepayment Amount is secured by (i) the assets held by GT Equipment Holdings LLC (a wholly-owned subsidiary of the Company and the legal owner of the ASF systems and related equipment used in the Arizona facility) and (ii) a pledge of all of the equity interests of GT Equipment Holdings LLC. If Apple were to foreclose on such equity interests and/or equipment, our business and results of operations would be substantially harmed.

They see they aren't going to be able to meet their financial metrics and file Chapter 11 before Apple can foreclose per the agreements. Whether Apple would have or not, we don't know, from other things it sounded like they were willing to work with them, but maybe GTAT just wants to get out of the whole production business? Ugly times for them for sure. We'll just have to wait and see how it'll all work out.

 

[dubels]

So at what point is Apple going to step in and buy them out? The daily news surrounding this is a circus that is spinning out of control.

Apple cannot just step in and buy them out at this point because they are in Bankruptcy. Everything needs to be channeled through the bankruptcy court and GTAT still has a lot of control.

 

[The Monkey]

So at what point is Apple going to step in and buy them out? The daily news surrounding this is a circus that is spinning out of control.

I don't think Apple will. Looks awfully predatory and will scare off vendors. Especially since Apple gets some IP as it is (not sure how much: furnaces etc.). Maybe, maybe it buys one of the pieces that gets thrown out to the distressed debt vultures.

 

[rsocal]

Don't tell me that is oppressive or burdensome.

Then again, I could be totally wrong, and GTAT's executives could have wrecklessly dove in head first at the thought of instantly doubling or tripling the company's size working with Apple.

It actually seems more like Apple is the one being scammed here, not the other way around.[/QUOTE]

This is my take as well.

As I stated earlier, GTAT bet the farm on Apple and signed a contract, if I understand it correctly, was just plain stupid!

 

[CWallace]

So at what point is Apple going to step in and buy them out? The daily news surrounding this is a circus that is spinning out of control.

When the Bankruptcy Judge and Creditors Committee decide to start entertaining such offers (though with Apple likely being on the Creditors Committee could complicate that).

 

[The Monkey]

This is my take as well.

As I stated earlier, GTAT bet the farm on Apple and signed a contract, if I understand it correctly, was just plain stupid!

Or GTAT took a calculated business risk on the only terms it could get at that time to stay in business.

 

[Solomani]

Apple cannot just step in and buy them out at this point because they are in Bankruptcy. Everything needs to be channeled through the bankruptcy court and GTAT still has a lot of control.

Empress of the Universe the Honorable Judge Lucy Koh…. doesn't work part-time as a bankruptcy judge….. does she??

If she does… Apple is so screwed.

 

[Zinthar]

On the flipside, what say does GTAT have in the business decisions at Apple?

I don't think GTAT could secure a contract with Apple that says "You must buy this amount of sapphire from me for use in the iPhone 6."

That would basically lock Apple into producing iPhone 6 with sapphire, which I don't think Apple would ever want to be in that position.

At the end of the day, Apple wants to make the go / no go call on sapphire, and that is something GTAT wouldn't ever be able to secure in a contract, IMO. It is just the risk of the business.

There's a middle ground: The contract could specify that Apple has first rights to buy any sapphire produced by GTAT at the specified price, and GTAT may sell any amount refused to another buyer.

It just doesn't stand to reason that Apple would want to allow a supplier to go bankrupt and stop producing, thus restricting the supply and raising the price of a component used in all of their mobile products.

 

[dubels]

You obviously have no idea what you're talking about. http://cdn.macrumors.com/vb/images/smilies/smile.png

Good day.

Yeah that made no sense.

I am not going to bother looking over the contract because I am not Apple's attorney, but there possible are strong arguments that the exclusive contract is still a benefit to GTAT because of its financing deal with Apple. The Monkey was right about the terms being a term of art, the 'Oppressive and Burdensome' was used to guide the court towards this goal of rejecting the executory contracts.