Market Price of Common Stock (as of One Day after Release Debt in $millions of Most Recent 10-Q or 10-K)
Total Stock Return
(10-Qor Long- Short- Number Total during
Ticker 10-K) Term Term of Shares Price ($millions) Beta Period Date
~~~~~ ~~ ~
Shoney’s SHN
Perkins Family Restaurants PFR International House of Pancakes IHOP
Bob Evans Farms BOBE
Cracker Barrel Old Country Store CBRL
CKE Restaurants CKR
DavCo Restaurants DVC
Foodmaker FM
Rally’s Hamburgers RLLY
Ryan’s Steak House RYAN
Luby’s LUB
Pollo Tropical POYO
Vicorv Restaurants VRES
511 1/97 313 119 7 3131197 4/25/97
5/2/97 5119197 3129197 4113197 3130197 4/2/97 2128197 3130197 4130197
$ 417 $ 87 48.57
$ 58 $ 7 10.48
$ 140 $ 6 9.52
$ 2 $ 69 42.64
$ 63 $ 4 60.95
$ 80 $ 6 33.44
$ 28 $ 15 6.43
$ 396 $ 1 38.98
$ 67 $ 1 20.55
$ 93 $ 45 47.41
$ 95 $ 0 23.41
$ 10 $ 0 8.13
$ 22 $ 1 9.08
$ 5.75
$13.50
$25.25
$13.13
$28.00
$21.70
$ 9.63
$10.38
$ 3.63
$ 7.94
$20.38
$ 5.00
$11.50
$ 279 1.14
$ 141 0.81
$ 240 1.46
$ 560 0.84
$1,707 1.24
$ 726 1.51
$ 62 0.08
$ 404 0.92
$ 74 1.37
$ 376 0.46
$ 477 0.49
$ 41 1.80
$ 104 0.77
-71 % 9%
63%
-25 % 2.5 yo 375%
-27%
4 7 % -58%
-27%
60%
-89%
-29 % Brinker International EAT 3126197 $ 103 $183 67.47 $12.63 $ 852 1.50 -4%
S&P 500 SPX 1.00 103%
Flagstar FLSTQ 4/2/97 $2,228 $ 0 42.43 $ 0.60 $ 25 0.07 -94%
Notes:
The above companies respresent all 14 publicly traded, predominantly restaurant companies that both DLJ and Jefferies re- None of the above companies had any material amount of preferred stock.
The time period used for the calculation of betas and total returns is approximately five years.
Sotrrces: Company 10-Ks and 10-Qs; Bloomberg.
garded as “comparable” to one or more of the restaurant chains that Flagstar owned.
-L
9
-L EXHIBIT 4.18 Flagstar’s Unsecured, Publicly Traded Debt: Changes in Market Value (as of Month-End)
3/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96 1/97 2/97 3/97 4/97 5/97 6/97
%
10.75% senior notes, due 2001 ($270 million)
Price 95.75 93.50 93.88 91.75
YTM 11.70 12.27 12.22 12.82
10.875% senior notes, due 2002 ($280 million)
Price 96.75 92.75 93.00 90.00
YTM 11.72 12.39 12.37 13.11
11.25% senior sub debs, due 2004 ($722 million)
Price 83.00 79.00 77.25 71.00
YTM 14.59 15.58 16.09 17.89
11.375% senior sub debs, due 2003 ($125 million)
Price 84.50 77.75 77.00 72.25
YTM 14.62 16.39 16.70 18.19
10% convertible junior sub debs, due 2014 ($100 million)
Price 72.75 70.50 72.00 54.00
YTM 14.13 14.60 14.31 19.05
90.75 87.00 13.18 14.36
88.75 13.97
91.50 13.22
96.75 11.67
97.00 11.61
98.50 11.18
99.50 99.25 10.89 10.96
101.50
-
90.63 87.25 13.01 13.94
86.75 14.16
91.00 13.10
96.50 11.71
96.75 11.66
98.50 11.23
98.75 99.00 11.18 11.12
101.50
-
73.25 65.50 17.34 19.87
60.00 22.05
40.00
- 40.00 - 39.00 - 44.75 - 45.00 42.50
- - 41.00 -
74.50 65.50 17.65 20.80
65.00 21.21
40.00
- 39.50 - 38.38 - 44.75 - 45.00 42.00
- - 40.00 -
58.50 56.88 17.65 18.16
32.88
- 28.88 - 24.50
- 15.25 - 15.38 -
17.50 16.00
- - 16.00 -
Stnnakrd c9Poor’s average YCM on five-year industrial bonds
B rating 9.99 9.86 9.63 9.93 10.10 10.05 9.85
BBIBB-rating 8.79 8.67 8.36 8.70 8.84 8.85 8.66
BBi rating 7.48 7.72 7.49 7.81 7.92 7.90 7.53
-. - , ,..-. - . . , 1~ - . ..., ._ ,. ~.. . . ~ ~ ..~ . .. , ~. . . ,. . . .. . -. ~ _. . . ., , - . . . _. . ~ , ._ -. . . . , ,..
Last Last Last
Standard 8 Poor’s ratings of Flagstar’s debt Rating Change Rating change Rating Change 10.75% senior notes, due 2001 ($270 million) B 4/94 E- 5/95 CCC 2197 10.875% senior notes, due 2002 ($280 million) B 4/94 B- 5/95 CCC 2/97 11.375% senior sub debs, due 2003 ($125 million) ccc+ 4/94 C C G 2l97 10% convertible junior sub debs, due 2014 ($100 million)
11.25% senior sub debs, due 2004 ($722 million) CCC+ 4/94 CCC- 2/97 M I
Source: Standard & Poor’s, Bond Guide, and Creditweek.
Note: “Price” represents percent of par; “YTM” represents the yield-to-maturity. All prices indicated are approximate “bid” prices.
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Flagstar Companies, Inc. 148 EXHIBIT 4.1 8 Dillon Read’s Valuation Grid for Flagstar’s Senior Subordinated Debt (as of Early March 1997) ($millions)
EBITDA (1996 actual) $ 286 $ 286 $ 286
Possible multiples 5.5 6.0 6.5
Enterprise values per different multiples $1,573 $1,716 $1,859
Less: senior debt ($1,295) ($1,295) ($1,295)
equity claims $ 278 $ 421 $ 564
($722 + $125) $ 847 $ 847 $ 847
sub debt 32.8% 49.7% 66.6%
Available for all subordinated debt and Face value of senior subordinated debt
Residual value as % of face value of senior Present value of senior subordinated debt assuming:
6 months to emergence from Chapter 11
@ 15% discount rate 30.5% 46.2% 61.9%
@ 20% discount rate 30.0% 45.4% 60.8%
@ 25% discount rate 29.4% 44.5% 59.6%
@ 15% discount rate 28.5% 43.2% 57.9%
@ 20% discount rate 27.4% 41.4% 55.5%
@ 25% discount rate 26.3% 39.8% 53.3%
@ 15% discount rate 26.8% 40.6% 54.4%
@ 20% discount rate 25.2% 38.2% 51.2%
@ 25% discount rate 23.9% 36.1% 48.4%
Source: Dillon Read “High-Yield Research” report, March 13, 1997; some modifi- cations by casewriter for simplification.
12 months to emergence from Chapter 11
18 months to emergence from Chapter 1 1
U
Alphatec Electronics Pc1
I t is better to eat dogs' dung than to go to court.
-Thai saying'
0 n the morning of July 28, 1997, Robert Mollerstuen, president and chief operating officer (COO) of Alphatec Group, received a call from the Alphatec Electronics Public Company Limited (ATEC) board of di- rectors asking him to take over as interim chief executive officer (CEO).
Based in Thailand, ATEC was part of the Alphatec Group, a sprawling network of technology-intensive businesses ranging from semiconductors to telephones, plastics, and life insurance. ATEC had been a high-tech pi- oneer in Thailand, starting out as a subcontract semiconductor packager with assembly and test operations in Bangkok, Shanghai, and two loca- tions in the United States. At an emergency session of ATEC's board, Charn Uswachoke, ATEC's charismatic founder and CEO, had resigned after a Price Waterhouse (PW) financial review uncovered several years of falsified financial statements and unauthorized disbursements to other companies controlled by him. Three weeks earlier Thailand had let its currency float, triggering a devaluation that set off a financial crisis across Asia.
The transactions PW discovered masked widening operating losses at
~ _ _ _ _ _ _ ~ _ _ _ _ ~~ ~ ___ ~~ ~ ~
This case was prepared by Research Associate Perry Fagan, Ph.D. Candidate C.
Fritz Foley, and Professor Stuart Gilson. Copyright 0 2001 by the President and Fellows of Haruard College. Haruard Business School case 200-004.
'William Gamble, "Restructuring in Asia-A Brief Survey of Asian Bankruptcy Law," Emerging Market, vol. 3, no. 1, January 25, 1999.
150
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Alphatec Electronics Pc1 151 ATEC, which left the company unable to service its $373 million debt. Af- ter it missed payments on two of its bond issues, a restructuring effort was launched in June 1997 under the direction of ATEC’s management and creditors. An initial attempt at restructuring failed when Charn, ATEC’s largest shareholder, rejected a plan that would have significantly diluted his ownership interest in the firm.
The failure of ATEC’s first attempt at restructuring coincided with an April 1998 amendment to the Thai bankruptcy code that for the first time offered debtor companies like ATEC the option to seek reorganiza- tion under the Thai equivalent of Chapter 11 protection found in U.S.
bankruptcy law. The prior law had provided only for the liquidation of distressed companies. Creditors could spend as long as fifteen years in court arguing their rights, and their prospects for significant recovery were dim. As a result, creditors were reluctant to seek the intervention of the courts.
In the wake of Charn’s refusal to approve the first restructuring plan, ATEC and its creditors initiated bankruptcy proceedings under the new law. Under court supervision creditors devised a second plan to restructure the company, one that did not require shareholder approval.
However, certain key creditors voted down this plan because of the large write-off involved and because they believed it would not guarantee their right to pursue legal action against Charn and ATEC’s former audi- tors, KPMG Peat Marwick Suthee Ltd. (KPMG). Negotiations over a re- vised plan commenced between ATEC’s creditors steering committee, two potential equity investors, the court appointed planner, and ATEC manage- ment. A final vote on the plan was scheduled for February 2,1999.
For Mollerstuen, a “yes’’ vote would prove his long-standing faith in ATEC’s underlying business, and would allow ATEC to emerge as the first firm to be reorganized under Thailand’s amended bankruptcy code. A re- jection by creditors would lead to further delays and risk the defection of the plan’s two equity investors, who had agreed to inject $40 million of fresh capital into the cash-starved company.
For over 18 months Mollerstuen had served as ATEC’s head cheer- leader (with bodyguards for protection), confronting anxious creditors, an- gry shareholders, and impatient customers against the backdrop of Thailand’s economic collapse. He felt strongly that with the new business plan the company could roar out of bankruptcy and could be profitable enough to go public within five years. With the vote less than one week away, he reflected on the events surrounding ATEC’s bankruptcy and won- dered what more he could do to end the protracted crisis.
152 RESTRUCTURING CREDITORS’ CLAIMS
HISTORY OF ALPHATEC ELECTRONICS AND THE ALPHATEC GROUP
Born to a middle-class ethnic Chinese family in Bangkok, Thailand (see Ex- hibit 5.1 for a map of Thailand), Charn Uswachoke graduated from North Texas University. After graduating, he joined Honeywell in the United States, and soon returned to Thailand to work for a division of the com- pany. Thailand’s economy was booming, and Charn wanted to set out on his own. When Philips Electronics N.V. decided to sell a portion of an inte- grated circuit (IC) packaging plant, Charn borrowed money to make the purchase from Philips and build a new factory in Chachoengsao province (about forty kilometers southeast of Bangkok) in 1989. As part of the deal, Philips agreed to purchase 90 percent of the output for the next five years.
The company, named Alphatec Electronics, began production in 1991.
ATEC’s objective was to provide fully integrated “turnkey” IC packaging and testing services at competitive rates and high quality. Packaging involved the sealing of an IC in a plastic or ceramic casing. Packaged ICs were then tested to meet customer specifications. The company hoped to develop long- term strategic relationships with leading semiconductor manufacturers and offer a broad mix of packaging services. Some important early customers in- cluded Cypress Semiconductor corporation and Microchip Technology, Inc.
Charn hoped to capitalize on two significant trends in the semiconduc- tor industry. First, more semiconductor companies worldwide were sub- contracting some or all of their packaging and testing operations to independent companies such as ATEC. Independents could offer significant cost savings due to their longer production runs and superior operating flexibility (e.g., they were better able to extend the useful lives of their equipment by migrating older machines to the testing of less complex products). Second, Southeast Asia was an increasingly attractive place to locate IC packaging and testing, due to the region’s low operating costs and the heavy local concentration of high-tech manufacturing.
Nineteen ninety-three was a pivotal year in the company’s development.
The company went public in Thailand through an initial public offering (PO), and in the process increased its borrowings from banks and public debt markets. Cham acquired a major semiconductor assembly and test plant from National Semiconductor, as well as telephone assembly and testing plants from AT&T Corp. He also entered the tool and plastic die industry.
The following year Cham began pursuing a longer-term strategy of de- veloping a competitive cluster in the IC industry. He wanted to do design work, wafer fabrication, IC assembly and testing, and product manufac- turing and marketing. His first major act under this expanded growth
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Alphatec Electronics Pc1 153 strategy was to launch a $1.1 billion venture called Submicron that would become Thailand's first state-of-the-art wafer fabricator. The project's ini- tial financing included $350 million of debt with twenty six local banks and finance companies.
The fabrication industry had played a significant role in the develop- ment of fellow Asian tiger countries Taiwan and Singapore, but it required reliable sources of water and power. Since these were generally wanting in Thailand, Charn decided to develop AlphaTechnopolis, a 4,000-acre high- tech industrial park that would be located nine kilometers from Alphatec Electronics. This park was intended to include Alpha Power, a $400 mil- lion 400-megawatt power facility, a $150 million water plant, and $200 million in other assets. Long-range plans called for the development of housing and retail establishments, a hospital and school, a research and de- velopment center, and a technical university.
A string of acquisitions and investments followed during 1994-1996.
These included a joint venture with China's state-owned Shanghai Indus- trial and Electronic Holding Group Co. (SIEHGC) and Microchip Tech- nology of Arizona to produce high volumes of low-tech chips (named Alphatec Shanghai). Charn purchased the U.S. firm Indy Electronics for
$30 million (renamed Alphatec Electronics USA). He founded several new businesses, including two life insurance companies, an equipment leasing company, and a telephone equipment company. He took a majority equity stake in Alpha Memory Co. Ltd., a joint venture between Texas Instru- ments (TI) and Acer that would provide assembly and testing services for semiconductor memory products and would require $100 million in capi- tal expenditures. And in late 1995 he and TI broke ground on a new $1.2 billion semiconductor manufacturing facility at AlphaTechnopolis, even though little progress had been made in completing the Submicron plant.
"Mr. Chlps"
Although Charn was a significant shareholder in all the companies he founded or acquired, he kept the businesses separate legal entities. Each company had its own board of directors and reported separate financial in- formation. Many of Charn's family members supported his efforts to build a competitive integrated circuit (IC) group of companies in Thailand, and they had important management positions at AlphaTechnopolis, Alpha- Comsat, and other group affiliates.
To manage all of his operations effectively, Charn united Alphatec Electronics and all of the other companies in which he held major stakes into what became known as the Alphatec Group (see Exhibit 5.2). The
154 RESTRUCTURING CREDITORS’ CLAIMS
Group was an informal entity without any legal basis. Charn ran this cen- tralized management group from ATEC headquarters in downtown Bangkok. Group managers were split across several departments, including public relations, finance, and operations. Charn had the financial organiza- tions in each company report directly to himself.
The operations department was actively involved in improving the effi- ciency of Charn’s various businesses. Mollerstuen was an important member of this group. He was an American with more than thirty years of experience in the computer industry in both the United States and Asia, and had held top-level operational management positions at National Semiconductor and Philips Semiconductor. As chief operating officer he was responsible for all group assembly and test operations. He also had a significant role in building and maintaining ATEC’s customer base. Working closely with Mollerstuen was Willem de Vries, executive vice president for production. De Vries had previously been the managing director of Philips Semiconductor Thailand, and also had more than thirty years of industry experience, working in Eng- land, the Philippines, Germany, France, Brazil, and the United States.
The ATEC board of directors was headed up by Waree Havanonda, a former deputy governor of the Bank of Thailand (BOT) and Charn’s for- mer finance professor. She countersigned for all of the major ATEC checks written by Charn. The eleven-member board included, in addition to these two, six bankers, the chairman of a trading company, the vice president of Bangkok Coil Center Co., Ltd., and the dean of the Institute of Industrial Technology at Suranaree University. “At that time the board had a bunch of bankers on it,” Mollerstuen recalled. “They did not know the electron- ics industry well and relied on Charn for a lot of guidance. People in oper- ations and from the factory were never allowed to attend meetings. Charn insisted that the meetings be conducted in Thai.” As a result, Mollerstuen, de Vries, and other expatriate executives in the operations department had very little interaction with the directors.
By the mid-1990s ATEC had won much praise for its financial manage- ment practices and performance. Charn was considered by many as a pioneer of Thailand’s electronics industry, earning him the nickname “Mr. Chips.” In 1995, Alphatec received the prestigious Financial Management Award from the Manila-based Asian Institute of Management, in a ceremony attended by the prime minister of Thailand. In 1996, Electronic Business Asia magazine named Charn one of Asia’s top business executives: and some observers compared him to Bill Gates. In 1996 ATEC employed over 1,700 workers 2Bangkok Post, December 20,1996.
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Alphatec Electronics Pc1 155 and accounted for roughly 1 percent of Thailand’s total exports. By 1997, seven of the top ten North American integrated circuit producers were ATEC customers, including Advanced Micro Devices, Cypress Semiconductor, Mi- crochip Technology, Philips Semiconductor, and Texas instrument^.^
ALPHATEC IN DISTRESS
In 1995, coinciding with a general slowdown in the global semiconductor in- dustry, ATEC‘s profit fell by 35 percent, from 699 million baht to 452 mil- lion baht. (Historical financial statements appear in Exhibit 5.3.) The Group came under increasing pressure to raise new financing. The initial phases of investment in AlphaTechnopolis and the Submicron wafer fabrication plant had required large infusions of cash. However, businesses that could have provided positive cash flow for investment were slow in getting off the ground. For example, although Charn had hired a staff for his two life insur- ance companies, he had not yet been able to obtain licenses to operate them.
Charn turned to Lehman Brothers for advice on funding his numerous ventures. One proposal considered was to merge six of the group companies, including ATEC, and then raise money through an offering of American de- pository receipts. During the due diligence process, however, Lehman noted significant inconsistencies in ATEC’s historical financial statements, and it ter- minated its relationship with Cham. Concerned by this development, ATEC‘s board hired Price Waterhouse to conduct a financial review of the company.
In March 1997 Charn made a proposal to the prime minister of Thai- land asking the government to make investments in electronics companies, in a program similar to that used in Malaysia, Singapore, Taiwan, and Ko- rea. On June 3 and June 10 the Thai cabinet issued proclamations confirm- ing support of the electronics industry in general, and the Alphatec Group in particular. The cabinet committee appointed to study ATEC’s request for funds said it felt the firm’s debt was excessive and should be restructured.
The committee appointed Krung Thai Bank (owned by the government and controlled through the Ministry of Finance) to work with ATEC on the re- structuring. The envisioned restructuring would include write-offs, debt-to- equity conversions, and conversions from short-term to long-term debt.
In early May, Texas Instruments announced it was pulling out of two
3ATEC’s contracts with semiconductor manufacturers were denominated in U.S.
dollars, as were the majority of its direct material purchase contracts. Roughly 40 percent of factory spending was baht based. About 35 percent of ATEC’s total debt was in U.S. dollars.
156 RESTRUCTURING CREDITORS’ CLAIMS factory construction projects, Alphatec-TI and Alpha Memory. Although the factories were nearing completion, neither had the financing necessary to start production. “What was clear was that Charn was not infusing the capital he promised into the ventures,” explained a spokesman for TI.
“Nor was the area’s infrastructure coming t~g eth er.”~
Later that month, ATEC failed to make a $34 million debt payment to a syndicate of banks led by ING Bank, and in late June it failed to come up with $45 million for a put option on its U.S. dollar-denominated euro con- vertible debentures. Under the company’s loan covenants, any formal dec- laration of default on either claim would have placed its entire $373 million in debt in default.
In response to these developments, in August ATEC appointed a provi- sional creditors steering committee (CSC) to intermediate between the com- pany and its various creditors. The group met multiple times per week in Bangkok and had twelve members representing more than 60 percent of the total loans outstanding. Members included Thai banks, Japanese and other foreign banks, bill of exchange holders, bondholders, and finance companies.
Of ATEC’s 1,277 listed creditors, 1,025 were company employees, 176 were trade creditors, 31 were bondholders, and 44 were financial institutions.
Krung Thai Bank held the largest debt of 4.23 billion baht (32%), followed by Bangkok Bank with 1.47 billion baht (1 1 %), and Union Bank of Bangkok with 390 million baht (3%). (See Exhibit 5.4 for a list of financial claims.)
The company’s share price dropped from over 300 baht in early May to less than 100 baht in late June. “Even though the Alphatec Group was not a legal entity,” Mollerstuen complained, “the press reported its col- lapse. People confused group problems with problems at ATEC, and this was very bad for our marketing efforts and employee morale.”
The July 2,1887, Currency Crisls
Nevertheless, Mollerstuen remained optimistic. “We believe the restructuring will work and by August it will be business as usual,” he wrote in an update distributed to ATEC customers and employees on July 2. The very same day, the Bank of Thailand allowed the baht to float in international money mar- kets. It had previously been tied to a basket of foreign currencies. By Septem- ber, the baht had fallen by 25 percent, to 32.75 to the dollar (Exhibit 5 3 , plunging firms with significant amounts of U.S. dollardenominated debt into
4Crista Hardie Souza, “Alphatec Chairman Quits; Scandal Grows,” Electronic News, vol. 43, August 4, 1997, p. 6(1).
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