GT Advanced COO Blames Apple's Strict Sapphire Contract Terms for Bankruptcy Filing

GT Advanced's Chief Operating Officer Daniel Squiller yesterday filed some revised documents with the court, giving a bit more insight into what went wrong between Apple and GT Advanced that led to the latter company's Chapter 11 bankruptcy filing.

Shared by Fortune, Squiller's affidavit [PDF] delves further into the contractual obligations outlined in GT's agreement with Apple, which led to huge losses of money as the contract was highly favorable to Apple.

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It was known that the terms of the contract prevented GT Advanced from selling its sapphire to customers other than Apple, but as it turns out, Apple also had a vast amount of control over GT's sapphire production. For example, GT was not able to modify equipment, specifications, or the manufacturing process without express consent from Apple, but Apple could modify the terms at any point. GT was also expected to fulfill any of Apple's purchase orders at Apple's demand, with severe penalties for failing to do so.

GTAT must accept and fulfill any purchase order placed by Apple on the date selected by Apple. If there is any delay, GTAT must either use expedited shipping (at its own cost) or purchase substitute goods (at its own cost). If GTAT's delivery is late, GTAT must pay $320,000 per boule of sapphire (and $77 per millimeter of sapphire material) as liquidated damages to Apple. To put this figure in perspective, a boule has a cost of less than $20,000. Apple, however, has the right, without compensating GTAT, to cancel a purchase order in whole or in part at any time and reschedule a delivery date at any time.

Apple was also in charge of the Mesa, Arizona facility that it acquired for GT Advanced, and delays at the facility cut into GT's production time. Apple reportedly decided it was too expensive to provide backup power for the furnaces and on multiple occasions, power interruptions led to delays and loss of sapphire boules. GT Advanced was also not in charge of the sapphire cutting tools that it received, and in his affidavit, the COO says that the tools did not "meet their performance and reliability specifications."

The contractual obligations ultimately resulted in GT's inability to meet "cost and production targets" for reasons that it says were "beyond its control." Issues in scaling its technology to create large 262kg sapphire boules to meet Apple's specifications also led to the bankruptcy filing.

The key to making the transaction profitable for both sides was the production of a sufficient number of 262kg boules of sapphire crystal meeting the specifications required by Apple. [...]

Unfortunately, the production of 262kg boules of sapphire could not be accomplished within the time frames the parties had agreed, and was more expensive than anticipated. These problems and difficulties resulted in a liquidity crisis at GTAT, which led to the commencement of these chapter 11 cases"

Though Apple and GT Advanced have reached an agreement to dissolve their partnership, the two will remain in contact as GT Advanced continues its research work focused on producing larger sapphire boules. The two companies will meet quarterly to discuss GT's progress on that front, with collaboration still possible if both sides agree to move forward.

GT Advanced has already begun winding down operations at the Mesa, Arizona sapphire plant, wrapping up sapphire boule production, decommissioning furnaces, and laying off employees. The plant is expected to shut down on December 31.

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Top Rated Comments

Peace Avatar
125 months ago
Of course it was highly favorable to Apple. Apple paid for it.

If the COO of GT thought it was the strict contract why did he sign it ?
Score: 75 Votes (Like | Disagree)
Z400Racer37 Avatar
125 months ago
So. A COO is dumb enough to sign a contract that was so potentially debilitating to his company, and then he blames Apple for signing next to his name?
Interesting...
Score: 52 Votes (Like | Disagree)
theheadguy Avatar
125 months ago
I know that everyone will get on GTAT's back about this, but I respect his point. Apple has billions upon billions of dollars, they don't. GTAT took a chance, and failed. It should be respected that they tried.

This is also a loss for Apple. Obviously, Apple wanted this work done, and they wanted the expertise that GTAT had. Perhaps if Apple was not as heavy handed with the contract terms, this would have worked out for all.

It's not necessary for Apple to flex its corporate muscle all the time. Sometimes it can backfire.
Score: 35 Votes (Like | Disagree)
MonstaMash Avatar
125 months ago
Of course Apple isn't going to pony up half a billion unless they have strict demands for a high quality product.

GTAA shouldn't have signed if they couldn't promise the results.
Score: 15 Votes (Like | Disagree)
c1phers Avatar
125 months ago
So. A COO is dumb enough to sign a contract that was so potentially debilitating to his company, and then he blames Apple for signing next to his name?
Interesting...

Exactly, both the Executives and their lawyers agreed to this. Don't blame Apple for your legal stupidity GTAT.
Score: 13 Votes (Like | Disagree)
Drumjim85 Avatar
125 months ago
Isn't Apple rich enough? Like seriously who creates possible fines of $300,000.

Like seriously, who accepts a contract with possible fines of $300,000
Score: 12 Votes (Like | Disagree)