SEC Opens Inquiry Into Apple Supplier GT Advanced

GT Advanced Technologies Inc., the Apple Inc. supplier seeking bankruptcy protection, is now facing a U.S. Securities and Exchange Commission inquiry on trading in its shares as the company approached bankruptcy.

The SEC inquiry, disclosed in a filing yesterday, could reveal what GT Advanced’s executives knew as they sold shares and struggled to fulfill a contract with Apple to deliver scratch-resistant sapphire glass for iPhones. The company is cooperating with the request for information, according to the filing.

When Apple introduced new iPhones in September, the smartphones didn’t include the sapphire, and GT Advanced filed for Chapter 11 reorganization last month. The inquiry is the latest challenge for GT Advanced, which has become a cautionary tale of a supplier relying too much on a single, big customer.

GT Advanced had evolved into a supplier for the iPhone maker with a deal to provide sapphire glass in exchange for early payments, to be paid out in four installments. Apple didn’t pay the final check that was due in April, GT Advanced disclosed in court records, as the supplier sought to fulfill “certain operational targets.”

During those months, GT Advanced Chief Executive Officer Thomas Gutierrez, Chief Operating Officer Daniel Squiller and other insiders sold more than $18 million of shares in the company, according to data from Inc.

Jeff Nestel-Patt, a spokesman for Merrimack, New Hampshire-based GT Advanced, didn’t respond to a request for comment. Judith Burns, a spokeswoman for the SEC, declined to comment about the inquiry.

Loan Terms

Under the terms of a deal signed a year ago, Apple agreed to make a prepayment loan of $578 million to GT Advanced to build furnaces used to make the synthetic sapphire. Early signs of trouble at GT Advanced emerged in August when the company disclosed in its quarterly earnings that it had “incurred significant costs” during the first six months of this year as it worked to convert an Apple-owned factory in Mesa, Arizona, to produce sapphire.

Yet Gutierrez sounded confident about the company’s prospects with Apple when he addressed analysts in an Aug. 5 conference call, noting that he remained “very positive about our sapphire materials business.” He said the fourth prepayment was expected by the end of October. Apple’s payments had technical and performance metrics attached to them, according to GT Advanced’s regulatory filings.

Cash Balance

“The fourth prepayment from Apple is contingent upon the achievement of certain operational targets by GT,” he said. “GT expects to hit these targets.”

He didn’t mention that the company was originally scheduled to receive that fourth payment by April 30 for meeting certain milestones. That deadline had been redacted from GT Advanced SEC filing in June. As part of the bankruptcy filings, GT Advanced filed an un-redacted version of the milestone deadlines.

After filing for bankruptcy on Oct. 6, GT Advanced called terms of a contract with Apple “oppressive” and “burdensome.”

GT Advanced was required to begin repaying the money in January, either as cash or a credit against Apple purchases of sapphire, according to regulatory filings.

“Without significant sapphire revenue from Apple, we would still be required to repay in cash (on a quarterly basis) significant amounts of the prepayment amount beginning in 2015, which would limit our ability to invest in or operate other portions of our business, including our equipment operations, or to repay indebtedness at the time of maturity of such indebtedness,” GT Advanced said in August.

GT Advanced ended the second quarter with $333 million in cash and cash equivalents, and Gutierrez said in August that the company was on track to end the year with about $400 million in cash. Instead, it finished the third quarter with about $85 million, according to a court affidavit.

Apple Settlement

The supplier then filed for bankruptcy protection in early October, without giving specific reasons. Later that month, GT Advanced sought court permission to shut down its synthetic-sapphire operations.

The supplier and Apple have since reached a settlement that, if approved by the court, will free GT Advanced from exclusivity agreements with Apple, letting it control its sapphire-manufacturing patents and retain ownership and sales rights for the production furnaces.

Apple will get an approved claim for $439 million secured by the furnaces. GT Advanced will have as much as four years to sell them, with proceeds going to Apple. Apple will also release all claims against GT Advanced, including damages that “would total in excess of $1 billion,” according to court papers.

The settlement was originally conditioned on keeping a statement by a GT Advanced executive under court seal.

U.S. Bankruptcy Judge Henry Boroff put the deal in peril last week, saying such secrecy was unnecessary. This week, he ordered that records be unsealed today. At the same time, Apple and GT Advanced said they had revised the terms of their settlement to make sealing unnecessary.

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