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What Scares Apple About Its GTAT Contracts?

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Apple has asked the judge in GTAT’s bankruptcy filing to keep a large number of documents sealed. In a recent court hearing covered by Fortune's Philip Elmer-DeWitt the judge said he was ‘having some trouble’ finding any trade secrets or commercial interests to justify a blanket seal. He added ‘I’m seeing what looks incredibly like a construction suit, where a homeowner says to the contractor, ‘It didn’t come out the way I wanted to,’ and the contractor says, ‘Well, it would have come out that way if you hadn’t changed the specifications.’ The judge has asked Apple to provide page by page and line by line details on what should remain sealed. (Note that I own Apple shares).

So why would Apple not want to have its GTAT agreements be public besides Apple’s culture of secrecy? There is another hearing on Tuesday, October 21, the day after Apple announces it September quarter results, so while we may learn more then I doubt the documents will be released that day since the judge will have to rule on the information provided by Apple’s attorneys.

Note that GTAT’s stock is no longer traded on the NASDAQ after the close this past Wednesday and is now traded on the Pink Sheets under the symbol GTATQ. It closed at $0.39 on Friday but given the financial resources or lack thereof I'd expect it to eventually go to $0.00.

Companies don’t want contract details leaked

First companies don’t want to have contracts they have struck with other companies made public. There is pricing information that the buyer and the seller don’t want to be available since it would weaken their negotiating position in dealings with other companies. There are also terms and conditions that while they could be unique to a specific deal (buying a factory for its supplier like Apple did for GTAT is a bit extreme and was made public due to its size for GTAT) there are many other arraignments that have value that companies don’t want to disclose.

What could be some of the reasons

In this situation Apple may not want public the details that are in its Master Development and Supply Agreement (MDSA) with GTAT; the exclusive rights GTAT agreed to not supply certain sapphire material or related technology to other companies (may lead to legal problems for Apple restricting products to another company?); the facility Apple bought for GTAT with below market lease payments or the payment terms for GTAT to pay back up to $578 million to Apple.

Apple doesn’t want any ‘dirty laundry’ aired

While information such as Phil Schiller’s, Apple’s SVP of Worldwide Marketing, email to its advertising agency lamenting how Samsung’s Super Bowl commercial had Samsung ‘feeling it, like they were in the zone’ and Apple was ‘struggling to nail a competitive brief on iPhone’ came out during a patent lawsuit there could be information on its dealings with GTAT that it doesn’t want made public.

Provide a view into future product plans to competitors?

As with any of the reasons this could be the most important for Apple’s secrecy desire. However what Apple and GTAT were doing was well known. All anyone needed to do was to read GTAT’s SEC filings, listen to its quarterly conference calls and read various analysts and press reports.

A competitor should be able to calculate using how much was being spent on equipment, amount of purchase commitments, how much inventory was in raw materials, work-in-process and finished goods and various other metrics to calculate how much sapphire glass GTAT could produce and therefore what products it could go in (such as only high-end 5.5’ iPhone 6 Plus’s or throughout the entire iPhone 6 product line).

Other various items were public

The effective interest rate that GTAT calculated on its loan from Apple was 7.44% which compares to 3.0% on its 2017 and 2020 debt.

In GTAT’s second quarter earnings presentation it talked about its Arizona sapphire facility being nearly complete and commencing transition to volume production.

From GTAT’s second quarter results conference call Tom Gutierrez, GTAT’s CEO said ‘our Arizona facility, which has involved taking a 1.4 million square foot facility from a shell to a functional structure and the installation of over 1 million square feet of sapphire growth and fabrication equipment is nearly complete and we are commencing the transition to volume production’ which gives parameters on how much sapphire could be produced and when.

From GTAT’s second quarter 2014 10-Q filing it had ‘the Company has identified three deliverables in the arrangement, namely, the supply deliverable (supply of sapphire material pursuant to the MDSA), the exclusivity deliverable (which represents the exclusivity rights granted to Apple), and the equipment lease deliverable (as described in the following sentence). The Company concluded that since the arrangement conveys to Apple the right to control the use of the equipment, the arrangement represents an operating lease of the equipment at the Arizona facility to Apple.’