First Day Declaration of CFO of A123 Filed With Bankruptcy Court in Delaware

A123 Systems Inc., which designs, develops, manufactures and sells advanced rechargeable lithium-ion batteries and energy storage systems primarily for use in hybrid and electric vehicles, voluntarily filed for bankruptcy protection today in Delaware.  The company’s largest customers are Fisker Automotive, Inc. (26% of revenue) and AES Energy Storage, LLC (24% of revenue).   A123 is also notable for having received a $249 million federal grant in 2009.

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Details of the company’s history, bankruptcy filing, and future plans are detailed in a declaration signed by A123’s Chief Financial Officer and filed with the bankruptcy court.  The full declaration is embedded below.  Here are some highlights of the most notable portions of the filing:

Business Operations & Financial Results

While the Company is headquartered in Waltham, Massachusetts, the Company and its debtor and non-debtor subsidiaries, collectively, have approximately 1,763 active employees, located in 10 technologically-advanced facilities across the United States, China and Germany. The Company’s U.S. manufacturing operations are located in Michigan and Massachusetts. In addition, the Company, through its non-debtor wholly owned subsidiaries, has manufacturing facilities located in China.

The Company’s consolidated total revenue, which includes non-debtor foreign subsidiaries of the Company, was approximately $41.349 million in 2007, $68.53 million in 2008, $91.05 million in 2009, $97.31 million in 2010, $159.15 million in 2011 and is $39.6 million through August, 2012. However, the Company experienced net losses in each year experiencing a total net loss of $31 million in 2007, $80.43 million in 2008, $86.59 million in 2009, $152.94 million in 2010, $257.76 million in 2011 and $269.0 million through August, 2012.

The Department of Energy Grant 

In December 2009, A123 entered into an agreement establishing the terms and conditions of a $249.1 million grant awarded under the U.S. Department of Energy Battery Initiative to support manufacturing expansion of new lithium-ion battery manufacturing facilities in Michigan. Under the agreement, as amended, the DOE is providing cost reimbursement for 50% of qualified expenditures incurred from December 1, 2009 to December 2, 2014. The agreement also provides for reimbursement of pre-award costs incurred from June 1, 2009 to November 30, 2009. There are no substantive conditions attached to this award that would require repayment of amounts received if such conditions were not met. Through June 30, 2012, A123 has incurred $260.6 million in qualified expenses, of which 50%, or $130.3 million, are allowable costs for reimbursement. Nearly all of the allowable costs have been reimbursed.

Summary of Pre-Petition Debt Structure

Type of Prepetition Indebtedness: Approximate Amount of Outstanding Debt as of the Petition Date (exclusive of interest, fees and expenses)

Silicon Valley Bank Loan: $0 ($8.7 million in letters of credit remain outstanding however they are fully collateralized by a $10 million letter of credit issued under the Wanxiang Bridge Loan Facility)

Michigan Strategic Fund Loan:$4.0 million

MassCEC Loan: $2.89 million

2011 3.75% Convertible Subordinated Notes: $143.8 million

2012 Senior Convertible Notes: $2.76 million

Trade Debt: $17.46 million

Wanxiang Bridge Loan Facility: $22.5 million, of which $10.0 million represents obligations on account of outstanding letters of credit.

Plans for Sale of Assets

Prior to filing these Chapter 11 Cases, the Debtors, with the assistance of Lazard, and in consultation with Latham & Watkins LLP, pursued a range of options to address the Debtors’ concerns about their ability to service their debt and fund operations going forward, including new financing, refinancing and the sale of certain or all of the Debtors’ assets or business.

The Debtors implemented an extensive marketing process searching for potential partners and equity investors as well as entities interested in acquiring some or all of the Debtors’ assets. This process was primarily conducted by Lazard as directed by A123. During an initial round of investigation, Lazard contacted approximately 74 parties, 24 of which reviewed a “teaser” prepared by Lazard and discussed the process with Lazard. These parties were primarily strategic investors as it was determined strategic buyers were more likely to have interest in the Debtors’ assets than financial buyers. Following this stage, 11 of the 24 parties signed confidentiality agreements to begin due diligence and received a confidential information memorandum. Ten parties were granted access to a dataroom to complete further diligence on A123. Seven parties visited A123 facilities and received management presentations. Ultimately, however, only one offer, from Wanxiang, was received to invest in the Debtors as a going concern, and three non-binding offers were received to purchase or otherwise invest in a more limited subset of the Debtors’ assets. One investor who expressed interest in acquiring the Debtors as a going concern declined to submit any binding offer after completing extensive due diligence.

Following extensive negotiations on the terms and conditions of Wanxiang’s offer, the Debtors entered into the various agreements with Wanxiang discussed above that comprised the Wanxiang Transactions. However, because certain of the Wanxiang Closing Conditions did not occur only the Initial Wanxiang Loan was funded as of the Petition Date.

Shortly before the Petition Date, it became apparent that certain of the Wanxiang Closing Conditions would not be satisfied prior to the Debtors’ liquidity falling below operational levels. Although the Debtors searched for interim bridge financing to permit operations through this period of reduced liquidity, the Debtors were unable to obtain such financing on terms that would permit continued operation of the Debtors businesses, outside of a bankruptcy process. As of the Petition Date, the Debtors had approximately $19 million of cash on hand, however the Debtors were unable to access such cash as a result of covenants under the Wanxiang Bridge Loan Facility. It is against this backdrop that the Debtors’ Board of Directors authorized the commencement of these Chapter 11 Cases.

In an attempt to maximize value for parties in interest, the Debtors have formulated and implemented a strategy which has resulted in (a) the securing of up to $72.5 million in debtor-in-possession financing from Johnson Controls, Inc. (“JCI”) . . . and (b) the entry into an Asset Purchase Agreement with JCI for the purchase of those assets, related contracts and intellectual property associated with the Debtors’ automotive business as well as certain other related transactions (collectively, the “Designated Assets”) at a purchase price of $125 million, which agreement contemplates an auction and sale process. That process and the related bidding procedures have been presented to the Court for approval . . . . The proposed process contemplates, among other things, that interested parties will be afforded an opportunity to submit higher and better offers for the Designated Assets and that an auction will be held to the extent qualified offers are received from any other parties. Thereafter, either JCI or such other party submitting a higher or better offer, will be authorized to purchase the Designated Assets free and clear of liens, claims and interests pursuant to Section 363 of the Bankruptcy Code upon entry of an order of the Bankruptcy Court approving such sale.

Additionally, in the weeks preceding the Petition Date, Lazard continued its efforts to identify potential buyers for the Debtors’ assets not included in the Designated Assets. The Debtors believe that certain bidders have been identified and that the Debtors’ will have success selling the assets which are not part of the Designated Assets.

First Day Declaration of CFO of A123 Filed With Bankruptcy Court in Delaware

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