Battery Maker For Hybrid Cars Files For Chapter 11, Secures $72.5M In Funding

by Tara Arick on October 18, 2012 · 0 comments

in Bankruptcy,Contract Law

- From LexisNexis® Mealey’s™ Daily Legal News.

A123 Systems Inc., manufacturer of lithium-ion batteries used in hybrid electric vehicles (HEVs), on Oct.16 filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware despite listing assets of $ 459,795,000 and debts of only $ 376,045,000 (In Re: A123 Systems Inc., No. 12-12859, Chapter 11, D. Del. Bkcy.).

Battery Industry

David Prystash, the CEO of A123, filed a first-day declaration in which he indicated that the company faced stiff competition in the battery industry.

Specifically, the market is subject to changing technology trends, shifting customer needs and expectations and frequent introduction of new technologies, Prystash said.

The competition comes from joint venture companies, such as a joint venture between Dow Chemical and Kokam America to build a facility in Michigan for the manufacture of lithium polymer batteries for use in HEVS and other electric vehicles.

In October 2011, A123 learned of an unexpected reduction in fourth-quarter orders from its largest customer, Fisker Automotive, as Fisker sought to balance inventory levels from all of its suppliers.

Reductions

In response to the reduction in orders, A123 launched a campaign to replace battery modules and packs that may contain defective prismatic cells produced at its Livonia, Mich., manufacturing facility, Prystash says. The cost of the campaign is estimated at $ 51.6 million. In addition, A123 recorded an inventory charge of approximately $ 15.2 million related to inventory produced at its Michigan facilities that may be defective.

Consequently, A123 was required to rebuild its inventory and manage its backlog for existing customer orders while simultaneously replacing the defective customer modules and packs. As a result, A123 expects to continue to incur significant net losses and negative operating cash flows over the next several quarters, Prystash says.

Financing

Prystash says A123 began to explore operational modifications to save costs, as well as sales of certain assets, and in March, the company began a sale process by retaining Lazard Fr?res & Co. LLC as an investment banker to assist A123 in addressing their financial situation and exploring potential financing and restructuring alternatives.

As part of its bankruptcy filing, A123 has secured post-petition financing from Johnson Controls Inc. in the amount of $ 72.5 million, Prystash says.

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