a123 affidavit

7/31/2019 A123 Affidavit

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

------------------------------------------------------------In re:

A123 SYSTEMS, INC., et al.,

Debtors.1

------------------------------------------------------------

x:::::

x

Chapter 11

Case No. 12-_______ (_____

Jointly Administered

DECLARATION OF DAVID PRYSTASH IN SUPPORT

OF CHAPTER 11 PETITIONS AND FIRST DAY MOTIONS

Under 28 U.S.C. 1764, David Prystash declares as follows under the penalty of pe

1. I am the Chief Financial Officer of A123 Systems, Inc. (A12corporation organized under the laws of the state of Delaware and the ultimate paren

of the other debtors and debtors-in-possession (collectively, the Debtors or the C

in the above-captioned chapter 11 cases (collectively, the Chapter 11 Cases). Ad

am the Treasurer and Secretary of A123 Securities Corporation. I am authorized to

declaration (the First Day Declaration) on behalf of the Debtors.

2. As Chief Financial Officer of A123 I am responsible for overfinancial activities of the Company, including but not limited to, monitoring cash flo

and financial planning. As a result of my tenure with the Debtors, my review of pub

public documents, and my discussions with other members of the Debtors managem

am familiar with the Companys business, financial condition, policies and procedu

day operations and books and records Except as otherwise noted I have personal


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employees or retained advisers that report to me in the ordinary course of my respon

am authorized by each of the Debtors to submit this First Day Declaration. Referen

Bankruptcy Code (as hereafter defined), the chapter 11 process and related legal ma

based on my understanding of such matters in reliance on the explanation provided

advice of, counsel. If called upon to testify, I would testify competently to the facts

this First Day Declaration.

3. On October 16, 2012 (the Petition Date), the Debtors filedpetitions for relief in the United States Bankruptcy Court for the District of Delawar

Court). The Debtors will continue to operate their businesses and manage their p

debtors-in-possession. A123s non-U.S. subsidiaries and affiliates (the Non-Debto

Affiliates) are not chapter 11 debtors, will continue their business operations witho

supervision from the Court, and will not be subject to the requirements of chapter 1

of the United States Code, 11 U.S.C. 101-1330, as amended (the Bankruptcy C

4. I submit this First Day Declaration on behalf of the Debtors inthe Debtors (a) voluntary petitions for relief that were filed under chapter 11 of the

Code and (b) first-day motions, which are being filed concurrently herewith (colle

First Day Motions).2

The Debtors seek the relief set forth in the First Day Motio

goal of minimizing the adverse effects of the commencement of the Chapter 11 Cas

businesses. I have reviewed the Debtors petitions and the First Day Motions, or ha

had their contents explained to me, and it is my belief that the relief sought therein i


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5. Part I of this First Day Declaration provides an overview of thbusinesses, organizational structure, capital structure, and significant prepetition ind

well as a discussion of the Debtors financial performance and the events leading to

chapter 11 filings. Part II sets forth the relevant facts in support of the First Day Mo

PART I

I. BUSINESS OVERVIEW6. The Debtors design, develop, manufacture and sell advanced

lithium-ion batteries and energy storage systems. The Debtors are primarily focuse

developing new generations of lithium-ion batteries and battery systems to serve ap

markets outside the historical domain of lithium-ion, such as hybrid electric vehicle

plug-in hybrid electric vehicles (PHEVs) and electric vehicles (EVs), electrical

services, industrial and commercial products. The Debtors products include batter

sizes and forms, such as starter batteries and lead acid replacement batteries, as well

modules and multi-megawatt and prismatic battery systems. The platform for batte

system development is the Debtors patented Nanophosphate material, which can

engineered to meet the requirements of a broad set of applications in the Debtors ta

A. Company History

7. A123 was incorporated in Delaware on October 19, 2001. Thwas founded on a belief that lithium-ion batteries will play an increasingly importan

facilitating a shift toward cleaner forms of energy. Since its founding, the Company


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8. In the third quarter of 2005, the Company began commercial cathode powder, a cell manufacturing material, and commenced the initial battery p

ramp-up. The Companys first commercial batteries began shipping in February 20

the Company commenced construction of two additional plants to be used for powd

and new coating production, and signed a lease for a new battery assembly plant in

China. In 2009, the Company expanded operations in China to include the assembl

packs. The Company thereafter expanded its domestic manufacturing capacity in 2

establishing vertically-integrated plants in the United States that would perform all o

of the manufacture of batteries and battery systems. The first phase of this expansio

in Livonia, Michigan, with the opening of a new manufacturing facility, where the C

produces prismatic cells and battery pack systems. The Company also built an addi

in Romulus, Michigan, which qualified for production of coated electrodes in Octob

9. Organizationally, A123 is the direct parent of each subsidiaryCompanys corporate structure, and is the main operating entity. A corporate organ

is attached hereto as Exhibit A. A123 Securities Corporation is a non-operating com

holds a large portion of the Companys cash, and a direct wholly owned subsidiary

Grid Storage Holdings LLC is a shell entity formed as a direct subsidiary of A123 f

purpose of facilitating certain contemplated grid projects which ultimately were not

10. A123 is also the direct parent of the following wholly owned debtor subsidiaries in the corporate structure: (a) A123 Systems (China) Materials C


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consolidating its Chinese operations/facilities is currently being closed and is in the

transferring its assets to A123 Systems (China) Materials Co., Ltd.; (c) A123 System

foreign non-debtor subsidiary located in Germany and primarily responsible for hou

sales employees as well as limited research and development activities; (d) A123 Sy

Ltd., which is located in London and was formed for technical support of a potentia

of the Companys operations in the United Kingdom; (e) A123 Systems Korea Co.,

was created as a result of A123s acquisition of Enerland Co., Ltd. in 2008, but is c

being wound down, and its assets and employees are being transferred to Company

the United States; (f) A123 Systems China Co., Ltd., which is largely a dormant she

that is being wound down; and (g) A123 Systems Hong Kong Ltd. which is primari

company for the Companys 49% equity interest in Shanghai Advanced Traction Ba

Co., Ltd a joint venture with SAIC Motor Co., Ltd. Additionally, Suzhou Gaolon

Co., Ltd. is a wholly owned subsidiary of A123 Systems (China) Materials Co., Ltd

formed for the purpose of eliminating certain trading costs.

B. A123 Ownership Summary

11. On September 29, 2009, A123 completed the initial public of32,407,576 million shares of common stock, which is traded on the NASDAQ Stock

(NASDAQ) under the symbol AONE. On April 6, 2011, A123 sold an addition

18,000,000 shares of its common stock in connection with the issuance of the 2011

Convertible Subordinated Notes, as discussed below.


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pursuant to which IHI agreed to purchase $25 million in shares of A123s common

A123, subject to a maximum share cap. The IHI Stock Purchase Agreement prohib

selling or transferring such shares, subject to certain exceptions, for a period of one

the same day, A123 and IHI entered into a Technology License Agreement (the IH

Agreement). Pursuant to the IHI License Agreement, A123 granted to IHI an excl

transferable, royalty-bearing license to A123s advanced battery system and system

technology and know-how to develop, use, make, offer to sell, sell, lease and provid

systems and modules for the transportation market in Japan and a non-exclusive, no

transferable, royalty-bearing license to such technology for certain non-competing p

approved by A123, in each case, for an initial period of ten years. A123 and IHI als

into a Product Supply Agreement pursuant to which the parties agreed that A123 wo

to IHI, on an exclusive basis, the lithium-ion battery cells for the battery systems an

produced by IHI utilizing the technology licensed under the IHI License Agreement

exchange for such licensing, IHI agreed to pay A123 a non-refundable license fee o

and future royalties based on a percentage of IHIs net sales of products that use or

licensed technology and agreed to enter into the IHI Stock Purchase Agreement.

13. January 2012 Investment - On January 19, 2012, A123 entereplacement agent agreement relating to a registered direct offering by A123 of an agg

12.5 million Units. Each Unit consisted of one share of A123s common stock an

warrant to purchase one share of such common stock at a negotiated purchase price


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The warrants became exercisable six months following the closing date and will exp

day that is twenty-four months after the date on which they become exercisable. Sub

satisfaction of the terms and conditions set forth in the subscription agreement betw

and the Jan. 2012 Investor, at any time during both (a) the ten (10) trading days beg

June 18, 2012 and (b) the ten (10) trading days beginning on July 23, 2012, A123 ha

to require the Jan. 2012 Investor to purchase up to an additional 6,250,000 shares of

common stock during each such period at a price equal to 90% of the lesser of (i) th

weighted average price on the date of exercise, or (ii) the arithmetic average of the d

weighted average price for the ten (10) consecutive trading days ending on the date

A123 could not, however, require the Jan. 2012 Investor to purchase more than $10

additional shares. A123 did not meet the required conditions during the first option

therefore, could not exercise the first purchase right. In addition, on July 5, 2012, A

an agreement with the Jan. 2012 Investor to terminate the purchase right associated

second option period.

14. May 2012 Warrants - On May 11, 2012, A123 issued certain purchase shares of A123s common stock equal to 30% of the number of shares und

2012 Senior Convertible Notes (as defined below) assuming conversion at an initial

price in connection with the issuance of the 2012 Senior Convertible Notes, which i

more detail below.

15. July 2012 Warrants - On July 5, 2012, A123 entered into a pl


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common stock were sold at a negotiated purchase price of $1.30, subject to certain a

based upon the exercise of the July 2012 Warrants per share of common stock in ord

gross proceeds of approximately $10 million, based upon the exercise of the July 20

from the offering of the shares of common stock and the July 2012 Warrants. The sa

common stock and the July 2012 Warrants was made pursuant to a subscription agr

between A123 and certain existing investors. The net offering proceeds that were re

A123 from this sale were approximately $9 million. Pursuant to the July 2012 War

agreed to issue additional shares of common stock to the holders of the July 2012 W

that the holders would receive the aggregate number of shares of A123s common s

(i) $5 million divided by 82% of the volume weighted average price of A123s com

over a period covering July 9, 2012, through July 11, 2012 or, if lower, 82% of the

weighted average price of A123s common stock on July 11, 2012 and (ii) $5 millio

82% of the volume weighted average price of A123s common stock over a period c

25, 2012, through July 27, 2012 or, if lower, 82% of the volume weighted average

A123s common stock on July 27, 2012. The July 2012 Warrants have a nominal e

per share. The placement agreement provided that the total number of shares of A1

stock issued in the offering could not exceed the amount permitted without sharehol

under the applicable provisions of NASDAQ Rule 5635, however, in the event that

otherwise be obligated to issue shares of common stock above that maximum numb

exercise of the warrants, A123 agreed to pay the value of such shares of common st


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Group Corporation (Wanxiang), a Chinese-based automotive parts manufacturer

connection with a senior secured bridge loan facility. Concurrently therewith, A123

into a securities purchase agreement, whereby it agreed to sell $200 million in aggre

of convertible notes to Wanxiang Clean Energy USA Corp. (the Wanxiang Purch

another Wanxiang affiliate, and agreed to issue additional warrants to the Wanxiang

The details of these transactions are discussed in Section IV below.

17. On August 22, 2012, A123 received a notice from NASDAQprice had fallen below a minimum bid price of $1.00 per share for the last thirty con

business days and that A123 would be de-listed from the NASDAQ if its stock price

recover in six months. As of the Petition Date, A123s common stock continued to

NASDAQ at a price of $0.24.

C. Business Operations and Sales

18. While the Company is headquartered in Waltham, MassachusCompany and its debtor and non-debtor subsidiaries, collectively, have approximate

activeemployees, located in 10 technologically-advanced facilities across the Unite

China and Germany.3 The Companys U.S. manufacturing operations are located in

and Massachusetts. In addition, the Company, through its non-debtor wholly owned

subsidiaries, has manufacturing facilities located in China.

19. The Companys consolidated total revenue, which includes nforeign subsidiaries of the Company, was approximately $41.349 million in 2007, $


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experiencing a total net loss of $31 million in 2007, $80.43 million in 2008, $86.59

2009, $152.94 million in 2010, $257.76 million in 2011 and $269.0 million through

2012.

20. The Debtors businesses consist of three primary business seg(i) transportation, consisting of both heavy-duty commercial vehicles and passenger

grid energy storage; and (iii) commercial.

21. Transportation Segment - The Debtors largest target market transportation industry, in which the Debtors are working with major global automo

manufacturers and tier 1 suppliers to develop batteries and battery systems for HEV

and EVs. The Debtors transportation business is divided into two categories: heavy

passenger. In the heavy-duty, commercial vehicle market, the Debtors are engaged

development activities with multiple heavy-duty vehicle manufacturers and tier 1 su

regarding their HEV, PHEV and EV development efforts for trucks and buses, and t

been selected to co-develop battery systems for several of them. The Debtors batte

include both roof mount and cabin mount designs for use in a number of different h

vehicles.

22. In the passenger vehicle market, the Debtors supply advancedbattery systems to automotive manufacturers such as Fisker Automotive, Inc. (Fisk

BMW, among others. They have also been selected to develop battery packs for a n

model year electric passenger car from SAIC, the largest automaker in China. As n


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electric sedan and the Roewe 550 plug-in hybrid electric sedan. Additionally, the D

been selected by GM to supply battery packs for the Chevrolet Spark EV, a new EV

be sold globally in multiple markets starting in 2013.

23. The Debtors have also been awarded production programs wiof original equipment manufacturers (OEMs) for starter batteries or micro hybrid

and are bidding for programs with several other vehicle manufacturers to develop an

batteries and battery systems for HEVs, PHEVs and EVs. The Debtors cylindrical

in volume production and are commercially available for use in automotive and hea

vehicles, and their next-generation prismatic batteries are currently being produced

Livonia, Michigan facility.

24. Grid Energy Storage Segment - In the energy storage market,produce energy storage solutions that improve the reliability and efficiency of the el

grid and help to integrate renewable sources of power generation. The Debtors hav

their patented Nanophosphate technology to deliver energy storage solutions for p

generation, transmission and distribution. The Debtors design, manufacture and ins

megawatt battery systems with integrated power electronics and smart grid control s

provide electric and ancillary services such as standby reserve capacity and regulati

Their products provide standby reserve capacity, by delivering power quickly in ord

supply shortages caused by generator or transmission outages, and regulation, by re

minute-to-minute frequency fluctuations in the grid that are caused by instantaneous


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compensate these fast-responding resources, the Debtors believe that their customer

higher value from deploying their grid systems.

25. Commercial Segment - The Debtors have also focused on themarket. A123 first commercialized their battery technologies for use in cordless po

A123 has agreements with The Gillette Company, a wholly-owned subsidiary of Th

Gamble Company, to supply Gillette with materials and technology for use in their

products. In other commercial areas, the Debtors believe that their products are wel

applications in telecommunications, IT infrastructure, medical systems, auxiliary po

material handling equipment and industrial controls.

D. Customers26. The Debtors primary customers are industry-leading compan

and require high battery performance. In the transportation market, the Debtors are

working under non-exclusive arrangements with major global automotive manufact

1 suppliers to develop batteries and battery systems for the HEV, PHEV and EV ma

have entered into a supply agreement with BMW to supply HEV batteries, and with

Navistar, and SAIC to supply EV batteries, and they are currently supplying batterie

for a mass-produced HEV by SAIC Motor Co. Ltd., or SAIC Motor, in China. The

also been supplying batteries to SAIC for a PHEV platform they are developing. A

above, A123 Systems Hong Kong Limited entered into a joint venture agreement in

2009 with SAIC for the development, production and sale of the vehicle battery sys


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The Debtors other automotive development partners include tier 1 suppliers, such a

Steyr and Delphi, major automobile manufacturers, and EV manufacturers.

27. In the heavy-duty vehicle market, the Debtors are supplying bsystems to BAE Systems pursuant to an amended long term supply agreement execu

December 2010. BAE Systems is initially using their battery systems in its HybriD

propulsion system, which is currently being deployed in Daimler's Orion VII hybrid

buses. The Debtors have also been selected by Daimler to supply battery systems fo

systems developed by Daimler's EvoBus subsidiary. Furthermore, the Debtors have

supply agreements with ALTe and Via Motors, two companies that develop alternat

drivetrains using chassis from other manufacturers, and have entered into supply an

development agreements with a number of vehicle manufacturers for the Debtors

Nanophosphate starter battery product.

28. The Debtors also offer customers their multi-megawatt battercapable of performing ancillary electric grid services, including standby reserve cap

frequency regulation services. The first system was installed at a facility of AES En

Storage, LLC (AES) in California, and the Debtors have shipped additional units

various locations including Chile, New York, and West Virginia. Some of these de

were part of an AES order for 44 megawatts to be installed in various projects inclu

energy storage project in the PJM Interconnection market, which coordinates the mo

electricity in all or part of 13 states and the District of Columbia. In September 201


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awards to Southern California Edison Company (SCE) and The Detroit Edison C

(DTE) to demonstrate the viability of advanced Smart Grid technologies. SCE w

Debtors advanced battery technology and DOE funding to implement a $53.5 milli

Wind Energy Storage Project. DTE is expected to use the Companys battery techn

plan to implement Community Energy Storage systems in its Michigan service terri

in December 2011, the Debtors announced three projects: Sempra Generation, Maui

Company, and NStar, which expand the use of the Debtors grid energy storage tech

new applications and markets.

29. On the commercial side, the Debtors have entered into licensmaterials supply agreements with Gillette pursuant to which they granted Gillette an

license to certain of their technology and are supplying materials to Gillette for use

consumer products (excluding power tools and certain other consumer products). T

are also pursuing opportunities in emerging applications, including telecommunicati

infrastructure, medical systems, auxiliary power units, material handling equipment

industrial controls. In addition, the Debtors are developing and selling products for

applications, selling primarily through a network of global distributors.

30. The Debtors two largest customers are Fisker and AES and iwhich accounted for approximately 26% and 24% of their total revenue during the y

December 31, 2011, respectively. The Debtors revenue sources have become more

more of their automotive customers ramp up production and as they continue to gro


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E. Competition31.

Competition in the battery industry is intense and rapidly evo

markets are subject to changing technology trends, shifting customer needs and exp

frequent introduction of new technologies. The primary competitive factors in the i

product performance, reliability and safety, integrated solutions, product price and

manufacturing capabilities. The Debtors face competition from joint venture compa

a joint venture between Dow Chemical and Kokam America to build a facility in M

the manufacture of lithium polymer batteries for use in HEVS and other electric veh

32. In the rechargeable battery market, the Debtors primary comPanasonic; Sanyo; BYD Company Limited; LG; Lithium Energy Japan; Blue Energ

and SB LiMotive. In the transportation market, the Debtors competition includes b

companies such as: Panasonic; SB LiMotive; Automotive Energy Supply Corporati

Controls-Saft Advanced Power Solutions; Toshiba; Kokam; Hitachi, Ltd.; LG; GS Y

Lithium Energy Japan; EnerDel Inc.; Valende; and MES-DEA S.A. In the commer

the Debtors principal competitors are Panasonic; Sony; Samsung; LG; Valence; an

Energy Corp. In the electric grid services market, the Debtors currently compete wi

Altairnano, while several other battery companies have indicated their intent to ente

II. OVERVIEW OF GOVERNMENT GRANTS33. Historically the Debtors have received numerous grants and a

state and federal governments. Each of the material grants and awards that the Deb


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Battery Initiative to support manufacturing expansion of new lithium-ion battery ma

facilities in Michigan. Under the agreement, as amended, the DOE is providing cost

reimbursement for 50% of qualified expenditures incurred from December 1, 2009 t

2, 2014. The agreement also provides for reimbursement of pre-award costs incurre

1, 2009 to November 30, 2009. There are no substantive conditions attached to this

would require repayment of amounts received if such conditions were not met. Thro

2012, A123 has incurred $260.6 million in qualified expenses, of which 50%, or $1

are allowable costs for reimbursement. Nearly all of the allowable costs have been r

B. Center of Energy and Excellence Grant

35. In February 2009, the State of Michigan awarded A123 a $10Center of Energy and Excellence grant. Under the agreement, the State of Michigan

cost reimbursement for 100% of qualified expenditures based on the achievement o

milestones by March 2012. There are no substantive conditions attached to this awa

require repayment of amounts received if such conditions were not met. A123 recei

million of this grant in March 2009 and $6 million of this grant in July 2010, with ad

payments to be made based on the achievement of certain milestones in the facility

Through June 30, 2012, A123 used $8.8 million of these funds, of which $7.9 millio

million was recorded as an offset to property, plant and equipment and operating ex

respectively.

C. Michigan Economic Growth Authority


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the time claimed to the extent A123 does not owe a tax. The terms and conditions o

Tech Credit were established in October 2009 and the Cell Manufacturing Credit in

2009.

37. The High-Tech Credit agreement provides A123 with a 15-yebased on qualified wages and benefits multiplied by the Michigan personal income t

beginning with payments made for the 2011 fiscal year. The tax credit has an estima

up to $25.3 million, depending on the number of jobs created in Michigan. The proc

received by A123 will be based on the number of jobs created, qualified wages paid

in effect over the 15 year period. The tax credit is subject to a repayment provision i

A123 relocates a substantial portion of the jobs outside the state of Michigan on or b

December 31, 2026.

38. The Cell Manufacturing Credit agreement authorizes a tax crfor A123 equal to 50% of capital investment expenses related to the construction of

integrated battery cell manufacturing facilities in Michigan, commencing with costs

from January 1, 2009, up to a maximum of $100 million over a four year period. Th

cannot exceed $25 million per year and can be submitted for reimbursement beginn

year 2012. A123 is required to create 300 jobs no later than December 31, 2016 for

credit to be non-refundable. The tax credit is subject to a repayment provision in the

relocates 51% or more of the 300 jobs outside of the state of Michigan within three

the last year the tax credit is received. Through June 30, 2012, A123 has incurred $2


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D. Department of Energy, Labor and Economic Growth

39.

In December 2009, the State of Michigan awarded A123 $2 m

assist in funding A123s smart grid stabilization project, the purpose of which is to d

improve the quality of application of energy efficient technologies and to create or e

market for such technologies. A123 received an advance of $0.9 million in Decemb

another $0.9 million in February 2011. Through December 31, 2011, A123 incurred

in allowable costs, which was recorded as an offset to operating expenses. During th

December 31, 2011, the remaining $0.4 million in funding was cancelled.

III.OVERVIEW OF THE PREPETITION DEBT STRUCTURE40. Prior to the Petition Date, the Debtors entered into various fin

arrangements. Each of the financing facilities and the amounts owed thereunder is

below.

Type of Prepetition Indebtedness Approximate Amountof Outsta

as of the Petition Date4

Silicon Valley Bank Loan $05

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 (discussed inSection IV below) $22.5 million, of which $10.0 milrepresents obligations on account outstanding letters of credit.


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A. Silicon Valley Bank Loan

41.

On September 30, 2011, A123 and A123 Securities Corporati

the SVB Borrowers), Silicon Valley Bank, as administrative agent, letter of credi

swingline lender and lender, and the other financial institutions from time to time pa

lenders (collectively with Silicon Valley Bank, the SVB Lenders) entered into a

Agreement (as amended or restated, the SVB Credit Agreement), which provide

Borrowers with a revolving loan facility in an aggregate principal amount of up to t

(i) $40 million and (ii) a Borrowing Base (as defined in the SVB Credit Agreement)

at 80% of certain eligible accounts, 15% of certain eligible foreign accounts and 30%

eligible inventory. The SVB Credit Agreement also provided a letter of credit sub-f

aggregate principal amount of up to $10 million and a swing-line loan sub-facility in

aggregate principal amount of up to $5 million. Any outstanding obligations under

letter of credit sub-facility or swing-line sub-facility is deducted from the availabilit

$40 million revolving facility. The SVB Credit Agreement additionally provided a

incremental facility in an aggregate principal amount of not less than $10 million an

million. The funding of the incremental facility was discretionary on the part of the

Lenders and depended upon market conditions and other factors.

42. The facilities provided under the SVB Credit Agreement werrefinance the SVB Borrowers prior outstanding revolving loan facility with Silicon

Bank, dated as of August 2, 2006, and for working capital and general corporate pur


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except intellectual property and certain other exceptions as set forth in the SVB Cre

Agreement and related documentation.

43. All of the SVB Borrowers obligations under the SVB Credithave been repaid or, in the case of the outstanding letters of credit, cash collateralize

that certain Second Amendment to Credit Agreement dated May 11, 2012 and the W

Transactions (as defined and discussed below). As of the Petition Date, the SVB Bo

obligations outstanding under the SVB Credit Agreement, representing letter of cred

which are fully supported by a $10 million letter of credit issued under the Wanxian

Loan Facility, totaled approximately $8.7 million.

44. On August 16, 2012, the parties agreed to terminate the SVB Agreement and the revolving loan commitments made and security interests granted

In connection with such termination, Silicon Valley Bank (for the benefit of the len

the SVB Credit Agreement) has been provided with standby letters of credit and oth

support in the aggregate amount of $10 million to cover potential amounts owing un

credit which were issued under the SVB Credit Agreement and remained outstandin

August 16, 2012.

B. Michigan Strategic Fund Loan45. On August 26, 2009, A123 entered into that certain Loan Agr

the Michigan Strategic Fund, a public body corporate and politic within the Departm

Treasury of the State of Michigan, pursuant to which the Michigan Strategic Fund p


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secured by the equipment purchased by A123 using, at least in part, the proceeds of

Loan as specifically identified by A123 as a condition to the disbursement of such p

46. The Michigan Loan will be completely forgiven, and the secuin A123s equipment terminated, if at any time between August 26, 2012 and Janua

A123 has created greater than or equal to 350 full-time jobs in the state of Michigan

on August 26, 2012, to the extent A123 did not create the full 350 jobs which would

complete forgiveness, the Michigan Loan is forgiven, on a monthly basis, in a pro ra

reflecting the number of jobs that A123 has created. As of the Petition Date, approx

million was outstanding under the Michigan Loan.

C. Massachusetts Clean Energy Technology Center Loan47. On October 8, 2010, A123 entered into that certain Loan and

Agreement with the Massachusetts Clean Energy Technology Center (MassCEC

independent public instrumentality of The Commonwealth of Massachusetts, pursua

MassCEC provided A123 a loan in the amount of $5 million (the Massachusetts L

fixed annual interest rate equal to 6.0% compounding monthly and due October 8, 2

forgiven prior to such date. The Massachusetts Loan is secured by (a) a first priorit

security interest in specific equipment of A123 set forth on a schedule to the Loan a

Agreement, which schedule may be amended from time to time by mutual agreemen

and MassCEC (the MassCEC Senior Collateral), and (b) a continuing security

and to substantially all assets of A123 other than the Senior Collateral (as defined be


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of the foregoing, (ii) a bank, financial institution or other commercial lending institu

(including without limitation, Silicon Valley Bank), or (iii) any other lender of regio

national reputation. This subordination was memorialized in that certain Subordina

Agreement dated October 8, 2010 by and between MassCEC and Silicon Valley Ba

48. The Massachusetts Loan will be forgiven by MassCEC if A1certain goals. For example, the greater of $2.5 million and 50% of the Massachuset

be forgiven on October 8, 2017 if (a) A123 has created 263 jobs in Massachusetts be

period of January 1, 2010 and December 31, 2014 and (b) maintains a minimum of

Massachusetts during the period from January 1, 2013 through October 8, 2017. To

A123 does not create and maintain a sufficient number of jobs to entitle such forgiv

on the Maturity Date, A123 will be entitled to partial forgiveness in a pro rata amou

the number of jobs that A123 was able to create and maintain.

49. Additionally, the Massachusetts Loan provided that on Octobthe greater of $2.5 million and 50% of the Massachusetts Loan would be forgiven if

demonstrated that A123 spent at least $12.5 million in infrastructure and leasehold

improvements. On October 18, 2011, A123 and MassCEC entered into Amendmen

Loan and Security Agreement and Acknowledgement of Partial Loan Forgiveness (

Amendment No. 1) whereby MassCEC acknowledged that A123 had satisfied the

infrastructure and leasehold improvement spending requirements and, as a result, th

amount of $2.5 million and all accrued interest relating thereto was forgiven. Mass


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the forgiveness. As of the Petition Date, approximately $2.8 million was outstandin

Massachusetts Loan.

D. 2011 3.75% Convertible Subordinated Notes

50. On April 6, 2011, A123 issued and sold $148.86 million aggrprincipal amount of 3.75% convertible subordinated notes due 2016 (the 2011 3.75

Convertible Subordinated Notes) pursuant to a base indenture (as supplemented

supplemental indenture, dated as of April 6, 2011, and as otherwise amended or rest

2011 Indenture) between A123 and U.S. Bank National Association, as trustee.

connection with this transaction, A123 also sold 18,000,000 shares of its common s

2011 3.75% Convertible Subordinated Notes are publicly traded, bear interest at a r

per annum, are payable semi-annually in arrears on April 15 and October 15 of each

mature on April 15, 2016. Additionally, holders of the 2011 3.75% Convertible Sub

Notes may surrender their 2011 3.75% Convertible Subordinated Notes, in integral

$1,000 principal amount, for conversion to equity, determined pursuant to an adjusta

set forth in the 2011 Indenture, any time prior to the close of business on the third b

immediately preceding the maturity date. Additionally, the 2011 Indenture provide

A123 undergoes certain fundamental changes, the holders of the 2011 3.75% Conve

Subordinated Notes may require A123 to repurchase all or a portion of the 2011 3.7

Convertible Subordinated Notes for cash at a price equal to 100% of the principal am

convertible notes to be purchased plus any accrued and unpaid interest relating there


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subordinated indebtedness and equal to all of A123s subordinated indebtedness. T

3.75% Convertible Subordinated Notes are structurally subordinated to all present a

debt and other liabilities and commitments (including trade payables) of A123s sub

The 2011 3.75% Convertible Subordinated Notes are also effectively subordinated t

secured debt to the extent of the value of the assets securing such debt.

52.

The net proceeds from the issuance of the 2011 3.75% Conve

Subordinated Notes and equity relating thereto, after deducting the underwriting dis

commissions and estimated offering expenses, totaled approximately $255.1 million

the net proceeds from the offerings for general corporate purposes. As of the Petitio

approximately $143.8 million of the 2011 3.75% Convertible Subordinated Notes re

outstanding.

E. 2012 Senior Convertible Notes

53. On May 11, 2012, A123 entered into a Securities Purchase Aamended or restated, the Senior Notes Purchase Agreement) with certain institu

investors (the Senior Noteholders) including (1) Hudson Bay Master Fund Ltd. a

Morgan Omni SPC, Ltd. and (2) Tenor Special Situation Fund, L.P., Parsoon Specia

Ltd., Tenor Opportunity Master Fund. Ltd, and Aria Opportunity Fund, Ltd. Pursua

terms of the Senior Notes Purchase Agreement, A123 agreed to sell to the Senior N

$50 million aggregate principal amount of unsecured, senior convertible notes (the

Convertible Notes) and, as noted above, warrants (the 2012 Senior Note Warra


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adjustments, and mature on July 15, 2013. The 2012 Senior Convertible Notes are c

at the Senior Noteholders option, into shares of A123s common stock initially at a

conversion price, subject to certain adjustments. A123 is required to repay the Seni

semi-monthly installments commencing on June 15, 2012. A123 may settle interest

amortization payments in common stock of A123, subject to certain conditions. The

Noteholders also have certain voluntary conversion rights. The sale under the Senio

Purchase Agreement closed on May 24, 2012 pursuant to an Amended and Restated

Purchase Agreement dated May 23, 2012.

54. The initial conversion price of the 2012 Senior Convertible Nat $1.18 and was subject to certain adjustments. Pursuant to the promissory note go

2012 Senior Convertible Notes, A123 has the right to make amortization or interest

and redemption payments in shares of its common stock at a price equal to the lesse

applicable conversion price and 82% of the market price, determined pursuant to a f

contained in the Senior Notes Purchase Agreement, of A123s common stock on the

interest date or amortization installment date. Additionally, Senior Noteholders hav

any time, and from time to time, after August 15, 2012, to elect to convert up to $30

aggregate principal amount of 2012 Senior Convertible Notes at a price equal to 85%

closing price of A123s common stock on the trading day immediately preceding th

date; provided, however, that the Senior Noteholders may not convert more than $3

aggregate principal amount of the 2012 Senior Convertible Notes on any given tradi


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may be raised to any other percentage not in excess of 9.99% at the option of the Se

Noteholders, upon at least 61-days prior notice to A123, or lowered to any other pe

the option of the Senior Noteholders, at any time.

56. The 2012 Senior Note Warrants have a strike price equal to 1closing price of A123s common stock on May 11, 2012, or $1.29 per share. In the

fundamental change, the Senior Noteholders are entitled to a fair value settlement fo

option value based on a Black-Scholes-based calculation. The 2012 Senior Note W

not be exercised for six months from the date of issuance. The 2012 Senior Note W

subject to customary anti-dilution adjustments and may not be exercised if, after giv

the exercise, the Senior Noteholders would exceed the equity ownership limits set fo

prior paragraph.

57. On August 10, 2012, A123 and certain of the Senior Noteholdinto a Consent and First Amendment to Senior Convertible Note (the Senior Note

Amendment), in order to amend certain terms of the 2012 Senior Convertible Not

connection with the proposed entry into a series of financing transactions with Wan

Corporation (discussed in more detail below). Among other things, the Senior Note

Amendment increased the conversion price of a portion of the 2012 Senior Converti

all times on or after August 21, 2012 from 85% of the market price thereof to 87% o

price thereof. In consideration of the foregoing, the Senior Note Consent and Amen

changed the first date on which the Senior Noteholders may convert up to $30 milli


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amend certain anti-dilution provisions in the 2012 Senior Note Warrants in order to

transactions with Wanxiang Group Corporation.

58. The 2012 Senior Convertible Notes are general unsecured obare pari passu in right of payment with all of A123s unsecured senior indebtedness

senior in right of payment to any of A123s subordinated indebtedness. However, p

the Senior Note Consent and Amendment, the 2012 Senior Convertible Notes are su

certain Permitted Senior Indebtedness (as defined therein), including indebtedness i

under the SBV Credit Agreement and the Wanxiang Bridge Loan Facility. As of th

Date, approximately $2.76 million of the 2012 Senior Convertible Notes remained o

F. Trade and Other Unsecured Debt

59. The Debtors have largely been paying obligations due and owvendors, suppliers and other prepetition creditors as they come due in the ordinary c

business. As of the Petition Date, the total outstanding obligations due and owing to

suppliers and other general unsecured creditors (other than the lenders under the var

financings discussed above) approximate $17.4 million. Additionally, the Debtors e

as of the Petition Date, approximately $15.3 million of obligations to vendors had ac

had not yet been invoiced to the Debtors.

IV.PRE-PETITION TRANSACTIONS WITH THE WANXIANG GROUP60. As pressures on their liquidity mounted, the Debtors, during t

quarter of 2012, began to consider a broad set of strategic alternatives, including me


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ultimately determined not to proceed with this transaction, and as a result the Debto

other efforts to raise additional capital. However, this transaction failed to develop

result the Debtors resumed their efforts to find additional capital. These efforts resu

Debtors announcement on August 16, 2012, that they had entered into definitive do

(following the parties earlier announcement of the execution of a memorandum of

understanding) with Wanxiang, which documentation memorialized Wanxiangs ag

among other things, (a) furnish the Companywith a senior secured bridge loan facil

amount up to $75 million (the Wanxiang Bridge Loan Facility) and (b) purchas

million in aggregate principal amount of 8.00% Senior Secured Convertible Notes (

Wanxiang 8.00% Convertible Notes) to be issued by the Company in connectio

transaction (collectively, the Wanxiang Transactions.)

A. The Wanxiang Bridge Loan Facility

61. Under the Wanxiang Bridge Loan Facility, the Wanxiang Lento provide the Debtors with an initial cash advance of $12.5 million7 and a letter of

that would result in approximately $10 million of additional liquidity for the Debtor

(collectively, the Initial Wanxiang Loan).8 The Debtors received the Initial Wan

on or about August 16, 2012. The Wanxiang Bridge Loan Facility also provided fo

subsequent $25 million cash advances (each a Subsequent Wanxiang Loan) sub

satisfaction of certain conditions (the Wanxiang Closing Conditions) including,


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limited to, (a) receipt of a favorable determination from the Committee of Foreign I

the United States,9

(b) receipt of Chinese government approvals, (c) the accuracy of

representations and warranties, (d) the absence of any default, and (e) the absence o

diminishment of the Debtors research and development and engineering teams by r

resignations or departures. As of the Petition Date, the Debtors had received only th

Wanxiang Loan because certain of the aforementioned conditions had not been satis

such date.

B. Other Aspects of the Wanxiang Transactions

62. The parties to the Wanxiang Bridge Loan Facility additionallupon the Initial Wanxiang Loan and each Subsequent Wanxiang Loan made under t

Bridge Loan Facility, A123 would issue certain warrants to the Wanxiang Lender.

Petition Date, only the Wanxiang Bridge Warrant corresponding to the Initial Wanx

had been issued to the Wanxiang Lender.

63. Similarly, the portion of the Wanxiang Transactions relating tissuance of the Wanxiang 8.00% Convertible Notes was memorialized by that certa

Purchase Agreement dated August 16, 2012 (the Wanxiang Purchase Agreement

A123 and the Wanxiang Purchaser. Pursuant to the terms of the Wanxiang Purchas

the Wanxiang Purchaser agreed, subject to the satisfaction of certain conditions, to p

(within 180 days after the first advance under the Wanxiang Bridge Loan Facility) $

in aggregate amount of the Wanxiang 8.00% Convertible Notes from A123. Howev


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64. Finally, under the Wanxiang Purchase Agreement and concurissuance of the Wanxiang 8.00% Convertible Notes, A123 also agreed that it would

warrants (the Wanxiang Convertible Note Warrants) to the Wanxiang Purchase

purchase, for an aggregate exercise price of $115 million, shares of common stock t

together with the shares of common stock issued under the Wanxiang Bridge Warra

Wanxiang 8.00% Convertible Notes, would be exercisable for 80% of the outstandi

stock of A123 at the time of exercise. As of the Petition Date, the Wanxiang Conve

Warrants had not been issued.

C. Wanxiang Pledge and Security Agreement

65. On or about August 16, 2012, A123 and A123 Securities Corentered into a Pledge and Security Agreement with the Wanxiang Lender in its capa

(the Wanxiang Pledge and Security Agreement), pursuant to which A123 and A

Securities Corporation granted the Wanxiang Lender, in its capacity as agent, a first

security interest in substantially all of their respective assets for purposes of securin

obligations under the Wanxiang Bridge Loan Facility and, although not issued as of

Date, the Wanxiang 8.00% Convertible Notes. Certain non-debtor subsidiaries wer

signatories to the Wanxiang Pledge and Security Agreement.

V. EVENTS LEADING TO THE CHAPTER 11 FILINGS

A. Contract and Warranty Issues

66. In 2010, the Debtors identified certain technical issues in the


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2011, the Company determined that some of the battery packs produced for Fisker h

potential safety issue relating to the battery cooling system due to the misalignment

hose clamps in the internal cooling system. There were no related battery performa

incidents with cars in the field; however, the problem required significant managem

expense, as well as the rapid re-deployment of technical personnel to the field.

67.

In October 2011, the Debtors learned of an unexpected reduc

fourth-quarter orders from its largest customer, Fisker Automotive, as Fisker sought

inventory levels from all of its suppliers. As a result, the Debtors revised their full-

revenue guidance (originally expected to be between $210 million and $225 million

this unexpected reduction in revenue. While the Debtors continued to increase their

ramp in the third quarter 2011, the lower plant utilization due to Fiskers reduction i

temporarily offset any gross margin improvements the Debtors were expecting. Co

A123s total revenue for the fiscal year ended December 31, 2011 was $159.1 millio

68. On March 26, 2012, A123 launched a field campaign to replamodules and packs that may contain defective prismatic cells produced at its Livoni

manufacturing facility. The cost of this field campaign is estimated at $51.6 million

A123 recorded an inventory charge of approximately $15.2 million related to invent

at its Michigan facilities that may be defective. As a result of this field campaign an

for existing prismatic cell inventory, A123 was required to rebuild its inventory and

backlog for existing customer orders while simultaneously replacing the defective c


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B. Pre-Petition Financing and Sale Process

69. As a result of the foregoing, the Debtors began to explore opemodifications to save operating costs, as well as sales of certain assets. In March 20

Debtors began a sale process by retaining Lazard Frres & Co. LLC (Lazard) as

investment banker to assist the Debtors in addressing their financial situation and ex

potential financing and restructuring alternatives. Additionally, in late August 2012

retained Alvarez and Marsal North America, LLC (Alvarez) to perform a variety

restructuring related services. The Debtors and their advisors continued to evaluate

changes that could result in decreased cost, while also negotiating with the lenders u

prepetition credit facilities.

70. Prior to filing these Chapter 11 Cases, the Debtors, with the assistancand in consultation with Latham & Watkins LLP, pursued a range of options to add

Debtors concerns about their ability to service their debt and fund operations going

including new financing, refinancing and the sale of certain or all of the Debtors as

business.

71. The Debtors implemented an extensive marketing process seapotential partners and equity investors as well as entities interested in acquiring som

Debtors assets. This process was primarily conducted by Lazard as directed by A1

an initial round of investigation, Lazard contacted approximately 74 parties, 24 of w

reviewed a teaser prepared by Lazard and discussed the process with Lazard. The


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memorandum. Ten parties were granted access to a dataroom to complete further d

A123. Seven parties visited A123 facilities and received management presentations

however, only one offer, from Wanxiang, was received to invest in the Debtors as a

concern, and three non-binding offers were received to purchase or otherwise invest

limited subset of the Debtors assets. One investor who expressed interest in acquir

Debtors as a going concern declined to submit any binding offer after completing ex

diligence.

72. Following extensive negotiations on the terms and conditionsWanxiangs offer, the Debtors entered into the various agreements with Wanxiang d

above that comprised the Wanxiang Transactions. However, because certain of the

Closing Conditions did not occur only the Initial Wanxiang Loan was funded as of t

Date.

73. Shortly before the Petition Date, it became apparent that certaWanxiang Closing Conditions would not be satisfied prior to the Debtors liquidity

operational levels. Although the Debtors searched for interim bridge financing to p

operations through this period of reduced liquidity, the Debtors were unable to obtai

financing on terms that would permit continued operation of the Debtors businesses

bankruptcy process. As of the Petition Date, the Debtors had approximately $19 mi

on hand, however the Debtors were unable to access such cash as a result of covena

Wanxiang Bridge Loan Facility. It is against this backdrop that the Debtors Board


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million in debtor-in-possession financing from Johnson Controls, Inc. (JCI), the r

approval of which is the subject of theDebtors Motion for Interim and Final Order

Authorizing Debtors to Obtain Post-Petition Secured Financing Pursuant to 11 U.S

361, 362 and 364; (II) Granting Liens and Super-Priority Claims; and (III) Schedul

Hearing Pursuant to Bankruptcy Rule 4001 (the DIP Motion) filed with this Cou

Petition Date and (b) the entry into an Asset Purchase Agreement with JCI for the p

those assets, related contracts and intellectual property associated with the Debtors

business as well as certain other related transactions (collectively, the Designated

purchase price of $125 million, which agreement contemplates an auction and sale p

process and the related bidding procedures have been presented to the Court for app

pursuant to theDebtors Motion for Entry of (I) An Order Approving and Authorizin

Bidding Procedures in Connection with the Sale of Certain Assets of the Debtors, (B

Horse Bid Protections, (C) the Form and Manner of Notice of the Sale Hearing and

Relief; and (II) An Order Authorizing (A) the Sale of Certain Assets of the Debtors F

Clear of All Claims, Liens, Liabilities, Rights, Interests and Encumbrances; (B) the

Enter into and Perform Their Obligations Under the Asset Purchase Agreement; (C

to Assume and Assign Certain Executory Contracts and Unexpired Leases; and (D)

Related Relief(the Sale Motion) which was filed with the Court on the Petition D

proposed process contemplates, among other things, that interested parties will be a

opportunity to submit higher and better offers for the Designated Assets and that an


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Designated Assets free and clear of liens, claims and interests pursuant to Section 3

Bankruptcy Code upon entry of an order of the Bankruptcy Court approving such sa

75. Additionally, in the weeks preceding the Petition Date, Lazarits efforts to identify potential buyers for the Debtors assets not included in the Des

Assets. The Debtors believe that certain bidders have been identified and that the D

have success selling the assets which are not part of the Designated Assets.

VI. OBJECTIVES OF THE CHAPTER 11 CASES

76. These cases have been initiated to enable the Debtors to stabioperations, obtain access to new financing and maximize the value of the Debtors a

a sale, or multiple sales, of substantially all of the Debtors assets pursuant to sectio

Bankruptcy Code (the Sale).

PART II

77. In furtherance of the objective of successfully maximizing vacreditors, the Debtors have sought approval of the First Day Motions and related ord

Proposed Orders), and respectfully request that the Court consider entering orde

such First Day Motions. For the avoidance of doubt, the Debtors seek authority, bu

direction, to pay amounts or satisfy obligations with respect to the relief requested in

First Day Motions.

78. I have reviewed each of the First Day Motions and Proposed (including the exhibits thereto), and the facts set forth therein are true and correct to


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productivity or value and (b) constitutes a critical element in the Debtors being able

successfully maximize value for the benefit of the estate.

I. ADMINISTRATIVE AND PROCEDURAL MOTIONSA. Joint Administration Motion

79. The Debtors seek the joint administration of their Chapter 11 in total, for procedural purposes only. Many of the motions, hearings, and other ma

involved in these Chapter 11 Cases will affect all of the Debtors. Thus, I believe th

administration of these cases will avoid the unnecessary time and expense of duplic

motions, applications, orders and other pleadings, thereby saving considerable time

for the Debtors and resulting in substantial savings for their estates.

A. Retention Applications80. I believe that the retention of chapter 11 professionals is esse

Chapter 11 Cases. Accordingly, during the filing of these Chapter 11 Cases, the De

anticipate that they will request permission to retain, among others, the following pr

(a) Latham & Watkins LLP, as co-counsel; (b) Richards, Layton & Finger PA, as co

(c) Alvarez & Marsal North America, LLC, as restructuring advisor; (d) Lazard Fre

investment banker; and (e) Logan & Company, as claims, noticing, soliciting and ba

agent. I believe that the above professionals are well qualified to perform the servic

contemplated by their various retention applications, the services are necessary for t

these Chapter 11 Cases, and the professionals will coordinate their services to avoid


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B. Equity Securities Trading Motion81. In the Equity Securities Trading Motion, the Debtors request

Court grant immediate interim relief, by entering an Interim Order and Final Order e

pursuant to Sections 105(a), 362(a)(3) and 541 of the Bankruptcy Code, notification

procedures for certain transfers of equity securities in A123 or of any beneficial inte

including Options (defined below) to acquire such equity securities, that must be co

before such transfers of equity securities are deemed effective. The procedures for

equity securities of A123 are necessary to protect and preserve the value of the Deb

attributes, including but not limited to, significant net operating losses (NOLs and

with any capital losses, unrealized built-in losses, and certain other tax and business

Tax Attributes).

82. The Debtors have incurred, and are currently incurring, signiffor U.S. federal income tax purposes. For tax periods through the 2011 tax year, the

have reported on their federal income tax returns approximately $497 million of con

NOLs. The Debtors continued to incur NOLs in the first three quarters of 2012 and

continue incurring NOLs after the Petition Date. Pursuant to the Equity Securities T

Motion, the Debtors seek authorization to protect and preserve the value of their Tax

including, without limitation, their federal NOL carryforwards. While the value of

Tax Attributes is contingent upon the amount of the Debtors taxable income that m

by the Tax Attributes before they expire and any existing limitation on their usage, t


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83. The Debtors NOLs are a valuable asset because the Debtors carry forward their NOLs to offset their future taxable income and tax liability, ther

potentially freeing up funds to meet working capital requirements and service debt.

example, the Debtors can carry forward federal NOLs to offset their future taxable i

to 20 taxable years, thereby potentially recovering cash for the benefit of their estate

potentially reducing their future aggregate tax obligations to the extent NOLs remain

be carried forward. See 26 U.S.C. 172. Such NOLs may also be available to the

offset taxable income generated by transactions completed during the Chapter 11 Ca

84. If no restrictions on trading are imposed by this Court, it is munderstanding that such trading could severely limit or even eliminate the Debtors

their Tax Attributes, which could lead to significant negative consequences for the D

estates, and the overall reorganization process. To preserve to the fullest extent pos

flexibility to craft a plan of reorganization that maximizes the use of the Tax Attribu

Debtors seek in the Equity Securities Trading Motion limited relief that will enable

closely monitor certain transfers of A123 equity securities, so as to be in a position t

expeditiously if necessary to preserve their Tax Attributes. By establishing procedu

continuously monitoring the trading of A123 equity securities, I believe the Debtors

their ability to seek substantive relief at the appropriate time, particularly if it appea

additional trading may jeopardize the use of their Tax Attributes.

II. BUSINESS OPERATION MOTIONS


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not directing, the Debtors to continue to maintain and use their existing cash manag

system, including maintenance of the Debtors existing bank accounts, checks and b

forms; (b) granting the Debtors a waiver of certain bank account and related require

United States Trustee to the extent that such requirements are inconsistent with (i) th

existing practices under the cash management system or (ii) any action taken by the

accordance with any order granting the Cash Management Motion or any other orde

the Chapter 11 Cases; (c) authorizing, but not directing, the Debtors to continue to m

use their existing investment anddeposit practices notwithstanding the provisions o

Code Section 345(b); (d) authorizing, but not directing, the Debtors to continue cert

course intercompany transactions; and (e) according superpriority status to postpetit

intercompany claims arising from certain of such transactions. The Debtors also req

Court authorize and direct all banks with which the Debtors maintain accounts to co

maintain, service and administer such accounts and authorize third-party payroll and

administrators and providers to prepare and issue checks on behalf of the Debtors. A

Petition Date the Debtors estimate that they have approximately $19million in cash

which amount is cash collateral for the Debtors obligations under Wanxiang Bridge

Facility.

86. In the ordinary course of their businesses, the Debtors maintacash management system (the Cash Management System) which includes opera

accounts, disbursement accounts, deposit accounts, foreign disbursement accounts,


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requirements of the Debtors non-debtor subsidiaries, (c) transfer cash as needed to

the cash requirements of the Debtors and the Debtors non-debtor subsidiaries, (d) t

intercompany transfers and (e) efficiently monitor and control all of the Debtors ca

and disbursements. I believe that the Cash Management System is similar to those u

many other companies of comparable size and complexity to collect, transfer and di

in a cost-effective and efficient manner.

87. The Cash Management System is managed by the financial pthe Debtors Accounting Department at the Debtors headquarters in Waltham, Mas

The Accounting Departments control over the administration of the various bank a

effect the collection, disbursement and transfer of cash facilitates accurate cash fore

reporting.

88. As of the Petition Date, the Debtors maintained approximatel(17) bank accounts (collectively, the Bank Accounts) at seven (7) financial instit

schedule of the Bank Accounts is attached as Attachment 2 to the Cash Managemen

As reflected in such schedule, all of the Bank Accounts are held in the name of eithe

Systems, Inc. or A123 Securities Corporation.

89. The Cash Management System is primarily organized in a warespects the separate cash funding and operating needs of the Debtors and the non-d

subsidiaries of the Debtors. A summary of the Cash Management System is attache

Attachment 1 to the Cash Management Motion. The Bank Accounts, which are loc


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90. The Debtors non-debtor foreign subsidiaries maintained apptwenty-five (25)bank accounts (collectively, the Non-Debtor Bank Accounts) a

financial institutions. A schedule of the Non-Debtor Bank Accounts is attached as A

to the Cash Management Motion.11

As reflected in such attachment, all of the Non-

Accounts are held in the name of either A123 Systems (China) Materials Co., Ltd.,

Systems China Co., Ltd., A123 Systems (Zhenjiang) Materials Co., Ltd., Suzhou Ga

Trading Co.,Ltd. or A123 Systems, Korea Co., Ltd. In the aggregate, the Non-Deb

Accounts held approximately $2,200,000 as of the Petition Date.

91. On average, the Debtors transfer approximately $6,000,000fAccounts to the Non-Debtor Bank Accounts on a monthly basis. The Debtors estim

during these Chapter 11 Cases the Debtors will need to transfer, on average, approx

$5,500,000 to the Non-Debtor Bank Accounts on a monthly basis in order to ensure

continued operation of the Debtors non-debtor foreign subsidiaries. Because the D

debtor foreign subsidiaries are critical to the continued operation of the Debtors as a

concern, such transfers are essential to maintaining the value of the Debtors busine

concern.

92. I believe that the Cash Management System is an ordinary cocustomary and essential business practice. The continued use of the Cash Managem

during the pendency of the Chapter 11 Cases is essential to the Debtors business op

their goal of maximizing value for the benefit of all parties in interest. Requiring th


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needless administrative burdens and cause undue disruption. Any such disruption w

adversely (and perhaps irreparably) affect the Debtors ability to maximize estate va

benefit of creditors and other parties in interest. Moreover, such a disruption would

unnecessary insofar as the Cash Management System provides a valuable and effici

the Debtors to address their cash management requirements and, to the best of the D

knowledge, the Bank Accounts are in financially stable institutions. In this regard,

mention that Silicon Valley Bank is an approved depository of the United States Tru

Maintaining the existing Cash Management System without disruption is both essen

Debtors ongoing operations and in the best interests of the Debtors, their estates an

interested parties. Accordingly, the Debtors request that they be allowed to maintai

continue to use the Cash Management System and the Bank Accounts.

93. The Debtors further request in the Cash Management Motionauthorized to implement such reasonable changes to the Cash Management System

Debtors may deem necessary or appropriate, including, without limitation, closing a

Bank Accounts or opening any additional Bank Accounts following the Petition Da

Accounts), wherever the Debtors deem that such accounts are needed or appropria

whether or not the banks in which the accounts are opened are designated depositor

District of Delaware. Notwithstanding the foregoing, any New Account that the De

will be (a) at one of the existing Banks or with a bank that either (i) is organized und

of the United States of America or any state therein and insured by the FDIC or the


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account by the relevant bank. The Debtors request that the relief sought by the Cash

Management Motion extend to any New Accounts and that any order approving the

Management Motion provide that the New Accounts are deemed to be Bank Accoun

similarly subject to the rights, obligations and relief granted in the order. The Debto

provide the United States Trustee with written notice of any New Accounts that are

furtherance of the foregoing, the Debtors also request that the relevant banks be auth

honor the Debtors requests to open or close (as the case may be) such Bank Accoun

Account(s).

94. Additional, The Debtors print their checks using a predefinedthat includes the Debtors names and addresses. Although the Debtors will endeavo

necessary system changes to this template such that checks printed postpetition will

Debtors as Debtors in Possession, in order to minimize expenses to their estates, t

seek authorization to continue using all checks substantially in the forms existing im

prior to the Petition Date, without reference to the Debtors status as debtors in poss

the event that the Debtors generate new checks during the pendency of these cases,

will include a legend referring to the Debtors as Debtor-in-Possession. The Debto

authority to use all correspondence and other business forms (including, without lim

letterhead, purchase orders and invoices) without reference to the Debtors status as

possession. Most parties doing business with the Debtors undoubtedly will be awar

Debtors status as debtors in possession as a result of the publicity of these cases, th


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would be expensive, unnecessary and burdensome to the Debtors estates. Further,

would be disruptive to the Debtors business operations and would not confer any b

those dealing with the Debtors. For these reasons, the Debtors request in the Cash M

Motion that they be authorized to use their existing check stock, all correspondence

business forms without being required to place the label Debtor-in-Possession on

foregoing.

95. The Debtors further request in the Cash Management Motioncertain bank account and related requirements of the United States Trustee to the ex

requirements are inconsistent with (a) the Debtors existing practices under the Cash

Management System or (b) any action taken by the Debtors in accordance with any

granting the Cash Management Motion or any other order entered in the Chapter 11

United States Trustee has established certain operating guidelines for debtors in pos

order to supervise the administration of chapter 11 cases. These requirements (each

Requirement and, collectively, the UST Requirements) require chapter 11 deb

among other things: (i) close all existing bank accounts and open new debtor-in-pos

accounts; (ii) establish one debtor-in-possession account for all estate monies requir

payment of taxes, including payroll taxes; (iii) maintain a separate debtor-in-posses

for cash collateral; and (iv) obtain checks for all debtor-in-possession accounts whic

designation Debtor-In-Possession, the bankruptcy case number and the type of ac

These requirements are designed to draw a clear line of demarcation between prepet


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96. To begin, as noted previously, in light of the complexity of thManagement System, it will be incredibly onerous for the Debtors to meet the requi

closing all existing bank accounts and opening new debtor-in-possession bank acco

not only would the Debtors be unnecessarily inconvenienced, but so would their cus

many of whom wire remittances directly to the Main Operating account held at SVB

97. Further, I believe that requiring the Debtors to abide by the URequirement to establish specific debtor-in-possession accounts for tax payments (i

payroll taxes) and to deposit to such specific tax accounts sufficient funds to pay an

(when incurred) associated with the Debtors payroll and other tax obligations woul

unnecessarily burdensome. The Debtors believe that they can pay their tax obligati

efficiently from the Main Operating Account maintained at SVB in accordance with

existing practices, that the United States Trustee can adequately monitor the flow of

and out of such accounts, and that the creation of new debtor-in-possession account

solely for tax obligations would be unnecessary and inefficient.

98. As part of the Cash Management System, it is the Debtors prdeposit and invest funds (the Deposit and Investment Practices). The Debtors m

several investment accounts, which are used to make short-term investments, curren

Morgan money market fund, Invesco Short Term Investments Trust, a SVB instituti

reserve share money market fund, and a SVB institutional liquid reserve share mone

fund. Additionally, as of the Petition Date, funds in the Main Operating Account w


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Management System, subject to any reasonable changes to the Cash Management S

the Debtors may implement and (b) a waiver of the investment and deposit requirem

Bankruptcy Code Section 345(b) to the extent that such requirements are inconsiste

Deposit and Investment Practices.

100. Additionally, in the past, the Debtors have provided loans to and their non-debtor foreign subsidiaries and, in certain instances, the Debtors were

recipients of funds loaned from one another (the Intercompany Debt Transaction

as noted above, in the ordinary course of business, the Debtors regularly participate

transactions with one another and with their non-debtor foreign subsidiaries in whic

purchase and sell goods for use in the manufacturing process of the various entities

for resale, certain manufactured products (the Intercompany Trade Transactions

together with the Intercompany Debt Transactions, the Intercompany Transactio

result of the Intercompany Transactions, the Debtors books and records reflect prep

obligations among the Debtors and between Debtors and their non-debtor foreign su

Before the commencement of these Chapter 11 Cases, the Debtors engaged in Interc

Transactions summarized in more detail in the Cash Management Motion.

101. In the Cash Management Motion, the Debtors seek authority,discretion, to pay for prepetition Intercompany Trade Transactions, if, in the exercis

Debtors business judgment, they deem the payment necessary and in the best intere

Debtors estates and other parties in interest. Additionally, the Debtors seek authori


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participate in Intercompany Trade Transactions and Intercompany Debt Transaction

postpetition, in the ordinary course of business.

102. As noted above, the Debtors anticipate that the funding needsdebtor foreign subsidiaries over the course of these cases will not exceed $5.5millio

which amount is provided for in the budget attached as an exhibit to the DIP Motion

Debtors believe in the exercise of their reasonable business judgment that preservati

going concern value of the company as a worldwide enterprise, including the mainte

non-debtor foreign subsidiaries, is absolutely essential to the success of the Debtors

materials supplied by the non-debtor foreign subsidiaries, the Debtors could not con

operate. I believe that the relief requested in the Cash Management Motion is neces

the non-debtor foreign subsidiaries are not stand-alone entities and do not have cust

than the Debtors. Accordingly, these subsidiaries will require payment on account

Intercompany Trade Transactions and intercompany advances in order to maintain t

and operations. Moreover, many of the contractual obligations of the non-debtor fo

subsidiaries are guaranteed by the Debtors and, as a result, the Debtors would incur

liabilities if the non-debtor foreign subsidiaries were forced to stop operating and pa

expenses in the ordinary course

103. The Debtors maintain records of all fund transfers and can asand account for Intercompany Transactions. At the same time, however, if the Inter

Transactions were to be discontinued, the Cash Management System and the related


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postpetitionclaims arising from Intercompany Transactions (the Intercompany C

against a Debtor by another Debtor arising after the Petition Date be accorded super

administrative claim status, subject and subordinate only to other superpriority admi

claims granted pursuant to order of the Bankruptcy Court. If postpetition Intercomp

are accorded superpriority administrative claim status, then each individual Debtor o

behalf another Debtor has utilized funds or incurred expenses will continue to bear u

repayment responsibility, thereby protecting the interests of each individual Debtor

Accordingly, the Court should grant superpriority status to the Intercompany Claim

B. Customer Programs Motion

105. In the Customer Programs Motion, the Debtors seek entry ofauthorizing, but not directing, them (a) to honor their prepetition warranty obligatio

under ordinary course customer practices and programs offered to the customers of

solutions group business unit (collectively, the Customer Programs and obligati

thereunder, collectively, the Customer Obligations) and (b) to otherwise continu

their postpetition obligations under, the Customer Programs in the ordinary course o

during the pendency of the bankruptcy cases.

106. As discussed above, the Debtors businesses are divided into business units: (a) the automotive solutions group (ASG) which addresses those o

Debtors customers in the automotive and transportation markets, primarily through

of prismatic battery and starter battery systems and (b) the energy solutions group (


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non-automotive purposes, including primarily, multi-megawatt systems that perform

electric power grid storage.

107. The Debtors have entered into an Asset Purchase Agreement automotive business assets of ASG to Johnson Controls, Inc., subject to the receipt

better offers received in connection with the proposed bidding procedures set forth i

Motion. It is my understanding that, because the various customer contracts associa

ASG will be addressed in connection with the Sale Motion the Customer Programs M

not seek any relief with respect to any customer obligations associated with that bus

Rather, the Customer Programs Motion seeks to address only those Customer Progr

Customer Obligations maintained for the customers of ESG. The Customer Program

customary in the industry in which ESG operates, are used to generate goodwill, me

competitive market pressures and ensure customer satisfaction, thereby retaining cu

customers, attracting new ones and ultimately enhancing revenue and profitability.

108.

In the ordinary course of conducting their ESG businesses, th

provide limited customer warranties on the products that they manufacture and sell.

warranties offered by the Debtors are similar to the warranties offered by their indus

competitors. The Debtors provide two distinct types of warranties to their ESG cus

warranties provided to customers with whom the Debtors have a contract for the pro

goods or services (the Contract Customer Warranties) and (b) warranties provi

customers who order goods or services through purchase orders (the Purchase Or


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109. Under the Contract Customer Warranties, the Debtors providagainst a certain percentage decline in the initial power and energy density specifica

particular product. For example, under a representative contract, the Debtors warra

battery products they provide will hold a certain charge level, with the expectation t

charge level will decrease over time. In the event that the battery product does not m

designated level at any given time, the Debtors warrant that they will provide additi

and/or packs to the customers as required for the battery product to meet the designa

In the event that the battery product is no longer able to meet the designated level at

time, the Debtors warrant (typically over a 5-7 year period) that they will provide ad

to the customer as required for the battery product to meet the designated levels.

110. The Purchase Order Customer Warranties provide that the Deproducts will be free from defects in material and workmanship and will, under norm

conform to the base specifications for the product. In the event that the Debtors pr

not meet the base specifications for that product as set forth in the purchase order, th

will replace the defective product with a product that does meet the required base sp

at no cost to the customer. However, the Debtors provide no guarantee in connectio

performance of such products. The warranty period under the Purchase Order Cust

Warranties typically extends for one year from the date of delivery of the product.

111. The honoring of the Customer Programs will not involve any payments to ESG customers. Rather, the Debtors are only required to furnish replac

112 I b li th t th d lti t i bilit f th D bt


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112. I believe that the success and ultimate viability of the Debtorsbusiness unit is dependent upon the Debtors continuing relationships with their cus

order to maintain such relationships and to ensure customer loyalty, the Debtors mu

Customer Obligations. In the competitive industry in which the ESG unit operates,

the failure to honor the Customer Obligations arising from warranties that are the sa

to their competitors is likely to have a material adverse impact on the Debtors abili

new customers and maintain existing ones.

113. Moreover, I believe that if they are not authorized to continueCustomer Programs during the pendency of these Chapter 11 Cases, the Debtors va

business relationships with their customers will be severely jeopardized. Even a sho

the Debtors in continuing their Customer Programs could cause serious and irrepara

the value of the Debtors estates.

114. It is my understanding that the total amount to be paid or credcustomers if the Court grants the requested relief is de minimis compared with the l

Debtors could suffer if the patronage of their customers erodes at the outset of these

Based upon historical averages, the Debtors believe that the total cost to the Debtor

those Customer Obligations (which costs, as noted above, do not involve direct pay

customers but rather the costs of the goods and labor necessary to replace and repair

products) that arose prior to the Petition Date will not exceed $20,000 per month.

115 In sum I believe that maintenance of the Customer Programs


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115. In sum, I believe that maintenance of the Customer Programsto the continued vitality of the Debtors businesses and, ultimately, to their prospect

successful reorganization. Permitting the Debtors to continue to honor the Custome

and the Customer Programs is in the best interests of their estates, their creditors, an

parties in interest.

C. Employee Obligations Motion

116. In the Employee Obligations Motion, the Debtors seek entry authorizing them, in their discretion, to pay, continue or otherwise honor various pre

Workforce-related (as defined below) obligations (collectively, the Prepetition W

Obligations) to or for the benefit of their (a) full-time regular employees typically

work forty hours per week (the Full-Time Employees), (b) part-time employee (t

Time Employee), (c) intern employees (the Intern Employees and, together wi

Time Employees and Part-Time Employee, the Employees),13 (d) certain individu

providing services to the Debtors on contract basis pursuant to the terms and conditi

service agreements between the Debtors and certain staffing agencies (the Tempo

Employees),14 and (e) certain independent contractors retained by the Debtors (the

Independent Contractors and, together with the Employees and the Temporary

the Workforce), for, among other things, (i) compensation to the Workforce, (ii)

13 The Employees include two individuals who are providing services as board members on th

expense reimbursements to the Employees Temporary Employees and Independent


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expense reimbursements to the Employees, Temporary Employees and Independent

(iii) continuation of benefits provided to the Employees under all plans, programs an

maintained or contributed to, and agreements entered into, by the Debtors prior to th

Date (the foregoing collectively, and as described in greater detail below, the Wor

Programs). In addition, the Debtors request in the Employee Obligations Motion

Court confirm their right to continue each of the Workforce Programs in the ordinar

business during the pendency of these Chapter 11 Cases in the manner and to the ex

Workforce Programs were in effect immediately prior to the filing of such cases and

payments in connection with expenses incurred in the postpetition administration of

Workforce Program

117. The Workforce Programs under which the Prepetition WorkfObligations arise include, without limitation, plans, programs, policies and agreeme

providing for (a) wages, salaries, holiday and vacation pay, sick pay and other accru

compensation; (b) reimbursement of business, travel, relocation and other reimbursa

and payment of business-related credit card obligations; and (c) benefits, with cover

applicable for eligible spouses, domestic partners and dependents, in the form of me

dental coverage, coverage continuation under COBRA,15

pre-tax contribution flexib

accounts and contributions relating thereto, basic term life, supplemental life, accide

and dismemberment and business travel accident insurance, short-term disability, lo

disability, employee assistance, workers compensation, severanceand miscellaneou

118 The Employee Obligations Motion also seeks authorization fo


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118. The Employee Obligations Motion also seeks authorization foDebtors to be permitted to pay any and all local, state and federal withholding and p

or similar taxes relating to the Prepetition Workforce Obligations including, but not

all withholding taxes, social security taxes and Medicare taxes. In addition, the Deb

authorization to pay to third parties any and all amounts deducted from Employee p

the Debtors for payments on behalf of Employees for savings programs, benefit plan

pro

a123 affidavit

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