A2P Notes: In Fall 2010, A123 Systems opened what the company touted as the “world’s largest lithium ion automotive battery manufacturing plant in North America” in Livonia, Michigan. According to a September 13, 2010 piece in the New York Times, the company was able to open the plant thanks to the fact that the move was “financed in part by a $249 million federal stimulus grant from the Energy Department.” A123’s federal grant in 2010 was augmented by $125.2 million in state incentives. Michigan wooed the company with a tax credit worth $25.2 million over 15 years and refundable battery cell production credits worth $100 million over four years. Former Governor Jennifer Granholm “predicted that they (A123) would create 62,000 jobs over the next decade,” the New York Times reported. The owner announced at the plant opening that A123 expected to create “thousands of jobs” in the greater Detroit area over the next few years. Thirteen months later, A123 was laying off Michigan employees.

On September 29, 2009, David Vieau sold 186,485 shares of A123 stock at a price of $13.50 per share. One year later, the federal government and the state of Michigan poured $374 million in grant money and tax credits into Vieau’s company. At the moment, A123 stock is valued at $1.70 per share. Why? Since January of 2009, A123 has lost $412.3 million dollars. However, over the same time period, David Vieau has sold over 250,000 shares of A123 stock and taken millions in profits from those sales. In fact, several insiders at the company have dumped significant chunks of stock and realized large profits from investment in a failing company, according to SEC records.

Now, Governor Rick Snyder is on a “trade mission” to Italy and Germany and incredibly he’s talking up A123. Kai Petainen writes about finance for Forbes and lives in Ann Arbor. He wonders why Michigan taxpayers (and the state’s Governor) are promoting a company that had insider selling, tax breaks that haven’t resulted in significant financial gains, lay-offs and dismal shareholder returns.

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by Kai Petainen

A while ago, I wrote an article titled “Insider Selling, Government Money and Layoffs at A123” at Forbes online and I spoke about the layoffs, the government money and the insider selling at A123 Systems (NASDAQ:AONE).  Back in 2010, AONE was trading at $20 and as the stock fell, the company insiders would sell shares in the company.  Ironically, according to the “A123 Code of Business Conduct and Ethics” that was posted on A123s webpage, it stated:

“Employees, officers and directors who have material non-public information about the Company or other companies, including our suppliers and customers, as a result of their relationship with the Company are prohibited by law and Company policy from trading in securities of the Company”

At its highest point, AONE would close at $25.77 on Oct. 2nd, 2009 (it would hit an intra-day high of $28.20 on Oct. 5th 2009).  As of the close of March 20th, 2012, AONE was trading at a closing price of $1.70 (it would hit an intra-day low of $1.53 on March 8th, 2012).  What was once a $25 stock had fallen to a price below $2.  Quite a number of shareholders would lose money as the stock would fall about -93% (from high to low) over the next few years.

Although that article would focus in on the insider selling, recently AONE released its annual report and so I wanted to see what they were saying about employees and the tax credits.  After all, my Forbes article was inspired by the article “A123 Systems layoffs high challenges for Michigan’s budding battery industry” by Nathan Borney at AnnArbor.com, and I wanted to revisit this idea of government money, insider selling and layoffs.

Let’s start by going back to the 2010 annual filing; it notes how the company has not met some conditions to receive some benefits:

“In May 2010, the Company entered into a Renaissance Zone Development agreement with the Michigan Strategic Fund and the property owners for the site leased by the Company in Romulus, Michigan. Under the terms of the agreement, the Company may receive exemptions, deductions, credits or other benefits if it invests a certain amount of capital and creates a certain number of jobs related to its facility in Romulus, Michigan. As of December 31, 2010, the Company has not yet met the conditions to be eligible to receive any of the Renaissance Zone benefits.”

As of the 2011 annual filing, A123 was still not meeting the conditions for the benefits:

“In May 2010, we entered into a Renaissance Zone Development agreement with the Michigan Strategic Fund and the property owners for the site we lease in Romulus, Michigan. We may receive exemptions, deductions, credits or other benefits if we invest a certain amount of capital and create a certain number of jobs related to the facility in Romulus, Michigan.  As of December 2011, we have not yet met all the conditions to be eligible to receive the Renaissance Zone benefits.’

In the 2010 annual report they spoke about how they wanted to hire some people:

“In the near term, we expect research, development and engineering expenses to increase in large part due to personnel-related expenses as we seek to hire additional employees, as well as contract-related expenses as we continue to invest in the development of our products.”

But, in the 2011 annual report they would change the wording as they removed the company’s desire to ‘seek to hire additional employees’.

“In the near term, we expect research, development and engineering expenses to increase modestly as we continue to invest in the development of our products.”

In 2010, A123 had 2,032 employees.  In 2011 they had 1,983 employees.  As they were laying-off employees, their revenues increased from $97.3 million in 2010, to $159.1 million in 2011.

From the 2010 report:

“We increased our number of full-time employees from 904 at January 1, 2008 to 2,032 at December 31, 2010, and our revenue increased from $68.5 million in 2008 to $97.3 million in 2010.”

From the 2011 report:

“We increased our number of full-time employees from 904 at January 1, 2008 to 1,983 at December 31, 2011, and our revenue increased from $68.5 million in 2008 to $159.1 million in 2011”

But, a lot of their employees are in Asia.  As stated by the annual report

“As a result of our foreign operations, we have significant expenses, assets and liabilities that are denominated in foreign currencies. A significant number of our employees are located in Asia.”

According to the annual report, there are also risks associated with conducting business in China:

“The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general and the intellectual property regime in particular, are relatively weak, it is often difficult to create and enforce intellectual property rights in China. Accordingly, we may not be able to effectively protect our intellectual property rights in China against business entities, individuals and current and former employees.  Enforcing agreements and laws in China is difficult and may be impossible because China does not have a comprehensive system of laws.”

The Pure Michigan tourism campaign runs through the MEDC.  Does AONE relate to the Michigan Economic Development Corporation?

Yes.  According to http://www.michiganadvantage.org/Michigan-Economic-Growth-Authority-MEGA/

“The Michigan Economic Development Corporation (MEDC) serves as staff to the MEGA Board and administers the activities and programs.”

What does the annual report say about MEGA (MEDC)?

“In October 2009, we entered into a High-Tech Credit agreement with the Michigan Economic Growth Authority, or MEGA, pursuant to which we are eligible for a 15-year tax credit, beginning with payments made for the 2011 fiscal year.”

Note, according to the 2010 report, “this credit has an estimated value of up to $25.3 million, depending on the number of jobs we create in Michigan.”

The report goes on to list another credit that they receive:

“In November 2009, we entered into a Cell Manufacturing Credit agreement with MEGA pursuant to which we are eligible for a credit equal to 50% of our capital investment expenses commencing January 2009, up to a maximum of $100 million over a four-year period related to the construction of our integrated battery cell manufacturing plant.  The tax credit proceeds shall not exceed $25 million per year beginning with the tax year of 2012.”

How many jobs does AONE need to create? “We are required to create 300 jobs no later than December 31, 2016 in order for the tax credit proceeds to be non-refundable.” So, they only need to create 300 jobs. But how many jobs need to stay in Michigan? “The tax credit is subject to a repayment provision in the event we relocate 51% or more of the 300 jobs outside of the State of Michigan within three years after the last year we received the tax credit.”

A123 Systems needs to keep 153 jobs in Michigan.

Has the insider selling continued after my Forbes article? Yes. On March 1st, Riley Gilbert sold 20,000 shares of AONE at $2.01. http://finance.yahoo.com/q/it?s=AONE+Insider+Transactions

Has the stock price fallen? Yes. When I wrote the article AONE was trading around $2.20.  Now it’s around $1.70.  That’s a drop of about -20 percent for shareholders.

As AONE has company layoffs, insider selling, and a limit of creating just 153 jobs in Michigan, does the MEDC promote AONE as a Michigan asset?

Yes.

At the moment MEDC officials are participating in a European Trade Delegation trip to Italy and they are promoting AONE.

The trip was featured in the article, ‘Photos Reveal Michigan “Trade Delegation to Europe “Exploring Growth Opportunities” – At Italian Art Museums’ by Rob Smith at A2Politico.  The article highlighted the museum tour photos that were posted on MEDC’s Facebook page from their trip to Italy.  Shortly after that article, the MEDC removed the museum photos and they kept the marketing-friendly photos. (This was a good lesson on Facebook and marketing for the MEDC).

A123 is promoted multiple times in this presentation slide by MEDC head Michael Finney. (The company’s logo, reproduced at left, is clearly in view multiple times in the “Michigan Assets” slide, below.) The following photos come from the MEDC’s Facebook page:

Pure Michigan in Italy:

Was the trip sponsored by taxpayers?

Although MEDC and Pure Michigan (as demonstrated by the sign above) would sponsor the event, according to MEDC Facebook page:

“No taxpayer dollars were used for this trip for either the Governor, his staff or MEDC personnel.”

So I need to ask this question:

Why should the Michigan EDC (also known as MEGA and Pure Michigan), promote a company that had insider selling, tax breaks, lay-offs and poor shareholder returns?

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Kai Petainen’s views on the market and stocks are his alone, and do not reflect the views of the Ross School of Business, or the University of Michigan.  Kai teaches a class on stocks and portfolio management at the Ross School of Business, and he writes a blog for Forbes @ http://blogs.forbes.com/kaipetainen/ .  He’s a MFolio master at Marketocracy (to avoid any conflict of interest, he uses his own laptop and his own software to choose stocks) and he’s featured in the book by Matthew Schifrin, “The Warren Buffetts Next Door.”