Business and Finance

Chrysler Group LLC filed a formal notice Friday informing the state of its intent to close its Kenosha engine plant, which will result in the layoff of 575 workers.

The layoffs at the plant are expected to begin on Oct. 8, according to a factory closing notice filed with the Wisconsin Department of Workforce Development.

The plant closing, which was previously announced by the Auburn Hills, Mich.-based automobile manufacturer, is expected to be permanent, the filing stated.

Hourly production workers at the plant are represented by the United Auto Workers union Local 72 and the International Association of Machinists and Aerospace Workers Lodge 66.

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AIG and Prudential PLC formally terminated a deal for an Asian life insurance unit on Thursday that would have accelerated AIG’s bailout repayment to the U.S. government.

The announcement comes two days after AIG rejected Prudential’s reduced bid for AIA, AIG’s Hong Kong-based life insurance division. In early March, the companies had agreed upon a $35.5 billion price tag for AIA. But it became apparent over the past few weeks that Prudential’s shareholders were not going to accept the deal.

Prudential attempted to renegotiate the terms of the deal with AIG, offering $30.375 billion instead. Prudential PLC is not related to the American insurer Prudential Financial Inc.

AIG has said that it considers the sale of AIA to be a crucial component of its effort to repay the more than $130 billion it has borrowed from U.S. taxpayers. The troubled insurer had planned on using the proceeds of the sale to pay down $25 billion of its debt to the Federal Reserve.

When the deal was first announced on March 1, AIG’s Chief Executive Robert Benmosche said the deal would allow AIG "to realize value on a faster track to repay U.S. taxpayers" and will give the company "greater flexibility" with its restructuring plans.

Now that the deal has fallen through, AIG may consider an initial public offering for AIA, an option that the company had initially proposed last year. An IPO would take much longer to complete than a direct sale, and the recent market turmoil may dictate a lower price for the unit.

According a regulatory filing, AIG will receive a termination fee from Prudential worth £152.6 million ($223.9 million) on July 1.

Shares of AIG (AIG, Fortune 500) rose more than 1% in premarket trading Thursday. 

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It has been called the front door to St. Louis.

So in an effort to improve the first impressions of visitors who walk through that door, officials at Lambert-St. Louis International Airport announced a major makeover in early 2007.

But more than three years later, the biggest renovation in the airport’s history — at a cost of $105 million — remains a major piece of unfinished business. Turbulence in the airline industry forced the airport to break the Airport Experience project into bite-sized chunks.

The first phase of work focused on the most pressing upgrades and is being wrapped up right now at a cost of $20 million. Clunky baggage carousels were replaced on the ground floor of the Main Terminal. The dingy domed ceiling above the main ticket counters has been restored with a bright, white surface. And many of the directional road signs have been replaced.

"You have to have an airport that you can compete with both cosmetically and aesthetically," said Airport Director Rhonda Hamm-Niebruegge. "The airlines don’t want their customers, if their flight is delayed for five hours, to sit there and have nothing to do. The more your airport has to offer helps the airlines when they have off-schedule days."

Later this summer, the airport will embark on the next phase of work — a $50 million interior renovation of the aging main terminal, and the A and C concourses.

The work will include:

— Replacing the hodgepodge of counters and terrazzo floors in the main ticketing lobby.

— Updating restrooms with new tile and fixtures.

— Improving the C concourse security-screening checkpoint.

— Brightening the cavernous lower level by removing the dark ceiling slats and adding recessed lighting.

— Incorporating art displays and a lower-level performance stage.

Lambert officials said the work would not only make the terminal more inviting, but would provide a boost to the beleaguered area job scene. The second wave of renovation work is expected to take about two years to complete and support about 150 skilled construction workers.

The improvements can’t come soon enough for passengers who use the airport.

"It’s dark and depressing down here" on the baggage-claim level, said Julie Kujawa of Mount Vernon, Ill., who was picking up family members returning from Orlando, Fla. "And there’s not much down here. The walls are dark. The ceilings are low."

Amy and Don Palumbo of suburban Washington said they had flown into Lambert before and had always been struck by the low ceilings and the cramped feeling they induce on the lower level.

"Compared to other airports," Amy Palumbo added, "it’s kind of old."

Gone from the original Airport Experience plan are the canvas awnings reaching from the Main Terminal to the hourly parking garage across the street payday advances. However, Hamm-Niebruegge said some projects could be reconsidered, if needed, when the second phase of work was completed in the fall of 2012.

The project will be financed using bonds sold in June 2009, Hamm-Niebruegge said. "The bonds are long sold. So you have to move forward with the project. They were sold for that specific purpose. That decision is not a returnable decision."

Even if it were, she said, the airport would still move forward with it.

One reason is that there were as many airline seats in June from Lambert as there were one year ago, although there are fewer cities served by nonstop flights from Lambert. That is largely because most of the aircraft added to the Lambert mix are larger planes, and they are replacing mostly regional-jet flights that were axed by American.

Bonds will be repaid with airport revenue, said Hamm-Niebruegge.

The piecemeal approach reflects the gradual erosion in flights at Lambert.

Last month, American Airlines cut its daily flight schedule by more than half to 36 daily flights to nine cities. By comparison, there were 82 daily flights to 20 destinations in November.

Other airlines — most notably Southwest Airlines — have jumped in to fill part of the void. Southwest, which is now the dominant carrier in the St. Louis market, announced nine additional daily departures to six new nonstop destinations. Four of those cities that Southwest flies to — San Diego, Nashville, New Orleans and Raleigh-Durham, N.C. — would have been unreachable by nonstop flights after American’s cuts. The two other cities — Los Angeles and Seattle — also will be served by competitors.

United Airlines and Delta Air Lines also have added flights.

Local business leaders have been clamoring for airport improvements since American Airlines made its first deep cuts to St. Louis flights in 2003. Airport staff and outside consultants began working on plans to improve the Main Terminal — which is significantly older and darker than the East Terminal.

Richard Fleming, president and chief executive officer for the St. Louis Regional Chamber and Growth Association, said air service came up consistently when companies considered expansion or relocation to a community — and that included the perception and appearance of the airport itself.

"Obviously, in the environment of really tough times in the industry, the Lambert folks have had to be prudent in how they have modified the scope and timing of the improvements," Fleming said.

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The California Public Utilities Commission Thursday authorized a five-year solar photovoltaic program to develop up to 500 megawatts of solar photovoltaic facilities in the range of 1 to 20 megawatts in Pacific Gas and Electric Co.’s service area.

The photovoltaic program allows for development of solar facilities owned by PG&E and also owned by third parties.

Under the utility-owned portion of the photovoltaic program, PG&E is authorized to install up to 250 megawatts of photovoltaic facilities from 1 to 20 megawatts in size in its service area at a rate of 50 megawatts per year.

Similarly, under the third-party owned portion of the program, PG&E can solicit energy from 250 megawatts of photovoltaic facilities from 1 to 20 megawatts in size located in its service area, also at a rate of 50 megawatts a year.

“This solar development program has many benefits and can help the state meet its aggressive renewable power goals,” said CPUC President Michael Peevey. “Smaller scale projects can avoid many of the pitfalls that have plagued larger renewable projects in California, including permitting and transmission challenges. Because of this, programs targeting these resources can serve as a valuable complement to the existing Renewables Portfolio Standard program.”

The CPUC authorized expenditures of up to $1.45 billion for the capital costs associated with the utility-owned portion of the photovoltaic program.

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Estimated taxes, something most working Americans don’t have to deal with or may not even be aware of, can be a hidden cost when converting traditional IRAs to Roth IRAs.

With proper planning, however, this potential trap can be easily avoided.

Estimated taxes are payments we must make four times a year to the Internet Revenue Service if the amount we have withheld for taxes at work or elsewhere does not meet certain minimums.

If we fail to make the required estimated payments — due April 15, June 15, Sept. 15 and the following Jan. 15 for each tax year — we will owe a penalty for underpayments. The penalty, a variable interest rate set by the IRS, stood at 4 percent for the first quarter of 2010.

This is not a problem for most American workers, who instead tend to have too much money withheld from their paychecks and get large refunds.

But the income from a large Roth IRA conversion is likely to create a tax liability that may trigger the need to increase withholding and/or pay estimated taxes.

From the year 2011 on, income from a conversion must be reported for the year the conversion is made. But for conversions made in 2010, taxpayers can either report the entire conversion income for 2010, or report half of it for 2011 and the other half for 2012. This latter income split is the "default" option, or what will happen if the taxpayer does not choose otherwise.

The decision of when to report the income is not made until the taxpayer files the 2010 tax return in 2011. Therefore, somebody choosing to report the Roth IRA conversion income for 2010 may discover after the fact that he owes a penalty for not having enough withholding and/or not paying enough estimated taxes in 2010.

But we can avoid a penalty by using any of three so-called "safe harbor" methods.

The easiest to implement — it’s foolproof and you don’t have to make any estimates — is to have your withholding and any estimated tax payments add up to 100 percent of your total tax liability for the previous year, or 110 percent if your adjusted gross income was higher than $150,000 ($75,000 for married taxpayers filing separately).

For example, my wife, Georgina, and I, filing jointly, had income of less than $150,000 in 2009 and our total tax liability was $12,941 (the number on line 60 of Form 1040). Because we have no withholding as freelance writers, by making estimated tax payments totaling $12,941 for 2010, with a required minimum each quarter, we will not owe any penalties even if our taxable income balloons in 2010 because of a large Roth IRA conversion. Of course, we would still have to pay regular tax at filing time, but no penalty.

And under this safe-harbor method, we would then have to increase our estimated tax payments in 2011 to reflect the higher tax liability for 2010.

We have other options, though. A second "safe harbor" method is to have withholding and/or estimated taxes add up to at least 90 percent of the current year’s total tax liability. This method would lower estimated payments for 2011, but at the risk of estimating wrong and owing a penalty. A third safe harbor is that no penalties are due if your total tax due when you file your return is less than $1,000. This is a complex topic, and I recommend consulting a professional for personal questions.

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Even in good times, the relationship between franchisors and their franchisees tends to be fraught. Toss in an economic downturn and things get downright nasty. Iconic brands are facing revolts in the trenches from owners fed up with their corporate parent.

Later this month, a Los Angeles jury trial will begin on a seven-years-old and still festering fight between UPS (UPS, Fortune 500) and a group of disgruntled franchisees of Mailboxes Etc., which UPS acquired in 2001. Quiznos recently settled a class-action lawsuit with its franchisees, while Burger King remains mired in a court battle with store owners over a $1 promotion for double cheeseburgers that cost more than a buck to produce.

Garth Snider, president of FranchiseOpportunities.com, a site that advertises franchises for sale, says the level of complaints by franchisees and franchisors alike "is commensurate with the hard economic times we’re experiencing. This wasn’t an issue three or four years ago, when there was plenty of money to go around, because franchisors weren’t looking to be as aggressive with their pricing."

When margins are razor-thin and sales slip, disputes are more likely to blow up into major skirmishes. The Quiznos fight featured complaints that Quiznos forced franchisees to buy food and supplies at inflated prices while setting retail prices so low that store owners couldn’t make a profit. Discounts — like those Burger King offered on its double cheeseburgers — are another flashpoint. T.G.I. Friday’s had a small war with its franchisees last year over a two-month promotion that slashed sandwich prices to a money-losing $5 each.

"It’s the divergence between generating volume by forcing your franchisees to charge lower prices and the net effect of that on the actual business owner, who still has to pay the same royalty and the same price for goods," says Justin Klein, a partner in Marks & Klein in Red Bank, N.J., and lead attorney for the Quiznos plaintiffs. "Essentially, it still costs you $5 to make the sandwich but you’re forced to sell it at $3.95."

The pressures come on all sides. One of Klein’s current franchisee clients is being forced by its parent company to extend operating hours — even if those extra hours aren’t profitable. "Forcing them to stay open longer means they have more employees there," he says.

Life in the trenches

Tish Reisman, owner of a Rita’s Italian ice outpost in Tampa, Fla., is facing many of the typical franchisee frustrations. She signed with the Trevose, Pa.-based parent company in June 2007, paying $65,000 for a two-store agreement. Reisman grew up in Philadelphia and had a fondness for Rita’s. She believed that in Florida "Italian ice would be a no-brainer."

The first store opened in March 2008. The problems began just six months later.

A competing Rita’s opened five miles away. A corporate marketing campaign required her to stand in front of Wal-Mart and Kmart stores handing out coupons, sucking up time and resources she couldn’t spare. Rita’s requires her to sell every new flavor it introduces for 24 days — even if it tanks.

"In November, I had to sell caramel apple, which I was throwing away every two days," she recalls. Rita’s projected waste from introducing new flavors is 7% and Reisman was given credit for that, but her actual waste was closer to 22%. "It would have been better if I could have decided what flavors would sell, rather than being forced to sell all of them."

Reisman lost $86,000 the first year she was in business and hasn’t been able to afford to open her planned second store. She’s sunk more $300,000 into the franchise. A single mother with four children, Reisman is worried about bankruptcy.

Jim Rudolph, CEO of Rita’s, says the coupon program and new flavor introductions have been successful for other franchisees. The company has been working with Reisman, he says, getting her rent reduced, offering incentives to potential buyers of her franchise, and negotiating with banks on her behalf.

"I feel terrible for her, but we also cannot be responsible for the unfortunate situation she’s gotten herself into," he says.

That’s the common line franchisors take when store owners run into trouble: You’re on your own.

Industry veteran says they’ve seen a few concessions to the economic downturn. "We’re seeing franchisors responding by temporarily deferring royalty payments," says David Kaufmann, a franchise attorney and partner with Kaufmann Gildin Robbins & Oppenheim in Manhattan. "Some have escalated corporate contributions to marketing programs, some are letting franchisees that promised to open new units now push that further into the future."

But Quiznos attorney Klein expects that even when the economy recovers, franchisees and franchisors will continue warring over the financial terms of their arrangement.

"I don’t think things like value meals and other low-priced promotions are going to stop," he says. "They are very popular with consumers." 

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After days of speculation, Houston oil service companies Schlumberger Ltd. and Smith International Inc. jointly announced today plans to merger in a stock transaction valued at about $11 billion.

Smith shareholders will receive 0.6966 shares of Schlumberger in exchange for each Smith share. Based on the closing stock prices for both companies on Feb. 18, the agreement places a value of $45.84 per Smith share – 37.5 percent higher than Smith’s Feb. 18 closing price of $33.35.

Upon closing, Smith stockholders collectively will own approximately 12.8 percent of Schlumberger's outstanding shares of common stock.

Andrew Gould, Schlumberger’s chairman and chief executive officer, said that Smith’s drilling technologies, other products and expertise complement those of Schlumberger.

Smith CEO John Yearwood predicts accelerated technology development for the combined company’s customers.

Said Yearwood: “Schlumberger offers Smith's various segments enhanced engineering and design capability to place our products and expertise at the center of the total drilling system of the future.”

The deal, which is subject to regulatory and Smith stockholder approvals, is expected to close in the latter part of the year. It will create an industry giant with revenues double that of rival Halliburton Co. (NYSE: HAL).

For 2009, Schlumberger (NYSE: SLB) and Smith (NYSE: SII) reported revenue of $22.7 billion and $8.2 billion, respectively.

Meanwhile, Halliburton posted 2009 revenue of $14.7 billion.

Schlumberger expects to realize incremental pretax synergies — after integration costs –of approximately $160 million in 2011 and approximately $320 million in 2012. Schlumberger expects the combination to be accretive to earnings per share in 2012.

On Feb. 19, Smith’s stock shot up by more than 14 percent to a new 52-week-high of $38.16 in heavy trading after The Wall Street Journal reported that the company was in advanced talks to be acquired by Schlumberger.

There was no word yet as to how many jobs might be impacted by the transaction.

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On an overcast English morning, two women from middle England are out shopping. They duck first into the Gucci boutique, fingering discounted handbags and rifling through racks of last season’s fashion lineup. Dolce & Gabbana is next, followed by Armani.

The outlet boutiques — among 136 clustered along a cobblestone outdoor shopping center called Bicester (BIS-ter) Village about an hour’s drive from London — are mobbed with bargain-seekers even at an early hour.

"You get value for money here," says Ann Prentice, who pauses to chat only briefly before her friend hustles her off to Valentino. "My husband is in business, so it’s hard for us just now, but I don’t mind paying more for quality."

Luxury outlet malls are the one bright spot of brisk trade going into the holiday shopping season. In recent weeks, retailers have reported small but still rather anemic signs of recovery. Yet sales numbers show that consumers have been flocking to discount outlets all year long, despite the recession.

Value Retail, the London-based company that owns the largest string of luxury outlets in Europe, including Bicester Village, has seen sales rise 20% to just over 1 billion euro ($1.5 billion) in the first three quarters of this year compared with 2008. (Sales totals are for the nine cities where its Chic Outlet Shopping outlets are located, including Milan, Paris, Dublin, Munich, and Madrid.) Foot traffic also rose 10% in the third quarter to 6.5 million shoppers.

When sales are tabulated for the fourth quarter, the growth is expected to be off the charts given the almost complete retail freeze of the fourth quarter of 2008. That compares with predictions of flat or at most a 2% increase in spending across the retail sector over the holiday shopping period.

Value Retail, whose major investor also owns part of the sprawling Woodbury Common outlet mall outside of New York City, has seen its growth this year double the average over the past 14 years, when sales increased at a rate of about 10% annually, according to Scott Malkin, Value Retail’s chairman.

"It’s human nature to indulge," Malkin says. "I think we’ve gone away from ‘I need more for the sake of more and more,’ to people being more discerning in what they purchase."

That sentiment has benefited luxury outlets in a year when full-priced luxury sales have been forecast to fall as much as 10%, according to Bain & Co. consultants.

Rather than view outlet shopping as cannibalizing from their High Street or Madison Avenue sales, luxury retailers in fact have welcomed the opportunity to sell excess merchandise in a slow time, while reaching a separate segment of customers to whom they wouldn’t normally be able to sell.

"We’re a service to the brand," says Desirée Bollier, the CEO of Value Retail Management low rates payday advance. "The brands have a lot more stock they want to dispose of, elegantly. We’re a platform for them that is quality, with a customer that is aspirational."

These so-called "aspirational" customers — those who may not be as wealthy as the typical elite luxury buyer, but will still purchase a few high-end pieces — now make up 60% of luxury buyers overall, according to Bernstein Research, an arm of AllianceBernstein.

"Before the recession, we were nice to have," says Bollier, referring to luxury outlets. "With the recession we’re a must. Our customers are not your fashionistas. She’s not going to buy the ‘It’ bag, but she recognizes the quality of a timeless piece."

Still, some fashion-forward heavy hitters are among the recent shoppers at these outlet malls: Stars Elizabeth Hurley and Victoria Beckham have been spotted in Bicester Village recently. Over the summer, a Saudi princess arrived with a retinue of 70 people. Tipped off in advance, says Malkin, the luxury brands sent out the Arabic speakers from their stores in London for the day to accommodate the entourage.

Most of Value Retail’s shoppers make the outlets a day-trip destination from the cities they’re visiting, or if they’re local residents, they may drive an average of two to three hours to reach an outlet mall. Some of these customers feel too intimidated to walk into a full-priced luxury boutique for the first time, so buying an item at a discount outlet can build confidence and allow shoppers to trade up. Rather than look for a dress to wear for an upcoming Saturday night, for example, they’re shopping for more enduring or signature items — at discounts of up to 60%.

"We use the expression, ‘guilt-free shopping,’" Malkin says, a particularly important sentiment in a recession. "What we’ve seen in the last 18 months is that women will buy something at full price in the center of Paris or London or Madrid and tell people that they bought the item at one of our villages. It’s a ways of avoiding conflict, of not wanting to seem better off than their friends and create discomfort and guilt."

The hope, of course, is that aspirational customers will be so satisfied with the items they purchase that they will eventually trade up into becoming luxury customers themselves, paying full price.

"People nine months ago said luxury is finished," says Malkin. "That’s nonsense. There will always be luxury, just that the nature of it will always be evolving." 

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Russell Read, the former chief investment officer of Calpers, the largest pension fund in the United States, knows his trees.

Read owned a 500-acre Maine forest landscaped with the same mix of maples and oaks the colonists would have seen when they first arrived on the shores of America.

Bob Carlson, who was a board member at the California Public Employees’ Retirement System for nearly half its history, recalls asking about commodities like timber during Read’s interview for the position at Calpers.

“His eyes lit up,” said Carlson. “That’s what I wanted.”

Read got the job in June 2006 at the age of 42 and quickly set out to turn Calpers into a modern, aggressive investor.

At the time, esoteric new markets were racking up huge, almost unimaginable gains. He and the board were in agreement — Calpers should be part of it.

“I think the push for commodities and infrastructure and forestry and some of those other things was kind of a movement afoot,” said Tony Oliveira, Supervisor of California’s Kings County and one of the Calpers board members who helped choose the new investment chief.

A former senior executive at Deutsche Bank, who had once taught risk management, Read seemed to be the right person for the times.

Despite Read’s background and the ever riskier bets he was making, Calpers still struggled with risk management. Carlson, who describes Read’s risk management plans as “brilliant,” said that Read left the fund before he could put them in place.

Red flags about the growing riskiness of Calpers’ portfolio also went unheeded. A consultant warned Read in December 2007 about the size of the fund’s commitment to private equity, but the push went on.

For a while, Calpers looked smart under Read, hitting a peak value of $260 billion in October 2007 as it borrowed money to boost returns and moved into sophisticated collateralized debt obligations, land for residential real estate, as well as commodities.

But as the financial crisis unfolded last year, Calpers lost $100 billion, more than a third of its value, tumbling to $160 billion a year and a half after the high. The other thing it lost was its gold plated reputation, founded on steady returns, pioneering new investments and policing public companies as an activist shareholder. Smaller rivals who were more conservative lost much less.

Calpers has not retreated, though — just the opposite, in fact. As the entire pension industry questions what level of risk it should be taking in the aftermath of last year’s financial meltdown, Calpers in June increased its target for venture capital and private equity — what the fund’s advisor itself called the highest risk, highest reward bet — to 14 percent of overall investments, up from 10 percent.

Chief Investment Officer Joseph Dear, who declined to comment for this story, in a published internal interview called the changes “relatively minor”. “We looked at the long term return assumption and basically said we don’t see a significant reason to change,” he said.

“Calpers has the reputation of being the gold standard of pension investing, largely by the virtue of its size. But the reality is very different,” said Edward Siedle of Benchmark Financial Services, a pension fund investigator and investment consultant. 

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The dominance enjoyed by Amazon.com Inc’s Kindle faces its first major test this holiday season, but industry experts say only a real technological leap will pose a threat.

Barnes & Noble Inc is expected to unveil its own branded electronic book reader on Tuesday with a hybrid model that incorporates a reading screen similar to the Kindle’s white and gray display, with a second touch-screen display that makes browsing easier.

The bookseller’s main advantage could be in its physical stores where users will be able to test out the device. A disadvantage may be its as-yet unknown price, which some say will be higher than the Kindle’s recently lowered $259.

Barnes & Noble has not confirmed its e-reader plans.

But the market — arguably built by Amazon — is getting crowded, with e-readers in the pipeline from a spin-off of Royal Philips Electronics called iRex Technologies, Taiwan’s Asustek, Plastic Logic and a Hearst-backed venture called FirstPaper. They would share the space with Interead’s “Cool-er,” the Cybook OPUS from Bookeen and others.

“It takes one person to prove this is a very viable business model and as soon as that is proven you have a lot of people … who jump in,” said Mukul Krishna, global director for digital media at consultancy Frost & Sullivan, adding that the best time to enter the market is ahead of the holidays.

“Amazon has done exactly that with the Kindle. They’ve caught everyone’s imagination,” Krishna said.

E-reader hype has hit a peak in the past month, as Amazon rolled out the Kindle internationally and the world’s biggest Web players and publishers began to mobilize.

Google Inc unveiled plans for an online e-book store, while News Corp’s Rupert Murdoch visited Japan and South Korea to size up e-reader technology. But Amazon is expected to retain its first-mover advantage.

“Amazon really controls the digital shelves right now,” said Mark Coker, founder of e-book publisher Smashwords. He cited the Kindle’s locked-in customers, who must buy e-books exclusively from Amazon that can then only be read on their Kindles or on Apple Inc’s iPhone or iPod Touch.

“I think everyone realizes Amazon got it completely right. They are way ahead of the curve,” he said.

Some 3 million e-readers are expected to be sold in the United States this year, with sales doubling in 2010, according to Forrester Research.

Amazon does not provide data on Kindle sales, but investors will be eager to learn of its progress when the online retailer releases results on Thursday.

DIGITALLY SHARING

Analysts say the larger — but not unsurmountable — threat to Amazon could come from demand for an open system in which e-books bought from various sources can be shared on multiple devices. 

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