Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2008

 

 

For the transition period from                to

 

Commission file number 0-31313

 

 

BROADWIND ENERGY, INC.

 (Exact name of registrant as specified in its charter)

 

 

47 East Chicago Avenue, Suite 332, Naperville, IL 60540

(Address of principal executive offices)

 

(630) 637-0315

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.              Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of October 31, 2008, 96,470,415 shares of common stock were outstanding.

 

 

Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

					Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements				3
		Condensed Consolidated Balance Sheets (Unaudited)			3
		Condensed Consolidated Statements of Operations (Unaudited)			4
		Condensed Consolidated Statements of Cash Flows (Unaudited)			5
		Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations				22
Item 4T.	Controls and Procedures				31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings				33
Item 1A.	Risk Factors				33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds				33
Item 3.	Defaults Upon Senior Securities				33
Item 4.	Submission of Matters to a Vote of Security Holders				33
Item 5.	Other Information				33
Item 6.	Exhibits				33
Signatures					34
Exhibit Index					35

 

2

Table of Contents

 

PART I.        FINANCIAL INFORMATION

 

Item 1.    Condensed Consolidated Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share and per share data)

 

		September 30, 2008			December 31, 2007
		(Unaudited)
ASSETS
Current assets:
Cash		$	34,392		$	5,782
Restricted cash		10,936			500
Accounts receivable, net of allowance of $1,135 and $2,983, respectively		31,955			13,541
Inventories, net of allowance of $868 and $1,096, respectively		35,429			12,983
Prepaid expenses and other current assets		18,082			1,946
Total current assets		130,794			34,752
Property and equipment, net of accumulated depreciation of $9,902 and $2,476, respectively		108,736			58,890
Goodwill		35,146			27,611
Intangibles, net of accumulated amortization of $9,904 and $1,655, respectively		108,503			84,022
Other noncurrent assets		884			543
TOTAL ASSETS		$	384,063		$	205,818
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit and notes payable		$	2,950		$	440
Notes payable to related parties		—			25,000
Current maturities of long-term debt		16,939			12,693
Current portions of long-term capital lease obligations		645			300
Accounts payable		31,149			10,136
Accrued liabilities		18,365			12,457
Unearned revenue		1,548			97
Customer deposits		12,011			1,326
Total current liabilities		83,607			62,449
Long-term debt, net of current maturities		19,326			17,620
Capital lease obligations, net of current portions		946			686
Interest rate swaps		404			388
Deferred income taxes		1,294			139
Other noncurrent liabilities		769			—
Total liabilities		106,346			81,282
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value: 150,000, 000 and 100,000,000 shares authorized, respectively: 96,470,415 and 76,260,912 shares issued and outstanding, respectively		96			76
Additional paid-in capital		296,352			133,033
Accumulated deficit		(18,731		)	(9,877		)
Interest in variable interest entity		—			1,304
Total stockholders’ equity		277,717			124,536
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	384,063		$	205,818

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(UNAUDITED)

(in thousands, except share and per share data)

 

		Three Months ended September 30,						Nine Months ended September 30,
		2008			2007			2008			2007
Net sales		$	64,488		$	3,123		$	140,482		$	7,985
Cost of sales		52,189			1,839			110,082			4,888
Gross profit		12,299			1,284			30,400			3,097
Operating costs and expenses:
Selling, general and administrative expenses		12,110			694			28,475			1,906
Amortization of intangible assets		2,932			—			8,249			—
Total operating costs and expenses		15,042			694			36,724			1,906
Operating (loss) income		(2,743		)	590			(6,324		)	1,191
Other income (expense):
Interest income (expense), net		90			93			(1,921		)	153
Other, net		(319		)	—			57			—
Total other income (expense), net		(229		)	93			(1,864		)	153
Income (loss) before provision for income taxes		(2,972		)	683			(8,188		)	1,344
Income tax provision		467			—			667			—
Net (loss) income		$	(3,439	)	$	683		$	(8,855	)	$	1,344
Net (loss) income per common share - basic and diluted		$	(0.04	)	$	0.01		$	(0.10	)	$	0.03
Weighted average common shares outstanding - basic and diluted		96,470,415			47,724,464			87,692,295			44,969,545

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)
(in thousands)

 

		Nine Months ended September 30,
		2008			2007
Cash flows from operating activities:
Net (loss) income		$	(8,855	)	$	1,344
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities
Depreciation		7,457			321
Amortization of intangible assets		8,249			—
Change in valuation of interest rate swap		16			—
Deferred income taxes		391			—
Stock issued for marketing costs		—			240
Stock-based compensation expense		988			2
Loss on disposal of assets		4			2
Allowance for doubtful accounts		(1,850		)	—
Changes in operating assets and liabilities:
Accounts receivable		(11,454		)	(1,695		)
Accounts receivable - retainage		—			493
Inventories, net		(21,487		)	(313		)
Prepaid expenses and other current assets		(15,711		)	(178		)
Other noncurrent assets		(672		)	—
Accounts payable		19,709			65
Accounts payable - related party		—			(722		)
Accrued liabilities		5,271			(955		)
Unearned revenue		1,446			—
Customer deposits		10,686			1,526
Net cash (used in) provided by operating activities		(5,812		)	130
Cash flows from investing activities:
Cash paid for acquisitions, net of cash received		(24,597		)	(611		)
Purchases of property and equipment		(49,613		)	(2,993		)
Increase in restricted cash		(10,436		)	(500		)
Net cash used in investing activities		(84,646		)	(4,104		)
Cash flows from financing activities:
Proceeds from the issuance of common stock		117,390			15,400
Payments of lines of credit		(727		)	—
Payments on related party notes		(1,365		)	(3,511		)
Proceeds from notes payable and lines of credit		1,398			—
Proceeds from long-term debt		5,442			—
Payments on long-term debt		(2,757		)	(536		)
Principal payments on capital leases		(453		)	(123		)
Issuance of restricted stock		140			—
Refund of bond issuance costs		—			11
Net cash provided by financing activities		119,068			11,241
Net increase in cash		28,610			7,267
Cash at beginning of period		5,782			125
Cash at end of period		$	34,392		$	7,392
Non-cash disclosure information:
Common stock issued to partially repay related notes payable		—			1,453
Common stock issued for finders fee related to private placement offering		—			1,491
Equipment purchased utilizing capital lease obligations		—			859
Accounts payable incurred for the purchase of equipment		4,518			—
Common stock issued for acquisitions		19,821			—
Non-cash purchase accounting allocation changes		2,758			—

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

Table of Contents

 

BROADWIND ENERGY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

 

Note 1 – Nature of business and summary of significant accounting policies

 

The accompanying unaudited condensed consolidated financial information has been prepared by Broadwind Energy, Inc., a Delaware corporation (“Broadwind”),  and its subsidiaries (also referred to as “we,” “us,” “our,” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, it does not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim three and nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The December 31, 2007 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.  This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.

 

Broadwind became a public company in February 2006, after a reverse shell transaction with Blackfoot Enterprises, Inc. which was incorporated in Nevada in 1996.  From the time following the reverse shell transaction through February 2008, the Company was known as Tower Tech Holdings, Inc.  On February 28, 2008 the Company changed its name to Broadwind Energy, Inc., and on June 20, 2008, Broadwind changed its state of incorporation from Nevada to Delaware.  The Company’s principal executive office is located at 47 East Chicago Avenue, Suite 332, Naperville, IL 60540, its phone number is (630) 637-0315 and its website address is www.broadwindenergy.com.

 

The Company’s business is dedicated to the production and servicing of components for energy and infrastructure-related industries. The Company is primarily focused on manufacturing components for the wind industry and energy-related industries, including: tower support structures through its Tower Tech Systems, Inc. (“Tower Tech”) subsidiary; mining and other heavy equipment through its R.B.A. Inc. (“RBA”) subsidiary; gearing systems through its Brad Foote Gear Works, Inc. (“Brad Foote”) subsidiary; construction, operations, support, maintenance, and component repairs for wind turbines through its Energy Maintenance Service, LLC (“EMS”) subsidiary; and specialized heavy haul trucking services through its Badger Transport, Inc. (“Badger”) subsidiary.

 

Manitowoc, Wisconsin serves as the main location of the manufacturing facility for Tower Tech, which is currently constructing additional wind tower manufacturing facilities in Brandon, South Dakota and Abilene, Texas.  RBA’s main facility is located in Manitowoc, Wisconsin and RBA also operates in a second facility located in Clintonville, Wisconsin.  Brad Foote has manufacturing and administrative facilities in Cicero, Illinois and Neville Island, Pennsylvania.  EMS is headquartered in Gary, South Dakota and operates service hub facilities in Abilene, Texas and Howard, South Dakota.  Badger is headquartered in Clintonville, Wisconsin with equipment dispatched throughout the United States.

 

Significant accounting policies disclosed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007 remain applicable at September 30, 2008, including the following:

 

Basis of consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Tower Tech, RBA, Brad Foote, EMS, and Badger. RBA and Brad Foote were acquired by the Company on October 1, 2007 and October 19, 2007, respectively. EMS and Badger were acquired by the Company on January 16, 2008 and June 4, 2008, respectively.  The financial position and results of operations of these subsidiaries are included in the Company’s consolidated financial statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Restricted Cash

 

The Company received cash down payments on certain contracts, the use of such cash is restricted as per the terms of the contract and relate to product shipments which will take place over the next several quarters, during which time restrictions on the use of such cash will be relieved.

 

6

Table of Contents

 

Revenue Recognition

 

The Company recognizes revenue when the earnings process is complete and when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable, collectability is reasonably assured, and delivery has occurred per the contract terms. Customer deposits and other receipts are deferred and recognized when earned.

 

Segment reporting

 

As of September 30, 2008, the Company operates and manages two reporting segments:  Products (formerly Products and Components); and Services (formerly Service, Transportation and Maintenance).  Initially, the Company created a Service and Maintenance segment in January 2008 when it acquired EMS.  In connection with the June 2008 acquisition of Badger, a specialized heavy haul trucking services company, the Company added a transportation component to this segment and created the Service, Transportation and Maintenance segment.  For the three and nine months ended September 30, 2007, the Company operated as a single segment, Towers and Fabrication, as the Company’s only subsidiary in existence as of September 30, 2007 was its Tower Tech subsidiary.  The Towers and Fabrication segment is now part of the Products segment, which also includes the Company’s previously reported Gearing Systems segment.  Refer to Note 18 “Segment information” for summarized financial information of the Company’s segments.

 

Reclassification

 

Certain reclassifications have been made in the prior periods financial statements to conform to current period presentation.

 

Effect of recently issued accounting standards

 

In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted the provisions of SFAS 159 on January 1, 2008. The Company did not elect to measure any of its financial assets or liabilities using the fair value option of SFAS 159. The Company will assess at each measurement date whether to use the fair value option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  This standard was adopted and did not have a material impact on the financial statements.

 

In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”), which delayed the effective date by which companies must adopt the provisions of SFAS 157. FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this standard is not anticipated to have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, Business Combinations (“SFAS 141R”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Early adoption is not permitted.  SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after the first reporting period beginning on or after December 15, 2008.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a

 

7

Table of Contents

 

noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has evaluated the effect of the adoption of SFAS 160, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations, as all subsidiaries are 100% owned.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This statement is intended to enhance required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effect of adoption of SFAS 161, but does not presently believe that it will have a material effect on its consolidated financial position or results of operations.

 

In April 2008,  the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of Useful Life of Intangible Assets (“FSP FAS 142-3”), which amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.”  FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives.  FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008.  The Company is currently evaluating the potential impact, if any, of the adoption of FSP FAS 142-3 on its financial position and results of operations.

 

In April 2008, the FASB issued FASB Staff Position SFAS 133-1 and FIN 45-4. Disclosures about Credit Derivatives and Certain Guarantees:  An amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161, (“FSP SFAS 133-1 and FIN 45-4”), effective for reporting periods (annual or interim) ending after November 15, 2008.  FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require the seller of credit derivatives to disclose the nature of the credit derivative, the maximum potential amount of future payments, fair value of the derivative, and the nature of any recourse provisions.  Disclosures must be made for entire hybrid instruments that have embedded credit derivatives.

 

FIN 45-4 also amends FIN 45 to require disclosure of the current status of the payment/performance risk of the credit derivative guarantee.  If an entity utilized internal groupings as a basis for the risk, how the groupings are determined must be disclosed as well as how the risk is managed.

 

FSP SFAS 133-1encourages that the amendments be applied in periods earlier than the effective date to facilitate comparisons at initial adoption.  After initial adoption, comparative disclosures are required only for subsequent periods.

 

FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that required disclosures should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008.  The adoption of this Staff Position will have no material effect on the Company’s financial position, results of operations or cash flows.

 

Note 2 – Inventories

 

The components of inventories as of September 30, 2008 and December 31, 2007 are summarized as follows:

 

		September 30, 2008			December 31, 2007
Raw materials		$	17,819		$	4,230
Work-in-process		17,867			8,976
Finished goods		611			873
		36,297			14,079
Less: allowance for excess and obsolete inventories		(868		)	(1,096		)
Net inventories		$	35,429		$	12,983

 

8

Table of Contents

 

Note 3 – Acquisitions

 

Badger Transport, Inc.

 

On June 4, 2008, the Company acquired all of the outstanding shares of Badger for an aggregate purchase price of $11,811, exclusive of $184 of transaction-related acquisition costs.  The purchase price consisted of $5,811 of cash and 581,959 unregistered shares of Broadwind common stock at a price per share of $10.31.  The Company entered into a registration rights agreement with the former owner of Badger that provides the former owner with limited piggyback registration rights.  The Company financed the cash portion of the acquisition with cash on hand.

 

The following table summarizes the estimated fair values of the Badger assets acquired and liabilities assumed on the date of the acquisition:

 

Current assets		$	1,496
Property and equipment		5,232
Intangible - Trade Name		370
Intangible - Customer Relationships		4,380
Intangible - Noncompete Agreement		1,490
Goodwill		5,565
Total assets acquired		18,533
Current liabilities		(2,178		)
Capital lease obligations		(1,052		)
Long term debt		(2,544		)
Deferred tax liability		(764		)
Total purchase consideration		$	11,995

 

The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions.  Typical adjustments include outstanding working capital, professional fees and fixed asset valuations.  Goodwill and intangible assets associated with the purchase of Badger are not expected to be deductible for income tax purposes.

 

In connection with the Badger acquisition, the Company was required to fund approximately $4,500 of equipment purchases that Badger had on order for expansion.  The Company has funded $4,384 of this commitment as of November 3, 2008.

 

Energy Maintenance Service, LLC

 

As disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, on January 16, 2008, the Company acquired all of the outstanding membership interests in EMS, a South Dakota-based company engaged in the sale, installation, and repair of wind-powered electric generators. The aggregate purchase price was $32,250, exclusive of $536 of transaction-related costs.  The purchase price consisted of $18,429 of cash and 1,629,834 shares of the Company’s common stock at a price per share of $8.48.  The cash portion of the purchase price was financed by a private placement of Company common stock, as described in Note 10 “Stockholders’ equity” below.

 

The following table summarizes the estimated fair values of the EMS assets acquired and liabilities assumed on the date of the acquisition:

 

Current assets		$	4,712
Property and equipment		1,549
Intangible - Trade Name		1,790
Intangible - Customer Relationships		24,700
Goodwill		4,561
Total assets acquired		37,312
Current liabilities		(3,556		)
Long term liabilities		(970		)
Total purchase consideration		$	32,786

 

9

Table of Contents

 

The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions. Typical adjustments include outstanding professional fees and fixed asset valuations. Goodwill of $4,561 and other intangibles of $26,490 are expected to be deductible for income tax purposes over 15 years.

 

The Company does not have any contingent payments or commitments in relation to the acquisition of EMS, with the exception of certain stock options that were awarded as a result of the acquisition. Stock options are a share-based compensation expense and are subject to accounting treatment under SFAS No. 123(R) as discussed in Note 11 “Stock-based compensation”.

 

Brad Foote Gear Works, Inc.

 

As disclosed in the Company’s Annual Report filed on Form 10-KSB for the year ended December 31, 2007, on October 19, 2007, the Company acquired all of the outstanding capital stock of Brad Foote, an Illinois-based manufacturer of gearing systems for the wind turbine, oil and gas and energy-related industries. The aggregate consideration paid in connection with the Brad Foote acquisition, which included cash and unregistered shares of the Company’s common stock, was $133,326.

 

Pro Forma Financial Information

 

The following table presents the consolidated financial information for the Company on a pro forma basis, assuming the acquisitions of Brad Foote, EMS and Badger had each occurred as of January 1, 2007. The Company is not including the pro-forma effect of RBA because the impact is not material to its results of operations for the nine-month period ended September 30, 2008 or 2007. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the acquisitions and expected to have a continuing impact on the consolidated results. These items include adjustments to increase depreciation related to the stepped-up basis in machinery and equipment, adjust inventory to fair market value, record amortization of intangible assets, increase interest expense for certain long-term notes payable, and reclassify certain items to conform to the Company’s financial reporting presentation.

 

The table sets forth unaudited financial information and has been compiled from historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transaction occurred on the dates indicated or that may be achieved in the future.

 

		Nine months ended September 30,
		2008									2007
		As reported			Pro-forma  adjustments			Pro-forma			As reported			Pro-forma  adjustments			Pro-forma
Revenues		$	140,482		$	5,716	(1)	$	146,198		$	7,985		85,746		(3)	$	93,731
Net income (loss)		(8,855		)	(1,826		)(2)	(10,681		)	1,344			(5,374		)(4)	(4,030		)
Earnings (loss) per share basic and diluted earnings		$	(0.10	)	$	(0.02	)	$	(0.12	)	$	0.03		$	(0.09	)	$	(0.06	)

 

(1)		Represents revenue of EMS and Badger for the period from January 1, 2008 through the respective acquisition dates.
(2)		Represents net loss of EMS and Badger for the period from January 1, 2008 through the respective acquisition dates. Adjustments to net loss include increases to depreciation related to the increase in fair market value of machinery and equipment to fair value, amortization of acquired intangible assets, and adjustments to interest income and interest expense relating to the Company’s assumption of certain short and long-term borrowings of EMS and Badger.
(3)		Represents revenue of Brad Foote, EMS and Badger for the period from January 1, 2007 through September 30, 2007.
(4)		Represents net income (loss) of Brad Foote, EMS and Badger for the period from January 1, 2007 through September 30, 2007. Adjustments to net income include increases to depreciation related to the stepped up basis in machinery and equipment to fair value, increases in cost of goods sold due to increasing inventory to fair market value, amortization of acquired intangible assets, and adjustments to interest income and interest expense relating to the Company’s assumption of certain short- and long-term borrowings of Brad Foote, EMS, and Badger.

 

Pro-forma tables illustrate results which are unaudited and are based on an acquired company’s history.  As a result, pro-

forma results shown above are subject to adjustment upon audits and other financially qualitative studies done by the

Company.

 

10

Table of Contents

 

Note 4 – Goodwill and intangible assets

 

The changes in the gross carrying amount of intangible assets for the nine months ended September 30, 2008 were as follows:

 

		Trade names			Customer  relationships			Non-compete			Total
Balance as of December 31, 2007		$	8,119		$	77,558		$	—		$	85,677
EMS acquisition		1,790			24,700			—			26,490
Badger acquisition		370			4,380			1,490			6,240
Balance as of September 30, 2008		$	10,279		$	106,638		$	1,490		$	118,407

 

Intangible assets subject to amortization were as follows as of September 30, 2008:

 

		Weighted  Average  Remaining  Amortization  Period (Years)		Gross  Carrying  Amount			Accumulated  Amortization			Net Carrying  Amount
Trade names		19.11		$	10,279		$	(457	)	$	9,822
Customer relationships		9.33		106,638			(9,281		)	97,357
Noncompete Agreements		2.67		1,490			(166		)	1,324
Total				$	118,407		$	(9,904	)	$	108,503

 

Amortization expense on trademarks, customer relationships and non-compete agreements, which is being recorded ratably over the estimated life of the related intangible assets, was respectively $2,932 and $8,249 for the three and nine months ended September 30, 2008. There was no such amortization expense for the three and nine months ended September 30, 2007 as the underlying intangible assets were acquired subsequent to September 30, 2007.

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2008 were as follows:

 

Balance as of December 31, 2007		$	27,611
EMS acquisition		4,561
Badger acquisition		5,565
Adjustments (1)		(2,591		)
Balance as of September 30, 2008		$	35,146

 

(1) Comprised primarily of purchase price allocation adjustments recorded in connection with the Company’s acquisition of Brad Foote in the fourth quarter of 2007. The adjustments were to adjust certain machinery and equipment to fair value and record additional acquisition-related costs. The adjustments also include additional acquisition costs that have been capitalized.  The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions.  Typical adjustments include outstanding professional fees and fixed asset valuations.

 

The Company will review goodwill and other intangible assets for impairment annually, or more frequently, if circumstances indicate that the assets’ carrying amount may not be recovered. As of September 30, 2008, no such circumstances existed, and, accordingly, no impairment expense was recorded.

 

11

Table of Contents

 

Note 5 – Accrued liabilities

 

Accrued liabilities at September 30, 2008 and December 31, 2007 consisted of the following:

 

		September 30, 2008			December 31, 2007
Accrued operating expenditures		$	12,380		$	4,217
Reimbursements due under Brad Foote purchase agreement		1,519			5,171
Accrued payroll, employee benefits, and related taxes		3,784			1,894
Accrued interest		21			560
Other		661			615
Total accrued liabilities		$	18,365		$	12,457

 

Note 6 – Lines of credit and notes payable

 

Lines of credit and notes payable at September 30, 2008 and December 31, 2007 consisted of the following:

 

		September 30, 2008			December 31, 2007
Third party
Line of credit (Libor + 1.75%)		$	2,518		$	—
Line of credit (Prime + 1.00%)		393			—
Note payable (7.25%)		39			—
Bank note (6.85%)		—			440
Total third party lines of credit and notes payable		2,950			440
Related party
9.5% related party note, subject to conversion		—			25,000
Total related party notes payable		—			25,000
Total lines of credit and notes payable		$	2,950		$	25,440
Weighted average interest rate		4.49		%	9.45		%

 

On April 24, 2008, Tontine Capital Overseas Master Fund, L.P. (“TMF”), Tontine Partners, L.P. (“TP”), and Tontine Overseas Fund (“TOF”) each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock. Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF. Interest that had accumulated in the aggregate amount of $1,223 on the notes as of the conversation date was paid by the Company to TMF, TP, and TOF in cash.

 

In connection with its acquisition of EMS, on January 16, 2008 the Company issued a note to the then President of EMS, who subsequently resigned from his position with EMS in October 2008. The note was in the amount of $1,365 and related to a limited liability company tax payment. In May 2008, the Company paid the note in full.

 

12

Table of Contents

 

Note 7 – Long-term debt

 

Long-term debt at September 30, 2008 and December 31, 2007 consisted of the following:

 

		September 30, 2008			December 31, 2007
2007 equipment line note, due 2013		$	6,776		$	5,947
Revolving note, due 2009		10,000			7,887
2006 equipment line note, due 2012		5,683			9,533
2006 term note, due 2011		2,106			4,871
2008 term note, due 2013		1,798			2,075
5.65% fixed rate loan, due 2013		1,534			—
Fixed rate notes 4.75% to 17.00%, due 2008 to 2012		7,982			—
6.85% fixed rate loan, due 2012		386			—
Total long-term debt		36,265			30,313
Less current maturities		(16,939		)	(12,693		)
Total long-term debt, less current maturities		$	19,326		$	17,620

 

On September 30, 2008, EMS paid-off all outstanding long-term debt and short term notes payable due to DNB National Bank.  The total amounts satisfied with the pay-off were $2,420 in principal and $5 in outstanding interest.

 

Pursuant to a note extension agreement dated September 29, 2008, the terms of Brad Foote’s Amended and Restated Renewal Revolving Note (the “Revolving Note”) with Bank of America dated January 15, 2008 were changed, extending the maturity date from October 31, 2008 to January 15, 2009. Pursuant to the thirty-first amendment of the Loan and Security Agreement dated as of January 17, 1997, as amended (the “Loan Agreement”) between Brad Foote and Bank of America, the Principal due under the Revolving Note was required to be paid down by $3,000 in 2008.

 

Pursuant to the thirty-first amendment to the Loan Agreement, Brad Foote had an obligation to pay down the outstanding principal amount under the Revolving Loan by September 30, 2008, and made the required payment on October 1, 2008.  Brad Foote received a waiver from Bank of America with respect to this payment, and otherwise was in compliance with the financial and other covenants contained in the Loan Agreement on September 30, 2008.  The Company was in compliance with all other debt covenants as of September 30, 2008.

 

Future payments of long-term debt as of September 30, 2008 are summarized below:

 

Period		Principal amount of  long-term debt
2008 (remaining 3 months)		$	11,735
2009		6,956
2010		7,004
2011		5,437
2012		3,341
2013		1,792
Thereafter		—
Total		$	36,265

 

Note 8 – Interest rate swaps

 

In 2007, the Company entered into two interest rate swap agreements to minimize the impact of interest rate fluctuations on its debt. Interest rate swap agreements involve exchanges of fixed or floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, all derivatives are measured at fair value and recognized as either assets or liabilities in the Company’s balance sheet. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in fair value must be recognized currently in earnings. The Company’s interest rate swaps do not qualify for hedge accounting under SFAS No. 133. Therefore, the Company is required to recognize the swap at its fair market value and record the fluctuations in the fair value of the swap in current earnings. The unrealized gain/(loss) related to these fluctuations was approximately ($27) and ($16) for the three and nine-month periods ended September 30, 2008, respectively, and is recognized within other income (expense). The fair market value of the interest rate swaps of $404 and $388 is recorded as a long-term liability as of September 30, 2008 and December 31, 2007, respectively.

 

13

Table of Contents

 

Note 9 – Capital leases

 

The Company leases equipment from various financing companies under capital leases with terms that extend to 2013. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases, and accordingly, they are recorded in the Company’s assets and liabilities. Amortization of the capital leases has been included in depreciation expense. The following is an analysis of the leased assets included in property and equipment as of September 30, 2008 and December 31, 2007.

 

		September 30, 2008			December 31, 2007
Machinery and equipment		$	2,896		$	1,589
Less accumulated depreciation		(307		)	(25		)
Net machinery and equipment		$	2,589		$	1,564

 

Gross capital lease assets obtained through the acquisition of Badger was $1,416.

 

Future minimum rental payments due under capital leases were the following:

 

Period Ending
2008 (remaining 3 months)		$	267
2009		572
2010		423
2011		315
2012		170
2013		47
Thereafter		23
Total minimum lease payments		1,817
Less: amounts representing interest		(226		)
Present value of future minimum lease payments		1,591
Less: current portion		(645		)
Capital lease obligations, noncurrent		$	946

 

Note 10 – Stockholders’ equity

 

On January 16, 2008, to finance the cash portion of the EMS acquisition, the Company sold an aggregate of 2,031,250 shares of unregistered common stock in a private placement to TP and T25 at $8.48 per share for a total purchase price of $17,225, pursuant to a previously disclosed Amended and Restated Securities Purchase Agreement with Tontine Capital Partners, L.P., (“TCP”), TP and Tontine 25 Overseas Master Fund, L.P. (“T25”).

 

In connection with the acquisition of EMS, on January 16, 2008, the Company issued 1,629,834 shares of unregistered common stock to the members of EMS, calculated at $8.48 per share, for total stock consideration of $13,821. Upon consummation of the Company’s acquisition of EMS, 7,500 shares of restricted stock units previously granted to certain Company executives vested; another 7,500 restricted shares remain unvested, and have a vesting date of January 16, 2009.

 

In the second quarter of 2008, the Company completed transactions resulting in the sale of an aggregate of $100,500 worth of its unregistered common stock, of which $500, or 62,814 shares, was purchased by a member of the Company’s Board of Directors at a price of $7.96 per share and an aggregate of $100,000 worth, or 12,562,814 shares, was purchased by TCP, TP, TOF, and T25 at a price of $7.96 per share. Thomas Weisel Partners issued a fairness opinion in connection with both transactions.

 

On April 24, 2008, TMF, TP, and TOF each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock. Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF.

 

On June 4, 2008, the Company acquired all of the outstanding capital stock of Badger for total purchase price of $11,811, exclusive of transaction-related acquisition costs. A portion of the purchase price consisted of 581,959 unregistered shares of Broadwind’s common stock at a price per share of $10.31.

 

14

Table of Contents

 

Note 11 – Stock-based compensation

 

The Company grants incentive stock options and other equity awards pursuant to the Employee Incentive Plan (“EIP”) which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June of 2008. On August 8, 2008, the Company’s Board of Directors approved certain non-material amendments to the EIP that clarify the terms and conditions of restricted stock grants under the EIP and provide that the administrator of the EIP has the authority to affect future amendments to the plan. The EIP reserves 3,500,000 shares of common stock for grants to officers, directors, and other key employees. Total stock-based compensation expense included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2008 is $224 and $1,128, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2007 was $2 and $2, respectively. There were 1,589,500 shares available for grant under the EIP as of September 30, 2008.

 

Stock Options

 

Compensation expense for incentive stock option grants is recognized over the requisite service period for vesting of the award, or to an employee’s eligible retirement date, if earlier and applicable. As of September 30, 2008, the Company had $9,291 of unrecognized compensation expense related to the outstanding stock options, which will be recognized over a weighted-average period of 4.33 years.

 

The fair value of each stock option grant was estimated as of the date of the grant using the Black-Scholes pricing model. The resulting compensation expense is amortized on a straight line basis over the vesting period of the grant. The expected term of stock options granted is determined utilizing a public company proxy with similar grants because the Company does not have sufficient stock option exercise history from its employees. Likewise, as the Company has only limited public trading history, the expected volatility rate used is also determined from a public company proxy in the same industry and business operations as the Company. The risk-free interest rate is based on US Treasury yield curve in effect at the time of the grant. A summary of these assumptions is included in the table below.

 

		Nine months ended			Nine months ended
		September 30, 2008			September 30, 2007
Dividend yield		0.00		%	0.00		%
Expected volatility		60% - 70		%	60.00		%
Risk-free interest rate		2.20% - 4.24		%	4.24		%
Vesting term (in years)		3 - 5 years			5 years
Weighted-average fair value of options granted		$	9.88		$	2.83

 

A summary of option activity as of September 30, 2008, and changes during the periods then ended is presented below:

 

		Shares		Weighted-Average  Exercise Price			Weighted-Average  Remaining  Contractual Term  (Years)
Options Outstanding at January 1, 2008		950,000		$	7.92		8.81
Options Granted		985,500		$	15.41		9.65
Options Exercised		—		$	—		—
Options Forfeited		(40,000	)	$	10.90		10.00
Options Outstanding at September 30, 2008		1,895,500		$	11.75		9.35
Options Exercisable at September 30, 2008		10,000		$	4.60		8.92

 

The following table summarizes share-based compensation expense related to share-based awards subject to SFAS No. 123(R) recognized during the periods indicated:

 

15

Table of Contents

 

		Nine months ended September 30,
		2008			2007
Share-based compensation expense included in consolidated statement of operations:
Selling, general, and administrative		$	1,128		$	2
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net income (loss)		$	(1,128	)	$	(2	)
Decrease in basic income (loss) per share		$	0.01		$	—

 

Aggregate intrinsic value of options outstanding as of September 30, 2008 was $6,006.

 

(1)           Income tax benefit is not illustrated because the Company is currently operating at a loss and actual income tax benefit will not be realized in the nine month period ended September 30, 2008. The result of the loss situation creates a timing difference, resulting in a deferred tax asset.

 

Restricted Stock

 

The EIP permits the Company to award restricted stock and restricted stock units subject to risks of forfeiture or vesting. In the fourth quarter of 2007, the Company granted restricted stock units to three executives, with vesting of half of the units based on completion of the Company’s EMS acquisition and service-based vesting for the remaining half of the units. The Company recognizes share-based compensation expense on restricted stock ratably over the requisite service or performance period of the award and the grant date fair value is derived by calculating the number of restricted stock option awards granted by the closing price of the Company’s common stock on the date of grant. For the nine months ended September 30, 2008, the Company recognized $140 in share-based compensation related to restricted stock.

 

The following table summarized restricted stock activity for the nine months ended September 30, 2008:

 

		Number of Shares  Underlying  Restricted Stock  Units		Weighted-Average  Grant Date Fair  Value
Unvested Restricted Stock Units Outstanding at December 31, 2007		15,000		$	10.90
Restricted Stock Units Granted		—		—
Restricted Stock Units Vested		(7,500	)	10.90
Restricted Stock Units Cancelled		—		—
Unvested Restricted Stock Units Outstanding, September 30, 2008		7,500		10.90

 

Total fair value of unvested units was $68 as of September 30, 2008.

 

Note 12 – Income taxes

 

The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes, which provides for an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of the tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.

 

The Company adopted the provision of Financial Standards Accounting Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustments in the liability for unrecognized income tax benefits. There have been no significant changes in unrecognized income tax benefits during the first three quarters of 2008.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2008, the Company had no accrued interest or penalties related to uncertain tax positions.

 

16

Table of Contents

 

The Company files income tax returns in the U.S. federal and state jurisdictions. As of September 30, 2008, open tax years in the federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carry forwards. No changes in settled tax years have occurred through September, 2008. The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next 12 months.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
(Loss) income before provision for income taxes		$	(2,972	)	$	683		$	(8,188	)	$	1,344
(Benefit) provision for income taxes		(134		)	—			66			—
Net (loss) income		$	(2,838	)	$	683		$	(8,254	)	$	1,344

 

Effective tax rates differ from federal statutory income tax rates primarily due to changes in valuation allowance and provisions for state and local income taxes. Consistent with 2006 and 2007, the Company continues to maintain a full valuation allowance against net deferred tax assets exclusive of deferred tax liabilities associated with indefinite-lived assets. As of September 30, 2008, after valuation allowance, the Company has a net deferred tax liability of $693 related to temporary differences in indefinite-lived assets. These indefinite-lived assets consist of tax deductible goodwill from recent business acquisitions. The income tax (benefit) expense for the three and nine months ended September 30, 2008 of ($134) and $66, respectively relates to the current quarter temporary differences in these indefinite-lived assets.

 

Note 13 – Employee benefit plans

 

On October 19, 2007, the Company began sponsoring a defined contribution savings plan for Brad Foote, Tower Tech and corporate employees that allows substantially all employees to contribute a portion of their pre-tax and/or after-tax income up to statutory limits. The plan requires the Company to match 50% of the participants’ contributions up to 4% of the participants’ compensation. The Company recognized $153 of matching expense during the nine months ended September 30, 2008 related to the plan.

 

Effective as of the date of the acquisition of RBA, the Company sponsors a defined contribution savings plan that allows RBA employees to contribute a portion of their pre-tax and/or after-tax income up to statutory limits. The plan requires the Company to match 100% of the participants’ contributions up to 3% of the participants’ compensation. RBA recognized $26 of matching expense during the nine months ended September 30, 2008 related to this plan.

 

Effective as of the date of the acquisition of EMS, the Company sponsors a defined contribution savings plan covering substantially all EMS employees. The Company can provide a discretionary match and/or profit sharing contribution each year. EMS recognized $0 of matching expense during the period ended September 30, 2008 related to this plan.

 

Effective as of the date of the acquisition of Badger, the Company sponsors a defined contribution savings plan covering substantially all Badger employees. The plan requires the Company to match 100% of the participants’ contributions up to 3% and an additional 50% up to 5% of the participants’ compensation. Badger recognized $13 of matching expense during the period ended September 30, 2008 related to this plan.

 

On October 24, 2007, the Company adopted its 2007 Deferred Compensation Plan, which provides incentives and rewards to certain key employees and non-employee directors of the Company who are selected by the Board of Directors to participate. As of September 30, 2008 and December 31, 2007, the Company had accrued $197 and $0, respectively, for amounts due under this plan.

 

As part of the collective bargaining agreement at Brad Foote, the Company maintains a life insurance policy for each member of the collective bargaining group who has retired. For 2008, the collective premiums on the policy were less than $1.

 

In addition to the plans described, the Company participates in certain customary employee benefit plans, including those which provide health and life insurance benefits to employees.

 

Note 14 – Operating leases – related party

 

During 2007, the Company amended one of the operating leases under which the Company leases manufacturing and office space for its Products segment from City Centre, LLC. In addition, the Company assumed a lease between RBA and City Centre, LLC upon its acquisition of RBA. City Centre, LLC is a limited liability company owned in part by two former

 

17

Table of Contents

 

directors of the Company, one of whom was also the Company’s former President, and each of whom were affiliates during 2007 and a portion of 2008. Neither of these individuals currently holds any position within the Company. The leases call for monthly rents of $42 and $8, and expire on December 31, 2014 and July 31, 2017, respectively. The lease ending December 31, 2014 grants the Company five options to renew, each for a five-year renewal term that begins at the end of the lease period just ended. The lease ending July 31, 2017 grants the Company two options to renew, each for a five-year renewal term that begins at the end of the lease period just ended.

 

In 2007, the Company entered into a 15-year lease with City Centre, LLC for a third building utilized for its Tower Tech and RBA operating facilities. The lease period commenced in June 2008 with a monthly payment due of $19.

 

The Company’s Services segment leases its primary administrative offices, a machine shop, a residential property, and storage facilities from the former President of EMS, who resigned from his position at EMS in October 2008. The lease agreement currently expires on December 31, 2009 and requires monthly payments of $10.

 

The former President of EMS, through a separate entity, owns residential real estate for investment purposes, which is typically rented to third parties. Occasionally, the Company has entered into short-term lease agreements to rent apartments from this entity for use by Company personnel.

 

All related party operating lease rents approximate market rates and are recorded as rent expense in the Company’s statements of operations.

 

Following is a schedule of future minimum rental payments required under the related-party leases as of September 30, 2008:

 

Period		Minimum payments on  operating lease obligations
2008 (remaining three months)		$	261
2009		989
2010		831
2011		831
2012		831
2013		831
Thereafter		2,964
Total minimum required lease payments		$	7,538

 

Related party rent expense for the three and nine months ended September 30, 2008 was $263 and $684, respectively, in comparison to $122 and $368, respectively, for the corresponding periods in 2007.

 

Note 15 – Operating leases – third party

 

The Company leases various property, equipment and buildings under lease agreements of varying terms extending to 2017. Rental expense attributed to third party operating leases for the three and nine months ended September 30, 2008 was $641 and $1,600, respectively, as compared to $12 and $79, respectively, for the corresponding periods in 2007.

 

Following is a schedule of future minimum rental payments required under the leases as of September 30, 2008:

 

18

Table of Contents

 

Period		Minimum payments on operating lease obligations
2008 (remaining three months)		$	600
2009		2,154
2010		2,036
2011		2,005
2012		2,013
2013		1,553
Thereafter		4,500
Total minimum required lease payments		$	14,861

 

Note 16 – Other related party transactions

 

Interest expense of $0 and $735 was incurred and paid on stockholder and related party notes during the three and nine months ended September 30, 2008, respectively.  No comparable interest expense was recorded during the three and nine months ended September 30, 2007.

 

At September 30, 2008 and December 31, 2007, $282 and $282, respectively, relating to amounts due from stockholders is included within other current assets on the consolidated balance sheets. These amounts were paid by the Company on behalf of four stockholders in connection with the March 2007 sale of stock by each of the stockholders.

 

During the second quarter of 2008, the Company completed transactions resulting in the sale of an aggregate of $100,500 worth of its unregistered common stock, of which $500, or 62,814 shares, was purchased by a member of the Company’s Board of Directors at a price of $7.96 per share and an aggregate of $100,000 worth, or 12,562,814 shares, were purchased by TP, TCP, TOF, and T25 at a price of $7.96 per share.  Thomas Weisel Partners issued a fairness opinion in connection with both transactions.

 

On April 24, 2008, TMF, TP, and TOF each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock. Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF.  Interest that had accumulated in the aggregate amount of $1,223 on the notes as of the conversion date was paid in cash by the Company to TMF, TP, and TOF with cash.

 

On January 16, 2008, to finance the cash portion of the EMS acquisition, the Company sold an aggregate of 2,031,250 shares of unregistered common stock in a private placement to TP and T25 at $8.48 per share for a total purchase price of $17,225, pursuant to a previously disclosed Amended and Restated Securities Purchase Agreement with TCP, TP and T25.

 

Note 17 – Commitments and contingencies

 

Customer disputes

 

The Company is involved in a pricing dispute with one of its customers with total disputed amounts approximating $2,249 as of September 30, 2008.  The Company has provided in its allowance for uncollectible accounts the portion of the disputed amounts due that management estimates may be uncollectible.

 

Purchase commitments

 

The Company has a purchase contract with a foreign vendor with total commitments outstanding of $18,014 with expected shipment through 2009.  During the three and nine months ended September 30, 2008, the Company recorded net foreign currency gain (loss) in the statement of operations of $6 and ($57), respectively, due to the decline in the value of the U.S. Dollar relative to the Euro.  This commitment price was converted from Euros to U.S. dollars during the quarter ended September 30, 2008, and no further foreign currency exposure exists with regard to this commitment.  Additionally, the Company issued commitments for land, buildings, raw steel, and equipment associated with the expansion of operations.

 

19

Table of Contents

 

Below is a summary of total Company’s estimated future amounts due:

 

Period
2008 (remaining three months)		$	44,297
2009		18,122
2010		1,568
Total commitment		$	63,987

 

Other

 

The Company is also subject to legal proceedings in the normal course of business. Management believes these proceedings will not have a material adverse effect on the consolidated financial statements.

 

In connection with the Badger acquisition, the Company was required to fund approximately $4,500 of equipment purchases that Badger had on order for expansion.  The Company has funded $4,384 of this commitment as of November 3, 2008.

 

Note 18 – Segment information

 

During the second quarter of 2008, management changed the Company’s reportable segments to reflect changes in the management reporting structure of the organization and the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. The revised reporting structure includes two segments: “Products” (formerly “Products and Components”) and “Services” (formerly “Service, Transportation and Maintenance.” The Company’s segments and their product and service offerings are summarized below:

 

Products

 

This Products segment includes the manufacturing of components for the wind and energy-related industries, including tower support structures, gearing systems, and mining and other heavy equipment.  The Products segment combines previously reported segments of “Towers and Fabrication” and “Gearing Systems”.

 

Services

 

The Services segment was established upon acquisition of EMS in January 2008 and was supplemented by the Badger acquisition during the second quarter of 2008.  This segment includes construction, operations, support, maintenance, and component repairs for wind turbines and specialized heavy-haul trucking services.

 

Other

 

The Company applies the provisions of EITF 04-10 for segment reporting. Under the provisions of EITF 04-10, any operating segments that do not individually meet the aggregation criteria or quantitative thresholds described in SFAS 131 may be combined with other operating segments that do not individually meet the aggregation criteria or quantitative thresholds to form a separate reportable segment. The Company has combined all operating segments that do not individually meet the aggregation criteria established in SFAS 131 to form the “Other” segment for segment reporting. The Other segment is comprised of activities of corporate administration activities, and elimination of intercompany transactions.

 

Below is a summary of segment operations for the three and nine months ended September 30, 2008 and 2007. For the three and nine months ended September, 2007, the Company operated as a single segment, as the Company’s only subsidiary in existence as of September 30, 2007 was its Tower Tech subsidiary.

 

20

Table of Contents

 

		Products			Services			Other			Total
As of and for the three months ended September 30, 2008
Revenues from external customers		$	51,042		$	13,501		$	(55	)	$	64,488
Cost of sales		43,792			8,341			56			52,189
Gross profit		$	7,250		$	5,160		$	(111	)	$	12,299
Net income (loss)		$	1,400		$	(549	)	$	(4,290	)	$	(3,439	)
Total assets		$	289,768		$	68,387		$	25,908		$	384,063

 

		Products			Services			Other			Total
As of and for the nine months ended September 30, 2008
Revenues from external customers		$	115,331		$	25,205		$	(54	)	$	140,482
Cost of sales		95,594			14,531			(43		)	109,815
Gross profit		$	19,737		$	10,674		$	(11	)	$	30,667
Net income (loss)		$	3,190		$	(1,373	)	$	(10,672	)	$	(8,855	)
Total assets		$	289,768		$	68,387		$	25,908		$	384,063

 

Note 19 – Earnings per share

 

The Company computes earnings per share in accordance with FASB Statement of Financial Accounting Standards No. 128, Earnings per Share (“SFAS 128”).  SFAS 128 requires companies to compute earnings per share under two different methods, basic and diluted, and present per share data for all periods in which statements of operations are presented.  Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted earnings per share is computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding.

 

The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for three and nine months ended September 30, 2008, and the three and nine months ended September 30, 2007:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Basic earnings per share calculation:
Net (loss) income to common stockholders		$	(3,439	)	$	683		$	(8,855	)	$	1,344
Weighted average of common shares outstanding		96,470,415			47,724,464			87,692,295			44,969,545
Basic net (loss) income per share		$	(0.04	)	$	0.01		$	(0.10	)	$	0.03
Diluted earnings per share calculation:
Net (loss) income to common stockholders		$	(3,439	)	$	683		$	(8,855	)	$	1,344
Weighted average of common shares outstanding		96,470,415			47,724,464			87,692,295			44,969,545
Stock options (1)		—			—			—			—
Diluted weighted average of common shares outstanding		96,470,415			47,724,464			87,692,295			44,969,545
Diluted net (loss) income per share		$	(0.04	)	$	0.01		$	(0.10	)	$	0.03

 

(1)             The options granted and outstanding would be anti-dilutive given the Company’s net loss. The options have therefore been excluded from diluted earnings per share.

 

21