Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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.:

 

 

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

 

Number of shares of registrant’s common stock, par value $0.001, outstanding as of August 6, 2009: 96,601,782

 

 

Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

			Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Cash Flows		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Submission of Matters to a Vote of Security Holders		38
Item 5.	Other Information		38
Item 6.	Exhibits		38
Signatures			39

 

2

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		June 30			December 31
		2009			2008
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	7,834		$	15,253
Restricted cash		2,503			500
Accounts receivable, net of allowance for doubtful accounts of $666 and $1,504 as of June 30, 2009 and December 31, 2008, respectively		26,716			36,709
Inventories, net		35,274			41,895
Prepaid expenses and other current assets		2,604			3,862
Total current assets		74,931			98,219
Property and equipment, net		141,651			144,707
Goodwill		33,984			30,954
Intangible assets, net		99,781			105,593
Other assets		1,597			275
TOTAL ASSETS		$	351,944		$	379,748
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Lines of credit and notes payable		$	12,522		$	3,340
Current maturities of long-term debt		8,814			9,711
Current portions of capital lease obligations		1,037			978
Accounts payable		31,634			40,225
Accrued liabilities		8,108			10,386
Customer deposits		12,800			21,102
Total current liabilities		74,915			85,742
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		19,481			25,792
Long-term capital lease obligations, net of current portions		3,841			3,521
Interest rate swap agreements		384			582
Deferred income tax liabilities		1,277			1,497
Other		654			458
Total long-term liabilities		25,637			31,850
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value; 150,000,000 shares authorized; 96,601,782 and 96,470,415 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively		97			96
Additional paid-in capital		299,033			297,222
Accumulated deficit		(47,738		)	(35,162		)
Total stockholders’ equity		251,392			262,156
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	351,944		$	379,748

 

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 per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Revenues		$	52,313		$	40,830		$	105,375		$	75,994
Cost of sales		49,162			30,739			97,539			57,893
Gross margin		3,151			10,091			7,836			18,101
OPERATING EXPENSES:
Selling, general and administrative		10,525			8,995			19,441			16,365
Intangible amortization		2,906			2,738			5,812			5,317
Total operating expenses		13,431			11,733			25,253			21,682
Operating loss		(10,280		)	(1,642		)	(17,417		)	(3,581		)
OTHER INCOME (EXPENSE), net:
Interest income		93			327			104			447
Interest expense		(650		)	(1,121		)	(1,203		)	(2,458		)
Other, net		5,574			475			5,667			376
Total other income (expense), net		5,017			(319		)	4,568			(1,635		)
Net loss before provision (benefit) for income taxes		(5,263		)	(1,961		)	(12,849		)	(5,216		)
PROVISION (BENEFIT) FOR INCOME TAXES		163			12			(273		)	200
NET LOSS		$	(5,426	)	$	(1,973	)	$	(12,576	)	$	(5,416	)
NET LOSS PER COMMON SHARE - Basic and diluted		$	(0.06	)	$	(0.02	)	$	(0.13	)	$	(0.07	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted		96,547			86,822			96,520			83,255

 

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)

 

		Six Months Ended June 30,
		2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(12,576	)	$	(5,416	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		13,433			9,798
Unrealized gain on derivatives		(198		)	(11		)
Deferred income taxes		(220		)	200
Stock-based compensation		979			784
Allowance for doubtful accounts		(798		)	(1,708		)
(Gain) loss on disposal of assets		(46		)	22
Changes in operating assets and liabilities:
Accounts receivable		10,792			(10,472		)
Inventories		6,621			(5,753		)
Prepaid expenses and other current assets		1,252			1,101
Accounts payable		(8,650		)	(2,554		)
Accrued liabilities		(2,166		)	(3,709		)
Customer deposits		(8,301		)	12,149
Other non-current assets		—			(865		)
Net cash provided by (used in) operating activities		122			(6,434		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash received		—			(24,955		)
Purchases of property and equipment		(9,064		)	(20,465		)
Proceeds from disposals of property and equipment		29			—
Increase in restricted cash		(2,003		)	(500		)
Net cash used in investing activities		(11,038		)	(45,920		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock		445			117,725
Payments on lines of credit and notes payable		(7,134		)	(1,385		)
Payments on related party notes payable		—			(1,365		)
Proceeds from lines of credit and notes payable		6,079			14,835
Proceeds from capital and sales-leaseback transactions		3,641			—
Proceeds from deposits on equipment		665			—
Principal payments on capital leases		(585		)	(1,488		)
Issuance of restricted stock grants		386			119
Net cash provided by financing activities		3,497			128,441
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(7,419		)	76,087
CASH AND CASH EQUIVALENTS, beginning of period		15,253			5,782
CASH AND CASH EQUIVALENTS, end of period		$	7,834		$	81,869
Supplemental cash flow information:
Interest paid, net of capitalized interest		$	1,214		$	2,175
Income taxes paid		$	535		$	—
Non-cash investing and financing activities:
Common stock issued for acquisitions		$	—		$	19,821
Non-cash purchase accounting allocation changes		$	3,030		$	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)

(In thousands, except share and per share data)

 

NOTE 1 — DESCRIPTION OF THE COMPANY

 

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Broadwind,” and the “Company,” refer to Broadwind Energy, Inc., a Delaware incorporated company headquartered in Naperville, Illinois, and its wholly-owned subsidiaries.

 

Business Overview

 

We are a supplier of value-added products and services to the North American wind energy sector as well as other energy-related industries. We provide our customers, such as leading wind turbine manufacturers and developers, wind farm operators and service companies, with a broad range of component and service offerings. Since 2006, we have made significant investments in the growth of our business through a series of acquisitions and capital investments. In doing so, we have developed a broad, U.S.-based supply chain for wind energy development in North America. We are also pursuing international business opportunities so that we can better serve our customers, enhance our supply chain and develop synergies among our subsidiary companies. In addition, we plan to increase our efforts in developing new technologies that will further enhance the products and services we provide our customers in the wind energy market. Our businesses are currently organized in two operating segments: Products and Services.

 

Products

 

The Products segment includes the operations of Brad Foote Gear Works, Inc. (“Brad Foote”), Tower Tech Systems Inc. (“Tower Tech”) and R.B.A., Inc. (“RBA”). This segment specializes in the manufacture and sale of products such as high precision gears for wind turbines, custom-engineered gearing systems for the mining, energy, and industrial sectors, structural wind towers, internal tower components, and large fabricated and machined components for the construction and mining industries. Production processes include sophisticated form grinding and finishing of gears and gear sets, steel plate processing, semi-automated heavy welding and custom corrosion protection of components. Our primary focus is on the wind energy industry; however, our Products segment also services mining, oil and gas, construction and other industrial energy applications.

 

The following is a summary of the three subsidiaries that comprise our Products segment:

 

·                  Brad Foote, founded in 1924 and acquired by us in October 2007, produces precision and custom-engineered gearing systems for the wind power generation, oil production, mining, steel, and transportation industries. Brad Foote has two facilities in Cicero, Illinois and one facility in Neville Island, Pennsylvania, which we believe collectively represent the largest gear grinding and carburizing capacity of any single company in North America.

 

·                  Tower Tech, founded in 2003 and acquired by us in February 2006, manufactures utility-scale wind towers for wind energy development. Today, Tower Tech is a leading manufacturer of wind towers and specializes in delivering the larger and heavier “next generation” wind towers to our customers. Tower Tech has facilities in Manitowoc, Wisconsin and Abilene, Texas and a third wind tower manufacturing facility currently under construction in Brandon, South Dakota.

 

·                  RBA, founded in 1985 and acquired by us in October 2007, specializes in heavy steel fabrication and performs specialty welding services. RBA refurbishes, assembles and welds heavy equipment for the crane manufacturing, construction and mining industries. RBA has facilities in Manitowoc, Wisconsin and Clintonville, Wisconsin.

 

Services

 

The Services segment was established upon our acquisition of Energy Maintenance Service, LLC (“EMS”) in January 2008 and expanded with our acquisition of Badger Transport, Inc. (“Badger”) in June 2008. This segment specializes in construction, operations and maintenance and component repair services for the wind energy industry as well as specialized heavy haul trucking services to installation sites. Services provided include construction and technical support in the erection of wind turbine generators, scheduled and unscheduled maintenance, fiberglass blade repair, retrofit solutions, technical training, and the transportation of oversize/overweight equipment and machinery. The Services segment has service hub locations in South Dakota, Texas and Wisconsin and satellite field service centers in California, Colorado and Illinois.

 

The following is a summary of the two subsidiaries that comprise our Services segment:

 

6

Table of Contents

 

·                  EMS, founded in 1998 and acquired by us in January 2008, provides construction, operations and maintenance, and component repair services for the wind energy industry. EMS specializes in wind turbine repair offerings, including major component refurbishing, wind turbine maintenance, construction support and engineering and advisory services. The company’s customers include turbine and component manufacturers, wind farm owners and developers. EMS’s main office is in Gary, South Dakota and it has major repair hubs in Howard, South Dakota and Abilene, Texas as well as satellite field service centers in California, Colorado and Illinois.

 

·                  Badger, founded in 1982 and acquired by us in June 2008, is a provider of specialty transportation services for oversize/overweight equipment and machinery, primarily to the wind energy industry. The company specializes in the transport of tower sections, blades, nacelles and other oversized equipment for large industrial applications. Badger has been in business for over 25 years, with 15 years in specialized heavy haul and more than 11 years serving the wind energy industry. Badger operates from its headquarters in Clintonville, Wisconsin.

 

We have a limited history of operations and have incurred operating losses since inception. We anticipate that the Company’s current cash resources and cash to be generated from operations will be adequate to meet the Company’s liquidity needs for at least the next twelve months. The Company has amended several of its primary debt agreements during 2009, which have resulted in reducing debt obligations coming due during the current year and obtained waivers for financial covenant violations.  While we expect that we will be in compliance with the amended and restated covenants contained in the loan agreements, there can be no certainty that we will be in compliance with such covenants for any future periods or that we will be able to attain a waiver from our lenders in the event of a violation of one or more such covenants.  As a result, among other things, our debt holders could declare all outstanding principal and interest to be due and payable.  In addition, if sales and subsequent collections from several large customers, as well as revenues generated from new customer orders, are not materially consistent with management’s plans, we may encounter cash flow and liquidity issues. Additional funding may not be available when needed or on terms acceptable to us and we may not be able to obtain financing under our current primary debt agreements. If we are unable to obtain additional capital or if our current sources of financing are reduced or unavailable, we will likely be required to delay, reduce the scope of or eliminate our plans for expansion and growth and this could affect our overall operations. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, will likely require covenants that restrict us and certain of such covenants may materially restrict us.

 

NOTE 2 — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The December 31, 2008 condensed consolidated balance sheets were derived from audited financial statements, but do 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-K for the year ended December 31, 2008.

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The results of operations of all acquired businesses have been consolidated for all periods subsequent to the date of acquisition. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

NOTE 3— INVENTORIES

 

Inventories are stated at the lower of cost or market value and primarily consist of raw material, work-in-process, and finished goods. Work-in-process consists of labor and overhead, processing costs and materials purchased for specific customer orders. Finished goods consist of components manufactured by the Company that will be used to produce final customer products.

 

The components of inventories as of June 30, 2009 and December 31, 2008 are summarized as follows:

 

		June 30,			December 31,
		2009			2008
Raw materials		$	7,110		$	16,429
Restricted material (1)		9,936			9,936
Work-in-process		11,391			16,226
Finished goods		8,952			401
		37,389			42,992
Less: Reserve for excess and obsolete inventory		(2,115		)	(1,097		)
Net inventories		$	35,274		$	41,895

 

(1) In December 2008, Tower Tech entered into an agreement pursuant to which it agreed to convey to a customer ownership of certain raw materials (the “Bailment Materials”) that Tower Tech had acquired for use in constructing wind turbine towers for such customer, in exchange for the release of a down payment of $9,936 paid by the customer pursuant to the terms of a purchase order. In connection with the transaction, the customer caused the release/cancellation of a letter of credit securing the down-payment (the “L/C”) in order for the cash being held by the L/C issuer as security for the L/C to be released to Tower Tech. The customer also granted Tower Tech a security interest in a portion of the Bailment Materials in the event the purchase order is not fully performed by the customer for any reason other than the breach or default of Tower Tech. Tower Tech issued a new performance letter of credit in the amount of $500 as a guarantee of complete performance by Tower Tech of its obligations under the purchase order. The Bailment Materials continue to be held by Tower Tech as a bailment for the sole and exclusive benefit and use of the

 

7

Table of Contents

 

customer, and are intended to be used by Tower Tech for construction of the wind turbine towers for such customer under the purchase order. As a result of this transaction, $9,436 was released from restricted cash and made available for other operating purposes.

 

NOTE 4 — BUSINESS ACQUISITIONS

 

Energy Maintenance Service, LLC

 

On January 16, 2008, the Company acquired all of the outstanding membership interests in EMS, a South Dakota-based company engaged in construction support, engineering and maintenance services for the wind energy industry. The aggregate purchase price was $32,250, excluding $536 of transaction-related costs. The purchase price consisted of $18,429 of cash and 1,629,834 unregistered shares of the Company’s common stock at a price per share of $8.48. The Company entered into a registration rights agreement with the former owners of EMS that provides the former owners with demand and piggyback registration rights. The cash portion of the purchase price was financed by a private placement of the Company’s common stock.

 

Badger Transport, Inc.

 

On June 4, 2008, the Company acquired all of the outstanding shares of Badger, a Wisconsin-based provider of transportation services for oversized/overweight equipment and machinery, primarily to the wind energy industry, for an aggregate purchase price of $11,811, excluding $184 of transaction-related costs. The purchase price consisted of $5,811 of cash and 581,959 unregistered shares of the Company’s 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 cash portion of the purchase price was financed with cash on hand.

 

Pro Forma Financial Information

 

The following table represents the consolidated financial information for the Company on a proforma basis, assuming the acquisitions of EMS and Badger had each occurred as of January 1, 2008. The historical financial information for EMS and Badger has been adjusted to give effect to proforma items that are directly attributable to the acquisitions and expected to have a continuing impact on the consolidated results. These items include adjustments to depreciation expense related to the fair value of machinery and equipment acquired and amortization expense related to intangible assets assigned as a result of these acquisitions.

 

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 transactions occurred on the dates indicated or that may be achieved in the future.

 

		Three Months Ended June 30,												Six Months Ended June 30,
		2009			2008									2009			2008
		As reported			As reported			Pro-forma adjustments (Unaudited)			Pro-forma (Unaudited)			As reported			As reported			Pro-forma adjustments (Unaudited)			Pro-forma (Unaudited)
Revenues		$	52,313		$	40,830		$	2,170	(1)	$	43,000		$	105,375		$	75,994		$	3,539	(3)	$	79,533
Net loss		(5,426		)	(1,973		)	(803		)(2)	(2,776		)	(12,576		)	(5,416		)	(1,022		)(4)	(6,438		)
Loss per share
Basic and diluted		$	(0.06	)	$	(0.02	)	$	(0.01	)	$	(0.03	)	$	(0.13	)	$	(0.07	)	$	(0.01	)	$	(0.08	)

 

(1)                  Represents revenue of Badger for the period of April 1, 2008 through June 3, 2008.

(2)                  Represents net loss of Badger for the period of April 1, 2008 through June 3, 2008. Adjustments to net loss include amortization of assigned intangible assets.

(3)                  Represents revenue of EMS for the period of January 1, 2008 through January 15, 2008 and revenue of Badger for the period of January 1, 2008 through June 3, 2008.

(4)                  Represents net loss of EMS for the period of January 1, 2008 through January 15, 2008 and net loss of Badger for the period of January 1, 2008 through June 3, 2008. Adjustments to net loss include depreciation expense adjustments related to the fair value of machinery and equipment acquired and amortization of assigned intangible assets.

 

8

Table of Contents

 

NOTE 5 — GOODWILL AND INTANGIBLE ASSETS

 

Changes in the carrying value of goodwill as of and during the six months ended June 30, 2009 were as follows:

 

		Products segment			Services segment			Total
Goodwill balance as of December 31, 2008		$	21,239		$	9,715		$	30,954
Purchase accounting adjustments		3,030			—			3,030
Goodwill balance as of June 30, 2009		$	24,269		$	9,715		$	33,984

 

In May 2009, the Company recorded purchase accounting adjustments of $3,030 in connection with an escrow settlement agreement with the former owners of Brad Foote. These adjustments related to the final settlement of tax obligations as part of the purchase price of the Company’s acquisition of Brad Foote.

 

Intangible assets represent the fair value assigned to definite-lived assets such as trade names, customer relationships and non-compete agreements as part of acquisitions completed by the Company. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 3 to 20 years. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company tests intangible assets for impairment only when events or circumstances indicate that the carrying value of these assets may not be recovered. During the three and six months ended June 30, 2009 and 2008, the Company did not record an impairment charge related to its intangible assets.

 

A continued economic slowdown may result in impairment to our goodwill and intangible assets and could result in changes to the Company’s expectations with respect to future financial results and cash flows. These changes could indicate an unfavorable change to management’s estimates of the fair value of the Company’s reportable segments and could result in a review of our goodwill and intangible assets, which could indicate potential impairment to the carrying value of the Company’s assets.

 

As of June 30, 2009 and December 31, 2008, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

		June 30, 2009									December 31, 2008
								Net									Net
					Accumulated			Book						Accumulated			Book
		Cost			Amortization			Value			Cost			Amortization			Value
Intangible assets:
Customer relationships		$	106,638		$	(17,246	)	$	89,392		$	106,638		$	(11,939	)	$	94,699
Trade names		10,279			(842		)	9,437			10,279			(585		)	9,694
Non-compete agreements		1,490			(538		)	952			1,490			(290		)	1,200
Intangible assets		$	118,407		$	(18,626	)	$	99,781		$	118,407		$	(12,814	)	$	105,593

 

Amortization expense on customer relationships, trade names and non-compete agreements, which are being amortized ratably over the estimated life of the related intangible assets, was $2,906 and $5,812 for the three and six months ended June 30, 2009, respectively, compared to $2,738 and $5,317 for the three and six months ended June 30, 2008, respectively.

 

9

Table of Contents

 

NOTE 6 — ACCRUED LIABILITIES

 

Accrued liabilities as of June 30, 2009 and December 31, 2008 consisted of the following:

 

		June 30,			December 31,
		2009			2008
Accrued operating expenditures		$	445		$	1,110
Accrued payroll and benefits		3,061			3,631
Accrued capital expenditures		502			2,204
Accrued warranty		1,265			890
Accrued professional fees		1,378			514
Accrued other		1,457			2,037
Total accrued liabilities		$	8,108		$	10,386

 

NOTE 7 — RELATED PARTY TRANSACTIONS

 

On May 26, 2009, the Company entered into a settlement agreement (the “Settlement Agreement”) with the former owners of Brad Foote (the “Selling Shareholders”), including J. Cameron Drecoll, the Company’s current Chief Executive Officer, related to the post-closing escrow established in connection with the Company’s acquisition of Brad Foote. Under the terms of the Settlement Agreement, the Company received the entire cash escrow balance of $5,000 plus accrued interest income of $82, which was recorded as other income. In exchange, the Company agreed to cause the release to the Selling Shareholders of 2,500,000 shares of the Company’s common stock held under the escrow agreement in proportion to their ownership interest in Brad Foote prior to its acquisition by the Company. In addition, we agreed to make a cash payment of $30 to one Selling Shareholder and issued promissory notes to the three Selling Shareholders in the aggregate principal amount of $3,000 (each a “Selling Shareholder Note”, and collectively the “Selling Shareholder Notes”) in respect of certain tax reimbursement obligations arising in connection with our acquisition of Brad Foote, and which was recorded as an increase to the purchase price in goodwill as they related to tax settlements calculated in accordance with the purchase agreement. The Company also paid to Mr. Drecoll certain tax refunds in the aggregate amount of approximately $2,212 related to our acquisition of Brad Foote and tax payments in respect of the period prior to the acquisition to which we believe the Selling Shareholders may be entitled (or to which we may be entitled on their behalf). The Selling Shareholder Notes mature on May 28, 2012 and bear interest at a rate of 7% per annum, with interest payments due quarterly. The Selling Shareholder Note issued to Mr. Drecoll in the principal amount of $2,320 and pursuant to the terms of the Settlement Agreement is deemed by the Company to be a related party transaction. As of June 30, 2009, principal of $3,000 and accrued interest of $22 was outstanding under the Selling Shareholder Notes. The Company has accounted for the Selling Shareholder Notes as long-term debt in our condensed consolidated balance sheets as of June 30, 2009.

 

NOTE 8 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of June 30, 2009 and December 31, 2008 consisted of the following:

 

		June 30,			December 31,
		2009			2008
Lines of credit		$	7,090		$	10,831
Related party note		2,320			—
Term loans and notes payable		31,407			28,012
		40,817			38,843
Less - Current portion		(21,336		)	(13,051		)
Long-term debt, net of current maturities		$	19,481		$	25,792

 

Credit Facilities

 

Brad Foote

 

In connection with our acquisition of Brad Foote in October 2007, we assumed outstanding debt and available lines of credit totaling approximately $25,500 under various debt facilities (the “Debt Facilities”) with Bank of America, as successor to LaSalle

 

10

Table of Contents

 

Bank (“BOA”). The Debt Facilities are governed by a Loan and Security Agreement dated as of January 17, 1997 (as previously amended and/or restated, the “Loan Agreement”).

 

Following a series of amendments to the Loan Agreement, as of June 30, 2009: (i) the interest rate under each of the Debt Facilities was the greater of (A) the London Interbank Offered Rate (“LIBOR”) plus 5% and (B) 6%; (ii) the maturity dates for the Debt Facilities range from January 15, 2011 to December 31, 2011; (iii) the total amount outstanding under the Debt Facilities is approximately $19,631; and (iv) there were required principal payments of approximately $7,364 due over the next twelve (12) months, with additional principal payments due thereafter.

 

Brad Foote’s obligations under the Loan Agreement are secured by the following: (i) all of the assets of Brad Foote; (ii) all of the shares of stock of Brad Foote and all of Brad Foote’s indebtedness to us; (iii) an unconditional guaranty from us and from the BF Subsidiaries (hereinafter defined); and (iv) mortgages from the BF Subsidiaries and Brad Foote to BOA (“BF Subsidiaries” means the following wholly-owned subsidiaries of Brad Foote that hold record title to certain facilities used in Brad Foote’s operations: 1309 South Cicero Avenue, LLC and 5100 Neville Road, LLC).

 

Each of the Debt Facilities becomes immediately due and payable upon breach of any covenants or representations made by Brad Foote in the Loan Agreement and upon other customary events of default.

 

The Loan Agreement requires Brad Foote to comply with standard covenants, including certain financial covenants, to provide monthly financial reporting and to submit the Company’s annual audited financial statements to BOA at the close of each fiscal year. Other covenants contained in the Loan Agreement include restrictions on Brad Foote’s ability to make distributions or dividends, incur indebtedness or make subordinated debt payments, as well as limitations on Brad Foote’s ability to make capital expenditures, any of which could ultimately affect our ability to undertake additional debt or equity financing. Certain of these covenants have been amended and/or restated from time to time pursuant to various amendments to the Loan Agreement. In addition, BOA has waived violations of certain covenants in certain instances.

 

On May 8, 2009, Brad Foote and BOA entered into a further amendment to the Loan Agreement. Under this amendment, BOA waived (solely with respect to certain specified time periods) Brad Foote’s violation of certain financial covenants with respect to (i) senior debt to EBITDA ratio, (ii) cash flow coverage ratio, and (iii) minimum EBITDA ratio. BOA also waived certain covenants relating to the delivery of Brad Foote’s financial information to BOA.

 

In addition, the May 8, 2009 amendment provided that certain of Brad Foote’s financial covenants be amended and restated, including requirements with respect to maintenance of ratios of (i) senior debt to EBITDA, (ii) cash flow coverage, and (iii) minimum EBITDA. In connection with this amendment, Brad Foote agreed to pay BOA a $25 amendment and waiver fee, as well as all reasonable fees and expenses of BOA incurred in connection with the amendment.

 

On August 7, 2009, Brad Foote, the BF Subsidiaries and BOA entered into a Third Omnibus Amendment Agreement (the “Third Omnibus Amendment”), further amending the Loan Agreement and the documents evidencing the Debt Facilities. The Third Omnibus Amendment also provided that (i) BOA waive Brad Foote’s violation of the financial covenants set forth in  the Loan Agreement (the senior debt to EBITDA and minimum EBITDA covenants) for the second quarter of 2009 and the calendar month of June 2009, respectively, (ii) amending and restating the requirements with respect to maintenance of ratios for the remainder of 2009 relating to, senior debt to EBITDA, cash flow coverage, a minimum monthly revenue requirements, and starting in 2010 a minimum monthly EBITDA requirements, (iii) BOA waive certain breaches or events of default under the Loan Agreement relating to Brad Foote’s inventory record keeping, and reporting liens filed against certain of Brad Foote’s property (which have subsequently been released by the lien holders), and the delivery of certain Brad Foote financial information, (iv) certain provisions pertaining to insurance ownership of collateral and tax returns be amended to clarify the language therein, (v) Brad Foote pay BOA a $35 amendment and waiver fee, as well as all accrued and unpaid fees and expenses under the Loan Agreement all reasonable fees and expenses of BOA incurred in connection with the Third Omnibus Amendment, (vi) the interest rate payable under each of the Debt Facilities shall be equal to the greater of (A) LIBOR plus five percent (5%) and (B) seven percent (7%), and (vii) Brad Foote may borrow funds from Broadwind on a revolving basis, up to a maximum principal amount of $3,000, which shall be subordinated to indebtedness owed by Brad Foote to BOA and which shall not be subject to certain restrictions imposed on reporting and payment of otherwise previously existing intercompany debt between Brad Foote and Broadwind.   Additionally, the Company and the BF Subsidiaries entered into a Reaffirmation dated August 7, 2009, reaffirming that each of the Loan Documents (as defined in the Loan Agreement) to which they are a party remains in full force and effect and is ratified and confirmed.  We expect to be in compliance with the amended and restated covenants contained in the loan agreement, and we believe the chance of default is remote for the next twelve months.

 

Tower Tech

 

In October 2007, Tower Tech obtained a secured line of credit (the “ICB Line”) from Investors Community Bank (“ICB”) in the amount of $2,500, which was increased to $5,500 on March 21, 2008. The ICB Line is secured by substantially all of the assets of Tower Tech and RBA. Draws on the ICB Line bear interest at a variable rate equal to the greater of (A) 4.25% or (B) 1.75% above LIBOR. Pursuant to a Commercial Debt Modification Agreement dated as of October 22, 2008, Tower Tech and ICB extended the maturity date of the ICB Line to April 22, 2009. In connection with the extension, Broadwind provided re-executed guaranties to ICB

 

11

Table of Contents

 

for all debt owed by each of Tower Tech and RBA to ICB. In addition, Tower Tech re-executed its guaranty for debts owed by RBA to ICB, and RBA re-executed its guaranty for debts owed to ICB by Tower Tech. We anticipated that each of Tower Tech and RBA would be in violation of certain financial covenants relating to net worth and debt to net worth ratio as of December 31, 2008. Tower Tech and RBA each received waivers on December 29, 2008 from ICB for the anticipated violations. On March 13, 2009, ICB agreed to extend the maturity date of the ICB Line to March 13, 2010 (the “ICB Line Extension Agreement”). Pursuant to the ICB Line Extension Agreement, Tower Tech agreed to establish new financial covenants with respect to minimum debt service coverage ratio and minimum tangible net worth. Tower Tech also agreed to maintain its primary deposit accounts with ICB and that no additional loans or leases shall be entered into by Tower Tech without the prior approval of ICB. As of June 30, 2009, Tower Tech had $110 available for additional borrowing under the ICB Line and was in compliance with all of its financial covenants under the ICB Line.

 

On April 28, 2009 (the “Construction Loan Closing Date”), Tower Tech entered into a Construction Loan Agreement with Great Western Bank (“Great Western”), pursuant to which Great Western will provide up to $10,000 in financing (the “Construction Loan”) to fund construction of Tower Tech’s wind tower manufacturing facility in Brandon, South Dakota (the “Facility”). Also on the Construction Loan Closing Date, Great Western agreed to advance $3,703, representing amounts previously paid by Tower Tech relating to construction of the Facility. Tower Tech anticipates making additional draws as needed until completion of the Facility.

 

The Construction Loan bears interest at a rate of 7.5% per annum on all advances. Tower Tech is required to make monthly payments of accrued and unpaid interest beginning June 5, 2009 and on the fifth day of each month thereafter, and must pay the outstanding principal and all accrued and unpaid interest on the maturity date, which is January 5, 2010, unless the Construction Loan is converted as described below. Tower Tech was also required to pay a $100 origination fee on the Construction Loan Closing Date.

 

The Construction Loan is secured by a first mortgage on the Facility and all fixtures, accounts and proceeds relating thereto, pursuant to a Mortgage and a Commercial Security Agreement, each between Tower Tech and Great Western and entered into on the Construction Loan Closing Date. In addition, pursuant to an Assignment of Deposit Account entered into on the Construction Loan Closing Date, Tower Tech granted Great Western a security interest in a $2,000 deposit account. The Company also executed a Commercial Guaranty and entered into a Subordination Agreement in connection with the Construction Loan, under which it has agreed to guarantee Tower Tech’s performance and to subordinate all intercompany debt with Tower Tech to the Construction Loan.

 

The Construction Loan may be accelerated under certain events of default (subject to applicable notice and cure provisions), including but not limited to: (i) failure to make any payment on the Construction Loan when due; (ii) failure to comply with or perform any covenants or conditions under the Construction Loan; (iii) failure to construct the Facility in accordance with the plans and specifications approved by Great Western or in accordance with the construction contracts relating to the Facility; and (iv) cessation of construction of the Facility. The Construction Loan contains representations, warranties and covenants that are customary to a construction financing arrangement.

 

Pursuant to a Letter Agreement dated as of the Construction Loan Closing Date among Great Western, Tower Tech and Broadwind (the “Letter Agreement”), Tower Tech may, any time prior to January 1, 2010, convert the Construction Loan into a term loan for up to $6,500, with an interest rate not to exceed 8.5% per annum (the “Great Western Term Loan”). Tower Tech would be required to pay a 1.0% origination fee upon the conversion, and would be required to make monthly payments of principal and accrued interest over the life of the Great Western Term Loan, which would be not less than seventy-eight months. Following the conversion to the Great Western Term Loan, Great Western would retain its security position in the collateral given as security for the Construction Loan, except for the deposit account assigned pursuant to the Assignment of Deposit Account, which would be released upon conversion. All other customary terms and conditions would be mutually agreed upon by Great Western and Tower Tech at the time of conversion. As of June 30, 2009, Tower Tech had received proceeds of approximately $3,808 under the Construction Loan.

 

Badger

 

On March 13, 2009, Badger obtained a term loan (the ‘‘FNB Term Loan’’) from First National Bank (“FNB”) in the amount of approximately $1,538. A portion of the proceeds from the FNB Term Loan was used to pay off Badger’s existing term loan and revolving line of credit with FNB, with the remainder available for working capital. The FNB Term Loan is secured by the inventory, accounts receivable and certain equipment of Badger. The FNB Term Loan bears interest at a rate of 6.75% per annum, matures on March 13, 2013, and is guaranteed by the Company.

 

RBA

 

On April 7, 2008, RBA executed four (4) promissory notes in favor of ICB (the “ICB Notes”), in the aggregate principal amount of approximately $3,781, as follows: (i) a term note in the maximum principal amount of approximately $421, bearing interest at a per annum rate of 6.85%, with a maturity date of October 5, 2012; (ii) a term note in the maximum principal amount of $700, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; (iii) a term note in the maximum principal

 

12

Table of Contents

 

amount of $928, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; and (iv) a line of credit note in the maximum principal amount of $1,732, bearing interest at a per annum rate of 4.48% until May 1, 2008 and thereafter at LIBOR, with a maturity date of April 5, 2009 (the “Line of Credit Note”). The ICB Notes provide for multiple advances, and are secured by substantially all of the assets of RBA. As of June 30, 2009, the total amount of indebtedness outstanding under the ICB Notes was $3,446.

 

On March 13, 2009, RBA and ICB extended the maturity date of the Line of Credit Note to March 13, 2010 (the “ICB Note Extension Agreement”). Pursuant to the ICB Note Extension Agreement, RBA established new financial covenants with respect to minimum debt service coverage ratio and minimum tangible net worth (these covenants were subsequently modified by the parties on April 22, 2009, effective as of March 31, 2009). RBA also agreed to maintain its primary deposit accounts with ICB and that no additional loans or leases shall be entered into by RBA without the prior approval of ICB. As of June 30, 2009, RBA had $32 available for additional borrowing under the Line of Credit Note and was in compliance with all of its financial covenants under the Line of Credit Note.

 

Related Party Note

 

As described in Note 7 “Related Party Transactions,” in May 2009 the Company entered into a settlement agreement with the Selling Shareholders, including Mr. Drecoll, the Company’s current Chief Executive Officer, related to the post-closing escrow established in connection with the Company’s acquisition of Brad Foote. Under the terms of the settlement agreement, among other terms, the Company issued three Selling Shareholder Notes in the aggregate principal amount of $3,000. The Selling Shareholder Notes mature on May 28, 2012 and bear interest at a rate of 7% per annum, with interest payments due quarterly. The Selling Shareholder Note issued to Mr. Drecoll in the principal amount of $2,320 is deemed by the Company to be a related party transaction. As of June 30, 2009, principal of $3,000 and accrued interest of $22 were outstanding under the Selling Shareholder Notes. The Company has accounted for the Selling Shareholder Notes as long-term debt in our condensed consolidated balance sheets as of June 30, 2009.

 

NOTE 9 — INTEREST RATE SWAP AGREEMENTS

 

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 amends and expands the previous disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), to provide more qualitative and quantitative information on how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company adopted the provisions of SFAS 161 on January 1, 2009 on a prospective basis. The adoption had no impact on our condensed consolidated financial statements or results of operations for the three and six months ended June 30, 2009 except for the additional disclosure requirements as required by the pronouncement.

 

As part of our acquisition of Brad Foote in October 2007, the Company assumed two interest rate swap agreements. These swap agreements are intended to minimize the impact of interest rate fluctuations on certain debt instruments. 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. In accordance with the provisions of SFAS 133, all derivatives are measured at fair value and recognized as either assets or liabilities on 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 the fair value of the derivative must be recognized currently in earnings. The Company’s interest rate swaps do not qualify for hedge accounting under SFAS 133, and therefore, the Company is required to recognize the swap agreements at their fair market value and record the fluctuations in the fair value of the swap agreements in current earnings. During the three and six months ended June 30, 2009, the Company reported an unrealized gain related to these fluctuations of approximately $113 and $198, respectively, compared to an unrealized gain of approximately $241 and $11, respectively, for the three and six months ended June 30, 2008. The fair market value of the interest rate swaps of $384 and $582 is recorded as a long-term liability in our condensed consolidated balance sheets as of June 30, 2009 and December 31, 2008, respectively.

 

13

Table of Contents

 

The following table presents the fair values of derivative instruments included on our condensed consolidated balance sheets as of June 30, 2009:

 

		Liability Derivatives
		Balance Sheet Location		Fair Value
Derivatives not designated as hedging instruments under SFAS 133
Interest rate contracts		Long-term liabilities (1)		$	384
Total derivatives not designated as hedging instruments under SFAS 133				$	384

 

(1)          The Company’s interest rate contracts are classified on a separate line item titled “Interest rate swap agreements” in the long-term liabilities section on our condensed consolidated balance sheets.

 

The following table presents the pretax amounts of interest rate contracts affecting our condensed consolidated statements of operations for the three and six months ended June 30, 2009:

 

Derivatives Not
Designated as Hedging		Location of Gain or (Loss)		Amount of Gain or (Loss)
Instruments under		Recognized in Income on		Recognized in Income on
SFAS 133		Derivative		Derivative
				Three Months Ended			Six Months Ended
				June 30, 2009			June 30, 2009
Interest rate contracts		Other income (expense)		$	113		$	198
Total				$	113		$	198

 

NOTE 10 — FAIR VALUE MEASUREMENTS

 

The Company has implemented SFAS No. 157, Fair Value Measurements (“SFAS 157”), related to its financial assets and liabilities, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. SFAS 157 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The SFAS 157 fair value hierarchy is defined as follows:

 

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

The following table represents the fair values of the Company’s financial liabilities as of June 30, 2009:

 

		Level I			Level II			Level III			Total
Liabilities:
Interest rate swaps		$	—		$	384		$	—		$	384
Total liabilities at fair value		$	—		$	384		$	—		$	384

 

14

Table of Contents

 

Fair value of financial instruments

 

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their respective fair values due to the relatively short-term nature of these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of the Company’s long-term debt is approximately equal to its fair value.

 

NOTE 11 — 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 tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2009, the Company had accrued interest or penalties related to uncertain tax positions totaling $53.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of June 30, 2009, open tax years in 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 June 30, 2009. 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						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
Loss before provision (benefit) for income taxes		$	(5,263	)	$	(1,961	)	$	(12,849	)	$	(5,216	)
Provision (benefit) for income taxes		163			12			(273		)	200
Net loss		$	(5,426	)	$	(1,973	)	$	(12,576	)	$	(5,416	)

 

Effective tax rates differ from federal statutory income tax rates primarily due to changes in valuation allowance, permanent differences and provisions for state and local income taxes. As of June 30, 2009, the Company had a net deferred tax liability of $1,277 primarily related to temporary differences in indefinite-lived assets. These indefinite-lived assets consist of tax deductible goodwill from business acquisitions completed during 2007 and 2008. During the three and six months ended June 30, 2009, the Company recorded a provision and benefit for income taxes of $163 and $273, respectively, compared to a provision for income taxes for the three and six months ended June 30, 2008 of $12 and $200, respectively. The decrease in income taxes was primarily attributable to higher net losses during the six months ended June 30, 2009, a full income tax valuation allowance for federal income tax reporting purposes as a result of the Company’s net operating loss carryforwards and a decrease in state income taxes and deferred state income tax liabilities resulting from a favorable change in the state of Wisconsin’s method of calculating state income taxes on a prospective basis.

 

NOTE 12 — SHARE-BASED COMPENSATION

 

The Company grants incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “EIP”), which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June 2008. The EIP was subsequently amended in August 2008 by the Company’s Board of Directors to include certain non-material amendments to clarify the terms and conditions of restricted stock awards and to provide that the administrator of the EIP has the authority to authorize future amendments to the EIP. The EIP was further amended in June 2009 to increase the number of shares of common stock authorized for issuance under the EIP. As amended, the EIP reserves 5,500,000 shares of common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large degree. As of June 30, 2009, the Company had reserved 1,654,193 shares for the exercise of stock options outstanding, 232,052 shares for restricted stock unit awards outstanding and 3,474,888 additional shares for future stock awards under the EIP. As of June 30, 2009, 138,867 shares of common stock reserved for stock options and restricted stock unit awards under the EIP have been issued in the form of common stock.

 

Stock Options. The exercise price of stock options granted under the EIP is equal to the closing price of our common stock on the date of grant. Stock options generally become exercisable on the anniversary of the grant date, with vesting terms that may

 

15

Table of Contents

 

range from one to five years from the date of grant. Additionally, stock options expire ten years after the date of grant. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to unvested stock option awards.

 

Stock option activity during the six months ended June 30, 2009 was as follows:

 

		Options		Weighted Average Exercise Price
Outstanding as of December 31, 2008		2,030,000		$	11.60
Granted		169,193		7.23
Exercised		(55,000	)	8.10
Forfeited		(474,667	)	10.43
Cancelled		(15,333	)	9.32
Outstanding as of June 30, 2009		1,654,193		$	11.63
Exercisable as of June 30, 2009		208,100		$	10.40

 

Restricted Stock. The granting of restricted stock units is provided for under the EIP. Restricted stock units generally vest on the anniversary date of the grant date; vesting terms range from immediate vesting to five years from the date of grant. The fair value of each unit granted is equal to the closing price of our common stock on the date of grant and is expensed ratably over the vesting term of the restricted stock award. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to any unvested portion of the restricted stock units.

 

Activity related to restricted stock unit awards during the six months ended June 30, 2009 was as follows:

 

		Number of Units		Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of December 31, 2008		127,500		$	10.71
Granted		180,919		5.84
Vested		(76,367	)	3.31
Forfeited		—		—
Outstanding as of June 30, 2009		232,052		$	9.16

 

In accordance with the pronouncement provisions of SFAS No. 123R (revised), Share-Based Payment, the fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Our determination of the fair value of each stock option is affected by our stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected life of the awards and projected stock option exercise behavior. The weighted average fair value per share of stock option awards granted during the six months ended June 30, 2009 and 2008, and assumptions used to value stock options, are as follows:

 

		Six Months Ended June 30,
		2009			2008
Dividend yield		—			—
Risk-free interest rate		2.6		%	3.1		%
Weighted average volatility		85.0		%	60.0		%
Expected life (in years)		6.5			6.5
Weighted average grant date fair value per share of options granted		$	5.31		$	5.61

 

Dividend yield is zero as the Company currently does not pay a dividend.

 

Risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life of the award.

 

Volatility is estimated based on comparable volatility averages for the energy related sector at the time of grant.

 

16

Table of Contents

 

The expected life of each stock option award granted during the six months ended June 30, 2009 was derived using the “simplified method” for estimating the expected term of a “vanilla-option” in accordance with Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment, as amended by SAB No. 110, Share-Based Payment. The expected life of each stock option award granted during the six months ended June 30, 2008 was estimated based on the service period of the stock option award.

 

The fair value of each unit of restricted stock is equal to the fair market value of our common stock as of the date of grant.

 

The following table summarizes share-based compensation expense included in our condensed consolidated statements of operations for the six months ended June 30, 2009 and 2008:

 

		Six Months Ended June 30,
		2009			2008
Share-based compensation expense:
Selling, general and administrative		$	1,365		$	903
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net loss		$	1,365		$	903
Reduction in earnings per share:
Basic and diluted earnings per share (2)		$	0.01		$	0.01

 

(1)		Income tax benefit is not illustrated because the Company is currently operating at a loss and an actual income tax benefit may not be realized for the six months ended June 30, 2009 and 2008, respectively. The result of the loss situation creates a timing difference, resulting in a deferred tax asset, which is reserved for in the valuation allowance.
(2)		Diluted earnings per share for the six months ended June 30, 2009 and 2008 does not include common stock equivalents due to its anti-dilutive nature as a result of the Company’s net losses for these respective periods. Accordingly, basic earnings per share and diluted earnings per share are identical for all periods presented.

 

As of June 30, 2009, we estimate that pre-tax compensation expense for all unvested share-based awards, including both stock options and restricted stock units, in the amount of approximately $10,320 will be recognized through the year 2014. We expect that the exercising of stock options and future vesting of restricted stock units will be satisfied by issuing new shares of our common stock.

 

NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2008, FASB issued FASB Staff Position (“FSP”) 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), which amends the list of factors an entity should consider in developing renewal or extension assumptions in determining the useful life of recognized intangible assets under FAS No. 142, Goodwill and Other Intangible Assets. The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP FAS 142-3, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. FSP FAS 142-3 will require certain additional disclosures beginning October 1, 2009 and prospective application to useful life estimates prospectively for intangible assets acquired after September 30, 2009. The Company is in the process of evaluating the impact that the adoption of FSP FAS 142-3 may have on its financial statements and related disclosures.

 

In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than Temporary Impairments. FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The adoption of FSP FAS 115-2 and FAS 124-2 had no material impact on the Company’s financial position, results of operations or cash flows.

 

In April 2009, FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are not Orderly. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

17

Table of Contents

 

In May 2009, FASB issued SFAS No 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s financial position or results of operations.

 

In June 2009, FASB issued SFAS No. 166 (“SFAS 166”), Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact SFAS 166 will have on the consolidated results of the Company.

 

In June 2009, FASB issued SFAS No. 167 (“SFAS 167”), Amendments to FASB Interpretation No. 46(R). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company is currently evaluating the impact SFAS 167 will have on the consolidated results of the Company.

 

In June 2009, FASB issued SFAS No 168, The FASB Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”), a replacement of SFAS No 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 168 will become the source of authoritative U.S. accounting and reporting standards recognized by the FASB for use in preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP effective July 1, 2009. Rules and authoritative releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim or annual financial periods ending after September 15, 2009. The adoption of this pronouncement is not anticipated to have a material impact on the Company’s financial position or results of operations.

 

NOTE 14 — SEGMENT REPORTING

 

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 our chief operating decision maker assesses information for decision-making purposes, including the allocation of resources. The revised reporting structure includes two reportable segments: “Products” (formerly “Products and Components”) and “Services” (formerly “Service, Transportation and Maintenance”). Accordingly, all prior period segment information has been reclassified to properly reflect our current reportable segments.

 

The Company’s segments and their product and service offerings are summarized below:

 

Products

 

The Products segment includes the operations of Brad Foote, Tower Tech and RBA. This segment specializes in the manufacture and sale of products such as high precision gears for wind turbines, custom-engineered gearing systems for the mining, energy, and industrial sectors, structural wind towers, internal tower components, and large fabricated and machined components for the construction and mining industries. Production processes include sophisticated form grinding and finishing of gears and gear sets, steel plate processing, semi-automated heavy welding and custom corrosion protection of components. Our primary focus is on the wind energy industry; however, our Products segment also services mining, oil and gas, construction and other industrial energy applications.

 

Services

 

The Services segment was established upon our acquisition of EMS in January 2008 and expanded with our acquisition of Badger in June 2008. This segment specializes in construction, operations and maintenance and component repair services for the wind energy industry as well as specialized heavy haul trucking services to installation sites. Services provided include construction and technical support in the erection of wind turbine generators, scheduled and unscheduled maintenance, fiberglass blade repair, retrofit solutions, technical training, and the transportation of oversize/overweight equipment and machinery. The Services segment has service hub locations in South Dakota, Texas and Wisconsin and satellite field service centers in California, Colorado and Illinois.

 

18

Table of Contents

 

Corporate and Other

 

The Company applies the provisions of Emerging Issues Task Force Issue No. 04-10 (“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 No. 131, Disclosures about Segments of an Enterprise and Related Information (“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 “Corporate and Other” segment for segment reporting. The “Corporate and Other” segment is comprised of adjustments to reconcile segment results to consolidated results, which primarily includes corporate administrative expenses and intercompany eliminations.

 

Below is a summary of segment operations as of June 30, 2009 and December 31, 2008 and for the three and six months ended June 30, 2009 and 2008. Segment information related to the three and six months ended June 30, 2008 has been reclassified to conform to our current segment presentation.

 

		Revenues						Operating Profit (Loss)
		Three Months Ended June 30,						Three Months Ended June 30,
		2009			2008			2009			2008
Segments:
Products segment		$	39,892		$	34,042		$	(5,697	)	$	2,421
Services segment		12,486			6,788			145			(393		)
Corporate and Other (1)		(65		)	—			(4,728		)	(3,670		)
		$	52,313		$	40,830		$	(10,280	)	$	(1,642	)

 

		Revenues						Operating Profit (Loss)
		Six Months Ended June 30,						Six Months Ended June 30,
		2009			2008			2009			2008
Segments:
Products segment		$	83,026		$	64,290		$	(9,526	)	$	2,718
Services segment		22,714			11,704			(783		)	(866		)
Corporate and Other (1)		(365		)	—			(7,108		)	(5,433		)
		$	105,375		$	75,994		$	(17,417	)	$	(3,581	)

 

		Total Assets as of
		June 30,			December 31,
		2009			2008
Segments:
Products segment		$	284,667		$	308,044
Services segment		61,096			65,795
Corporate and Other (2)		6,181			5,909
		$	351,944		$	379,748

 

(1)	“Corporate and Other” includes corporate selling, general and administrative expenses and intercompany eliminations. Corporate selling, general and administrative expenses includes corporate salaries and benefits, share-based compensation, and professional fees.
(2)	“Corporate and Other” includes assets of the corporate headquarters and intercompany eliminations.

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES

 

Customer Disputes

 

During 2008, the Company was involved in a pricing dispute with a customer, which included accumulated unpaid accounts receivable balances totaling approximately $2,249. In the fourth quarter of 2008, the Company and the customer reached a tentative resolution on this matter, which is still being finalized. Based on the discussions that occurred in 2008, the Company wrote-off accounts receivable balances in the amount of $2,249 during the fourth quarter of 2008.

 

19