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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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Amendment No. 3 to |
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Form S-1 |
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PIONEER POWER SOLUTIONS, INC. |
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(Exact Name of Registrant as Specified in its Charter) |
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Delaware |
3612 |
27-1347616 |
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(State or other jurisdiction of |
(Primary Standard Industrial |
(I.R.S. Employer |
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One Parker Plaza |
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400 Kelby Street, 9th Floor |
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Fort Lee, New Jersey 07024 |
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(212) 867-0700 |
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(Address, including zip code, and telephone number, |
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including area code, of principal executive offices) |
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Nathan J. Mazurek |
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Chief Executive Officer |
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Pioneer Power Solutions, Inc. |
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One Parker Plaza |
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400 Kelby Street, 9th Floor |
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Fort Lee, New Jersey 07024 |
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(212) 867-0700 |
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(Address, including zip code, and telephone number, |
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including area code, of agent for service) |
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Copies of all communications, including communications sent to agent for service, should be sent to: |
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Rick A. Werner, Esq. |
Douglas S. Ellenoff, Esq. |
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Haynes and Boone, LLP |
Lawrence A. Rosenbloom, Esq. |
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30 Rockefeller Plaza, 26th Floor |
Ellenoff Grossman & Schole LLP |
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New York, New York 10112 |
150 East 42nd Street, 11th Floor |
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Tel. (212) 659-7300 |
New York, New York 10017 |
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Fax (212) 884-8234 |
Tel. (212) 370-1300 |
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Fax (212) 370-7889 |
Approximate date of proposed sale to public: As soon as practicable on or after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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. (Check one):
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Large accelerated filer o |
Accelerated filer o |
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Non-accelerated filer o |
Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities
to |
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Proposed
Maximum |
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Amount of
Registration |
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Primary Offering: |
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Common Stock, $0.001 par value per share |
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$ |
18,383,400 |
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$ |
2,134.31 |
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Secondary Offering: |
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Common Stock, $0.001 par value per share |
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5,256,000 |
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610.22 |
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(1) |
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
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(2) |
Includes shares of our common stock that the underwriters have the option to purchase to cover over-allotments, if any. |
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(3) |
Filing fees of $2,042.78 and $610.22 were previously paid. The aggregate filing fee is being offset by these previously paid amounts. |
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The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.
The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Pioneer Power Solutions, Inc.
Common Stock
$ per share
Our common stock is quoted on the OTC Bulletin Board under the symbol “PPSI.OB.” The last reported market price of the common stock on the OTC Bulletin Board on June 3, 2011 was $3.00 per share. This does not reflect a one-for-five reverse stock split that is expected to occur the day immediately following the effectiveness of the registration statement of which this prospectus is a part.
We anticipate that the offering price per share of our common stock will be between $8.00 and $10.00. There is presently a limited market for our common stock, and the shares are being offered in anticipation of development of a secondary trading market. Our shares of common stock have been approved for quotation on the Nasdaq Capital Market under the symbol “PPSI,” subject to the completion of this offering.
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Per Share |
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Total |
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Price to the public |
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$ |
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$ |
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Underwriting discount |
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$ |
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$ |
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Proceeds to us, before expenses |
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$ |
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$ |
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Proceeds to the selling stockholders |
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$ |
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$ |
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Subject to
compliance with FINRA Rule 5110(f)(2)(D), we have agreed to reimburse the
underwriters’ accountable expenses for up to a maximum amount of $425,000
(subject to our approval for expenses over $225,000). We have also granted the
underwriters an option to purchase up to 342,600 additional shares of common
stock from us at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers in the offering against payment in New York, New York on or about , 2011.
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Houlihan Lokey |
Sidoti & Company, LLC |
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The date of this prospectus is |
, 2011 |
Table of Contents 1 10 24 26 27 27 29 30 32 Management’s Discussion and Analysis of Financial Condition and
Results of Operations 34 46 56 64 68 70 74 75 81 81 81 F-1 You should rely
only on the information contained in this prospectus. We have not, the selling
stockholders have not, and the underwriters have not, authorized any other
person to provide you with information different from or in addition to that
contained in this prospectus. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where an offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date. Unless otherwise indicated, all
information in this prospectus reflects a one-for-five reverse stock split of
our common stock that is expected to occur the day immediately following the
effectiveness of the registration statement of which this prospectus is a part,
other than share and per share information in our consolidated financial
statements and the related notes included in this prospectus. For investors
outside the United States: We have not, the selling stockholders have not
and the underwriters have not done anything that would permit this offering or
possession or distribution of this prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. You are required
to inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus. Industry and
Market Data In this prospectus, we rely on
and refer to information and statistics regarding our industry. We obtained
this statistical, market and other industry data and forecasts from publicly
available information. While we believe that the statistical data, market data
and other industry data and forecasts are reliable, we have not independently
verified the data. Prospectus Artwork The photograph on the inside back cover of this prospectus is published pursuant
to a license available at creativecommons.org/licenses/by/2.0/deed.en This summary highlights information contained in other parts
of this prospectus. Because it is a summary, it does not contain all of the
information that you should consider in making your investment decision. Before
investing in our common stock, you should read the entire prospectus carefully,
including our consolidated financial statements and the related notes included
in this prospectus and the information set forth under the headings “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” When used herein, unless the context requires otherwise,
references to the “Company,” “Pioneer,” “we,” “our” and “us” for periods prior
to the closing of our share exchange on December 2, 2009 refer to Pioneer
Transformers Ltd., a company incorporated under the Canada Business
Corporations Act that is now our wholly-owned subsidiary, and its subsidiaries.
For periods subsequent to the closing of the share exchange on December 2,
2009, references to the “Company,” “Pioneer,” “we,” “our” and “us” refer to
Pioneer Power Solutions, Inc., a publicly traded company, and its subsidiaries,
including Pioneer Transformers Ltd., Jefferson Electric, Inc., and Pioneer Wind
Energy Systems Inc.
Unless otherwise indicated, all information in this
prospectus reflects a one-for-five reverse stock split of our common stock that
is expected to occur the day immediately following the effectiveness of the registration
statement of which this prospectus is a part, other than share and per share
information in our consolidated financial statements and the related notes
included in this prospectus. The Company Overview We primarily serve
the North American market and our broad customer base includes a number of
recognized national and regional utility and industrial companies. We currently
have five locations in the U.S., Canada and Mexico for manufacturing,
centralized distribution, engineering, sales and administration. In addition,
we utilize a network of 21 independently-operated stocking locations in the
U.S., including two regional distribution centers. On May 13, 2011, we entered
into a definitive agreement to acquire Transformateur Bemag Inc. in a
transaction that will also include its U.S. affiliate, Vermont Transformer,
Inc. These businesses are engaged in the design and manufacture of low and
medium voltage dry-type transformers and custom magnetics, generating
approximately $15 million of revenue annually on a combined basis. We value the
transaction at approximately $9.5 million, consisting of $6.5 million of cash
consideration plus the assumption of debt. The acquisitions will be funded
through new bank credit facilities to be provided by our Canadian bank, which
will replace our existing credit facilities with our Canadian bank and are
expected to close at the start of our third quarter in July 2011. Financial Results and Guidance We expect that our net
revenue will increase to between $74 and $85 million in the year ending
December 31, 2011, and that our non-GAAP net earnings per diluted share will be
between $0.80 and $0.95. Including the additional Electrical Transmission and Distribution Equipment Our electrical transformers
segment designs and manufactures a full line of custom and standard
liquid-filled, encapsulated and ventilated electrical transformers used in the
control and conditioning of electrical current for critical processes. Our
operating companies within this segment, Pioneer Transformers Ltd. and
Jefferson Electric, Inc., specialize in liquid-filled and dry-type
transformers, respectively. Each business offers a wide range of engineered-to-order
and standard equipment, sold either directly to end users, through engineering
and construction firms, or through wholesale distributors. These operating
companies serve customers in a variety of industries including electric
utilities, industrial customers, commercial construction companies and
renewable energy producers. Wind Energy Equipment and Services We are developing our wind
energy business segment to target community and industrial wind customers
seeking wind turbines with generation capacities of one to two megawatts (MW).
We believe this market is underserved by our larger wind industry competitors.
For this market, we intend to provide project integration solutions, including
equipment sales, procurement, after-sales services and financing to customers.
Our wind energy operating company, Pioneer Wind Energy Systems Inc., was
established through acquisitions that we completed in 2010. Its predecessors
have a 10-year history of developing, manufacturing, commissioning and servicing
advanced wind turbine designs, principally the P-1650, which is a 1.65 MW wind
turbine generator. Although Pioneer Wind Energy Systems Inc. has generated
immaterial revenue for us to date, the business previously completed power
projects encompassing five wind turbine units commissioned between 2008 and
2010 in the Northeast U.S., California and for the U.S. military. We intend to
rely on Pioneer Wind Energy Systems Inc.’s portfolio of licensed technologies and expertise in engineering, procurement
and field services to meet the specific challenges of each wind energy project.
In situations where the site characteristics and investment constraints of a
project are not conducive to the deployment of our P-1650 unit, we intend to
acquire and resell comparable units from other manufacturers that meet the
project owner’s requirements. We also intend to stimulate growth in this
segment by offering customers equipment financing arrangements with extended
payment terms and revenue-sharing features. We intend to implement this
strategy on a small number of projects using a portion of the proceeds of this
offering. Key Industry Trends We believe that we are well
positioned to capitalize on projected power transmission and distribution
infrastructure related expenditures in the North American electric grid and on
the projected expansion of North American wind power generation capacity. We
expect to benefit from the following industry trends: Electrical Transmission and Distribution Equipment • Aging and Overburdened North American Power Grid — The
aging and overburdened North American power grid is expected to require
significant capital expenditures to upgrade the existing infrastructure
over the next several years to maintain adequate levels of reliability and
efficiency. According to the North American Electric Reliability Corp. (NERC),
Level 5 Transmission Load Relief (TLR) events, which are triggered when
power outages are imminent or in progress, have grown at a 63% compounded
annual growth rate from 1999 to 2010. These events demonstrate the current
power grid’s inadequate
transmission capacity to accommodate all requests for reliable power.
Significant capital investment will be required over the next several decades
to relieve congestion, accommodate growth and replace components of the U.S.
power grid operating at, near or past their planned service lives. According
to the consulting firm The Brattle Group, 70% of all power transformers in
the U.S. are currently over 25 years old and $900 billion of capital
investment will be required for transmission and distribution equipment by
2030 in order to meet growing demand and achieve targets for efficiency,
emissions, renewable sources and infrastructure replacement. • Increasing Demand for Reliably Delivered Electricity — Increasing demand for reliably delivered
electricity in North America will require substantial investment in the
electric grid to expand capacity and improve efficiency. The Department of
Energy’s Energy Information Administration, or EIA, forecasts that total
electricity use in the U.S. will increase by approximately 30% from 2008 to
2035. This increase is driven by population growth, economic expansion,
increasing dependence on computing power throughout the economy and the increased
use of electrical devices in the home. As an example, the power consumption
of servers and data centers, one of the larger uses of electricity in the
U.S., doubled between 2000 and 2006 and is expected to double again by 2011
according to estimates by the U.S. Environmental Protection Agency. Electric
vehicles are another example of a demand source that has the potential to significantly
increase U.S. power consumption. The expected increase in electricity demand
will require considerable investment in the North American electric
transmission and distribution infrastructure as well as specialized equipment
to ensure the reliability and quality of electricity for critical
applications such as servers and data centers. • Strong Legislative Support — The U.S. government has directed
significant resources towards the modernization and improvement of the U.S.
electric grid. The legislative developments continue to promote growth and
investment in electric transmission and distribution infrastructure by
encouraging electricity providers to expand capacity and relieve grid
congestion. The Energy Policy Act of 2005 established mandatory grid
reliability standards and created incentives to increase electric
transmission and distribution infrastructure investments. Incentives
associated with such law ensured that utilities (who represent our largest
customer segment) are better positioned to finance and realize system
enhancement projects. In addition, the American Recovery and Reinvestment Act
of 2009 allocated $4.5 billion to improve electricity delivery and energy
reliability through modernization of the electric transmission and
distribution infrastructure. • Mandates for Renewable Power Sources Leading to Grid
Expansion —
North American federal, state, provincial, and local governments have enacted
and are considering legislation and regulations aimed at increasing energy
efficiency and encouraging expansion of renewable energy generation. We
believe that the increased focus on renewable energy will drive investment
growth in the electric transmission and distribution grid as additional
infrastructure is developed to integrate renewable energy sources such as
wind and solar with the existing electric power grid. Many sources of
renewable energy are not near key demand centers, and according to NERC and
the Edison Electric Institute (EEI), significant infrastructure investments
will be required to reliably transport and integrate electricity with the
grid. Power transformers will be a critical component of the additional
infrastructure. We also expect that the general upward trend in energy demand
will push power suppliers toward renewable power sources, driving investment
in new plant construction and significantly contributing to growth in the
transmission and distribution industry over the next several years. Renewable
power development also benefits from strong regulatory support, with 29
states and the District of Columbia having adopted mandatory renewable
portfolio standards, or RPS. Seven other states have enacted non-binding
RPS-like goals and the U.S. Congress is evaluating national renewable
generation targets. Wind Energy Equipment and Services • Wind Power Leading the Growth in Renewable Generation
Capacity — Wind
power generation is one of the more mature renewable energy technologies and
one of the fastest growing renewable energy sources according to the
Institute of Electrical and Electronics Engineers and the Global Wind Energy
Council. U.S. wind power generation capacity increased by 15% in 2010 and,
according to the Department of Energy (DOE), U.S. wind power generation
capacity has the potential to grow at a compounded annual rate in excess of
15% through 2020. The 2008 DOE report, “20% Wind Energy by 2030”, published
in a joint effort with industry and the nation’s leading laboratories,
provides a potential framework for large scale integration of wind power in
the U.S. Among other considerations, this report stipulates that reaching the
20% wind energy level in the U.S. will require expansion of the nation’s
transmission infrastructure to integrate wind energy into the grid. • Continued Support for Wind Power from Federal and State
Governments —
Wind power enjoys broad public support and can be a fundamental part of
federal and state economic development strategies. In the U.S., a number of
federal and state legislative and regulatory activities influence the wind
industry’s ability to compete in the electric market. A federal-level income
tax credit, the Production Tax Credit (PTC), is allowed for the production of
electricity from utility-scale wind turbines. Congress acted in 2009 to
provide a three-year extension of the PTC through
the end of 2012. At the state level, a renewable portfolio standard is a policy
that sets hard targets for renewable energy in the near- and long-term to
diversify electricity supply, stimulate local economic development, reduce
pollution and cut water consumption. Competitive Strengths We believe we are well
positioned for significant growth in the niche markets within the electrical
transmission and distribution equipment industry in which we compete. Our
competitive strengths include: • Recurring Customer Base — We believe that our established,
long-standing customer relationships provide us with a stable and recurring
revenue base. Approximately 90% of our electrical transformer revenue in each
of 2010 and 2009, adjusted to include revenue from Jefferson Electric, Inc.
during periods prior to its 2010 acquisition by us, originated from customers
who had also ordered from us in the prior year. We believe this customer
continuity is a direct result of our deeply-rooted culture of uncompromising
attention to detail, design and engineering expertise and consistently high
customer service levels. Our commitment to service is evident in our high
supplier scorecard ratings with several of our largest customers. We have
found that our customers are typically reluctant to switch suppliers once a
favorable service track record has been established, even in cases where
orders for our products are routinely released for competitive bidding. • Focus on Attractive Niche Markets — We focus on niche markets in the utility,
industrial, commercial and wind energy market sectors of the electrical
transmission and distribution industry that we believe are underserved by our
larger competitors and have either attractive growth or profitability characteristics.
Our key target markets are characterized by specialty applications of often
customized products with particular electrical and mechanical attributes,
which we frequently manufacture in low quantity production runs. The
transformer market we serve is very fragmented due to the range of sizes,
voltages and technological standards required by different categories of end
users. We have developed a number of designs for specialty applications in
niche markets, including: utility network failsafe planning, wind energy,
elevators, and more recently, data centers. Many orders are custom-engineered
and tend to be time-sensitive as other critical work is frequently
coordinated with the customer’s transformer installation schedule, or because
our transformers are a key sub-component of the customer’s overall products
being sold to end users. We believe that the historical growth of our product
range, end-markets and revenues is due in large part to close relationships
with our customers. Our strong customer relationships enable us to anticipate
customers’ needs and collaborate with our customers to identify new, often
highly-engineered applications. • Integration of Strategic Acquisitions — Our management team has a long track
record of acquiring and integrating companies. Our recent and pending
acquisitions have and will provide us with new products and services,
additional sales channels and markets, manufacturing facilities, technical
expertise, purchasing economies and administrative efficiencies. We believe
that our management’s ability to identify and integrate acquisitions will
allow us to implement our growth plans and compete more effectively in the
markets we serve. • Experienced Management Team — Our management team has extensive
experience in the electrical equipment and components industry and has
consummated a significant number of acquisitions, divestitures and joint
ventures. Our senior management team includes seasoned professionals with
industry, finance, transaction and operational experience that averages over
20 years per person. The prior companies owned and operated by our chief
executive officer, Nathan J. Mazurek, have been focused on transformer, circuit
breaker and film capacitor products. Mr. Mazurek has developed an extensive
network of relationships with domestic and international companies in the
electrical equipment and components industry. Growth Strategy We believe we have a stable
platform from which to develop and grow our business lines, revenues and
earnings. We intend to grow our company through strategic acquisitions and
organically, capitalizing on our existing competitive strengths to maximize
stockholder value. The key elements of our growth strategy are: • Expand Our Product and Service Offerings — We
intend to grow and acquire businesses that expand our product and service
offerings to both existing and new customers. We are focused on products
and end-markets that we expect will benefit from an increase in the demand
for substation-class and other transformers driven by rising electricity
demand, the repair and replacement cycle of an aging electric transmission
grid, rising electricity demand and the transition to renewable energy sources.
In anticipation of increased manufacturing volumes, each of our transformer
business units completed expansions of their respective manufacturing capacities
in the last two years. We expect to continually evaluate opportunities to
expand organically or through acquisitions to broaden our relationships
with existing and new customers where we can leverage our manufacturing,
design and engineering capabilities. We also plan to introduce new products
from companies we acquire into our existing sales channels in order to maximize
the productivity of our distribution network. For example, our pending
acquisition of Transformateur Bemag Inc. is expected to introduce medium
voltage dry-type transformers to our U.S. sales channels operated by
Jefferson Electric, Inc. • Focus on Operating Efficiencies — We intend to continue to efficiently
manage and invest in our assets and operations. We are focused on improving
product mix, enhancing our supply chain management, optimizing the use of our
available capacity and continuing to manage project costs efficiently
throughout their lifecycle. We have demonstrated our ability to integrate new
production facilities into our existing operations and will continue to
examine joint purchasing and production capabilities between our companies to
further improve our operating results. For example, Transformateur Bemag Inc.
has developed proprietary automation systems and product designs that we
intend to implement at Jefferson Electric Inc. Risks Associated with Our Business Our ability to operate our
business and achieve our goals and strategies is subject to numerous risks as
discussed more fully in the section titled “Risk Factors,” including, without
limitation: • our ability to expand
our business through strategic acquisitions; • our ability to integrate
acquisitions and related businesses; • competition within the
electrical equipment manufacturing and service industry; • our dependence on
Hydro-Quebec Utility Company and Siemens Industry, Inc. for a large portion
of our business; • the potential loss or
departure of key personnel, including Nathan J. Mazurek, our Chairman,
President and Chief Executive Officer; • currency exchange rate
risk; • our ability to generate
internal growth; • market acceptance of our
existing and new products and services; • operating margin risk due
to competitive pricing and operating efficiencies, supply chain risk,
material, labor or overhead cost increases, interest rate risk and commodity
risk; • restrictive loan
covenants or our ability to repay or refinance debt under our credit
facilities that could limit our future financing options and liquidity
position and may limit our ability to grow our business; • the continuation of
government incentive programs promoting electrical equipment capital
investment and development of renewable energy sources upon which our
customers may rely; • our ability to develop
and grow our wind energy business; • control of us by our
chairman through our majority stockholder; and • general economic and
market conditions in the electrical equipment, power generation, commercial
construction, industrial production, oil and gas, marine and infrastructure
industries. Any of the above risks as
well as others discussed herein could materially and negatively affect our
business, financial condition and operating results. Investing in our common
stock involves a high degree of risk. You should carefully consider the
information set forth in “Risk Factors” and other information in this
prospectus before making a decision to invest in our common stock. Corporate and Other Information Our principal executive
offices are located at One Parker Plaza, 400 Kelby Street, 9th Floor, Fort Lee,
New Jersey. Our telephone number is (212) 867-0700. Our website address is
http://www.pioneerpowersolutions.com. Information on or accessed through our
website is not incorporated into this prospectus and is not a part of this
prospectus. The Offering1 Common stock offered by us 1,700,000 shares Common stock offered by
the selling stockholders 584,000 shares Common stock outstanding
before offering 5,907,255 shares Common stock to be
outstanding after the offering 7,607,255 shares Offering price $8.00 to $10.00 per share
(estimate) Use of proceeds We intend to use the
proceeds of this offering to fund new acquisitions, to offer extended
purchase terms to future customers of our wind energy business, to repay
indebtedness, and for general corporate purposes. We will not receive any
proceeds from the sale of shares by the selling stockholders. See “Use of
Proceeds” beginning on page 27 of this prospectus. Directed share program At our request, the underwriters have reserved
up to 3% of the shares of common stock for sale at the public offering price
to persons who are directors, officers or employees of or who are otherwise
associated with us, through a directed share program. The number of
shares of common stock available for sale to the general public will
be reduced by the number of directed shares purchased by participants
in the directed share program. For further information, see “Underwriting” beginning
on page 75 of this prospectus. Risk factors Investing in our common
stock involves a high degree of risk. See “Risk Factors” beginning on page 10
of this prospectus.
OTC Bulletin Board symbol PPSI.OB Nasdaq Capital
Market symbol PPSI 1 All share amounts are adjusted for the
anticipated one-for-five reverse stock split that is expected to occur
the day immediately following the effectiveness of the registration statement of which
this prospectus is a part. The number of shares of common stock outstanding after this offering excludes: • 118,400 shares of common
stock issuable upon the exercise of currently outstanding options at a
weighted average exercise price of $15.07; • 640,000 shares of common
stock issuable upon the exercise of currently outstanding warrants at a
weighted average exercise price of $14.00 per share; and • 581,600 shares of common
stock available for issuance under our 2011 Long-Term Incentive Plan. Unless otherwise stated, all
information contained in this prospectus assumes no exercise of the
over-allotment option granted to the underwriters. Summary Consolidated Financial Information The historical share and per
share amounts set forth below reflect the anticipated one-for-five reverse
stock split of our common stock that is expected to occur the day immediately following
the effectiveness of the registration statement of which this prospectus is a part. Years Ended Three Months Ended 2008 2009 2010 2010 2011 Statement
of Operations Data: Revenue $ 43,844 $ 40,599 $ 47,236 $ 8,250 $ 15,726 Cost of goods sold 34,896 28,734 35,637 6,444 11,405 Gross profit 8,988 11,865 11,599 1,806 4,321 Operating expenses: Selling, general and administrative 4,379 4,220 8,048 1,150 2,790 Foreign exchange (gain) loss (98 ) (272 ) (139 ) 92 (17 ) Total operating
expenses 4,281 3,948 7,909 1,242 2,773 Operating income 4,707 7,917 3,690 564 1,548 Interest and bank charges 512 312 183 13 122 Other expense (income) 700 - 884 - - Gain on bargain purchase - - (650 ) - - Earnings before income
taxes 3,495 7,605 3,273 551 1,426 Provision for income taxes 1,357 2,490 327 161 463 Net earnings $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963 Earnings per diluted common
share $ 0.47 $ 1.10 $ 0.50 $ 0.07 $ 0.16 Weighted average diluted
common shares outstanding 4,560 4,659 5,931 5,813 5,950 Other
Data: Non-GAAP earnings per
diluted common share $ 0.58 $ 1.10 $ 0.43 $ 0.07 $ 0.17 Adjusted EBITDA (Non-GAAP
measure) $ 4,999 $ 8,224 $ 4,849 $ 679 $ 1,830 Average exchange rate
during period (CAD/USD) 1.0671 1.1415 1.0301 1.0409 0.9860 Balance
Sheet Data: Cash and cash equivalents $ 368 $ 1,560 $ 516 $ 3,116 $ 140 Working capital 1,727 8,962 2,033 9,596 3,198 Total assets 11,555 14,595 32,103 15,351 35,785 Total debt 410 284 6,080 242 6,237 Total liabilities 9,439 4,988 17,011 5,098 19,441 Total shareholders’ equity 2,115 9,607 15,092 10,253 16,344 Use of Non-GAAP Financial Measures We have presented non-GAAP
measures such as non-GAAP net earnings and Adjusted EBITDA because many of our
investors use these non-GAAP measures to monitor our performance. These
non-GAAP measures should not be considered as an alternative to GAAP measures
as an indicator of our operating performance. Non-GAAP net earnings is
defined by us as net earnings before amortization of acquisition-related
intangibles, stock-based compensation, non-recurring acquisition costs and
reorganization expense, impairments, other unusual gains or charges and any tax
effects related to these items. We define Adjusted EBITDA as net earnings
before interest, income tax expense, depreciation and amortization, non-cash
compensation and non-recurring acquisition costs and reorganization expenses
and other non-recurring or non-cash items. Generally, a non-GAAP
financial measure is a numerical measure of a company’s performance, financial
position or cash flow that either excludes or includes amounts that are not
normally excluded or included in the most directly comparable measure
calculated and presented in accordance with GAAP. The non-GAAP measures
included below, however, should be considered in addition to, and not as a
substitute for or superior to, operating income, cash flows, or other measures
of financial performance prepared in accordance with GAAP. A reconciliation of
non-GAAP to GAAP financial measures is set forth in the table below. Reconciliation of GAAP Measures to Non-GAAP Measures Years Ended Three Months Ended 2008 2009 2010 2010 2011 Non-GAAP
Net Earnings and Diluted EPS: Net earnings per share
(GAAP measure) $ 0.47 $ 1.10 $ 0.50 $ 0.07 $ 0.16 Net earnings (GAAP measure) $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963 Amortization of acquisition intangibles - - 144 - 53 Stock-based compensation expense - - 161 4 61 Stock and warrant issuance expense for services - - 232 21 - Non-recurring acquisition and reorganization costs - - 884 - - Impairment charges 700 - - - - Gain on bargain purchase - - (650 ) - - Canadian tax recovery - - (831 ) - - Tax adjustments (209 ) - (323 ) (10 ) (44 ) Non-GAAP net earnings $ 2,629 $ 5,115 $ 2,562 $ 405 $ 1,033 Non-GAAP net earnings per
diluted share $ 0.58 $ 1.10 $ 0.43 $ 0.07 $ 0.17 Weighted average diluted
shares outstanding 4,560 4,659 5,931 5,813 5,950 Reconciliation
to Adjusted EBITDA: Net earnings (GAAP measure) $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963 Interest and bank charges 512 312 183 13 122 Provision for income taxes 1,357 2,490 327 161 463 Depreciation and amortization 292 307 767 90 221 Gain on bargain purchase - - (650 ) - - Non-recurring acquisition and reorganization costs - - 884 - - Impairment charges 700 - - - - EBITDA 4,999 8,224 4,457 654 1,769 Adjustments to EBITDA: Stock-based compensation expense - - 161 4 61 Stock and warrant issuance expense for services - - 232 21 - Adjusted EBITDA (Non-GAAP
measure) $ 4,999 $ 8,224 $ 4,849 $ 679 $ 1,830 Investing in
our common stock involves a high degree of risk. You should carefully consider
the following factors and other information in this prospectus before making a
decision to invest in our common stock. Additional risks and uncertainties that
we are unaware of may become important factors that affect us. If any of the
following events occur, our business, financial conditions and operating
results may be materially and adversely affected. In that event, the trading
price of our common stock may decline, and you could lose all or part of your
investment. Risks Relating to Our
Business We may not be able to expand our
business through strategic acquisitions, which could decrease our
profitability. A key element of our strategy is and a material
portion of the proceeds of our offering is expected to be utilized to pursue
strategic acquisitions that either expand or complement our business in order
to increase revenue and earnings. We may not be able to identify additional
attractive acquisition candidates on terms favorable to us or in a timely
manner. We may require additional debt or equity financing for future
acquisitions, which may not be available on terms favorable to us, if at all.
Moreover, we may not be able to integrate any acquired businesses into our
business or to operate any acquired businesses profitably. Acquired businesses
(such as Jefferson Electric, Inc.) may operate at lower profit margins, which
could negatively impact our results of operations. Each of these factors may
contribute to our inability to grow our business through strategic
acquisitions, which could ultimately result in increased costs without a
corresponding increase in revenues, which would result in decreased
profitability. Any acquisitions that we complete could
disrupt our business and harm our financial condition and operations. In an effort to effectively compete in the specialty
electrical equipment manufacturing and service businesses, where increasing
competition and industry consolidation prevail, we will seek to acquire
complementary businesses in the future. In the event of any future
acquisitions, we could: • issue
additional securities that would dilute our current stockholders’ percentage
ownership or provide the purchasers of the additional securities with certain
preferences over those of common stockholders, such as dividend or
liquidation preferences; • incur
debt and assume liabilities; and • incur
large and immediate write-offs of intangible assets, accounts receivable or
other assets. These events could result in significant expenses
and decreased revenue, which could adversely affect the market price of our
common stock. In addition, integrating product acquisitions and
completing any future acquisitions could also cause significant diversions of
management’s time and resources. Managing acquired businesses entails numerous
operational and financial risks. These risks include difficulty in assimilating
acquired operations, diversion of management’s attention, and the potential
loss of key employees or customers of acquired operations. Our industry is highly competitive. The electrical transformer
industry is highly competitive. Principal competitors in our markets include
ABB Ltd., Carte International, Inc., Cooper Industries plc, General Electric
Company, Hammond Power Solutions Inc., Howard Industries, Inc., Partner
Technologies, Inc. and Schneider Electric. Many of these competitors, as well as
other companies in the broader electrical equipment manufacturing and service
industry where we expect to compete, are significantly larger and have
substantially greater resources than we do and are able to achieve greater
economies of scale and lower cost structures than us and may, therefore, be
able to provide their products and 10 services to customers at
lower prices than we are able to. Moreover, we cannot be certain that our
competitors will not develop the expertise, experience and resources to offer
products that are superior in both price and quality to our products.
Similarly, we cannot be certain that we will be able to market our business
effectively in the face of competition or to maintain or enhance our
competitive position within our industry, maintain our customer base at current
levels or increase our customer base. Our inability to manage our business in
light of the competitive forces we face could have a material adverse effect on
our results of operations. Because we currently derive a
significant portion of our revenues from two customers, any decrease in orders
from these customers could have an adverse effect on our business, financial
condition and operating results. We depend on Hydro-Quebec
Utility Company for a large portion of our business, and any change in the
level of orders from Hydro-Quebec Utility Company, has, in the past, had a
significant impact on our results of operations. In particular, Hydro-Quebec
Utility Company represented a substantial portion of our entire company’s
sales, approximately 36% and 40% of net sales in the years ended December 31,
2010 and 2009, respectively. In addition, Siemens Industry, Inc. accounted for
9% of our entire company’s sales in the year ended December 31, 2010. Aside
from being a customer of ours, Siemens Industry, Inc. is also a manufacturer of
transformers. If either of these customers was to significantly cancel, delay
or reduce the amount of business it does with us, there could be a material
adverse effect on our business, financial condition and operating results. Our
long term supply agreements for the sale of our products to Hydro-Quebec
Utility Company expire in 2012 and we therefore cannot assure you that
Hydro-Quebec Utility Company will continue to purchase transformers from us in
quantities consistent with the past or at all. Moreover, although Jefferson
Electric, Inc. has a pricing agreement for the sale of its products to Siemens
Industry, Inc., the agreement does not obligate Siemens Industry, Inc. to
purchase transformers from Jefferson Electric, Inc. in quantities consistent
with the past or at all. If either of these customers were to become insolvent
or otherwise unable to pay or were to delay payment for services, our business,
financial condition and operating results could also be materially adversely
affected. We are vulnerable to economic downturns
in the commercial construction market, which may reduce the demand for some of
our products and adversely affect our sales, earnings, cash flow or financial
condition. Portions of our business, in
particular those of Jefferson Electric, Inc., involve sales of our products in
connection with commercial real estate construction. Our sales to this sector
are affected by the levels of discretionary business spending. During economic
downturns in this sector, the levels of business discretionary spending may
decrease. This decrease in spending will likely reduce the demand for some of
our products and may adversely affect our sales, earnings, cash flow or
financial condition. The commercial and
industrial building and maintenance sectors began to experience a significant
decline in 2008. The downturn in these segments contributed to a decline in the
demand for some of Jefferson Electric, Inc.’s products and adversely affected
Jefferson Electric, Inc.’s sales and earnings in 2008 through 2010. We cannot
predict the duration or severity of the downturn in these segments. Continued
downturn in these segments could continue to reduce the demand for some of our
products and may adversely impact sales, earnings and cash flow. The departure or loss of key personnel
could disrupt our business. We depend heavily on the
continued efforts of Nathan J. Mazurek, our principal executive officer, and on
other senior officers who are responsible for the day-to-day management of our
three operating subsidiaries. In addition, we rely on our current electrical
and mechanical design engineers, along with trained coil winders, many of whom
are important to our operations and would be difficult to replace. We cannot be
certain that any of these individuals will continue in their respective
capacities for any particular period of time. The departure or loss of key
personnel, or the inability to hire and retain qualified employees, could
negatively impact our ability to manage our business. Our revenue may be adversely affected by
fluctuations in currency exchange rates. 11 Canadian dollar appreciates
relative to the U.S. dollar, the fluctuation will result in a positive impact
on the revenues that we report. However, if the Canadian dollar depreciates
relative to the U.S. dollar, there will be a negative impact on the revenues we
report due to such fluctuation. It is possible that the impact of currency
fluctuations will result in a decrease in reported sales even though we have
experienced an increase in sales when reported in the Canadian dollar.
Conversely, the impact of currency fluctuations may result in an increase in
reported sales despite declining sales when reported in the Canadian dollar. The
exchange rate from the U.S. dollar to the Canadian dollar has
fluctuated substantially and may continue to do so in the future. Though we may
choose to hedge our exposure to foreign currency exchange rate changes in the
future, there is no guarantee such hedging, if undertaken, will be successful. We may be unable to generate internal
growth. Our
ability to generate internal growth will be affected by, among other factors,
our ability to attract new customers, increase or decrease in the number or
size of orders received from existing customers, hire and retain skilled
employees and increase volume utilizing our existing facilities. Many of the
factors affecting our ability to generate internal growth may be beyond our
control, and we cannot be certain that our strategies will be implemented with
positive results or that we will be able to generate cash flow sufficient to
fund our operations and to support internal growth. If we do not achieve
internal growth, our results of operations will suffer and we will likely not
be able to expand our operations or grow our business. Fluctuations in the price and supply of
raw materials used to manufacture our products may reduce our profits. Our raw material costs
represented approximately 63% and 64% of our revenues for the years ended
December 31, 2010 and 2009, respectively. Although we anticipate that this
percentage will be lower in the future due to our acquisition of Jefferson
Electric, Inc., there is no guarantee that such result will be achieved. The
principal raw materials purchased by us are core steel, copper wire, aluminum
strip and insulating materials including transformer oil. We also purchase
certain electrical components from a variety of suppliers including bushings,
switches, fuses and protectors. These raw materials and components are
available from, and supplied by, numerous sources at competitive prices,
although there are more limited sources of supply for electrical core steel and
transformer oil. Unanticipated increases in raw material prices or disruptions
in supply could increase production costs and adversely affect our
profitability. We cannot provide any assurances that we will not experience
difficulties sourcing our raw materials in the future. Jefferson Electric, Inc. may be unable
to service, repay or refinance its debt and remain in compliance with its debt
covenants, which could have a material adverse effect on our business. Jefferson Electric, Inc. is
highly leveraged, and its ability to repay its debt, substantially all of which
is due to be repaid in October 2011, will depend on its financial and operating
performance and on our ability to execute on our business strategy with respect
to Jefferson Electric, Inc. The financial and operational performance of
Jefferson Electric, Inc. will depend on numerous factors, many of which are
beyond our control, such as economic conditions and governmental regulation. We
cannot be certain that Jefferson Electric, Inc.’s cash flow will be sufficient
to allow it to pay the principal and interest on its debt and meet other
obligations. If Jefferson Electric, Inc. does not generate enough cash flow to
fully amortize its debt, it may be unable to refinance all or part of the
existing debt or sell assets on terms acceptable to us, if at all. Further,
failing to comply with the financial and other restrictive covenants in its
loan agreement could result in an event of default, which could result in
acceleration of the payments due. Because Jefferson Electric, Inc.’s debt is
secured by substantially all of Jefferson Electric, Inc.’s assets, if Jefferson
Electric, Inc. is unable to service, repay or refinance its debt and remain in
compliance with its debt covenants, we could lose all of our investment in
Jefferson Electric, Inc. 12 Our operating subsidiaries have, and are
expected to continue to have, credit facilities with restrictive loan covenants
that may impact our ability to operate our business and to pursue our business
strategies, and our failure to comply with these covenants could result in an
acceleration of our indebtedness. We rely on our Pioneer Transformers Ltd. and Jefferson Electric, Inc. subsidiaries for a significant portion
of the cash flow to operate our business and execute our strategy. Our current credit facilities with our lenders and our
proposed new credit facility with our Canadian bank (which is expected to be effective in July 2011) contain or will
contain certain covenants that restrict each of these subsidiaries’ ability to, among other things: • effect
an amalgamation, merger or consolidation with any legal entity; • cause
its subsidiaries to wind up, liquidate or dissolve their affairs, in the case
of Pioneer Transformers Ltd, and permit any subsidiaries to exist, in the
case of Jefferson Electric, Inc.; • change
the nature of its core business; • in
the case of Pioneer Transformers, Ltd., alter its capital structure in a
manner that would be materially adverse to our Canadian lender and undergo a
change of control and make investments or advancements to affiliated or
related companies without our Canadian lender’s prior written consent; or • in the case of Jefferson
Electric, Inc., recapitalize its corporate structure, acquire any business,
acquire stock of any corporation, or enter into any partnership or joint
venture. The majority of the
liquidity derived from our credit facilities is based on availability
determined by a borrowing base. Specifically, the availability of credit is
dependent upon eligible receivables, inventory and certain liens. We may not be
able to maintain adequate levels of eligible assets to support our required
liquidity. In addition, our credit facilities
require us to meet certain financial ratios, including maintenance of a minimum
debt service coverage ratio, a minimum current ratio and a maximum total debt
to tangible net worth ratio in the case of Pioneer Transformers, Ltd. and a
requirement to exceed minimum quarterly targets for tangible net worth, as
defined, and maintain a minimum debt service coverage ratio in the case of
Jefferson Electric, Inc. Our ability to meet these financial provisions may be
affected by events beyond our control. If, as or when required, we are unable
to repay, refinance or restructure our indebtedness under, or amend the
covenants contained in our credit facilities, our lenders could institute
foreclosure proceedings against the assets securing borrowings under those
facilities, which would harm our business, financial condition and results of
operations. We may not be able to fully realize the
revenue value reported in our backlog. We are subject to pricing pressure from
our larger customers. We face significant pricing
pressures in all of our business segments from our larger customers, including
Hydro-Quebec Utility Company. Because of their purchasing size, our larger
customers can influence market participants to compete on price terms. Such
customers also use their buying power to negotiate lower prices. If we are not
able 13 to offset pricing reductions
resulting from these pressures by improved operating efficiencies and reduced
expenditures, those price reductions may have an adverse impact on our
financial results. Deterioration in the credit quality of several
major customers could have a material adverse effect on our operating results
and financial condition. A significant asset included
in our working capital is accounts receivable from customers. If customers
responsible for a significant amount of accounts receivable become insolvent or
otherwise unable to pay for products and services, or become unwilling or
unable to make payments in a timely manner, our operating results and financial
condition could be adversely affected. A significant deterioration in the
economy could have an adverse effect on the servicing of these accounts
receivable, which could result in longer payment cycles, increased collection
costs and defaults in excess of management’s expectations. Deterioration in the
credit quality of Hydro-Quebec Utility Company, Siemens Industry, Inc. or of
any other major customers, could have a material adverse effect on our
operating results and financial condition. Our operating results may vary
significantly from quarter to quarter. Our quarterly results may be
materially and adversely affected by: • the
timing and volume of work under new agreements; • the
spending patterns of customers; • customer
orders received; • a
change in the mix of our customers, contracts and business; • increases
in design and manufacturing costs; • the
length of our sales cycles; • the
rates at which customers renew their contracts with us; • changes
in pricing by us or our competitors, or the need to provide discounts to win
business; • a
change in the demand or production of our products caused by severe weather
conditions; • our
ability to control costs, including operating expenses; • losses
experienced in our operations not otherwise covered by insurance; • the
ability and willingness of customers to pay amounts owed to us; • the
timing of significant investments in the growth of our business, as the
revenue and profit we hope to generate from those expenses may lag behind the
timing of expenditures; • costs
related to the acquisition and integration of companies or assets; • general
economic trends, including changes in equipment spending or national or
geopolitical events such as economic crises, wars or incidents of terrorism;
and • future
accounting pronouncements and changes in accounting policies. 14 Accordingly,
our operating results in any particular quarter may not be indicative of the
results that you can expect for any other quarter or for an entire year. We rely on third parties for key
elements of our business whose operations are outside our control. We rely
on arrangements with third-party shippers and carriers such as independent
shipping companies for timely delivery of our products to our customers. As a
result, we may be subject to carrier disruptions and increased costs due to
factors that are beyond our control, including labor strikes, inclement
weather, natural disasters and rapidly increasing fuel costs. If the services
of any of these third parties become unsatisfactory, we may experience delays
in meeting our customers’ product demands and we may not be able to find a
suitable replacement on a timely basis or on commercially reasonable terms. Any
failure to deliver products to our customers in a timely and accurate manner
may damage our reputation and could cause us to lose customers. We also
utilize third party distributors and manufacturer’s representatives to sell,
install and service certain of our products. While we are selective in whom we
choose to represent us, it is difficult for us to ensure that our distributors
and manufacturer’s representatives consistently act in accordance with the
standards we set for them. To the extent any of our end-customers have negative
experiences with any of our distributors or manufacturer’s representatives, it
could reflect poorly on us and damage our reputation, thereby negatively
impacting our financial results. We may face impairment charges if
economic environments in which our business operates and key economic and
business assumptions substantially change. Assessment of the potential
impairment of property, plant and equipment, goodwill and other identifiable
intangible assets is an integral part of our normal ongoing review of
operations. Testing for potential impairment of long-lived assets is dependent
on numerous assumptions and reflects our best estimates at a particular point
in time, which may vary from testing date to testing date. The economic
environments in which our businesses operate and key economic and business
assumptions with respect to projected product selling prices and materials
costs, market growth and inflation rates, can significantly affect the outcome
of impairment tests. Estimates based on these assumptions may differ significantly
from actual results. Changes in factors and assumptions used in assessing
potential impairments can have a significant impact on both the existence and
magnitude of impairments, as well as the time at which such impairments are
recognized. Future changes in the economic environment and the economic outlook
for the assets being evaluated could also result in additional impairment
charges. Any significant asset impairments would adversely impact our financial
results. International expansion is one of our growth
strategies, and international operations beyond our current markets will expose
us to additional risks that we do not face in our current markets, which could
have an adverse effect on our operating results. We generate a significant
portion of our revenue from operations in Canada and currently derive limited
revenue from outside of North America. However, international expansion is one
of our growth strategies, including into Western Europe and to Asia, and we
expect our revenue and operations outside of North America will expand in the
future. These operations will be subject to a variety of risks that we do not
face in the U.S., and that we may face only to a limited degree in Canada,
including: • building
and managing highly experienced foreign workforces and overseeing and
ensuring the performance of foreign subcontractors; • increased
travel, infrastructure and legal and compliance costs associated with
multiple international locations; • additional
withholding taxes or other taxes on our foreign income, and tariffs or other
restrictions on foreign trade or investment; • imposition
of, or unexpected adverse changes in, foreign laws or regulatory
requirements, many of which differ from those in the U.S.; 15 • increased
exposure to foreign currency exchange rate risk; • longer
payment cycles for sales in some foreign countries and potential difficulties
in enforcing contracts and collecting accounts receivable; • difficulties
in repatriating overseas earnings; • general
economic conditions in the countries in which we operate; and • political
unrest, war, incidents of terrorism, or responses to such events. Our ability to expand into
international markets will depend, in part, on our ability to navigate
differing legal, regulatory, economic, social and political conditions. We may
be unable to develop and implement policies and strategies that will be
effective in managing these risks in each country where we do business. Our
failure to manage these risks could cause us to fail to reap our investments in
developing these markets and could harm our international operations, reduce
our international sales and increase our costs, thus adversely affecting our
international and overall business, financial condition and operating results. Our business requires skilled labor, and
we may be unable to attract and retain qualified employees. Our
ability to maintain our productivity and profitability will be limited by our
ability to employ, train and retain skilled personnel necessary to meet our
requirements. We may experience shortages of qualified personnel. We cannot be
certain that we will be able to maintain an adequate skilled labor force
necessary to operate efficiently and to support our growth strategy or that our
labor expenses will not increase as a result of a shortage in the supply of
skilled personnel. Labor shortages, increased labor costs or loss of our most
skilled workers could impair our ability to maintain our business or grow our
revenues, and may adversely impact our profitability. Our business operations are dependent
upon our ability to engage in successful collective bargaining with our
unionized workforce. Approximately
75% of our workforce is unionized. Our current collective bargaining agreement
with our unionized workforce in Canada expires in May 2015. We have a similar
agreement with our unionized workforce in Reynosa, Mexico that has an
indefinite term, subject to annual review and negotiation of key provisions. If
we are unable to renew our agreements regarding the terms of these collective
bargaining agreements, or if additional segments of our workforce become
unionized, we may be subject to work interruptions or stoppages. Strikes or
labor disputes with our employees may adversely affect our ability to conduct
our business. Our risk management activities may leave
us exposed to unidentified or unanticipated risks. Although
we maintain insurance policies with respect to our related exposures, these
policies contain deductibles and limits of coverage. We estimate our
liabilities for known claims and unpaid claims and expenses based on
information available as well as projections for claims incurred but not
reported. However, insurance liabilities are difficult to estimate due to
various factors and we may be unable to effectively anticipate or measure
potential risks to our company. If we suffer unexpected or uncovered losses,
any of our insurance policies or programs are terminated for any reason or are
not effective in mitigating our risks, we may incur losses that are not covered
by our insurance policies or that exceed our accruals or that exceed our
coverage limits and could adversely impact our consolidated results of
operations, cash flows and financial position. Regulatory, environmental, monetary and
other governmental policies could have a material adverse effect on our
profitability. We are
subject to international, federal, provincial, state and local laws and
regulations governing environmental matters, including emissions to air,
discharge to waters and the generation and handling of waste. We are also
subject to laws relating to occupational health and safety. The operation of
manufacturing plants involves a high level of susceptibility in these areas,
and there is no assurance that we will not incur material environmental or
occupational 16 health
and safety liabilities in the future. Moreover, expectations of remediation
expenses could be affected by, and potentially significant expenditures could
be required to comply with, environmental regulations and health and safety
laws that may be adopted or imposed in the future. Future remediation
technology advances could adversely impact expectations of remediation
expenses. Future litigation could impact our
financial results and condition. Our
business, results of operations and financial condition could be affected by
significant future litigation or claims adverse to us. Types of potential
litigation cases include product liability, contract, employment-related, labor
relations, personal injury or property damage, intellectual property,
stockholder claims and claims arising from any injury or damage to persons,
property or the environment from hazardous substances used, generated or
disposed of in the conduct of our business. Market disruptions caused by domestic or
international financial crises could affect our ability to meet our liquidity
needs at reasonable cost and our ability to meet long-term commitments, which
could adversely affect our financial condition and results of operations. We rely
on credit facilities with our lenders, amongst other avenues, to satisfy our
liquidity needs. Disruptions in the domestic or international credit markets or
deterioration of the banking industry’s financial condition (such as occurred
beginning in 2008), may discourage or prevent our lenders and other lenders
from meeting their existing lending commitments, extending the terms of such
commitments or agreeing to new commitments, such as for acquisitions or to
refinance existing credit facilities. Market disruptions may also limit our
ability to issue debt securities in the capital markets. We can provide no
assurances that our lenders or any other lenders we may have will meet their
existing commitments or that we will be able to access the credit markets in
the future on terms acceptable to us or at all. Longer
term disruptions in the domestic or international capital and credit markets as
a result of uncertainty, reduced financing alternatives or failures of
significant financial institutions could adversely affect our access to the
liquidity needed for our business. Any disruption could require us to take
measures to conserve cash until the market stabilizes or until alternative
financing can be arranged. Such measures could include deferring capital
expenditures and reducing other discretionary expenditures. Market
disruptions could cause a broad economic downturn that may lead to increased
incidence of customers’ failure to pay for services delivered, which could
adversely affect our financial condition, results of operations and cash flow. Capital
market disruptions could result in increased costs related to variable rate
debt. As a result, continuation of market disruptions could increase our
interest expense and adversely impact our results of operations. Disruption in
the capital markets and its actual or perceived effects on particular
businesses and the greater economy also adversely affects the value of the
investments held within our pension plans. Significant declines in the value of
the investments held within our pension plans may require us to increase
contributions to those plans in order to meet future funding requirements if
the actual asset returns do not recover these declines in value in the
foreseeable future. These trends may also adversely impact our results of
operations, net cash flows and financial positions, including our stockholders’
equity. Risks Relating to
Pioneer Wind Energy Systems Inc. The wind turbine-related assets that we
acquired from AAER Inc. were acquired pursuant to Canadian court proceedings in
which AAER Inc. sought protection from its creditors after it failed to raise
additional capital to fund losses from its wind turbine manufacturing and
marketing business. As such, no assurance can be given that we will be able to
operate AAER Inc.’s former business at a profit, or that we will continue to
provide for the funding needs of Pioneer Wind Energy Systems Inc. if it does
not perform to our expectations. All of our wind turbine
assets were acquired from AAER Inc. in connection with the failure of AAER Inc.
to raise sufficient capital to continue funding its wind turbine manufacturing
and marketing business. We are seeking a qualified third party to assemble our
wind turbine model for us, but have so far been unable to establish such an
arrangement. While we believe this operating model for our Pioneer Wind Energy
Systems Inc. business would 17 entail less inventory risk
and require less working capital than AAER Inc.’s operations, no assurance can
be given that we will be able to monetize the wind turbine assets we purchased,
and related products sold in the future, at a profit and succeed where AAER
Inc. was unable to. In particular, we have limited experience in working with
wind turbines. Moreover, the wind turbine business is highly competitive and
dominated by a few much larger corporations with greater resources such as GE
Energy, Siemens Wind Power A/S, Vestas Wind Systems A/S and Gamesa Corporation
Tecnologica S.A. We have significantly restructured the
operations of the wind energy business we acquired and, as such, we consider
Pioneer Wind Energy Systems Inc. to be a development stage business that is
highly dependent on its senior management personnel. The business of Pioneer Wind
Energy Systems Inc. is highly dependent on the experience, reputation and
knowledge of its senior managers in order to secure attractive wind energy
project customers, including its president and manager of strategic
procurement. The loss of either of these individuals could significantly impair
Pioneer Wind Energy Systems Inc.’s ability to identify and attract customers
and adequately source and supply products and services that meet customers’
needs. Our business strategy includes providing
equipment financing assistance to our customers, a practice with which we have
no experience to date. Inherent in our strategy to
provide financing in conjunction with sales of our wind turbine equipment is
credit risk associated with our customers. We intend to provide customers
extended payment terms from the time of wind turbine delivery and installation.
If we are able to sell wind turbine equipment on this basis, we anticipate that
each sale will create over $1.0 million of accounts receivable plus interest
per customer per project and will provide for a payment schedule of up to, or
exceeding, one year. If customers responsible for a significant amount of
accounts receivable become insolvent or otherwise unable to pay for our
equipment and services, or become unwilling or unable to make payments in a
timely manner, our operating results and financial condition could be adversely
affected. The creditworthiness of each customer and the rate of delinquencies,
repossessions and net losses on customer obligations will be directly impacted
by several factors, including relevant industry and economic conditions, the
availability of capital, the experience and expertise of the customer’s
management team, the sustained value of the underlying collateral and the
overall performance of the customer’s power project. In the event of
delinquencies that might cause us to seek to take possession of our collateral,
there can be no assurance that we will be able to sell such collateral at a
price sufficient to recover our investment. Our wind energy equipment and services
business is highly dependent on our customers receiving regulatory incentives,
subsidies and third party financing. The wind energy industry is
supported in many territories through a variety of financial incentives offered
by government and regulatory bodies. If the availability of such incentives was
reduced or removed it would likely have an adverse effect on our business. Such
an incentive in the U.S. is the PTC, which is due to expire on December 31,
2012. Without the PTC, the projected return on investment in an individual wind
power facility may not be sufficient to attract investment capital in the
amount necessary to fund the acquisition, development and construction of wind
power projects in the U.S. While the PTC has been in
effect continuously since 1992 and most recently renewed in February 2009,
there can be no assurance that the PTC will be renewed beyond its current
expiration date of December 31, 2012. The absence of the PTC could have a
significant adverse effect on our growth potential. The PTC will only be
available for qualifying facilities that are placed in service while the PTC is
in effect or through a retrospective application of the PTC. The time required
to identify potential wind power projects, and to then pursue them to
completion and implementation, typically ranges from 18 to 36 months, although
lesser periods are possible for smaller projects. If the PTC is not extended
beyond 2012, U.S. projects under development by us at that time and not completed
by December 31, 2012 would not be eligible for the PTC. Accordingly, our
customers might have to reduce their project spending to offset the
corresponding reduction in revenues from the sale of U.S. projects. 18 The wind energy industry in
other jurisdictions in which we expect to have a market presence may also rely
to some extent on financial incentives and/or penalties designed to support the
wind energy industry in that jurisdiction. Changes to, or the removal of such
measures may have a significant adverse affect on our ability to compete in
such jurisdictions. Finally, in addition to
regulatory incentives, some of our customers will rely on us or on third
parties in connection with the financing of purchases of wind turbines from us.
Starting during the economic downturn of 2008, third party financing became
very difficult to obtain for wind power projects and remains challenging to
secure. The absence of easily obtainable third party financing for wind power
projects could materially reduce demand for our wind turbines. Our customers may have difficulty in
locating suitable project development sites, resulting in less demand for our
wind turbines. The development of new wind
power generating projects requires the identification, acquisition and permit
for viable wind resource land assets. We believe that adequate wind resource
land exists and can be acquired by our current and prospective customers on a
reasonable cost basis. However, management believes competition for wind
resource sites is increasing and we believe developers in some areas have bid
up site costs to levels that result in marginal project economics. This trend
may increase and spread to many wind regions, limiting demand for our wind
turbines. In some locations, residents and others have objected to wind
projects based on noise, visual aesthetics or wildlife protection concerns. Changes in tax laws may adversely affect
our wind turbine business. When the U.S. Congress
renewed the PTC in 2004, it amended certain provisions of the Internal Revenue
Code in a manner that resulted in wind energy property no longer qualifying as
five-year depreciation property. Congress restored the availability of
accelerated 5-year depreciation as part of the Energy Policy Act of 2005, which
also extended the PTC. There can be no assurance, however, that future changes
in U.S. tax laws will not require wind energy property to be depreciated over a
longer period of time. Such changes could force us to modify our pricing and
could lead to a material adverse effect on our business. Risks Relating to Our
Organization Our certificate of incorporation
authorizes our board to create new series of preferred stock without further
approval by our stockholders, which could adversely affect the rights of the
holders of our common stock. Our board of directors has
the authority to fix and determine the relative rights and preferences of
preferred stock. Our board of directors also has the authority to issue
preferred stock without further stockholder approval. As a result, our board of
directors could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon liquidation, the
right to receive dividend payments before dividends are distributed to the
holders of common stock and the right to the redemption of the shares, together
with a premium, prior to the redemption of our common stock. In addition, our
board of directors could authorize the issuance of a series of preferred stock
that has greater voting power than our common stock or that is convertible into
our common stock, which could decrease the relative voting power of our common
stock or result in dilution to our existing stockholders. Your ability to influence
corporate decisions may be limited because Provident Pioneer Partners,
L.P. owns a controlling percentage of our common stock. 19 assets. This concentration
of voting power could delay or prevent an acquisition of our company on terms
that other stockholders may desire. In addition, as the interests of Provident
Pioneer Partners, L.P. and our minority stockholders may not always be the
same, this large concentration of voting power may lead to stockholder votes
that are inconsistent with the best interests of our minority stockholders or
the best interest of us as a whole. We are subject to financial reporting
and other requirements for which our accounting, internal audit and other
management systems and resources may not be adequately prepared. On December 2, 2009, we
became subject to reporting and other obligations under the Securities Exchange
Act of 1934, as amended, including the requirements of Section 404 of the
Sarbanes-Oxley Act. Section 404 requires us to conduct an annual management
assessment of the effectiveness of our internal controls over financial
reporting. These reporting and other obligations place significant demands on
our management, administrative, operational, internal audit and accounting
resources. We anticipate that we may need to upgrade our systems, implement
additional financial and management controls, reporting systems and procedures,
implement an internal audit function, and hire additional accounting, internal
audit and finance staff. If we are unable to accomplish these objectives in a
timely and effective fashion, our ability to comply with our financial
reporting requirements and other rules that apply to reporting companies could
be impaired. Any failure to maintain effective internal controls could have a
material adverse effect on our business, operating results and stock price. Because we became public by means of a
reverse merger, we may not be able to attract the attention of major brokerage
firms. There may be risks
associated with the fact that we became a public company through a “reverse
merger.” Securities analysts of major brokerage firms may not provide
coverage of us since there is no incentive to brokerage firms to recommend the
purchase of our common stock. No assurance can be given that brokerage firms
will, in the future, want to conduct any secondary offerings on our behalf.
Moreover, regulatory authorities such as the SEC and securities exchanges may
subject us to heightened scrutiny because of the manner in which we became a
public company, which could lead to increased compliance costs or delays in
implementing transactions such as financings and acquisitions. Risks Relating to this
Offering and our Common Stock Purchasers in this offering will
experience immediate and substantial dilution in the book value of their
investment. 20 We may apply the proceeds of this
offering to uses that ultimately do not improve our operating results or
increase the value of your investment. We intend to use the net proceeds from this offering
to fund additional acquisition opportunities, offer equipment financing terms
to customers of our wind energy subsidiary and for general corporate purposes,
including working capital and the possible repayment of indebtedness. Depending
on several factors, including the availability of alternate sources of capital
and the possibility that the execution or timing of our business plans may
change, management may use these proceeds in a manner different than originally
intended. These proceeds could be applied in ways that do not improve our
operating results or otherwise increase the value of your investment. There may be a limited market for our
securities and we may fail to qualify for continued listing on Nasdaq, which
could make it more difficult for investors to sell their shares. Our common stock has been approved for listing on the Nasdaq
Capital Market under the symbol “PPSI,” subject to the completion
of this offering. There can be no
assurance that trading of our common stock on such market will be sustained or
desirable. In the event that our common
stock fails to qualify for continued listing, our common stock could
thereafter only be quoted on the OTC Bulletin Board or on what are commonly
referred to as the “pink sheets” operated by OTC Markets Group, Inc.
Under such circumstances, you may find it more difficult to dispose of, or to
obtain accurate quotations, for our common stock, and our common stock would
become substantially less attractive to certain purchasers, such as financial
institutions, hedge funds and other similar investors. Our common stock may be affected by
limited trading volume and price fluctuations, each of which could adversely
impact the value of our common stock. There has been very limited trading in our common
stock and there can be no assurance that an active trading market in our common
stock will either develop or be maintained. Our common stock has experienced,
and is likely to experience in the future, significant price and volume
fluctuations, which could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially. These fluctuations may
also cause short sellers to enter the market from time to time in the belief
that we will have poor results in the future. We cannot predict the actions of
market participants and, therefore, can offer no assurances that the market for
our stock will be stable or appreciate over time. Our stock price may be volatile, which
could result in substantial losses for investors. The market price of our
common stock is highly volatile and could fluctuate widely in response to
various factors, many of which are beyond our control, including the following: • technological
innovations or new products and services by us or our competitors; • additions
or departures of key personnel; • sales
of our common stock, including management shares; • limited
availability of freely-tradable “unrestricted” shares of our common stock to
satisfy purchase orders and demand; • our
ability to execute our business plan; • operating
results that fall below expectations; 21 • loss
of any strategic relationship; • industry
developments; • economic
and other external factors; • our
ability to manage the costs of maintaining adequate internal financial
controls and procedures in connection with the acquisition of additional
businesses; and • period-to-period
fluctuations in our financial results. In addition, the securities
markets have from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These market fluctuations may also significantly affect the market
price of our common stock. A significant number of our shares will
be eligible for sale and their sale or potential sale may depress the market
price of our common stock. In addition, 758,400 shares are issuable upon exercise of options and warrants. Pursuant
to an effective registration statement, 400,000 shares issuable upon exercise
of outstanding warrants are freely tradeable unless they are purchased by our
“affiliates,” as defined in Rule 144 under the Securities Act of 1933, as
amended. If any options or other warrants are exercised,
the shares issued upon exercise will also be restricted, but may be sold under
Rule 144 after the shares have been held for six months. Sales under Rule 144
may be subject to volume limitations and other conditions. In
addition to the possibility that actual sales of significant amounts of our
common stock in the public market could harm our common stock price, the fact
that our stockholders have the ability to make such sales could create a
circumstance commonly referred to as an “overhang,” in anticipation of which
the market price of our common stock could fall. The existence of an overhang,
whether or not sales have occurred or are occurring, could also make it more
difficult for us to raise additional financing through the sale of equity or
equity-related securities in the future at a time and price that we deem
reasonable or appropriate. We do not expect to pay dividends in the
future. As a result, any return on investment may be limited to the value of
our common stock. We do not anticipate paying
cash dividends on our common stock in the foreseeable future. The payment of
dividends on our common stock will depend on our earnings, financial condition
and other business and economic 22 factors as our board of
directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if our
stock price appreciates. If securities or industry analysts do
not publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline. The trading market for our
common stock will depend in part on the research and reports that securities or
industry analysts publish about us or our business. We do not currently have
research coverage by securities and industry analysts and you should not invest
in our common stock in anticipation that we will obtain such coverage. If we
obtain securities or industry analyst coverage and if one or more of the
analysts who covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would likely decline.
If one or more of these analysts ceases coverage of us or fails to publish
reports on us regularly, demand for our stock could decrease, which could cause
our stock price and trading volume to decline. 23 Cautionary Note Regarding Forward-Looking Statements This prospectus contains
“forward-looking statements,” which include information relating to future
events, future financial performance, financial projections, strategies,
expectations, competitive environment and regulation. Words such as “may,”
“should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,”
“anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and
similar expressions, as well as statements in future tense, identify
forward-looking statements. Forward-looking statements should not be read as a
guarantee of future performance or results and may not be accurate indications
of when such performance or results will be achieved. Forward-looking
statements are based on information we have when those statements are made or
management’s good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to: • Our
ability to expand our business through strategic acquisitions. • Our
ability to integrate acquisitions and related businesses. • Many
of our competitors are better established and have significantly greater
resources, and may subsidize their competitive offerings with other products
and services, which may make it difficult for us to attract and retain
customers. • We
depend on Hydro-Quebec Utility Company and Siemens Industry, Inc. for a large
portion of our business, and any change in the level of orders from
Hydro-Quebec Utility Company or Siemens Industry, Inc. could have a significant
impact on our results of operations. • The
potential loss or departure of key personnel, including Nathan J. Mazurek,
our Chairman, President and Chief Executive Officer. • A
majority of our revenue and a significant portion of our expenditures are
derived or spent in Canadian dollars. However, we report our financial
condition and results of operations in U.S. dollars. As a result,
fluctuations between the U.S. dollar and the Canadian dollar will impact the
amount of our revenues. • Our
ability to generate internal growth. • Market
acceptance of existing and new products. • Operating
margin risk due to competitive pricing and operating efficiencies, supply
chain risk, material, labor or overhead cost increases, interest rate risk
and commodity risk. • Restrictive
loan covenants or our ability to repay or refinance debt under our credit
facilities could limit our future financing options and liquidity position
and may limit our ability to grow our business. • Our
ability to develop and grow our wind energy business. • General
economic and market conditions in the electrical equipment, power generation,
commercial construction, industrial production, oil and gas, marine and
infrastructure industries. • The
impact of geopolitical activity on the economy, changes in government
regulations such as income taxes, climate control initiatives, the timing or
strength of an economic recovery in our markets and our ability to access
capital markets. • Unanticipated
increases in raw material prices or disruptions in supply could increase
production costs and adversely affect our profitability. 24 • Our
chairman controls a majority of our combined voting power, and may have, or
may develop in the future, interests that may diverge from yours. • Future
sales of large blocks of our common stock may adversely impact our stock
price. 25 Our common
stock was originally approved for quotation on the OTC Bulletin Board on
February 2, 2009 and since January 7, 2010, our common stock has been quoted
under the trading symbol PPSI.OB. Prior to January 7, 2010, our common stock
did not trade regularly. The following table sets forth the high and low bid
prices for our common stock for the periods indicated, as reported by the OTC
Bulletin Board. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
The quotations are adjusted for the
anticipated one-for-five reverse stock split of our common stock that is
expected to occur the day immediately following the effectiveness of the registration
statement of which this prospectus is a part. High Low Fiscal Year 2010 First Quarter $ 17.00 $ 7.50 Second Quarter $ 15.45 $ 13.25 Third Quarter $ 15.25 $ 10.00 Fourth Quarter $ 15.00 $ 13.25 Fiscal
Year 2011 First Quarter $ 15.30 $ 10.00 We intend to
effectuate a one-for-five reverse stock split, in order to comply with the
listing requirements of Nasdaq Capital Market that is expected to occur
the day immediately following the effectiveness of the registration statement of which
this prospectus is a part. Such reverse stock split would immediately increase
our stock price. In addition, such reverse stock split would reduce the number
of shares of common stock outstanding and may affect the liquidity of our
common stock. 26 We intend to use the net proceeds as follows: • approximately
$4 million to fund new acquisition opportunities; • approximately
$3 million to offer extended equipment purchase terms to future customers of
our wind energy business; • approximately
$6 million for the repayment of all debt outstanding under Jefferson
Electric, Inc.’s revolving
credit facility and term credit facility, which mature in October 2011 and bear interest at 6.5% annually and 7.27%
annually, respectively; and • the
balance of the net proceeds for general corporate purposes. Investors are cautioned, however, that
expenditures may vary substantially from these estimates. Investors will be
relying on the judgment of our management, who will have broad discretion
regarding the application of the proceeds of this offering. The amounts and
timing of our actual expenditures will depend upon numerous factors, including
our potential investments in new businesses, the amount of cash generated by
our operations, the amount of competition and other operational factors. We may
find it necessary or advisable to use portions of the proceeds from this
offering for other purposes. From time to time, we evaluate these and
other factors and we anticipate continuing to make such evaluations to
determine if the existing allocation of resources, including the proceeds of
this offering, is being optimized. Circumstances that may give rise to a change
in the use of proceeds include: • our
ability to negotiate definitive agreements with acquisition candidates; • the
availability and terms of debt financing to fund a portion of the purchase
price(s) for potential acquisitions; • the
status of our efforts to sell wind turbines with equipment financing terms
acceptable to us; • the
need or desire on our part to accelerate, increase or eliminate existing
initiatives due to, among other things, changing market conditions and
competitive developments; and • the
availability of other sources of cash including cash flow from operations and
new bank debt financing arrangements, if any. Until we use
the net proceeds of this offering, we will invest the funds in short-term,
investment grade, interest-bearing securities. We have never
paid any cash dividends on our common stock. We anticipate that we will retain
earnings to support operations and to finance the growth and development of our
business. Therefore, we do not expect to pay cash dividends in the foreseeable
future. Notwithstanding the foregoing, Pioneer Transformers Ltd., our wholly-owned 27 subsidiary, prior to our share exchange on December 2, 2009, paid cash dividends to
Provident Pioneer Partners, L.P., its sole stockholder at the time, of $2.7
million during 2009. 28 • on
an actual basis; and
• on a
pro forma, as adjusted basis, giving effect to (1) the anticipated
one-for-five reverse stock split of our common stock that is expected to occur
the day immediately following the effectiveness of the registration statement of which
this prospectus is a part, and (2) our receipt of the net proceeds from the
sale by us in this offering of shares of common stock at an assumed public
offering price of $9.00
per share, the midpoint of the range set forth on the cover page of this
prospectus, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us and (3) the application of the net proceeds we will receive
from this offering in the manner described in “Use of Proceeds.” March 31, 2011 Actual As Adjusted (in
thousands) Cash and cash equivalents $ 140 $ 7,530
Short-term debt, including current portion of long-term debt $ 6,224 $ 14 Long-term debt, less current portion 13 13 Stockholders’ equity (1): Preferred stock, no par value; 5,000,000 shares authorized, no shares
issued and outstanding, actual; 5,000,000 authorized, no shares issued and
outstanding, as adjusted - - Common stock; par value $0.001; 75,000,000 shares authorized,
29,536,275 shares issued and outstanding, actual; 30,000,000 shares
authorized, 7,607,255 shares issued and outstanding, as adjusted 30 8
Additional paid-in capital 7,578 21,177
Accumulated other comprehensive income (loss) (77 ) (77 ) Retained earnings 8,813 8,813 Total stockholders’ equity 16,344 29,920
Total capitalization $ 22,581 $ 29,947
29 The discussion below gives
effect to the anticipated one-for-five reverse stock split of our common stock
that is expected to occur the day immediately following the effectiveness of the
registration statement of which this prospectus is a part. After giving effect to
adjustments relating to the offering, our pro forma net tangible book value on
March 31, 2011, would have been $20,026,988 or $2.63 per share. The adjustments
made to determine pro forma net tangible book value per share are the
following: • An increase in total assets to reflect the net proceeds of the offering as described under “Use
of Proceeds” (assuming that the public offering price will be $9.00 per share, the midpoint of the range set forth on the
cover page of this prospectus). • The
addition of the number of shares offered by this prospectus to the number of
shares outstanding. Assumed public offering price per share $ 9.00 Net tangible book value per share as of March 31,
2011 $ 1.09 Increase in net tangible book value per share
attributable to the offering $ 1.54 Pro forma net tangible book value per share as
of March 31, 2011 after giving effect to the offering $ 2.63 Dilution per share to new investors in the
offering $ 6.37 The following table shows
the difference between existing stockholders and new investors with respect to
the number of shares purchased from us, the total consideration paid and the
average price paid per share. The table assumes that the public offering price
will be $9.00 per share, the midpoint of the range set forth on the cover page
of this prospectus. Shares Purchased Total Consideration Average Price Number Percent Amount Percent Per Share Existing stockholders 5,907,255 77.7 % $ 6,825,432 30.8 % $ 1.16 New investors 1,700,000 22.3 % $ 15,300,000 69.2 % $ 9.00 Total 7,607,255 100.0 % $ 22,125,432 100.0 % The foregoing tables and
calculations are based on the number of shares of our common stock outstanding
as of March 31, 2011 and exclude: • 342,600
shares of common stock subject to the over-allotment option granted to the
underwriters. • 118,400
shares of common stock issuable upon the exercise of currently outstanding
options at a weighted average exercise price of $15.07; • 640,000
shares of common stock issuable upon the exercise of currently outstanding
warrants at a weighted average exercise price of $14.00 per share; and • 201,600
shares of common stock available for issuance under our 2009 Equity Incentive Plan. 30 The sale of 584,000 shares
of our common stock by the selling stockholders in this offering will reduce
the number of shares of our common stock held by existing stockholders to
5,323,255 shares, or 70.0% of the total shares outstanding, and will increase
the number of shares of our common stock held by new investors to 2,284,000
shares, or 30.0% of total shares of our common stock outstanding. 31 Selected Consolidated Financial Data This section
presents our selected historical financial data. You should read carefully the
financial statements included in this prospectus, including the notes to the
financial statements. The selected data in this section is not intended to
replace the financial statements. The share and per share amounts set forth below reflect the anticipated one-for-five reverse
stock split of our common stock. Selected Consolidated Financial Data Years Ended Three Months Ended 2008 2009 2010 2010 2011 Statement of Operations Data: Revenue $ 43,844 $ 40,599 $ 47,236 $ 8,250 $ 15,726
Cost of goods sold 34,896 28,734 35,637 6,444 11,405
Gross profit 8,988 11,865 11,599 1,806 4,321
Operating expenses: Selling, general and administrative 4,379 4,220 8,048 1,150 2,790
Foreign exchange (gain) loss (98 ) (272 ) (139 ) 92 (17
) Total operating
expenses 4,281 3,948 7,909 1,242 2,773
Operating income 4,707 7,917 3,690 564 1,548
Interest and bank charges 512 312 183 13 122
Other expense (income) 700 - 884 - - Gain on bargain purchase - - (650 ) - - Earnings before income taxes 3,495 7,605 3,273 551 1,426 Provision for income taxes 1,357 2,490 327 161 463 Net earnings $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963
Earnings per diluted common share $ 0.47 $ 1.10 $ 0.50 $ 0.07 $ 0.16
Weighted average diluted common shares outstanding 4,560 4,659 5,931 5,813 5,950
Other Data: Non-GAAP earnings per diluted common share $ 0.58 $ 1.10 $ 0.43 $ 0.07 $ 0.17 Adjusted EBITDA (Non-GAAP measure) $ 4,999 $ 8,224 $ 4,849 $ 679 $ 1,830
Average exchange rate during period (CAD/USD) 1.0671 1.1415 1.0301 1.0409 0.9860
Balance
Sheet Data: Cash and cash equivalents $ 368 $ 1,560 $ 516 $ 3,116 $ 140 Working capital 1,727 8,962 2,033 9,596 3,198 Total assets 11,555 14,595 32,103 15,351 35,785 Total debt 410 284 6,080 242 6,237 Total liabilities 9,439 4,988 17,011 5,098 19,441 Total shareholders’ equity 2,115 9,607 15,092 10,253 16,344 32 Use of Non-GAAP Financial Measures We have
presented non-GAAP measures such as non-GAAP net earnings and Adjusted EBITDA
because many of our investors use these non-GAAP measures to monitor our
performance. These non-GAAP measures should not be considered as an alternative
to GAAP measures as an indicator of our operating performance. Non-GAAP net
earnings is defined by us as net earnings before amortization of
acquisition-related intangibles, stock-based compensation, non-recurring
acquisition costs and reorganization expense, impairments, other unusual gains
or charges and any tax effects related to these items. We define Adjusted
EBITDA as net earnings before interest, income tax expense, depreciation and
amortization, non-cash compensation and non-recurring acquisition costs and
reorganization expenses and other non-recurring or non-cash items. Generally, a
non-GAAP financial measure is a numerical measure of a company’s performance,
financial position or cash flow that either excludes or includes amounts that
are not normally excluded or included in the most directly comparable measure
calculated and presented in accordance with GAAP. The non-GAAP measures
included below, however, should be considered in addition to, and not as a
substitute for or superior to, operating income, cash flows, or other measures
of financial performance prepared in accordance with GAAP. A reconciliation of
non-GAAP to GAAP financial measures is set forth in the table below. Reconciliation
of GAAP Measures to Non-GAAP Measures Years Ended Three Months Ended 2008 2009 2010 2010 2011 Non-GAAP Net Earnings and Diluted EPS: Net earnings per share (GAAP measure) $ 0.47 $ 1.10 $ 0.50 $ 0.07 $ 0.16
Net earnings (GAAP measure) $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963
Amortization of acquisition intangibles - - 144 - 53
Stock-based compensation expense - - 161 4 61
Stock and warrant issuance expense for services - - 232 21 - Non-recurring acquisition and reorganization costs - - 884 - - Impairment charges 700 - - - - Gain on bargain purchase - - (650 ) - - Canadian tax recovery - - (831 ) - - Tax adjustments (209 ) - (323 ) (10 ) (44 ) Non-GAAP net earnings $ 2,629 $ 5,115 $ 2,562 $ 405 $ 1,033
Non-GAAP net earnings per diluted share $ 0.58 $ 1.10 $ 0.43 $ 0.07 $ 0.17
Weighted average diluted shares outstanding 4,560 4,659 5,931 5,813 5,950
Reconciliation to Adjusted EBITDA: Net earnings (GAAP measure) $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963
Interest and bank charges 512 312 183 13 122
Provision for income taxes 1,357 2,490 327 161 463
Depreciation and amortization 292 307 767 90 221
Gain on bargain purchase - - (650 ) - - Non-recurring acquisition and reorganization costs - - 884 - - Impairment charges 700 - - - - EBITDA 4,999 8,224 4,457 654 1,769
Adjustments to EBITDA: Stock-based compensation expense - - 161 4 61
Stock and warrant issuance expense for services - - 232 21 - Adjusted EBITDA (Non-GAAP measure) $ 4,999 $ 8,224 $ 4,849 $ 679 $ 1,830
33 Management’s Discussion and Analysis of You should read the following discussion and analysis of our
financial condition and results of operations together with the section
entitled “Selected Consolidated Financial Data” and our financial statements
and related notes appearing elsewhere in this prospectus. In addition to
historical financial information, the following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to these differences include those
discussed below and elsewhere in this prospectus, particularly in the section
entitled “Risk Factors.” See “Cautionary Note Regarding Forward-Looking
Statements.” Overview and Recent Events We are an owner and operator
of electrical equipment and service businesses headquartered in Fort Lee, New
Jersey. Our subsidiaries provide a range of products and services to the
electrical transmission and distribution industry. Our focus is on the electric
utility, industrial, commercial and wind energy market segments and our customers
are primarily located in North America. On December 2, 2009, we
completed a share exchange pursuant to which we acquired all of the issued and
outstanding capital stock of Pioneer Transformers Ltd. in exchange for a
controlling interest in us and our officers and directors at that time were
replaced by designees of Pioneer Transformers Ltd. In addition, following the
share exchange, we discontinued development of our former business and
succeeded to the business of Pioneer Transformers Ltd. As a result, the share
exchange was accounted for as a reverse business combination in which Pioneer
Transformers Ltd., rather than us, was deemed to be the accounting acquirer.
Accordingly, the historical financial statements presented and the discussion
of financial condition and results of operations herein are those of Pioneer
Transformers Ltd. and do not include historical financial results of our former
business. On April 30, 2010, we
completed the acquisition of Jefferson Electric, Inc., a Wisconsin-based manufacturer
and supplier of dry-type transformers. In addition, through transactions
completed in June and August 2010 we acquired substantially all the assets and
the capital stock of AAER Inc. to form Pioneer Wind Energy Systems Inc. AAER
Inc. was formerly a manufacturer of wind turbines with generation capacities
exceeding one megawatt based in Quebec, Canada.
On May 13, 2011, we entered into a definitive agreement to acquire
100% of the stock of Transformateur Bemag Inc., a Quebec-based manufacturer of
low and medium voltage dry-type transformers. Among other conditions to closing,
there is a requirement that the parties enter into a similar agreement providing
for the purchase of Vermont Transformer, Inc., an affiliate of Transformateur
Bemag, Inc., located in St. Albans, Vermont. The transactions are expected to
close at the start of our third quarter in July 2011. Accounting for the Share Exchange The share exchange on
December 2, 2009 was accounted for as a recapitalization. Pioneer Transformers
Ltd. was the acquirer for accounting purposes and we were the acquired company.
Accordingly, the historical financial statements presented and the discussion
of financial condition and results of operations herein are those of Pioneer
Transformers Ltd., retroactively restated for, and giving effect to, the number
of shares received in the share exchange, and do not include the historical
financial results of our former business. The accumulated earnings of Pioneer
Transformers Ltd. were also carried forward after the share exchange and
earnings per share have been retroactively restated to give effect to the
recapitalization for all periods presented. Therefore, results of operations
reported for periods prior to the share exchange are those of Pioneer
Transformers Ltd. Foreign Currency Exchange Rates In connection with our
acquisition of Pioneer Transformers Ltd. and the discontinuation of our former
business, we elected to report our financial results in U.S. dollars.
Accordingly, all comparative financial information contained in this discussion
has been recast from Canadian dollars to U.S. dollars. We also elected to
report our financial 34 results in accordance with
generally accepted accounting principles in the U.S. to improve the
comparability of our financial information with our peer companies. 2011 2010 2009 Consolidated
Consolidated Statements of Consolidated Consolidated Statements Consolidated
Consolidated
Quarter
End of
Period Period Cumulative End of
Period Period Cumulative End of
Period Period Cumulative March 31 $0.9696 $0.9860 $0.9860 $1.0158 $1.0409 $1.0409 $1.2613 $1.2453 $1.2453 June 30 $1.0646 $1.0276 $1.0343 $1.1630 $1.1672 $1.2062 September 30 $1.0290 $1.0391 $1.0359 $1.0707 $1.0974 $1.1700 December 31 $0.9946 $1.0128 $1.0301 $1.0510 $1.0563 $1.1415 Although we have elected to
report our results in accordance with generally accepted accounting principles
in the U.S. and in U.S. dollars, our largest operating subsidiary, Pioneer
Transformers Ltd., is a Canadian entity and its functional currency is the
Canadian dollar. As such, its financial position, results of operations, cash
flows and equity are initially consolidated in Canadian dollars. The
subsidiary’s assets and liabilities are then translated from Canadian dollars to
U.S. dollars by applying the foreign currency exchange rate in effect at the
balance sheet date, while the results of our operations and cash flows are
translated to U.S. dollars by applying the average foreign currency exchange
rate in effect during the reporting period. The resulting translation
adjustments are included in other comprehensive income or loss. The financial position and
operating results of Pioneer Transformers Ltd. have been translated to U.S.
dollars by applying the following exchange rates, expressed as the number of
Canadian dollars to one U.S. dollar for each period reported: Critical Accounting Policies Use of Estimates. The preparation of financial statements in accordance with generally
accepted accounting principles in the U.S. requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The financial statements include estimates based on currently
available information and our judgment as to the outcome of future conditions
and circumstances. Significant estimates in these financial statements include
pension expense, inventory provisions, useful lives and impairment of
long-lived assets, determination of fair values of warrants and allowance
for doubtful accounts. Changes in the status of certain facts or circumstances
could result in material changes to the estimates used in the preparation of
the financial statements and actual results could differ from the estimates and
assumptions. Revenue Recognition Policies. Revenue is recognized when (1) persuasive
evidence of an arrangement exists, (2) delivery occurs, (3) the sales price is
fixed or determinable, (4) collectability is reasonably assured and (5)
customer acceptance criteria, if any, have been successfully demonstrated.
Revenue is recognized on the sale of goods, when the significant risks and
rewards of ownership have been transferred to the buyer upon delivery, provided
that we maintain neither managerial involvement to the degree usually associated
with ownership, nor effective control over the goods sold. There are no further
obligations on our part subsequent to revenue recognition, except when
customers have the right of return or when we warrant the product. We record a
provision for future returns, based on historical experience at the time of
shipment of products to customers. We warrant some of our products against
defects in design, materials and workmanship for periods ranging from one to
three years depending on the model. We record a provision for estimated future
warranty costs based on the historical relationship of warranty claims to sales
at the time of shipment of products to customers. We periodically review the
adequacy of our product warranties and adjust, if necessary, the warranty
percentage and accrued warranty reserve for actual experience. 35 Changes in Accounting Principles No significant changes in
accounting principles were adopted during 2009 and 2010, except for the
following: Fair Value Measurements. In January 2010, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06,
“Fair Value Measurements and Disclosures (Topic 820)” (“ASU 2010-06”). ASU
2010-06 requires reporting entities to make more robust disclosures about (1)
the different classes of assets and liabilities measured at fair value, (2) the
valuation techniques and inputs used, (3) the activity in Level 3 fair value
measurements, including information on purchases, sales, issuances, and
settlements on a gross basis, and (4) the transfers between Levels 1, 2, and 3.
ASU 2010-06 is effective for fiscal years beginning on or after December 15,
2009, except for the disclosure regarding Level 3 activity, which is effective
for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06
for Levels 1 and 2 did not have a material impact on our consolidated financial
statements, and we do not expect the adoption of the standard for Level 3 to
have a material impact on our consolidated financial statements. Results of Operations Revenue. For the three months ended March 31, 2011, consolidated revenues
increased 90.6% to $15.7 million, up from $8.3 million during the three months ended
March 31, 2010. The acquisition of Jefferson Electric, Inc. on April 30, 2010
contributed approximately $5.2 million to our revenue during the three months
ended March 31, 2011, versus $4.4 million in the three months ended March 31,
2010, which was prior to our acquisition of Jefferson Electric, Inc. Revenue
from Pioneer Transformers Ltd. increased by approximately $2.2 million, or
27.1%, during the three months ended March 31, 2011, as compared to the three
months ended March 31, 2010. This increase was due to higher average selling
prices due to the mix of products sold, as well as to strengthened demand from
industrial and renewable energy customers, as compared to the prior year. Our
wind energy business, which was established in June 2010, made no contribution
to our total revenue during either reporting period. Gross Margin. For the three months ended March 31, 2011, our gross margin
percentage increased to 27.5% of revenues, compared to 21.9% during the three
months ended March 31, 2010. This 5.6% gross margin increase was due to a more
favorable product mix experienced by our Pioneer Transformers Ltd. business
during the three months ended March 31, 2011, as compared to the three months
ended March 31, 2010. Our Jefferson Electric, Inc. subsidiary also experienced
a gross margin improvement during the three months ended March 31, 2011, as
compared to the three months ended March 31, 2010 which was prior to our
acquisition of Jefferson Electric, Inc. Selling, General and Administrative Expense. For the three months ended March 31, 2011,
selling, general and administrative expense increased by approximately $1.6
million, or 142.6%, to $2.8 million, as compared to $1.2 million during the
three months ended March 31, 2010. Approximately $1.2 million of the increase
was due to the inclusion of Jefferson Electric, Inc. ($1.0 million) and Pioneer
Wind Energy Systems Inc. ($0.2 million) in our consolidated results during the
three months ended March 31, 2011. In addition, $0.3 million of the increase
was due to higher corporate expenses. Operating expenses attributable to
Pioneer Transformers Ltd. increased by $0.1 million in the three months ended
March 31, 2011 as compared to the prior year. Foreign Exchange (Gain) Loss. Most of our consolidated operating revenues
are denominated in Canadian dollars, principally via our Pioneer Transformers
Ltd. operating subsidiary, and a material percentage of our expenses are
denominated and disbursed in U.S. dollars. We have not historically engaged in
currency hedging activities. Fluctuations in foreign currency exchange rates
between the time we initiate and then settle transactions with our customers
and suppliers can have an impact on our operating results. For the three months
ended March 31, 2011, we recorded a gain of approximately $17,000 due to
currency fluctuations, compared to a loss of approximately $92,000 during the
three months ended March 31, 2010. Interest and Bank Charges. For the three months ended March 31, 2011,
interest and bank charges were approximately $122,000 as compared to $13,000
for the three months ended March 31, 2010. The increase in interest expense was
due to higher average borrowings as a result of the assumption of our Jefferson
Electric, Inc. subsidiary’s debt during the second quarter of 2010. 36 Net Earnings. We generated net earnings of $1.0 million for the three months ended
March 31, 2011, up 147% from approximately $0.4 million during the three months
ended March 31, 2010. Our net earnings benefited from significantly stronger
sales and earnings from our Pioneer Transformers Ltd. subsidiary. Earnings per
basic and diluted share was $0.03 for the three months ended March 31, 2011, as
compared to $0.01 per basic and diluted share for the three months ended March
31, 2010. There were 0.7 million additional weighted average diluted shares
outstanding during the three months ended March 31, 2011, as compared to the
three months ended March 31, 2010, a change due primarily to the issuance of
our common shares in conjunction with the acquisition of Jefferson Electric,
Inc. Backlog. Our order backlog at March 31, 2011 was $18.2 million, down 2.3% from
$18.7 million at December 31, 2010. The decrease in the dollar value of our
backlog was distributed evenly between our Pioneer Transformers Ltd. and
Jefferson Electric, Inc. subsidiaries. Our backlog is based on orders expected
to be delivered in the future, most of which is expected to occur during 2011. Year Ended December 31,
2010 Compared to the Year Ended December 31, 2009 Revenue. For the year ended December 31, 2010, consolidated revenues increased
16.3% to $47.2 million, up from $40.6 million during the year ended December
31, 2009. The acquisition of Jefferson Electric, Inc. on April 30, 2010
contributed approximately $13.2 million to our revenue during 2010, versus no
contribution in 2009. Revenue from Pioneer Transformers Ltd. decreased by
approximately $6.5 million, or 16.1%, during the year ended December 31, 2010,
as compared to 2009. This decline was due to lower unit volume, attributed
primarily to weakness in demand from industrial customers, as compared to the
prior year. Our wind energy business, which was established in June 2010, made
no contribution to our total revenue in 2010 and 2009. Gross Margin. For the year ended December 31, 2010, our gross margin percentage
decreased to 24.6% of revenues, compared to 29.2% during the year ended
December 31, 2009. This decrease was attributable primarily to less favorable
product mix and lower unit volume experienced by our Pioneer Transformers Ltd. business
during the year ended December 31, 2010, as compared to the prior year. In
addition, our new Jefferson Electric, Inc. subsidiary generally achieves a
lower gross margin percentage as compared to Pioneer Transformers Ltd. On a
consolidated basis, approximately 3.1% of the gross margin decline was
attributable to Pioneer Transformers Ltd. and 1.5% to Jefferson Electric, Inc. Selling, General and Administrative Expense. For the year ended December 31, 2010,
selling, general and administrative expense increased by approximately $3.8
million, or 90.7%, to approximately $8.0 million, as compared to $4.2 million
during the year ended December 31, 2009. Approximately $1.5 million of the
increase was due to higher corporate expenses mostly incurred in connection
with being a public company, including $0.4 million for non-cash costs
associated with the issuance of employee and director stock options and the
issuance of stock and warrants to our investor relations firm. The remaining
$2.4 million net increase is attributable to the inclusion of Jefferson
Electric, Inc. ($2.4 million) and Pioneer Wind Energy Systems Inc. ($0.4
million) in our consolidated results during the year ended December 31, 2010,
offset by reduced selling, general and administrative expense at Pioneer
Transformers Ltd. ($0.5 million). Foreign Exchange (Gain) Loss. Most of our consolidated operating revenues
are denominated in Canadian dollars, principally via our Pioneer Transformers
Ltd. operating subsidiary, and a material percentage of our expenses are
denominated and disbursed in U.S. dollars. We have not historically engaged in
currency hedging activities. Fluctuations in foreign currency exchange rates
between the time we initiate and then settle transactions with our customers
and suppliers can have an impact on our operating results. For the year ended
December 31, 2010, we recorded a gain of $0.1 million due to currency
fluctuations, compared to a gain of approximately $0.3 million during the year
ended December 31, 2009. 37 Interest and Bank Charges. For the year ended December 31, 2010,
interest and bank charges were approximately $0.2 million, as compared to $0.3
million for the year ended December 31, 2009. The decrease in interest expense
was due to the reversal of approximately $0.1 million of interest accrued that
was related to a tax liability previously recorded by Pioneer Transformers Ltd.
In the fourth quarter of 2010, we agreed to a settlement with the Canadian tax
authorities whereby no interest charges will be imposed and we are instead
expecting to receive a significant refund. Without the effect of reversing this
accrued interest, our interest expense would have been stable during 2010 as
compared to 2009. We had higher average borrowings as a result of the
assumption of our Jefferson Electric, Inc. subsidiary’s debt in 2010. The
resulting increase in interest expense was offset by a decrease at Pioneer
Transformers Ltd. which had significantly lower average borrowings during 2010
as compared to 2009, primarily due to the repayment of approximately $4.4
million of its bank indebtedness in December 2009. Other Expense (Income). For the year ended December 31, 2010, our
other expense of $0.9 million consisted of professional fees and restructuring
costs related to our acquisitions of Jefferson Electric, Inc., select
assets from AAER Inc. and the acquisition of AAER Inc. Approximately 50% of
these costs were transaction-related fees and expenses. The remainder of other
expense (income) was incurred in connection with restructuring AAER Inc.’s
business following the acquisition. Gain on Bargain Purchase. On June 7, 2010, we acquired most of the
inventory and substantially all of the capital assets, intangible assets and
intellectual property of AAER Inc. for approximately $0.4 million in cash. In
connection with the transaction, the fair value of the inventory and capital
assets acquired, net of deferred tax liabilities, was determined to be
approximately $1.5 million. In August 2010, we sold a portion of the AAER Inc.
assets that were acquired in June at a price exceeding their initially recorded
fair value, resulting in an additional gain on sale of approximately $0.1
million. Accordingly, we recognized a gain on bargain purchase of approximately
$1.1 million, representing the excess of the fair value of net assets acquired
over the consideration paid. In the fourth quarter of 2010, we determined that
certain of the capital assets we acquired were impaired by an amount of $0.4
million, resulting in a reduction to the previously recognized gain on bargain
purchase to $0.7 million. Provision for Income Taxes. Our provision for income taxes reflects an
effective tax rate on earnings before income taxes of 10.0% in 2010 compared to
32.7% in 2009. The decrease in the effective tax rate resulted primarily from a
settlement we reached with the Canadian tax authority resulting in a $0.9
million refund of taxes previously paid by us, to be received during 2011. Backlog. Our order backlog at December 31, 2010 was $18.7 million, up 13.3%
from $16.5 million at December 31, 2009. The $2.2 million increase in our
backlog is evenly split between new orders received by Pioneer Transformers
Ltd. and the inclusion of backlog from Jefferson Electric, Inc. in the 2010
period. Our backlog is based on orders expected to be delivered in the future,
most of which is expected to occur during 2011. New orders placed during the
year ended December 31, 2010 totaled $47.7 million, an increase of 25.7% compared
to new orders of $38.0 million that were placed during the year ended December
31, 2009. The large percentage increase in orders on a year-over-year basis is
primarily due to the inclusion of Jefferson Electric, Inc. in our 2010 results. 38 Liquidity and Capital Resources Three Months Ended March 31, 2011 Compared to Three Months
Ended March 31, 2010 Our operating activities
used cash flow of approximately $1.0 million during the three months ended
March 31, 2011, compared to cash flow generated from operating activities of
$1.6 million during the three months ended March 31, 2010. The principal
elements of cash flow from operating activities during the three months ended
March 31, 2011 were net earnings of $1.0 million and $0.1 million of non-cash
expenses included in our net earnings, offset by approximately $2.1 million of
cash used due to higher working capital requirements. Cash used in investing
activities during the three months ended March 31, 2011 was approximately $0.1
million, as compared to $45,000 during the three months ended March 31, 2010.
During the three months ended March 31, 2011 and 2010, our cash used in
investing activities consisted entirely of additions to property, plant and
equipment. Cash provided by our
financing activities was approximately $0.8 million during the three months
ended March 31, 2011, compared to cash used of $0.1 million during the three
months ended March 31, 2010. Our source of cash from financing activities
during the three months ended March 31, 2011 was $0.9 million from short term
bank borrowings to support our working capital requirements, offset by
approximately $0.1 in million for long-term debt and capital lease obligation
payments. During the three months ended March 31, 2010, we paid approximately
$0.1 million in the aggregate for transactions costs related to the common
stock private placement completed on December 2, 2009 and for principal
repayments of debt. As of March 31, 2011, our
current assets were 1.2 times our current liabilities. Current assets increased
by $3.6 million and current liabilities increased by $2.5 million during the
three months ended March 31, 2011. These increases were primarily due to increased
accounts receivable and inventories at Pioneer Transformers Ltd. during the
three months ended March 31, 2011. As a result, our net working capital balance
increased by $1.0 million to $3.2 million during the three months ended March
31, 2011, as compared to $2.0 million of net working capital as of December 31,
2010. Year Ended December 31,
2010 Compared to the Year Ended December 31, 2009 Our operating activities
generated cash flow of approximately $3.3 million during the year ended
December 31, 2010, compared to cash flow from operating activities of $4.3
million during the year ended December 31, 2009. The principal elements of cash
flow from operating activities during 2010 were net earnings of $2.9 million,
offset by $0.7 million of non-cash income related to the gain on bargain
purchase associated with the AAER Inc. transaction. Cash flow from operating
activities during 2010 also increased by approximately $0.2 million from
changes in our operating working capital and $0.9 million from the effect of
non-cash expenses included in our net earnings. Cash used in investing
activities during the year ended December 31, 2010 was approximately $2.3
million, as compared to $0.3 million during the year ended December 31, 2009.
During the year ended December 31, 2010, we used approximately $1.7 million for
capital expenditures, principally for the expansion of our manufacturing
facility located in Quebec, Canada. In 2010, we used another $0.8 million for
acquisitions. Offsetting our cash used in investing activities was $0.2 million
of net proceeds we received from the sale of certain capital assets we had
previously purchased from AAER Inc. During the year ended December 31, 2009,
our cash used in investing activities consisted entirely of additions to property
and equipment at Pioneer Transformers Ltd. 39 Cash used by our financing
activities was approximately $2.0 million during the year ended December 31,
2010, compared to $2.5 million during the year ended December 31, 2009. Our
primary use of cash for financing activities during the year ended December 31,
2010 was for debt repayment of $1.9 million, together with approximately $0.1
million for equity financing transaction costs. During the year ended December
31, 2009, we raised gross proceeds of $5.0 million from an issuance of common
stock to investors. Our primary uses of cash for financing activities in 2009
consisted of $4.5 million in debt repayments, $2.7 million to make dividend
payments to Provident Pioneer Partners, L.P., previously the sole stockholder
of Pioneer Transformers Ltd., and $0.2 million for equity financing transaction
costs. As of December 31, 2010, our
current assets were 1.1 times our current liabilities. Current assets increased
by $2.1 million and current liabilities increased by $9.0 million during the
year ended December 31, 2010. These increases were primarily due to the
acquisition of Jefferson Electric, Inc. during the year and the inclusion of
its current maturities of debt and accounts payable and accrued liabilities. As
a result, our net working capital balance decreased by $6.9 million to $2.0
million during the year ended December 31, 2010, as compared to $9.0 million of
net working capital as of December 31, 2009. Credit Facilities. In October 2009, our Pioneer Transformers Ltd. subsidiary entered
into a financing arrangement with a Canadian bank that replaced its previous
credit facility. Expressed in approximate U.S. dollars, the $10.0 million
credit agreement consists of a $7.7 million demand revolving credit facility, a
$1.8 million term loan facility and a $0.5 million foreign exchange settlement
risk facility. The credit facilities are secured by a first-ranking lien in the
amount of approximately $10.0 million on all of our assets, as well as a
collateral mortgage of $10.0 million on our land and buildings. Our Jefferson Electric, Inc.
subsidiary has a bank loan agreement with a U.S. bank that includes a revolving
credit facility with a borrowing base of $5.0 million and a term credit
facility. Monthly payments of accrued interest must be made under the revolving
credit facility and monthly payments of principal and accrued interest must be
made under the term credit facility, with a final payment of all outstanding
amounts due on October 31, 2011. We believe that our relationships with our
banks are good and that we will be able to repay or refinance these credit
facilities at or before maturity through a combination of cash on hand, cash
flow from operations or through a replacement credit facility. Borrowings under
the bank loan agreement are collateralized by substantially all the assets of
Jefferson Electric, Inc. and are guaranteed by its Mexican subsidiary. In
addition, an officer of Jefferson Electric, Inc. is a guarantor under the bank
loan agreement and has provided additional collateral to the bank in the form of
our common stock and a warrant to purchase our shares of common stock held by
him. The bank loan agreement
requires Jefferson Electric, Inc. to comply with certain financial covenants,
including a requirement to exceed minimum quarterly targets for tangible net
worth, as defined, and maintain a minimum debt service coverage ratio. The bank
loan agreement also restricts Jefferson Electric, Inc.’s ability to pay
dividends or make distributions, advances or other transfers of assets. The
interest rate under the revolving credit facility is equal to the greater of
the bank’s reference rate (currently 3.25% annually) or 6.5% annually. The
interest rate under the term credit facility is 7.27% annually. As of March 31,
2011, our Jefferson Electric, Inc. subsidiary had approximately $3.5 million
outstanding under the revolving credit facility and approximately $2.7 million
outstanding under the term credit facility and was in compliance with its
financial covenant requirements. Equipment Loans and Capital Lease Obligations. As of March 31, 2011, we had equipment
loans and capital lease obligations with an aggregate principal amount
outstanding of approximately $28,000, as compared to approximately $31,000
outstanding as of December 31, 2010. These equipment loans and capital lease
obligations 40 bear interest at rates
varying from 0.0% to 18.8% and are repayable in monthly installments. We
anticipate that these equipment loans will be paid off by the end of December
2013. Loans from Stockholders. Certain limited partners of Provident
Pioneer Partners, L.P., our controlling stockholder, previously advanced to us
an aggregate of $150,000 at an interest rate of 12% per annum with no specific
terms of repayment. During the year ended December 31, 2010, the aggregate principal
amount of these advances were repaid in full. Subsequent Events. In April 2011, our Pioneer Transformers Ltd. subsidiary revised its
financing arrangement with its Canadian bank and thereby replaced its October
2009 credit facilities. The terms of the new credit agreement are substantially
similar to the 2009 credit agreement. Expressed in approximate U.S. dollars,
the $10.2 million credit agreement consists of a $7.7 million demand revolving
credit facility, a $2.0 million term loan facility and a $0.5 million foreign
exchange settlement risk facility. The term loan facility, of which
approximately $1.9 million was drawn during May 2011, will have principal
repayments becoming due on a seven year amortization schedule, as compared to
five year amortization in the previous credit agreement. In addition, the new
credit facilities are no longer secured by a collateral mortgage of $10.0
million on the land and buildings of Pioneer Transformers Ltd. On May 13, 2011, we entered
into a definitive agreement to acquire the stock of Transformateur Bemag Inc.
for cash consideration of $5.5 million Canadian dollars. Among other conditions
to closing, there is a requirement that the parties enter into a similar
agreement providing for the purchase of Vermont Transformer, Inc., an affiliate
of Transformateur Bemag, Inc., for cash consideration of $1.0 million Canadian
dollars. Transformateur Bemag Inc. and Vermont Transformer, Inc. design and
manufacture low and medium voltage dry-type transformers and custom magnetics
for customers in the commercial and industrial segments of the North American
electrical equipment market. The companies operate from locations in Farnham,
Quebec and St. Albans, Vermont, generating approximately $15.0 million of
revenue annually on a combined basis. We anticipate that funding for the cash
portion of the transaction consideration will be provided by a new acquisition
term loan credit facility to be established with our Canadian bank. The
transactions are expected to close at the start of our third quarter in
July 2011. Financial Guidance Cautionary Note on Estimates and Projections Any estimates, forecasts or
projections set forth below or elsewhere in this prospectus have been prepared
by our management in good faith on a basis believed to be reasonable. Such
estimates, forecasts and projections involve significant elements of subjective
judgment and analysis as well as risks (many of which are beyond our control).
As such, no representation can be made as to the attainability of our forecasts
and projections. Investors are cautioned that such estimates, forecasts or
projections have not been audited and have not been prepared in conformance
with generally accepted accounting principles. For a listing of risks and other
factors that could impact our ability to attain our projected results, please
see “Cautionary Note Regarding Forward-Looking Statements”. Outlook for 2011 41 Net Earnings. We expect our non-GAAP net earnings
will increase to between $0.80 and $0.95 per diluted share in the year ending
December 31, 2011, as compared to $0.43 per diluted share in 2010 (each as
adjusted for the anticipated one-for-five reverse stock split). Our electrical
transformer segment accounts for most of our expected earnings improvement
during 2011. Including the additional shares to be outstanding after this
offering of our common stock, and our anticipated use of the net proceeds,
we expect that our non-GAAP net earnings per diluted share will be between
$0.72 and $0.88. Non-GAAP net earnings is defined by us as net earnings
before amortization of acquisition-related intangibles, stock-based compensation,
non-recurring acquisition costs and reorganization expense, impairments,
other unusual gains or charges and any tax effects related to these items. Reconciliation of GAAP Measures to Non-GAAP Measures We have presented non-GAAP measures such as non-GAAP net earnings and non-GAAP net
earnings per share because many of our investors use these non-GAAP measures to
monitor our performance. These non-GAAP measures should not be considered as an
alternative to GAAP measures as an indicator of our operating performance. Non-GAAP net earnings is defined by us as net earnings before amortization of
acquisition-related intangibles, stock-based compensation, non-recurring
acquisition costs and reorganization expense, impairments, other unusual gains
or charges and any tax effects related to these items. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial
position or cash flow that either excludes or includes amounts that are not
normally excluded or included in the most directly comparable measure
calculated and presented in accordance with GAAP. The non-GAAP measures
included below, however, should be considered in addition to, and not as a
substitute for or superior to, operating income, cash flows, or other measures
of financial performance prepared in accordance with GAAP. A reconciliation of
non-GAAP to GAAP net earnings is set forth in the table below. 42 Reconciliation
of GAAP Measures to Non-GAAP Measures Years Ended Three Months Ended 2008 2009 2010 2010 2011 Non-GAAP Net Earnings and Diluted EPS: Net earnings per share (GAAP measure) $ 0.47 $ 1.10 $ 0.50 $ 0.07 $ 0.16
Net earnings (GAAP measure) $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963
Amortization of acquisition intangibles - - 144 - 53
Stock-based compensation expense - - 161 4 61
Stock and warrant issuance expense for services - - 232 21 - Non-recurring acquisition and reorganization costs - - 884 - - Impairment charges 700 - - - - Gain on bargain purchase - - (650 ) - - Canadian tax recovery - - (831 ) - - Tax adjustments (209 ) - (323 ) (10 ) (44 ) Non-GAAP net earnings $ 2,629 $ 5,115 $ 2,562 $ 405 $ 1,033
Non-GAAP net earnings per diluted share $ 0.58 $ 1.10 $ 0.43 $ 0.07 $ 0.17
Weighted average diluted shares outstanding 4,560 4,659 5,931 5,813 5,950
Reconciliation to Adjusted EBITDA: Net earnings (GAAP Measure) $ 2,138 $ 5,115 $ 2,946 $ 390 $ 963
Interest and bank charges 512 312 183 13 122
Provision for income taxes 1,357 2,490 327 161 463
Depreciation and amortization 292 307 767 90 221
Gain on bargain purchase - - (650 ) - - Non-recurring acquisition and reorganization costs - - 884 - - Impairment charges 700 - - - - EBITDA 4,999 8,224 4,457 654 1,769
Adjustments to EBITDA: Stock-based compensation expense - - 161 4 61
Stock and warrant issuance expense for services - - 232 21 - Adjusted EBITDA (Non-GAAP Measure) $ 4,999 $ 8,224 $ 4,849 $ 679 $ 1,830
Factors That May Affect Future Operations We believe that our future
operating results will continue to be subject to quarterly variations based
upon a wide variety of factors, including the cyclical nature of the electrical
transformer and wind energy products industries and the markets for our
products and services. Our operating results could also be impacted by a weakening
of the Canadian dollar, changing customer requirements and exposure to
fluctuations in prices of important raw supplies, such as copper, steel and
aluminum. We attempt to minimize the effect of fluctuations with respect to
commodities in our customer contracts through the inclusion of index clauses.
In addition to these measures, we attempt to recover other cost increases
through improvements to our manufacturing efficiency and through increases in
prices where competitively feasible. Lastly, other economic conditions we
cannot foresee may affect customer demand. We predominately sell to customers
in the utility, industrial production and commercial construction markets.
Accordingly, changes in the condition of any of our customers may have a
greater impact than if our sales were more evenly distributed between different end-markets. Off Balance Sheet Transactions and Related Matters We have no off-balance sheet
transactions, arrangements, obligations (including contingent obligations), or
other relationships with unconsolidated entities or other persons that have, or
may have, a material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources. Recent Accounting Pronouncements In December 2010, the FASB
issued Update No. 2010-28, “Intangibles-Goodwill and Other (Topic 350): When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts” (“ASU 2010-28”). ASU 2010-28 affects all entities
that have recognized goodwill and have one or more reporting units whose
carrying amount for purposes of performing Step 1 of the goodwill impairment
test is zero or negative. ASU 2010-28 modifies Step 1 so that for those
reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment
exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The qualitative
factors are consistent with existing guidance, which requires that goodwill of
a reporting unit be tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its 43 carrying amount. ASU 2010-28
is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. We are
currently evaluating the impact of ASU 2010-28 on our consolidated financial
statements. In December 2010, the FASB
issued Update No. 2010-29, “Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”)
The objective of ASU 2010-29 is to address diversity in practice about the
interpretation of the pro forma revenue and earnings disclosure requirements
for business combinations. ASU 2010-29specifies that if a public entity
presents comparative financial statements, the entity should disclose revenue
and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments also expand the
supplemental pro forma disclosures to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to
the business combination included in the reported pro forma revenue and
earnings. The amendments affect any public entity as defined by Topic 805 that
enters into business combinations that are material on an individual or
aggregate basis. ASU 2010-29 is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period on or after December 15, 2010. Early adoption is
permitted. We are currently evaluating the impact of ASU 2010-29 on our
consolidated financial statements. In April 2010, the FASB
issued Update No. 2010-13, “Compensation—Stock Compensation (Topic 718): Effect
of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades” (“ASU
2010-13”). This amendment clarifies that a share-based payment award with an
exercise price denominated in the currency of a market in which a substantial
portion of the entity’s equity securities trades shall not be considered to
contain a market, performance, or service condition. Therefore, such an award
is not to be classified as a liability if it otherwise qualifies as equity
classification. ASU 2010-13 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. Earlier
application is permitted. We are currently evaluating the impact of ASU
2010-13on our consolidated financial statements. In April 2010, the FASB
issued Update No. 2010-17, “Revenue Recognition—Milestone Method (Topic 605):
Milestone Method of Revenue Recognition” (“ASU 2010-17”). ASU 2010-17 provides
guidance on defining a milestone under Topic 605 and determining when it may be
appropriate to apply the milestone method of revenue recognition for research
or development transactions. Consideration that is contingent on achievement of
a milestone in its entirety may be recognized as revenue in the period in which
the milestone is achieved only if the milestone is judged to meet certain
criteria to be considered substantive. Milestones should be considered
substantive in their entirety and may not be bifurcated. An arrangement may
contain both substantive and non-substantive milestones that should be
evaluated individually. ASU 2010-17 is effective on a prospective basis for
milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Early adoption is permitted. We are
currently evaluating the impact of ASU 2010-17 on our consolidated financial statements. In October 2009, the FASB
issued Update No. 2009-13, “Revenue Recognition (Topic
605)—Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force” (“ASU 2009-13”). ASU 2009-13 provides amendments to the
criteria in ASC 605-25 for separating consideration in multiple-deliverable
arrangements. As a result of those amendments, multiple-deliverable
arrangements will be separated in more circumstances than under existing U.S.
GAAP. ASU 2009-13: (1) establishes a selling price hierarchy for determining
the selling price of a deliverable, (2) eliminates the residual method of
allocation and requires that arrangement consideration be allocated at the
inception of the arrangement to all deliverables using the relative selling
price method, (3) requires that a vendor determine its best estimate of selling
price in a manner that is consistent with that used to determine the price to
sell the deliverable on a standalone basis, and (4) significantly expands the
disclosures related to a vendor’s multiple-deliverable revenue arrangements.
ASU 2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
We are currently evaluating the impact of ASU 2009-13 on our consolidated
financial statements. In October 2009, the FASB
issued Update No. 2009-14, “Software (Topic 985) - Certain Revenue Arrangements
That Include Software Elements a consensus of the FASB Emerging Issues Task
Force” (“ASU 2009-14”). ASU 2009-14 changes the accounting model for revenue
arrangements that include both tangible products and software 44 elements and provides
additional guidance on how to determine which software, if any, relating to
tangible product would be excluded from the scope of the software revenue
guidance. In addition, ASU 2009-14 provides guidance on how a vendor should
allocate arrangement consideration to deliverables in an arrangement that
includes both tangible products and software. ASU 2009-14 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-14
is not expected to have a material effect on our financial position or results
of operations. 45 Overview Pioneer Power Solutions,
Inc., a Delaware corporation, based in Fort Lee, New Jersey, is an owner and
operator of specialty electrical equipment manufacturing and service
businesses. We provide a range of products and services to the electrical
transmission and distribution industry and our focus is on the electric
utility, industrial, commercial and wind energy market segments. We intend to
grow our business by increasing our portfolio of highly-engineered solutions
for specialty electrical applications, both through acquisitions and internal
product development. Our customers, which include
a number of recognized national and regional utility and industrial companies,
are primarily located in North America. We currently have five locations in the
U.S., Canada and Mexico for manufacturing, centralized distribution,
engineering, sales and administration. In addition, we utilize a network of 21
independently-operated stocking locations in the U.S., including two regional
distribution centers. Operating Structure We operate in two business
segments, electrical transformers and wind energy equipment and services. Electrical Transmission and Distribution Equipment Our electrical transformers
segment designs and manufactures a full line of custom and standard
liquid-filled, encapsulated and ventilated electrical transformers used in the
control and conditioning of electrical current for critical processes. Our
operating subsidiaries, Pioneer Transformers Ltd. and Jefferson Electric, Inc.,
specialize in liquid-filled and dry-type transformers, respectively. Each
business unit distinguishes itself by producing a wide range of
engineered-to-order and standard equipment, sold either directly to end users,
through engineering and construction firms, or through wholesale distributors.
These operating companies serve customers in a variety of industries including
electric utilities, industrial customers, commercial construction companies and
renewable energy producers. Wind Energy Equipment and Services We are currently developing
our wind energy business segment to provide project integration solutions,
including equipment sales, procurement, after-sales services and financing to
community wind and industrial customers seeking wind turbines with generation capacities
of one to two megawatts (MW). Our wind energy operating company, Pioneer Wind
Energy Systems Inc., was established through acquisitions that we completed in
2010. Its predecessors have a 10-year history of developing, manufacturing,
commissioning and servicing our advanced wind turbine designs, principally the
P-1650, which is a 1.65 MW wind turbine generator. Our portfolio of completed
projects encompasses five units in the Northeast U.S., California and for the
U.S. military, all commissioned between 2008 and 2010. We intend to rely on
Pioneer Wind Energy Systems Inc.’s portfolio of licensed technologies and our
expertise in engineering, procurement and field services to meet the specific
challenges of each wind energy project. In situations where the site
characteristics and investment constraints of a project are not conducive to
the deployment of our P-1650 unit, we intend to acquire and resell comparable
units from other manufacturers that meet the project owner’s requirements. We
also intend to advance growth in this segment by offering customers tailored
financing arrangements with extended payment terms and revenue-sharing
features. Business Strategy We believe we have developed
a stable platform from which to develop and grow our business lines, revenues,
earnings and shareholder value. We intend to expand rapidly over the next
several years through a two-pronged strategy. First, we intend to pursue
strategic acquisitions that provide us with complementary product and service
offerings, new sales channels, end-markets and scalable operations. Second, we
will focus on internal growth through operating efficiencies, customer focus
and our continued migration towards more highly-engineered products and
specialized services. 46 Acquisitions Internal Growth We intend to build our
revenue and earnings at rates exceeding industry norms primarily by continuing
our sales and product mix movement towards more value-added products. We intend
to accomplish this goal within our liquid-filled transformer business by
emphasizing the sale of more power, network and subsurface transformers to new
and existing utility customers, particularly in the U.S. In February 2011, we
completed a plant expansion that added approximately 6,000 square feet to our
Granby, Quebec facility which will allow us to increase our manufacturing
capacity for these larger products. We believe our internal
growth objectives for our dry-type transformer business will be achieved by
expanding the geographic coverage and productivity of our national distribution
network, as well as by continuing to expand our direct sales channel with
original equipment manufacturers (OEMs) and brand label customers. Within our wind energy
business, we intend to cross-sell equipment manufactured by our other business
units, find opportunistic ways to make our products and services more
accessible and better suited to community wind market customers, and establish
new partnerships with major international wind turbine equipment manufacturers
as appropriate. Products Electrical Transmission and Distribution
Equipment We design,
develop, manufacture and sell a wide range of liquid-filled and dry-type power,
distribution and specialty electrical transformers. An electric transformer is
used to reduce or increase the voltage of electricity traveling through a wire.
This is accomplished by transferring electric energy from one coil or winding
to another coil through electromagnetic induction. Electric power generating
plants use generator transformers to “step-up,” or increase, voltage that is transferred
through power lines in order to transmit the electricity more efficiently and
over long distances. When the high voltage electricity nears its final
destination, a “step-down” transformer reduces its voltage. A distribution
transformer makes a final step-down in voltage to a level usable in homes and
businesses. Transformers
are integral to every electrical transmission and distribution system. Electric
utilities use transformers for the construction and maintenance of their power
networks. Industrial firms use transformers to supply factories with
electricity and to distribute power to production machinery. The renewable
energy industry uses transformers to connect new sources of electricity
generation to the power grid, as does the construction industry for the supply
of electricity to new homes and buildings. Liquid-Filled Transformers Our liquid-filled
transformer products are manufactured by our wholly-owned subsidiary, Pioneer
Transformers Ltd., in electrical power ranges from 25 kVA (kilovolt amperes) to
30 MVA (megavolt amperes) and at up to 69 kV (kilovolts) in voltage. In recent
years, we have focused primarily on the small power market, generally
considered to include transformers between 1 MVA and 10 MVA, as well as on
specialty transformers such as network and other highly-customized models. We
sell these products to electrical utilities, independent power providers, 47 electrical co-ops,
industrial companies, commercial users and electric equipment wholesalers. Our
primary categories of liquid-filled transformers are as follows: Transformer Type Range of Sizes Applications Small and Medium Power 300 kVA to 30 MVA Power conversion for the
utility and industrial/commercial market, typically found in substations Network 300 kVA to 3.75 MVA Subway and vault-type
transformers designed to withstand harsh environments and typically used by
utilities and municipal power authorities to ensure reliability of service Pad-Mount 75 kVA to 10 MVA Distribution transformers
commonly used in underground power or distribution systems Unitized Pad-Mount Up to 5 MVA Combines pad-mounts with
other equipment in a product that can be substituted for conventional unit
substations at apartment complexes, shopping centers, hospitals and similar
commercial facilities Mini-Pad 25 kVA to 167 kVA Single phase, low profile
pad-mounted distribution transformers for residential and underground
distribution Platform-Mount 250 kVA to 2.5 MVA Single phase units from
250 kVA to 1 MVA, also supplied for substation installation up to 2.5 MVA Dry-Type Transformers Our dry-type transformer
products are manufactured by our wholly-owned subsidiary, Jefferson Electric,
Inc. Our focus is primarily on low voltage distribution transformers for
commercial and industrial power applications, typically in the 15 kVa through 1
MVA size range and for indoor use. Our primary categories of dry-type
transformers are as follows: Transformer Type Range of Sizes Applications Encapsulated Single &
Three Phase 50 VA to 50 kVA General purpose
encapsulated transformers for lighting, industrial and commercial
applications. Suitable for indoor or outdoor use Ventilated Single &
Three Phase 25 kVA to 100 kVA Ventilated transformers
designed for general loads, indoors or out, including for lighting,
industrial and commercial applications Floor Mount Encapsulated 30 kVA to 75 kVA For all general loads in
rugged environment areas including refineries, factories, chemical plants,
marine duty, ship docks, and grain mills Buck Boost Transformers 50 VA to 10 kVA Single phase transformers
for correcting voltage line drops, landscape lighting, low voltage lighting,
international voltage adaptation and motor applications Non-Linear Transformers 15 kVA to 300 kVA Jefferson Plus™ line of
non-linear transformers are designed to meet the load demands caused by
computers and other electronic office equipment Other Transformers Various size ranges Drive isolation,
industrial control and custom designed transformers, lighting ballasts,
reactors, filters and associated other parts 48 Through our pending acquisition of Transformateur Bemag Inc.
and Vermont Transformers, Inc., we expect to expand our product range in dry-type
transformers. We anticipate that the acquisitions will increase our size range
from 1 MVA to 5 MVA, and our voltage range from 600 V to 35 kV. We intend to
capitalize on these increased capabilities to more fully address the low and medium
voltage needs of our customers for commercial and industrial power applications. Wind Energy Products and Services Our P-1650 model wind
turbine generator is a 1.65 MW, three-blade wind turbine equipped with full
span pitch control and a transmission system with integrated main shaft and
main bearings. Our P-1650 turbine is Germanischer Lloyd-certified and was
developed by us through a technology license with Windtec Engineering GmbH, a
subsidiary of American Superconductor. There is only one other company licensed
to sell this wind turbine design in the U.S. The P-1650 unit is also available
in a 1.5 MW power rating and can be delivered with a tower height ranging from
65 to 100 meters and a rotor diameter of 77 meters. This model uses a variable
speed asynchronous generator and fixed speed gearbox. The combination of
electrical torque control and variable pitch control allows the wind turbine to
operate at wind speeds from 3.5 meters per second (m/s) and with a constant
1.65 MW energy production in wind speeds between 11 m/s and 20 m/s. In
situations where the site characteristics and investment constraints of a
project are not conducive to the deployment of our P-1650 unit, our strategy is
to acquire and resell comparable units from other manufacturers that meet the
project owner’s requirements. Our monitoring service
provides real-time performance tracking and remote control of wind turbines in
operation. We also provide operations and maintenance (O&M) services
including scheduled maintenance, as well as unscheduled maintenance in
situations where uncharacteristic weather conditions, network disturbances or
other operating complications arise. As is standard in our industry, we offer a
range of manufacturer warranties: • electro-mechanical
warranty (two years standard); • power
curve warranty (one year standard); • sound
level warranty (one year standard); and • an
availability warranty covering the duration of the O&M contract. According to
each customer’s needs, we also offer extended warranties typically covering the
three to five year period after installation. Harnessing the
power of wind requires knowledge of the grid, electrical equipment expertise
and an understanding of the complexities of interconnection. In addition to
wind turbine products, our wind energy business assists customers in the
procurement of ancillary electrical equipment for the project balance of plant,
including medium voltage switchgear and liquid-filled transformers such as
those manufactured by Pioneer Transformers Ltd. Community wind projects
require a substantial investment. The cost of a single 1.65 MW wind turbine
such as ours, including blades and the tower, typically will exceed $2 million.
In addition, the project owner must fund the costs of transportation,
construction, the balance of plant and professional fees. In order to alleviate
this obstacle for qualified projects, our wind energy business seeks to provide
vendor financing for the wind turbine portion of the total project cost. We are
offering financing structures tailored to each project that reduce the amount
of down payment required and establish a repayment schedule following delivery
that includes interest charges. Our equipment financing terms are accompanied
by customary credit protections and may require that the customer purchase a
minimum scope of related services from us, such as an O&M contract. Our Industries Electrical Transmission and Distribution
Equipment Demand for our
electrical power and distribution transformers results primarily from spending
by electric utilities for replacement equipment, grid expansion and efficiency
improvements. Demand is also sensitive to overall economic conditions,
particularly with respect to the level of industrial production and investment
in commercial and residential construction. Other market factors include
voltage conversion, voltage unit upgrades, electrical equipment failures, higher
energy costs, stricter environmental regulations and investment in sources of
renewable energy generation. 49 According to
IBISWorld Inc., a market research firm, the total value of U.S. electrical
equipment industry shipments was approximately $34.6 billion in 2010. Of this
amount, 16.0%, or $5.5 billion, was comprised of power, distribution and
specialty transformers, compared with a 13.1% share of total shipments for
transformers in 2002. Together with Canadian shipments of transformers, we
believe that the North American market currently exceeds $6.0 billion annually.
IBISWorld expects U.S. electrical equipment industry revenue to increase in
real terms on average by 4.3% annually in the five year period ending in 2015.
We believe several of the key industry trends supporting this growth estimate
are as follows: • Aging and Overburdened North American
Power Grid — The aging and overburdened North American power grid
is expected to require significant capital expenditures to upgrade the
existing infrastructure over the next several years to maintain adequate
levels of reliability and efficiency. According to the North American
Electric Reliability Corp. (NERC), Level 5 Transmission Load Relief (TLR)
events, which are triggered when power outages are imminent or in progress,
have grown at a 63% compounded annual growth rate from 1999 to 2010. These
events demonstrate the current power grid’s inadequate transmission capacity
to accommodate all requests for reliable power. Significant capital investment
will be required over the next several decades to relieve congestion,
accommodate growth and replace components of the U.S. power grid operating
at, near or past their planned service lives. According to the consulting
firm The Brattle Group, 70% of all power transformers in the U.S. are
currently over 25 years old and $900 billion of capital investment will be
required for transmission and distribution equipment by 2030 in order to meet
growing demand and achieve targets for efficiency, emissions, renewable
sources and infrastructure replacement. • Increasing Demand for Reliably Delivered
Electricity — Increasing demand for reliably delivered electricity
in North America will require substantial investment in the electric grid to
expand capacity and improve efficiency. The DOE’s Energy Information
Administration, or EIA, forecasts that total electricity use in the U.S. will
increase by approximately 30% from 2008 to 2035. This increase is driven by
population growth, economic expansion, increasing dependence on computing
power throughout the economy and the increased use of electrical devices in
the home. As an example, the power consumption of servers and data centers,
one of the larger uses of electricity in the U.S., doubled between 2000 and
2006 and is expected to double again by 2011 according to estimates by the
U.S. Environmental Protection Agency. Electric vehicles are another example of a demand
source that has the potential to significantly increase U.S. power consumption. The expected increase
in electricity demand will require considerable investment in the North American electric transmission
and distribution infrastructure as well as specialized equipment to ensure
the reliability and quality of electricity for critical applications such as
servers and data centers. • Strong Legislative Support — The U.S. government
has directed significant resources towards the modernization and improvement
of the U.S. electric grid. The legislative developments continue to promote
growth and investment in electric transmission and distribution
infrastructure by encouraging electricity providers to expand capacity and
relieve grid congestion. The Energy Policy Act of 2005 established mandatory
grid reliability standards and created incentives to increase electric transmission
and distribution infrastructure investments. Incentives associated with such
law ensured that utilities (who represent our largest customer segment) are
better positioned to finance and realize system enhancement projects. In
addition, the American Recovery and Reinvestment Act of 2009 allocated $4.5
billion to improve electricity delivery and energy reliability through
modernization of the electric transmission and distribution infrastructure. • Mandates for Renewable Power Sources
Leading to Grid Expansion — North American federal, state, provincial, and
local governments have enacted and are considering legislation and
regulations aimed at increasing energy efficiency and encouraging expansion
of renewable energy generation. We believe that the increased focus on renewable
energy will drive investment growth in the electric transmission and
distribution grid as additional infrastructure is developed to integrate
renewable energy sources such as wind and solar with the existing electric power
grid. Many sources
of renewable energy are not near key demand centers, and according to NERC
and the Edison Electric Institute
(EEI), significant infrastructure investments will be required to reliably
transport and integrate electricity with the grid. Power transformers will be
a critical component of the additional infrastructure. We also expect that
the general upward trend in energy demand will push power suppliers toward
renewable power sources, driving investment in new plant construction and significantly
contributing to growth in the transmission and distribution industry over the
next several years. Renewable power development also 50 benefits
from strong regulatory support, with 29 states and the District of Columbia
having adopted mandatory renewable portfolio standards, or RPS. Seven other
states have enacted non-binding RPS-like goals and the U.S. Congress is
evaluating national renewable generation targets. The
transformer market is very fragmented due to the range of sizes, voltages and
technological standards required by different categories of end users. Many
orders are custom-engineered and tend to be very time-sensitive since other
critical work is frequently being coordinated around the customer’s transformer
installation. The vast majority of North American demand for transformers is
satisfied by producers in the U.S. and Canada. According to the U.S. Census
Bureau, there are over 250 transformer manufacturers in the U.S. and at least
50 that manufacture larger power and distribution transformers such as those
produced by us. Wind Energy Equipment and Services With rising
energy demand, volatile carbon fuel prices and increasing awareness of the
effects of climate change, the wind power market has expanded substantially in
the U.S. over the past 5 years. As of January 2011, the American Wind Energy
Association (AWEA) reported that total U.S. wind generation capacity stands at
40,180 MW, representing an average annual increase of 35% per annum since the
year 2005. Due primarily to the effects of the economic downturn and financial
crisis starting in 2008, the rate of U.S. wind generation capacity additions
decreased significantly in 2010 versus 2009, but still grew 15% in 2010. The
latest industry statistics from AWEA indicate that wind power projects
accounted for 39% of all new generating capacity added in 2009 and 1.8% of all
electricity provided to the U.S. electric grid. We believe
that the market for wind energy equipment and services has favorable long-term
growth characteristics due primarily to the following key industry trends: • Wind Power Leading the Growth in
Renewable Generation Capacity — Wind power generation is one of the more mature
renewable energy technologies and one of the fastest growing renewable energy
sources according
to the Institute of Electrical and Electronics Engineers and the Global Wind
Energy Council. According to the DOE, U.S. wind power generation capacity has
the potential to grow at a compounded annual rate in excess of 15% through
2020. The 2008 DOE report, “20% Wind Energy by 2030”, published in a joint
effort with industry and the nation’s leading laboratories, provides a
potential framework for large scale integration of wind power in the U.S.
Among other considerations, this report stipulates that reaching the 20% wind
energy level in the U.S. will require expansion of the nation’s transmission
infrastructure to integrate wind energy into the grid. • Continued Support for Wind Power from
Federal and State Governments — Wind power enjoys broad public support and can be
a fundamental part of federal and state economic development strategies. In
the U.S., a number of federal and state legislative and regulatory activities
influence the wind industry’s ability to compete in the electric market. A
federal-level income tax credit, the PTC, is allowed for the production of
electricity from utility-scale wind turbines. Congress acted in 2009 to
provide a three-year extension of the PTC through the end of 2012. At the
state level, a renewable portfolio standard is a policy that sets hard
targets for renewable energy in the near- and long-term to diversify
electricity supply, stimulate local economic development, reduce pollution and cut water
consumption.
Investment in
wind generation capacity is heavily dependent on government incentives to
promote commercial-scale development. The effectiveness of these incentives,
principally federal programs like the PTC and the investment tax credit, has
been marred by frequent expirations and one- to two-year extension periods.
Historical uncertainty surrounding the continuation of such incentives has
created a boom-and-bust cycle of wind project development and hindered rational
industry planning, investments in technology and efforts to reduce costs. In
addition to federal-level tax incentives, wind project development is also
driven by states that have instituted their own renewable portfolio standards
requiring electricity service providers to gradually increase the percentage of
renewable sources used to meet their electricity demand by specified dates. RPS
policies, which invoke financial penalties on service providers if targets are
not met, currently exist in 29 U.S. states and in the District of Columbia, but
not at the national level. 51 The wind turbine equipment
market is dominated by several large, multi-national manufacturers that are
equipped for orders requiring dozens or even hundreds of units sold to
utilities and other well-capitalized project developers. By contrast, the
market segment addressed by our wind energy business, “community wind,”
encompasses projects that are locally owned and employ utility-scale equipment,
but are generally intended to have less than 20 MW in generation capacity, with
many requiring as few as one wind turbine. Community wind projects are commonly
owned by municipal or cooperative electric utilities, towns, universities,
individual landowners and local businesses or factories. Although community
wind represents only a small sub-sector of the entire U.S. wind market, it has
several characteristics that we believe are favorable to our business: • local
ownership and support which tends to facilitate project approval and
implementation; and • the
power generated is often for on-site consumption, rather than exclusively
intended for resale and distribution into the broader grid. These factors generally make
the viability of community wind projects less susceptible to fluctuations in
wholesale electricity prices and the availability of financing in the capital
markets. At the same time, given the relatively small size of community wind
projects, developers frequently have difficulty attracting major turbine
manufacturers and traditional sources of financing, challenges that we feel
represent an opportunity for our wind energy business. Customers Prior to 2010, we sold our
products principally to Canadian customers, including many of Canada’s
electrical utilities, municipal power systems, large industrial companies,
engineering and construction firms and a number of electrical distributors.
After giving effect to our acquisition of Jefferson Electric, Inc. on April 30,
2010, we expect annual sales in our electrical transformers segment to be more
balanced between the U.S. and Canada, with Canadian customers still
representing the majority. Our wind energy business unit, Pioneer Wind Energy
Systems Inc., is focused primarily on selling products and services to U.S.
customers, and did not make any contribution to our revenue during 2010. Approximately 36% and 40% of
our sales in 2010 and 2009, respectively, were made to Hydro-Quebec Utility
Company, a provincial government-owned utility in the Province of Quebec,
Canada. The majority of our sales to Hydro-Quebec Utility Company are made
pursuant to a long-term contract for the supply of pad-mount transformers that
expired and was replaced in 2010. In 2010, we were awarded an additional
contract by Hydro-Quebec Utility Company for the supply of submersible
transformers. Both contracts have initial terms expiring during the second
quarter of 2012 and two one-year renewal options providing for a maximum term
of four years. The contracts set forth the terms, conditions and rights of the
parties with respect to the supply of the subject products including ordering
and delivery procedures, required technical specifications, minimum performance
standards, product pricing and price adjustment mechanisms, terms of payment
and rights of termination. The contracts do not require Hydro-Quebec Utility
Company to order any minimum quantity of products from us and do not grant us
any form of supply exclusivity. Hydro-Quebec Utility Company has been a
customer of ours and our predecessors for approximately 40 years, over which
time we have been party to consecutive long-term contracts for an uninterrupted
period spanning several decades. We believe the status of our business
relationship with Hydro-Quebec Utility Company to be good. In 2010, no other
customer accounted for 10% or more of our sales, although Siemens Industry,
Inc., a significant customer of Jefferson Electric, Inc., represented 9% of our
sales. Aside from Hydro-Quebec Utility Company and Siemens Industry, Inc., we
do not believe that the loss of any specific customer would have a material
adverse effect on our business. Marketing, Sales and Distribution A substantial portion of the
transformers manufactured by us are sold to customers by our direct sales force
of full-time sales personnel and executive management operating from our office
locations in the U.S. and Canada. Our transformer products are also sold
through a network of independent sales agents throughout North America that
sell primarily to full-line electrical distributors and to maintenance, repair
and overhaul organizations. Our direct sales force markets to end users and to
third parties, such as original equipment manufacturers and engineering firms,
that 52 prescribe the specifications
and parameters that control the applications of our products. Our wind energy
products and services are marketed entirely on a direct basis to customers by
our full-time business development personnel. Sales Backlog Competition Electrical Transmission and Distribution
Equipment We experience substantial
competition from a large number of transformer manufacturers. The number and
size of our competitors varies considerably by product line, with many of our
competitors tending to be small, highly specialized or focused on a certain
geographic market area or customer. However, several of our competitors have
substantially greater financial and technical resources than us, including some
of the world’s largest electrical products companies. A representative list of
our competitors includes ABB Ltd., Actuant Corporation, Carte International,
Inc., Cooper Industries plc, General Electric Company, Groupe Schneider,
Hammond Power Solutions Inc., Howard Industries, Inc. and Partner Technologies,
Inc. We believe that we compete
primarily on the basis of product quality, product availability, on-time
shipment record, service, price and our flexibility to provide
custom-engineered solutions to satisfy customer needs. In our liquid-filled
transformer business, we have established a niche in the manufacture and design
of small power and distribution electrical transformers and, in particular,
custom transformers for specialized and complex applications. As a result of
our long-time presence in the industry, we possess a number of special
transformer designs that we have engineered and developed specifically for our
customers. We believe these designs give us a competitive advantage and that
they are a major contributor to our frequency of repeat customer orders. In
both of our transformer businesses, our customers order from us as their needs
may require, and the level of such orders may change significantly from
year-to-year based on the status of their individual construction projects and
capital budgeting activities. Despite these variations, we have a significant
number of repeat customers. Approximately 90% of our electrical transformer
revenue in each of 2010 and 2009, adjusted to include revenue from Jefferson
Electric, Inc. during periods prior to the acquisition, originated from
customers who had also ordered from us in the prior year. Wind Energy Equipment and Services The wind turbine equipment
and services business is highly competitive and dominated by a few larger
corporations with significantly greater resources than us, such as GE Energy,
Vestas Wind Systems A/S, Siemens Wind Power A/S and Gamesa Corporation
Tecnologica S.A. In future years we also expect increasing competition in the
North American market from a number of low-cost manufacturers based in China.
Our ability to grow in the face of this competition will depend on our ability
to successfully provide customized, innovative solutions to community wind
customers, a segment of the marketplace we currently believe to be underserved
by our competition. Raw Materials and Suppliers The principal raw materials
purchased by us are core steel, copper wire, aluminum strip and insulating
materials including transformer oil. We also purchase certain electrical
components from a variety of suppliers including bushings, switches, fuses and
protectors. These raw materials and components are available from and supplied
by numerous sources at competitive prices, although there are more limited
sources of supply for electrical core steel and transformer oil. Unanticipated
increases in raw material prices or disruptions in supply could increase
production costs and adversely affect our profitability. We attempt to minimize
the effect on our profit margins of 53 unanticipated changes in the
prices of raw materials by including index clauses in our customer contracts
that allow us to increase or reduce our fees if the costs of raw materials
unexpectedly rise or decrease. Approximately 50% of our annual sales are made
pursuant to contracts that contain such index clauses, which, subject to
various formulae and limitations, permit us to adjust the final prices we
charge. We anticipate no significant difficulty fulfilling our raw material
purchase requirements and have not experienced any such difficulty in the past
several years. Our largest suppliers include Aztek Technologies, S.A. De C.V.,
Cogent Power, Inc., Essex Group, Inc., Itochu Corporation, JFE Shoji Steel
America, Inc. and Rea Magnet Wire Company. Purchases of raw materials
and components in our wind energy business were insignificant during the
seven-month period in 2010 in which we were an industry participant. In the
future, as order volume may dictate, we anticipate that the largest components
of our purchases will consist of finished wind turbine nacelles, towers and
rotor blades. The wind turbine equipment supply chain is a large and global
industry with many participants and we do not anticipate significant difficulty
in fulfilling our potential future purchasing requirements. Employees Environmental We are subject to numerous
environmental laws and regulations concerning, among other areas, air
emissions, discharges into waterways and the generation, handling, storing,
transportation, treatment and disposal of waste materials. These laws and
regulations are constantly changing and it is impossible to predict with
accuracy the effect they may have on us in the future. Like many other
industrial enterprises, our manufacturing operations entail the risk of
noncompliance, which may result in fines, penalties and remediation costs, and
there can be no assurance that such costs will be insignificant. To our
knowledge, we are in substantial compliance with all federal, state, provincial
and local environmental protection provisions, and believe that the future cost
of fines, penalties and remediation protection provisions, if any, should not
have a material adverse effect on our capital expenditures, earnings or
competitive position. However, legal and regulatory requirements in these areas
have been increasing and there can be no assurance that significant costs and
liabilities will not be incurred in the future due to regulatory noncompliance. Corporate History We were originally formed in
the State of Nevada in 2008. On November 30, 2009, we merged with and into
Pioneer Power Solutions, Inc., a Delaware corporation and our wholly-owned
subsidiary, for the sole purpose of changing our state of incorporation from
Nevada to Delaware and changing our name to “Pioneer Power Solutions, Inc.” On
December 2, 2009, pursuant to a share exchange agreement, we acquired all of
the issued and outstanding capital stock of Pioneer Transformers Ltd. and our
officers and directors at that time were replaced by designees of Pioneer
Transformers Ltd. After the share exchange, we divested all of our pre-share
exchange operating assets and succeeded to the business of Pioneer Transformers
Ltd. as our sole line of business. On April 30, 2010, we
acquired Jefferson Electric, Inc. through a merger pursuant to which JEI
Acquisition, Inc., our wholly-owned subsidiary, merged with and into Jefferson
Electric, Inc., with Jefferson Electric, Inc. continuing as the surviving
corporation and becoming a wholly-owned subsidiary of ours. On June 7, 2010, through our
wholly-owned subsidiary Pioneer Wind Energy Systems Inc., we acquired
substantially all the inventory, capital assets, intangible assets and
intellectual property of AAER Inc., a manufacturer of wind turbines with
generation capacities exceeding one MW based in Quebec, Canada. On
August 13, 2010, through our wholly-owned subsidiary Pioneer Wind Energy
Holdings, Inc., we purchased common 54 shares representing 100% of
the voting and economic interests of AAER Inc., including its residual assets
and accumulated operating tax losses. On December 31, 2010, we completed a
share exchange in which Pioneer Wind Energy Systems Inc. was merged with and
into AAER Inc., the entity through which we conduct all our wind energy
business activities. On March 18, 2011, we amended the articles of
incorporation of AAER Inc. to change its name to Pioneer Wind Energy Systems
Inc. Properties We believe our manufacturing
and distribution facilities are well maintained and in proper condition to
operate at current levels. In order to increase the manufacturing capacity of
our Granby facility, in February 2011 we completed a plan that expanded its
size by approximately 6,000 square feet by building onto land that we already
owned. We lease office space for
the engineering and marketing activities of our Pioneer Transformers Ltd.
subsidiary in Mississauga near Toronto, Ontario, Canada. Our monthly rent is
$3,200 and the lease expires in 2016. Our Jefferson Electric, Inc. subsidiary
leases office space for its management, sales, marketing, design engineering
and administrative functions in Franklin, Wisconsin for a monthly rent of
approximately $4,300 under a lease that expires in December 2013. We also
pay approximately $3,400 per month to lease our executive
management and sales office in Fort Lee, New Jersey. Legal Proceedings We are not presently a party to
any material legal proceedings nor are we aware of any such threatened or
pending litigation. 55 The following
table sets forth information regarding our executive officers and the members
of our board of directors. All directors hold office for one-year terms until
the election and qualification of their successors. Officers are elected by the
board of directors and serve at the discretion of the board. Name Age Position Nathan J. Mazurek 49 Chief Executive Officer,
President and Chairman of the Board of Directors Andrew Minkow 42 Chief Financial Officer,
Secretary, Treasurer and Director Thomas Klink 48 Director, President of
Jefferson Electric, Inc. Yossi Cohn 33 Director David J. Landes 55 Director Ian Ross 67 Director David Tesler 37 Director Jonathan Tulkoff 50 Director Nathan J. Mazurek, President, Chief Executive Officer and
Chairman of the Board of Directors. Mr. Mazurek has served as our chief executive officer, president and
chairman of the board of directors since December 2, 2009. From December
2, 2009 through August 12, 2010, Mr. Mazurek also served as our chief financial
officer, secretary and treasurer. Mr. Mazurek has over 20 years of experience
in the electrical equipment and components industry. Mr. Mazurek has served as
the chief executive officer, president, vice president, sales and marketing and
chairman of the board of directors of Pioneer Transformers Ltd. since 1995. Mr.
Mazurek has served as the president of American Circuit Breaker Corp., a
manufacturer and distributor of circuit breakers, since 1988 and as a director
of Empire Resources, Inc., a distributor of semi-finished aluminum products,
since 1999. From 2002 through 2007, Mr. Mazurek served as president of Aerovox,
Inc., a manufacturer of AC film capacitors. Mr. Mazurek received his BA from
Yeshiva College in 1983 and his JD from Georgetown University Law Center in
1986. Mr. Mazurek brings to the board extensive experience with our company,
Pioneer Transformers Ltd. and in our industry. Since he is responsible for, and
familiar with, our day-to-day operations and implementation of our strategy,
his insights into our performance and into the electrical equipment and
components industry are critical to board discussions and to our success. Andrew Minkow, Chief Financial Officer, Secretary and
Treasurer and Director. Mr.
Minkow has served as our chief financial officer, secretary and treasurer and a
director since August 12, 2010. Mr. Minkow has over 19 years of industry
experience in corporate finance, mergers and acquisitions, capital markets,
financial reporting, forecasting and general operational and administrative
management. Before joining us, Mr. Minkow was an independent financial
consultant and provider of executive management, strategic planning and
financial reporting services to several corporate clients, including us. Before
that, from 2001 to 2009, Mr. Minkow was a member of the investment banking
division at Morgan Joseph & Co. Inc., a middle market investment bank in
which he was a founding employee and shareholder. Between 1997 and 2001, he
served in several investment banking and capital markets roles at the U.S.
division of ING Barings (formerly known as Furman Selz). Mr. Minkow has a BA
from Cornell University and an MBA from Columbia Business School. Based on Mr.
Minkow’s recent history with us, coupled with his years of experience working
with similarly situated companies in connection with a wide range of corporate
finance transactions, we believe that Mr. Minkow brings a set of skills and
knowledge to the board that will assist us in continuing to grow our business
and realizing our strategic goals. Thomas Klink, Director, President of Jefferson Electric, Inc.
Mr. Klink has served
as a director since April 30, 2010. Since 1996, he has served in various
positions at Jefferson Electric, Inc., including as its chief executive
officer, chief financial officer, vice president, treasurer, secretary and
chairman of the board of directors. Mr. Klink previously served as a
controller for U.S. Music Corporation, a manufacturer of musical instruments
from 1990 through 1994. Mr. Klink received his BBA in Accounting from the
University of Wisconsin – Milwaukee in 1984 and is a Certified Public
Accountant. Mr. Klink brings extensive industry and leadership experience to
our board, including over 15 years experience in the electrical equipment
industry. Yossi Cohn, Director. Mr. Cohn has served as a director since
December 2, 2009. Mr. Cohn founded YY Capital Partners, LLC, an investment
firm, in 2007 and has served as its co-managing partner since its inception. 56 Mr. Cohn has
also served as a member of L3C Partners, LLC, an investor in
multi-family residential properties, since June 2009. Mr. Cohn served as a
director of investor relations at IDT Corporation, a NYSE-listed
telecommunications company, from September 2005 through May 2007. Prior to
joining IDT Corporation, Mr. Cohn was a director of research at SAGEN
Asset Management, an asset manager of funds of hedge funds, from January 2005
through May 2005. Mr. Cohn began his career as an analyst in the funds-of-funds
investment group of Millburn Ridgefield Corporation, where he worked from 2001
through January 2005. Our board believes Mr. Cohn’s background at these
and other companies, particularly in areas of capital markets, financial,
strategic and investment management experience, makes him an effective member
of our board. David J. Landes, Director. Mr. Landes has served as a director since
December 2, 2009. Mr. Landes has served as president of Provident Sunnyside,
LLC, CYMA Investments LLC, each private real estate and investment
companies, for over the past five years and 516 Churchill Associates, LLC. Mr.
Landes received a BA from Columbia University, a JD from the University of
Chicago and a PhD from Princeton University. Mr. Landes practiced corporate and
securities law at Shearman and Sterling in New York City. Mr. Landes’s
experience as a lawyer and principal provides him with
significant knowledge and insight regarding corporate
governance, financing, capital markets and executive leadership. In addition, as
a founding member of the managing partner of Provident Pioneer Partners, L.P.,
our sole shareholder until December 2009, Mr. Landes provides the board
with a unique perspective on our history and performance. Ian Ross, Director. Mr. Ross has served as a director since March 24, 2011. In 2000, Mr.
Ross was co-founder of and has since served as, President of Omniverter Inc., a
company specializing in electrical power quality solutions for industrial
producers and electrical utilities in the U.S. and Canada. He has also served
as the President of KIR Resources Inc. and KIR Technologies Inc. since 1999,
companies engaged in management consulting and import/export activities in the
electrical equipment industry, respectively. Mr. Ross previously held positions
in Canada as Vice President Technology with Schneider Canada, a specialist in
energy management, and Vice President of the Distribution Products Business at
Federal Pioneer Ltd., now part of Schneider Canada. Previously, Mr. Ross held a
number of successive board level positions in UK engineering companies,
culminating in five years as Managing Director, Federal Electric, Ltd., before
moving to Canada in 1986 at the request of Federal Pioneer Ltd. He received an
MA in Mechanical Sciences (Electrical and Mechanical Engineering) from
Cambridge University and subsequently qualified as an accountant ACMA. Our
board believes that Mr. Ross’ relationships and broad experience in the
electrical transmission and distribution equipment industry will assist us in
continuing to grow our business and realizing our strategic goals. David Tesler, Director. Mr. Tesler has served as a director since
December 2, 2009. Mr. Tesler has served as chief executive officer of
LeaseProbe, LLC, a provider of lease abstracting services, since he founded the
company in 2004. In 2008, LeaseProbe, LLC acquired Real Diligence, LLC, a
provider of financial due diligence services. The combined company does
business as Real Diligence and operates as an integrated outsourced provider of
legal and commercial due diligence services for the commercial real estate
industry. Prior to 2004, Mr. Tesler practiced law at Skadden Arps Slate Meager
& Flom LLP and at Jenkens & Gilchrist, Parker Chapin LLP. Mr. Tesler
received his BA from Yeshiva College, a Master’s degree in Medieval History
from Bernard Revel Graduate School and a JD from Benjamin A. Cardozo School of
Law. Mr. Tesler brings extensive legal, strategic and executive leadership
experience to our board. Jonathan Tulkoff, Director. Mr. Tulkoff has served as director since
December 2, 2009. Mr. Tulkoff has served as president of Uniwire International,
Ltd., a steel trading and marketing company, since 1995. Our board believes Mr.
Tulkoff’s extensive strategic, international and executive leadership
experience, particularly in commodity markets for metal products which
represent one of the largest components of our company’s cost of manufacture,
make him an effective member of our board. There are no family
relationships among any of our directors and executive officers. Mr. Klink is a
party to certain agreements related to his appointment as an executive officer
and director described under “Item 11. Executive Compensation – Agreements with
Executive Officers.” 57 Board Committees Code of Business Conduct and Ethics We have adopted a Code of
Business Conduct and Ethics that applies to directors, officers and other
employees of the Company and its subsidiaries, including our principal
executive officer, principal financial officer and principal accounting
officer. Copies of the code can be obtained free of charge from our web site, www.pioneerpowersolutions.com. We intend
to post any amendments to, or waivers from, our Code of Ethics on our web site. Executive Compensation 2010 and 2009 Summary Compensation Table The following table
summarizes the annual and long-term compensation paid to Nathan J. Mazurek, our
Chief Executive Officer, President and Chairman of the Board of Directors
(principal executive officer), Andrew Minkow, our Chief Financial Officer,
Secretary, Treasurer and a director and Thomas Klink, the President of
Jefferson Electric, Inc. and a director, whom we refer to collectively as the
“named executive officers.” Name and Principal Position Year Salary Bonus Option Awards(1) All Other Total Nathan J. Mazurek 2010 264,295 31,510 159,698 7,000 (2) 462,503 President, Chief Executive
Officer, Chairman of the Board of Directors 2009 — — — 250,000 (3) 250,000 Andrew Minkow 2010 84,462 22,500 215,597 52,450 (4) 375,009 Chief Financial Officer,
Secretary, 2009 — — — 61,340 (5) 61,340 Thomas Klink 2010 204,000 — — 4,920 (6) 208,920 President of Jefferson
Electric, Inc. 2009 — — — — — (1) This column represents the
aggregate grant date fair value of stock options granted to named executive
officers in 2010 in accordance with FASB ASC Topic 718, with the exception
that the amount shown assumes no forfeitures. Assumptions used in the
calculation of these amounts are included in “Note 2. Summary of Significant
Accounting Policies—Share-Based Payments” and “Note 13. Additional Paid-in
Capital” to our audited financial statements for the year ended December 31,
2010 included in this prospectus. (2) Comprised of board of
directors meeting fees. 58 (3) Comprised of fees earned
for consulting services. Such compensation is solely comprised of payment for
services rendered to us and does not include any amounts that would be
considered perquisites, property, gross-ups or other personal benefits. (4) Comprised of $2,000 of
board of directors meeting fees and $50,450 of fees earned for consulting
services. Such compensation is solely comprised of payment for services
rendered to us and does not include any amounts that would be considered
perquisites, property, gross-ups or other personal benefits. (5) Comprised of $20,000 of
fees earned for consulting services and $41,340 representing the aggregate
grant date fair value of a warrant to purchase 30,000 shares of common stock
at $10.00 per share (as adjusted for the
anticipated one-for-five reverse stock split of our common stock) in
accordance with FASB ASC Topic 718. Assumptions used in the calculation of
this amount are included in “Note 2. Summary of Significant Accounting
Policies—Share-Based Payments” and “Note 13. Additional Paid-in Capital” to
our audited financial statements for the year ended December 31, 2010
included in this prospectus. Such compensation is solely comprised of payment
for services rendered to us and does not include any amounts that would be
considered perquisites, property, gross-ups or other personal benefits. (6) Comprised of $3,000 of
board of directors meeting fees and $1,920 of company matches of employee contributions
to 401(k) plan. As of October 2010, we discontinued matches of employee
contributions to the 401(k) plan. Agreements with Executive Officers Nathan J. Mazurek We have entered into an
employment agreement with Mr. Mazurek, dated as of December 2, 2009, pursuant
to which Mr. Mazurek is serving as our chief executive officer for a term of
three years. Pursuant to this employment agreement, Mr. Mazurek was entitled to
receive an annual base salary of $250,000 from December 2, 2009 through
December 2, 2010, which was increased to $275,000 on December 2, 2010 and will
be increased to $300,000 on December 2, 2011. Mr. Mazurek is entitled to
receive an annual cash bonus at the discretion of our board of directors, or a
committee thereof, of up to 50% of his annual base salary, which percentage may
be increased in the discretion of the board. In the event that Mr. Mazurek is
terminated without cause, Mr. Mazurek will be entitled to receive his base
salary for the balance of the term of this agreement. This agreement prohibits Mr.
Mazurek from competing with us for a period of four years following the date of
termination, unless he is terminated without cause or due to disability or he
voluntarily resigns following a breach by us of this agreement, in which case he
is prohibited from competing with us for a period of only two years. Prior to becoming our chief
executive officer, Mr. Mazurek provided Pioneer Transformers Ltd. with
executive services and served as its chief executive officer, president and
vice president, sales and marketing. Pioneer Transformers Ltd. paid an
aggregate of $250,000 in 2009 to Provident Management, Inc. and Provident
Canada Corp., each of which is controlled by Mr. Mazurek, as consideration for
Mr. Mazurek’s services. On March 23, 2010, we
granted Mr. Mazurek incentive stock options to purchase 30,000 shares of our
common stock for service as an executive officer and non-qualified stock
options to purchase 400 shares of our common stock for service as a director
(each as adjusted for the anticipated
one-for-five reverse stock split of our common stock). The grants were
made under our 2009 Equity Incentive Plan at an exercise price of $16.25 per
share for the incentive stock options and the non-qualified stock options.
One-third of the incentive stock options vested on March 23, 2011 and one-third
will vest on each of March 23, 2012 and 2013. All of the non-qualified stock
options vested on March 23, 2011. The incentive stock options expire on March
23, 2015 and the non-qualified stock options expire on March 23, 2020. 59 On March 24, 2011, we
granted Mr. Mazurek incentive stock options to purchase 2,000 shares of our
common stock for service as an executive officer and non-qualified stock
options to purchase 400 shares of our common stock for service as a director
(each as adjusted for the anticipated
one-for-five reverse stock split of our common stock). The grants were
made under our 2009 Equity Incentive Plan at an exercise price of $13.20 per
share for the incentive stock options and $12.00 for the non-qualified stock
options. The incentive stock options will vest in three equal annual
installments on each of March 24, 2012, 2013 and 2014. All of the non-qualified
stock options will vest on March 24, 2012. The incentive stock options expire
on March 24, 2016 and the non-qualified stock options expire on March 24, 2021. Andrew Minkow We have entered into a
three-year employment agreement with Mr. Minkow, dated as of August 12, 2010,
pursuant to which Mr. Minkow is serving as our chief financial officer,
secretary and treasurer for a term of three years. Pursuant to this employment
agreement, Mr. Minkow is entitled to receive an annual base salary of $180,000
until August 12, 2011, which will be increased to $205,000 on August 12, 2011 and
$230,000 on August 12, 2012. Mr. Minkow is entitled to receive an annual cash
bonus at the discretion of our board of directors, or a committee thereof, of
up to 50% of his base salary, which percentage may be increased in the
discretion of the board. The employment agreement also provided that Mr. Minkow
receive incentive stock options to purchase 30,000 shares of our common stock
under our 2009 Equity Incentive Plan, which was granted on August 12, 2010 at
an exercise price of $15.20 per share (as adjusted for the anticipated one-for-five reverse stock split of our common stock).
The option expires on August 12, 2020 and will vest in three equal annual
installments of 10,000 shares on each of August 12, 2011, August 12, 2012 and
August 12, 2013. If we terminate Mr. Minkow’s
employment without cause, he will be entitled to: (i) the continued payment of
his base salary for the remainder of the term of the employment agreement; (ii)
annual bonus payments based on the average bonus compensation (as a percentage
of base salary) paid to Mr. Minkow during the period prior to his termination
without cause and (iii) the immediate vesting of all stock options previously
awarded to Mr. Minkow. Mr. Minkow has also agreed not to compete with us, or to
solicit employees or customers from us, until the earlier of (a) August 12,
2013, (b) the date upon which Mr. Minkow is terminated without cause, (c) the
termination of Mr. Minkow’s employment due to disability or (d) Mr. Minkow’s
voluntary termination of his employment following a breach by us of his
employment agreement. On March 24, 2011, we
granted Mr. Minkow incentive stock options to purchase 1,600 shares of our
common stock for service as an executive officer and non-qualified stock
options to purchase 400 shares of our common stock for service as a director
(each as adjusted for the anticipated one-for-five
reverse stock split of our common stock). The grants were made under our
2009 Equity Incentive Plan at an exercise price of $12.00 per share for the
incentive stock options and the non-qualified stock options. The incentive
stock options will vest in three equal annual installments on each of March 24,
2012, 2013 and 2014. All of the non-qualified stock options will vest on
March 24, 2012. The incentive
stock options and the non-qualified stock options expire on March 24, 2021. Thomas Klink On April 30, 2010, in
connection with our acquisition of Jefferson Electric, Inc., Jefferson
Electric, Inc. entered into an employment agreement with Thomas Klink pursuant
to which Mr. Klink is serving as Jefferson Electric, Inc.’s president, subject
to the authority of our chief executive officer, Mr. Mazurek, for a term of
three years. Mr. Klink is entitled to receive an annual base salary of
$312,000. Mr. Klink’s employment may be terminated upon his death or
disability, upon the occurrence of certain events that constitute “cause,” and
without cause. If terminated without cause, Mr. Klink will be entitled to
receive as severance an amount equal to his base salary for the remainder of
the three year employment period, conditioned upon his execution of a release
in form reasonably acceptable to counsel of Jefferson Electric, Inc. Mr. Klink was appointed to
our board of directors effective upon our acquisition of Jefferson Electric,
Inc. The merger agreement pursuant to which we effected our acquisition of
Jefferson Electric, Inc. provides that, with certain exceptions, including
resignation, termination or removal as a director, we will cause Mr. Klink
to be 60 nominated as a director of
our company during the three year term of his employment agreement. In
addition, on April 30, 2010, Mr. Klink entered into a voting agreement with
Provident Pioneer Partners, L.P., pursuant to which Provident Pioneer Partners,
L.P. agreed to vote all of its shares to elect Mr. Klink as a director of us
during the three year term of his employment agreement, subject to certain
exceptions, including resignation, termination or removal as a director. On March 24, 2011, we
granted Mr. Klink incentive stock options to purchase 1,000 shares of our
common stock for service as an executive officer of Jefferson Electric, Inc.
and non-qualified stock options to purchase 400 shares of our common stock for
service as a director (each as adjusted for the anticipated one-for-five reverse stock split of our common stock).
The grants were made under our 2009 Equity Incentive Plan at an exercise price
of $12.00 per share for the incentive stock options and the non-qualified stock
options. The incentive stock options will vest in three equal annual
installments on each of March 24, 2012, 2013 and 2014. All of the non-qualified
stock options will vest on March 24, 2012. The incentive stock options and the non-qualified stock options expire on
March 24, 2021. 2010 Outstanding Equity Awards at Fiscal Year End The following table provides
information on the holdings of stock options of the named executive officers at
December 31, 2010, as adjusted for the
anticipated one-for-five reverse stock split of our common stock. This
table includes unexercised and unvested options awards. Each outstanding award
is shown separately for each named officer. Option Awards Number of Number of Option Option Price Expiration Name Exercisable Unexercisable ($) Date Nathan J. Mazurek 10,000 (1) 20,000 (1) $ 16.25 03/23/2015 400 (2) 0 $ 16.25 03/23/2020 Andrew Minkow 0 30,000 (3) $ 15.20 08/12/2020 Thomas Klink - - - - (1) Vests in equal annual
installments of 10,000 shares on each of March 23, 2012 and 2013. (2) Vested on March 23, 2011. (3) Vests in three equal
annual installments of 10,000 shares on each of August 12, 2011, 2012 and
2013. 2009 Equity Incentive Plan 61 Equity Incentive Plan will
be administered by our board of directors until such time as such authority has
been delegated to a committee of the board of directors. On March 24, 2011, we
granted options to purchase common stock under the 2009 Equity Incentive Plan
to the named executive officers as follows, as adjusted for the anticipated one-for-five reverse stock
split of our common stock: Name Shares Subject Exercise Price Vesting Schedule Expiration Nathan J. Mazurek 400 (1) $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 2,000 (2) $ 13.20 One-third annually in
2012, 2013 and 2014 on the anniversary of the grant date March 24, 2016 Andrew Minkow 400 (1) $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 1,600 (2) $ 12.00 One-third annually in
2012, 2013 and 2014 on the anniversary of the grant date March 24, 2021 Thomas Klink 400 (1) $ 12.00 100% on the one year anniversary
of the grant date March 24, 2021 1,000 (2) $ 12.00 One-third annually in
2012, 2013 and 2014 on the anniversary of the grant date March 24, 2021 (1) Non-qualified stock
options granted for service as a director. (2) Incentive stock options
granted for service as an executive officer. On May 11, 2011, the board
of directors of the Company adopted the 2011 Long-Term Incentive Plan, subject
to stockholder approval, which was obtained on May 31, 2011. The 2011 Long-Term Incentive Plan replaces and
supersedes the 2009 Equity Incentive Plan. The Company’s outside directors and
employees, including the Company’s principal executive officer, principal
financial officer and other named executive officers, and certain contractors
are all eligible to participate in the 2011 Long-Term Incentive Plan. The 2011
Long-Term Incentive Plan allows for the granting of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units, performance awards, dividend equivalent rights, and
other awards, which may be granted singly, in combination, or in tandem, and
upon such terms as are determined by the Board or a committee of the Board that
is designated to administer the Plan. Subject to certain adjustments, the
maximum number of shares of the Company’s common stock that may be delivered
pursuant to awards under the 2011 Long-Term Incentive Plan is 700,000 shares,
as adjusted for the anticipated
one-for-five reverse stock split of our common stock. Director Compensation The following table provides
compensation information for the one year period ended December 31, 2010 for
each non-employee member of our board of directors: 62 2010 Fiscal Year Director Compensation Table Name Fees
Earned or Option
Total Yossi Cohn $ 7,000 $ 2,719 $ 9,719 David J. Landes $ 7,000 $ 2,719 $ 9,719 David Tesler $ 7,000 $ 2,719 $ 9,719 Jonathan Tulkoff $ 7,000 $ 2,719 $ 9,719 (1) This column represents the
aggregate grant date fair value of stock options granted to non-employee
directors in 2010 in accordance with FASB ASC Topic 718, with the exception
that the amount shown assumes no forfeitures. Assumptions used in the
calculation of these amounts are included in “Note 2. Summary of Significant
Accounting Policies—Share-Based Payments” and “Note 12. Additional Paid-in
Capital” to our audited financial statements for the year ended December 31,
2010 included in this prospectus. All of our directors,
including our employee directors, are paid cash compensation of $1,000 per
meeting of the board of directors and reimbursed for reasonable out-of-pocket
expenses incurred in connection with their attendance at such meetings. On March 24, 2011, we
granted to each non-employee director options to purchase common stock under
the 2009 Equity Incentive Plan as follows, as adjusted for the anticipated one-for-five reverse stock
split of our common stock: Name Shares Subject Exercise Price Vesting Schedule Expiration Yossi Cohn 400 $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 David J. Landes 400 $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 Ian Ross 400 $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 David Tesler 400 $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 Jonathan Tulkoff 400 $ 12.00 100% on the one year
anniversary of the grant date March 24, 2021 (1) Non-qualified stock
options granted for service as a director. 63 Principal and Selling Stockholders • each
person known by us to beneficially own more than 5.0% of our common stock; • each
of our directors; • each
of the named executive officers; and • all of
our directors and executive officers as a group. Name of Beneficial Owner Number of Shares Percentage 5% Owners Provident Pioneer
Partners, L.P. 4,760,000 (2) 77.9 % A. Lawrence Carroll Trust 420,000 (3) 7.1 % WEC Partners LLC 386,860 (4) 6.5 % Officers and Directors Nathan J. Mazurek 4,770,400 (5) 78.0 % Thomas Klink 297,255 (6) 4.9 % Andrew Minkow 32,000 (7) * Yossi Cohn 400 (8) * David J. Landes 4,760,400 (9) 77.9 % Ian Ross 0 * David Tesler 400 (8) * Jonathan Tulkoff 400 (8) * All directors and
executive officers as a group (8 persons) 5,101,255 (5)(6)(7)(8) 80.3 % * Less than one percent
(1%). (1) Shares of common stock
beneficially owned and the respective percentages of beneficial ownership of
common stock assumes the exercise of all options, warrants and other
securities convertible into common stock beneficially owned by such person or
entity currently exercisable or exercisable within 60 days of the date of this prospectus.
Shares issuable pursuant to the exercise of stock options and warrants
exercisable within 60 days are deemed outstanding and held by the holder of
such options or warrants for computing the percentage of outstanding common
stock beneficially owned by such person, but are not deemed outstanding for
computing the percentage of outstanding common stock beneficially owned by
any other person. 64 (2) Includes (i) 4,560,000
shares of common stock held by Provident Pioneer Partners, L.P. and (ii) a
currently exercisable warrant to purchase up to 200,000 shares of common
stock at an exercise price of $16.25 per share held by Provident Pioneer
Partners, L.P. Nathan J. Mazurek is the majority stockholder and a control
person of Provident Canada Corp., the general partner of Provident Pioneer
Partners, L.P., and, as such, has sole voting and investment power over these
shares. (3) A. Lawrence Carroll is the
trustee of the A. Lawrence Carroll Trust and, in such capacity, has voting
and dispositive power over the securities held for the account of this
stockholder. (4) Comprised of (i) 236,860
shares of common stock held by certain affiliates of WEC Partners LLC and its
affiliate, Genesis Capital Advisors LLC, and (ii) 150,000 shares of common
stock held by WEC Partners LLC. Genesis Capital Advisors LLC also holds a
warrant to purchase 200,000 shares of common stock, which shares are not
included in the table above. The warrant is not convertible to the extent
that after giving effect to the conversion, the holder (together with its
affiliates, and any other person or entity acting as a group together with
such holder or any of its affiliates) would beneficially own more than 4.99%
of the number of shares of our common stock outstanding immediately after
such conversion, unless such requirement is waived by the holder upon not
less than 61 days’ prior notice to us to change the beneficial ownership
limitation to 9.99%. Each of Daniel Saks, Jaime Hartman and Ethan Benovitz
are principals of Genesis Capital Advisors LLC and of WEC Partners LLC and,
as such may be deemed to have voting and dispositive power over the
securities held for the account of these stockholders. (5) Nathan J. Mazurek is the
majority stockholder and a control person of Provident Canada Corp., the
general partner of Provident Pioneer Partners, L.P., and, as such, has
beneficial ownership of the 4,560,000 shares of common stock held by
Provident Pioneer Partners, L.P. and the currently exercisable warrant to
purchase up to 200,000 shares of common stock at an exercise price of $16.25
per share held by Provident Pioneer Partners, L.P. In addition, includes
10,400 shares subject to stock options which are exercisable within 60 days
of the date of this prospectus. (6) Includes (i) 97,255 shares
of common stock and (ii) a currently exercisable warrant to purchase up to
200,000 shares of common stock at an exercise price of $16.25 per share. (7) Includes (i) 2,000 shares
of common stock and (ii) a currently exercisable warrant to purchase up to
30,000 shares of common stock at an exercise price of $10.00 per share. (8) Includes 400 shares
subject to stock options which are exercisable within 60 days of the date of
this prospectus. (9) David J. Landes is the
minority stockholder and a control person of Provident Canada Corp., the general
partner of Provident Pioneer Partners, L.P., and, as such, has
beneficial ownership of the 4,560,000 shares of common stock held by
Provident Pioneer Partners, L.P. and the currently exercisable warrant to
purchase up to 200,000 shares of common stock at an exercise price of $16.25
per share held by Provident Pioneer Partners, L.P. In addition, includes
14,000 shares subject to stock options which are exercisable within 60 days
of the date of this prospectus. Selling Stockholders All information with respect
to share ownership has been furnished by or on behalf of the selling
stockholders and is as of the date of this prospectus. We believe, based on
information supplied by the selling stockholders, that except as may otherwise
be indicated in the notes to the table below, each of them has sole voting and
investment power with respect to the shares of common stock owned by them. To
our knowledge, none of the selling stockholders has had any position with, held
any office of, or had any other material relationship with us during the past
three years, except as described in the footnotes to the table below. The
percentage of shares beneficially owned after the offering is based on
7,607,255 shares of common stock to be outstanding after this offering,
including the 1,700,000 shares that we are selling in this offering. 65 Shares Beneficially Owned Shares Beneficially Owned Number of Name of Selling Stockholder Number (1) Number (1) Percent (1) A. Lawrence Carroll
Trust(2) 420,000 210,000 210,000 2.8 % Dene LLC(3) 26,000 13,000 13,000 * Ronald Gurman 30,000 15,000 15,000 * Josef Hartman 10,000 5,000 5,000 * Eli Lerner 80,000 40,000 40,000 * Jules Nordlicht 100,000 50,000 50,000 * Michael Raskas 30,000 15,000 15,000 * Stanley Raskas 20,000 20,000 - - A George Saks and Stephanie
Saks JTWROS(4) 30,000 15,000 15,000 * David Saks 12,000 6,000 6,000 * Sami Shemtov 10,000 5,000 5,000 * Stephen Sundheimer 20,000 10,000 10,000 * WEC Partners LLC(5) 386,860 (6) 150,000 236,860 3.1 % Dov Wiener 10,000 10,000 - - Margaret Y. Wong 30,000 15,000 15,000 * Alex Ping Zhang 10,000 5,000 5,000 * * Less than one percent
(1%). (1) Shares of common stock
beneficially owned and the respective percentages of beneficial ownership of
common stock assumes the exercise of all options, warrants and other
securities convertible into common stock beneficially owned by such person or
entity currently exercisable or exercisable within 60 days of the date of this prospectus. Shares issuable pursuant to the exercise of stock options and warrants
exercisable within 60 days are deemed outstanding and held by the holder of
such options or warrants for computing the percentage of outstanding common
stock beneficially owned by such person, but are not deemed outstanding for
computing the percentage of outstanding common stock beneficially owned by
any other person. (2) A. Lawrence Carroll is the
trustee of the A. Lawrence Carroll Trust and, in such capacity, has voting
and dispositive power over the securities held for the account of this
selling stockholder. (3) Naomi Saks is the managing
member of Dene, LLC and, in such capacity, has voting and dispositive power
over the securities held for the account of this selling stockholder. (4) Each of A. George Saks and
Stephanie Saks have voting and dispositive power over the securities held for
the account of this selling stockholder. (5) Each of Daniel Saks, Jaime
Hartman and Ethan Benovitz are principals of WEC Partners LLC and, as such
may be deemed to have voting and dispositive power over the securities held
for the account of this selling stockholder. (6) Comprised of
(i) 236,860 shares of common stock held by certain affiliates of WEC
Partners LLC and its affiliate, Genesis Capital Advisors LLC, and
(ii) 150,000 shares of common stock held by WEC Partners LLC. Genesis
Capital Advisors LLC also holds a warrant to purchase 200,000 shares of
common stock, which shares are not included in the table above. The warrant
is not convertible to the extent that after giving effect to the conversion,
the holder (together with its affiliates, and any other person or entity
acting as a group together with such holder or any of its affiliates) would
beneficially own more than 4.99% of the number of shares of our common stock
outstanding immediately after such conversion, unless such 66 requirement is waived
by the holder upon not less than 61 days’ prior notice to us to change the
beneficial ownership limitation to 9.99%. Each of Daniel Saks, Jaime Hartman
and Ethan Benovitz are principals of Genesis Capital Advisors LLC and, as
such may be deemed to have voting and dispositive power over the securities
held for the account of this stockholder. 67 Certain Relationships and Related Party Transactions Immediately following the
share exchange, we transferred all of our pre-share exchange operating assets
and liabilities to our wholly-owned subsidiary, Sierra Concepts Holdings, Inc.
and transferred all of Sierra Concepts Holdings, Inc.’s outstanding capital stock
to David Davis, the sole officer, director and majority stockholder prior to
the share exchange, as consideration for Mr. Davis consenting to the
cancellation of 1,440,000 shares of our common stock held by Mr. Davis (as
adjusted for the anticipated one-for-five reverse stock split of our common
stock). Following such cancellation, Mr. Davis, the sole stockholder of Sierra
Concepts Holdings, Inc., does not hold any of our shares. In 2009, we paid Provident
Pioneer Partners, L.P., our sole stockholder at the time, cash dividends of
$2.7 million. In 2009 and 2010, we paid
$152,000 and $66,000 to Provident Management, Inc., a company with respect to
which Nathan J. Mazurek is the sole shareholder, as reimbursement for rent,
office services, and travel and entertainment expenses. In 2009, Pioneer
Transformers Ltd. paid an aggregate of $250,000 to Provident Management, Inc.,
and Provident Canada Corp. as consideration for Mr. Mazurek providing executive
services to Pioneer Transformers Ltd., along with serving as its chief
executive officer, president and vice president, sales and marketing. In 1997, two limited
partners of Provident Pioneer Partners, L.P., the Isaac Landes Revocable Trust,
of which our director, David J. Landes, is a trustee, and the Naomi S. Landes
Revocable Trust, controlled by Ms. Landes, advanced $100,000 and $50,000,
respectively, to us, with such amounts accruing interest at the rate of 12% per
annum and no specific terms of repayment or maturity date. Since 1997, we have
paid interest continually on these advances. In 2010, we repaid the principal
amounts in full. On April 30, 2010, we
acquired Jefferson Electric, Inc. through a merger pursuant to which JEI
Acquisition, Inc., a wholly-owned subsidiary of ours, merged with and into
Jefferson Electric, Inc., with Jefferson Electric, Inc. continuing as the
surviving corporation and becoming a wholly-owned subsidiary of ours. Upon
consummation of the merger, we issued an aggregate of 97,255 shares of our
common stock to Thomas Klink, Jefferson Electric, Inc.’s sole stockholder prior
to the merger (as adjusted for the anticipated one-for-five reverse stock split
of our common stock). In connection with the
acquisition, on April 30, 2010, Jefferson Electric, Inc. entered into an
employment agreement with Mr. Klink pursuant to which Mr. Klink serves as
Jefferson Electric, Inc.’s president on a full time basis, subject to the
authority of our chief executive officer, Mr. Mazurek, for a term of three
years, unless Mr. Klink is terminated earlier in accordance with the provisions
of the employment agreement. Mr. Klink receives an annual base salary of
$312,000. Mr. Klink was also appointed to our board of directors effective upon
our acquisition of Jefferson Electric, Inc. Finally, on April 30, 2010, Mr.
Klink entered into a voting agreement with Provident Pioneer Partners, L.P.,
pursuant to which Provident Pioneer Partners, L.P. agreed to vote all of its
shares to elect Mr. Klink as a director of ours during the three year term of
Mr. Klink’s employment agreement, subject to certain exceptions, including
resignation, termination or removal as a director. In connection with our
acquisition of Jefferson Electric, Inc., we advanced $3.0 million to Jefferson
Electric, Inc., which was utilized to partially repay the principal amount
outstanding under Jefferson Electric, Inc.’s revolving credit facility with its
bank and to partially repay the principal amount outstanding under Jefferson
Electric, Inc.’s 68 term loan facility. Mr.
Klink is a guarantor under this facility, and borrowings are also
collateralized by the shares of our common stock acquired by Mr. Klink in the
acquisition and Mr. Klink’s warrant, which is described below. On April 30, 2010, we also
sold Mr. Klink a warrant to purchase up to an aggregate of 200,000 shares of
common stock for $10,000 (as adjusted for the anticipated one-for-five reverse
stock split of our common stock). Such warrant provides for the purchase of
shares of our common stock for five years at an exercise price of $16.25 per
share. This warrant contains a provision that protects its holder against
dilution by adjustment of the purchase price in the event of a stock split or
combination. The warrant also provides that the holder may not, subject to
certain exemptions, sell or transfer any of the shares that may be purchased
upon exercise of the warrant until October 30, 2011. In accordance with the
merger agreement pursuant to which we acquired Jefferson Electric, Inc., JE
Mexican Holdings, Inc., a newly incorporated Delaware corporation and
wholly-owned subsidiary of ours, entered into a purchase agreement providing
for the sale by Mr. Klink to JE Mexican Holdings, Inc. of one hundred percent
of the membership interests in Jefferson Electric Mexico Holdings LLC, a Wisconsin
limited liability company, for nominal consideration. Jefferson Electric Mexico
Holdings LLC was the holder of a less than 0.1% minority equity interest in
Nexus Magneticos de Mexico, S. de R.L. de C.V., the principal manufacturing
subsidiary of Jefferson Electric, Inc., which is located in Reynosa, Mexico. None of the transactions
described above was approved pursuant to a formal policy or procedure related
to the approval of related party transactions. Going forward, our board of
directors intends for us not to enter into any related party transaction unless
the members of the board who do not have an interest in the potential
transaction have reviewed the transaction and determined that (i) we would not
be able to obtain better terms by engaging in a transaction with a non-related
party and (ii) the transaction is in our best interest. This policy applies
generally to any transaction in which we are to be a participant and the amount
involved exceeds the lesser of $120,000 or one percent of the average of our
total assets at year end for the previous two completed fiscal years, and in
which any related person had or will have a direct or indirect material
interest. This policy is not currently in writing. In the future, our audit
committee, which was established on March 24, 2011, will be required to
pre-approve any related party transactions, either pursuant to its charter or
pursuant to a separate written policy. 69 Common Stock The holders of common stock
are entitled to one vote per share. Our certificate of incorporation does not
provide for cumulative voting. The holders of our common stock are entitled to
receive ratably such dividends, if any, as may be declared by the board of
directors out of legally available funds. Upon liquidation, dissolution or
winding-up, the holders of our common stock are entitled to share ratably in
all assets that are legally available for distribution. The holders of our
common stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of our common stock are
subject to, and may be adversely affected by, the rights of the holders of any
series of preferred stock, which may be designated solely by action of the
board of directors and issued in the future. Preferred Stock The board of directors is
authorized, subject to any limitations prescribed by law, without further vote
or action by the stockholders, to issue from time to time shares of preferred
stock in one or more series. Each such series of preferred stock shall have
such number of shares, designations, preferences, voting powers,
qualifications, and special or relative rights or privileges as shall be
determined by the board of directors, which may include, among others, dividend
rights, voting rights, liquidation preferences, conversion rights and
preemptive rights. Warrants $10.00 Warrant On December 2, 2009, we sold
a warrant to purchase up to an aggregate of 200,000 shares of common stock for
$10,000. Such warrant provides for the purchase of shares of common stock for
five years at an exercise price of $10.00 per share. We are prohibited from
effecting the exercise of the warrant to the extent that as a result of such
exercise the holder of the exercised warrant would beneficially own more
than 4.99% (or, if such limitation is waived by the holder upon no less than 61
days prior notice to us, 9.99%) in the aggregate of our issued and
outstanding shares of common stock, as calculated immediately after giving
effect to the issuance of shares of our common stock upon the exercise of the
warrant. The warrant contains provisions that protect its holder against
dilution by adjustment of the purchase price in certain events such as stock
dividends, stock splits and other similar events. If at any time after the one
year anniversary of the issuance date of such warrant there is no effective
registration statement, or no current prospectus available for the resale of
the shares of common stock underlying the warrant, then the holder of such
warrant has the right to exercise the warrant by means of a cashless exercise. $16.25 Warrant In connection with our
acquisition of Pioneer Transformers Ltd., we issued a warrant to purchase up to
200,000 shares of common stock to Provident Pioneer Partners, L.P. Such warrant
provides for the purchase of shares of common stock for five years at an
exercise price of $16.25 per share. This warrant contains a provision that
protects its holder against dilution by adjustment of the purchase price in the
event of a stock split or combination. If at any time after the one year
anniversary of the issuance date of such warrant there is no effective
registration statement registering, or no current prospectus available for, the
resale of the shares of common stock underlying such warrant, then the holder
shall have the right to exercise this warrant by means of a cashless exercise. 70 Klink Warrant On April 30, 2010, we sold
Thomas Klink a warrant to purchase up to an aggregate of 200,000 shares of
common stock for $10,000. Such warrant provides for the purchase of shares of
common stock for five years at an exercise price of $16.25 per share. This
warrant contains a provision that protects its holder against dilution by
adjustment of the purchase price in the event of a stock split or combination.
The warrant also provides that the holder may not, subject to certain
exemptions, sell or transfer any of the shares that may be purchased upon
exercise of the warrant until October 30, 2011. Investor Relations Warrants On April 19, 2010, we issued
four year warrants to our investor relations firm and its designees to purchase
up to an aggregate of 10,000 shares of common stock at an exercise price of
$16.25 per share. These warrants contain a provision that protects their
holders against dilution by adjustment of the purchase price in the event of a
stock split or combination. In addition, if at any time after the one year
anniversary of the issuance date of the warrant there is no effective
registration statement registering, or no current prospectus available for, the
resale of the shares of common stock underlying the warrant, then the holders
of these warrants will have the right to exercise the warrants by means of a
cashless exercise. Consultant Warrant On April 26, 2010, we issued
a five year warrant to a consultant to purchase up to an aggregate of 30,000
shares of common stock at an exercise price of $10.00 per share. This warrant
contains a provision that protects its holder against dilution by adjustment of
the purchase price in the event of a stock split or combination. In addition,
if at any time after the one year anniversary of the issuance date of the
warrant there is no effective registration statement registering, or no current
prospectus available for, the resale of the shares of common stock underlying
the warrant, then the holder of this warrant will have the right to exercise
the warrant by means of a cashless exercise. Registration Rights We granted to Provident
Pioneer Partners, L.P. and Genesis Capital Advisors, LLC warrant piggyback
registration rights, pursuant to which we agreed to register the shares of
common stock issuable upon the exercise of the warrants held by them in the
event that we determined to prepare and file a registration statement with the
Securities and Exchange Commission relating to an offering of any of our equity
securities for our own account or the account of others under the Securities
Act of 1933, as amended, subject to certain exemptions. These shares were
included in the effective registration statement describe above. Lock-up Agreements Each of our officers and
directors, as well as Provident Pioneer Partners, L.P., have agreed not to,
subject to certain exemptions, sell or transfer any shares of our common stock
or other securities convertible into or exchangeable or exercisable for shares
of our common stock or derivatives of our common stock owned by these persons
prior to this offering or common stock issuable upon exercise of options or
warrants held by these persons for a period of 180 days after the date of this
offering without the prior written consent of Oppenheimer & Co. Inc.
This consent may be given at any time without public notice. 71 exchangeable or exercisable
for shares of our common stock or derivatives of our common stock owned by
these persons prior to this offering or common stock issuable upon exercise of
options or warrants held by these persons for a period of 180 days after the
date of this offering without the prior written consent of
Oppenheimer & Co. Inc. This consent may be given at any time without
public notice. In addition, on December 2,
2009, Provident Pioneer Partners, L.P. entered into a lock-up agreement
pursuant to which Provident Pioneer Partners, L.P. agreed not to, subject
to certain exemptions, sell or transfer any of the 4,560,000 shares of common
stock it received in connection with our acquisition of Pioneer Transformers
Ltd. until June 3, 2011. On April 30, 2010, Thomas
Klink entered into a lock-up agreement pursuant to which he agreed not to,
subject to certain exemptions, sell or transfer any of the 97,255 shares of
common stock he received in connection with our acquisition of Jefferson
Electric, Inc. until October 30, 2011. The warrant sold to Mr. Klink on April
30, 2010 also provides for a concurrent lock-up period that covers the shares
that may be purchased upon exercise of such warrant. Anti-Takeover Effect of Delaware Law, Certain Charter and
Bylaw Provisions Our certificate of
incorporation and bylaws contain provisions that could have the effect of
discouraging potential acquisition proposals or tender offers or delaying or
preventing a change of control of our company. These provisions are as follows: • they
provide that special meetings of stockholders may be called only by our
chairman, our president or by a resolution adopted by a majority of our board
of directors; • they
do not include a provision for cumulative voting in the election of
directors. Under cumulative voting, a minority stockholder holding a
sufficient number of shares may be able to ensure the election of one or more
directors. The absence of cumulative voting may have the effect of limiting
the ability of minority stockholders to effect changes in our board of
directors; and • they
allow us to issue, without stockholder approval, up to 5,000,000 shares of
preferred stock that could adversely affect the rights and powers of the
holders of our common stock. We are subject to the
provisions of Section 203 of the General Corporation Law of the State of
Delaware, an anti-takeover law. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a “business combination” includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an “interested stockholder” is a person who, together with affiliates and
associates, owns, or within three years prior did own, 15% or more of the
voting stock of a corporation. Indemnification of Directors and Officers Section 145 of the General
Corporation Law of the State of Delaware provides, in general, that a
corporation incorporated under the laws of the State of Delaware, as we are,
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of
the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person’s conduct was unlawful. In the case of
a derivative action, a Delaware corporation may indemnify any such person
against expenses (including attorneys’ fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit if such person acted in 72 good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests
of the corporation, except that no indemnification will be made in respect of
any claim, issue or matter as to which such person will have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or any other court in which such action was
brought determines such person is fairly and reasonably entitled to indemnity
for such expenses. Our certificate of
incorporation and bylaws provide that we will indemnify our directors,
officers, employees and agents to the extent and in the manner permitted by the
provisions of the General Corporation Law of the State of Delaware, as amended
from time to time, subject to any permissible expansion or limitation of such
indemnification, as may be set forth in any stockholders’ or directors’
resolution or by contract. Any repeal or modification of these provisions
approved by our stockholders will be prospective only and will not adversely
affect any limitation on the liability of any of our directors or officers
existing as of the time of such repeal or modification. We are also permitted to
apply for insurance on behalf of any director, officer, employee or other agent
for liability arising out of his actions, whether or not the General
Corporation Law of the State of Delaware would permit indemnification. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to our directors, officers and persons controlling
us, we have been advised that it is the Securities and Exchange Commission’s
opinion that such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable. 73 Shares Eligible for Future Sale In addition, 758,400 shares
are issuable upon exercise of options and warrants. Pursuant to an effective
registration statement, 400,000 shares issuable upon exercise of outstanding
warrants are freely tradeable unless they are purchased by our “affiliates,” as
defined in Rule 144 under the Securities Act of 1933, as amended. If any
options or other warrants are exercised, the shares issued upon exercise will
also be restricted, but may be sold under Rule 144 after the shares have been
held for six months. Sales under Rule 144 may be subject to volume limitations
and other conditions. 74 We and the selling stockholders
have entered into an underwriting agreement with the underwriters named below.
Oppenheimer & Co. Inc. is acting as representative of the underwriters and
Houlihan Lokey Capital, Inc. and Sidoti & Company, LLC are acting
as co-managers. The underwriting agreement
provides for the purchase of a specific number of shares of common stock by
each of the underwriters. The underwriters’ obligations are several, which
means that each underwriter is required to purchase a specified number of
shares, but is not responsible for the commitment of any other underwriter to
purchase shares. Subject to the terms and conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the number of
shares of common stock set forth opposite its name below: Underwriter Number of Oppenheimer & Co. Inc. Houlihan Lokey Capital
Inc. Sidoti & Company, LLC Total 2,284,000 The underwriters have agreed
to purchase all of the shares offered by this prospectus (other than those
covered by the over-allotment option described below) if any are purchased. The shares should be ready
for delivery on or about , 2011 against payment in immediately available funds.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The representative has advised us and the
selling stockholders that the underwriters propose to offer the shares directly
to the public at the public offering price that appears on the cover page of
this prospectus. In addition, the representatives may offer some of the shares
to other securities dealers at such price less a concession of $ per share. The
underwriters may also allow, and such dealers may reallow, a concession not in
excess of $ per share to other dealers. After the shares are released for sale
to the public, the representatives may change the offering price and other
selling terms at various times. The following table provides
information regarding the amount of the discount to be paid to the underwriters
by us and the selling stockholders. All selling stockholders may be deemed
underwriters with respect to the shares they are offering for sale. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters’ option to purchase 342,600 additional shares. Per Share Total Without Exercise of Total With Full Pioneer Power Solutions,
Inc $ $ $ Selling stockholders $ $ $ Total $ $ $ 75 We and the selling stockholders
have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. The representative has
informed us and the selling stockholders that they do not expect discretionary
sales by the underwriters to exceed five percent of the shares offered by this
prospectus. There is no well-established
trading market for the shares. The offering price for the shares has been
determined by us and the representatives, based on the following factors: • the history and
prospects for the industry in which we compete; • our past and present
operations; • our historical results
of operations; • our prospects for future business and
earning potential; • our management; • the general condition of
the securities markets at the time of this offering; • the recent market prices
of securities of generally comparable companies; • the market
capitalization and stages of development of other companies which we and the
representatives believe to be comparable to us; and • other factors deemed to
be relevant. Rules of the Securities and
Exchange Commission may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules: • Stabilizing transactions –
The representatives may make bids or purchases for the purpose of pegging,
fixing or maintaining the price of the shares, so long as stabilizing bids do
not exceed a specified maximum. • Over-allotments and
syndicate covering transactions – The underwriters may sell more shares of
our common stock in connection with this offering than the number of shares
than they have committed to purchase. This over-allotment creates a short
position for the underwriters. This short sales position may involve either
“covered” short sales or “naked” short sales. Covered short sales are short
sales made in an amount not greater than the underwriters’ over-allotment
option to purchase additional shares in this offering described above. The
underwriters may close out any covered short position either by exercising
their over-allotment option or by purchasing shares in the open market. To
determine how they will close the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase
in the open market, as compared to the price at which they may purchase
shares through the over-allotment option. Naked short sales are 76 short sales in excess of
the over-allotment option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that, in the open
market after pricing, there may be downward pressure on the price of the
shares that could adversely affect investors who purchase shares in this
offering. • Penalty bids – If the representatives
purchase shares in the open market in a stabilizing transaction or syndicate
covering transaction, they may reclaim a selling concession from the
underwriters and selling group members who sold those shares as part of this
offering. • Passive market making –
Market makers in the shares who are underwriters or prospective underwriters
may make bids for or purchases of shares, subject to limitations, until the
time, if ever, at which a stabilizing bid is made. Similar to other purchase
transactions, the underwriters’ purchases to cover the syndicate short sales or
to stabilize the market price of our common stock may have the effect of
raising or maintaining the market price of our common stock or preventing or
mitigating a decline in the market price of our common stock. As a result, the
price of the shares of our common stock may be higher than the price that might
otherwise exist in the open market. The imposition of a penalty bid might also
have an effect on the price of the shares if it discourages resales of the
shares. Neither we nor the
underwriters makes any representation or prediction as to the effect that the
transactions described above may have on the price of the shares. These
transactions may occur on the Nasdaq Capital Market or otherwise. If such
transactions are commenced, they may be discontinued without notice at any
time. The underwriters and their
respective affiliates are full service financial institutions engaged in
various activities, which may include securities trading, commercial and
investment banking, financial advisory, investment management, investment
research, principal investment, hedging, financial and brokerage activities.
Certain of the underwriters and their respective affiliates have, from time to
time, performed, and may in the future perform, various financial advisory and
investment banking, commercial banking and other services for us and our
affiliates, for which they received or will receive customary fees and
expenses. In the ordinary course of
their various business activities, the underwriters and their respective
affiliates may make or hold a broad array of investments and actively trade
debt and equity securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for the account of
their customers, and such investment and securities activities may involve
securities and/or instruments of us. The underwriter and their respective
affiliates may also make investment recommendations and/or publish or express
independent research views in respect of such securities or instruments and may
not at any time hold, or recommend to clients that they acquire, long and/or
short positions in such securities and instruments. Selling Restrictions - Notice to Non- US Investors BELGIUM The offering is exclusively
conducted under applicable private placement exemptions and therefore it has
not been and will not be notified to, and this document or any other offering
material relating to the common stock has not been and will not be approved by,
the Belgian Banking, Finance and Insurance Commission (“Commission bancaire,
financière et des assurances/Commissie voor het Bank-, Financie- en
Assurantiewezen”). Any representation to the contrary is unlawful. Each underwriter has
undertaken not to offer sell, resell, transfer or deliver directly or
indirectly, any securities, or to take any steps relating/ancillary thereto,
and not to distribute or publish this document or any other material relating
to the securities or to the offering in a manner which would be construed as:
(a) a public offering under the Belgian Royal Decree of 7 July 1999 on the
public character of financial transactions; or (b) an offering of securities to
the public under Directive 2003/71/EC which triggers an obligation to publish a
prospectus in Belgium. Any action contrary to these restrictions will cause the
recipient and the issuer to be in violation of the Belgian securities laws. 77 Neither this prospectus nor
any other offering material relating to the securities has been submitted to
the clearance procedures of the Autorité des
marchés financiers in France. The securities have not been offered
or sold and will not be offered or sold, directly or indirectly, to the public
in France. Neither this prospectus nor any other offering material relating to
the securities has been or will be: (a) released, issued, distributed or caused
to be released, issued or distributed to the public in France; or (b) used in
connection with any offer for subscription or sale of the securities to the
public in France. Such offers, sales and distributions will be made in France
only: (i) to qualified investors (investisseurs
qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each
case investing for their own account, all as defined in and in accordance with
Articles L.411-2, D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of
the French Code monétaire et financier; (ii) to investment services providers
authorized to engage in portfolio management on behalf of third parties; or
(iii) in a transaction that, in accordance with article L.411-2-II-1º-or-2º-or
3º of the French Code monétaire et financier
and article 211-2 of the General Regulations (Règlement
Général) of the Autorité des
marchés financiers, does not constitute a public offer (appel public à l’épargne). Such securities
may be resold only in compliance with Articles L.411-1, L.411-2, L.412-1 and
L.621-8 through L.621-8-3 of the French Code
monétaire et financier. UNITED KINGDOM/GERMANY/NORWAY/THE NETHERLANDS In relation to each member
state of the European Economic Area that has implemented the Prospectus
Directive (each, a relevant member state), with effect from and including the
date on which the Prospectus Directive is implemented in that relevant member
state (the “relevant implementation date”), an offer of securities described in
this prospectus may not be made to the public in that relevant member state
prior to the publication of a prospectus in relation to the securities that has
been approved by the competent authority in that relevant member state or,
where appropriate, approved in another relevant member state and notified to
the competent authority in that relevant member state, all in accordance with
the Prospectus Directive, except that, with effect from and including the
relevant implementation date, an offer of securities may be made to the public
in that relevant member state at any time: • to any legal entity that
is authorized or regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to invest in
securities; • to any legal entity that
has two or more of (1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than €43,000,000 and (3) an
annual net turnover of more than €50,000,000, as shown in its last annual or
consolidated accounts; • to fewer than 100
natural or legal persons (other than qualified investors as defined below)
subject to obtaining the prior consent of the underwriter for any such offer;
or • in any other
circumstances that do not require the publication of a prospectus pursuant to
Article 3 of the Prospectus Directive. Each purchaser of securities
described in this prospectus located within a relevant member state will be
deemed to have represented, acknowledged and agreed that it is a “qualified
investor” within the meaning of Article 2(1)(e) of the Prospectus Directive. For the purpose of this
provision, the expression an “offer to the public” in any relevant member state
means the communication in any form and by any means of sufficient information
on the terms of the offer and the securities to be offered so as to enable an
investor to decide to purchase or subscribe for the securities, as the
expression may be varied in that member state by any measure implementing the
Prospectus Directive in that member state, and the expression “Prospectus
Directive” means Directive 2003/71/EC and includes any relevant implementing
measure in each relevant member state. 78 We and the selling
stockholders have not authorized and do not authorize the making of any offer
of securities through any financial intermediary on their behalf, other than
offers made by the underwriters with a view to the final placement of the
common stock as contemplated in this prospectus. Accordingly, no purchaser of
such securities, other than the underwriters, is authorized to make any further
offer of such securities on behalf of us, the selling stockholders or the
underwriters. ISRAEL In the State of Israel, the
securities offered hereby may not be offered to any person or entity other than
the following: • a fund for joint
investments in trust (i.e., mutual fund), as such term is defined in the Law
for Joint Investments in Trust, 5754-1994, or a management company of such a
fund; • a provident fund as
defined in Section 47(a)(2) of the Income Tax Ordinance of the State of
Israel, or a management company of such a fund; • an insurer, as defined
in the Law for Oversight of Insurance Transactions, 5741-1981, (d) a banking
entity or satellite entity, as such terms are defined in the Banking Law
(Licensing), 5741-1981, other than a joint services company, acting for their
own account or fro the account of investors of the type listed in Section
15A(b) of the Securities Law 1968; • a company that is
licensed as a portfolio manager, as such term is defined in Section 8(b) of
the Law for the Regulation of Investment Advisors and Portfolio Managers,
5755-1995, acting on its own account or for the account of investors of the
type listed in Section 15A(b) of the Securities Law 1968; • a company that is
licensed as an investment advisor, as such term is defined in Section 7(c) of
the Law for the Regulation of Investment Advisors and Portfolio Managers,
5755-1995, acting on its own account; • a company that is a
member of the Tel Aviv Stock Exchange, acting on its own account or for the
account of investors of the type listed in Section 15A(b) of the Securities
Law 1968; • an underwriter
fulfilling the conditions of Section 56(c) of the Securities Law 1968; • a venture capital fund
(defined as an entity primarily involved in investments in companies which,
at the time of investment, (i) are primarily engaged in research and
development or manufacture of new technological products or processes and
(ii) involve above-average risk); • an entity primarily
engaged in capital markets activities in which all of the equity owners meet
one or more of the above criteria; and • an entity, other than an
entity formed for the purpose of purchasing securities in this offering, in
which the shareholders equity (including pursuant to foreign accounting
rules, international accounting regulations and U.S. generally accepted
accounting rules, as defined in the Securities Law Regulations (Preparation
of Annual Financial Statements), 1993) is in excess of NIS 250 million. Any offeree of the
securities offered hereby in the State of Israel shall be required to submit
written confirmation that it falls within the scope of one of the above
criteria. This prospectus will not be distributed or directed to investors in
the State of Israel who do not fall within one of the above criteria. ITALY The offering of the
securities offered hereby in Italy has not been registered with the Commissione
Nazionale per la Società e la Borsa (“CONSOB”) pursuant to Italian securities
legislation and, accordingly, the securities offered hereby cannot be offered,
sold or delivered in the Republic of Italy (“Italy”) nor may any copy of this
prospectus or 79 any other document relating
to the securities offered hereby be distributed in Italy other than to
professional investors (operatori
qualificati) as defined in Article 31, second paragraph, of CONSOB
Regulation No. 11522 of 1 July, 1998 as subsequently amended. Any offer, sale
or delivery of the securities offered hereby or distribution of copies of this
prospectus or any other document relating to the securities offered hereby in
Italy must be made: (a) by an investment firm,
bank or intermediary permitted to conduct such activities in Italy in
accordance with Legislative Decree No. 58 of 24 February 1998 and Legislative
Decree No. 385 of 1 September 1993 (the “Banking Act”); (b) in compliance with Article
129 of the Banking Act and the implementing guidelines of the Bank of Italy;
and (c) in compliance with any
other applicable laws and regulations and other possible requirements or
limitations which may be imposed by Italian authorities. SWEDEN This prospectus has not been
nor will it be registered with or approved by Finansinspektionen (the Swedish
Financial Supervisory Authority). Accordingly, this prospectus may not be made
available, nor may the securities offered hereunder be marketed and offered for
sale in Sweden, other than under circumstances which are deemed not to require
a prospectus under the Financial Instruments Trading Act (1991: 980). This
offering will be made to no more than 100 persons or entities in Sweden. SWITZERLAND The securities offered
pursuant to this prospectus will not be offered, directly or indirectly, to the
public in Switzerland and this prospectus does not constitute a public offering
prospectus as that term is understood pursuant to art. 652a or art. 1156 of the
Swiss Federal Code of Obligations. The issuer has not applied for a listing of
the securities being offered pursuant to this prospectus on the SWX Swiss
Exchange or on any other regulated securities market, and consequently, the
information presented in this prospectus does not necessarily comply with the
information standards set out in the relevant listing rules. The securities
being offered pursuant to this prospectus have not been registered with the
Swiss Federal Banking Commission as foreign investment funds, and the investor
protection afforded to acquirers of investment fund certificates does not
extend to acquirers of securities. Investors are advised to
contact their legal, financial or tax advisers to obtain an independent
assessment of the financial and tax consequences of an investment in
securities. The securities offered hereby
may not be offered or sold in Hong Kong, by means of any document, other than
(a) to “professional investors” as defined in the Securities and Futures
Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance, or
(b) in other circumstances which do not result in this document being a
“prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or
which do not constitute an offer to the public within the meaning of that
Ordinance. No advertisement, invitation or document relating to the securities
offered hereby may be issued, whether in Hong Kong or elsewhere, which is
directed at, or the contents of which are likely to be accessed or read by, the
public of Hong Kong (except if permitted to do so under the securities laws of
Hong Kong) other than with respect to securities which are or are intended to
be disposed of only to persons outside of Hong Kong or only to “professional
investors” as defined in the Securities and Futures Ordinance and any rules
made under that Ordinance. This prospectus has not been
registered with the Monetary Authority of Singapore. Accordingly, the
underwriters have not offered or sold any securities of the company or caused
any such securities to be made the subject of an invitation for subscription or
purchase and may not offer or sell any such securities or cause such securities
to be 80 made the subject of an
invitation for subscription or purchase, and has not circulated or distributed,
nor will it circulate or distribute, this prospectus or any other document or
material in connection with the offer or sale, or invitation for subscription
or purchase, of such securities, whether directly or indirectly, to persons in
Singapore other than (i) to an institutional investor under Section 274 of the
Securities and Futures Act (Cap. 289) (“SFA”), (ii) to a relevant person, or
any person pursuant to Section 257(1A), and in accordance with the conditions,
specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in
accordance with the conditions of, any other applicable provision of the SFA. The underwriters will notify
(whether through the distribution of the prospectus or otherwise) each of the
following relevant persons specified in Section 275 of the SFA which has
subscribed or purchased securities of the company from or through that
underwriter, namely a person which is: • a corporation (which is
not an accredited investor) the sole business of which is to hold investments
and the entire share capital of which is owned by one or more individuals,
each of whom is an accredited investor; or • a trust (where the trustee
is not an accredited investor) whose sole purpose is to hold investments and
each beneficiary is an accredited investor. Shares, debentures and units
of shares and debentures of that corporation or the beneficiaries’ rights and
interest in that trust shall not be transferable for six months after that
corporation or that trust has acquired the company’s securities under Section
275 except: • to an institutional
investor under Section 274 of the SFA or to a relevant person, or any person
pursuant to Section 275(1A), and in accordance with the conditions, specified
in Section 275 of the SFA; • where no consideration
is given for the transfer; or • by operation of law. Electronic Delivery of Preliminary Prospectus: A prospectus in electronic format may be
delivered to potential investors by one or more of the underwriters
participating in this offering. The prospectus in electronic format will be
identical to the paper version of such preliminary prospectus. Other than the
prospectus in electronic format, the information on any underwriter’s web site
and any information contained in any other web site maintained by an underwriter
is not part of the prospectus or the registration statement of which this
prospectus forms a part. Haynes and Boone, LLP, New
York, New York, has passed upon the validity of the shares of our common stock
offered by us and the selling stockholders under this prospectus. The
underwriters are being represented by Ellenoff Grossman & Schole LLP, New
York, New York, in connection with the offering. Our financial statements as
of December 31, 2009 and 2010 and for the years ended December 31, 2009 and
2010 included in this prospectus have been audited by RSM Richter Chamberland
S.E.N.C.R.L./LLP, an independent registered public accounting firm, as stated
in their report appearing in the registration statement, and are included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing. Where You Can Find More Information We have filed a registration
statement on Form S-1 with the Securities and Exchange Commission in connection
with this offering. In addition, we file annual, quarterly and current reports
and other information with the Securities and Exchange Commission. You may read
and copy the registration statement and any other documents we have filed at 81 the Securities and Exchange
Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the Public Reference Room. Our Securities and Exchange
Commission filings are also available to the public at the Securities and
Exchange Commission’s Internet site at “http://www.sec.gov”. This prospectus is part of
the registration statement and does not contain all of the information included
in the registration statement. Whenever a reference is made in this prospectus
to any of our contracts or other documents, the reference may not be complete
and, for a copy of the contract or document, you should refer to the exhibits
that are a part of the registration statement. 82 F-1 Page F-3 F-4 Consolidated Statements of Earnings for the
Year Ended December 31, 2010 and 2009 F-5 Consolidated Statement of Cash Flows for the
Year Ended December 31, 2010 and 2009 F-6 F-7 F-8 F-2 2, Place Alexis
Nihon Report of Independent Registered Public Accounting Firm To the Shareholders and
Board of Directors of We have audited the
accompanying consolidated balance sheets of Pioneer Power Solutions, Inc. as at
December 31, 2010 and 2009 and the related consolidated statements of
earnings, shareholders’ equity and comprehensive income and cash flows for the
years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, these
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2010 and 2009 and the
results of its operations, comprehensive income and its cash flows for the
years then ended in accordance with accounting principles generally accepted in
the United States. Signed by RSM Richter Chamberland LLP1 Chartered Accountants Montréal, Québec F-3 December 31, 2010 2009 ASSETS Current assets Cash and cash equivalents $ 516 $ 1,560 Accounts receivable 5,358 5,492 Inventories 7,814 6,433 Income taxes receivable 1,191 - Deferred income taxes 245 - Prepaid expenses and other current assets 575 103 Total current assets 15,699 13,588 Property, plant and equipment 5,123 987 Noncurrent deferred income taxes 1,311 20 Intangible assets 4,436 - Goodwill 5,534 - Total assets $ 32,103 $ 14,595 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities $ 7,442 $ 2,567 Current maturities of long-term debt and capital lease obligations 6,063 134 Income taxes payable 161 1,775 Advances from limited partners of a shareholder - 150 Total current liabilities 13,666 4,626 Long-term debt and capital lease obligations, net of current
maturities 17 - Pension deficit 308 362 Noncurrent deferred income taxes 2,320 - Deferred credit 700 - Total liabilities 17,011 4,988 Commitments (Note 11) Shareholders’ equity Preferred stock, par value $0.001; 5,000,000 shares authorized; none
issued - - Common stock, par value $0.001; 75,000,000 shares authorized;
29,536,275 and 29,000,000 shares issued and outstanding, respectively 30 29 Additional paid-in capital 7,517 5,365 Accumulated other comprehensive income (loss) (305 ) (691 ) Retained earnings 7,850 4,904 Total shareholders’ equity 15,092 9,607 Total liabilities and shareholders’ equity $ 32,103 $ 14,595 F-4 Year Ended December 31, 2010 2009 Revenues $ 47,236 $ 40,599 Cost of goods sold 35,637 28,734 Gross profit 11,599 11,865 Operating expenses Selling, general and administrative 8,048 4,220 Foreign exchange (gain) loss (139 ) (272 ) Total operating expenses 7,909 3,948 Operating income 3,690 7,917 Interest and bank charges 183 312 Other expense (income) 884 - Gain on bargain purchase (650 ) - Earnings before income taxes 3,273 7,605 Provision for income taxes 327 2,490 Net earnings $ 2,946 $ 5,115 Earnings per common share Basic $ 0.10 $ 0.22 Diluted $ 0.10 $ 0.22 Weighted average number of common shares outstanding Basic 29,362 23,293 Diluted 29,655 23,293 F-5 Year Ended December 31, 2010 2009 Operating
activities Net earnings $ 2,946 $ 5,115 Depreciation 623 307 Amortization of intangibles 144 - Deferred tax expense (216 ) 2 Accrued pension (145 ) (86 ) Stock-based compensation 161 - Warrant issuance expense 92 - Common stock issuance expense 140 - Gain on bargain purchase (650 ) - Changes in current operating assets and liabilities Accounts receivable, net 1,721 105 Inventories 1,502 (82 ) Prepaid expense and other current assets (278 ) (6 ) Income taxes (2,806 ) 723 Accounts payable and accrued liabilities 75 (1,767 ) Net cash provided by (used in) operating activities 3,309 4,311 Investing
activities Additions to property, plant and equipment (1,680 ) (334 ) Acquisition of subsidiaries, net of cash acquired (832 ) - Proceeds from sale of assets 202 - Net cash used in investing activities (2,310 ) (334 ) Financing
activities Increase (decrease) in short-term borrowings - (4,392 ) Increase (decrease) in revolving credit facilities (1,025 ) - Dividends paid - (2,706 ) Repayment of long-term debt (768 ) (154 ) Repayment of advances from limited partners of a shareholder (150 ) - Issuance of common shares - 5,000 Issuance of warrants 12 10 Transaction costs (108 ) (248 ) Net cash provided by (used in) financing activities (2,039 ) (2,490 ) Increase (decrease) in
cash and cash equivalents (1,040 ) 1,487 Effect of foreign exchange
on cash and cash equivalents (4 ) (295 ) Cash and cash equivalents Beginning of year 1,560 368 End of Period $ 516 $ 1,560 F-6 Other Additional Retained Accumulated Total Common Stock Shares Amount Balance - December 31, 2008 22,800,000 $ 23 $ 567 $ 2,495 $ (970 ) $ 2,115 Net earnings $ 5,115 - - - 5,115 - 5,115 Transaction costs - - - (270 ) - - (270 ) Stock-based compensation - - - - - - Foreign currency translation adjustment 487 - - - - 487 487 Issuance of common stock - 5,000,000 5 5,000 - - 5,005 Issuance of common stock, net of transaction costs relating to the
issuance and recapitalization - 1,200,000 1 (249 ) - - (248 ) Warrants issued for consulting services rendered - - - 276 - - 276 Warrants issued for consulting services to be rendered in the future - - - 41 - - 41 Pension adjustment, net of taxes (208 ) - - - - (208 ) (208 ) Dividends paid - - - - (2,706 ) - (2,706
) Total Comprehensive Income 5,394 - - - 5,115 279 5,394
Balance - December 31, 2009 29,000,000 29 5,365 4,904 (691 ) 9,607 Net Earnings 2,946 - - - 2,946 - 2,946 Transaction costs - - (108 ) - - (108 ) Stock-based compensation - - 161 - - 161 Foreign currency translation adjustment 436 - - - - 436 436 Issuance of common stock and warrants 536,275 1 1,259 - - 1,260 Warrants issued for consulting services 50 50 Warrants issued for acquisition 790 - - 790 Pension adjustment, net of taxes (50 ) - - - - (50 ) (50 ) Dividends paid - - - - - - Total Comprehensive Income $ 3,332 - - - 2,946 386 3,332 Balance – December 31, 2010 29,536,275 $ 30 $ 7,517 $ 7,850 $ (305 ) $ 15,092 F-7 Pioneer
Power Solutions, Inc. (the “Company”), a Delaware corporation headquartered in
Fort Lee, New Jersey, is an owner and operator of electrical equipment and
service businesses. The Company’s subsidiaries provide a range of products and
services to the electrical transmission and distribution industry, including
electrical transformers and wind energy products and services. Prior to
December 2, 2009, the Company was a public shell company, as defined by the
Securities and Exchange Commission, without material assets or activities. On
December 2, 2009, the Company completed a share exchange pursuant to which it
acquired all of the capital stock of Pioneer Transformers Ltd., causing Pioneer
Transformers Ltd. to become its wholly-owned subsidiary. In connection with
this share exchange, the Company discontinued its former business and succeeded
to the business of Pioneer Transformers Ltd. as its sole line of business. On April
30, 2010, the Company completed the acquisition of Jefferson Electric, Inc., a
Wisconsin-based manufacturer and supplier of dry-type transformers. On June 7,
2010, Pioneer Wind Energy Systems Inc., the Company’s wholly-owned subsidiary,
acquired most of the inventory and substantially all of the capital assets,
intangible assets and intellectual property of AAER Inc., a manufacturer of
wind turbines based in Quebec, Canada. On August 13, 2010 the Company purchased
common shares representing 100% of the voting and economic interests of AAER
Inc., including its residual assets and accumulated operating tax losses. On
December 31, 2010, Pioneer Wind Energy Systems Inc. completed a share exchange
in which it was merged with and into AAER Inc. On March 18, 2011, the Company
amended the articles of incorporation of AAER Inc. to change its name to
Pioneer Wind Energy Systems Inc. 2. Summary of Significant Accounting Policies Principles of Consolidation The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Use of Estimates The
preparation of financial statements in accordance with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The financial statements include
estimates based on currently available information and management’s judgment as
to the outcome of future conditions and circumstances. Significant estimates in
these financial statements include allowance for doubtful accounts, inventory
provision, useful lives and impairment of long-lived assets, warranty accruals,
income tax determination, stock-based compensation, cost of pension benefits
and estimates related to acquisition valuation. Changes in
the status of certain facts or circumstances could result in material changes
to the estimates used in the preparation of the financial statements and actual
results could differ from the estimates and assumptions. Accounting for the Share Exchange The share
exchange completed on December 2, 2009 was accounted for as a recapitalization.
Pioneer Transformers Ltd. was the acquirer for accounting purposes and Pioneer
Power Solutions, Inc. was the acquired company. Accordingly, the historical financial
statements presented and the discussion of financial condition and results of
operations in 2009 are those of Pioneer Transformers Ltd., retroactively
restated for, and giving effect to, the number of shares received in the share
exchange, and do not include the historical financial results of any former
business. The accumulated earnings of Pioneer Transformers Ltd. were also
carried forward after the share exchange in 2009 and earnings per share have
been retroactively restated to give effect to the recapitalization for all F-8 Revenue Recognition Revenue is
recognized when (1) persuasive evidence of an arrangement exists, (2) delivery
occurs, (3) the sales price is fixed or determinable, (4) collectability is
reasonably assured and (5) customer acceptance criteria, if any, has been
successfully demonstrated. Revenue is recognized on the sale of goods, when the
significant risks and rewards of ownership have been transferred to the buyer
upon delivery, provided that the Company maintains neither managerial
involvement to the degree usually associated with ownership, nor effective
control over the goods sold. There are no further obligations on the part of
the Company subsequent to revenue recognition, except when customers have the
right of return or when the Company warrants the product. The Company records a
provision for future returns, based on historical experience at the time of
shipment of products to customers. The Company warrants some of its products
against defects in design, materials and workmanship for periods ranging from
one to three years depending on the model. The Company records a provision for
estimated future warranty costs based on the historical relationship of
warranty claims to sales at the time of shipment of products to customers. The
Company periodically reviews the adequacy of its product warranties and
adjusts, if necessary, the warranty percentage and accrued warranty reserve for
actual experience. The
following table provides detail of change in the Company’s product warranty
provision, which is a component of accrued liabilities on the consolidated
balance sheets for the years ended December 31, 2010 and 2009 (in thousands): December 31, 2010 2009 Balance at
beginning of year $ 238 $ 166 Increase due
to acquisition during year 64 - Increase due
to warranty expense 334 167 Deductions
for warranty charges (338 ) (125 ) Change due
to foreign currency translation (7 ) 30 Balance at
end of year $ 291 $ 238 Financial Instruments The Company
estimates the fair value of its financial instruments based on current interest
rates, market value and pricing of financial instruments with comparable terms.
Unless otherwise indicated, the carrying value of these financial instruments
approximates their fair market value. Cash and Cash Equivalents Cash and
cash equivalents comprise cash on hand, demand deposits and investments with an
original maturity at the date of purchase of three months or less. Supplemental
disclosure of cash flow information (in thousands): Year Ended December 31, 2010 2009 Interest
paid $ 382 $ 191 Income taxes
paid 3,312 1,765 Supplemental
disclosure of non-cash financing: Warrant
issued in connection with share exchange $ - $ 168 Warrants
issued for consulting services rendered 92 266 F-9 The Company
accounts for trade receivables at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer’s financial condition, credit history and current economic conditions.
The Company writes off trade receivables when they are deemed uncollectible.
The Company records recoveries of trade receivables previously written off when
it receives them. Management considers the Company’s allowance for doubtful
accounts of $0.1 million (2009 - $0.1 million) sufficient to cover any exposure
to loss in its December 31, 2010 and 2009 accounts receivable. Property, Plant and Equipment Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the declining balance method for buildings,
furniture and fixtures at the Company’s Canadian operations. Non-Canadian
property, plant and equipment are depreciated using the straight line method,
based on the estimated useful lives of the assets (buildings - 25 years, machinery
and equipment - 5 to 15 years, computer hardware and software - 3 to 5 years)
depreciation commences once the assets are ready for their intended use. Upon
retirement or disposal, the cost of the asset disposed of and the related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income. Expenditures for repairs and maintenance are expensed as
incurred. Impairment of Long-Lived Assets Long-lived
assets, which comprise property, plant, equipment and intangible assets that
have a finite life, held and used by the Company are reviewed for possible
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the assets to
the estimated undiscounted cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the
fair value thereof. Goodwill and Indefinite-Lived Intangible
Assets Goodwill
and certain other intangible assets with indefinite useful lives (primarily
trademarks) are evaluated for impairment annually, or immediately if conditions
indicate that impairment could exist. The evaluation requires a two-step
impairment test to identify potential impairment of goodwill and intangible
assets and measure the amount of an impairment loss. The first step of the test
compares the fair value of a reporting unit (in the case of goodwill) or the
specific asset (in the case of intangibles) with its carrying amount. In each
case, the Company estimates fair value using a discounted cash flow method based
on its own market assumptions including projections of future cash flows,
determinations of appropriate discount rates, and other assumptions which are
considered reasonable and inherent in the discounted cash flow analysis. The
projections are based on historical performance and estimated future results.
These assumptions require significant judgment and actual results may differ.
If the carrying amount of the reporting unit or intangible asset exceeds its
fair value, the second step of the impairment test is performed to measure the
amount of the impairment loss. Both steps of impairment testing involve
significant estimates. Finite-Lived Intangible Assets Intangible
assets which have a finite life are recorded at fair value at the time of
recognition and are amortized based on their respective estimated useful lives.
The Company’s finite-lived intangible assets consist of a non-compete
agreement, which has a defined term, and three categories of customer
relationships for which estimated useful lives were determined based on actual
historical customer attrition rates. These finite-lived intangible assets are
amortized by the Company over periods ranging from three to twenty years. F-10 The Company’s
reporting currency is the United States dollar. The Canadian dollar is the
functional currency of the Company’s Canadian operations which is translated to
the United States dollar using the current rate method. Under this method,
accounts are translated as follows: • Assets and liabilities - at exchange rates in effect at the balance
sheet date. • Revenue and expenses - at average exchange rates prevailing during
the year. • Gains and losses arising from foreign currency translation are
included in other comprehensive income. Income Taxes The Company
accounts for income taxes under the asset and liability method, based on the
income tax laws and rates in the countries in which operations are conducted
and income is earned. This approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. Developing the provision for income taxes requires significant
judgment and expertise in federal, international and state income tax laws,
regulations and strategies, including the determination of deferred tax assets
and liabilities and, if necessary, any valuation allowances that may be required
for deferred tax assets. The Company records a valuation allowance to reduce
its deferred tax assets to the amount that is more likely than not to be
realized. The Company believes that the deferred tax asset recorded as of
December 31, 2010, is realizable through future reversals of existing taxable
temporary differences and future taxable income. If the Company was to
subsequently determine that it would be able to realize deferred tax assets in
the future in excess of its net recorded amount, an adjustment to deferred tax
assets would increase earnings for the period in which such determination was
made. The Company will continue to assess the adequacy of the valuation
allowance on a quarterly basis. The Company’s judgments and tax strategies are
subject to audit by various taxing authorities. The
objective of accounting for income taxes is to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences or events that have been recognized in
an the Company’s financial statements or tax returns. The Company recognizes
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position (see “Unrecognized
Tax Benefits” below). Interest
and penalties are grouped with interest and bank charges on the consolidated
statement of earnings. Unrecognized Tax Benefits The Company
accounts for unrecognized tax benefits in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) “Income
Taxes” (“ASC 740”). ASC 740 prescribes a recognition threshold that a tax position
is required to meet before being recognized in the financial statements and
provides guidance on de-recognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition issues. ASC
740 contains a two-step approach to recognizing and measuring uncertain tax
positions. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more
likely than not that the position will be sustained upon ultimate settlement
with a taxing authority, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount that is more than 50% likely of being realized upon ultimate settlement.
Additionally,
ASC 740 requires the Company to accrue interest and related penalties, if
applicable, on all tax positions for which reserves have been established
consistent with jurisdictional tax laws. F-11 The Company
discloses the amount of those taxes that are recognized on a gross basis in
interim and annual financial statements for each period for which an income
statement is presented if those amounts are significant. While the amounts are
not material, the Company’s policy is to present such taxes on a net basis in
the consolidated statements of earnings. Share-Based Payments The Company
accounts for share based payments in accordance with the provisions of FASB ASC
718 “Compensation - Stock Compensation” and accordingly recognizes in its
financial statements share based payments at their fair value. In addition, it
recognizes in the financial statements an expense based on the grant date fair
value of stock options granted to employees and directors. The expense is
recognized on a straight line basis over the expected option life while taking
into account the vesting period and the offsetting credit is recorded in
additional paid-in capital. Upon exercise of options, the consideration paid together
with the amount previously recorded as additional paid-in capital is recognized
as capital stock. The Company estimates its forfeiture rate in order to
determine its compensation expense arising from stock based awards. The Company
uses the Black-Scholes Merton option pricing model to determine the fair value
of the options. Employee Benefit Plan The Company
sponsors a defined benefit plan as described in Note 15. The cost of pension
benefits earned by employees is actuarially determined using the accumulated
benefit method and a discount rate, used to measure interest cost on the
accrued employee future benefit obligation, based on market interest rates on
high-quality debt instruments with maturities that match the timing and benefits
expected to be paid by the plan. Plan assets are valued using current market
values and the expected return on plan assets is based on the fair value of the
plan assets. The costs
that relate to employee current service are charged to income annually. The
transitional obligation created upon adoption of the FASB ASC 715 “Compensation
- Retirement Benefits” is amortized over the average remaining service period
of employees. For a given year, unrecognized actuarial gains or losses are recognized
into income if the unamortized balance at the beginning of the year is more
than 10% of the greater of the plan asset or liability balance. Any
unrecognized actuarial gain or loss in excess of this threshold is recognized
in income over the remaining service period of the employees. The Company
reflects the funded status of its defined pension plans as a net asset or net
liability in its balance sheet, with an offsetting amount in accumulated other
comprehensive income, and recognizes changes in that funded status in the year
in which the changes occur through comprehensive income. Inventories Inventories
are stated at the lower of cost or market using first-in, first-out (FIFO) or
weighted-average methods and include the cost of materials, labor and
manufacturing overhead. The Company uses estimates in determining the level of
reserves required to state inventory at the lower of cost or market. The
Company estimates are based on market activity levels, production requirements,
the physical condition of products and technological innovation. Changes in any
of these factors may result in adjustments to the carrying value of inventory. Earnings Per Share Basic
earnings per share is computed by dividing the earnings for the period by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing the earnings for the period by the
weighted average number of common and common equivalent shares outstanding during
the period. Potentially dilutive securities composed of incremental common
shares issuable upon the exercise of stock options or warrants was included in
diluted earnings per share since the exercise price of some of the Company’s
stock options and/or warrants were in the money (see Note 19 “Basic and Diluted
Earnings Per Share”). F-12 FASB ASC
820 “Fair Value Measurement and Disclosure” applies to all assets and
liabilities that are being measured and reported on a fair value basis. ASC 820
establishes a framework for measuring fair value in U.S. GAAP, and expands
disclosure about fair value measurements. ASC 820 enables the reader of the
financial statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. ASC 820 requires that assets and
liabilities carried at fair value be classified and disclosed in one of the
following three categories: Level 1:
Quoted market prices in active markets for identical assets or liabilities. Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data. Level 3:
Unobservable inputs that are not corroborated by market data. In
determining the appropriate levels, the Company performs a detailed analysis of
the assets and liabilities that are subject to ASC 820. At each reporting
period, all assets and liabilities for which the fair value measurement is
based on significant unobservable inputs are classified as Level 3. The fair
value represents management’s best estimates based on a range of methodologies
and assumptions. The carrying value of receivables and payables arising in the
ordinary course of business approximate fair value because of the relatively
short period of time between their origination and expected realization. These
items have been classified as Level 1. Subsequent Events Management
has performed an evaluation of the Company’s activities through the filing of
these financial statements and concluded that there are no additional
significant events requiring recognition or disclosure. 3. Recent Accounting Pronouncements In December
2010, the FASB issued ASU No. 2010-28, “Intangibles—Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). ASU 2010-28
affects all entities that have recognized goodwill and have one or more
reporting units whose carrying amount for purposes of performing Step 1 of the
goodwill impairment test is zero or negative. The amendments in this Update
modify Step 1 so that for those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity should consider whether
there are any adverse qualitative factors indicating that an impairment may
exist. The qualitative factors are consistent with existing guidance, which
requires that goodwill of a reporting unit be tested for impairment between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
ASU 2010-28 is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2010. Early adoption is not permitted. The
Company is currently evaluating the impact of this Statement on its
consolidated financial statements. In December
2010, the FASB issued Update No. 2010-29, “Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business Combinations.
The objective of this ASU is to address diversity in practice about the
interpretation of the pro forma revenue and earnings disclosure requirements
for business combinations. The amendments in this ASU specify that if a public
entity presents comparative financial statements, the entity should disclose
revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments affect any public entity as defined by
Topic 805 that enters into business combinations that are material on an
individual or aggregate basis. ASU 2010-29 is effective prospectively for
business combinations for which the acquisition date is on or after F-13 In April
2010, the FASB issued Update No. 2010-13, “Compensation—Stock Compensation
(Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment
Award in the Currency of the Market in Which the Underlying Equity Security
Trades”. This amendment clarifies that a share-based payment award with an
exercise price denominated in the currency of a market in which a substantial
portion of the entity’s equity securities trades shall not be considered to
contain a market, performance, or service condition. Therefore, such an award
is not to be classified as a liability if it otherwise qualifies as equity
classification. ASU 2010-13 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. Earlier application is permitted. The
Company is currently evaluating the impact of this Statement on its
consolidated financial statements. In April
2010, the FASB issued Update No. 2010-17, “Revenue Recognition—Milestone Method
(Topic 605): Milestone Method of Revenue Recognition”. This ASU provides
guidance on defining a milestone under Topic 605 and determining when it may be
appropriate to apply the milestone method of revenue recognition for research
or development transactions. Consideration that is contingent on achievement of
a milestone in its entirety may be recognized as revenue in the period in which
the milestone is achieved only if the milestone is judged to meet certain criteria
to be considered substantive. Milestones should be considered substantive in
their entirety and may not be bifurcated. An arrangement may contain both
substantive and non substantive milestones that should be evaluated
individually. ASU 2010-17 is effective on a prospective basis for milestones
achieved in fiscal years, and interim periods within those years, beginning on
or after June 15, 2010. Early adoption is permitted. The Company is currently
evaluating the impact of this Statement on its consolidated financial
statements. In October
2009, the FASB issued Update No. 2009-13, “Revenue Recognition (Topic
605)—Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force” (“ASU 2009-13”). ASU 2009-13 provides amendments to the
criteria in ASC 605-25 for separating consideration in multiple-deliverable
arrangements. As a result of those amendments, multiple-deliverable
arrangements will be separated in more circumstances than under existing U.S.
GAAP. ASU 2009-13: 1) establishes a selling price hierarchy for determining the
selling price of a deliverable, 2) eliminates the residual method of allocation
and requires that arrangement consideration be allocated at the inception of
the arrangement to all deliverables using the relative selling price method, 3)
requires that a vendor determine its best estimate of selling price in a manner
that is consistent with that used to determine the price to sell the
deliverable on a standalone basis, 4) significantly expands the disclosures
related to a vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The Company is
currently evaluating the impact of this
statement on its consolidated financial statements. In October
2009, the FASB issued Update No. 2009-14, “Software (Topic 985) - Certain
Revenue Arrangements That Include Software Elements a consensus of the FASB Emerging
Issues Task Force” (“ASU 2009-14”). ASU 2009-14 changes the accounting model
for revenue arrangements that include both tangible products and software
elements and provides additional guidance on how to determine which software,
if any, relating to tangible product would be excluded from the scope of the
software revenue guidance. In addition, ASU 2009-14 provides guidance on how a
vendor should allocate arrangement consideration to deliverables in an
arrangement that includes both tangible products and software. ASU 2009-14 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The adoption of
ASU 2009-14 is not expected to have a material effect on the Company’s financial
position or results of operations. 4. New Accounting Standards Fair Value Measurements and Disclosures In January
2010, FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value
Measurements and Disclosures (Topic 820)” (“ASU 2010-06”). ASU 2010-06 requires
reporting entities to make more robust disclosures about (1) the different
classes of assets and liabilities measured at fair value, (2) the valuation
techniques and inputs used, (3) the activity in Level 3 fair value
measurements, including information on purchases, sales, issuances, and
settlements on a gross basis, and (4) the transfers between Levels 1, 2, and
3. ASU 2010-06 is F-14 5. Acquisitions On
April 30, 2010, the Company acquired 100% of the common stock of Jefferson
Electric, Inc. a Wisconsin-based manufacturer and supplier of dry-type
transformers in a transaction valued at approximately $9.6 million. The
transaction was accounted for under the purchase method of accounting. Upon
consummation of the acquisition, all of Jefferson Electric, Inc.’s issued and
outstanding common stock were cancelled and converted into the right to receive
an aggregate of 486,275 common stock of the Company. In connection with the
acquisition, the Company entered into a warrant purchase agreement with the
former sole shareholder of Jefferson Electric, Inc., pursuant to which, in
exchange for $10,000, the Company sold a five-year warrant that is exercisable
for up to 1 million common shares of the Company at an exercise price of $3.25
per share. On
June 7, 2010, through its wholly-owned subsidiary Pioneer Wind Energy Systems
Inc., the Company acquired the inventory, capital assets, intangible assets and
intellectual property of AAER Inc. a manufacturer of wind turbines with
generation capacities exceeding one megawatt based in Quebec, Canada, for U.S.
$427,000 (approximately CDN $450,000) in cash. The transaction was accounted
for under the purchase method of accounting. Under the purchase method of
accounting, the total purchase price was allocated to the assets acquired and
liabilities assumed in connection with the acquisition, based on their
estimated fair values as of the effective date of the acquisition. A gain on
bargain purchase arising from the acquisition was determined based on the
excess amounts assigned to acquired assets and liabilities over the purchase
price paid. On
August 13, 2010, through its wholly-owned subsidiary, Pioneer Wind Energy Holdings,
Inc., the Company purchased common shares representing 100% of the voting and
economic interests of AAER Inc. for U.S. $432,000 (approximately CDN $450,000)
in cash. For accounting purposes the transaction was treated as a purchase of
assets and the amount of consideration paid, plus transaction expenses, was
attributed to the residual assets of AAER Inc. consisting of accounts
receivable, prepaid assets, and accumulated operating tax losses of
approximately $42.5 million. The
allocation of the purchase price for the Jefferson Electric, Inc. and AAER
business acquisitions closed in April and June 2010, respectively, was based on
management’s best current estimates of the fair value of tangible and
intangible assets acquired and liabilities assumed. The allocation of the
purchase price for the transactions was as follows (in thousands): Purchase
Price: Jefferson AAER Total Consideration: Cash and cash equivalents $ - $ 427 $ 427 Common stock 1,119 - 1,119 Warrant issued 790 - 790 Proceeds from warrant sale (10 ) - (10 ) 1,899 427 2,326 Debt assumed: Bank indebtedness 7,698 - 7,698 Capitalized lease obligations 39 - 39 7,737 0 7,737 Total Purchase Price $ 9,636 $ 427 $ 10,063 F-15 Purchase
Price Allocation: Cash and cash equivalents $ 28 $ - $ 28 Accounts receivable 1,293 - 1,293 Inventories 1,958 346 2,304 Prepaid expenses and other
current assets 141 - 141 Property, plant and
equipment 2,443 539 2,982 Deferred income tax asset 669 - 669 Realized proceeds from
assets previously held for sale - 202 202 Accounts payable and
accrued liabilities (4,637 ) - (4,637 ) Deferred income tax
liability (2,373 ) (10 ) (2,383 ) Net tangible assets acquired (478 ) 1,077 599 Intangible assets acquired 4,580 - 4,580 Goodwill (gain on bargain
purchase) 5,534 (650 ) 4,884 Total Purchase Price $ 9,636 $ 427 $ 10,063 The
acquisition of assets from AAER in June 2010 was made in a distressed sale.
Management’s estimate of the fair value of net assets acquired exceeded the
purchase price by approximately $0.7 million resulting in an accounting gain on
bargain purchase. Goodwill and Other Intangible Assets Identifiable
intangible assets having finite lives arising from the Jefferson Electric, Inc.
acquisition were valued at $2.1 million, consisting primarily of Jefferson
Electric, Inc.’s customer relationships and a non-compete agreement. These
intangible assets will be amortized based on their estimated remaining useful
lives which is from three to twenty years and 9.6 years on a weighted average
basis. None of these definite-lived intangible assets acquired are deductible
for tax purposes. Indefinite-lived
intangible assets acquired consist of Jefferson Electric, Inc.’s trademarks and
certain technology-related industry accreditations, neither of which are
deductible for tax purposes. The excess of the Jefferson Electric, Inc.
purchase price over the aggregate fair values, which was approximately $5.5
million, was recorded as goodwill. Goodwill has an indefinite life, is not
subject to amortization and is not deductible for tax purposes. Goodwill
arising from the Jefferson Electric, Inc. acquisition will be tested for
impairment at least annually more frequently if indicators of impairment arise.
In the event that management determines that the goodwill has become impaired,
the Company will incur an accounting charge for the amount of the impairment
during the fiscal quarter in which the determination is made. Impact of Acquisition to Consolidated Statements of Earnings The
operating results of Jefferson Electric, Inc., a material acquisition, since
the date of the transaction closing on April 30, 2010 were included in the
Company’s audited consolidated statements of earnings as follows (in thousands,
except per share data): For the Year Ended For the Year Ended Pioneer Jefferson As Pioneer Jefferson As Revenues $ 34,052 $ 13,184 $ 47,236 $ 40,599 $ - $ 40,599 Cost of goods sold 25,573 10,064 35,637 28,734 - 28,734 Gross Profit 8,479 3,120 11,599 11,865 - 11,865 Operating expenses Selling, general and administrative 5,608 2,440 8,048 4,220 - 4,220 Foreign exchange (gain) loss (139 ) 0 (139 ) (272 ) - (272 ) F-16 5,469 2,440 7,909 3,948 - 3,948 Operating income 3,010 680 3,690 7,917 - 7,917 Interest and bank charges (107 ) 290 183 312 - 312 Other expense (income) 849 35 884 0 - - Gain on bargain purchase (650 ) 0 (650 ) 0 - - Earnings before income taxes 2,918 355 3,273 7,605 - 7,605 Provision for income taxes 220 107 327 2,490 - 2,490 Net earnings $ 2,698 $ 248 $ 2,946 $ 5,115 $ - $ 5,115 Foreign currency translation adjustments 436 0 436 487 - 487 Pension adjustment, net of taxes (50 ) 0 (50 ) (208 ) - (208 ) Comprehensive income $ 3,084 $ 248 $ 3,332 $ 5,394 $ - $ 5,394 Earnings per common share Basic - - $ 0.10 - - $ 0.22 Diluted - - $ 0.10 - - $ 0.22 Weighted average number of common shares outstanding Basic - - 29,362 - - 23,293 Diluted - - 29,655 - - 23,293 Pro Forma Financial Information The
following unaudited combined pro forma statements of earnings for the years
ended December 31, 2010 and 2009 have been prepared as if the Jefferson
Electric, Inc. acquisition had occurred as of the beginning of each period
presented and exclude the historical operating results AAER, prior to its
acquisition, as this business acquisition did not constitute a material
acquisition. The unaudited combined pro forma statements of earnings are based
on accounting for the acquisition under the purchase method of accounting. The
unaudited pro forma information may not be indicative of the results that
actually would have occurred if the acquisition had been in effect from and on
the dates indicated or which may be obtained in the future (in thousands,
except per share data): Unaudited
Pro Forma Combined 2010 2009 Revenues $ 52,752 $ 60,785 Net earnings $ 2,702 $ 2,593 Earnings per common share Basic $ 0.09 $ 0.11 Diluted $ 0.09 $ 0.11 Weighted average number of
common shares outstanding Basic 29,362 23,779 Diluted 29,655 23,779 F-17 6. Inventories The
components of inventories are summarized below (in thousands): December 31, 2010 2009 Raw materials $ 3,693 $ 2,344 Work in process 2,029 2,401 Finished goods 2,092 1,688 Total inventories $ 7,814 $ 6,433 Included
in raw materials are goods in transit of approximately $0.3 million (2009 -
$0.2 million). The
preceding amounts are net of inventory reserves of approximately $0.4 million
(2009 - $0.1 million). 7. Property,
Plant and Equipment Property,
plant and equipment are summarized below (in thousands): December
31, 2010 2009 Land $ 7 $ 7 Buildings 1,639 474 Machinery and equipment 6,153 2,528 Furniture and fixtures 204 126 Computer hardware and
software 615 565 Leasehold improvements 40 38 Construction in progress 10 - 8,668 3,738 Less: Accumulated
depreciation (3,545 ) (2,751 ) Total property, plant and
equipment, net $ 5,123 $ 987 Included
in buildings is approximately $1.2 of buildings under construction (2009 - $0)
which was not depreciated. 8. Goodwill
and Other Intangible Assets Changes
in goodwill and intangible asset balances for the year ended December 31, 2010,
consisted of the following (in thousands): Goodwill Intangible
Assets Balance December 31, 2009 $ - $ - Acquisition of Jefferson Electric, Inc. 5,534 4,580 Amortization - (144 ) Balance December 31, 2010 $ 5,534 $ 4,436 The
components of intangible assets are summarized below (in thousands): Intangible Accumulated Intangible
Assets, Customer relationships $ 2,050 $ (129 ) $ 1,922 Non-compete agreement 80 (15 ) 65 Trademarks 1,790 - 1,790 Technology-related
industry accreditations 660 - 660 Total intangible assets $ 4,580 $ (144 ) $ 4,436 F-18 Years Ending December 31, Total 2011 $ 215 2012 215 2013 212 2014 193 2015 193 Thereafter 958 $ 1,987 9. Credit
Facilities In
October 2009, the Company’s Pioneer Transformers Ltd. subsidiary entered into a
financing arrangement with a Canadian bank that replaced its previous credit
facility. Expressed in approximate U.S. dollars, the new $10.0 million credit
agreement consists of a $7.7 million demand revolving credit facility, a $1.8
million term loan facility and a $0.5 million foreign exchange settlement risk
facility. The credit facilities are secured by a first-ranking lien in the
amount of $10.0 million on all the assets Pioneer Transformers Ltd., as well as
a collateral mortgage of $10.0 million on its land and buildings which had a
net carrying value of approximately $1.5 million as of December 31, 2010. The
credit facilities require Pioneer Transformers Ltd. to comply with various
financial covenants, including maintaining a minimum debt service coverage
ratio of 1.25, a minimum current ratio of 1.20 and a maximum total debt to
tangible net worth ratio of 2.50. The credit facilities also restrict the
ability of Pioneer Transformers Ltd. to make investments or advancements to
affiliated or related companies without the lender’s prior written consent. The
demand revolving credit facility is subject to margin criteria and borrowings
bear interest at the bank’s prime rate per annum on amounts borrowed in
Canadian dollars, or the U.S. base rate plus 0.75% per annum on amounts
borrowed in U.S. dollars. Borrowings under the term loan facility bear interest
at the bank’s prime rate plus 1.0% per annum. As of December 31, 2010, Pioneer
Transformers Ltd. had no borrowings outstanding under the demand revolving
credit facility. Jefferson
Electric, Inc. has a bank loan agreement with a U.S. bank that includes a
revolving credit facility with a borrowing base of $5.0 million and a term
credit facility. Monthly payments of accrued interest must be made under the
revolving credit facility and monthly payments of principal and accrued
interest must be made under the term credit facility, with a final payment of
all outstanding amounts due on October 31, 2011. Borrowings under the bank loan
agreement are collateralized by substantially all the assets of Jefferson
Electric, Inc. and are guaranteed by its Mexican subsidiary. In addition, an
officer of Jefferson Electric, Inc. is a guarantor under the bank loan
agreement and has provided additional collateral to the bank in the form of
common stock and a warrant to purchase shares of common stock held by him. The
bank loan agreement requires Jefferson Electric, Inc. to comply with certain
financial covenants, including a requirement to exceed minimum quarterly
targets for tangible net worth and maintain a minimum debt service coverage
ratio. The bank loan agreement also restricts Jefferson Electric, Inc.’s
ability to pay dividends or make distributions, advances or other transfers of
assets. The interest rate under the revolving credit facility is equal to the
greater of the bank’s reference rate (currently 3.25% per annum) or 6.5% per
annum. The interest rate under the term credit facility is 7.27% annually. As
of December 31, 2010, Jefferson Electric, Inc. had approximately $3.2 million
outstanding under the revolving credit facility and approximately $2.8 million
outstanding under the term credit facility. F-19 10. Long-Term
Debt Long-term
debt consists of the following (in thousands): December
31, 2010 2009 Revolving credit
facilities $ 3,217 $ - Term credit facilities 2,832 - Capital lease obligations 31 134 Total debt and capital
lease obligations 6,080 134 Less current portion (6,063 ) $ (134 ) Total long-term debt and capital lease obligations $ 17 $ - Jefferson
Electric, Inc. has equipment loans and capital lease obligations that bear
interest at rates varying from 0.0% to 18.8% and are repayable in monthly
installments. These obligations are scheduled to be paid in full by December
2013. 11. Commitments The
Company leases certain offices, facilities and equipment under operating leases
expiring at various dates through 2016. At December 31, 2010 the minimum annual
lease commitments under the leases having terms in excess of one year were as
follows (in thousands): Years Ending December 31, Operating 2011 $ 686 2012 612 2013 300 2014 76 2015 47 Thereafter 22 Total lease commitments $ 1,743 Rent
and lease expense was approximately $0.5 million and $0.1 million for 2010 and
2009, respectively. 12. Common
Stock On
April 30, 2010, the Company issued 486,275 common shares as part of the
completion of the acquisition of Jefferson Electric, Inc. During
the quarter ended June 30, 2010, the Company also issued 50,000 common shares
in lieu of payment for investor relations services. The issuance of the shares
and related expense was accounted for at the fair value of the shares on the
issue date which amounted to $140,000. The
board of directors is authorized, subject to any limitations prescribed by law,
without further vote or action by the shareholders, to issue from time to time
shares of preferred stock in one or more series. Each such series of preferred
stock shall have such number of shares, designations, preferences, voting
powers, qualifications, and special or relative rights or privileges as shall
be determined by the board of directors, which may include, among others,
dividend rights, voting rights, liquidation preferences, conversion rights and
preemptive rights. F-20 13. Additional
Paid-in Capital Stock Options On
December 2, 2009, the Company adopted the 2009 Equity Incentive Plan (the
“Plan”) for the purpose of issuing incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended,
non-qualified stock options, restricted stock, stock appreciation rights,
performance unit awards and stock bonus awards to employees, directors,
consultants and other service providers. A total of 1,600,000 shares of common
stock are reserved for issuance under this Plan. Options may be granted under
the Plan on terms and at prices as determined by the board of directors or by
the plan administrators appointed by the board of directors. As of December 31,
2010, 550,000 stock options had been granted (2009 – none granted), consisting
of 300,000 incentive stock options and 250,000 non-qualified stock options. On
March 23, 2010, the Company granted an aggregate of 240,000 non-qualified stock
options to eleven employees to purchase common shares. The stock options are
exercisable for common shares at an exercise price of $2.95 per share, expire on
March 23, 2020 and vest over three years with one third vesting on the first
anniversary of the date of grant and one third vesting on each of the second
and third anniversaries of the date of grant. On
March 23, 2010, the Company also granted 150,000 incentive stock options to an
employee to purchase common shares. The stock options are exercisable for
common shares at an exercise price of $3.25 per share, expire on March 23, 2015
and vest over three years with one third vesting on the first anniversary of
the date of grant and one third vesting on each of the second and third
anniversaries of the date of grant. On
March 23, 2010, the Company granted an aggregate of 10,000 non-qualified stock
options to five directors to purchase common shares. 8,000 of the stock options
are exercisable for common shares at an exercise price of $2.95 per share and
2,000 of the stock options are exercisable for common shares at an exercise
price of $3.25 per share. The stock options expire on March 23, 2020 and vest
on the first anniversary of the date of grant. The
stock options granted on March 23, 2010 were accounted for at their fair value,
as determined by the Black-Scholes Merton valuation model, using the following
assumptions and based on a fair market value of $2.95 per share, which was the
last reported sales price for the Company’s common shares on the day prior to
the grant date: Expected volatility 47.31%
- 50.84% Expected life 3.5
years – 6 years Risk-free interest rate 1.77%
- 2.84% Dividend yield Nil The
expected life represents the period of time the options are expected to be
outstanding. As the Company did not have stock price trading history at the
time of grant for a period equivalent to the expected life of the options, the
Company’s expected volatility assumptions were calculated by averaging the
historical volatility of a peer group of publicly-traded companies that operate
in the same industry as the Company. The risk-free interest rates reflect the
yield to maturity of on-the-run U.S. Treasury bonds with maturities consistent
with the expected terms of the options granted. Using different assumptions for
these variables could significantly impact the estimated grant date fair value
of the options. On
August 12, 2010, the Company granted 150,000 incentive stock options to an
employee to purchase common shares. The stock options are exercisable for
common shares at an exercise price of $3.04 per share, expire on August 12,
2020 and vest over three years with one third vesting on the first anniversary
of the date of grant and one third vesting on each of the second and third
anniversaries of the date of grant. The
stock options granted on August 12, 2010 were accounted for at their fair value,
as determined by the Black-Scholes Merton valuation model, using the following
assumptions and based on a fair market value of $3.04 per share, which was the
last reported sales price for the Company’s common shares on the day prior to
the grant date: F-21 Expected volatility 47.97% Expected life 6
years Risk-free interest rate 1.77% Dividend yield Nil Expense
for stock-based compensation recorded during the year ended December 31, 2010
was approximately $0.2 million. There was no stock-based compensation expense
recorded during any period of 2009. As at December 31, 2010, the Company had
total stock-based compensation expense remaining to be recognized of
approximately $0.5 million. A
summary of stock option activity under all plans as of December 31, 2010, and
changes during the year then ended is presented below: Stock Weighted- Weighted- Aggregate Balance December 31, 2009 - - - - Granted 550,000 $ 3.06 7.97 $ - Exercised - - - - Forfeited - - - - Outstanding on December
31, 2010 550,000 $ 3.06 7.97 $ - Exercisable on December
31, 2010 - - - Warrants On
December 2, 2009, the Company granted two five-year warrants, each exercisable
to purchase up to 1,000,000 shares of common stock at $3.25 and $2.00 per
share. The warrant exercisable at $3.25 per share was issued in conjunction
with the share exchange and the warrant exercisable at $2.00 per share was
issued in payment of consulting services received. On the same day, the Company
granted a five-year warrant exercisable to purchase up to 150,000 shares of
common stock at $2.00 per share in payment of consulting fees to be rendered.
The warrants were accounted for at their fair values amounting to $0.2 million,
$0.3 million and $0.04 million respectively, as determined by the Black-Scholes
Merton valuation model, based on the following assumptions: Expected volatility 51.35% Expected life 5
years Risk-free interest rate 2.15% Dividend yield Nil The
fair market value of the Company’s stock price on December 2, 2009 was
determined based on the $1.00 price per share paid by investors on an arms
length basis in the 5,000,000 share private placement which also occurred on
December 2, 2009. The
expected life of the Company’s warrants represents the period of time the
warrants are expected to be outstanding. At the time of grant, the Company did
not have historical stock price data available for a period equal to the
expected life of the warrants; therefore, the expected volatility assumptions
were calculated by averaging the historical volatility of a peer group of
publicly-traded companies that operate in the same industry as the Company. The
risk free interest rate assumptions used reflected the yield to maturity of
on-the-run U.S. Treasury bonds with maturities consistent with the expected
terms of the warrants granted. Using different weighted-average assumptions
could significantly impact the estimated grant date fair value of the warrants. On
April 19, 2010, the Company agreed to issue a four-year warrant to its investor
relations firm and its designees to purchase up to an aggregate of 50,000
shares of common stock at an exercise price of $3.25 per share. These warrants
have been issued and were accounted for at their fair value amounting to approximately
$50,200. The Company expensed the entire fair value of these warrants during
the three month period ended June 30, 2010. F-22 The
warrants granted during April 2010 were accounted for at their fair value as
determined by the Black-Scholes Merton valuation model, based on the following
assumptions: Expected volatility 49.57%
- 51.13% Expected life 4.0
years – 5.0 years Risk-free interest rate 2.01%
- 2.42% Dividend yield Nil As
of December 31, 2010, the Company had warrants outstanding to purchase
3,200,000 million shares of common stock with an average exercise price of
approximately $2.80 per share. The warrants expire on dates beginning on
December 2, 2014 through April 30, 2015. No warrants were exercised during the
year ended December 31, 2010. The
following table summarizes the continuity of the Company’s warrants: Number
of Weighted
Average Expiry
Date Balance December 31, 2008 Granted December 2, 2009 1,000,000 $ 3.25 December
2, 2014 December 2, 2009 1,000,000 2.00 December
2, 2014 December 2, 2009 150,000 2.00 December
2, 2014 Balance December 31, 2009 2,150,000 2.58 Granted April 19, 2010 50,000 3.25 April
19, 2014 April 30, 2010 1,000,000 3.25 April
30, 2015 Balance December 31, 2010 3,200,000 $ 2.80 As
of December 31, 2010, there were exercisable warrants outstanding to purchase
3,200,000 shares of common stock and none were exercised. 14. Income
Taxes The
components of the income tax provision were as follows (in thousands): Year
Ended December 31, 2010 2009 Federal $ 6 $ - State 1 - Foreign 526 2,490 Deferred (206 ) - Total income tax provision $ 327 $ 2,490 The
components of earnings before income taxes are summarized below (in thousands): Year
Ended December 31, 2010 2009 U.S. operations $ (972 ) $ (75 ) Foreign operations 4,245 7,680 Total earnings before income taxes $ 3,273 $ 7,605 F-23 Year
Ended December 31, 2010 2009 Federal income tax at
statutory rate 35 % 35 % State and local income taxes, net of federal effect - - Foreign rate differential (6 ) (2 ) Provision for uncertain tax positions 5 - Foreign tax recovery (25 ) - Other items 1 - Effective income tax rate 10 % 33 % The
Company’s provision for income taxes reflects an effective tax rate on earnings
before income taxes of 10% in 2010 (33% in 2009). The decrease in the effective
rate resulted primarily from a settlement the Company reached with the Canadian
tax authority, partially reversing an assessment recognized in 2008, resulting
in an expected $0.9 million refund. The
net deferred income tax asset (liability) was comprised of the following (in
thousands): December
31, 2010 2009 Current deferred income
taxes Gross assets $ 245 $ - Gross liabilities - - Net current deferred income tax asset (liability) 245 - Noncurrent deferred income
taxes Gross assets 1,311 20 Gross liabilities (2,320 ) - Net noncurrent deferred income tax asset (liability) (1,009 ) 20 Net deferred income tax
asset (liability) $ (764 ) $ 20 The
tax effect of temporary differences between GAAP accounting and federal income
tax accounting creating deferred income tax assets and liabilities were as
follows (in thousands): December
31, 2010 2009 Deferred income tax assets Canada net operating loss carry forwards $ 11,981 $ - U.S. net operating loss carry forward 383 - Property and equipment (92 ) (92 ) Other 565 112 Gross deferred tax assets 12,837 20 Less valuation allowance (11,281 ) - Net deferred tax assets 1,556 20 Deferred income tax
liabilities Other (2,320 ) - Deferred asset
(liability), net $ (764 ) $ 20 F-24 The
Company believes that its deferred tax assets in other tax jurisdictions are
more likely than not realizable through future reversals of existing taxable
temporary differences and its estimate of future taxable income. A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits, exclusive of interest and penalties, is as follows (in thousands): December
31, 2010 2009 Balance as of December 31,
2009 $ - $ - Increases related to tax positions taken during the period 161 - Decreases related to expectations of statute of limitations - - Balance as of December 31,
2010 $ 161 $ - The
Company’s policy is to recognize interest and penalties related to income tax
matters as interest expense. Management
believes that an adequate provision has been made for any adjustments that may
result from tax examinations. However, the outcome of tax audits cannot be
predicted with certainty. If any issues addressed in the Company’s tax audits
are resolved in a manner not consistent with management’s expectations, the
Company could be required to adjust its provision for income taxes in the
period such resolution occurs. Although timing of the resolution and/or closure
of audits is highly uncertain, the Company does not believe it is reasonably
possible that its unrecognized tax benefits would materially change in the next
twelve months. 15. Pension
Plan The
Company sponsors a defined benefit pension plan in which a majority of its
Canadian employees are members. The employer contributes 100% to the plan. The
benefits, or the rate per year of credit service, are established by the
Company and updated at its discretion. Cost of Benefits The
components of the expense the Company incurred under the pension plan are as
follows (in thousands): Year
Ended December 31, 2010 2009 Current service cost, net
of employee contributions $ 40 $ 35 Interest cost on accrued
benefit obligation 151 135 Expected return on plan
assets (147 ) (109 ) Amortization of
transitional obligation 14 12 Amortization of past
service costs 9 5 Amortization of net
actuarial gain 33 20 Total cost of benefit $ 100 $ 98 F-25 The
Company’s obligation for the pension plan is valued annually as of the
beginning of each fiscal year. The projected benefit obligation represents the
present value of benefits ultimately payable to plan participants for both past
and future services expected to be provided by the plan participants. The
Company’s obligations pursuant to the pension plan are as follows (in
thousands): December
31, 2010 2009 Projected benefit
obligation, at beginning of year $ 2,404 $ 1,794 Current service cost 40 35 Interest cost 151 135 Impact of change in
discount rate 107 298 Benefits paid (164 ) (169 ) Amendment 63 - Foreign exchange
adjustment 132 311 Projected benefit
obligation, at end of year $ 2,733 $ 2,404 A
summary of expected benefit payments related to the pension plan is as follows
(in thousands): Years Ending December 31, Pension
Plan 2011 $ 170 2012 187 2013 201 2014 223 2015 222 2016 - 2020 1,082 Other
changes in plan assets and benefit obligations recognized in other
comprehensive income are as follows (in thousands): Year
Ended December 31, 2010 2009 Net loss $ 69 $ 339 Prior service cost 57 - Amortization of prior
service cost (9 ) (5 ) Amortization of gain (31 ) (20 ) Amortization of
transitional asset (13 ) (12 ) 73 302 Taxes 22 94 Total recognized in other
comprehensive income, net of taxes $ 50 $ 208 The
estimated net loss amortized from accumulated other comprehensive income into
net periodic benefit cost over the next year amounts to approximately $31,000.
The estimated prior service cost amortized from accumulated other comprehensive
income into net periodic benefit cost over the next year amounts to F-26 The
accumulated other comprehensive loss consists of the following amounts that
have not yet been recognized as components of net benefit cost (in thousands): December
31, 2010 2009 Unrecognized prior service
cost $ 138 $ 90 Unrecognized net actuarial
loss 111 124 Unrecognized transitional
obligation 780 743 Deferred income taxes (312 ) (290 ) $ 717 $ 667 Plan Assets Assets
held by the pension plan are invested in accordance with the provisions of the
Company’s approved investment policy. The pension plan’s strategic asset
allocation was structured to reduce volatility through diversification and
enhance return to approximate the amounts and timing of the expected benefit
payments. The asset allocation for the pension plan at the end of fiscal years
2010 and 2009 and the target allocation for fiscal year 2011, by asset
category, is as follows: Allocation
at December 31, 2011
Target 2010 2009 Equity securities 58 % 56 % 56 % Fixed income securities 33 38 38 Real estate 4 4 4 Other 5 2 2 Total 100 % 100 % 100 % The
fair market values, by asset category are as followed (in thousands): Fair
Value Measurements at 2010 2009 Equity securities $ 1,406 $ 1,143 Fixed income securities 800 776 Real estate 97 82 Other 121 41 Total $ 2,424 $ 2,042 Changes
in the assets held by the pension plan in fiscal 2010 and 2009 are as follows
(in thousands): December
31, 2010 2009 Fair value of plan assets,
at beginning of year $ 2,042 $ 1,564 Current service cost 180 196 Benefits paid 257 185 Amendment (164 ) (169 ) Foreign exchange
adjustment 109 266 Fair value of plan assets,
at end of year $ 2,424 $ 2,042 F-27 The
Company’s policy is to fund the pension plan at or above the minimum required
by law. The Company made $0.2 million of contributions to its defined benefit
pension plan during the 2010 and 2009 years. The Company expects to make
contributions of less than $0.2 million to the defined benefit pension plan in
fiscal 2011. Changes in the discount rate and actual investment returns which
continue to remain lower than the long-term expected return on plan assets
could result in the Company making additional contributions. Funded Status The
funded status of the pension plan is as follows (in thousands): December
31, 2010 2009 Projected benefit
obligation $ 2,732 $ 2,404 Fair value of plan assets 2,424 2,042 Amendment (net of foreign
exchange adjustment) - - Accrued obligation (long
term) $ 308 $ 362 Assumptions Assumptions
used in accounting for the pension plan are as follows: December
31, 2010 2009 Weighted average discount
rate used to determine the accrued benefit obligations 5.50 % 5.85 % Discount rate used to
determine the net pension expense 5.85 % 7.25 % Expected long-term rate on
plan assets 6.50 % 6.50 % To
determine the expected long-term rate of return on pension plan assets, the
Company considers the current and expected asset allocations, as well as
historical and expected returns on various categories of plan assets. The
Company applies the expected rate of return to a market related value of the
assets which reduces the underlying variability in assets to which the Company
applies that expected return. The Company amortizes gains and losses as well as
the effects of changes in actuarial assumptions and plan provisions over a
period no longer than the average future service of employees. Primary
actuarial assumptions are determined as follows: The
expected long-term rate of return on plan assets is based on the Company’s
estimate of long-term returns for equities and fixed income securities weighted
by the allocation of assets in the plans. The rate is impacted by changes in general
market conditions, but because it represents a long-term rate, it is not
significantly impacted by short-term market swings. Changes in the allocation
of plan assets would also impact this rate. The
assumed discount rate is used to discount future benefit obligations back to
today’s dollars. The discount rate is reflective of yield rates on U.S.
long-term investment grade corporate bonds on and around the December 31
valuation date. This rate is sensitive to changes in interest rates. A decrease
in the discount rate would increase the Company’s obligation and expense. 16. Major
Customers Sales
to one customer accounted for approximately 36% of sales in 2010 (40% in 2009).
Outstanding accounts receivable for this customer at December 31, 2010
accounted for 13% (45% in 2009) of total trade receivables. F-28 17. Related
Party Transactions The
following table summarizes the Company’s related party transactions for the
2010 and 2009 measured at the exchange amount which is the amount of the
consideration established and agreed to by the related parties (in thousands): Year
Ended December 31, 2010 2009 Companies under common significant influence $ 66 $ 402 In
2010 and 2009, the Company paid $66,000 and $152,000, respectively, to a
company controlled by a limited partner of a shareholder of the Company, as
reimbursement for rent, office services, and travel and entertainment expenses. In
2009, the Company paid an aggregate of $250,000, respectively, to two companies
controlled by a limited partner of a shareholder as consideration for this
limited partner providing executive services, along with serving as the
Company’s president and head of sales and marketing. In
1997, two limited partners of a shareholder, advanced $100,000 and $50,000,
respectively, to the Company, with such amounts accruing interest at the rate
of 12% per annum and no specific terms of repayment or maturity date. In 2010
the aggregate principal amount of these advances were repaid in full. 18. Geographical
Information The
Company has one material operating segment, being the sale of electrical
equipment. Revenues are attributable to countries based on the location of the
Company’s customers (in thousands): Year
Ended December 31, 2010 2009 Canada $ 32,954 $ 38,626 United States 13,808 1,066 Others 474 907 Total $ 47,236 $ 40,599 The
distribution of the Company’s property, plant and equipment by geographic
location is approximately as follows (in thousands): December
31, 2010 2009 Canada $ 2,769 $ 974 United States 192 13 Others 2,162 - Total $ 5,123 $ 987 19. Basic and
Diluted Earnings Per Common Share Basic
and diluted earnings per common share are calculated based on the weighted
average number of shares outstanding during the period. Dilutive potential
common shares consist of incremental shares issuable upon exercise of certain
warrants. The Company’s employee and director stock options have been excluded
from the calculation of diluted earnings per share since they are
anti-dilutive. The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data): F-29 December 31, 2010 2009 Numerator: Net earnings for basic and diluted earnings per common share $ 2,946 $ 5,115 Denominator: Weighted average basic shares outstanding 29,362 23,293 Effect of
dilutive securities: Employee and director stock option awards - - Warrants outstanding 292 - 292 - Denominator for diluted earnings per common share 29,655 23,293 Earnings
per share basic and diluted: Basic earnings per common share $ 0.10 $ 0.22 Diluted earnings per common share $ 0.10 $ 0.22 F-30 F-31 March 31, December
31, ASSETS (unaudited) Current Assets Cash and cash equivalents $ 140 $ 516 Accounts receivable 7,496 5,358 Inventories 9,478 7,814 Income taxes receivable 1,341 1,191 Deferred income taxes 245 245 Prepaid expenses and other current assets 620 575 Total current assets 19,320 15,699 Property, plant and
equipment 5,130 5,123 Noncurrent deferred income
taxes 1,418 1,311 Intangible assets 4,383 4,436 Goodwill 5,534 5,534 Total assets $ 35,785 $ 32,103 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Bank overdrafts $ 618 $ - Accounts payable and accrued liabilities 9,115 7,442 Current maturities of long-term debt and capital lease obligations 6,224 6,063 Income taxes payable 165 161 Total current liabilities 16,122 13,666 Long-term debt and capital
lease obligations, net of current maturities 13 17 Pension deficit 293 308 Noncurrent deferred income
taxes 2,313 2,320 Deferred credit 700 700 Total liabilities 19,441 17,011 Shareholders’ Equity Preferred stock, par value $0.001; 5,000,000 shares authorized; none
issued - - Common stock, par value $0.001; 75,000,000 shares authorized;
29,536,275 shares issued and outstanding 30 30 Additional paid-in capital 7,578 7,517 Accumulated other comprehensive income (loss) (77 ) (305 ) Retained earnings 8,813 7,850 Total shareholders’ equity 16,344 15,092 Total liabilities and shareholders’ equity $ 35,785 $ 32,103 F-32 PIONEER POWER SOLUTIONS, INC. Three
Months Ended March 31, 2011 2010 Revenue $ 15,726 $ 8,250 Cost of goods sold 11,405 6,444 Gross profit 4,321 1,806 Operating expenses Selling, general and administrative 2,790 1,150 Foreign exchange (gain) loss (17 ) 92 Total operating expenses 2,773 1,242 Operating income 1,548 564 Interest and bank charges 122 13 Earnings before income
taxes 1,426 551 Provision for income taxes 463 161 Net earnings $ 963 $ 390 Earnings per common share Basic $ 0.03 $ 0.01 Diluted $ 0.03 $ 0.01 Weighted average number of
common shares outstanding Basic 29,536 29,000 Diluted 29,750 29,066 F-33 Three Months
Ended March 31, 2011 2010 Operating activities Net earnings $ 963 $ 390 Depreciation 168 90 Amortization of intangibles 53 - Deferred tax expense (114 ) 5 Accrued pension (5 ) (40 ) Stock-based compensation 61 4 Warrant issuance expense - 21 Changes in current operating assets and liabilities Accounts receivable, net (2,030 ) 959 Inventories (1,515 ) 349 Prepaid expense and other current assets (44 ) (166 ) Income taxes (117 ) (1,564 ) Accounts payable and accrued liabilities 1,559 1,600 Net cash provided by (used in) operating activities (1,021 ) 1,648 Investing activities Additions to property, plant and equipment (117 ) (45 ) Net cash used in investing activities (117 ) (45 ) Financing activities Increase (decrease) in bank overdrafts 608 - Increase (decrease) in revolving credit facilities 326 - Repayment of long-term debt and capital lease obligations (169 ) (45 ) Transaction costs - (83 ) Net cash provided by (used in) financing activities 765 (128 ) Increase (decrease) in
cash and cash equivalents (373 ) 1,475 Effect of foreign exchange
on cash and cash equivalents (3 ) 81 Cash and cash equivalents Beginning of year 516 1,560 End of period $ 140 $ 3,116 F-34 Other Additional Retained Accumulated Total Common Stock Shares Amount Balance - December 31, 2010 29,536,275 $ 30 $ 7,517 $ 7,850 $ (305 ) $ 15,092 Net earnings 963 - - - 963 - 963 Stock-based compensation - - - 61 - - 61 Foreign currency translation adjustment 210 - - - - 210 210 Pension adjustment, net of taxes 18 - - - - 18 18 Total comprehensive income $ 1,191 - - - 963 228 1,191 Balance - March 31, 2011 29,536,275 $ 30 $ 7,578 $ 8,813 $ (77 ) $ 16,344 F-35 Unless the context requires otherwise, references in
this Form 10-Q to the “Company,” “Pioneer,” “we,” “our” and “us” refer to
Pioneer Power Solutions, Inc. and its subsidiaries, including Pioneer
Transformers Ltd., Jefferson Electric, Inc. and Pioneer Wind Energy Systems
Inc. These
unaudited consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. These
unaudited consolidated financial statements have been prepared pursuant to the
rules of the Securities and Exchange Commission (“SEC”). Certain information
and footnote disclosures, normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”), have been condensed or omitted pursuant to those
rules and regulations. We believe that the disclosures made are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly state the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements have been included.
The results of operations for the interim period are not necessarily indicative
of the results for the entire fiscal year. The year-end balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by U.S. GAAP. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto of the Company
and its subsidiaries included in its Annual Report on Form 10-K for the year
ended December 31, 2010, which was filed with the SEC on March 31, 2011. 2. Adoption of New Accounting Standards Fair Value
Measurements and Disclosures In January
2010, Financial Accounting Standards Board (‘FASB’) issued Accounting Standards
Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820)”
(“ASU 2010-06”). ASU 2010-06 requires reporting entities to make more robust
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity
in Level 3 fair value measurements, including information on purchases, sales,
issuances, and settlements on a gross basis, and (4) the transfers between
Levels 1, 2, and 3. ASU 2010-06 is effective for fiscal years beginning on or
after December 15, 2009, except for the disclosure regarding Level 3 activity,
which is effective for fiscal years beginning after December 15, 2010. The
adoption of ASU 2010-06 for Levels 1, 2 and 3 did not have a material impact on
the Company’s consolidated financial statements. Intangibles –
Goodwill & Other In December
2010, the FASB issued ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). ASU 2010-28
affects all entities that have recognized goodwill and have one or more
reporting units whose carrying amount for purposes of performing Step 1 of the
goodwill impairment test is zero or negative. ASU 2010-28 modifies Step 1 so
that for those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than not that a
goodwill impairment exists, an entity should consider whether there are any
adverse qualitative factors indicating that an impairment may exist. The
qualitative factors are consistent with existing guidance, which requires that
goodwill of a reporting unit be tested for impairment between annual tests if
an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. ASU 2010-28 is
effective for fiscal years, and interim periods within those years, beginning
after December 15, 2010. The adoption of ASU 2010-28 did not have a
material impact on the Company’s consolidated financial statements. F-36 In December
2010, the FASB issued ASU No. 2010-29, “Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business Combinations
(“ASU 2010-29”). The objective of ASU 2010-29 is to address diversity in
practice about the interpretation of the pro forma revenue and earnings
disclosure requirements for business combinations. ASU 2010-29 specifies that
if a public entity presents comparative financial statements, it should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the required supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. ASU 2010-29 affects any public entity
as defined by Topic 805 that enters into business combinations that are
material on an individual or aggregate basis. ASU 2010-29 is effective
prospectively for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period on or after December
15, 2010. The adoption of ASU 2010-29 did not have a material impact on
the Company’s consolidated financial statements. 3. Fair Value Measurements FASB ASC
820 “Fair Value Measurement and Disclosure” applies to all assets and
liabilities that are being measured and reported on a fair value basis. ASC 820
establishes a framework for measuring fair value in U.S GAAP, and expands
disclosure about fair value measurements. ASC 820 enables the reader of the
financial statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. ASC 820 requires that assets and
liabilities carried at fair value be classified and disclosed in one of the
following three categories: Level 1:
Quoted market prices in active markets for identical assets or liabilities. Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data. Level 3:
Unobservable inputs that are not corroborated by market data. In
determining the appropriate levels, the Company performs a detailed analysis of
the assets and liabilities that are subject to ASC 820. At each reporting
period, all assets and liabilities for which the fair value measurement is
based on significant unobservable inputs are classified as Level 3. The fair
value represents management’s best estimates based on a range of methodologies
and assumptions. The carrying value of receivables and payables arising in the
ordinary course of business approximate fair value because of the relatively
short period of time between their origination and expected realization. These
items have been classified as Level 1. 4. Inventories The
components of inventories are summarized below (in thousands): March 31, December 31, Raw materials $ 3,213 $ 3,693 Work in process 2,665 2,029 Finished goods 3,600 2,092 Total inventories $ 9,478 $ 7,814 Included
in raw materials at March 31, 2011 and December 31, 2010 are goods in transit
of approximately $0.2 million and $0.3 million, respectively. F-37 5. Basic and Diluted Earnings Per Share Changes in
goodwill and intangible asset balances for the three months ended March 31,
2011, consisted of the following (in thousands): Goodwill Intangible
Balance
December 31, 2010 $ 5,534 $ 4,436 Additions
due to acquisitions - - Amortization - (53 ) Balance
March 31, 2011 $ 5,534 $ 4,383 The
components of intangible assets are summarized below (in thousands): Intangible Accumulated Intangible Assets, Customer relationships $ 2,050 $ (176 ) $ 1,874 Non-compete agreement 80 (21 ) 59 Trademarks 1,790 - 1,790 Technology-related industry accreditations 660 - 660 Total intangible assets $ 4,580 $ (197 ) $ 4,383 6. Credit Facilities In October
2009, the Company’s Pioneer Transformers Ltd. subsidiary entered into a
financing arrangement with a Canadian bank that replaced its previous credit
facility. Expressed in approximate U.S. dollars, the $10.0 million credit
agreement consists of a $7.7 million demand revolving credit facility, a $1.8
million term loan facility and a $0.5 million foreign exchange settlement risk
facility. The credit facilities are secured by a first-ranking lien in the
amount of $10.0 million on all the assets Pioneer Transformers Ltd., as well as
a collateral mortgage of $10.0 million on its land and buildings which had a
net carrying value of approximately $1.6 million as of March 31, 2011. The credit
facilities require Pioneer Transformers Ltd. to comply with various financial
covenants, including maintaining a minimum debt service coverage ratio of 1.25,
a minimum current ratio of 1.20 and a maximum total debt to tangible net worth
ratio of 2.50. The credit facilities also restrict the ability of Pioneer Transformers
Ltd. to make investments or advances to affiliated or related companies without
the lender’s prior written consent. The demand revolving credit facility is
subject to margin criteria and borrowings bear interest at the bank’s prime
rate per annum on amounts borrowed in Canadian dollars, or the U.S. base rate
plus 0.75% per annum on amounts borrowed in U.S. dollars. Borrowings under the
term loan facility bear interest at the bank’s prime rate plus 1.0% per annum. In April
2011 our Pioneer Transformers Ltd. subsidiary revised its financing arrangement
with its Canadian bank and thereby replaced its October 2009 credit facilities.
The terms of the new credit agreement are substantially similar to the 2009
credit agreement. Expressed in approximate U.S. dollars, the $10.2 million
credit agreement consists of a $7.7 million demand revolving credit facility, a
$2.0 million term loan facility and a $0.5 million foreign exchange settlement
risk facility. Amounts drawn on the term loan facility will have principal
repayments becoming due on a seven year amortization schedule, as compared to
five year amortization in the previous credit agreement. In addition, the new
credit facilities are no longer secured by a collateral mortgage of $10.0
million on the land and buildings of Pioneer Transformers Ltd. Jefferson Electric, Inc. has a bank loan agreement with a U.S. bank
that includes a revolving credit facility with a borrowing base of $5.0 million
and a term credit facility. Monthly payments of accrued interest must be made
under the revolving credit facility and monthly payments of principal and
accrued interest must be made under the term credit facility, with a final
payment of all outstanding amounts due on October 31, 2011. Borrowings under
the F-38 The bank
loan agreement requires Jefferson Electric, Inc. to comply with certain
financial covenants, including a requirement to exceed minimum quarterly
targets for tangible net worth and maintain a minimum debt service coverage
ratio. The bank loan agreement also restricts Jefferson Electric, Inc.’s
ability to pay dividends or make distributions, advances or other transfers of
assets. The interest rate under the revolving credit facility is equal to the
greater of the bank’s reference rate (currently 3.25% per annum) or 6.5% per
annum. The interest rate under the term credit facility is 7.27% annually. As
of March 31, 2011, Jefferson Electric, Inc. had approximately $3.5 million
outstanding under the revolving credit facility and approximately $2.7 million
outstanding under the term credit facility. 7. Long-Term Debt Long-term
debt consists of the following (in thousands): March 31, December 31, Revolving credit facilities $ 3,542 $ 3,217 Term credit facilities 2,667 2,832 Capital lease obligations 28 31 Total debt and capital lease obligations 6,237 6,080 Less current portion (6,224 ) (6,063 ) Total long-term debt and capital lease
obligations $ 13 $ 17 8. Common Stock On April
30, 2010, the Company issued 486,275 common shares in conjunction with the
acquisition of Jefferson Electric, Inc. During the
quarter ended June 30, 2010, the Company also issued 50,000 common shares as
payment for investor relations services. The issuance of the shares and related
expense was accounted for at the fair value of the shares on the issue date
which amounted to $140,000. The board
of directors is authorized, subject to any limitations prescribed by law,
without further vote or action by the shareholders, to issue from time to time
shares of preferred stock in one or more series. Each such series of preferred
stock shall have such number of shares, designations, preferences, voting
powers, qualifications, and special or relative rights or privileges as shall
be determined by the board of directors, which may include, among others,
dividend rights, voting rights, liquidation preferences, conversion rights and
preemptive rights. 9. Additional Paid-in Capital Stock Options On December
2, 2009, the Company adopted the 2009 Equity Incentive Plan (the “Plan”) for
the purpose of issuing incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified
stock options, restricted stock, stock appreciation rights, performance unit
awards and stock bonus awards to employees, directors, consultants and other
service providers. A total of 1,600,000 shares of common stock are reserved for
issuance under this Plan. Options may be granted under the Plan on terms and at
prices as determined by the board of directors or by the plan administrators
appointed by the board of directors. As of March 31, 2011, 592,000 stock
options had been granted, consisting of 326,000 incentive stock options and
266,000 non-qualified stock options. F-39 On March
24, 2011, the Company granted an aggregate of 16,000 non-qualified stock
options to eight directors to purchase common shares. The stock options are
exercisable for common shares at an exercise price of $2.40 per share, expire
on March 24, 2021 and vest on the first anniversary of the date of grant. Expense for
stock-based compensation recorded during each of the three months ended March
31, 2011 and 2010 was approximately $61,000 and $4,000, respectively. As of
March 31, 2011, the Company had total stock-based compensation expense
remaining to be recognized of approximately $0.5 million. A summary
of stock option activity under all plans as of March 31, 2011, and changes
during the three months ended March 31, 2011 are presented below: Stock Weighted- Weighted- Aggregate Balance
December 31, 2010 550,000 $ 3.06 Granted 42,000 $ 2.46 Exercised - - Forfeited - - Outstanding
on March 31, 2011 592,000 $ 3.01 7.8 $ 75 Exercisable
on March 31, 2011 140,000 $ 3.06 7.2 $ 44 On May 11,
2011, the board of directors of the Company adopted the Pioneer Power
Solutions, Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”), subject to
stockholder approval. The 2011 Plan replaces and supersedes the Pioneer Power
Solutions, Inc. 2009 Equity Incentive Plan. The Company’s outside directors and
employees, including the Company’s principal executive officer, principal
financial officer and other named executive officers, and certain contractors
are all eligible to participate in the 2011 Plan. The 2011 Plan allows for the
granting of incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
awards, dividend equivalent rights, and other awards, which may be granted
singly, in combination, or in tandem, and upon such terms as are determined by
the Board or a committee of the Board that is designated to administer the
Plan. Subject to certain adjustments, the maximum number of shares of the
Company’s common stock that may be delivered pursuant to awards under the 2011
Plan is 3,500,000 shares. Warrants As of March
31, 2011, the Company had warrants outstanding to purchase 3.2 million shares
of common stock with an average exercise price of approximately $2.80 per
share. The warrants expire on dates beginning on December 2, 2014 and ending on
April 30, 2015. No warrants were exercised during the three months ended March
31, 2011. F-40 Number of Weighted average Balance at
December 31, 2010 3,200,000 $ 2.80 Granted - - Exercised - - Balance at
March 31, 2011 3,200,000 $ 2.80 10. Pension Plan The Company
sponsors a defined benefit pension plan in which a majority of its Canadian
employees are members. The employer contributes 100% to the plan. The benefits,
or the rate per year of credit service, are established by the Company and
updated at its discretion. Cost of Benefits The
components of the expense the Company incurred under the pension plan are as
follows (in thousands): Three Months Ended 2011 2010 Current service cost, net of employee
contributions $ 8 $ 10 Interest cost on accrued benefit obligation 37 35 Expected return on plan assets (38 ) (34 ) Amortization of transitional obligation 3 3 Amortization of past service costs 2 1 Amortization of net actuarial gain 8 6 Total cost of benefit $ 20 $ 21 The
Company’s policy is to fund the pension plan at or above the minimum level
required by law. The Company made $22,000 and $64,000 of contributions to its
defined benefit pension plan during the three months ended March 31, 2011 and
2010, respectively. Changes in the discount rate and actual investment returns
that continue to remain lower than the long-term expected return on plan assets
could result in the Company making additional contributions. 11. Related Party Transactions The
following table summarizes the Company’s related party transactions for the
three months ended March 31, 2011 and 2010 measured at the exchange amount
which is the amount of the consideration established and agreed to by the
related parties (in thousands): Three Months Ended 2011 2010 Companies
under common significant influence $ - $ 66 During the
three month periods ended March 31, 2011 and 2010, the Company paid $0 and
$66,000, respectively, to a company controlled by a limited partner of a
shareholder of the Company, as reimbursement for rent, office services, and
travel and entertainment expenses. In 1997,
two limited partners of a shareholder, advanced $100,000 and $50,000,
respectively, to the Company, with such amounts accruing interest at the rate
of 12% per annum and no specific terms of repayment or F-41 12. Geographical Information The Company
has one material operating segment, the sale of electrical equipment. Revenues
are attributable to countries based on the location of the Company’s customers
(in thousands): Three Months Ended 2011 2010 Canada $ 9,882 $ 7,791 United States 5,230 237 Others 614 222 Total $ 15,726 $ 8,250 13. Basic and Diluted Earnings Per Share Basic and
diluted earnings per common share are calculated based on the weighted average
number of shares outstanding during the period. Dilutive potential common
shares consist of incremental shares issuable upon exercise of certain
warrants. The Company’s employee and director stock options have been excluded
from the calculation of diluted earnings per share since they are
anti-dilutive. The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data): Three Months Ended 2011 2010 Numerator: Net earnings for basic and diluted earnings
per common share $ 963 $ 390 Denominator: Weighted average basic shares outstanding 29,536 29,000 Effect of dilutive securities: Employee and director stock option awards - - Warrants outstanding 214 66 214 66 Denominator for diluted earnings per common
share 29,750 29,066 Earnings per common share basic
and diluted: Basic $ 0.03 $ 0.01 Diluted $ 0.03 $ 0.01 14. Subsequent Event On May 13,
2011, the Company entered into a definitive
agreement to acquire the stock of Transformateur Bemag, Inc. (“Bemag”) for cash
consideration of $5.5 million Canadian dollars and the assumption of
liabilities. Among other conditions to closing, there is a requirement that the
parties enter into a similar agreement providing for the purchase of Vermont
Transformer, Inc. (“Vermont”), an affiliate of Bemag, for cash consideration of
$1.0 million Canadian dollars and the assumption of liabilities. Bemag and
Vermont design and manufacture low and medium voltage dry-type transformers and
custom magnetics for customers in the commercial and industrial segments of the
North American electrical equipment market. The companies operate from
locations in Farnham, F-42 F-43 2,284,000 Shares Pioneer Power Solutions, Inc. Common Stock PROSPECTUS , 2011 Sidoti &
Company, LLC You
should rely only on the information contained in this prospectus. No dealer,
salesperson or other person is authorized to give information that is not
contained in this prospectus. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted. The
information contained in this prospectus is correct only as of the date of
this prospectus, regardless of the time of
the delivery of this prospectus or any sale of these securities. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Our estimated expenses in
connection with the issuance and distribution of the securities being
registered are: SEC Registration Fee $ 2,745 Nasdaq Listing Fee $ 50,000 FINRA Filing Fee $ 2,725 Accounting Fees and
Expenses $ 25,000 Legal Fees and Expenses $ 475,000 Transfer Agent Fees $ 10,000 Printing Expenses $ 30,000 Miscellaneous Fees and
Expenses $ 33,530 Total $ 629,000 ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 145 of the Delaware
General Corporation Law (the “DGCL”) provides, in general, that a corporation
incorporated under the laws of the State of Delaware, as we are, may indemnify
any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (other than a derivative action
by or in the right of the corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another enterprise, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person’s conduct was unlawful. In the case of a derivative action,
a Delaware corporation may indemnify any such person against expenses
(including attorneys’ fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such
person is fairly and reasonably entitled to indemnity for such expenses. Our certificate of
incorporation and bylaws provide that we will indemnify our directors,
officers, employees and agents to the extent and in the manner permitted by the
provisions of the DGCL, as amended from time to time, subject to any
permissible expansion or limitation of such indemnification, as may be set
forth in any stockholders’ or directors’ resolution or by contract. In
addition, our director and officer indemnification agreements with each of our
directors and officers provide, among other things, for the indemnification to
the fullest extent permitted or required by Delaware law, provided that no
indemnitee will be entitled to indemnification in connection with any claim
initiated by the indemnitee against us or our directors or officers unless we
join or consent to the initiation of the claim, or the purchase and sale of
securities by the indemnitee in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended. Any repeal or modification
of these provisions approved by our stockholders will be prospective only and
will not adversely affect any limitation on the liability of any of our
directors or officers existing as of the time of such repeal or modification. We are also permitted to
apply for insurance on behalf of any director, officer, employee or other agent
for liability arising out of his actions, whether or not the DGCL would permit
indemnification. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On September 25, 2008, we
sold 1,200,000 shares of common stock to David Davis, our former president,
chief executive officer, chief financial officer and secretary-treasurer, in
exchange for $6,000. These securities were offered and sold to Mr. Davis in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. Mr.
Davis qualified as an accredited investor (as defined by Rule 501 under the
Securities Act of 1933, as amended) at the time of his acquisition of these
shares. On December 2, 2009, we
consummated a private placement pursuant to which we sold an aggregate of
1,000,000 shares of common stock to 18 investors for aggregate gross proceeds
of $5,000,000. The securities were offered and sold to investors in reliance
upon exemptions from registration pursuant to Section 4(2) under the Securities
Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of the
persons and/or entities receiving our securities in this private placement
qualified as an accredited investor (as defined by Rule 501 under the
Securities Act of 1933, as amended) at the time of the private placement. On December 2, 2009, we
entered into a share exchange agreement with Pioneer Transformers Ltd., a
company incorporated under the Canada Business Corporations Act, and Provident
Pioneer Partners, L.P., a Delaware limited partnership and the holder of all of
the outstanding capital stock of Pioneer Transformers Ltd., pursuant to which
Provident Pioneer Partners, L.P. transferred all of the issued and outstanding
capital stock of Pioneer Transformers Ltd. to us in exchange for (i) 4,560,000
newly issued shares of our common stock and (ii) a five year warrant to
purchase up to 200,000 shares of our common stock at an exercise price of
$16.25 per share. These securities were offered and sold to Provident Pioneer
Partners, L.P. in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. Provident Pioneer Partners, L.P. qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933,
as amended) at the time of the share exchange. On December 2, 2009, we sold
Genesis Capital Advisors LLC a five year warrant to purchase up to an aggregate
of 200,000 shares of our common stock at an exercise price of $10.00 per share
for aggregate gross proceeds of $10,000. This warrant was offered and sold to
Genesis Capital Advisors LLC in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Rule
506 promulgated thereunder. Genesis Capital Advisors LLC qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933,
as amended) at the time of this warrant purchase. On April 26, 2010, we issued
a five year warrant to a consultant to purchase up to an aggregate of 30,000
shares of common stock at an exercise price of $10.00 per share. This warrant was
issued as consideration for the provision of certain consulting services to us.
This warrant was offered and sold in reliance upon an exemption from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended. The holder represented to us that he was an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended) and was
acquiring the warrant and will acquire the underlying shares of common stock
for investment for his own account, with no present intention of dividing his
participation with others or reselling or otherwise distributing the same. On April 30, 2010, we
consummated the acquisition of Jefferson Electric, Inc., pursuant to which we
issued an aggregate of 97,255 shares of our common stock to Thomas Klink, the
sole stockholder of Jefferson Electric, Inc. prior to the merger. These shares
were offered and sold in reliance upon an exemption from registration pursuant
to Section 4(2) under the Securities Act of 1933, as amended. Mr. Klink represented
to us that he was an accredited investor (as defined by Rule 501 under the
Securities Act of 1933, as amended). On April 30, 2010, we sold
Thomas Klink a five year warrant for a price of $10,000 to purchase up to an
aggregate of 200,000 shares of common stock at an exercise price of $16.25 per
share. This warrant was offered and sold in reliance upon an exemption from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended. Mr. Klink represented to us that he was an accredited investor (as
defined by Rule 501 under the Securities Act of 1933, as amended) and was
acquiring the warrant and will acquire the underlying shares of common stock
for investment for his own account, with no present intention of dividing his
participation with others or reselling or otherwise distributing the same. II-2 On April 19, 2010, we issued
four year warrants to our investor relations firm and its designees to purchase
up to an aggregate of 10,000 shares of common stock at an exercise price of $16.25
per share. These warrants were issued as consideration for the provision of
certain investor relations services to us pursuant to an investor relations
agreement. These warrants were offered and sold in reliance upon an exemption
from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended. Each of the recipients represented to us that it was an accredited
investor (as defined by Rule 501 under the Securities Act of 1933, as amended)
and was acquiring the warrant and will acquire the underlying shares of common
stock for investment for its own account, with no present intention of dividing
its participation with others or reselling or otherwise distributing the same. On May 11, 2010, we issued
an aggregate of 10,000 shares of our common stock to our investor relations
investor relations firm and two of its designees. These shares were issued as
consideration for the provision of certain investor relations services to us
pursuant to an investor relations agreement. These shares were offered and sold
in reliance upon an exemption from registration pursuant to Section 4(2) under
the Securities Act of 1933, as amended. Each of the recipients represented to
us that it was an accredited investor and that the shares are subject to a six
month holding period. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit
No. Description 1.1*** Form of Underwriting
Agreement, by and between the underwriters, Pioneer Power Solutions, Inc. and
the selling stockholders (including Form of Custody Agreement and Irrevocable
Power of Attorney for the Selling Stockholders). 2.1 Share Exchange Agreement,
dated December 2, 2009, by and among Pioneer Power Solutions, Inc., Pioneer
Transformers Ltd. and Provident Pioneer Partners, L.P. (Incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power
Solutions, Inc. filed with the Securities and Exchange Commission on December
7, 2009). 2.2 Agreement and Plan of
Merger, dated April 30, 2010, by and among Pioneer Power Solutions, Inc.,
Jefferson Electric, Inc., Thomas Klink, and JEI Acquisition, Inc.
(Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on May 4, 2010). 3.1 Certificate of
Incorporation (Incorporated by reference to Exhibit 3.1 to the Current Report
on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 2, 2009). 3.2 Bylaws (Incorporated by
reference to Exhibit 3.2 to the Current Report on Form 8-K of Pioneer Power
Solutions, Inc. filed with the Securities and Exchange Commission on December
2, 2009). 4.1 Form of Securities
Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities
and Exchange Commission on December 7, 2009). 4.2 Form of $10.00 Warrant
(Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on December 7, 2009). 4.3 Form of $16.25 Warrant
(Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on December 7, 2009). 4.4 Form of Lock-up Agreement
(Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on December 7, 2009). II-3 Exhibit
No. Description 4.5 Warrant to Purchase Common
Stock, dated April 30, 2010, issued to Thomas Klink (Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K of Pioneer Power
Solutions, Inc. filed with the Securities and Exchange Commission on May 4,
2010). 4.6 Warrant to Purchase Common
Stock, dated April 26, 2010 (Incorporated by reference to Exhibit 4.6 to
Post-Effective Amendment No. 1 to Registration Statement on Form S-1 of
Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on June 1, 2010). 4.7 Form of Warrant to
Purchase Common Stock, dated May 11, 2010, issued to investor relations firm
and its designees (Incorporated by reference to Exhibit 4.7 to the Registration
Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on April 20, 2011). 5.1*** Opinion of Haynes and
Boone, LLP 10.1 Form of Director and
Officer Indemnification Agreement (Incorporated by reference to Exhibit 10.1
to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission for the year ended December 31, 2010). 10.2 Employment Agreement,
dated December 2, 2009, by and between Pioneer Power Solutions, Inc. and
Nathan J. Mazurek (Incorporated by reference to Exhibit 10.7 to the Current
Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities
and Exchange Commission on December 7, 2009). 10.3 Pioneer Power Solutions,
Inc. 2009 Equity Incentive Plan (Incorporated by reference to Exhibit 10.8 to
the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission on December 7, 2009). 10.4 Form of 2009 Incentive
Stock Option Agreement (Incorporated by reference to Exhibit 10.9 to the
Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on December 7, 2009). 10.5 Form of 2009 Non-Qualified
Stock Option Agreement (Incorporated by reference to Exhibit 10.10 to the
Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on December 7, 2009). 10.6 Agreement of Conveyance,
Transfer and Assignment of Assets and Assumptions of Obligations, dated
December 2, 2009, by and between Pioneer Power Solutions, Inc. and Sierra
Concepts Holdings, Inc. (Incorporated by reference to Exhibit 10.11 to the
Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on December 7, 2009). 10.7 Stock Purchase Agreement,
dated December 2, 2009, by and between Pioneer Power Solutions, Inc. and
David Davis (Incorporated by reference to Exhibit 10.12 to the Current Report
on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 7, 2009). 10.8 Collective Labor
Agreement, dated November 26, 2010, by and between Pioneer Transformers Ltd.
and United Steelworkers, Local Section 9414 (Incorporated by reference to
Exhibit 10.8 to the Annual Report on Form 10-K of Pioneer Power Solutions,
Inc. filed with the Securities and Exchange Commission for the year ended
December 31, 2010). 10.9 Lease Amending Agreement,
dated March 1, 2011, by and between Pioneer Transformers Ltd. and 1713277
Ontario Inc. (Incorporated by reference to Exhibit 10.9 to the Annual Report
on II-4 Exhibit
No. Description Form 10-K of Pioneer Power
Solutions, Inc. filed with the Securities and Exchange Commission for the
year ended December 31, 2010). 10.10 License and Services
Agreement, dated May 4, 2007, by and between Pioneer Transformers Ltd. and
Oracle Corporation Canada Inc. (Incorporated by reference to Exhibit 10.20 to
the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission on December 7, 2009). 10.11 ValuePlan Lease, dated
September 27, 2007, by and between Pioneer Transformers Ltd. and IBM Canada
Limited (Incorporated by reference to Exhibit 10.21 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 7, 2009). 10.12 ValuePlan Lease, dated
November 22, 2007, by and between Pioneer Transformers Ltd. and IBM Canada
Limited (Incorporated by reference to Exhibit 10.22 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 7, 2009). 10.13 ValuePlan Lease, dated
December 11, 2007, by and between Pioneer Transformers Ltd. and IBM Canada
Limited (Incorporated by reference to Exhibit 10.23 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 7, 2009). 10.14 ValuePlan Lease, dated
December 19, 2007, by and between Pioneer Transformers Ltd. and IBM Canada
Limited (Incorporated by reference to Exhibit 10.24 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 7, 2009). 10.15* Agreement dated August 5,
2009, by and between Pioneer Transformers Ltd. and Toronto Hydro-Electric
System Limited (Incorporated by reference to Exhibit 10.25 to the Current
Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities
and Exchange Commission on December 7, 2009). 10.16 Commitment Letter, dated
July 9, 2009, by and between Pioneer Transformers Ltd. and the Bank of
Montreal (Incorporated by reference to Exhibit 10.27 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on December 7, 2009). 10.17* Agreement dated January 1,
2010, by and between Pioneer Transformers Ltd. and Hydro-Quebec Utility
Company (Incorporated by reference to Exhibit 10.34 to Amendment No. 1 to the
Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed
with the Securities and Exchange Commission on March 10, 2010). 10.18* Agreement dated January 8,
2010, by and between Pioneer Transformers Ltd. and Hydro-Quebec Utility
Company (Incorporated by reference to Exhibit 10.35 to Amendment No. 1 to the
Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed
with the Securities and Exchange Commission on March 10, 2010). 10.19 Description of Consulting
Services Provided by Nathan J. Mazurek to Pioneer Transformers Ltd.
(Incorporated by reference to Exhibit 10.36 to Amendment No. 1 to the
Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed
with the Securities and Exchange Commission on March 10, 2010). 10.20 Agreement dated January 8,
2010, by and between Pioneer Transformers Ltd. and Hydro-Quebec II-5 Exhibit
No. Description Utility Company
(Incorporated by reference to Exhibit 10.35 to Amendment No. 1 to the
Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed
with the Securities and Exchange Commission on March 10, 2010). 10.21 Employment Agreement,
dated April 30, 2010, by and between Jefferson Electric, Inc. and Thomas
Klink (Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on May 4, 2010). 10.22 Voting Agreement, dated
April 30, 2010, by and between Provident Pioneer Partners, L.P. and Thomas
Klink (Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on May 4, 2010). 10.23 Lock-Up Agreement, dated
April 30, 2010, by and among Thomas Klink, Pioneer Power Solutions, Inc. and
Jefferson Electric, Inc. (Incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on May 4, 2010). 10.24 Purchase Agreement, dated
April 30, 2010, by and between Thomas Klink and JE Mexican Holdings, Inc.
(Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on May 4, 2010). 10.25 Warrant Purchase
Agreement, dated April 30, 2010, by and between Pioneer Power Solutions, Inc.
and Thomas Klink (Incorporated by reference to Exhibit 10.5 to the Current
Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities
and Exchange Commission on May 4, 2010). 10.26 Loan and Security
Agreement, dated January 2, 2008, by and between Jefferson Electric, Inc. and
Johnson Bank (Incorporated by reference to Exhibit 10.6 to the Current Report
on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and
Exchange Commission on May 4, 2010). 10.27 Amendment to Loan and
Security Agreement, dated January 29, 2008, by and between Jefferson
Electric, Inc. and Johnson Bank (Incorporated by reference to Exhibit 10.7 to
the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission on May 4, 2010). 10.28 Second Amendment to Loan
and Security Agreement, dated May 2, 2008, by and between Jefferson Electric,
Inc. and Johnson Bank (Incorporated by reference to Exhibit 10.8 to the
Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on May 4, 2010). 10.29 Third Amendment to Loan
and Security Agreement, dated December 3, 2008, by and between Jefferson
Electric, Inc. and Johnson Bank (Incorporated by reference to Exhibit 10.9 to
the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission on May 4, 2010). 10.30 Forbearance Agreement and
Fourth Amendment to Loan Agreement, dated August 28, 2009, by and among
Johnson Bank, Jefferson Electric, Inc. Thomas Klink and Diane Klink
(Incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on May 4, 2010). 10.31 First Amended and Restated
Forbearance Agreement and Fourth Amendment to Loan Agreement, II-6 Exhibit No. Description dated December 8, 2009, by
and among Johnson Bank, Jefferson Electric, Inc. Thomas Klink and Diane Klink
(Incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission on May 4, 2010). 10.32 First Amendment to First
Amended and Restated Forbearance Agreement and Fourth Amendment to Loan
Agreement, dated March 31, 2010, by and among Johnson Bank, Jefferson
Electric, Inc. Thomas Klink and Diane Klink (Incorporated by reference to
Exhibit 10.12 to the Current Report on Form 8-K of Pioneer Power Solutions,
Inc. filed with the Securities and Exchange Commission on May 4, 2010). 10.33 Fifth Amendment to Loan
and Security Agreement, dated April 30, 2010, by and between Jefferson
Electric, Inc. and Johnson Bank (Incorporated by reference to Exhibit 10.13
to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission on May 4, 2010). 10.34 Sixth Amendment to Loan
and Security Agreement, dated November 24, 2010, by and between Jefferson
Electric, Inc. and Johnson Bank (Incorporated by reference to Exhibit 10.34
to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with
the Securities and Exchange Commission for the year ended December 31, 2010). 10.35 Collective Bargaining
Agreement Nexus Magneticos S. de R.L. de C.V., dated January 1, 2011
(Incorporated by reference to Exhibit 10.35 to the Annual Report on Form 10-K
of Pioneer Power Solutions, Inc. filed with the Securities and Exchange
Commission for the year ended December 31, 2010). 10.36 Agreement for Authorized
Sales Representatives, dated September 19, 2003, by and between Pioneer
Transformers Ltd. and AESCO Associates Ltd. (Incorporated by reference to
Exhibit 10.15 to the Current Report on Form 8-K of Pioneer Power Solutions,
Inc. filed with the Securities and Exchange Commission on December 7, 2009). 10.37 Agreement for Authorized
Sales Representatives, dated May 11, 2006, by and between Pioneer
Transformers Ltd. and Techno-Contact, Inc. (Incorporated by reference to
Exhibit 10.17 to the Current Report on Form 8-K of Pioneer Power Solutions,
Inc. filed with the Securities and Exchange Commission on December 7, 2009). 10.38* Agreement for Authorized
Sales Representatives, dated January 1, 2010, by and between Pioneer
Transformers Ltd. and CHAZ Sales Corp. (Incorporated by reference to Exhibit
10.38 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc.
filed with the Securities and Exchange Commission for the year ended December
31, 2010). 10.39 Employment and
Non-Competition Agreement, dated August 12, 2010, by and between Pioneer
Power Solutions, Inc. and Andrew Minkow (Incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed
with the Securities and Exchange Commission on August 18, 2010). 10.40 Commitment Letter, dated
February 7, 2011, by and among Pioneer Transformers Ltd., Bernard Granby
Realty Inc. and Bank of Montreal (Incorporated by reference to Exhibit 10.40
to the Registration Statement on Form S-1 of Pioneer Power Solutions, Inc.
filed with the Securities and Exchange Commission on April 20, 2011). 10.41 Share Purchase Agreement,
dated May 13, 2011, by and among Fiducie Familiale Mazoyer, Bon-Ange Inc.,
Gilles Mazoyer and 7834080 Canada Inc. (Incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed
with the Securities and II-7 Exhibit
No. Description Exchange Commission on May 19, 2011). 10.42 Pioneer Power Solutions, Inc. 2011
Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the
Securities and Exchange Commission on May 31, 2011). 21.1*** List of Subsidiaries. 23.1** Consent of RSM Richter
Chamberland S.E.N.C.R.L./LLP. 23.2*** Consent of Haynes and
Boone, LLP (Included in Exhibit 5.1). * Confidential treatment
has been granted with respect to certain portions of this exhibit. ** Filed herewith. *** Previously filed. ITEM 17. UNDERTAKINGS The
undersigned registrant hereby undertakes: (1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) To include any
Prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) To reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in
the effective registration statement; and (iii) To include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; (2)
That, for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof. (3)
To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering. (4)
That, for the purpose of determining liability under the Securities Act of
1933, as amended, to any purchaser, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed
in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use. II-8 (5)
That, for the purpose of determining liability of the registrant under the
Securities Act of 1933, as amended, to any purchaser in the initial
distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser: (i) Any preliminary
prospectus or prospectus of the undersigned registrant relating to the
offering required to be filed pursuant to Rule 424; (ii) Any free writing
prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any
other free writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by or
on behalf of the undersigned registrant; and (iv) Any other
communication that is an offer in the offering made by the undersigned
registrant to the purchaser. Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue. II-9 SIGNATURES PIONEER
POWER SOLUTIONS, INC. By: /s/ Nathan J. Mazurek Name: Nathan J. Mazurek Title: Chief Executive Officer Pursuant
to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated. Signature Title Date /s/ Nathan J. Mazurek President, Chief Executive
Officer and Chairman of the Board of Directors (Principal Executive
Officer) June 6, 2011 Nathan J. Mazurek * Chief Financial Officer,
Secretary, Treasurer and Director (Principal Financial Officer and Principal
Accounting Officer) June 6, 2011 Andrew Minkow * Director, President of
Jefferson Electric, Inc. June 6, 2011 Thomas Klink * Director June 6, 2011 Yossi Cohn * Director June 6, 2011 David J. Landes * Director June 6, 2011 Ian Ross * Director June 6, 2011 David Tesler * Director June 6, 2011 Jonathan Tulkoff * Signed by
Nathan J. Mazurek as agent. II-10
We are an owner and operator
of specialty electrical equipment and service businesses which provide
highly-engineered solutions for niche markets in the utility, industrial,
commercial and wind energy sectors of the electrical transmission and
distribution industry. Our products include liquid-filled and dry-type
transformers and, more recently, wind energy equipment and services. We intend
to grow our business by increasing our portfolio of specialty solutions for the
markets we serve, both through acquisitions and internal product development.
Our management team has extensive industry experience and a significant track
record of acquiring, integrating and operating companies.
Pending Acquisition
We generated net revenue of
$47.2 million and net earnings per diluted share of $0.50 in the year ended
December 31, 2010 (as adjusted for the anticipated one-for-five reverse stock
split). During the three month period ended March 31, 2011, our revenue and net
earnings per diluted share grew to $15.7 million and $0.16, respectively, as
compared to revenue of $8.3 million and net earnings per diluted share of $0.07
in the three month period ended March 31, 2010.
shares to be outstanding
after this offering of our common stock, and our anticipated use of the net
proceeds, we expect that our non-GAAP net earnings per diluted share will be
between $0.72 and $0.88. For
an explanation of non-GAAP net earnings per share, a reconciliation of GAAP net
earnings to non-GAAP net earnings and a description of how management uses
non-GAAP measures, please see page 9 of this prospectus. With respect to
factors that could impact our expected operating results, please see
“Cautionary Note Regarding Forward-Looking Statements” beginning on
page 24 of this prospectus.
•
Pursue Targeted Strategic Acquisitions — We intend to accelerate our growth
through a disciplined acquisition strategy to broaden and enhance our product
and service offerings, technical expertise, customers, end-markets and sales
channels. The electrical transformer market is very fragmented with a large
number of potential acquisition candidates who focus on highly-specialized
applications, select end-markets or more regionally defined market areas. We
favor candidates that have competencies and business characteristics similar
to our own, and those that we expect will benefit from some of the major
trends affecting our industry, such as companies that specialize in power
quality and conditioning. We intend to continually evaluate acquisition
targets and our senior management team provides us with significant
experience in integrating acquired companies. Our 2010 acquisition of
Jefferson Electric, Inc. and pending acquisition of Transformateur Bemag Inc.
are examples of our ability to implement this strategy.
•
342,600 shares of common
stock subject to the over-allotment option granted to the underwriters.
We intend to effectuate a
one-for-five reverse stock split, in order to comply with the listing requirements
of Nasdaq Capital Market. Such reverse stock split would immediately increase
our stock price. In addition, such reverse stock split would reduce the number
of shares of common stock outstanding and may affect the liquidity of our
common stock. The reverse stock split is expected to occur the day immediately
following the effectiveness of the registration statement of which this prospectus is a
part.
(In thousands, except per share data)
December 31,
March 31,
(In thousands, except per share data)
December 31,
March 31,
A majority of our revenue and a significant portion of our expenditures are
derived or spent in Canadian dollars. However, we report our financial condition and results of
operations in U.S. dollars. As a result, fluctuations between the U.S. dollar
and the Canadian dollar will impact the amount of our revenues. For example, if
the
We routinely have a backlog
of work to be completed on contracts representing a significant portion of our
annual sales. As of March 31, 2011, our order backlog was $18.2 million. Orders
included in our backlog are represented by customer purchase orders and
contracts that we believe to be firm. Backlog develops as a result of new business
taken, which represents the revenue value of new customer orders received by us
during a given period. Backlog consists of customer orders that either (1) have
not yet been started or (2) are in progress and are not yet completed. In the
latter case, the revenue value reported in backlog is the remaining value
associated with work that has not yet been completed. From time to time,
customer orders are canceled that appeared to have a high certainty of going
forward at the time they were recorded as new business taken. In the event of a
customer order cancellation, we may be reimbursed for certain costs but
typically have no contractual right to the total revenue reflected in our
backlog. In addition to our being unable to recover certain direct costs, canceled
customer orders may also result in additional unrecoverable costs due to the
resulting underutilization of our assets.
Provident Pioneer Partners,
L.P., which is controlled by Nathan J. Mazurek, chief executive officer,
president and chairman of the board of directors, beneficially owns
approximately 78% of our outstanding common stock and is expected to
beneficially own approximately 63% of our outstanding common stock after the
offering contemplated herein, assuming no exercise of the underwriters’
over-allotment option. As a result of this stock ownership, Provident Pioneer
Partners, L.P. and Mr. Mazurek can control all matters submitted to our
stockholders for approval, including the election of directors and approval of
any merger, consolidation or sale of all or substantially all of our
The public offering price of our common stock will
be substantially higher than the net tangible book value per share of our
common stock immediately after this offering. Therefore, if you purchase our
common stock in this offering, you will incur an immediate dilution of $6.37
(or 70.8%) in net tangible book value per share from the price you paid, based
on an assumed public offering price of $9.00 per share (as adjusted for the
anticipated one-for-five reverse stock split of our common stock that is
expected to occur the day immediately following the effectiveness of the registration
statement of which this prospectus is a part), the midpoint of the range set forth on the
cover page of this prospectus. The exercise of outstanding warrants and options may result in further
dilution of your investment, but only if the public offering price is greater
than $10.00 per share. In addition, if we raise funds by issuing additional
shares or convertible securities in the future, the newly issued shares may
further dilute your ownership interest.
Sales of a significant number of shares of our
common stock in the public market could harm the market price of our common
stock. When this offering is completed, we will have a total of
7,607,255 shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and
no exercise of outstanding stock options. The 2,284,000 shares offered
by this prospectus, assuming no
exercise of the underwriters’ over-allotment option, will be freely
tradeable unless they are purchased by our “affiliates,” as defined in Rule 144
under the Securities Act of 1933, as amended. An additional 656,000 shares are
freely tradeable unless they are purchased by our “affiliates,” as defined in
Rule 144 under the Securities Act of 1933, as amended. The remaining 4,667,255
shares outstanding are “restricted,” which means they were originally sold in
offerings, or issued as merger consideration, that were not subject to a
registration statement filed with the Securities and Exchange Commission. These
restricted shares may be resold only through registration under the Securities
Act of 1933, as amended, or under an available exemption from registration,
such as provided through Rule 144.
The holders of 5,300,115 shares of common stock currently outstanding, or 5,799,915
shares of common stock including shares issuable upon exercise of options and
warrants, have agreed with the representative of the underwriters to a 180 day
“lock-up” with respect to these shares.
This generally means that they cannot sell these shares during the 180 days
following the date of this prospectus. See “Underwriting” for additional
details. After the 180 day lock-up period, these shares may be sold in
accordance with Rule 144 or pursuant to an effective registration statement.
The foregoing does not
represent an exhaustive list of matters that may be covered by the
forward-looking statements contained herein or risk factors that we are faced
with that may cause our actual results to differ from those anticipated in our
forward-looking statements. Please see “Risk Factors” for additional risks
which could adversely impact our business and financial performance. Moreover,
new risks regularly emerge and it is not possible for our management to predict
or articulate all risks we face, nor can we assess the impact of all risks on
our business or the extent to which any risk, or combination of risks, may
cause actual results to differ from those contained in any forward-looking
statements. All forward-looking statements included in this prospectus are
based on information available to us on the date of this prospectus. Except to
the extent required by applicable laws or rules, we undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements
contained above and throughout this prospectus.
We estimate
that the net proceeds from the sale of the shares of common stock we are
offering will be approximately $13.6 million. If the underwriters fully
exercise the over-allotment option, the total net proceeds of the shares we
sell will be approximately $16.5 million. “Net proceeds” is what we expect to
receive after paying the underwriting discount and other expenses of the
offering. For the purpose of estimating net proceeds, we are assuming that the
public offering price will be $9.00 per share, the midpoint of the range
set forth on the cover page of this prospectus. We will not receive any
proceeds from the sale of shares by the selling stockholders.
The following table summarizes our cash and cash equivalents and capitalization as of March 31, 2011:
The following table
illustrates the pro forma increase in net tangible book value of $1.54 per
share and the dilution (the difference between the offering price per share and
net tangible book value per share) to new investors:
To the extent any of these
outstanding options or warrants is exercised, the dilution to new investors
would be reduced. To the extent all of such outstanding options and warrants
had been exercised as of March 31, 2011, the pro forma as adjusted net tangible
book value per share after this offering would be $3.68, and total dilution per
share to new investors would be $5.32.
If the
underwriters exercise in full their option to purchase additional shares, the number
of shares of our common stock held by existing stockholders will be reduced to
67.0% of the total shares outstanding, and the number of shares of our common
stock held by new investors will be increased to 2,626,600 shares, or 33.0% of
total shares of our common stock outstanding.
We derived the
statement of operations data for the years ended December 31, 2008, 2009 and
2010, and balance sheet data as of December 31, 2008, 2009 and 2010 from the
audited financial statements in this prospectus. Those financial statements
were audited by RSM Richter S.E.N.C.R.L./LLP, independent auditors. We derived
the statement of operations data for the year ended December 31, 2008 and the
balance sheet data as of December 31, 2008 from audited financial statements
that are not included in the prospectus. We derived the statement of operations
data for the years ended December 31, 2009 and 2010 and balance sheet data as
of December 31, 2009 and 2010 from the audited consolidated financial statements
included in this prospectus. We derived the statement of operations data
for the three months ended March 31, 2011 and 2010 and the balance sheet data
at March 31, 2011 from the unaudited financial statements in this prospectus. Our
management believes that the unaudited, non-GAAP historical financial statement
information contains all adjustments needed to present fairly the information
included in those statements, and that the adjustments made consist only of
normal recurring adjustments.
(In thousands, except per share data)
December 31,
March 31,
(In thousands, except per share data)
December 31,
March 31,
Financial Condition and Results of Operations
We intend to effectuate a
one-for-five reverse stock split, in order to comply with the listing
requirements of Nasdaq Capital Market. Such reverse stock split would
immediately increase our stock price. In addition, such reverse stock split
would reduce the number of shares of common stock outstanding and may affect
the liquidity of our common stock. The reverse stock split is expected to occur
the day immediately following the effectiveness of the registration statement of which
this prospectus is a part.
Balance
Sheet
Earnings
Balance Sheet
of
Earnings
Balance Sheet
Statements of
Earnings
Ended
Average
Average
Average
Average
Average
Average
Three Months Ended March 31, 2011 Compared to Three Months
Ended March 31, 2010
Provision for Income Taxes. Our provision for income taxes reflects an
effective tax rate on earnings before income taxes of 32.5% during the three
months ended March 31, 2011 compared to 29.2% in the three months ended March
31, 2010. Our effective tax rate increased for the three months ended March 31,
2011 as a result of certain operating losses from our Pioneer Wind Energy
Systems Inc. business for which we did not recognize a future tax benefit
beyond what has already been recorded.
Net Earnings. We generated net earnings of $2.9 million for the year ended December
31, 2010, down 42.4% from approximately $5.1 million during the year ended
December 31, 2009. Our net earnings benefited from the acquisition of Jefferson
Electric, Inc. during 2010, but were negatively impacted by weaker sales and
earnings from our Pioneer Transformers Ltd. subsidiary and significantly higher
selling, general and administrative expenses during the year ended December 31,
2010, as compared to the year ended December 31, 2009. Earnings per basic and
diluted share was $0.50 for the year ended December 31, 2010, as compared to
$1.10 per basic and diluted share for the year ended December 31, 2009 (each as
adjusted for the anticipated one-for-five reverse stock split of our common
stock that is expected to occur the day immediately following the effectiveness of the
registration statement of which this prospectus is a part). There were 1.3
million additional weighted average diluted shares outstanding during the year
ended December 31, 2010, as compared to the year ended December 31, 2009, an
amount which reflects the completion of our share exchange and private
placement transactions during the fourth quarter of 2009, as well as the
issuance of our common shares in conjunction with the acquisition of Jefferson
Electric, Inc.
General. At March 31, 2011, we had cash and
cash equivalents of approximately $0.1 million and total debt, including
capital lease obligations, of $6.2 million. At December 31, 2010, we had
cash and cash equivalents of approximately $0.5 million and total debt, including
capital lease obligations, of $6.1 million. We have historically met our
cash needs through a combination of cash flows from operating activities
and bank borrowings. Our cash requirements are generally for operating activities,
debt repayment and capital improvements. We believe that working capital,
borrowing capacity available under our credit facilities and funds generated
from operations should be sufficient to finance our cash requirements for
anticipated operating activities, capital improvements and principal repayments
of debt through at least the next 12 months.
The credit facilities
require Pioneer Transformers Ltd. to comply with various financial covenants,
including maintaining a minimum debt service coverage ratio of 1.25, a minimum
current ratio of 1.20 and a maximum total debt to tangible net worth ratio of
2.50. The credit facilities also restrict the ability of Pioneer Transformers
Ltd. to make investments or advances to affiliated or related companies without
the lender’s prior written consent. The demand revolving credit facility is
subject to margin criteria and borrowings bear interest at the bank’s prime
rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or the U.S.
base rate plus 0.75% per annum on amounts borrowed in U.S. dollars. Borrowings
under the term loan facility bear interest at the bank’s prime rate plus 1.0%
per annum. As of March 31, 2011 we had no borrowings outstanding under the
credit facilities and we were in compliance with their financial covenant
requirements.
Capital Expenditures. In September 2009, we commenced an
expansion of our Pioneer Transformers Ltd. plant that increased our
manufacturing facilities and office space by approximately 6,000 square feet. The
capital budget for the project was approximately $2.0 million, including
machinery and equipment, and the project was substantially complete by March
31, 2011. The cost of the project was funded through cash flow from operations.
We have no major future capital projects planned, or significant replacement
spending anticipated, during 2011.
On March 31, 2010, in
conjunction with announcing our annual financial results for the fiscal year
ended December 31, 2010, we commenced an investor relations policy of
providing guidance for expected annual revenue and earnings for the year in
progress. Our guidance for the year ending December 31, 2011 includes the
acquisitions of Transformateur Bemag Inc. and Vermont Transformer Inc. and
excludes non-recurring costs and income, if any. In addition, for the purpose
of translating the financial results of our Canadian operations to U.S.
dollars, we have assumed a constant foreign exchange rate at parity ($USD/CAD:
1.00) throughout the year.
Revenue. We expect our consolidated revenue in the year ending December
31, 2011 to be between $74 and $85 million, consisting of approximately $71 to
$78 million from our electrical transformer businesses and approximately $3 to
$7 million from our wind energy equipment and services business. Our expected
growth assumption in our electrical transformer segment reflects 20% to 30%
year-over-year growth for each of Pioneer Transformers Ltd. and Jefferson
Electric, Inc., plus the benefit of including twelve months of Jefferson
Electric, Inc. results during 2011, and the inclusion of approximately six
months of results in 2011 for Transformateur Bemag Inc. and Vermont Transformer
Inc. following the acquisitions. Our revenue expectation for Pioneer Wind
Energy Systems Inc. reflects a portion of the pipeline of sales opportunities
we are presently focused on. Our actual results in our wind energy segment
could deviate significantly from our revenue guidance depending on
unanticipated changes in timing and on the ultimate terms and pricing we are
able to achieve with customers for each power project, if any.
(In thousands, except per share data)
December 31,
March 31,
We believe a disciplined
acquisition program is a key component to accelerating our growth and we intend
to pursue opportunities to acquire businesses that broaden the range of
customer solutions we provide, increase our market share or expand our
geographic reach. In addition to transformer manufacturers, we also intend to
acquire producers of other technically-advanced, customized, ancillary or
complementary products which address market segments where we seek penetration
-- such as in power quality and conditioning. We operate in a highly fragmented
industry that is served by a few global diversified electrical equipment
manufacturers and numerous small manufacturing companies that provide niche
products and services to various sub-segments of the power transmission and
distribution market. We favor candidates that have competencies and business
characteristics similar to our own, and those that we expect will benefit from
some of the major trends affecting our industry. Our 2010 acquisition of Jefferson
Electric, Inc. and our pending acquisition of Transformateur Bemag Inc.
are examples of the implementation of our acquisition strategy.
3 kVA to 75 kVA
15 kVA to 1 MVA
Backlog reflects the amount
of revenue we expect to realize upon the shipment of customer orders for our
transformer products that are not yet complete or for which work has not yet
begun. Our sales backlog as of March 31, 2011 was approximately $18.2 million, as compared to
approximately $18.7 million and approximately $16.5 million as of December 31, 2010 and 2009, respectively.
We anticipate that substantially all of our current backlog will be delivered
during 2011. Orders included in our sales backlog are represented by customer
purchase orders and contracts that we believe to be firm. As of March 31,
2011, there was no backlog for our wind energy business.
At June 6, 2011, we had 215
employees consisting of 62 salaried staff and 153 hourly workers. We also had
two part-time employees. Our hourly employees located at our plant in Granby,
Quebec, Canada are covered by a collective bargaining agreement with the United
Steel Workers of America Local 9414 that expires in May 2015. The hourly
employees located at our manufacturing facility in Reynosa, Mexico are also
covered by a collective bargaining agreement with a local labor union that has an indefinite term, subject
to annual review and negotiation of key provisions. We consider our
relationship with our employees to be good.
We have two manufacturing
facilities, one located in Granby, Quebec, Canada, and the other located in
Reynosa, Mexico. Our Granby facility was built in 1962 and consists of
approximately 44,000 square feet. The facility sits on approximately 25 acres
in the town of Granby which is located approximately 40 miles east of Montreal.
We own both the facility and the land through our wholly-owned subsidiary,
Bernard Granby Realty, Inc. Our Reynosa facility consists of approximately
52,000 square feet of manufacturing and office space and is leased for
approximately $24,000 per month under a lease that expires in 2013. The lease
includes an option to renew for an additional five years at the same lease
rate. We also lease a 22,000 square foot centralized logistics facility in
Pharr, Texas for approximately $12,000 per month under a lease that expires in
2013.
Audit Committee. We established an audit committee of the board of directors on March
24, 2011. The audit committee consists of Messrs. Cohn, Ross and Tulkoff, each
of whom our board has determined to be financially literate and qualify as an
independent director under Section 5605(a)(2) of the rules of the Nasdaq Stock
Market. In addition, Mr. Ross qualifies
as a financial expert, as defined in Item 407(d)(5)(ii) of Regulation S-K. The
audit committee’s duties are to recommend to our board of directors the
engagement of independent auditors to audit our financial statements and to
review our accounting and auditing principles. The audit committee will review
the scope, timing and fees for the annual audit and the results of audit
examinations performed by the internal auditors and independent public
accountants, including their recommendations to improve the system of
accounting and internal controls.
($)
($)
($)
Compensation
($)
($)
(principal executive officer)
Treasurer and Director
and Director
All share amounts noted in
the section have been adjusted to reflect the anticipated one-for-five reverse
stock split that is expected to occur the day immediately following the effectiveness of
the registration statement of which this prospectus is a part.
Securities
Underlying
Unexercised
Options
(#)
Securities
Underlying
Unexercised
Options
(#)
Exercise
On December 2, 2009, our
board of directors and stockholders adopted the 2009 Equity Incentive Plan,
pursuant to which 320,000 shares of our common stock were reserved for issuance
as awards to employees, directors, consultants and other service providers. The
purpose of the 2009 Equity Incentive Plan was to provide an incentive to
attract and retain directors, officers, consultants, advisors and employees
whose services are considered valuable, to encourage a sense of proprietorship
and to stimulate an active interest of such persons in our development and
financial success. Under the 2009 Equity Incentive Plan, we were authorized to
issue incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended, non-qualified stock options,
restricted stock, stock appreciation rights, performance unit awards and stock
bonus awards. The 2009
to Options
2011 Long-Term Incentive Plan
Paid in Cash
($)
Awards
($)(1)
($)
to Options (1)
The discussion below gives
effect to the anticipated one-for-five reverse stock split of our common stock
that is expected to occur the day immediately following the effectiveness of the
registration statement of which this prospectus is a part.
The following table sets
forth information with respect to the beneficial ownership of our common stock
as of the date of this prospectus by:
Beneficially Owned (1)
Beneficially
Owned (1)
The following table sets
forth information with respect to the beneficial ownership of our common stock
as of the date of this prospectus by each of our stockholders that will sell shares of common stock in this
offering.
Before Offering
After Offering
Shares
Being
Offered (1)
On December 2, 2009, we
entered into a share exchange agreement with Pioneer Transformers Ltd. and
Provident Pioneer Partners, L.P., the sole stockholder of Pioneer Transformers
Ltd. Pursuant to the share exchange agreement, on December 2, 2009, Provident
Pioneer Partners, L.P. transferred all of the issued and outstanding capital
stock of Pioneer Transformers Ltd. to us in exchange for (i) 4,560,000 newly
issued shares of our common stock and (ii) a five year warrant to purchase up
to 200,000 shares of our common stock at an exercise price of $16.25 per share
(each as adjusted for the anticipated one-for-five reverse stock split of our
common stock that is expected to occur the day immediately following the effectiveness
of the registration statement of which this prospectus is a part). Nathan J.
Mazurek, our chief executive officer, president and chairman of the board of
directors, is the control person of Provident Canada Corp., the general partner
of Provident Pioneer Partners, L.P.
The discussion
below gives effect to the
anticipated one-for-five reverse stock split of our common stock that is
expected to occur the day immediately following the effectiveness of the registration
statement of which this prospectus is a part.
We are authorized to issue
30,000,000 shares of common stock and 5,000,000 shares of preferred stock. As
of the date of this prospectus, there are 5,907,255 shares of common stock issued and outstanding and no
shares of preferred stock issued and outstanding.
In connection with our $5
million private placement of common stock on December 2, 2009, we agreed to use
our best efforts to file a registration statement with the Securities and
Exchange Commission on or before February 1, 2010 covering the resale of the
shares of common stock issued in such private placement, and to cause such
registration statement to be declared effective by the Securities and Exchange
Commission on or before May 31, 2010. As required, we filed a registration
statement on January 25, 2010, which was declared effective on April 20, 2010.
We filed a post-effective amendment to the registration statement, which was
declared effective on May 4, 2011, in order to update the registration
statement to include audited financial statements for our 2010 fiscal year.
The holders of 89.7% of our
common stock outstanding prior to this offering have also agreed not to,
subject to certain exemptions, sell or transfer any shares of our common stock
or other securities convertible into or
The discussion below gives
effect to the anticipated one-for-five reverse stock split of our common stock
that is expected to occur the day immediately following the effectiveness of the
registration statement of which this prospectus is a part.
When the offering is
completed, we will have a total of 7,607,255 shares of common stock
outstanding, assuming no exercise of the underwriters’ over-allotment option
and no exercise of outstanding stock options. The 2,284,000 shares offered by
this prospectus, assuming no exercise of the underwriters’ over-allotment
option, will be freely tradeable unless they are purchased by our “affiliates,”
as defined in Rule 144 under the Securities Act of 1933, as amended. An
additional 656,000 shares are freely tradeable unless they are purchased by our
“affiliates,” as defined in Rule 144 under the Securities Act of 1933, as
amended. The remaining 4,667,255 shares outstanding are “restricted,” which
means they were originally sold in offerings, or issued as merger
consideration, that were not subject to a registration statement filed with the
Securities and Exchange Commission. These restricted shares may be resold only
through registration under the Securities Act of 1933, as amended, or under an
available exemption from registration, such as provided through Rule 144.
The holders of 5,300,115
shares of common stock currently outstanding, or 5,799,915 shares of common
stock including shares issuable upon exercise of options and warrants, have
agreed with the representative of the underwriters to a 180 day “lock-up” with
respect to these shares. This generally means that they cannot sell these
shares during the 180 days following the date of this prospectus. See
“Underwriting” for additional details. After the 180 day lock-up period, these
shares may be sold in accordance with Rule 144 or pursuant to an effective
registration statement.
Shares
We have granted the
underwriters an over-allotment option. This option, which is exercisable for up
to 30 days after the date of this prospectus, permits the underwriters to
purchase a maximum of 342,600 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will
be $ and the total proceeds to us will be $ . The underwriters have severally
agreed that, to the extent the over-allotment option is exercised, they will
each purchase a number of additional shares proportionate to the underwriter’s
initial amount reflected in the foregoing table.
Over-Allotment Option
Exercise of
Over-Allotment Option
We estimate that our total
expenses of the offering, excluding the underwriting discount, will be
approximately $629,000. The selling stockholders will bear the cost of all
underwriting discounts, selling commissions and stock transfer taxes applicable
to the sale of common stock by them. Subject to compliance with FINRA Rule
5110(f)(2)(D), we have also
agreed to reimburse the underwriter’s accountable expenses for up to a maximum
amount of $425,000 (subject to our
approval for expenses over $225,000).
We, our officers and
directors, Provident Pioneer Partners L.P. and certain of the selling
stockholders have agreed to a 180 day “lock up” with respect to an
aggregate of 5,799,915 shares of common stock, including securities that are
convertible into shares of common stock and securities that are exchangeable
or exercisable for shares of common stock. This means that, subject to certain
exceptions, for a period of 180 days following the date of this prospectus, we
and such persons and entities may not offer, sell, pledge or otherwise dispose
of these securities without the prior written consent of Oppenheimer & Co. Inc.
At our request, the underwriters have reserved
up to 3% of the shares of common stock for sale at the public offering price to persons who are directors, officers or employees
of or who are otherwise associated with us, through a directed share program. The number of shares of common stock available for
sale to the general public will be reduced by the number of directed shares purchased by participants in the directed share program.
Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares
of common stock offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, in connection with the sales of the directed shares. Any shares purchased by our officers, directors,
selling stockholders or other existing security holders in the directed share program will be subject to the 180-day lock-up period
from the date of this prospectus, as described above. Other than the underwriting discount described
on the front cover of this prospectus, the underwriters will not be entitled to any commission with respect to shares of common
stock sold pursuant to the directed share program.
FRANCE
HONG KONG
SINGAPORE
Comptables agréés
Chartered Accountants
Montréal (Québec) H3Z 3C2
Téléphone / Telephone : (514) 934-3400
Télécopieur / Facsimile : (514) 934-3408
www.rsmrch.com
Pioneer Power Solutions, Inc.
March 31, 2011
Consolidated Statements of Earnings
(In thousands, except per share data)
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income
(Dollars in thousands)
Comprehensive
Income
paid-in
capital
earnings
other compre-
hensive (loss)
shareholders’
equity
periods presented. Operations reported for periods prior to the share
exchange are those of Pioneer Transformers Ltd.
Accounts Receivable
Foreign Currency Translation
Sales Tax
Fair Value Measurements
the beginning of the first annual reporting period on or after December
15, 2010. Early adoption is
permitted. The Company is currently
evaluating the impact of this Statement on its consolidated financial
statements.
effective for fiscal years beginning on or after December 15, 2009,
except for the disclosure regarding Level 3 activity, which is effective for
fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 for
Levels 1 and 2 did not have a material impact on the Company’s consolidated
financial statements, and the Company does not expect the adoption of the
standard for Level 3 to have a material impact on its consolidated financial
statements.
Electric, Inc.
Assets
December 31, 2010
December 31, 2009
Power
Solutions,
Inc.
Electric,
Inc.
Reported
Power
Solutions,
Inc.
Electric,
Inc.
Reported
for the Year Ended December 31,
Assets
Amortization
Net
Future
scheduled annual amortization expense for finite-lived intangible assets is as
follows (in thousands):
leases
Options
Average Exercise
Price (Per Share)
Average Remaining
Contractual Term
Intrinsic Value
On
April 30, 2010, the Company granted a five-year warrant, subject to an 18-month
lockup agreement, to purchase up to 1,000,000 shares of common stock at $3.25
per share to the former sole shareholder of Jefferson Electric, Inc. The
warrant was accounted for at its fair value amounting to $790,000, which for
accounting purposes, was included in the Jefferson Electric, Inc. purchase
price allocation.
Shares
Exercise Price
A
reconciliation from the statutory U.S. income tax rate and the Company’s
effective income tax rate, as computed on earnings before income taxes, is as
follows:
Through
the Company’s acquisition of AAER Inc., which was recognized as a purchase of
assets for accounting purposes, the Company purchased approximately $42.5
million of tax losses, among other assets. These losses are subject to
expiration over the next 18 to 20 years. In accordance with ASC 740-10-25-51
the tax effect of an asset purchase that is not a business combination in which
the amount paid differs from the tax basis of the assets acquired shall not
result in immediate income statement recognition for the difference. The
simultaneous equations method is used to record the assigned value of the asset
and the related deferred tax asset or liability. Similarly, the net tax benefit
resulting from the purchase of future tax benefits from a third party is
recorded using the same model. No consideration was allocated to the
acquisition of these losses. As of December 31, 2010, it was determined to be
more likely than not that the Company would realize approximately $700,000 of
tax loss benefits related to the acquisition. The amount assigned to the
deferred tax asset at its gross amount is $11.9 million with a valuation
allowance of $11.2 million and the excess of the net amount over the purchase
price has been recorded as a deferred credit in the amount of $700,000. The
deferred credit arising from this acquisition will be amortized to income tax
expense in proportion to the realization of the tax benefits, if any, that gave
rise to the deferred credit.
Benefit Obligation
approximately
$9,000. The estimated transitional asset amortized from accumulated other
comprehensive income into net periodic benefit cost over the next year amounts
to approximately $13,000.
Allocation
December 31,
Contributions
Consulting and
administration fee expenses
2011
2010
Consolidated Statements of
Earnings (unaudited)
(In thousands, except per share data)
Consolidated Statements of
Shareholders’ Equity and Comprehensive Income (unaudited)
(Dollars in thousands)
Comprehensive
Income
paid-in
capital
earnings
other compre-
hensive (loss)
shareholders’
equity
Business Combinations
2011
2010
The
preceding amounts are net of inventory reserves of approximately $0.4 million
at March 31, 2011 and December 31, 2010.
Assets
Assets
Amortization
Net
bank loan agreement are collateralized by substantially all the assets
of Jefferson Electric, Inc. and are guaranteed by its Mexican subsidiary. In
addition, an officer of Jefferson Electric, Inc. is a guarantor under the bank
loan agreement and has provided additional collateral to the bank in the form
of common stock and a warrant to purchase shares of common stock held by him.
2011
2010
On March
24, 2011, the Company granted an aggregate of 26,000 incentive stock options to
four employees to purchase common shares. Options to purchase 16,000 common
shares are exercisable for common shares at an exercise price of $2.40 per
share, expire on March 24, 2021 and vest over three years with one-third
vesting on the first anniversary of the date of grant and one-third vesting on
each of the second and third anniversaries of the date of grant. Options to
purchase 10,000 common shares are exercisable for common shares at an exercise
price of $2.64 per share, expire on March 24, 2016 and vest over three years
with one third vesting on the first anniversary of the date of grant and one
third vesting on each of the second and third anniversaries of the date of
grant.
Options
Average Exercise
Price Per Share
Average Remaining
Contractual Term (years)
Intrinsic Value
(in thousands)
The
following table summarizes the continuity of the Company’s warrants:
Shares
exercise price
March 31,
March 31,
Consulting and administration fee expenses
maturity date. Interest incurred on these obligations during the three
months ended March 31, 2011 and 2010 was $0 and $4,500, respectively. During
the year ended December 31, 2010, the aggregate principal amount of these
advances was repaid in full.
March 31
March 31,
Quebec and St. Albans, Vermont, generating approximately $15.0 million
of revenue annually on a combined basis. The Company anticipates that funding
for the cash portion of the transaction consideration will be provided by a new
acquisition term loan credit facility with our Canadian bank. The transactions
are expected to close at the start of the Company’s third quarter in July 2011.
Houlihan Lokey
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Lee, State of New
Jersey on June 6, 2011.