Will Financial Irregularities Topple Broadwind Energy?

Generating electricity from wind power is now a reality, but poor financial performance remains as predictable as the Santa Ana winds at Broadwind Energy. Nonetheless, officers and directors at the maker of tower support structures and gearing systems for wind turbines profit from owned interests in outside ventures that transact business with the company. Many of these activities are non-arms length transactions, according to its recent proxy filing.

With accumulated deficits of $13.3 million as of March, Broadwind survives by financing its operations primarily through stock issuance and debt, including borrowings from its founders, Raymond L. Brickner III, Terence P. Fox, Daniel P. Wergin and Christopher C. Allie.

In March 2007, to repay $1.08 million of debt owed to founders, the company issued to them collectively 722,297 shares at $1.50 per share, now worth an estimated $18.9 million! Karl Marx might detest these debt arrangements, but with risk comes return.

What bothers me, however, is that the insiders also leveraged the debt obligations to profit in any type of weather:

The manufacturing facilities for its subsidiaries -- Tower Tech, a wind tower manufacturer, and RBA, a heavy weld and machining fabricator -- are leased from City Centre, a limited liability company owned and controlled by Brickner and entities controlled by founders Wergin and Allie. Annual rent expense from Tower Tech for three fabrication facilities is $831,000.

Brad Foote Gear Works, a precision gearing systems manufacturer, acquired for $133.2 million in August 2007, from Broadwind's current CEO, J. Cameron Drecoll, came with its own particular purchase agreement. This platform subsidiary agreed to purchase two real estate parcels from Drecoll's wife for an aggregate $3.6 million. Unclear as to what the capital gain was for the Drecoll family.

Insider dealings are not the only troubling issue plaguing Broadwind. The company disclosed in its 2007 annual filing that accounting weaknesses exist in its internal audit control procedures, including material deficiencies in reporting of quarterly financial reports (unauthorized access to ledgers!) and limited detailed procedures in place to document operating costs.

In lending $500,000 to the company for "working capital requirements," Charles H. Beynon, chairman of the audit committee, purchased 62,814 of common stock at a sharp discount of $7.96 per share on April 24, 2008; the stock closed that day at $12.25. Beynon's stake is now worth $1.6 million.

Does anyone else see a financial storm brewing at Broadwind Energy?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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