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As filed with the Securities and Exchange Commission on May 26, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

Securities Act of 1933

 

 

POWER SOLUTIONS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		3510		33-0963637
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

655 Wheat Lane

Wood Dale, IL 60191

(630) 350-9400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Gary S. Winemaster

Chief Executive Officer and President

Power Solutions International, Inc.

655 Wheat Lane

Wood Dale, IL 60191

(630) 350-9400

(Name, address, including zip code, and telephone number including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

Mark D. Wood

Katten Muchin Rosenman LLP

525 W. Monroe Street

Chicago, IL 60661

Tel.: (312) 902-5200

 

 

Approximate date of commencement of proposed sale to the public: From time to time 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 check the following box.    þ

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.    ¨

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.    ¨

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.    ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Securities to be Registered		Amount to be Registered		Proposed Maximum Offering Price Per Share		Proposed Maximum Aggregate Offering Price		Amount of Registration Fee
Common Stock, $0.001 par value per share		75,360,014 (1)		$1.26 (2)		$94,953,618 (2)		$11,025

 

(1)

This Registration Statement registers the offer and sale of 75,360,014 shares of common stock, par value $0.001 per share of the registrant, of which 48,000,007 shares will be issuable upon conversion of the registrant’s Series A Convertible Preferred Stock, and the remaining 27,360,007 of which will be issuable upon exercise of warrants to acquire common stock, in each case previously issued by the registrant. In addition, there are being registered hereunder such additional number of shares of common stock of the registrant, of a currently indeterminable amount, as may from time to time become issuable by reason of stock splits, stock dividends or similar transactions, which shares of common stock are registered hereunder pursuant to Rule 416.

(2)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) based on the average of the bid and asked prices of the common stock reported on the over-the-counter markets on May 24, 2011.

 

 

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 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

 

 

Subject to completion, dated May 26, 2011

Prospectus

POWER SOLUTIONS INTERNATIONAL, INC.

75,360,014 Shares of Common Stock

 

 

This prospectus relates to the sale or other disposition from time to time by selling securityholders of some or all of any shares of our common stock (1) issuable from time to time upon (a) conversion of shares of our Series A Convertible Preferred Stock (the “Preferred Stock”), and (b) exercise of warrants representing the right to purchase initially an aggregate of 24,000,007 shares of our common stock (the “Warrants”), in each case originally issued by us pursuant to the Purchase Agreement, dated as of April 29, 2011, by and among us and the investors party thereto (the “Private Placement Purchase Agreement”), and (2) issuable from time to time upon exercise of a warrant issued to Roth Capital Partners, LLC, as compensation for its role as placement agent in connection with the Private Placement (as defined and described below under “Prospectus Summary – About This Offering”), representing the right to purchase initially an aggregate of 3,360,000 shares of our common stock (the “Roth Warrant”).

Each share of Preferred Stock is initially convertible into shares of our common stock at any time at the election of the holder thereof, subject to the limitations on conversion set forth in the Certificate of Designation of the Preferred Stock (the “Certificate of Designation”) (as described below), at an initial conversion price of $0.375 per share, subject to adjustment as set forth in the Certificate of Designation. After giving effect to the Reverse Split (as defined and described below under “Description of Capital Stock – Reverse Split and Migratory Merger”), as if it occurred on or prior to the date hereof, the conversion price at which each share of Preferred Stock will convert into shares of our common stock would be $12.00 per share.

The Warrants have an initial exercise price of $0.40625 per share, subject to adjustment, and the Roth Warrant has an initial exercise price of $0.4125 per share, subject to adjustment. None of the Warrants or the Roth Warrant are exercisable prior to the effectiveness of the Reverse Split. Giving effect to the Reverse Split, as if it occurred on or prior to the date hereof, the Warrants would represent the right to purchase an aggregate of 750,002 shares of our common stock, at an exercise price of $13.00 per share, and the Roth Warrant would represent the right to purchase an aggregate of 105,000 shares of our common stock, at an exercise price of $13.20 per share. Each of the Warrants and the Roth Warrant will expire on April 29, 2016.

The selling securityholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of our common stock or interests in shares of our common stock received after the date of this prospectus from a selling securityholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of our common stock or interests in shares of our common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. If these shares are sold through underwriters, broker-dealers or agents, the selling securityholders will be responsible for underwriting discounts or commissions or agents’ commissions.

None of the Preferred Stock, the Warrants or the Roth Warrant is listed on an exchange, and we do not intend to list the Preferred Stock, the Warrants or the Roth Warrant on any exchange.

Our common stock is quoted on the OTC Bulletin Board and the OTC Markets – OTCQB tier under the symbol “PSIX.” On May 24, 2011, the last reported closing bid price of our common stock was $0.51 per share. These over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. You are urged to obtain current market quotations of the common stock.

 

 

Investing in the securities involves a high degree of risk. See “Risk Factors” beginning on page 3 of this prospectus.

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of the securities offered hereby or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is                     , 2011

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Table of Contents

 

		Page
Prospectus Summary			1
Risk Factors			3
Cautionary Note Regarding Forward-Looking Statements			20
Use of Proceeds			21
Dividend Policy			21
Price Range of Common Stock			22
Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Business			38
Management			59
Executive Compensation			63
Security Ownership of Certain Beneficial Owners and Management			70
Selling Securityholders			73
Certain Relationships and Related Party Transactions			81
Description of Capital Stock			85
Plan of Distribution			91
Legal Matters			93
Experts			93
Where You Can Find More Information			93
Index to Financial Statements			F-1
Index to Unaudited Pro Forma Combined Financial Statements			P-1

 

 

ABOUT THIS PROSPECTUS

Upon the closing of the Reverse Merger (as defined and discussed below under “Business – Company History”), Power Solutions International, Inc. (f/k/a Format, Inc.), a Nevada corporation, succeeded to the business of The W Group, Inc., a Delaware corporation (“The W Group”). In connection with the Reverse Merger, effective April 29, 2011, we changed our corporate name to Power Solutions International, Inc. Unless the context otherwise requires, “we,” “our,” “us,” “our company” and similar expressions used in this prospectus refer to The W Group and its consolidated subsidiaries, collectively, prior to the closing of the Reverse Merger on April 29, 2011, and Power Solutions International, Inc. (f/k/a Format, Inc.), as successor to the business of The W Group, and its consolidated subsidiaries, collectively, following the closing of the Reverse Merger.

This prospectus is part of a registration statement that we filed with the SEC.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus is offering to sell, and is seeking offers to buy, the securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of our common stock.

We may provide a prospectus supplement containing specific information about the terms of a particular offering by the selling securityholders, or their transferees. The prospectus supplement may add, update or change information in this prospectus. If information in a prospectus supplement is inconsistent with the information in this prospectus, you should rely on the information in that prospectus supplement. You should read both this prospectus and, if applicable, any prospectus supplement hereto. See “Where You Can Find More Information” for more information.

 

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This prospectus includes industry and market data and other information, which we have obtained from, or is based upon, market research, independent industry publications or other publicly available information. Although we believe each such source to have been reliable as of its respective date, we have not independently verified the information contained in such sources. Any such data and other information is subject to change based on various factors, including those described below under the heading “Risk Factors” and elsewhere in this prospectus.

 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should consider carefully the risks, uncertainties and other factors described below, in addition to the other information set forth in this prospectus, before deciding whether to invest in shares of our common stock. Any of these risks, uncertainties and other factors could materially and adversely affect our business, financial condition, results of operations, cash flows or prospects. In that case, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock. See also “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to our Business and our Industry

Our financial position, results of operations and cash flows have been, and may continue to be, negatively impacted by the current challenging global economic conditions and the recent financial crisis.

The current challenging global economic conditions, which have had a particularly severe impact on industrial markets, have had, and may continue to have, a material adverse effect on our business. More specifically, such conditions resulted in significantly reduced demand in 2009 for our power systems and other products from our industrial OEM customers, as those customers faced sharp declines in market demand for their products into which our power systems are incorporated. Our net sales decreased 34% from 2008 to 2009, primarily due to lower power system shipment volumes and aftermarket parts sales resulting from this reduced demand. This sales decrease was reflected across our base of customers in all of the OEM categories in which our power solutions are utilized. The difficult market conditions continue to affect our sales environment. As a result, among other things, we are experiencing pricing pressure, which is negatively impacting our margins.

The current difficult economic climate and future economic downturns may continue to materially impact our OEM customers, as well as suppliers and other parties with which we do business. Economic conditions that adversely affect our customers may cause them to terminate existing supply agreements or to reduce the volume of power systems they purchase from us in the future. In the case of a further economic downturn, we may have significant balances owing from customers that face liquidity issues. Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations and financial condition. Similarly, with adverse market conditions, our key suppliers from which we source power system components may be unable to provide components to us. Furthermore, we may not be able to successfully anticipate, plan for and respond to changing economic conditions, and our business could be negatively affected.

In addition, the recent financial troubles affecting the banking system and financial markets and the on-going concerns and threats to investment banks and other financial institutions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit and equity markets. There could be a number of follow-on effects from the credit crisis on the industrial OEM industry generally and on our business specifically. Our OEM customers may be unable to obtain credit to finance purchases of their inventory (thus reducing demand for our power systems), or to honor their obligations to us, or may become insolvent. In addition, our key suppliers may make changes in the credit terms they extend to us, such as shortening the required payment period for our amounts owing them or reducing the maximum amount of trade credit available to us, or may become insolvent.

The market for alternative fuel spark-ignited power systems may not develop according to our expectations and, as a result, our business may not grow as planned and our business plan may be adversely affected.

Our future growth is dependent upon the market for efficient alternative fuel spark-ignited power systems (including natural gas and propane) expanding as a result of our customers and potential customers substituting alternative fuel power systems for diesel power systems. Part of our business plan is dependent on our market forecasts with respect to this expected substitution trend. However, there can be no assurance that we can accurately predict the potential impact of new diesel emission regulations, which we assume will help drive this trend by increasing the cost and product footprint of diesel power systems, nor can we assure that customers or potential customers would substitute natural gas and propane powered power systems for diesel power systems in response to

 

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these regulations. In addition, to the extent that diesel power system manufacturers develop the ability to design and produce emission-compliant diesel power systems that they can sell at a lower price and have smaller product footprints than we currently expect, diesel power systems will be more competitive with our alternative fuel power solutions, and customers and potential customers may be less likely to substitute alternative fuel power systems for diesel power systems. Furthermore, even if alternative fuel power systems are substituted for diesel power systems, there can be no assurance that our power systems would capture any portion of this potential market size increase. If the industrial OEM market generally, or more specifically any of the industrial OEM categories which represent a significant portion of our business or in which we anticipate significant growth opportunities for our power systems, fails to develop or develops more slowly than we anticipate, the growth of our business and our business plan could be materially adversely affected.

Changes in environmental and regulatory policies could hurt the market for our products.

Our business is affected by government environmental policies, mandates and regulations around the world, most significantly with respect to emission standards in the United States. Examples of such regulations include those that (1) restrict the sale of power systems that do not meet emission standards, (2) impose penalties on sellers of non-compliant power systems, and (3) require the use of more expensive ultra-low sulfur diesel fuel. There can be no assurance that these policies, mandates and regulations will be continued or expanded as assumed in our growth strategy. Incumbent industry participants with a vested interest in gasoline and diesel, many of which have substantially greater resources than we do, may invest significant resources in an effort to influence environmental regulations in ways that delay or repeal requirements for more stringent carbon, particulate matter and other emissions.

We generally must obtain product certification from both the EPA and CARB to sell our products in the United States. We may attempt to expand sales of our power systems to industrial OEMs that sell their products in Europe, which also has stringent emissions requirements. Accordingly, future sales of our product will depend upon their being certified to meet the existing and future air quality and energy standards imposed by the relevant regulatory agencies. We cannot assure you that our products will continue to meet these standards. We incur significant research and developments costs to ensure that our products comply with emission standards and meet certification requirements in the regions where our products are sold. The failure to comply with certification requirements would not only adversely affect future sales but could result in the recall of our products or civil or criminal penalties.

The adoption of new, more stringent and burdensome government emission regulations, whether at the foreign, federal, state, or local level, in markets in which we supply our power systems, may require modification of our emission certification and other manufacturing processes for our power systems. Thus, we might incur unanticipated expenses in meeting future compliance requirements, and may be required to increase our research and product development expenditures. Increases in such costs and expenses could necessitate increases in the prices we charge our OEM customers for our power systems, which could adversely affect demand for them.

We currently face, and will continue to face, significant competition, which could result in a decrease in our revenue.

The market for our products and related services is intensely competitive, subject to rapid change and sensitive to new product and service introductions and changes in technical requirements. New developments in power system technology may negatively affect the development or sale of some or all of our power systems or make our power systems uncompetitive or obsolete. Other companies, some of which have longer operating histories, greater name recognition and greater financial and marketing resources than us, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, certain of our products and power system technologies. If the markets for our products (including particular industrial OEM market categories) grow as we anticipate, competition may intensify, as existing and new competitors identify opportunities in such markets.

We face competition from companies that employ current power system technologies, and may face competition in the future from additional companies as new power system technologies are adopted. Among our competitors are fuel system providers such as Westport Innovations, Inc., Fuel System Solutions and Woodward Governor, Inc., which supply engines and engine system components to the industrial OEM marketplace.

 

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Additionally, we may face competition from companies developing technologies such as cleaner diesel engines, bio-diesel, fuel cells, advanced batteries and hybrid battery/internal combustion power systems. We may not be able to incorporate such technologies into our product offerings, or may be required to devote substantial resources to doing so. The success of our business depends in large part on our ability to provide single assembly, integrated, comprehensive, technologically sophisticated power solutions to our customers. The development or enhancement by our competitors of similar capabilities could adversely affect our business.

Our industrial OEM customers may not continue to outsource their power system needs.

The purchasers of our power systems are industrial OEMs that manufacture industrial equipment. As a result of the significant resources and expertise required to develop and manufacture emission-certified power systems, these customers have historically chosen to outsource production of power systems to us. Our business depends in significant part on our industrial OEMs continuing to outsource design and production of power systems, power system components and subsystems. However, there can be no assurance that our OEM customers will continue to outsource, or outsource as much of, their power system production in the future. Industrial OEMs that otherwise might utilize our power systems may instead seek to internalize the production of these power systems and related components. Increased levels of OEM vertical integration could result from a number of factors, such as shifts in our customers’ business strategies, acquisition by a customer of a power system manufacturer or the emergence of low-cost production opportunities in foreign countries.

We are dependent on certain products and industrial OEM market categories for a significant share of our revenues and profits.

During fiscal 2010, a significant portion of our revenues were derived from sales of our power systems to be incorporated into equipment used in the power generation market category, and we anticipate that sales of power systems in the power generation market category will continue to represent a significant portion of our revenues for the foreseeable future. We further believe that our growth may depend in a significant part upon our ability to increase sales of our power systems in the oil and gas market category, as well as certain other industrial OEM categories. There can be no assurance that the oil and gas market category, or any other industrial market category into which we sell our power systems, will grow as quickly or as significantly as we expect (if at all), or that the current, or any future, demand for our power systems in any of these market categories will not decrease.

Failure to raise additional capital or to generate the significant capital necessary to continue our growth could reduce our ability to compete and could harm our business.

We may need to raise additional capital in the future, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. Our current credit facility contains covenants restricting our ability to enter into additional debt financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources – Credit agreement” for a description of our credit facility. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. Furthermore, if we engage in additional debt financing, the holders of debt would have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness, and take other actions that would otherwise be in the interests of our shareholders and force us to maintain specified liquidity or other ratios. If we need additional capital and cannot raise it on acceptable terms, we may not, among other things, be able to:

 

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continue to expand our research and product development operations and sale and marketing organization;

 

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expand operations both organically and through acquisitions; or

 

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respond to competitive pressures or unanticipated working capital requirements.

 

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We are dependent on relationships with our OEM customers.

Our power systems are integrated into our OEM customers’ equipment for subsequent sales and distribution to end-users of off-highway industrial equipment. Historically, a limited number of our OEM customers account for significant portions of our revenues. We do not currently have formal, written agreements with some of our largest customers. There can be no assurance that our current material customers, or industrial OEMs in general, will continue manufacturing equipment that utilizes our power systems or, if they do manufacture such equipment, that the end-users of our OEM customers will choose to purchase products into which our power systems are incorporated. Any integration, design, manufacturing or marketing problems encountered by our OEM customers could adversely affect the demand for our power systems and the ability of our OEM customers to timely pay us amounts due for our products and services. Any change in our relationships with any of our key OEM customers, whether as a result of economic or competitive pressures or otherwise, including any decision by our OEM customers to reduce their commitments to purchase our power systems in favor of competing products, could have a material adverse effect on our business and financial results.

In addition, we may be subject to disputes arising from agreements and other arrangements with our OEM customers. Disputes with our OEM customers could lead to termination of arrangements with our OEM customers and delays in collaborative development or commercialization of power systems that we design for, and supply to, these customers. Moreover, disagreements may arise with our OEM customers over rights to proprietary technology and other intellectual property incorporated in our power systems and our customers’ products into which our power systems are integrated. Significant disagreements with our OEM customers could result in costly and time-consuming litigation. Any such conflicts with our OEM customers could negatively impact our relationships, reduce the number of power systems which we supply, and negatively impact our ability to obtain future business, in each case with these and other OEM customers.

We are dependent on relationships with our material suppliers, and the partial or complete loss of one of these key suppliers, or the failure to find replacement suppliers or manufacturers in a timely manner, could adversely affect our business.

We have established relationships with third party engine and fuel system suppliers and other suppliers from which we source our internally designed components for our power systems. However, we do not currently have formal, written agreements with some of these suppliers. We are substantially dependent on our third party engine suppliers. If any of our three key engine suppliers, Caterpillar/Perkins, General Motors and Doosan, fails to provide engines in a timely manner or to supply engines that meet our quality, quantity or cost requirements, and we are unable to obtain substitute sources in a timely manner or on terms acceptable to us, our ability to manufacture our products could be adversely affected. In addition, we currently source certain components used in our power systems, including our fuel systems, on an exclusive basis for a substantial portion of our power systems. The technology incorporated into the fuel systems and other of these components that we source on an exclusive basis is technologically sophisticated, and we believe it provides us with a competitive advantage. If our exclusive relationship with any of these suppliers were to terminate, or if any of these suppliers were to be acquired, our competitors may gain access to this sophisticated technology which may harm our business. Further, if any suppliers from which we exclusively source components are unable to provide these components in a timely manner, or are unable to meet our quality, quantity or cost requirements, we may be unable to obtain a substitute source. Any extended delay in receiving engines, fuel systems or other critical components could impair our ability to deliver products to our OEM customers. We could incur significant costs if we are forced to use alternative suppliers.

The quality and performance of our power systems are, in part, dependent on the quality of their component parts that we obtain from various suppliers, which makes us susceptible to performance issues that could materially and adversely affect our business, reputation and financial results.

Our power systems are sophisticated and complex, and the success of our power systems is dependent, in part, upon the quality and performance of key components, such as engines, fuel systems, generators, breakers, and complex electrical components and associated software. There can be no assurance that the power system parts and components will not have performance issues from time to time, and the warranties provided by our suppliers may not always cover the potential performance issues. We may face disputes with our suppliers with respect to those performance issues and their warranty obligations, and our customers could claim damages as a result of such performance issues.

 

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We maintain a significant investment in inventory, and a decline in our customers’ purchases could lead to a decline in our sales and profitability.

We cannot always predict the timing, frequency or size of the future orders of our OEM customers. Our ability to accurately forecast our sales is further complicated by the current global economic uncertainty. We maintain significant inventories in an effort to ensure that our OEM customers have a reliable source of supply. If we fail to anticipate the changing needs of our customers and accurately forecast our customer demands, our customers may not continue to place orders with us, and we may accumulate significant inventories of products that we will be unable to sell or return to our suppliers. This may result in a significant decline in the value of our inventory and a decrease in our future gross profit.

Changes in our product mix could materially and adversely affect our business.

The margins on our revenues from some of our product and service offerings are higher than the margins on some of our other product and service offerings. In particular, the margins vary between sales of our power systems as compared to sales of our aftermarket parts and components. Our margins can also fluctuate based upon competition, alternative products and services, operating costs and contractual factors. In addition, we may not be able to accurately estimate the margins of some of our new and developing products and services due to our limited operating history with sales of these products. Our new products and services may have lower margins than our current products and services.

While margins differ across the range of our power systems, prices for our power systems generally vary based on the relative sizes in terms of horsepower of the power systems. For example, if a greater proportion of our revenues are generated from sales of our lower-power power systems, our total revenues and profits may be lower than what they would be if we sold a comparable number of larger power systems, even if margins on these smaller power systems are greater.

We derive a substantial majority of our revenues attributed to our diesel power systems business from our relationships with Perkins and Caterpillar.

We derive a significant portion of our diesel power systems business from our distributor agreement with Perkins, packaging and distribution agreements with Caterpillar engine dealers and our association with Caterpillar. Our business with Perkins and Caterpillar represented approximately 19% and 20% of our revenues in fiscal 2010 and fiscal 2009, respectively. Any change in our relationships with Perkins and Caterpillar, including the termination of our agreements with Perkins or Caterpillar engine dealers, could have a material adverse effect on our business and financial results.

Fuel price differentials are hard to predict and may have an adverse impact on the demand for our products in the future.

The prices of various fuel alternatives are subject to fluctuation, based upon many factors, including changes in resource bases, pipeline transportation capacity for natural gas, refining capacity for crude oil and government excise and fuel tax policies. The price differential among various fuel alternatives can impact OEMs and their decisions to buy power systems from us. For example, if fossil fuel prices increase significantly, OEMs may choose to seek power systems powered by electric motors instead of ones that utilize fossil fuels. Furthermore, if OEMs do decide to purchase power systems from us, relative fuel prices may affect which power systems they purchase from us. The margins on our sale of certain of our power systems are higher than the margins on other power systems that we sell to our OEM customers. See “—Changes in our product mix could materially and adversely affect our business.”

 

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Price increases in some of the key components in our power systems could materially and adversely affect our operating results and cash flows.

The prices of some of the key components of our power systems are subject to fluctuation due to market forces beyond our control, including changes in the costs of raw materials incorporated into these components. Such price increases occur from time to time due to spot shortages of commodities, increases in labor costs or longer-term shortages due to market forces. In particular, the prices of certain precious metals used in our emissions control systems have recently increased significantly. Substantial increases in the prices of raw materials used in components which we source from our suppliers may result in increased prices charged by our suppliers. If we incur price increases from our suppliers for key components in our power systems, our operating costs will increase. Given competitive market conditions and contractual pricing limitations, we may not be able to pass all or any of those cost increases on to our OEM customers in the form of higher sales prices. To the extent our competitors do not suffer comparable component cost increases, we may have even greater difficulty passing along price increases and our competitive position may be harmed. As a result, increases in costs of key components may adversely affect our margins and otherwise adversely affect our operating results and cash flows.

Many of our power systems involve long and variable design and sales cycles, which could have a negative impact on our results of operations for any given quarter or year.

The design and sales cycle for our customized power systems, from initial contact with our potential OEM customer to the commencement of shipments of our power systems, may be lengthy. Customers generally consider a wide range of issues before making a decision to purchase our power systems. Before an industrial OEM commits to purchase our power systems, they often require a significant technical review, assessment of competitive products and approval at a number of management levels within their organization. The current challenging economic conditions have resulted in even longer sales cycles than we had experienced previously. During the time our customers are evaluating our products, we may incur substantial sales and marketing, engineering and research and development expenses to customize our power systems to the customer’s needs. We may also expend significant management efforts, increase manufacturing capacity, order long-lead-time components or purchase significant amounts of power system components and other inventory prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products.

The product development time after an industrial OEM customer agrees to purchase our power systems can be considerable. Our process for establishing technical specifications and developing a customized, integrated power system requires utilization of significant engineering resources, including design, prototyping, modeling, testing and application engineering. The length of this cycle is influenced by many factors, including the difficulty of the technical specification, the novelty and complexity of the design and the customer’s procurement processes.

Our design, development and sales cycle may vary based on the specific power system and the industrial OEM market category in which our customer’s product will compete, and it is difficult to predict for any particular transaction. The length and variability of our sales cycle can make it difficult to predict whether particular sales commitments will be received in any given quarter. As a result, a significant period may elapse between our investment of time and resources in designing and developing a custom power solution for an OEM customer and our revenue from sales of that power system.

The length of this process may increase the risk that an OEM customer will decide to cancel or change its plans related to its equipment into which our power system is integrated, especially in this challenging economic climate. Such a cancellation or change in plans by a customer could cause us to lose anticipated sales. In addition, our business, results of operations and financial condition could be materially adversely affected if a customer curtails, materially reduces or delays a significant order during our sales cycle, chooses not to release its equipment that contains our custom power system, or is not successful in the sale and marketing of its equipment that contains our custom power system.

 

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The loss of one or more key members of our senior management, or our inability to attract and retain qualified personnel could harm our business.

Our success and future growth depends to a significant degree on the skills and continued services of our management team, in particular Gary Winemaster, our Chief Executive Officer and President. The loss of any of our key members of management could inhibit our growth prospects. We do not expect that the proceeds from any “key man” life insurance policies we maintain for certain members of management would adequately compensate us for the loss of any of these individuals. Our future success also depends in large part on our ability to attract, retain and motivate key management, engineering, manufacturing and operating personnel. As we develop additional capabilities, we may require more skilled personnel. Given the highly specialized nature of our power systems, these personnel must be highly skilled and have a sound understanding of our industry, business and our technology. The market for such personnel is highly competitive. As a result, we may not be able to continue to attract and retain the personnel needed to support our business.

Our existing debt could adversely affect our business and growth prospects.

At April 29, 2011, after giving effect to our entry into our credit facility with Harris N.A. in connection with the consummation of the Reverse Merger and the Private Placement, and the repayment of debt using a portion of the proceeds from the Private Placement, we had approximately $18.4 million in principal amount of outstanding debt under a credit line that allows us to borrow up to an aggregate of $35.0 million. Our indebtedness, the cash flow needed to satisfy our debt and the covenants contained in current and potential future credit agreements have important consequences, including:

 

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limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

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limiting our ability to incur additional indebtedness;

 

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limiting our ability to capitalize on significant business opportunities;

 

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placing us at a competitive disadvantage to those of our competitors that are less indebted than we are;

 

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making us more vulnerable to rising interest rates; and

 

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making us more vulnerable in the event of a downturn in our business.

More specifically, pursuant to our current loan and security agreement with our senior lender entered into in connection with the consummation of the Reverse Merger and the Private Placement, we have agreed to certain financial covenants, including maintaining certain ratios between our adjusted EBITDA and our fixed charges. In addition, our current loan and security agreement places limitations on our ability to make capital expenditures and to make acquisitions of other companies. As of December 31, 2010, we were not in compliance with certain of the financial covenants set forth in our previous loan and security agreement; however, on January 20, 2011, we received a waiver from our previous senior lender with respect to our noncompliance with these financial covenants as of December 31, 2010. Any failure by us to comply with the financial covenants set forth in our current loan and security agreement in the future, if not cured or waived, could result in our senior lender accelerating the maturity of our indebtedness or preventing us from accessing availability under our credit facility. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned.

Our quarterly operating results are subject to variability from quarter to quarter.

Our quarter-to-quarter and quarter-over-quarter operating results (including our sales, gross profit and net income) and cash flows have been, and in the future may be, impacted by a variety of internal and external events associated with our business operations, many of which are outside of our control. Examples of such events include (1) changes in regulatory emission requirements (which generally occur on January 1 of the year in which they become effective), (2) customer product phase-in/phase-out programs, (3) supplier product (i.e. a specific engine model) phase-in/phase-out programs, (4) changes in pricing by suppliers to us of engines, components and other

 

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parts (typically effective January 1 of any year), and (5) changes in our pricing to our customers (typically effective January 1 of any year), which may be related to changes in the pricing by suppliers to us. In order to mitigate potential availability or pricing issues, customers may adjust their demand requirements from traditional patterns. We may also extend special programs to customers in advance of such events, and we are more likely to offer such programs in our fourth quarter of a year in anticipation of events expected to occur in the first quarter of the next year. The occurrence of any of the events discussed above may result in fluctuations in our operating results (including sales and profitability) and cash flows between and among reporting periods.

If we fail to adequately protect our intellectual property rights, we could lose important proprietary technology, which could materially and adversely affect our business.

We believe that the success of our business depends, in substantial part, upon our proprietary technology, information, processes and know-how. The unauthorized use of our intellectual property rights and proprietary technology by others could materially harm our business. We do not own any material patents and rely on a combination of trademark and trade secret laws, along with confidentiality agreements, contractual provisions and licensing arrangements, to establish and protect our intellectual property rights. Although certain of our employees have entered into confidentiality agreements with us to protect our proprietary technology and processes, not all of our employees have executed such agreements, nor can we ensure that employees who have executed such agreements will not violate them.

Despite our efforts to protect our intellectual property rights, existing laws afford only limited protection, and our actions may be inadequate to protect our rights or to prevent others from claiming violations of their proprietary rights. Unauthorized third parties may attempt to copy, reverse engineer or otherwise obtain, use or exploit aspects of our products and services, develop similar technology independently, or otherwise obtain and use information that we regard as proprietary. We cannot assure you that our competitors will not independently develop technology similar or superior to our technology or design around our intellectual property. In addition, the laws of some foreign countries may not protect our proprietary rights as fully or in the same manner as the laws of the United States.

We may need to resort to litigation to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of other companies’ proprietary rights in the future. However, litigation could result in significant costs or in the diversion of financial resources and management’s attention. We cannot assure you that any such litigation will be successful or that we will prevail over counterclaims against us.

In addition, many of the components we source from our suppliers and which are incorporated into our power systems utilize proprietary intellectual property of our suppliers. We also license certain intellectual property from third parties, including the “back office” software for our telematics offering. Any of these third parties from which we source our power system components or from which we license certain intellectual property may also supply these components (or other components that incorporate the same intellectual property) or license such intellectual property, as applicable, to others, including our competitors.

If we face claims of intellectual property infringement by third parties, we could encounter expensive litigation, be liable for significant damages or incur restrictions on our ability to sell our products and services.

We cannot be certain that our products, services and power system technologies, including any of the intellectual property incorporated into components that we source from our suppliers or that we license from third parties, do not, or in the future will not, infringe on the valid intellectual property rights held by third parties. In addition, we cannot assure you that third parties will not claim that we have infringed their intellectual property rights. For example, a third party alleged, and asserted those allegations in proceedings against us (which proceedings were subsequently settled), that certain technology related to our telematics product, MasterTrak, infringed upon the intellectual property rights of that party.

In the future, we may be a party to further litigation as a result of an alleged infringement of others’ intellectual property. Successful infringement claims against us could result in substantial monetary liability, require us to enter into royalty or licensing arrangements, or otherwise materially disrupt the conduct of our business. In addition, even

 

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if we prevail on these claims, any such litigation could be time-consuming and expensive to defend or settle, and could result in the diversion of the time and attention of management and of operational resources, which could materially and adversely affect our business. Any potential intellectual property litigation also could force us to do one or more of the following:

 

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stop selling, incorporating or using our products and services that use the infringed intellectual property;

 

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obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on commercially reasonable terms, or at all; or

 

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redesign the products and services that use the technology.

We could suffer warranty claims.

Provisions we make for warranty accrual may not be sufficient, and we may recognize additional expenses as a result of warranty claims in excess of our current expectations. Such warranty claims may necessitate a redesign, re-specification, a change in manufacturing processes, and/or recall of our power systems, which could have an adverse impact on our finances and on existing or future sales of our power systems and other products. Even in the absence of any warranty claims, a product deficiency such as a manufacturing defect or a safety issue may necessitate a product recall, which could have an adverse impact on our finances and on existing or future sales.

We could become subject to product liability claims.

Our business exposes us to potential product liability claims that are inherent to natural gas, propane, gasoline and diesel, and products that use these fuels. Natural gas, propane and gasoline are flammable and are potentially dangerous products. Any accidents involving our power systems could materially impede widespread market acceptance and demand for our power systems. In addition, we may be subject to a claim by end-users of our OEM customers’ products or others alleging that they have suffered property damage, personal injury or death because our power systems or the products of our customers into which our power systems are integrated did not perform adequately. Such a claim could be made whether or not our power systems perform adequately under the circumstances. From time to time, we may be subject to product liability claims in the ordinary course of business, and we carry a limited amount of product liability insurance for this purpose. However, our current insurance policies may not provide sufficient or any coverage for such claims, and we cannot predict whether we will be able to maintain our insurance coverage on commercially acceptable terms.

Our telematics offering, MasterTrak, may not be successful.

We have recently begun to offer connected asset services through our telematics solution, MasterTrak. Our telematics offering is unproven in the market and does not yet provide a material portion of our revenues. There can be no assurance that our telematics offering will gain widespread acceptance among customers or generate meaningful revenues or profits.

We are subject to various laws and regulations relating to our telematics offering. Among other things, wireless transceiver products are required to be certified by the Federal Communications Commission and comparable authorities in foreign countries where they are sold. If we fail to obtain product certifications for our telematics product, or otherwise fail to successfully comply with applicable regulations in this area, we may be required to make significant unanticipated expenditures to bring our telematics offering within compliance with such regulations, and future sales of our telematics offering may be adversely affected. Furthermore, through our telematics offering, we transmit and store information of customers, including equipment-specific information such as performance data. Equipment-specific information may also reveal customer-identifiable information. A growing body of laws designed to protect the privacy of personally-identifiable information, as well as to protect against its misuse, and the judicial interpretations of such laws, may adversely affect the growth of our telematics business. In particular, such laws could limit our ability to collect information related to users of our telematics offering, to store or process that information in what would otherwise be the most efficient manner, or to commercialize new telematics services based on emerging technologies. In addition, we could become subject to third party claims based upon allegations of loss or misuse of customer information.

 

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See also “— If we face claims of intellectual property infringement by third parties, we could encounter expensive litigation, be liable for significant damages or incur restrictions on our ability to sell our products and services,” for a discussion of a third party intellectual property infringement claim with respect to technology related to our telematics offering, which matter has been settled.

We may have difficulty managing the expansion of our operations.

Our current organization and our facilities currently in place may not be adequate to support our future growth. In order to effectively manage our operations and any significant growth, including any significant growth in the sales of, and services related to, our power systems, we may need to:

 

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scale our internal infrastructure, including establishing additional facilities, while continuing to provide technologically sophisticated power systems on a timely basis;

 

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attract and retain sufficient numbers of talented personnel, including application engineers, customer support staff and production personnel;

 

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continue to enhance our compliance and quality assurance systems; and

 

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continue to improve our operational, financial and management controls and reporting systems and procedures.

Rapid expansion of our operations could place a significant strain on our senior management team, support teams, assembly lines, information technology platforms and other resources. In addition, we may be required to place more reliance on our strategic partners and suppliers, some of whom may not be capable of meeting our production demands in terms of timing, quantity, quality or cost. Difficulties in effectively managing the budgeting, forecasting and other process control issues presented by any rapid expansion could harm our business, prospects, results of operations or financial condition.

New products may not achieve widespread adoption.

Our growth may depend on our ability to develop and/or acquire new products, and/or refine our existing products and power system technology, to complement and enhance the breadth of our power system offering with respect to engine class and the industrial OEM market categories into which we supply our products. We are currently in the process of developing a range of hybrid power solutions, and have recently begun offering our telematics solution, MasterTrak, to our OEM customers and other businesses to which we do not supply our power systems. We will generally seek to develop or acquire new products, or enhance our existing products and power system technology, if we believe they will provide significant additional revenues and favorable profit margins. However, we cannot know beforehand whether any new or enhanced products will successfully penetrate our target markets. There can be no assurance that newly developed or acquired products will perform as well as we expect, or that such products will gain widespread adoption among our customers.

Additionally, there are greater design and operational risks associated with new products. The inability of our suppliers to produce technologically sophisticated components for our new power systems, the discovery of any product or process defects or failures associated with production of any new products and any related product returns could each have a material adverse effect on our business, financial condition and results of operations. If new products for which we expend significant resources to develop or acquire are not successful, our business could be adversely affected.

If we do not properly manage the sales of our products into foreign markets, our business could suffer.

A significant portion of our future revenues could be derived from sales outside of the United States, particularly in Asia. We have recently begun sales and distribution activities in Asia and Europe where we may lack sufficient expertise, knowledge of local customs or contacts. In Asia and Europe, we depend upon independent sales

 

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and support organizations to complement our OEM relationships and provide knowledge of local customs and requirements, while also providing immediate, local sales, engineering and customer support. There can be no assurance that we will be able to maintain these current relationships with independent sales and support organizations, or that we will be able to develop effective, similar relationships in foreign markets into which we supply our products in the future.

Establishment of a market for our products in Asia and other markets outside of the United States may take longer and cost more to develop than we anticipate and is subject to inherent risks, including unexpected changes in government policies, trade barriers restricting our ability to sell our products in those countries, longer payment cycles, exposure to currency fluctuations, and foreign exchange controls that restrict or prohibit repatriation of funds. As a result, if we do not properly manage foreign sales, our business could suffer.

In addition, our foreign sales are subject us to numerous stringent U.S. and foreign laws, including the Foreign Corrupt Practices Act, or FCPA, and comparable foreign laws and regulations which prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. Safeguards that we may implement to discourage these practices could prove to be ineffective, and violations of the FCPA and other laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, including class action lawsuits and enforcement actions from the SEC, Department of Justice and overseas regulators. Any of these factors, or any other international factors, could impair our ability to effectively sell our power solutions, or other products or services that we may develop, outside of the U.S.

If our production facilities become inoperable, our business, including our ability to manufacture our power systems, will be harmed.

We operate our business, including all of our production and manufacturing processes, out of facilities that are all located in Wood Dale, Illinois. If damaged, our facilities, our assembly lines, the equipment we use to perform our emission certification and other tests and our other business process systems would be costly to replace and could require substantial time to repair or replace. We are particularly subject to this risk because of our current geographic concentration of our facilities. We may decide to consolidate into fewer facilities in the future, which would further exacerbate this risk. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires, floods, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us to efficiently operate our business for some period of time. In addition, such events may temporarily interrupt our ability to receive engines, fuels systems or other components for our power systems from our suppliers and to have access to our various production systems necessary to operate our business. Our insurance covering damage to our properties and the disruption of our business may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

In the event our facilities are damaged or destroyed, we may need to find another facility into which we can move our operations. Finding a facility that meets the criteria necessary to operate our business would be time-consuming and costly and result in delays in our ability to provide our sophisticated power solutions or to provide the same level of quality in our services as we currently provide.

We may be adversely impacted by work stoppages and other labor matters.

As of March 31, 2011, our workforce consisted of approximately 220 persons, including full-time and part-time employees, as well as members of our production team whose services we obtain through an arrangement with a professional employer organization. While none of the members of our workforce are currently represented by a union or covered by a collective bargaining agreement, there have been unsuccessful efforts to unionize our manufacturing employees in the past, and there can be no assurance that members of our workforce will not in the future join a union. If our employees organize and join a union in the future, there can be no assurance that future issues with our workforce will be resolved favorably or that we will not encounter future strikes, work stoppages or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse effect on us or may limit our flexibility in dealing with our workforce.

 

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In addition, many of our suppliers have unionized work forces. Work stoppages or slow-downs experienced by our material suppliers could result in slow-downs or closures at the manufacturing facilities of our suppliers from where our power system components are sourced. If one or more of our key suppliers experience a material work stoppage, it could have a material adverse effect on our operations.

We could be adversely affected by risks associated with potential acquisitions.

From time to time, we may seek to expand our business through investments in, or acquisitions of, complementary businesses, technologies, services or products, subject to our business plans and management’s ability to identify, acquire and develop suitable investments or acquisition targets in both new and existing industrial OEM market categories and geographic markets. In certain circumstances, acceptable investments or acquisition targets might not be available. Acquisitions involve a number of risks, including: (1) difficulty in integrating the operations, technologies, products and personnel of an acquired business, including consolidating redundant facilities and infrastructure; (2) potential disruption of our ongoing business and the distraction of management from our day-to-day operations; (3) difficulty entering markets in which we have limited or no prior experience and in which competitors have a stronger market position; (4) difficulty maintaining the quality of services that such acquired companies have historically provided; (5) potential legal and financial responsibility for liabilities of acquired businesses; (6) overpayment for the acquired company or assets; (7) increased expenses associated with completing an acquisition and amortizing any acquired intangible assets; and (8) challenges in implementing uniform standards, controls, procedures and policies throughout an acquired business. In addition, under the terms of our credit facility, we may be restricted from engaging in certain acquisition transactions. See “– Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources – Credit agreement” for a description of our credit facility.

If we were to pursue acquisition or investment opportunities, these potential risks could disrupt our ongoing business, result in the loss of key customers or personnel, increase expenses and otherwise have a material adverse effect on our business, results of operations and financial condition.

We could become liable for damages resulting from our manufacturing activities.

The nature of our manufacturing operations exposes us to potential claims and liability for environmental damage, personal injury, loss of life and damage to, or destruction of, property. Our manufacturing operations are subject to numerous laws and regulations that govern environmental protection and human health and safety. These laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in the future. Our manufacturing operations may not comply with future laws and regulations, and we may be required to make significant unanticipated capital and operating expenditures to bring our operations within compliance with such regulations. If we fail to comply with applicable environmental laws and regulations, manufacturing guidelines, and workplace safety requirements, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits, and private parties may seek damages from us. Under such circumstances, we could be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims for which may not have sufficient or any insurance coverage for claims.

We may have unanticipated tax liabilities that could adversely impact our results of operations and financial condition.

We are subject to various types of taxes in the U.S., as well as foreign jurisdictions into which we supply our products. The determination of our provision for income taxes and other tax accruals involves various judgments, and therefore the ultimate tax determination is subject to uncertainty. In addition, changes in tax laws, regulations, or rules may adversely affect our future reported financial results, may impact the way in which we conduct our business, or may increase the risk of audit by the Internal Revenue Service or other tax authority. Although we are not subject to any audits currently, we may be in the future subject to an Internal Revenue Service audit or other audit by state, local and foreign tax authorities. The final determinations of any tax audits in the U.S. or abroad could be materially different from our historical income tax provisions and accruals. If any taxing authority disagrees with the positions taken by us on our tax returns, we could incur additional tax liabilities, including interest and penalties.

 

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Variability in self-insurance liability estimates could significantly impact our results of operations.

We self-insure for employee health insurance coverage up to a predetermined level, beyond which we maintain stop-loss insurance from a third-party insurer. Our aggregate exposure varies from year to year based upon the number of participants in this health insurance plan. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. Our accruals for insurance reserves reflect these estimates and other management judgments, which are subject to a high degree of variability. Any significant variation in these estimates and judgments could cause a material change to our reserves for self-insurance liabilities, as well as our earnings.

Risks Related to the Shell Company

We may have contingent liabilities related to Format, Inc.’s operations prior to the Reverse Merger of which we are not aware and for which we have not adequately provisioned.

Format, Inc. may be deemed to have been a shell company with nominal operations and assets prior to the Reverse Merger. Upon completion of the Reverse Merger, we acquired all of the operations of The W Group and its subsidiaries. Prior to the consummation of the Reverse Merger, Format, Inc. was engaged, to a limited extent, in EDGARizing corporate documents for filing with the SEC, and providing limited commercial printing services. We cannot assure you that there are no material claims outstanding, or other circumstances of which we are not aware, that would give rise to a material liability relating to those prior operations, even though we do not record any provisions in our financial statements related to any such potential liability. If we are subject to past claims or material obligations relating to our operations prior to the consummation of the Reverse Merger, such claims could materially adversely affect our business, financial condition and results of operations.

Risks Related to the Reverse Merger and the Ownership of our Common Stock

We will incur increased costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal control over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our consolidated financial statements.

As a public operating company, we will incur significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. In particular, we will need to enhance and supplement our internal accounting resources with additional accounting and finance personnel with the requisite technical and public company experience and expertise, as well as refine our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations. However, even if we are successful in doing so, there can be no assurance that our finance and accounting organization will be able to adequately meet the increased demands that result from being a public company.

Furthermore, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to document and test our internal control procedures and prepare annual management assessments of the effectiveness of our internal control over financial reporting. These assessments will need to include disclosure of identified material weaknesses in our internal control over financial reporting. Testing and maintaining internal control over financial reporting will involve significant costs and could divert management’s attention from other matters that are important to our business. Additionally, we cannot provide any assurances that we will be successful in remediating any deficiencies that may be identified. If we are unable to remediate any such deficiencies or otherwise fail to establish and maintain adequate accounting systems and internal control over financial reporting, or we are unable to recruit, train and retain necessary accounting and finance personnel, we may not be able to accurately and timely prepare our consolidated financial statements and otherwise satisfy our public reporting obligations. Any inaccuracies in our

 

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financial statements or other public disclosures (in particular if resulting in the need to restate previously filed financial statements), or delays in our making required SEC filings, could have a material adverse effect on the confidence in our financial reporting, our credibility in the marketplace and the trading price of our common stock.

In addition, our management team will also have to adapt to other requirements of being a public company. We will need to devote significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly.

Concentration of ownership among our existing executive officers may prevent new investors from influencing significant corporate decisions.

As of May 25, 2011, Gary Winemaster, our Chairman of the Board, Chief Executive Officer and President, and Kenneth Winemaster, our Senior Vice President and Secretary, on a fully-diluted basis, but giving effect to any limitations on conversion of the Preferred Stock and any limitations on exercise of any warrants, beneficially own in the aggregate approximately 85.70% of our outstanding shares of common stock (giving effect to Gary Winemaster’s agreement to purchase the shares of Preferred Stock and shares of our common stock issued to Thomas Somodi pursuant to the Merger Agreement (as defined and described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments – Reverse Merger, Principal Purchase and Sale Transaction, Private Placement and Stock Repurchase”), but without giving effect to the Reverse Split), and approximately 77.28% on a pro forma basis as if the Reverse Split were consummated on or prior to such date.

As of May 25, 2011, Gary Winemaster alone beneficially owns approximately 55.77% of our outstanding shares of common stock, on a fully-diluted basis calculated on the same basis as described above (giving effect to Mr. Winemaster’s agreement to purchase the shares of Preferred Stock and the shares of our common stock issued to Thomas Somodi pursuant to the Merger Agreement, but without giving effect to the Reverse Split), and approximately 50.30% on a pro forma basis as if the Reverse Split were consummated on or prior to such date. See “Certain Relationships and Related Party Transactions – Principal Purchase and Sale Transaction” below for a description of Mr. Winemaster’s agreement to purchase from Mr. Somodi the shares of Preferred Stock and shares of our common stock issued to Thomas Somodi pursuant to the Merger Agreement.

As a result, these shareholders can exercise significant influence over all matters requiring shareholder approval, including the election of directors, amendment of our articles of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these shareholders.

An active, liquid and orderly trading market for our common stock may not develop, and the price of our stock may be volatile and may decline in value.

There currently is not an active public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares of common stock at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.

To the extent there is trading in shares of our common stock, including the shares covered by this prospectus, the trading price is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

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Our common stock may not be eligible for listing on a national securities exchange.

Our common stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. Our common stock is currently quoted on the OTC Bulletin Board and the OTC Markets – OTCQB tier and, until our common stock is listed on a national securities exchange, we expect that it will continue to be eligible and quoted on the OTC Bulletin Board and the OTC Markets – OTCQB tier, on another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

Our common stock may be considered a “penny stock.”

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock may be less than $5.00 per share and therefore may be a “penny stock.” Broker and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect your ability to sell shares of our common stock in the future.

As a result of the registration of the shares covered by this prospectus, a significant number of shares of our common stock have become eligible for sale, which could depress the market price for our common stock. Future sales by us or our existing shareholders could similarly depress the market price of our common stock.

As a result of the registration of the shares covered by this prospectus, a significant number of shares of our common stock have become eligible for sale in the public market, which could cause the market price for our common stock to decline significantly. If we or our existing shareholders sell a large number of shares of our common stock, or if we sell additional securities that are convertible into common stock, in the future, the market price of our common stock similarly could decline. Further, even the perception in the public market that we or our existing shareholders might sell shares of common stock could depress the market price of our common stock.

Anti-takeover provisions contained in our articles of incorporation and bylaws, as well as provisions of Nevada law, could impair a takeover attempt.

In addition to the concentration of ownership described under “Concentration of ownership among our existing executive officers and their affiliates may prevent new investors from influencing significant corporate decisions” above, which will limit any attempt to acquire control of our company not supported by these significant shareholders, our articles of incorporation, bylaws and Nevada law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our organizational documents include provisions:

 

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creating a classified board of directors whose members serve staggered three-year terms;

 

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authorizing “blank check” preferred stock, which could be issued by our board of directors without shareholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

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limiting the liability of, and providing indemnification to, our directors and officers; and

 

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•

restricting the ability of our shareholders to take action by written consent.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. Pursuant to the Private Placement Purchase Agreement, we agreed to consummate the Migratory Merger (as defined and described below under “Description of Capital Stock – Reverse Split and Migratory Merger”), pursuant to which we will change our jurisdiction of incorporation from Nevada to Delaware, and agreed with the investors in the Private Placement on forms of each of the certificate of incorporation and the bylaws for the surviving entity in the Migratory Merger. These forms of the certificate of incorporation and the bylaws for the surviving entity in the Migratory Merger contain provisions similar in some respects to those contained in our current articles of incorporation and amended and restated bylaws.

As a Nevada corporation, we are also subject to provisions of Nevada law which restrict shareholders beneficially owning 10% or more of our outstanding voting shares from engaging in certain business combinations without approval of our board of directors or the holders of our stock representing a majority of the voting power not beneficially owned by the interested stockholder. Our articles of incorporation contain a similar provision restricting shareholders beneficially owning 20% or more of our outstanding voting shares from engaging in certain business combinations without approval of our board of directors or the holders of our common stock representing two-thirds of the outstanding shares of common stock, subject to the voting rights of any issued and outstanding preferred stock.

After the consummation of the Migratory Merger, we will be subject to Delaware law. Provisions of Delaware law, and the terms of our certificate of incorporation and bylaws (after giving effect to the Migratory Merger), may have anti-takeover effects.

Any provision of our charter or bylaws (including our charter and bylaws, after giving effect to the Migratory Merger) or Nevada law or, after the consummation of the Migratory Merger, Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our shareholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.

If we engage in capital raising activities in the future, including issuances of common stock, to fund the growth of our business, our shareholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. In the future, we may adopt and establish an equity incentive plan pursuant to which equity awards may be granted to eligible employees (including our executive officers), directors and consultants, if our board of directors determines that it is in our best interest and the best interest of our shareholders to do so. The issuance of shares of our common stock upon the exercise of any such equity awards may result in dilution to our shareholders and adversely affect our earnings.

If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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We do not anticipate paying any dividends in the foreseeable future.

We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.

 

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Cautionary Note Regarding Forward-Looking Statements

This prospectus includes forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “potential,” “should,” “will,” “will be,” “would” and similar expressions, but this is not an exclusive way of identifying such statements. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, the forward-looking statements contained in this prospectus as a result of various risks, uncertainties and other factors, including those described above under the heading “Risk Factors” and elsewhere in this prospectus.

Forward-looking statements speak only as of the date of this prospectus. Except as expressly required under federal securities laws and the rules and regulations of the SEC, we do not undertake any obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this prospectus, whether as a result of new information or future events or otherwise. You should not place undue reliance on the forward-looking statements included in this prospectus or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

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Use of Proceeds

This prospectus relates to the sale or other disposition of shares of our common stock by the selling securityholders listed under “Selling Securityholders” and their transferees. We will not receive any proceeds from any sale of the shares by the selling securityholders. Although we will not receive any proceeds from the sale or other disposition of the shares covered hereby by the selling securityholders or their transferees, we will receive proceeds from any exercise of the Warrants or the Roth Warrant, if they are exercised for cash. If (1) the Warrants to purchase initially an aggregate of 24,000,007 shares of our common stock, and (2) the Roth Warrant, representing the right to purchase initially an aggregate of 3,360,000 shares of our common stock, were all exercised for cash, the selling securityholders and Roth Capital Partners, LLC, as applicable, would pay us an aggregate exercise price of approximately $11,136,000. If we do receive any proceeds from the exercise of the Warrants or the Roth Warrant, we will likely use such proceeds to pay down the revolving line of credit under our existing credit facility. Pursuant to the terms of our existing credit facility, our cash accounts are required to be held with Harris, N.A., as agent for the lenders under our existing credit facility. Our cash deposits in such accounts are swept by Harris, N.A. daily and applied against the outstanding revolving line of credit balance. The revolving line of credit is scheduled to mature on April 29, 2014 and bears interest at Harris, N.A.’s prime rate (3.25% at March 31, 2011) plus an applicable margin ranging from 0% to 0.50% or, at our option, a portion of the revolving line of credit can be designated to bear interest at LIBOR plus an applicable margin ranging from 2.00% to 2.50%. We entered into our existing credit facility in connection with the consummation of the Reverse Merger and the Private Placement. We used a portion of the proceeds from the Private Placement, together with a draw of approximately $18,400,000 on our existing line of credit, to repay all of our prior line of credit, including fees, costs and expenses thereunder. For further description of the terms of our existing credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources – Credit agreement” below.

Dividend Policy

We have not paid any cash dividends on our common stock to date. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition, and will be within the discretion of our then-existing board of directors. We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, our board of directors does not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources – Credit agreement” below for a further discussion regarding restrictions on the payment of dividends under our new credit facility.

 

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Price Range of Common Stock

Our common stock is quoted on the OTC Bulletin Board (“OTCBB”) and the OTC Markets – OTCQB tier under the symbol PSIX. The table below sets forth the high and low bid prices per share of our common stock as quoted on the over-the-counter markets for the periods indicated. Prior to April 29, 2011, the effective date of the Reverse Merger, the common stock traded under the symbol FRMT. All over-the-counter market quotations included herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Prior to the Reverse Merger, there was limited or no trading activity in Format’s common stock and there has continued to be a lack of trading activity in our common stock. There can be no assurance that an active market will develop for our common stock in the future.

We intend to apply to list and, pursuant to the Private Placement Purchase Agreement, we have agreed to use our reasonable best efforts to list, our common stock for trading on a national securities exchange as soon as reasonably practicable after we meet the initial quantitative listing standards of any such exchange. However, we cannot be certain that we will meet such initial listing standards or receive approval to list our common stock on any national securities exchange.

 

		High				Low
Fiscal Year Ended December 31, 2009
First Quarter			N/A				N/A
Second Quarter			N/A				N/A
Third Quarter			N/A				N/A
Fourth Quarter			N/A				N/A
Fiscal Year Ended December 31, 2010
First Quarter			N/A				N/A
Second Quarter		$	0.05			$	0.05
Third Quarter		$	2.00			$	0.05
Fourth Quarter		$	0.20			$	0.20
Fiscal Year Ended December 31, 2011
First Quarter		$	0.51			$	0.20
Second Quarter through May 24, 2011		$	0.51			$	0.51

As of May 24, 2011, the closing bid price for our common stock on the over-the-counter markets was $0.51 per share.

Holders

As of May 25, 2011, there were approximately 50 holders of record of our common stock.

 

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Securities Authorized for Issuance Under Compensation Plans

We currently do not have any compensation plans or individual compensation arrangements under which our equity securities are authorized for issuance.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A description of material factors known to us that may cause our results to vary, or may cause management to deviate from its current plans and expectations, is set forth under “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.” The following discussion should also be read in conjunction with our audited and unaudited consolidated financial statements, including the notes thereto, and unaudited pro forma combined financial statements appearing elsewhere in this prospectus.

Overview

Organization

We design, manufacture, distribute and support power system solutions for industrial OEMs across a broad range of industries including stationary electricity power generation, oil and gas, material handling, aerial work platforms, industrial sweepers, arbor, welding, airport ground support, turf, agricultural, construction and irrigation. Our engineering personnel design and test power system solutions and components supporting those solutions. Our major engine suppliers include Caterpillar, General Motors and Doosan, and we source components from a variety of domestic and global suppliers. We operate as one business and geographic segment. Accordingly, the following discussion is based upon this presentation.

Net sales

We generate revenues and cash primarily from the sale of off-highway industrial power systems and aftermarket parts to industrial OEMs. Our products are sold globally, and we are a sole source power solution provider of our products for most of our customers. Net sales are derived from gross sales less sales returns and or sales discounts.

Cost of sales

We assemble all of our products at our facilities in Wood Dale, Illinois. The most significant component of our cost of sales is the engine cost. The remainder of our cost of sales primarily includes the cost of additional materials utilized in our finished goods, labor, freight, depreciation and other inventoriable costs such as allocated overhead.

Operating expenses

Operating expenses include engineering, selling and service and general and administrative expenses. Engineering expenses include both internal personnel costs and expenses associated with outsourced third party engineering relationships. Engineering activities are staff intensive; thus costs incurred primarily consist of salary and benefits for professional engineers and amounts paid to third parties under contractual engineering agreements. Engineering consists of a Product and Application Research and Development Engineering Group and a Customer Support Engineering Group. The primary focus of the Product and Application Research and Development Engineering Group is on current and future product design, prototyping, testing and application development activities. The Customer Support Engineering Group provides dedicated engineering and technical attention to customer production support, including a direct communication link with our internal operations.

 

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Selling and service expenses represent the costs of our OEM sales team, an aftermarket sales group and a customer support group for field service and warranty support of our products. We utilize a direct sales and marketing approach to maintain maximum customer interface and service support. Wages and benefits, together with expenses associated with travel, account for the majority of the costs in this category.

General and administrative expenses principally represent costs of our corporate office and personnel that provide management, accounting, finance, human resources, information systems and related costs which support the organization. In addition to wages and benefits, costs include professional services, insurance, banking fees and other general facility and administrative support costs.

Recent developments

Reverse Merger, Principal Purchase and Sale Transaction, Private Placement and Stock Repurchase

On April 29, 2011, Format, Inc. (n/k/a Power Solutions International, Inc.) completed a reverse merger transaction, in which PSI Merger Sub, Inc., newly-created as a wholly-owned subsidiary of Format, Inc., merged with and into The W Group, and The W Group remained as the surviving corporation of the merger, becoming a wholly-owned subsidiary of Power Solutions International, Inc. The Reverse Merger was consummated under Delaware corporate law pursuant to an agreement and plan of merger, dated as of April 29, 2011 (the “Merger Agreement”). Pursuant to the Merger Agreement, all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger converted into, and Format, Inc. issued to the three stockholders of The W Group, shares of our common stock and shares of the Preferred Stock. In connection with the consummation of the Reverse Merger and the parties entering into the Purchase and Sale Agreement (as defined and described below under “Certain Relationships and Related Party Transactions – Principal Purchase and Sale Transaction”), (1) The W Group and Mr. Somodi entered into a Termination Agreement, pursuant to which each of Mr. Somodi’s employment agreement with The W Group (the term of which expired in April 2010) and the subscription agreement between The W Group and Mr. Somodi were terminated; and (2) Power Solutions International, Inc. entered into a new employment agreement with Mr. Somodi, which sets forth the terms of Mr. Somodi’s employment with us. See “Executive Compensation – Employment Agreements” below for a description of the new employment agreement with Mr. Somodi.

Concurrently with the closing of the Reverse Merger, on April 29, 2011, we completed a private placement of shares of the Preferred Stock, together with the Warrants to purchase shares of our common stock, to 29 accredited investors, receiving total gross proceeds of $18,000,000. Each share of Preferred Stock is initially convertible into a number of shares of our common stock equal to $1,000 divided by the conversion price then in effect, subject to the limitations on conversion set forth in the Certificate of Designation. For every one share of our common stock issuable upon conversion of Preferred Stock purchased in the Private Placement, each investor in the Private Placement also received a Warrant to purchase initially one-half of a share of our common stock, at an initial exercise price of $0.40625 per share, subject to the limitations on exercise and adjustment as set forth in the Warrants.

In connection with the Reverse Merger and the Private Placement, Format, Inc. entered into the Repurchase Agreement (as defined and described below under “Business – Company History”), dated as of April 29, 2011, with Ryan Neely, the sole director and executive officer of Format, Inc. immediately prior to the closing of the Reverse Merger, and his wife, Michelle Neely. Pursuant to the Repurchase Agreement, at the time of consummation of the Reverse Merger, (1) we repurchased 3,000,000 shares of our common stock from Ryan Neely and Michelle Neely, and (2) Ryan Neely and Michelle Neely terminated all of their right, title and interest in and to, and released us from any and all obligations it had with respect to, the loans made by Ryan Neely and Michelle Neely to Format, Inc. from time to time (which, as of the closing of the transactions contemplated by the Repurchase Agreement, were in an aggregate principal amount of $114,156), in exchange for aggregate consideration of $360,000.

As a result of the Reverse Merger, Power Solutions International, Inc. has succeeded to the business of The W Group. See “Business – Company History” below for a detailed description of the Reverse Merger and the Stock Repurchase; see “Selling Securityholders” below for a detailed description of the Private Placement; and see “Certain Relationships and Related Party Transactions – Principal Purchase and Sale Transaction” below for a detailed description of the Principal Purchase and Sale Transaction (as defined and described thereunder).

 

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Replacement of Prior Credit Agreement

On April 29, 2011, in connection with the closing of the Reverse Merger, the Stock Repurchase and the Private Placement, Power Solutions International, Inc. and The W Group entered into a loan and security agreement with Harris N.A., and such loan and security agreement replaced the then existing loan and security agreement that The W Group had with its senior lender prior to the closing of the Reverse Merger (the “Bank Refinancing”). Pursuant to the loan and security agreement with Harris N.A., among other things, Power Solutions International, Inc. became a party to the loan and security agreement, the maximum loan amount under the senior credit facility was reduced from the maximum loan amount under The W Group’s prior credit facility to reflect The W Group’s repayment in full of its two previously outstanding term loans under the prior credit facility and the financial covenants under the prior credit facility were replaced with a new fixed charge coverage ratio. See “– Liquidity and capital resources – Credit agreement” below for a discussion of our current credit facility and The W Group’s prior credit facility, which was replaced by the current credit facility in connection with the Reverse Merger.

Factors affecting future comparability

We have set forth below selected factors that we believe have had, or can be expected to have, a significant effect on the comparability of recent or future results of operations:

Public company expenses

As a result of the Reverse Merger, we are now a public company, and anticipate that we will make an application to list our shares for trading on a national securities exchange, once we satisfy the relevant quantitative listing criteria. As a result, we expect that our general and administrative expenses will increase as we pay our employees, legal counsel and accountants to assist us in, among other things, establishing and maintaining a more comprehensive compliance and board governance function, establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, and preparing and distributing periodic public reports under the federal securities laws. In addition, we expect that as a public company the cost of director and officer liability insurance will increase. We may also incur additional costs associated with compensation of non-employee directors.

Stock-based and other executive compensation

Prior to the Reverse Merger and the Private Placement, we have not granted or issued any stock-based compensation. Accordingly, we have not recognized any stock-based compensation expense. Upon and following the consummation of this offering, we may consider adopting an equity compensation plan and making awards under such a plan to our directors, officers and other employees and possibly to consultants. As a result, to the extent relevant, we may incur non-cash, stock-based compensation expenses in future periods.

Events affecting sales and profitability comparisons

Our quarter-to-quarter and quarter-over-quarter operating results (including our sales, gross profit and net income) and cash flows can be impacted by a variety of internal and external events associated with our business operations. Examples of such events include (1) changes in regulatory emission requirements (which generally occur on January 1 of the year in which they become effective), (2) customer product phase-in/phase-out programs, (3) supplier product (i.e. a specific engine model) phase-in/phase-out programs, (4) changes in pricing by suppliers to us of engines, components and other parts (typically effective January 1 of any year), and (5) changes in our pricing to our customers (typically effective January 1 of any year), which may be related to changes in the pricing by suppliers to us. In order to mitigate potential availability or pricing issues, customers may adjust their demand requirements from traditional patterns. We may also extend special programs to customers in advance of such events, and we are more likely to offer such programs in our fourth quarter of a year in anticipation of events expected to occur in the first quarter of the next year. The occurrence of any of the events discussed above may result in fluctuations in our operating results (including sales and profitability) and cash flows between and among reporting periods.

 

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Critical accounting policies and estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements in accordance with GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, bad debts, inventories, warranties and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and our revenue recognition. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition

We recognize revenue at the time title and risk of loss of inventory passes to the customer, which is typically upon shipment of goods. In certain cases, we recognize revenue upon billing for goods which are not immediately shipped at the request and for the convenience of our customer, otherwise known as a “bill and hold” arrangement. In these cases, revenue is recognized under the same terms and conditions as any other sales except that the products are held by us until the customer initiates the shipment of the product from our warehouses. Transfer of the title and risk of loss pass to the customer, and there are no future performance obligations, at the time the bill and hold sale is recognized. Any product that has been sold under a bill and hold arrangement is segregated from our owned inventory. When billed to the customers, shipping and handling charges to customers are included in revenue when incurred. Shipping and handling costs incurred by the company are included in cost of sales.

Allowance for doubtful accounts

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all past due accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.

Inventories

Inventories consist primarily of engines and parts. Engines are valued at the lower of cost, as determined by specific serial number identification, or market value. Parts are valued at the lower of cost (first-in, first out) or market value.

We write down inventory for estimated unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated realizable value, based upon assumptions about future demand and market conditions.

Warranty programs

We offer a standard limited warranty on the workmanship of our products that in most cases covers defects for a period of (i) one year from the date of shipment or (ii) six months from the date products are placed into service, whichever occurs first. Warranties for certified emission products are mandated by the EPA and/or the CARB and are longer than our standard warranty on certain emission related products. Our products also carry limited warranties from suppliers. Costs related to supplier warranty claims are borne by the supplier; our warranties apply only to the modifications we make to supplier base products. We estimate and record a liability, and related charge to income, for our warranty program at the time products are sold to customers. Our estimates are based on historical experience and reflect management’s best estimates of expected costs at the time products are sold. We make adjustments to our estimates in the period in which it is determined that actual costs may differ from our initial or previous estimates.

 

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Income taxes

All income tax amounts reflect the use of the liability method. Under this method deferred tax assets and liabilities are determined based upon the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. These differences relate primarily to different depreciation methods for financial statement and income tax purposes, nondeductible allowances for accounts receivable and inventory, certain accrued expenses, unrealized losses on hedging activities and research and development credit carryforwards.

Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and tax rates as of the date of enactment.

Results of operations

Three months ended March 31, 2011 compared with the three months ended March 31, 2010

Net sales

Our net sales increased 59.7% to $31.4 million for the three months ended March 31, 2011 compared to $19.6 million for the three months ended March 31, 2010. The increase in net sales was primarily due to increases in sales to existing customers arising from an improvement in the general global economy, together with a continued growth in sales of large power systems and expansion of sales to Asia-based customers to whom we began shipping product in the latter part of 2010.

Cost of sales

Our cost of sales increased 53.1% to $25.4 million for the three months ended March 31, 2011 from $16.6 million in the comparable period of 2010. The increase in cost of sales was primarily due to the increase in our sales volume. As a percentage of net sales, cost of sales has declined to 80.9% for the three months ended March 31, 2011, compared to 84.4% for the three months ended March 31, 2010. Costs were spread over higher volumes which favorably affected cost of sales. In addition, the increase in sales, noted in Net sales above, occurred across the majority of our customer base, broadening our product mix, which also favorably impacted our cost of sales.

Gross profit

Our gross profit increased 95.8% to $6.0 million for the three months ended March 31, 2011 from $3.1 million in the comparable period of 2010. Our gross profit increased primarily due to the previously discussed increase in sales volumes. As a percentage of revenue, gross profit was 19.1% for the three months ended March 31, 2011 compared to 15.6% in 2010. The higher gross profit during the first quarter of 2011 was principally attributable to the broadening product mix and higher sales volume relative to production costs as described in Cost of sales above.

Engineering

Engineering expenses increased 38.9% to $1.0 million for the three months ended March 31, 2011 from $0.7 million in the comparable period of 2010 due to an increase in customer product support activities associated with the increase in sales and product development. Wages and benefits account for the majority of our engineering expenses, and we increased our headcount in 2011 in connection with these activities. In addition, our engineering expenses were lower in 2010 due to cost control initiatives which included, among other things, temporary compensation reductions. However, as a percentage of net sales, engineering expenses decreased to 3.2% in the three months ended March 31, 2011 compared to 3.6% for the same period in 2010.

 

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Selling and service

Selling and service expenses increased 18.9% to $1.4 million for the three months ended March 31, 2011 from $1.2 million in the comparable period of 2010. The increase in selling and services expense was primarily attributable to an increase in wages and benefits, travel costs, and warranty costs in support of our increased product sales for the three months ended March 31, 2011 as compared to 2010. However, our sales increased at a higher percentage than our increase in selling and service expenses. Accordingly, as a percentage of net sales, selling and service expenses decreased to 4.4% in the three months ended March 31, 2011 compared to 6.0% for the same period in 2010.

General and administrative

General and administrative expenses increased 79.6% to $1.3 million for the three months ended March 31, 2011 from $0.7 million in the comparable period of 2010. The increase was principally attributable to (i) the cost of additional staff to support our higher sales volume, (ii) professional fees incurred in connection with our year end audit, and (iii) non-capitalizable consulting and professional fees incurred in connection with the Reverse Merger and the Bank Refinancing. As a percentage of net sales, general and administrative expenses increased to 4.2% in the three months ended March 31, 2011 from 3.7% for the same period of 2010.

Interest expense

Interest expense increased 23.0% to $0.6 million for the three months ended March 31, 2011, as compared to $0.5 million for the year-ago period. The increase was principally attributable to a $0.1 million fee incurred under the Prior Credit Agreement (as defined and discussed below). Our average outstanding bank borrowings were $0.8 million higher for the three months ended March 31, 2011 compared to the same period in 2010; however, our average effective interest rate on our bank borrowings was 5.86% during the first quarter of 2011, compared to 5.97% in 2010. Holding all other variables constant, we expect that our interest expense will decrease, in part, as a result of a lower effective interest rate pursuant to our new credit facility. For a description of our new credit facility, see “—Liquidity and capital resources — Credit agreement” below.

Income tax expense

Our income tax expense increased $0.6 million for the three months ended March 31, 2011, to $0.6 million, as compared to a tax benefit of less than $0.1 million in 2010. Our effective tax rate for the three months ended March 31, 2011 was 36.2% compared with 18.8% for the comparable prior year period. Our effective tax rate in 2010 was lower than in 2011 as the amount of tax credits expected to be generated and used for 2010 was significantly higher relative to the amount of taxable income generated for the year. In 2011, our effective tax rate is expected to be higher as we expect that the proportion of credits generated and used will be lower relative to our taxable income for the year.

Year ended December 31, 2010 compared with the year ended December 31, 2009

Net sales

Our net sales increased 21% to $100.5 million for the year ended December 31, 2010 compared to $82.9 million for the year ended December 31, 2009. The increase in net sales was primarily due to increased sales volumes from new product releases and increases in sales from existing customers due to an improvement in the general global economy. In addition to the sales increases arising from the improvement in the general global economy, sales to new, Asia-based customers contributed to the sales growth, and we experienced a full year’s sales of our larger power systems which were initially introduced in 2009. Our net sales in 2009 included a special program whereby we offered our customers the opportunity to purchase certain products scheduled for a supplier phase out in 2010 in order to avoid potential availability issues and future published price increases on those products. Sales under this program represented a substantial portion of total net sales in the fourth quarter of 2009.

 

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Cost of sales

Our cost of sales increased 26% to $83.9 million for the year ended December 31, 2010 from $66.5 million in the comparable period of 2009. The increase in cost of sales was primarily due to the increase in our sales volume. As a percentage of net sales, cost of sales increased to 83% for the year ended December 31, 2010, compared to 80% for the year ended 2009. Cost of sales as a percentage of net sales was lower in 2009 primarily due to lower costs associated with products sold in a special program discussed under “Net sales” above and the cost control initiatives begun in 2008 and which continued throughout 2009.

Gross profit

Our gross profit increased 1.5% to $16.6 million for the year ended December 31, 2010 from $16.4 million in the comparable period of 2009. Our gross profit increased primarily due to the previously discussed increase in sales volumes. As a percentage of revenue, gross profit was 17% for the year ended December 31, 2010 compared to 20% in 2009. The higher gross profit in 2009 was principally attributable to the lower material costs associated with the products sold in a special program discussed under “Net sales” above and the cost control initiatives discussed above.

Engineering expense

Engineering expenses increased 41% to $3.8 million in the year ended December 31, 2010 from $2.7 million in the comparable period of 2009 due to an increase in activity associated with new customer product launches, costs associated with the required periodic testing of engines for emission compliance, and increased product development activity. Our research and development expenses increased from $2.4 million in 2009 to $3.0 million in 2010.

Selling and services expense

Selling and service expenses increased 21% to $5.5 million for the year ended December 31, 2010 from $4.5 million in the comparable period of 2009. The increase in selling and services expense was primarily attributable to supporting our increased sales for the year ended December 30, 2010 as compared to 2009 and remained consistent as a percentage of net sales year over year.

General and administrative expenses

General and administrative expenses increased 7% to $3.3 million in the year ended December 31, 2010 from $3.1 million in the comparable period of 2009. The sales growth from 2009 to 2010 outpaced the increase in general and administrative expenses as we were able to effectively leverage our general and administrative costs to support our increased sales volume. As a result, general and administrative expenses decreased to 3% of net sales in 2010 from 4% in 2009.

Interest expense

Interest expense decreased 8% to $2.1 million for the year ended December 31, 2010, as compared to $2.3 million for the year ended December 31, 2009. Our average outstanding bank borrowings were $1.8 million lower in 2010 compared to 2009. Our average effective interest rate on our bank borrowings was 5.82% in 2010 as compared to 5.01% in 2009. We benefitted from lower average outstanding debt and reduced amortization of deferred financing costs in 2010. The lower outstanding debt was primarily attributable to scheduled payments of term loans and capital lease obligations. In addition, we wrote off additional deferred financing costs in 2009 as a result of an amendment to our existing credit agreement which reduced our overall borrowing capacity. Offsetting these reductions in interest expense was a higher average interest rate in 2010.

Income tax expense

Our income tax expense decreased $1.0 million to $0.4 million for the year ended December 31, 2010, primarily as the result of our lower taxable income. Our effective tax rate was 19% on income before taxes of $1.9 million for the year ended December 31, 2010 compared to an effective tax rate of 37% on pre-tax income of $3.8 million for the comparable period of 2009. The lower effective income tax rate in 2010 was attributable to available tax research credits generated and used. Absent changes to existing legislation, we expect these research tax credits to be available for the benefit of our company in the future as well.

 

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Year ended December 31, 2009 compared with Year ended December 31, 2008

Cost control program – 2009

We initiated a cost control program in 2008, which we expanded in 2009 to reduce expenses by implementing mandatory cost reduction programs, including stringent budgetary cost controls on discretionary spending and various employee cost control programs that matched required staffing levels with the variability of product demand during the year. We historically maintained a mix of full-time and temporary staffing in both production and administrative functions, allowing us to flex the staff in response to market conditions. This mix provided us with the ability to quickly adjust our staffing cost to the decrease in demand in 2009. In addition, we were able to establish flexible production lines along with flexible work programs with the remainder of our staff, enabling us to match required production capacity and staffing levels with the variability of product demand. This also enabled us to retain our most qualified staff, which in turn provided a solid technical base to support the anticipated improvement in customer sales activity as ultimately realized in 2010.

Net sales

Net sales decreased 34% to $82.9 million in the year ended December 31, 2009 compared to $125.3 million for the comparable period of 2008. The decrease in net sales was attributable to lower demand as a result of the downturn in global economic conditions across our customer base. The decrease in shipments occurred across all power system products, as well as our aftermarket parts, although our customer base remained stable during this period. In spite of a general decrease in net sales in 2009, fourth quarter 2009 net sales remained strong due to increased sales activity associated with customers purchasing product before our published January 1 price increases, product purchases by customers to cover transitional requirements associated with new mobile emission standards and a special program whereby we offered our customer base the opportunity to purchase certain products scheduled for a supplier phase out in 2010 in order to avoid potential availability issues and future published price increases on those products. Sales under this program represented a substantial portion of total net sales in the fourth quarter of 2009.

Cost of sales

Our cost of sales decreased 38% to $66.5 million for the year ended December 31, 2009 from $107.4 million in the comparable period of 2008. The decrease in cost of sales was due to the decrease in our sales volume associated with the downturn in the global economy. As a percentage of net sales, cost of sales decreased to 80% in 2009 compared to 86% in 2008. The improvement in the cost of sales as a percentage of net sales between 2009 and 2008 was primarily attributable to lower costs associated with the products sold in the special program discussed under “Net sales” above, as well as lower labor and overhead costs resulting from cost control programs initiated during 2008 and 2009.

Gross profit

Our gross profit decreased 8% to $16.4 million for the year ended December 31, 2009 from $17.9 million in the comparable period of 2008. The decrease in gross profit was due to the overall decrease in sales volumes associated with the general downturn in global economic conditions that generally affected our customer base. As a percentage of sales, gross profit increased to 20% in 2009 compared to 14% in 2008. Our gross profit as a percentage of sales increased due primarily to the factors noted above in “Cost of sales.”

Engineering expense

Engineering expenses decreased 18% to $2.7 million for the year ended December 31, 2009 from $3.3 million in the comparable period of 2008. The decrease in engineering expense was primarily due to our cost control plan which was implemented in 2008 and continued into 2009. Engineering activities are staff intensive; thus costs incurred primarily consist of salary and benefits for professional engineers and amounts paid to third parties for contract services. Although we did reduce engineering costs according to our cost control plan, we retained our technical staff to continue development of new products independent of our sales volume.

 

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Selling and service expense

Selling and service expenses decreased 24% to $4.5 million for the year ended December 31, 2009 from $6.0 million in the comparable period of 2008. The decrease in selling and service expense was the result of the cost control plan implemented in 2008 and continued into 2009. As a percentage of net sales, selling and service expense was 5% in 2009 and 2008.

General and administrative expense

General and administrative expenses decreased 31% to $3.1 million for the year ended December 31, 2009 from $4.4 million in the comparable period of 2008. The decrease in general and administrative expense was primarily due to decreased discretionary spending and personnel costs from the continuation of the cost control program, which was expanded in 2009 in response to lower sales and general business activity levels. General and administrative expenses remained consistent at approximately 4% of net sales in 2009 and 2008.

Interest expense

Interest expense decreased 17% to $2.3 million for the year ended December 31, 2009 from $2.8 million in the comparable period of 2008. Our average outstanding bank borrowings were $3.2 million lower in 2009 compared to 2008. Our average effective interest rate on our bank borrowings was 5.01% in 2009 compared to 5.50% in 2008. Partially offsetting the expense decrease was a $0.2 million increase in deferred financing charges arising from an amendment to our then existing credit facility, which among other things, resulted in a decrease in our overall borrowing capacity.

Income tax expense

Our income tax provision increased to $1.4 million for the year ended December 31, 2009 from $0.8 million in 2008, primarily due to higher income before income taxes. Our effective tax rate was 37% and 53% for the years ended December 31, 2009 and 2008, respectively. We were under audit by the Internal Revenue Service (“IRS”) for certain tax years prior to 2008. During 2008, these audits were completed, resulting in additional income tax expense of $0.2 million, which increased our effective overall income tax rate as a percentage of pre-tax income. The additional taxes arising from the settlement and closure of these tax years were partially offset by research tax credits of $0.1 million.

Liquidity and capital resources

Our cash requirements are dependent upon a variety of factors, foremost of which is the execution of our strategic plan. We expect to continue to devote substantial capital resources to running our business. Our primary sources of liquidity are cash flows from operations, principally collections of customer accounts receivable and borrowing capacity under our credit facility. Our existing and historical financing arrangements require that cash received by us be applied against our revolving line of credit. Accordingly, we do not maintain cash or cash equivalents on our balance sheet, but instead fund our operations through borrowings under a revolving line of credit which is described below under “Credit agreement.”

Based on our current forecasts and assumptions, we believe that our sources of cash and cash equivalents, namely the sales of our power systems and aftermarket products and access to borrowing capacity will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

As of March 31, 2011, we had working capital of $5.9 million compared to $6.3 million as of December 31, 2010 and $7.1 million at December 31, 2009. Our working capital decreased from December 31, 2010 to March 31, 2011, primarily due to a $1.5 million reduction in inventories and a $1.1 million increase in liabilities that were partially offset by a $2.2 million increase in accounts receivable. Our working capital decreased from December 31, 2009 to December 31, 2010 principally due to the scheduled debt payments arising from collections on accounts receivable in excess of the amounts used to reduce accounts payable and our line of credit. Additionally, inventories increased $1.0 million during that year, but this increase was partially offset by increases in accrued liabilities.

 

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Three months ended March 31, 2011

Operating activities

For the three months ended March 31, 2011, we generated cash flows from operations of $2.2 million, resulting primarily from net income of $1.1 million, increased by non-cash adjustments (primarily depreciation and trade receivable allowances) of $0.2 million and cash provided by a $1.5 million reduction in inventories, a $1.4 million increase in accounts payable and a $0.7 million increase in income taxes payable. The cash provided by operating activities was offset in part by a $2.3 million increase in accounts receivable, $0.2 million increase in other assets and a $0.1 million increase in accrued liabilities.

Investing activities

Net cash used in investing activities of $0.3 million for the three months ended March 31, 2011 related primarily to the acquisition of property, equipment and other assets.

Financing activities

Net cash used in financing activities was $1.9 million for the three months ended March 31, 2011 and was used for scheduled payments on our long-term debt, repayment of borrowings under our revolving line of credit, reduction in our cash overdraft and payment of financing fees paid in connection with the Reverse Merger.

Three months ended March 31, 2010

Operating activities

For the three months ended March 31, 2010, we generated cash flows from operations of $3.7 million. Cash flows from operating activities primarily arose from a net loss and non-cash adjustments (primarily depreciation and trade receivable allowances) of $0.2 million, cash provided by a $16.7 million reduction in receivables, a $0.1 million decrease in inventories and $0.4 million reduction in other assets. The cash provided by operating activities was offset by cash used of approximately $13.0 million to reduce accounts payable and income taxes payable, a $0.5 million increase in prepaid and other and a $0.2 million decrease in accrued liabilities.

Investing activities

Net cash used in investing activities related primarily to the acquisition of equipment and other assets of $0.2 million for the three months ended March 31, 2010.

Financing activities

Net cash used in financing activities was $3.6 million for the three months ended March 31, 2010 and was used for scheduled payments on our long-term debt, repayment of borrowings under our revolving line of credit, and reduction in our cash overdraft balance.

Year ended December 31, 2010

Operating activities

For the year ended December 31, 2010, we generated cash flows from operations of $3.9 million, which consisted primarily of net income of $1.6 million, increased by non-cash adjustments (primarily for depreciation) of $1.1 million, cash provided by the collection of accounts receivable of approximately $12.0 million, an increase in

 

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accrued liabilities of $0.5 million, and an increase in deferred revenue of $0.2 million. These increases were offset by cash used for the purchase of inventory of $1.0 million, a $0.5 million net increase in prepaid and other assets and payments of accounts payable and income taxes of $9.3 million and $0.7 million, respectively.

Investing activities

Net cash used in investing activities of $0.6 million and $0.4 million in the years ended December 31, 2010 and 2009, respectively, related primarily to the acquisition of fixed assets. Fixed asset expenditures principally arose from the purchase of tooling and transportation equipment.

Financing activities

Net cash used in financing activities was $3.3 million for the year ended December 31, 2010. The cash was used for scheduled payments on our long-term debt and capital leases of $1.7 million and $0.5 million, respectively, repayment of $0.7 million in borrowings under our revolving line of credit, payment of $0.3 million in financing fees relating to the Reverse Merger discussed herein, and a $0.1 million reduction in our cash overdrafts offset by $0.1 million in proceeds from additional borrowings.

Year ended December 31, 2009

Operating activities

In the year ended December 31, 2009, we generated cash flows from operations of $3.4 million, which consisted primarily of net income of $2.4 million, increased by non-cash adjustments (primarily for depreciation) of $0.9 million, cash provided by a net decrease in prepaid and other assets of $0.3 million and cash provided by increases in accounts payable and income taxes payable of $13.2 million and $1.2 million, respectively, offset by cash used for the purchase of inventory of $4.9 million, an increase in accounts receivable of approximately $9.5 million and a $0.2 million decrease in accrued liabilities. The increase in accounts receivable and accounts payable were attributable to fourth quarter sales activity as indicated in our discussion of Net sales for the year ended December 31, 2009 as compared to Net sales for the year ended December 31, 2008.

Investing activities

Net cash used in investing activities related primarily to the acquisition of fixed assets of $0.4 million for the year ended December 31, 2009. Fixed asset expenditures principally arose from the purchase of custom tooling used in the production of components for power systems.

Financing activities

Net cash used in financing activities for the year ended December 31, 2009 was $3.0 million and was used to repay borrowings under our revolving line of credit and scheduled payments on our long term debt.

Year ended December 31, 2008

Operating activities

In the year ended December 31, 2008, we generated cash flows from operations of $2.7 million, which consisted primarily of net income of approximately $0.7 million, increased by non-cash adjustments (primarily for deferred income taxes and depreciation) of $1.1 million and cash provided by the collection of accounts and other receivables of $5.8 million and $0.1 million, respectively, the reduction of inventory and other assets of $7.4 million and $0.2 million, respectively, and offset by cash used for the reduction of accounts payable, prepaid and other and accrued liabilities and taxes of $12.0 million, $0.3 million and $0.3 million, respectively.

Investing activities

Net cash used in investing activities related primarily to the acquisition of fixed assets of $0.6 million for the year ended December 31, 2008. Fixed asset expenditures principally arose from the purchase of custom tooling used in the production of components for power systems.

 

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Financing activities

Net cash used in financing activities for the year ended December 31, 2008 was $2.1 million. We refinanced our line of credit and term debt during 2008 and used $1.5 million to repay borrowings, and we used $1.3 million of cash to pay financing fees related to new debt. We also entered into a sales leaseback transaction for certain assets which generated proceeds of $0.4 million and had a $0.3 million increase in our cash overdraft position.

Credit agreement

In connection with the consummation of the Reverse Merger and the Private Placement, on April 29, 2011, we entered into a loan and security agreement (the “New Credit Agreement”) with certain lenders (the “Lenders”) and Harris N.A., as agent for the Lenders (the “Agent”). The New Credit Agreement replaced the loan and security agreement (the “Prior Credit Agreement”) with Fifth Third Bank, the terms of which are discussed below. The New Credit Agreement provides for borrowings of up to $35.0 million under a revolving line of credit (the “New Line of Credit”), which New Line of Credit is scheduled to mature on April 29, 2014 and has a variable interest rate as described below. Borrowings under the New Credit Agreement are collateralized by substantially all of our assets. Under the New Credit Agreement, we are required to meet certain financial covenants, including a minimum monthly fixed charge coverage ratio and a limitation on annual capital expenditures, the testing of which commences on April 30, 2011. The New Credit Agreement also contains customary covenants and restrictions applicable to us, including agreements to provide financial information, comply with laws, pay taxes and maintain insurance, restrictions on the incurrence of certain indebtedness, guarantees and liens, restrictions on mergers, acquisitions and certain dispositions of assets, and restrictions on the payment of dividends and distributions. In addition, the New Credit Agreement requires our cash accounts to be held with the Agent. Our cash deposits in the New Line of Credit account are swept by the Agent daily and applied against the outstanding New Line of Credit balance. As a result, we maintain a zero cash balance in our New Line of Credit account, and we borrow on the New Line of Credit on a daily basis to fund our cash disbursements.

Under the New Credit Agreement (in contrast to the Prior Credit Agreement discussed below): (a) Power Solutions International, Inc. is a party to the New Credit Agreement and pledged the equity interests of The W Group to the Agent; (b) there are no term loans; (c) the New Line of Credit bears interest at the Agent’s prime rate (3.25% at December 31, 2010) plus an applicable margin ranging from 0% to 0.50% or, at our option, a portion of the New Line of Credit can be designated to bear interest at LIBOR plus an applicable margin ranging from 2.00% to 2.50%; (d) there is a higher limit on annual capital expenditures; (e) there is no maximum quarterly senior debt leverage ratio; and (f) there is a fixed charge coverage ratio similar to the fixed charge coverage ratio in the Prior Credit Agreement, except that the fixed charge coverage ratio under the New Credit Agreement excludes historical debt service on Term Loan A and Term Loan B (each as defined and discussed below) and certain other one-time expenses.

On April 29, 2011, upon consummation of the Reverse Merger and the other transactions referred to above under “—Recent Developments,” we used net proceeds from the Private Placement and proceeds from a draw on the New Line of Credit to repay the Prior Loans (as discussed and defined below) under the Prior Credit Agreement in full. Upon consummation of the Reverse Merger and immediately following the repayment of the Prior Loans on April 29, 2011, availability under the New Line of Credit was approximately $12.7 million.

The Prior Credit Agreement was entered into in 2008 among Fifth Third Bank and The W Group and its subsidiaries. The initial proceeds from the Prior Credit Agreement were used to retire the revolving line of credit and term loans with our predecessor bank. The Prior Credit Agreement provided for a revolving line of credit of up to $37.5 million (the “Prior Line of Credit”), a term loan of $8.7 million (“Term Loan A”) and a term loan of $2.4 million (“Term Loan B” and together with Prior Line of Credit and Term Loan A, the “Prior Loans”), which Prior Loans were scheduled to mature on July 15, 2013 and had variable interest rates. Under the terms of the Prior Credit Agreement, we had the ability to elect whether outstanding amounts under the Prior Loans accrued interest based on the prime rate plus a margin or LIBOR plus a margin. Prior to being repaid in full, the Prior Loans under the Prior Credit Agreement were collateralized by substantially all of our assets. Under the Prior Credit Agreement, we were required to maintain our cash accounts with Fifth Third Bank. We had our cash deposits in the Prior Line of Credit account swept by Fifth Third Bank daily and applied against the outstanding Prior Line of Credit balance. As a

 

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result, we maintained a zero cash balance in our Prior Line of Credit account, and we borrowed on the Prior Line of Credit on a daily basis to fund our cash disbursements. Outstanding borrowings under the Prior Line of Credit were $21.0 million and $21.6 million at March 31, 2011 and December 31, 2010, respectively. Prior to its repayment in full in connection with the closing of the Reverse Merger, principal payments of Term Loan A were payable in quarterly installments ranging from $0.2 million to $0.6 million over the life of the loan. Term Loan A had an outstanding balance of $5.1 million and $5.6 million as of March 31, 2011 and December 31, 2010, respectively. Prior to its repayment in full in connection with the closing of the Reverse Merger, principal payments of Term Loan B were payable in quarterly installments of less than $0.1 million over the life of the loan plus a balloon payment at maturity. Term Loan B had an outstanding balance of $2.1 million and $2.1 million as of March 31, 2011 and December 31, 2010, respectively. In addition to scheduled quarterly payments, prior to its replacement, the Prior Credit Agreement required an annual repayment equal to 60% of excess cash flow.

The Prior Line of Credit was previously amended, in August 2009, to reduce the maximum borrowings from $37.5 million to $29.0 million, bearing interest at Fifth Third Bank’s prime rate (3.25% at December 31, 2009) plus an applicable margin ranging from 2.25% to 2.50%. Prior to the replacement of the Prior Credit Agreement on April 29, 2011, at our option a portion of the Prior Line of Credit could be designated to bear interest at LIBOR, subject to a 2.00% floor, plus an applicable margin ranging from 3.25% to 3.50%. At December 31, 2010, the entire outstanding balance of $21.6 million had been designated to bear interest at the LIBOR rate, plus margin. The interest rate on the Prior Line of Credit was 5.50% at December 31, 2010.

As of December 31, 2010, we determined that we were not in compliance with the quarterly fixed charge coverage ratio and the quarterly senior debt leverage ratio covenants of our Prior Credit Agreement. On January 20, 2011, we received from Fifth Third Bank a waiver of our noncompliance with these financial covenants as of December 31, 2010.

Contractual obligations

As of December 31, 2010, our commitments under our revolving line of credit, term debt, purchase obligations, operating and capital leases (which do not reflect the consummation of the Reverse Merger, the Stock Repurchase or the Private Placement) were as set forth below (amounts in 000s). During the three months ended March 31, 2011, there were no material contractual obligations entered into, or modified, outside the ordinary course of business which require adjustment to the amounts presented in the table below. As discussed and described in “— Liquidity and capital resources – Credit agreement,” subsequent to March 31, 2011, we entered into the New Credit Agreement.

 

		Total				Less than 1 year				2 - 3 years				4 - 5 years				More than 5 years
Revolving line of credit		$	21,633			$	—			$	21,633			$	—			$	—
Term debt			7,824				2,148				5,663				13				—
Interest (1)			3,873				1,672				2,201				—				—
Purchase commitments (2)			1,109				378				150				150				431
Capital leases			78				78				—				—				—
Operating leases			1,630				1,184				441				5				—
Total		$	36,147			$	5,460			$	30,088			$	168			$	431

 

(1)

For our revolving line of credit, we estimated future interest expense using the balance and interest rate as of December 31, 2010 through the remaining term of the agreement. For all other debt with scheduled principal payments, we estimated future interest expense using the applicable balances expected during the remaining term of each obligation and the interest rate in effect as of December 31, 2010.

 

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(2)

On November 18, 2010, we entered into an agreement with a supplier to build certain tooling and fixtures to be owned by us and used to produce certain of the components for our power systems. In exchange for the intellectual development and building of the tooling and fixtures, we agreed to pay the supplier $1.125 million over a 10 year period. Of this amount, $0.9 million remains unpaid at December 31, 2010. In addition, we have a $0.2 million commitment to another supplier relating to the development of licensing exclusively for our benefit.

Off-balance sheet arrangements

We do not have any material off-balance sheet arrangements.

Impact of recently issued accounting standards

Revenue Recognition

In September 2009, the FASB reached a consensus on ASU No. 2009-13, “Revenue Recognition (Topic No. 605)—Multiple-Deliverable Revenue Arrangements,” (ASU 2009-13). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: (i) vendor specific objective evidence (VSOE) or (ii) third-party evidence (TPE), before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements. Overall arrangement consideration must be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. The application of this standard in the first quarter of 2011 had no material impact on the results of operations for the three months ended March 31, 2011.

Quantitative and Qualitative Disclosure About Market Risk

We maintain cash accounts with Harris N.A. (the “Agent”), which is where we also maintain the New Line of Credit. Our cash deposits in the New Line of Credit account are swept by the Agent on a daily basis and applied against the outstanding New Line of Credit balance, and we borrow on the New Line of Credit on a daily basis to fund our cash disbursements.

Our exposure to changes in the level of interest rates is generally limited to borrowings under our credit facility with the Agent. In particular, our interest expense sensitivity results from changes in the underlying prime rate or LIBOR. At our option, we have the ability to elect whether outstanding amounts under the New Line of Credit with the Agent bear interest at the prime rate plus a margin or LIBOR plus a margin and, prior to the repayment of the Prior Line of Credit with our previous senior lender, Fifth Third Bank as of April 29, 2011, we had the ability to elect whether outstanding amounts under each of Term Loan A and Term Loan B with Fifth Third Bank, bore interest at the prime rate plus a margin or LIBOR plus a margin. We designated our outstanding balance under the Prior Line of Credit with Fifth Third Bank to bear interest at LIBOR, subject to a 2.0% floor, plus an applicable margin ranging from 3.25% to 3.50%. At March 31, 2011 and December 31, 2010, (1) the principal amount of indebtedness outstanding under the Prior Line of Credit was $21.0 million and $21.6 million, respectively, (2) the principal amount of indebtedness outstanding under Term Loan A was $5.1 million and $5.6 million, respectively, and (3) the principal amount of indebtedness outstanding under Term Loan B was $2.1 million and $2.1 million, respectively. At March 31, 2011 and December 31, 2010, the entire outstanding balance of $21.0 million and $21.6 million, respectively, under the Prior Line of Credit bore interest at a rate of 5.50%. At March 31, 2011 and December 31, 2010, all outstanding balances under Term Loan A and Term Loan B bore interest at the prime rate plus a margin. See Note 5 – under the heading “Line of credit” and Note 6 – under the heading “Long-term debt” to the Unaudited Consolidated Financial Statements for the three months ended March 31, 2011 and 2010; see

 

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Note 3 – under the heading “Line of credit” and Note 4 – under the heading “Long-term debt” to the Consolidated Financial Statements for the years ended December 31, 2010, 2009, and 2008; and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and capital resources – Credit agreement” above for a discussion of the Prior Line of Credit, Term Loan A and Term Loan B.

We previously maintained, and may maintain in the future, an interest-rate risk management strategy using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest-rate volatility. However, we have not maintained such a strategy since the third quarter of fiscal 2008.

Based upon our Prior Credit Agreement with Fifth Third Bank, using our balances and interest rates as of March 31, 2011 and holding other variables constant, a 10% increase in interest rates for the next 12-month period would have decreased our pre-tax earnings and cash flow by approximately $0.2 million. Excluding Term Loan A and Term Loan B, the decrease would have been approximately $0.1 million. Assuming for purposes hereof that the New Credit Agreement was effective as of March 31, 2011, using our balances other than Term Loan A and Term Loan B as of March 31, 2011 and holding other variables constant, a 10% increase in interest rates for the next 12-month period would have decreased our pre-tax earnings and cash flow by approximately $0.1 million.

We are currently not subject to any material foreign currency exchange rate risk or any investment-related risk.

 

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Business

Company Overview

We are a global producer and distributor of one of the broadest ranges of high performance, certified low emission, power solutions for original equipment manufacturers of off-highway industrial equipment. Our customers include large, industry-leading, multinational organizations, and we are a sole source power solution provider for most of our customers. By leveraging our expertise in developing emission-certified power systems and through our access to the latest power system technologies, we believe that we are able to provide a turnkey “green” solution to industrial OEMs at a lower cost and faster design turnaround than other alternatives.

Our power systems are primarily spark-ignited, running on alternative fuels such as natural gas and propane. We design, develop, manufacture, distribute and provide after-market support for our power solutions for industrial OEMs in a wide range of industries with a diversified set of applications. Our power solutions are used in stationary electricity generators, oil and gas equipment, forklifts, aerial work platforms, industrial sweepers, arbor equipment, agricultural and turf equipment, aircraft ground support equipment, construction and irrigation equipment, and other industrial equipment. For these applications, our low-emission, alternative fuel power solutions, which range in size from under 1 liter to over 22 liters and meet, and in many cases produce emissions at levels significantly lower than those required by, emission standards of the EPA and CARB, represent a cleaner, and typically less expensive, alternative to diesel fuel power systems. In addition, while our power systems primarily run on alternative fuels, we also supply low-emission standard fuel (such as diesel) and hybrid power solutions. In the markets in which our diesel and alternative fuel power systems compete, substantially all of the engines are water-cooled (as opposed to air-cooled), multi-cylinder engines.

Pursuant to a distributor agreement with Perkins, a wholly-owned subsidiary of Caterpillar, packaging and distribution agreements with Caterpillar engine dealers and our association with Caterpillar, we are one of the largest suppliers of Perkins and Caterpillar diesel power systems under 275 horsepower. This makes us a world leader in the supply of EPA and CARB emission-certified diesel power solutions to the industrial OEM marketplace. As we do for our alternative fuel power systems, we supply components for, and apply our sophisticated application engineering and design services to, these Perkins and Caterpillar power systems in a wide range of industrial applications. We believe that the 12-state territory covered by these distribution agreements presents us with the opportunity to capitalize on the majority of all diesel industrial OEM opportunities in the United States.

 

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Building upon our experience in developing emission-compliant power systems, and with a view to serving our customers’ needs regarding emissions compliance, we are also developing a range of hybrid power solutions. We plan to leverage technology from our existing green power solutions and our application expertise to provide tailored, cost-efficient, emission-compliant hybrid power systems to the industrial OEM marketplace, both domestically and internationally.

We expect that growth in domestic sales of our low-emission power solutions will be driven by the substantial breadth of our emission-certified products, as well as increasing U.S. demand for alternative fuel power solutions resulting from the adoption of increasingly stringent engine emission regulations. Additionally, we are seeing increasing demand for our power solutions from international industrial OEMs, most significantly in Asia, that manufacture industrial equipment for the U.S. import market.

Industry and Market Overview

Industrial OEM Market

The off-highway industrial OEM market represents a diversified set of applications and industry categories that include power generation, oil and gas, material handling, aerial work platforms, sweepers, arbor, welding, airport ground support, agricultural, turf, construction and irrigation. While the power system requirements for the industrial OEM market bear similarities to the requirements for power systems used in automotive applications, there are substantial application differences between automotive and industrial equipment applications. Torque, start, stop, low speed and, with respect to certain applications, indoor use requirements make direct utilization of an automotive power system impractical for use in most industrial equipment applications. Recognizing these differences, the EPA and CARB have issued distinct emission standards and regulations for industrial applications, as compared to those for automotive applications. As a result, there is not a direct cross-over of available automotive power systems into the industrial OEM market. Power systems utilized in the industrial OEM market must satisfy these emission standards through a certification process with the EPA and CARB that includes durability testing of the engine emission system at zero and 5,000 hours, production line testing on a quarterly basis and field compliance audit testing. Given the level of engineering and financial resources that automotive engine manufacturers would need to dedicate to supply EPA emission-certified product into this industrial OEM marketplace, and that this marketplace does not represent a core business for these manufacturers, it is generally impractical for automotive engine manufacturers to compete in the industrial OEM marketplace.

Industrial OEM power systems utilize internal combustion engines (both diesel and spark-ignited), as well as electric motors. Diesel engine systems, which use compression to initiate ignition to burn fuel, in contrast to spark-ignited engine systems which utilize a spark plug to initiate the combustion process, currently represent the dominant power systems, depending on the specific industrial application involved. For example, diesel powered equipment is generally utilized in outdoor industrial applications, while electric motors and alternative fuel, spark-ignited power systems are used for indoor industrial applications where carbon monoxide and air quality issues must be addressed.

The following charts illustrate the industrial OEM market in 2009 for water-cooled, multi-cylinder diesel and spark-ignited engines, broken down by geographic regions for which these engines are procured, and between diesel and spark-ignited engines, based upon data supplied by Power Systems Research, Inc., a global supplier of business information to the engine and power products industries.

 

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Both diesel power systems and electric motors have significant limitations. Diesel power systems present unique emission compliance challenges, while electric motors are often not feasible alternatives in industrial applications as a result of limitations on battery storage capacity. We expect demand for spark-ignited power systems within the industrial OEM marketplace, even without full consideration of the anticipated migration from diesel to spark-ignited power systems in the industrial OEM marketplace, to grow at a high rate, with worldwide demand estimated by Power Systems Research, Inc. to be approximately 272,000 units in 2011, a 67% increase over the 2009 level of approximately 163,000 units, and approximately 357,000 units in 2015, an increase of approximately 119% over 2009 levels. Additionally, consistent with trends in the automotive marketplace, industrial OEMs are demonstrating strong interest in hybrid power systems.

Market Trends

The market for our power solutions is continuing to grow globally as a result of several key drivers.

Increasingly Stringent Regulations and Growing Efforts to Reduce Emissions

Concerns regarding climate change and other environmental considerations have led to implementation of laws and regulations that restrict, cap or tax emissions in the automotive industry and throughout other industries. While emission standards vary significantly around the world, such standards have become increasingly more stringent. Over the last ten years in particular, there has been a significant increase in regulation of off-highway equipment emissions. Industrial OEMs have experienced pressure to redesign their products to address these emission regulations, as products that are unable to meet emission standards may not be sold in the marketplace. However, we believe few suppliers to industrial OEMs have been capable of providing, or are willing to make the investments of time and financial and other resources necessary to provide, products that meet the new EPA and CARB requirements.

Increased EPA and CARB emission regulations associated with diesel power systems due to take effect over the next several years are expected to increase both the cost and product footprint (i.e., the size of the power system) of diesel power products. Internal combustion engines generally produce emissions of carbon monoxide, unburned hydrocarbons and oxides of nitrogen, and diesel engines produce particularly high levels of these pollutants. In addition, diesel engines produce particulate matter, which is among the areas of focus of these emission regulations. In 2004, the EPA adopted rules introducing Tier 4 emission standards which significantly reduce permitted emissions of oxides of nitrogen and particulate matter, and restrict hydrocarbon emissions, for off-road diesel engines of various sizes. The most recent standards adopted were initially implemented in 2008 and will continue to be phased in through 2015. As an example of the increasingly stringent standards to which diesel engines are subject, in 2012 permitted levels of particulate matter for nonroad diesel engines will be reduced by approximately 90% from 2009 permitted levels. As a result, manufacturers and suppliers of diesel power systems, in comparison to spark-ignited and hybrid power systems, face greater challenges in complying with the new emission regulations. A manufacturer of diesel power systems must expend significant resources to develop a compliant power system, often

 

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through incorporation of additional componentry into a power solution to reduce levels of particulate and other emissions. This can be a lengthy and expensive process—based upon our experience with customers and suppliers, and on additional information provided by Power Systems Research, Inc., industrial OEMs are experiencing cost increases of between 30% and 100% for a comprehensive diesel power system with combustion and aftertreatments incorporated to satisfy the new requirements. Furthermore, these emission regulations will create not only a cost but also a footprint disadvantage for a diesel power system, when compared to a spark-ignited, emission-certified power system.

Additionally, countries outside of the United States have historically adopted emission regulations aligned with those of the U.S., and accordingly, it is anticipated that regulations comparable to current and future EPA and CARB emission regulations will be implemented internationally. For example, recently implemented policies in Europe, generally referred to as Stage I, II, III and IV regulations, regulate emissions of off-road mobile equipment. Similar to emission regulations in the U.S., these regulations in Europe call for reductions in emissions of hydrocarbons, oxides of nitrogen and particulate matter, to be phased in over a period of time. If foreign jurisdictions continue to adopt emission regulations consistent with those of the U.S., it is expected that the international industrial OEM market will experience similar pressures to utilize cost effective, emission-certified power systems.

The chart below represents our estimate of the anticipated growth in sales of water-cooled, multi-cylinder, spark-ignited engines, relative to equivalent diesel engines, in the worldwide industrial OEM market for water-cooled, multi-cylinder diesel and spark-ignited engines over the next several years, based upon data supplied by Power Systems Research, Inc.

Projected Growth in Sales of Water-Cooled, Multi-Cylinder Spark-Ignited Engines in the Worldwide

Industrial OEM Market

Increased Use of Alternative Fuels

As a result of economic considerations, the drive for energy independence and the widespread availability of alternative fuels such as natural gas and propane, in addition to environmental concerns, the market for alternative fuel technology continues to grow. We believe that providers of industrial equipment in industrial OEM categories, such as power generation, that rely significantly on coal, diesel fuel and gasoline, will face increasing pressure to use alternative fuel power solutions.

 

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In the United States, significant domestic alternative fuel reserves have been identified. These reserves include the Marcellus Gas Shale, with estimated technically recoverable resources of 262 trillion cubic feet of natural gas, and the Bakken Formation of the Williston Basin Province, Montana and North Dakota, with an estimated mean of undiscovered volumes of 3.65 billion barrels of oil, 1.85 trillion cubic feet of associated/dissolved natural gas and 148 million barrels of natural gas liquids. It is believed that the alternative fuel reserves identified in the United States could satisfy much of the energy needs of the U.S. for many years.

Additionally, the infrastructure supporting alternative fuel in the United States continues to expand. Further, the United States and some other countries have taken action to increase demand and support for alternative fuels, in an effort to reduce dependence on imported oil, capitalize on domestic natural gas reserves and reduce emissions from diesel engines. For example, the EPA has provided certain subsidies in the form of grants and other financing programs for the advancement of alternative fuel technologies (to date directed primarily towards on-road vehicles). Additionally, industry organizations, such as the Propane Education and Research Council, an organization authorized by the U.S. Congress with the passage of the Propane Education and Research Act, award grants to a wide variety of institutions, universities, and government organizations for the continued research, development, demonstration and commercialization of alternative fuel technologies.

Industrial OEM Trend Toward Outsourcing

Industrial OEMs have been following the broader marketplace trend of outsourcing non-core functions. The dynamics of global sourcing and the need for cost competitiveness have led, and should continue to lead, industrial OEMs to assess what operations and system components are core to their business model and what they should outsource to their suppliers and partners. In particular, to comply with frequently changing environmental regulations while remaining competitive, industrial OEMs have been increasingly more reliant on outsourcing to third party suppliers and partners with specialized regulatory and design expertise. By looking to outside sources for power systems, power system components and subsystems, industrial OEMs are able to focus their resources on overall design and functionality of their products, rather than on developing the sophisticated technology associated with emission-certified power systems. We expect increasingly more industrial OEMs to outsource power systems, system components and subsystems to third party suppliers with the requisite experience and technology.

Penetration by International Suppliers into Regulated Markets

The implementation of emission regulations domestically and in certain non-U.S. markets also impacts international suppliers of industrial equipment products outside these regulated markets. International industrial OEMs that supply into regulated industrial OEM markets, including those already doing so and those recognizing emerging opportunities to sell their products into these markets, must meet applicable emission requirements, like those imposed by the EPA and CARB in the U.S. For example, Chinese and other Asian suppliers have recognized that, in order to effectively penetrate and sell into emission regulated industrial OEM markets like North America and Western Europe, their products must be emission-certified. These international industrial OEMs generally lack the regulatory and design expertise necessary to develop their own emission-certified power systems. Furthermore, they recognize that, even if they had or could acquire the relevant expertise, it can be much less time consuming and much more cost-effective for them to procure compliant power systems from third-party suppliers, rather than internally developing and manufacturing their own solutions. Accordingly, just as domestic industrial OEMs are outsourcing this function, so too are international industrial OEMs, and we expect this trend to continue.

Growing Demand for Sophisticated Electronic Technology and Automotive Grade Quality Standards

Demanding automotive grade quality, as well as on-time delivery, has become standard practice in the industrial OEM marketplace. Consistent with the trend in the automotive industry, the level of technology and sophistication, including electronic controls, associated with industrial OEM power systems has advanced significantly to meet the growing demand for improved quality, reliability and performance. This has led to an ongoing reduction in the number of suppliers capable of supporting such product requirements.

 

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Our Competitive Strengths

We have a 25-year history and reputation as a proven supplier of cost-effective, technologically advanced products to the industrial OEM marketplace. We believe that our technological superiority and the comprehensive nature of our product offerings position us to capitalize on developing trends in the industrial OEM markets and drive significant future growth.

Our Deep and Broad Array of Green Product Offerings

Alternative Fuel Power Systems

Our power systems represent one of the broadest ranges of EPA and CARB emission-certified, alternative fuel products for industrial applications in the world. We are one of only a few providers of industrial OEM products that meet, and in many cases produce emissions at levels significantly lower than those required by, current and publicly disclosed future emission standards of the EPA and CARB. We also provide advanced, standardized fuel system and component technology across our entire range of emission-certified products, utilizing a common fuel system and electronic controls on most of our power systems. As a result, our OEM customers are able to focus internal engineering and technical support resources, and train their personnel, on one standardized fuel system and one set of electronic controls employed throughout the range of power systems they acquire from us, and are able to reduce their product design and ongoing product support costs.

Our existing capability to provide one of the largest ranges of emission-certified, alternative fuel products currently available strategically positions us to capitalize on the cost and packaging disadvantage associated with diesel power systems that will result from increased EPA and CARB emission regulations scheduled to take effect over the next several years. Given the existing dominance of diesel power systems in the industrial OEM marketplace, even a minor shift in the marketplace from diesel to spark-ignited, alternative fuel power systems will represent a significant growth opportunity for us.

Additionally, as international OEMs desire to supply industrial equipment products into the United States that must meet required EPA and CARB emission requirements, we provide a fast, certain, cost-effective route for these foreign industrial OEMs to meet these emission requirements. Specifically, because we own the EPA and CARB compliance certificates specific to our power solutions, we provide foreign industrial OEMs with immediate access to EPA and CARB compliant power systems through our lineup of emission-certified product and application engineering capabilities. We believe our ability to provide emission-certified turnkey solutions to these industrial OEMs is unmatched by any competitor. We have already secured sourcing relationships with some of Asia’s largest industrial OEMs, and have begun supplying EPA and CARB compliant power systems for incorporation into their product lineups.

Furthermore, because we expect countries outside of the United States to implement emission regulations that are aligned with current and future U.S. emission standards, we anticipate an opportunity to further diversify and supplement our customer base with industrial OEMs that supply products outside of the U.S. If such emission regulations are implemented consistent with our expectation, we anticipate being able to provide power systems to industrial OEMs that meet applicable foreign emission standards, leveraging our technology and experience in developing our EPA and CARB emission-certified products.

In summary, we represent a “one-stop” power solution for industrial OEMs desiring to meet the growing demands for green products with reduced emissions across their entire range of products. As such, we believe we are in a prime competitive position to continue to grow market share domestically, as well as internationally.

Hybrid Power Systems

We believe that, as increased emission standards are implemented, our existing OEM customers and other industrial OEMs may explore power system alternatives to standalone combustion engines. Accordingly, in addition to alternative fuel power systems, we are developing hybrid power solutions that address future emission standards and today’s environmental and cost related concerns, with the ability to operate over an extended range. We are developing versatile hybrid powertrain units for the industrial OEM market, and expect to be able to integrate our

 

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hybrid power systems within the powertrain as a parallel system (i.e., coupled to a traditional hydraulic pump or transmission) or series system (i.e., used to provide extended on-board electrical power to an electric drive system). We believe that our hybrid power systems will reduce fuel costs, increase torque and increase productivity of the power system. Additionally, our hybrid power systems are being designed to produce low levels of noise and exhaust emissions and excellent fuel economy. These systems should also enable customers to downsize current engine displacements (i.e., get the same power out of smaller engines).

Capitalizing on our extensive experience in developing both short and long term green power solutions, we will be able to accurately specify the proper engine size, battery and voltage range, along with the proper integrated hybrid system and engine management controls for a specific industrial application. We believe our ability to provide fully integrated hybrid powertrain solutions to our industrial OEM customers will be an advantage over our competitors and strengthen our ability to meet the alternative power system needs of industrial OEMs in the future.

Our Deep Market Penetration and Strong and Diverse Customer Base

Through industrial OEMs outsourcing component products to us, we are able to leverage off cross-industry category standardization opportunities, while still providing each industrial OEM with the flexibility to customize as required for particular design and application specifications. We aggregate our product development efforts, and can amortize associated costs, over our large and diverse OEM customer base and across industry categories. Furthermore, we capitalize on volume, economies of scale and global supply opportunities when sourcing component products. We can therefore provide our OEM customers with lower cost structures than they would otherwise be able to achieve and help them reduce their part numbers and supply base by consolidating their procurement and assembly efforts down to a single part number product supplied by us. Our component sourcing relationships further enable our OEM customers to recognize resource reductions, inventory reductions and engineering support advantages.

Additionally, our relationships with international OEM customers that supply their industrial equipment into the United States generate opportunities for us to further supplement our business. We believe that, once one of our power systems is engineered into a foreign industrial OEM’s product, that OEM is likely to also standardize on our power system solutions for its non-emission-compliant power systems. This standardization by foreign industrial OEMs reduces ongoing engineering, aftermarket and field service support requirements, while supporting a product strategy that can easily be adjusted to any future worldwide changes in emission requirements. These relationships further provide us with growth opportunities beyond those dependent upon U.S. demand for emission regulated products, and solidify our supplier and partnership position with our foreign industrial OEM customers.

Moreover, even if our relationship with an international OEM customer is limited to United States compliant power systems, we are in an opportune position to provide additional emission-compliant power systems in the future, as emission regulations for industrial equipment begin to emerge in other countries around the world. Given our established expertise and worldwide presence, we provide a cost effective strategy to meet emerging emission regulations for both domestic and foreign industrial OEMs that can continue to leverage off our emission expertise and aggregation capabilities.

 

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Our Superior Technology

We are a recognized leader in providing industrial OEMs with highly engineered, technologically superior, emission-certified power system solutions that cover a wide range of possible fuel alternatives. Rather than dedicating the significant resources necessary to develop the in-house capabilities to design and manufacture technologically sophisticated, emission-certified power systems for their products, our OEM customers are able to leverage our proven power system technology, our engineering application expertise, the broad range of our EPA and CARB emission-certified power systems and our industrial equipment testing and certification processes. By utilizing our emission-certified, technologically sophisticated power systems, our OEM customers recognize potentially significant cost reductions. They are able to focus their efforts on the development of operations and system components core to their business, without having to expend considerable resources associated with the emission certification process, which requires potentially years to perform durability testing of the engine emission system at zero and 5,000 hours, production line testing on a quarterly basis and field compliance audit testing, in each case mandated and regulated by the EPA and CARB.

The level and range of our EPA and CARB emission-certified product offering further demonstrates the strength of our technology. Our emission-certified products not only meet existing emission standards of the EPA and CARB, but also meet all publicly disclosed EPA and CARB emission requirements for future years, thereby reducing our OEM customers’ costs and providing our OEM customers with a present day solution for future emissions requirements. We are able to maintain and enhance our position as a supplier of technologically sophisticated, emission-certified power systems through our experienced and technologically savvy team of application engineers. This team gives us the ability to support and integrate our power systems into a significant number of industrial OEM applications. We believe that our continued recruitment and development of talented personnel will augment our ability to stay ahead of emerging technologies in the industrial OEM marketplace.

The graph below illustrates the low level of emissions (in grams per kilowatt-hour of oxides of nitrogen and hydrocarbons (“g/kW Hr NOx+HC”)) produced by the largest of our technologically sophisticated, large spark-ignited (“LSI”) power systems (engines of greater than 25 horsepower), relative to permitted emissions levels, under EPA standards, for equivalent diesel power systems and standard LSI power systems.

Further, we are not captive of our own internal manufactured components and technology. Unlike some of our competitors that focus on developing and manufacturing most of their own product technology and components, we believe that superior technology is derived from having the flexibility to incorporate the best proven technology available in the marketplace. We focus on developing deep internal engineering and application expertise, rather than on developing in-house components and technology. This affords us the flexibility to capitalize on current and emerging technology that best meets the requirements of any given application, as opposed to limiting our solutions by only utilizing internally-developed technology that might not provide the best solution. Because we do not directly compete in the development of this technology, suppliers of the underlying technology are interested in supplying their latest innovations to us. As a result, we believe we have access to the best proven technology available in the marketplace. We believe this strategy puts us in the best position to leverage off our significant OEM customer base and aggregation capabilities in order to provide the best available product and technology solutions for our OEM customers.

 

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Our Dedicated Customer-centric Product and Application Expertise

We have a customer-centric business focus. We commit our attention and efforts first on solidifying and expanding relationships with our existing customers by staying connected with our customers, being aware of challenges they face and understanding their evolving needs. Through our extensive experience in the industrial OEM marketplace and our adaptive technology strategy that we utilize in developing our power systems, we accept the specific requests of our individual customers and provide tailored power solutions to their power system needs. We believe that satisfaction of our current customers’ needs helps generate new opportunities for us to expand our market presence and obtain new business. In addition, we are always looking for opportunities that may develop into new customer relationships.

Our goal is to be not only a leader in technology, but also a leader in customer satisfaction at all levels of customer interaction. Our product and application experience and expertise extends beyond our extensive design, prototyping, testing and application integration engineering capability. Our entire team, from production personnel to our customer support staff, is highly experienced in both the products we sell and the OEM customer applications into which they are integrated. This experience is derived from both industry experience with industrial equipment and formal training.

We assign a customer support engineer, holding an engine technology degree, to each of our OEM customers. Each customer support engineer provides dedicated application support for our OEM customers, providing a direct line of communication between the OEM’s manufacturing line and our production operations. Our quality, field service support and service operations have similar capabilities and provide knowledgeable and responsive support to our OEM customers at every point of customer interface.

Growth Strategy

Our core strategy is to develop comprehensive power solutions for the industrial OEM marketplace. We believe that, with our competitive advantages, our continued pursuit of our core strategy will drive growth in our business. More specifically, we intend to seek future growth as follows:

Expand Products and Services Provided to Existing OEM Customers

We are continually working to capitalize on organic growth opportunities, building upon our strong existing customer relationships, which in many cases are on a sole source basis. We plan to expand our business with our existing customers, including through the natural expansion of the products and services we supply to them, as their own businesses grow, their product lines evolve and they standardize based on our power solutions. As economic conditions improve and our existing OEM customers’ businesses and product lines expand, including into new market categories, we expect to continue to satisfy all of their emission-compliant, power system needs across their entire range of products. We continue to build upon our current range of emission-certified power solutions, including further broadening our range of alternative fuel power solutions and developing our hybrid power solutions, positioning us to offer comprehensive green power solutions that meet the emerging needs of our existing OEM customers.

Establish New Industrial OEM Relationships

We expect to strengthen our OEM customer base by developing new relationships with industrial OEMs. We seek to acquire new clients and gain new business from OEMs that we do not presently serve by focusing our marketing efforts toward these potential customers and leveraging our reputation, the depth, breadth and technological sophistication of our power solutions, our commitment to customer service and the cost savings we can offer, to develop these new relationships. Emphasizing our experience and reputation in market categories in which our power systems are already well-established, such as power generation, we focus on establishing new industrial OEM relationships in these market categories, thereby capturing an increasingly greater share of the market opportunity in these industrial OEM categories.

 

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We aim to establish new relationships with, and supply our emission-certified power solutions to, OEMs in a variety of industrial OEM market categories. In particular, we target expanding our OEM relationships in high-growth market categories, such as oil and gas applications, while maintaining and enhancing our penetration in market categories that are growing more slowly. As we gain traction in emerging industrial OEM categories that did not previously represent significant opportunities for our power systems, we plan to further focus our efforts on potential customers in those categories.

Expand Into New Geographic Markets

We plan to increase our penetration of international markets, expanding our business with existing and international OEM customers by satisfying their needs for EPA and CARB emission requirement compliant power systems for use in products sold in the U.S. and for non-compliant systems for use in products sold outside the U.S. Additionally, with our expertise in developing comprehensive, integrated green power systems, our expanding worldwide presence and our ability to provide beneficial cost structures to our customers as a result of our aggregation capabilities, we intend to take advantage of increases in demand for emission-compliant industrial OEM power systems from industrial OEMs that sell into international markets, as emissions regulations emerge in those markets.

Develop New Products

By leveraging the deep industry experience of our engineering and new product development teams, we are working to broaden the range of our power system product offerings, including with respect to engine classes and the industrial OEM market categories into which we supply our products. We capitalize on our technologically sophisticated, in-house design, prototyping, testing and application engineering capabilities to further refine our superior spark-ignited power system technology. We plan to leverage our experience and expertise in developing comprehensive, integrated green power solutions to expand our spark-ignited alternative fuel offerings and further develop our hybrid power solutions. We also plan to develop new, complementary product offerings, such as MasterTrak, our telematics solution that we offer bundled with our power systems, as well as on a stand-alone basis, to our OEM customers and other businesses.

Selectively Pursue Complementary Strategic Transactions

We may enter into strategic transactions, such as acquisitions of, or joint ventures or partnerships with, companies that present complementary non-organic growth opportunities. Specifically, we will seek opportunities that extend or supplement our presence into new geographic markets or industrial OEM market categories, expand our customer base, add new products or service applications (such as our 2007 acquisition of the telematics technology for our MasterTrak product and services; see “—Our Products and Industry Categories—Connected Asset Services”) or provide significant operating synergies. We believe that there may be domestic or international strategic opportunities available to us, as the sophistication of technology and amount of resources necessary to develop and supply power systems that meet increasingly stringent emission standards continue to increase.

Company History

Founded in 1985, we sought to break the then-prevalent OEM focus on the diesel engine as a commodity by providing value-added engineering, procurement and packaging of products and services to the industrial OEM marketplace. Because of our expanded product and service offerings, we played a significant role in moving the industrial OEM marketplace from a simple, engine-centric model to a more comprehensive power system solutions model. This comprehensive power system solutions model includes engineering, procurement and packaging solutions for cooling, electronics, air intake, fuel systems, power takeoff, exhaust, hydraulics and packaging application requirements. Through implementation of our strategy, we grew our diesel power system sales and became one of the largest Perkins diesel power system distributors in the world, a position we still maintain today.

 

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Our desire to expand our product and service offerings, coupled with the success of our strategy in the diesel marketplace, motivated us to move into the marketplace for spark-ignited power systems. From the mid-1990s going forward, we have applied our strategy to spark-ignited gasoline and alternative fuel (and now hybrid) products. In applying our extensive, prior experience developing power solutions for our diesel power system OEM customers to the spark-ignited industrial OEM marketplace, and addressing the growing demand for diesel alternatives as a result of environmental and economic considerations, we have developed a comprehensive range of alternative fuel power systems. As a result, we have become a leading supplier of power solutions to prominent OEM customers located throughout North America, Asia and Europe.

On April 29, 2011, we consummated a reverse merger transaction (the “Reverse Merger”) with Format, Inc. (n/k/a Power Solutions International, Inc.) (prior to the consummation of the Reverse Merger sometimes referred to herein as “Format”), in which PSI Merger Sub, Inc., a Delaware corporation that was newly-created as a wholly-owned subsidiary of the Format, merged with and into us, and we remained as the surviving corporation of the merger, becoming a wholly-owned subsidiary of Power Solutions International, Inc. The Reverse Merger was consummated under Delaware corporate law pursuant to the Merger Agreement, and, in connection with the consummation of the Reverse Merger, Format changed its name to Power Solutions International, Inc. Pursuant to the Merger Agreement, all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger converted into, and Power Solutions International, Inc. issued to the three stockholders of The W Group, an aggregate of 10,000,000 shares of our common stock and 95,960.90289 shares of the Preferred Stock, representing a substantial majority of the shares of our common stock and shares of the Preferred Stock outstanding immediately following the consummation of the Reverse Merger.

In connection with the Reverse Merger, Format entered into a stock repurchase and debt satisfaction agreement (the “Repurchase Agreement”) with Ryan Neely, Format’s sole director and executive officer immediately prior to the closing of the Reverse Merger, and his wife, Michelle Neely. Pursuant to the Repurchase Agreement, at the time of consummation of the Reverse Merger, (1) Format repurchased 3,000,000 shares of our common stock from Ryan Neely and Michelle Neely, which represented approximately 79.57% of the shares of our common stock outstanding immediately prior to the consummation of the Reverse Merger, and immediately thereafter Format cancelled those shares, and (2) Ryan Neely and Michelle Neely terminated all of their right, title and interest in and to, and released Format from any and all obligations it had with respect to, the loans made by Ryan Neely and Michelle Neely to Format from time to time, in exchange for aggregate consideration of $360,000 (collectively, the “Stock Repurchase”).

As a result of the Reverse Merger, Power Solutions International, Inc. has succeeded to the business of The W Group.

Our Products and Industry Categories

Power Systems for Off-Highway Industrial Equipment

Our power systems are customized to meet specific industrial OEM application requirements. Power system configurations range from a basic long block engine fitted with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry.

Our power systems include (1) EPA and CARB emission-certified spark-ignited water cooled internal combustion engines ranging from 0.97 liters to 22.1 liters, which utilize alternative fuels and gasoline, (2) non-certified spark-ignited water cooled internal combustion engines ranging from 0.65 liters to 22.1 liters, which similarly utilize alternative fuels and gasoline, and (3) emission-certified Perkins engines ranging from 0.5 liters to 7.1 liters, which utilize diesel fuel. Our diesel and alternative fuel power systems utilize water-cooled (as opposed to air-cooled), multi-cylinder engines. We are also developing hybrid power solutions.

 

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Our products are sold into a diversified set of markets within the industrial OEM industry, including power generation, oil and gas, material handling, aerial work platforms, sweepers, arbor, welding, airport ground support, agricultural, turf, construction and irrigation. Different types of power systems are used within different industry categories.

Power Generation

We offer EPA and CARB emission-certified power systems, including 0.97 liter to 22.1 liter spark-ignited power systems utilizing alternative fuels, for stationary emergency and non-emergency (prime power generation and peak shaving power systems) power generation products. Emergency engines are stationary engines which operate solely in emergency situations and during required periodic testing and maintenance. Examples include engines used in generators to produce power for critical networks when electrical power from the local utility provider is interrupted, and stand-by engines that pump water in the event of a fire or flood. Prime power generation products produce continuous generation of power for an extended period of time, and peak shaving products generate power at times of maximum power demand.

We currently supply our power systems to a substantial number of manufacturers of power generation products, including Cummins, Kohler, MTU and Caterpillar, four of the world’s largest such manufacturers. We believe that our customers choose our power solutions because no other power system producer provides as broad of a range of emission-certified, spark-ignited power systems for this industry category. Additionally, by utilizing a common fuel system and electronic controls across our range of power systems, we provide our customers with the opportunity to support and train their personnel on one standardized fuel system and one set of electronic controls employed throughout the range of products they acquire from us.

Oil and Gas

The oil and gas market category includes oil field pumps, progressing cavity pumps, and other components and machines utilized in drilling, evaluation, completion and production of oil and gas assets. Previously OEMs competing in these markets were generally not concerned about fuel economy, cost of repair or efficiency of operation. Today, however, there is a growing focus in this market category on, and understanding of, the costs associated with down time, the value of fuel savings with more economical solutions and the benefits of using product portfolios with consistent fuel systems and aftermarket support. Environmental disasters like the oil leak in the Gulf of Mexico following the explosion of BP PLC’s Deepwater Horizon drilling platform may serve to highlight the need to use specialized fuel system technology in oil and gas equipment. We believe that these factors will create significant opportunities for our power solutions in this market category. Furthermore, we believe that recent discoveries of oil and gas reserves in North America will drive domestic demand for the products of oil and gas OEMs, enhancing our growth opportunities.

 

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We are continuing to develop relationships with oil and gas companies for their well head jacks, compressors and power generators. We believe we are the only provider in this market that supplies pre-certified, as opposed to site-certified, power systems. Site certification is a tedious, and costly process for oil and gas equipment OEMs that can take many hours, to source components and integrate them into existing fuel system hardware (if even possible).

We also view this market category as an emerging market for our telematics solution, which further differentiates us from our competitors.

Material Handling – Forklift Trucks

The material handling market category includes forklift trucks and other mobile products utilized for movement, handling and storage of materials within a facility or at a specific location. We provide spark-ignited power solutions into the high volume 1.5, 3.5 and 5 ton capacity forklift markets, and may expand production in the future to support the 8 and 10 ton forklift markets in connection with anticipated increases in diesel prices resulting from regulations on diesel engines taking effect in 2011 through 2013. Currently, we provide our power solutions to, among others, Toyota, NACCO, Mitsubishi Caterpillar Forklift America, Doosan, Clark Material Handling Company, Heli (a division of Anhui Forklift Truck Group) and Hyundai Heavy Industries, seven of the largest forklift truck OEMs in the world.

Demand is currently strong in the United States for our material handling power systems as a result of emission and OSHA regulations. Based upon data supplied by Power Systems Research, Inc., we believe that, in the United States, nearly 100% of the indoor forklift market uses spark-ignited liquid propane gas or electric powered units (with approximately equal market shares), in contrast to Asian and European forklift markets which currently utilize diesel in excess of 85% of all applications. In connection with the implementation of pending EPA Tier 4 and European Stage IV regulations, and the resulting price increases related to the compliance of diesel engines with these regulations, we expect foreign spark-ignited liquid propane gas markets to grow, driving increased international demand for our power solutions.

Aerial Work Platforms

The aerial work platforms market category consists of aerial work platforms, or machines used to provide access to areas typically inaccessible because of their height. Rental companies represent a majority of all purchasers in this industry category. We currently sell our liquid propane gas/gasoline dual fuel power systems to four of the largest OEMs of aerial work platforms in the world, including JLG, Skyjack, Haulotte and Snorkel.

As a result of the increase in diesel engine pricing related to the implementation of EPA Tier 4 regulations, we expect to see an increase in the number of OEMs in the aerial work platforms market which consider our liquid propane gas and gasoline powered power solutions, as an alternative to diesel powered power systems.

Industrial Sweepers

The industrial indoor sweeper market category consists of machines utilized for cleaning and sweeping various indoor surfaces. The power solutions for this market category utilize both spark-ignited and diesel engines, as well as electric motors. The industrial indoor sweeper market includes three significant OEMs – Tennant Company, Nilfisk and PowerBoss. We currently supply to each of these OEMs 100% of their 30 to 80 horsepower liquid propane gas and gasoline power systems. We believe this market category represents a growth opportunity for our hybrid power systems.

Arbor Products

The arbor products market category includes wood chippers and grinders. We currently provide engines to four of the largest OEMs of wood chippers in the United States. We also design and manufacture our own proprietary power take-off clutch, which may be applied to any of our arbor product power systems. See “—Other Engine Power Products—Power Take Off (“PTO”) Clutch Assemblies for Industrial Applications.”

 

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We believe that our diesel power systems maintain a leading position in the market for wood chippers that utilize water-cooled engines. We believe that diesel regulations scheduled to take effect in the near future will cause EPA Tier 4 diesel engine packages to become more expensive and, as a result, open the market for consideration of our gasoline and other alternative fuel engine packages.

Other Industry Categories

We provide power solutions within other industrial OEM markets, including welding, airport ground support, agricultural, turf, construction and irrigation.

Other Engine Power Products

Power Take Off (PTO) Clutch Assemblies for Industrial Applications

We design and manufacture our own proprietary PTO clutch assemblies (a mechanical component which drives separate power to various parts of a given piece of industrial equipment) for industrial applications. Our PTO clutch assemblies are designed for heavy duty industrial applications.

Customized OEM Subsystems, Kits and Componentry

Leveraging off our global sourcing capabilities, we supply engine packaging, subsystems, kits and componentry associated with cooling systems, electronic systems, air intake systems, fuel systems, housings and power takeoff systems, exhaust systems, hydraulic systems and enclosures to industrial OEMs for incorporation into their applications, in addition to the complete engine power systems we provide to these OEMs.

Connected Asset Services

We have begun to offer connected asset services through our telematics solution, MasterTrak. We provide services to our OEM customers that allow these OEMs and their customers to remain connected to their equipment, even as the equipment is being utilized in the field. These capabilities and services are in many respects similar to General Motors’ “OnStar” service. Our MasterTrak solution includes:

 

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GPS for location monitoring, geofencing and directions for rapid service dispatching;

 

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Automated and continuous remote asset monitoring with automatic alerts and notifications that can be transmitted via e-mail and text messaging;

 

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Maintenance management which provides the ability to monitor and provide notice of impending equipment maintenance requirements based on actual equipment utilization (as opposed to random time intervals);

 

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Real-time, bi-directional communication capability for remote testing and troubleshooting; and

 

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Extensive web-based monitoring and reporting capability with multi-tiered system security available at all times.

Through MasterTrak, we provide our OEM customers and their customers the ability to track the location and functional status (including maintenance requirements) of their assets in real-time via web access and automated alerts. Such monitoring capabilities provide information regarding the specific utilization characteristics of a connected asset, and allow our customers and their customers to efficiently and proactively schedule service maintenance. These attributes will help reduce unexpected equipment failures, which will help to further reduce the total cost of ownership of a given piece of equipment, and may generate additional sale and service opportunities for the OEM customer.

 

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We offer MasterTrak with our engine power systems as a bundled solution, and also on a stand-alone basis both to our OEM customers and to other businesses to which we do not currently supply our power solutions. We have also developed a relationship with SmartEquip, based in Norwalk, Connecticut, to incorporate MasterTrak into SmartEquip’s aftermarket service platform for industry suppliers. This product pairs data regarding failures and faults generated by MasterTrak with OEM-provided recommendations to remedy these faults, and produces a corrective or preventative maintenance solution.

While these connected asset services have not yet provided a material portion of our revenues, we believe our telematics solution represents a meaningful growth opportunity for us.

Service and Support

Aftermarket and Service Parts

We have extensive aftermarket and service parts programs. These programs consist of: (1) internal aftermarket service parts programs with worldwide sales and distribution capabilities, and (2) internal OEM developed service parts programs for components and products supplied by us. Recently, we have increased our focus on, and investment in, the aftermarket portion of our business. We have grown our industrial spark-ignited engine parts business by employing experts in the gas engine aftermarket field, increasing our investment in global sourcing of parts and expanding parts books and online ordering capabilities. We have also developed stocking programs and maintenance kits that enable OEMs, service dealers and distributors to reduce downtime and increase product utilization.

We have focused on capturing the aftermarket sales of the value added components that we include in our power systems. With a significant portion of the selling prices of our power systems coming from value added components, this is a large, continuing growth opportunity for our aftermarket business.

Product and Warranty Support

We provide technical support and training to our OEM customers. These services include in-plant training and support through web- and phone-based field service. Our dedicated team of product and application engineers delivers high quality, responsive technical support to our OEM customers.

Customers

Our customers include large, industry-leading, multinational organizations that demand automotive grade engineering support, product quality and on-time delivery. We believe that the number of competitors capable of supporting not just the sophisticated technology requirements, but also the world class automotive engineering, quality and delivery requirements emphasized by industrial OEMs is limited. We are solidly positioned to capitalize on the diminishing base of suppliers capable of meeting these increasingly stringent customer expectations. In almost every industrial OEM category, we maintain a supplier relationship with two or more of the largest OEMs in their respective industry category.

Our depth of expertise and broad range of product offerings is the underlying basis for our position as a sole source provider of products to a majority of our OEM customers. We estimate that over 70% of the power systems that we supply are provided to our major OEM customers on a sole-source basis. Our strong customer base, which includes a diversity of customers across industry categories, provides a broad range of opportunities for continued growth.

Our largest customers include Kohler, Bandit, Cummins, MTU and Toyota. The only customer that represented in excess of ten percent of our consolidated revenues in fiscal 2010 was Kohler.

 

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Operations and Research and Development

Design and Engineering / Research and Development

Our research and development efforts are market driven. Our sales team first meets to identify and define market requirements and trends and then communicates that vision to our engineering and new product development groups. Our engineering and new product development groups then review our existing power system portfolio and develop new solutions that build upon the technology within that portfolio. We maintain in-house design, prototyping, testing and application engineering capability, including specialists in EPA and CARB certification, fuel systems, electronics, cooling systems, mechanical engineering and application engineering. Our design and application engineering expertise and capabilities include expertise in (1) emissions compliance, (2) design and development of standardized and customized products for incorporation into industrial equipment, (3) three-dimensional solid modeling, (4) computer-based modeling and testing, (5) rapid OEM product prototyping, (6) industrial OEM product retrofitting and testing and (6) support for application engineering and system integration.

We have also established engineering outsourcing relationships for design, development and product testing that allow us to fulfill demands for specialty services and satisfy fluctuating workload requirements. We utilize engineering relationships in India to quickly increase or decrease product design, development and testing services as dictated by demands from our industrial OEM customers. Where applicable, we also leverage off the design, development and testing capabilities of our supplier base.

We provide the design, durability testing, validation testing and compliance with other engineering and administrative requirements necessary to meet and obtain EPA and CARB certification for a range of spark-ignited engines. As a result, we provide our OEM customers with emission-certified power systems, without these OEMs having to expend considerable research and development time and resources related to obtaining power system certification. We further provide the tools and services necessary to support revalidation and other EPA and CARB requirements that exist beyond the initial emission compliance requirements. As a result of such revalidation, we become the “Manufacturer of Record” for the emission-certified engine that is incorporated into the industrial OEM’s equipment.

We staff our engineering support activities associated with released product and component sourcing programs with dedicated internal engineering personnel, separate from our product and application development engineering team. This allows us to provide committed engineering and technical attention to internal operational support, customer production support and component sourcing activities, thereby helping to buffer the demands placed on our product and application development engineering group. Through such attention and support, we are able to maximize the focus of our product and application development engineering group on current and future design, prototyping, testing and application development activities resulting in shorter design, prototyping and testing cycles for our OEM customer base.

Our research and development expenditures for our fiscal years 2010, 2009 and 2008 were approximately $3,005,000, $2,387,000 and $2,623,000, respectively.

Manufacturing

Our current manufacturing operations consist of product assembly at our facilities in Wood Dale, Illinois. We utilize technologically sophisticated, flexible assembly lines in our manufacturing facilities, and allocate production capacity on our assembly lines to accommodate the demand levels and product mix required by our OEM customers. Our flexible assembly lines are equipped with display screens, through which our production personnel are able to monitor design and other technological specifications for each product being assembled on the assembly line at that time. The information displayed on these screens is supplied from a central server, which is updated in real-time with all current product information. Through this process, we ensure that the product assembly and other specifications utilized by our production personnel is the most current information available. We have also developed efficient in-line methods to support specialized product testing, as required by a specific customer or product application.

Our engineering and manufacturing systems utilize sophisticated, paperless, integrated software based management and control systems. Our warehouse systems include computerized management systems and high speed infrastructure such as wire guided racking systems and high density automated carousel systems. We utilize a

 

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dynamic, software-driven inventory management system, which allows us to accurately monitor inventory levels for our comprehensive power systems, subsystems and individual components. We also incorporate within our manufacturing process software that enables us to identify and deliver components and other parts to our OEM customers.

We focus on safety, quality and on-time delivery in our manufacturing operations. We are 9001-2008 ISO Certified, the highest ISO certification available. We also use Six Sigma, 5S and other disciplines in our goal of continuous improvements in quality and on-time delivery. Structured staff training is a constant priority and includes closed-loop quality monitoring and feedback systems.

Supplier Relationships

Our major engine suppliers include Caterpillar, General Motors and Doosan. In addition, we coordinate design efforts for our technologically sophisticated fuel systems with a supplier from whom we source fuel systems on an exclusive basis. We also internally design other parts and components for our products and globally source them from a variety of domestic and global suppliers. Because we design many of our parts and components in-house, we are generally not limited in using only certain suppliers. As such, we are able to select our supplier relationships based upon a supplier’s reliability and performance.

We aggregate our product sourcing efforts across our large and diverse OEM customer base and across industry categories, capitalizing on volume, economies of scale and global supply opportunities. Our OEM customers leverage off the aggregation of our global sourcing, procurement, assembly and packaging services, thereby obtaining cost benefits that might not otherwise accrue to them if they rely on their own internal resources, capabilities and more limited demand requirements. Through this process, industrial OEMs are able to reduce their part numbers and supply base by consolidating their procurement and assembly efforts down to a single part number product supplied by us. We are then able to deliver this single assembly to an industrial OEM’s production line as an integrated drop-in to the OEM’s end product.

Sales and Marketing and Distribution

Sales and Marketing

We utilize a direct sales and marketing approach to maintain maximum interface with, and service support for, our OEM customers. This direct interface incorporates our internal technical sales representatives. In Asia and Europe, we currently complement our direct OEM relationships with local, independent sales and support organizations. These local sales and support organizations provide the necessary knowledge of local customs and requirements, while also providing immediate, local sales, engineering and customer support.

Where our domestic (and typically smaller) OEM customers require limited volume, regional distributions of our power systems, we support our OEM customers through engagements with regional distributors. We have developed similar distribution relationships with respect to certain of our current OEM customers throughout Europe.

Aftermarket Distribution

Our aftermarket and service parts distribution organization consist of three main sales and distribution programs:

 

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OEM Customers With an In-House, Spark-Ignited Product Service Parts Program: For our OEM customers that maintain their own service parts distribution and product support programs, we supply them with the information and component products required to support an effective global OEM customer service parts program.

 

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•

OEM Customers Without an In-House Product Service Parts Program: For our OEM customers that do not maintain their own service parts distribution and product support programs, we maintain a web-based and internal sales oriented global aftermarket and service parts distribution system for our spark-ignited product and ancillary components. Through this product support program that we provide on behalf of our OEM customers, we capitalize on market opportunities that exist outside of those associated with our OEM customer base.

 

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Perkins Diesel Service Parts Program: We provide Perkins diesel service parts through a network of established service and parts organizations located throughout our 12-state distributor territory.

Intellectual Property

We consider portions of our emission certification process to be proprietary trade secrets. In addition to putting our OEM customers’ engines through initial emission compliance testing, including durability testing, production line testing and field compliance audit testing, we also provide the tools, and perform sophisticated testing and other services, on these engines to comply with EPA and CARB requirements. As a result of the lengthy and technologically sophisticated testing we perform to revalidate these engines, we become the “Manufacturer of Record” for the emission-certified engine that is incorporated into our OEM customers’ equipment.

In addition, many of the components we source from our suppliers and which are incorporated into our power systems utilize proprietary intellectual property of our suppliers. We also license certain intellectual property from third parties for use in our power systems and our manufacturing processes. We rely on a combination of trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights, as well as the intellectual property of our power system component suppliers and of third parties from which we license intellectual property. We do not currently own any material patents, but believe that the safeguards we have in place, together with the costs associated with the development, testing, launch and marketing of competitive products, adequately protect our intellectual property rights.

Competition

We believe we are one of the few providers of comprehensive power solutions to the industrial OEM market. However, the market for our products and related services is intensely competitive, subject to rapid change and sensitive to new product and service introductions and changes in technical requirements. Some competitors have longer operating histories, greater name recognition and greater financial and marketing resources. Competition in our markets may become more intense as additional companies enter them and as new technologies are adopted. Generally, we believe that the principal competitive factors for our business include the following:

 

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Completeness and comprehensiveness of power solutions;

 

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Range of power systems employing common technology platform;

 

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Emissions regulation (EPA and CARB) compliance and certification;

 

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Ease of installation;

 

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Pricing and cost effectiveness;

 

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Breadth of product offerings, including system power and fuel alternatives;

 

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Ability to tailor power solution to specific customer needs;

 

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Performance and quality; and

 

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•

Customer support and service.

We believe that, with our current product lineup and our ongoing research and product development efforts, as well as our global procurement capabilities, we are able to compete effectively based on each of these factors.

Among our competitors are fuel system providers such as Westport Innovations, Inc., Fuel System Solutions and Woodward Governor, Inc. These companies supply engines and engine system componentry into the industrial OEM marketplace. However, we do not believe that any of the other fuel system providers with which we compete are able to provide the single assembly, integrated, comprehensive power solutions that our OEM customers demand and that we provide on a cost-effective basis. Further, some of our competitors do not have the internal resources or capabilities to enable them to meet these customer requirements and, in their efforts to compete, sometimes rely upon third party logistic companies to fit and dress engine systems with specific engine parts and components which these competitors are unable to provide themselves. As a result of the changing environment of the marketplace, some fuel system providers have been forced into non-core competency areas and some have exited the marketplace entirely.

Other competitors have been automotive engine companies, but a number have ceased directly supplying power systems to industrial OEMs (although they continue to supply their standard engines and components to producers of power systems for this market). They have left this market primarily because production of emission-compliant and certified industrial engines is not in their core competency areas and generally the changing regulations create difficulties for them as engine life spans are short. More generally, we believe that the significant costs associated with developing and certifying emission-compliant power systems as applicable regulations change have led some companies to exit our markets and have deterred others from entering them.

Government Regulation

Our Products

Our power systems are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emissions and noise. Our power systems are subject to compliance with all current emissions standards imposed by the EPA, state regulatory agencies in the United States, including CARB, and other regulatory agencies around the world and established for power systems utilized in off-highway industrial equipment. EPA and CARB regulations imposed on engines utilized in industrial off-highway equipment generally serve to restrict emissions, with a primary focus on oxides of nitrogen, particulate matter and hydrocarbons. Emission regulations for engines utilized in off-highway industrial equipment vary based upon the use of the equipment into which the engine is incorporated (such as stationary power generation or mobile off-highway industrial equipment), and the type of fuel used to drive the power system. Further, applicable emission thresholds differ based upon the gross power of an engine utilized in industrial off-highway equipment.

The first EPA emissions regulations adopted for diesel engines, known as Tier 1, applied to diesel engines used in mobile off-highway applications in the U.S., and similar standards for diesel engines, known as Stage I regulations, were implemented thereafter in Europe. The EPA and applicable agencies in Europe have continued to develop emission regulations for diesel engines in the U.S. and Europe, respectively, and have adopted more restrictive standards, with Tier 3 and Stage III regulations currently in effect in the U.S. and Europe, respectively. Recently, the EPA adopted Tier 4 diesel emission requirements, applicable to nonroad diesel engines used in industrial equipment. Similarly, Europe has adopted more restrictive standards under its Stage IV regulations. Tier 4 and Stage IV regulations will be phased in commencing in the beginning of 2011, and call for reductions in levels of particulate matter and oxides of nitrogen by approximately 90% from current levels in a majority of power categories.

The EPA and CARB have similarly adopted regulations to reduce pollutant emissions for spark-ignited engines utilized in off-road equipment. Similar to standards which apply to diesel engines, these regulations serve to reduce emissions of hydrocarbon and oxides of nitrogen for engines of varying powers and industrial equipment applications. The EPA and CARB continue to further enhance existing emission regulations, including in 2007 and 2010, by amending existing emission standards and test procedures for large spark-ignited off-road engines (i.e., engines rated at 25 horsepower or greater) by further restricting emissions of hydrocarbon and oxides of nitrogen.

 

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All of our power systems meet existing emission standards of the EPA and CARB, and also meet all publicly disclosed EPA and CARB emission requirements for future years. Failure to comply with these standards could result in adverse effects on our future financial results.

Pursuant to the regulations of the EPA and CARB, we are presently required to obtain emission compliance certification from the EPA and CARB to sell certain of our power systems generally throughout the United States and in California. We are also required to meet foreign emission regulations standards to sell certain of our power systems internationally. Currently, the emission certification process with the EPA and CARB includes, among other requirements, durability testing of the engine emission system at zero and 5,000 hours, production line testing on a quarterly basis and field compliance audit testing. Each of our power systems must be emission-certified before it can be introduced into commerce, and must meet component, subsystem and system level durability and emission tests.

We are also subject to various laws and regulations relating to our telematics offering. Among other things, wireless transceiver products are required to be certified by the Federal Communications Commission and comparable authorities in foreign countries where they are sold. We currently maintain applicable certifications from governmental agencies in each of the jurisdictions in which our telematics product is required to be so certified.

Our Operations

Our operations are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required to incur significant costs to comply with such laws and regulations in the future, and any failure to comply with such laws or regulations could have a material adverse effect upon our ability to do business.

Properties

We operate within approximately an aggregate of 249,000 square feet of space in four facilities located in the Chicago, Illinois area. The following table lists the location of each of our facilities material to our business (one of which we own, and the others of which are leased by us), such facility’s principal use, the approximate square footage of such facility, and the current lease expiration date (to the extent applicable):

 

Location		Principal Use		Square Footage				Lease Expiration
Wood Dale, Illinois		Sales, Engineering & Product Support Offices; Engineering Development and Product Assembly			99,000			April 30, 2012
Wood Dale, Illinois		Service Parts Sales; Warehousing & Distribution			90,000			April 30, 2012
Elk Grove Village, Illinois		Warehousing			18,000			April 30, 2012
Wood Dale, Illinois		Finance & Operations Offices; Product Assembly			42,000			Owned

 

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The facilities collectively house our manufacturing operations. We believe that our facilities are adequate to meet our current needs and that additional facilities will be available for lease, if necessary, to meet any of our future needs.

Employees

As of March 31, 2011, our workforce consisted of approximately 220 persons, including approximately 75 full-time and two part-time employees, as well as members of our production team whose services we obtain through an arrangement with a professional employer organization and other individuals whose services we obtain through a temporary employment agency. Of these persons, approximately 21 were in Product Development and Emissions Compliance, 15 were in Sales, 18 were in Customer Support Engineering, Quality and Service, 14 were in Executive Management and Finance, 27 were in Operations Management and approximately 125 were in Production. In addition, Product Development and Engineering supplements fluctuating demands for resources through external design and drafting outsourcing services located in India, and Asian sales and procurement activities are supported through an external dedicated outsourced service organization located in Asia.

None of the members of our workforce are represented by a union or covered by a collective bargaining agreement. We believe we have a good relationship with the members of our workforce.

Legal Proceedings

From time to time, in the normal course of business, we are a party to various legal proceedings. We do not currently expect that any currently pending proceedings will have a material adverse effect on our business, results of operations or financial condition.

 

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Management

Prior to the closing of the Reverse Merger and the Private Placement, Ryan Neely was the sole member of Format’s board of directors, and the only executive officer of Format. Our articles of incorporation and bylaws provide that our board of directors has the authority to set the size of the board of directors from between one and 15 directors and, pursuant thereto, immediately prior to the consummation of the Reverse Merger, the Stock Repurchase and the Private Placement, Format’s board of directors expanded the size of the board of directors to six members. Pursuant to the terms of our articles of incorporation, our board of directors is classified with respect to the terms for which its members will hold office by dividing the members into three classes, with the terms of the directors of one class expiring at each annual meeting of our shareholders, subject to the appointment and qualification of their successors. See “—Terms of Office” below. However, pursuant to the Private Placement Purchase Agreement, we agreed to a form of certificate of incorporation for the surviving entity in the Migratory Merger, which certificate of incorporation will declassify our board of directors. Accordingly, upon the consummation of the Migratory Merger, and the declassification of our board of directors, each of our directors will hold office until the next annual meeting of stockholders and until his or her successor is duly elected and qualified.

Mr. Neely, as the sole member of Format’s board of directors, approved the appointment of Gary Winemaster to fill one of the newly-created vacancies on our board of directors as a member of Class I of our board of directors, effective immediately following the closing of the Reverse Merger and the Private Placement, and approved the appointments of (1) Thomas Somodi as a member of Class III of our board of directors, (2) each of Kenneth Winemaster and Kenneth Landini as a member of Class II of our board of directors, and (3) H. Samuel Greenawalt as a member of Class I of our board of directors, to fill the remaining vacancies on our board of directors, in each case effective as of May 23, 2011, the date that is ten days after the date on which we filed with the SEC and mailed to our shareholders an information statement in accordance with Rule 14f-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding such appointments (the “Information Statement Date”). In connection with such action, Mr. Neely designated himself as a member of Class III of our board of directors.

Concurrently with the appointment and designation by Mr. Neely of the new members of our board of directors in connection with the Reverse Merger and the Private Placement, Mr. Neely appointed the following persons as our new executive officers, effective immediately following the closing of the Reverse Merger and the Private Placement: Gary Winemaster – Chairman of the Board, Chief Executive Officer and President; Thomas Somodi – Chief Operating Officer and Chief Financial Officer, and Kenneth Winemaster – Senior Vice President and Secretary. These individuals held prior to the Reverse Merger, and currently hold, the same positions with The W Group, our wholly-owned subsidiary through which we conduct our business, provided that Gary Winemaster was also appointed as the Chairman of the Board effective immediately following the closing of the Reverse Merger and the Private Placement. In connection with the consummation of the Reverse Merger and the Private Placement, we agreed to endeavor to hire a new Chief Financial Officer as soon as reasonably possible. We believe that our hiring of a new Chief Financial Officer will allow Mr. Somodi (who is expected to continue as our Chief Operating Officer) to focus his efforts on his operational and strategic responsibilities with us. Our officers are elected annually by our board of directors and serve at the discretion of our board of directors.

Prior to the closing of the Reverse Merger and the Private Placement, Ryan Neely delivered his irrevocable resignation from each office held by him with Format, effective immediately following the closing of the Reverse Merger and the Private Placement, and from our board of directors, effective on May 23, 2011, the Information Statement Date. On April 29, 2011, our board of directors accepted Mr. Neely’s resignation from the offices held by him with us, effective immediately following the closing of the Reverse Merger and the Private Placement, and accepted his resignation from our board of directors, effective on May 23, 2011, the Information Statement Date.

Gary Winemaster, Thomas Somodi, Kenneth Winemaster, Kenneth Landini and H. Samuel Greenawalt were all directors of The W Group immediately prior to the closing of the Reverse Merger. Pursuant to the terms of the Private Placement Purchase Agreement, we agreed to take action such that, no later than 180 days following the closing of the Private Placement, our board of directors will consist of five or greater directors, a majority of whom will constitute “independent directors” as defined by the marketplace rules of The NASDAQ Stock Market. See “Composition of the Board of Directors and Director Independence” below.

 

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The following table sets forth information concerning our executive officers and directors, including their ages and their position(s) with us and, with respect to our directors, the expiration of their current terms and the class of directors of which they are members. For purposes of the discussion below, unless the context otherwise requires, “we,” “our,” “us,” “our company” and similar expressions used in this section refer to The W Group prior to the closing of the Reverse Merger on April 29, 2011, and Power Solutions International, Inc. (f/k/a Format, Inc.), as successor to the business of The W Group, following the closing of the Reverse Merger. In other words, references below to service on our board of directors or as one of our executive officers prior to the Reverse Merger means service on the board of directors, or as an executive officer, as applicable, of The W Group.

 

Name		Age				Position		Executive Officer Since (1)		Director Since		Term Expires		Class of Director
Gary Winemaster			53			Chairman of the Board, Chief Executive Officer and President		2001		2001(2)		2013		I
Thomas Somodi			58			Director, Chief Operating Officer and Chief Financial Officer		2005		2005(2)		2011		III
Kenneth Winemaster			47			Director, Senior Vice President and Secretary		2001		2001(2)		2012		II
Kenneth Landini			54			Director		N/A		2001(2)		2012		II
H. Samuel Greenawalt			82			Director		N/A		2001(2)		2013		I

 

(1)	Includes service as an executive officer of The W Group, our wholly-owned subsidiary through which we now operate our business, through the consummation of the Reverse Merger.

(2)	Includes service as a member of the board of directors of The W Group through the consummation of the Reverse Merger.

Executive Officers/Directors

The following information pertains to our executive officers who also serve as directors, their principal occupations and other public company directorships for at least the last five years and information regarding their specific experiences, qualifications, attributes and skills.

Gary Winemaster has served as our Chief Executive Officer and President and as a director since 2001, and served as the Chief Executive Officer and President of Power Great Lakes (which, prior to the incorporation of our company in 2001, was the parent operating company of our business, and is currently our wholly-owned subsidiary) from 1992 until our incorporation in 2001. In connection with the Reverse Merger, Mr. Winemaster was also appointed as the Chairman of the Board. Mr. Winemaster is a co-founder of our company, and has played a significant role in developing and expanding our presence as a distributor of alternative fuel spark-ignited and diesel power systems. Prior to serving in his role as Chief Executive Officer and President of our company and of Power Great Lakes, Mr. Winemaster served as the Vice President of Sales for Power Great Lakes. Prior to founding our company, Mr. Winemaster worked in sales management for the European operations, with territory responsibility for the German, Scandinavian and Benelux markets, of Guardian Industries, a United States glass manufacturer. Mr. Winemaster holds a Bachelor of Science degree from the Wharton School at the University of Pennsylvania.

Our board of directors believes that Mr. Winemaster, as our Chief Executive Officer and President and as a co-founder of our company, should serve as a director because of Mr. Winemaster’s unique understanding of the opportunities and challenges that we face and his in-depth knowledge about our business, including our customers, products, operations and key business drivers, and our long-term growth strategies, derived from his long service as our Chief Executive Officer and President.

 

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Thomas Somodi has served as our Chief Operating Officer and Chief Financial Officer and as a director since 2005, and previously served as a consultant to us from 2002 to 2005. Mr. Somodi has over 30 years of experience in domestic and international corporate reorganizations, acquisitions, divestitures and greenfield expansions covering the U.S., the United Kingdom, South Africa, Canada, Mexico, Japan, the Caribbean, Germany and Australia. From 1980 to 1998, Mr. Somodi served as the Corporate Controller and, for a portion of such period, as VP of Finance of International Operations for Albert Trostel & Sons Company/Everet Smith Group, LTD, an international holding company with a significant presence in the leather tanning, precision molding, metal fabrication and foundry industries. Mr. Somodi served as an executive consultant for Crowe Chizek and Company LLC, a consulting and accounting practice company, from 1998 to 2000, and has personally owned and overseen eight independent companies covering pallet & crate manufacturing, packaging, lumber mill operations, furniture manufacturing, internet technology, media & advertising, access control/security and merchant processing services. Mr. Somodi holds a Masters of Science in management from the University of Wisconsin-Milwaukee, and a Bachelor of Business Administration in finance from the University of Wisconsin-Milwaukee. Mr. Somodi is also a certified public accountant in the state of Wisconsin.

Our board of directors believes that Mr. Somodi should serve as a director because of his significant executive experience, his financial and accounting expertise, and his extensive knowledge of our business and operations, which he has acquired through his service as our Chief Operating Officer and Chief Financial Officer.

Kenneth Winemaster has served as our Senior Vice President and Secretary and as a director since 2001. Mr. Winemaster has primary responsibility for our relationships and operations with Caterpillar and Perkins. Mr. Winemaster has expertise in raw material procurement, assembly and shipping.

Our board of directors believes that Mr. Winemaster, as our Senior Vice President, should serve as a director because of his extensive knowledge of our industry and in-depth knowledge of our business and operations.

Other Directors

The following information pertains to our non-employee directors, their principal occupations and other public company directorships for at least the last five years and information regarding their specific experiences, qualifications, attributes and skills.

H. Samuel Greenawalt has served as a director since 2001. Mr. Greenawalt has over 50 years of experience in the banking industry. Over the past 25 years, Mr. Greenawalt has served an instrumental advisory role in helping us achieve our growth initiatives and address our financial requirements. Since 2000, Mr. Greenawalt has served as a vice president of Sulpho Technologies, LLC, an automotive component service-provider, for which Mr. Greenawalt is also a partner and owner. From 1959 to 1995 Mr. Greenawalt served as executive vice president at Michigan National Bank, a mid-sized Midwestern bank. Mr. Greenawalt has served as a director of Williams Controls, Inc., a publicly held manufacturer of electronic throttle controls for commercial vehicles, since 1993 and currently serves as the chairman of the audit committee and as a member of the governance and nominating committee of the board of directors of Williams Controls. Mr. Greenawalt holds a Bachelor of Science degree from the Wharton School at the University of Pennsylvania, and is a graduate of the University of Wisconsin Banking School.

Our board of directors believes that Mr. Greenawalt should serve as a director because of his experience on the board of directors of another public company, which our board of directors believes will be beneficial to us as we move forward as a public company, as well as Mr. Greenawalt’s relevant business experience and his extensive financial expertise, which he has acquired through his years of experience in the banking industry.

Kenneth Landini has served as a director since 2001 and assisted in the development and growth of the business of our company since 1985. Mr. Landini previously served as the Vice President of Finance for our subsidiary, Power Great Lakes, Inc., from December 1985 to March 1988, and assisted us in establishing distributor relationships and expanding the territories into which we provide our power systems. Mr. Landini is a partner and co-founder of Landini, Reed & Dawson, P.C., a certified public accounting and consulting firm in southeastern

 

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Michigan, which was established in 1988. Mr. Landini has served as a certified public accountant for Landini, Reed & Dawson, P.C. since its inception. Mr. Landini holds a Bachelor of Arts degree from Albion College and is a licensed certified public accountant in the state of Michigan.

Our board of directors believes that Mr. Landini should serve as a director because of his significant knowledge of our industry, his prior experience with our business and his financial expertise, which will be important as our board of directors exercises its oversight responsibility regarding the quality and integrity of our accounting and financial reporting processes and the auditing of our financial statements.

Terms of Office

Our board of directors consists of five directors. Pursuant to the terms of our articles of incorporation, our board of directors is classified with respect to the terms for which its members will hold office by dividing the members into three classes, with the terms of the directors of one class expiring at each annual meeting of our shareholders, subject to the appointment and qualification of their successors. The term of service for directors on our board of directors is as follows: (1) Class I will expire at the 2013 annual meeting of our shareholders, (2) Class II will expire at the 2012 annual meeting of our shareholders, and (3) Class III will expire at the 2011 annual meeting of our shareholders. Each director will continue to serve as a director until such director’s term expires and such director’s successor is duly elected and qualified.

Family Relationships

Gary Winemaster, our Chairman of the Board, Chief Executive Officer and President, and Kenneth Winemaster, our Senior Vice President, Secretary and a member of our board of directors, are brothers. There are no other family relationships among the members of our board of directors or our executive officers.

 

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Executive Compensation

Compensation Discussion and Analysis

Philosophy and objectives

The primary objective of the compensation program for the executive officers of The W Group, which program we have now adopted for our executive officers, has been to retain and motivate our talented and qualified members of management to lead our business. Prior to the consummation of the Reverse Merger, The W Group’s compensation package consisted primarily of base salary, certain perquisites and other personal benefits and, on limited occasions, special performance-based bonuses. In 2010, The W Group paid its executive officers a mix of base salary and certain perquisites and other personal benefits, with compensation decisions being made by Gary Winemaster individually, or, where determined by Mr. Winemaster to be necessary or appropriate, in consultation with, and/or with the approval of, the board of directors of The W Group. The compensation in prior years for Mr. Somodi, The W Group’s and our current Chief Operating Officer and Chief Financial Officer, was determined based upon his employment agreement with The W Group, which expired in April 2010. See “— Employment Agreements” below for a description of Mr. Somodi’s prior employment agreement, as well as a description of our new employment agreement entered into with Mr. Somodi. As a private company, The W Group’s compensation plans were developed informally as indicated above.

Prior to the consummation of the Reverse Merger, Format, Inc. paid Ryan Neely, its only executive officer and its sole director, minimal compensation for services provided to Format, which compensation was determined by him in his discretion. Ryan Neely is no longer an executive officer or a member of our board of directors.

All future decisions regarding executive compensation will be the responsibility of our board of directors. While our board of directors has not yet established formal executive compensation programs going forward, we anticipate that such programs will focus on providing competitive levels of compensation to attract and retain qualified executives to contribute to our long-term success. We expect that our compensation program will include a mix of compensation awards that will serve both long-term and short-term goals, which may include base salary, cash bonus payments based upon the achievement of short-term individual and corporate goals, long-term equity-based awards and other benefits.

Elements of executive compensation

Base salary

Historically, The W Group has focused on providing its senior management with a level of base salary in the form of cash compensation appropriate for their roles and responsibilities. Base salaries for The W Group’s executives have been, and going forward we anticipate that base salaries of our executive officers will be, established based on the executive’s qualifications, experience, scope of responsibilities, future potential and past performance and cash available to pay executive compensation. The base salaries paid to the executive officers of The W Group in 2010 are reflected in the Summary Compensation Table below. In 2010, in determining the base salaries of The W Group’s executive officers, other than Mr. Somodi whose compensation was established by his employment agreement then in effect, The W Group considered such factors as past individual performance, cash available to pay executive compensation, and total compensation each executive officer previously received while employed with The W Group. The first factor (past performance) was measured subjectively by Mr. Winemaster individually or, where determined by Mr. Winemaster to be necessary or appropriate, in consultation with the board of directors of The W Group. The last two factors (cash available and total previous compensation) were measured objectively based on The W Group’s financial records. While our board of directors intends to re-evaluate our compensation program in its entirety, we anticipate that our board of directors will focus on similar criteria when determining annual base salaries for our executive officers. We anticipate that base salaries will be reviewed annually and adjusted from time to time by our board of directors to realign salaries with market levels after taking into account individual responsibilities, performance and experience.

 

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Perquisites and other benefits

Historically, The W Group has provided certain of its executive officers with perquisites and other personal benefits, but has not provided a defined benefit pension arrangement, post-retirement health coverage or similar benefits for any of its executive officers. The W Group’s executive officers have also been eligible to receive the same benefits that are generally available to all employees. We do not view perquisites as a significant element of our compensation structure, but do believe that perquisites can be useful in attracting, motivating and retaining executive talent. Our board of directors intends to re-evaluate our policies regarding perquisites and other personal benefits and may make changes as it deems appropriate.

Equity compensation

Each of our three executive officers has a significant equity interest in our company. However, The W Group has not granted equity awards as a component of compensation in the past (other than the equity in The W Group awarded to Mr. Somodi in connection with his joining The W Group as an executive officer, which equity has been converted into other securities pursuant to the Reverse Merger), and we presently do not have a stock option plan or other similar equity compensation plan for officers, directors and employees. As of the date hereof, no stock options, restricted stock or stock appreciation rights were outstanding.

We believe, however, that successful long-term performance may be achieved through an ownership culture that encourages long-term performance by our executive officers through the use of stock and stock-based awards. In the future, we may adopt and establish an equity incentive plan pursuant to which equity awards may be granted to eligible employees (including our executive officers), directors and consultants, if our board of directors determines that it is in our best interest and the best interest of our shareholders to do so. We believe that, if such an equity incentive program is adopted, stock-based awards may be used to incentivize officers to continue their employment with us, provide our executive officers with an opportunity to obtain an (or increase his or her, as applicable) ownership interest in our company and encourage our executive officers to focus on our long-term profitable growth. We believe that the use of stock-based awards would serve to promote our overall executive compensation objectives.

Incentive cash bonuses

While The W Group generally has not awarded incentive cash bonuses in the past to its executive officers, other than the cash bonus paid to Mr. Somodi pursuant to his prior employment agreement with The W Group (see “—Employment Agreements” for a description of this cash bonus paid to Mr. Somodi), our board of directors may determine that it is in the best interest of our company and our shareholders to do so. If adopted, we expect that any program awarding incentive cash bonuses would award executive officers based upon such criteria as their individual performance, as well as our overall business and strategic objectives, including corporate financial and operational goals.

Policies related to compensation

Guidelines for equity awards

We have not formalized a policy as to the amount or timing of equity grants to our executive officers. If our board of directors decides to adopt an equity incentive plan as a component of our executive compensation program, we expect that our board of directors would approve and adopt guidelines for equity awards. Among other things, we expect that such guidelines would specify procedures for equity awards to be made under various circumstances, address the timing of equity awards in relation to the availability of information about us and provide procedures for grant information to be communicated to and tracked by our finance department. We anticipate that such guidelines would require that any stock options or stock appreciation rights have an exercise or strike price not less than the fair market value of our common stock on the date of the grant.

Stock ownership guidelines

As of the date hereof, we have not established ownership guidelines for our executive officers or directors, but we intend to consider adopting such guidelines in the future.

 

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Compliance with Sections 162(m) and 409A of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code limits the deductibility of compensation in excess of $1 million paid to certain executive officers, unless such compensation qualifies as performance-based compensation. Among other things, in order to be deemed performance-based compensation for Section 162(m) purposes, the compensation must be based on the achievement of pre-established, objective performance criteria and must be pursuant to a plan that has been approved by our shareholders. At least for the next few years, we expect the cash compensation paid to our executive officers to be below the threshold for non-deductibility provided in Section 162(m), and, if our board of directors adopts an equity compensation plan in the future, and our shareholders approve such an equity plan, we expect that any such plan will afford our board of directors with the flexibility to make a variety of types of equity awards to our executive officers that will qualify as performance-based compensation under Section 162(m). However, we do not know whether any such equity incentive plan will be established and, accordingly, whether any awards which may be granted in the future will satisfy the requirements for deductibility under Section 162(m).

We also currently intend for our executive compensation program to satisfy the requirements of Internal Revenue Code Section 409A, which addresses the tax treatment of certain nonqualified deferred compensation benefits.

Summary Compensation Table

Power Solutions International, Inc. (f/k/a Format, Inc.)

The table below summarizes the compensation earned for the fiscal years indicated for services rendered to Power Solutions International, Inc. (f/k/a Format, Inc.), in all capacities, by Ryan Neely, its only executive officer during the last fiscal year.

 

Name and Principal Position		Year				Salary (2)				Bonus				Stock Awards				Option Awards				Non-Equity Incentive Plan Compensation				Nonqualified Deferred Compensation Earnings				All Other Compensation				Total (2)
Ryan Neely (1)			2010			$	30,000				—				—				—				—				—				—			$	30,000
			2009			$	15,000				—				—				—				—				—				—			$	15,000
			2008				—				—				—				—				—				—				—				—

 

(1)	Ryan Neely resigned from his position as our only executive officer effective as of April 29, 2011, immediately following the closing of the Reverse Merger and the Private Placement.

(2)

As of the closing of the Reverse Merger, $42,500 of such compensation for fiscal years 2010 and 2009 was accrued on the books and records of Format, and, in connection with the consummation of the Reverse Merger, Mr. Neely released Format from its obligation to pay Mr. Neely such $42,500 compensation amount for fiscal years 2010 and 2009 pursuant to the terms of the Repurchase Agreement.

 

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The W Group, Inc.

The table below summarizes the compensation earned for the fiscal year indicated for services rendered to The W Group, in all capacities, by (i) its Chairman of the Board, Chief Executive Officer and President, (ii) its Chief Operating Officer and Chief Financial Officer and (iii) the only other executive officer of The W Group during the last fiscal year.

 

Name and Principal Position		Year				Salary				Bonus				Stock Awards				Option Awards				Non-Equity Incentive Plan Compensation				Nonqualified Deferred Compensation Earnings				All Other Compensation				Total
Gary Winemaster			2010			$	500,000				—				—				—				—				—			$	37,655	(1)		$	537,655
Chairman of the Board, Chief Executive Officer and President
Thomas Somodi			2010			$	500,000				—				—				—				—				—			$	41,897	(2)		$	541,897
Chief Operating Officer and Chief Financial Officer
Kenneth Winemaster			2010			$	250,000				—				—				—				—				—			$	40,250	(3)		$	290,250
Senior Vice President and Secretary

 

(1)

This amount consists of (1) payments for (a) use of an automobile for Gary Winemaster, including insurance premiums, car payments, gas, parking and other similar car-related expenses, (b) mobile telephone service for Gary Winemaster and members of his family, (c) internet and landline telephone service, (d) sporting event tickets, (e) airfare for Gary Winemaster’s spouse and other family members, (f) dining-related expenses and (g) other personal and entertainment expenses, and (2) use of The W Group’s country club membership. In addition, this amount includes $1,013 paid by The W Group in respect of gross-ups of taxes for The W Group’s fiscal year ended December 31, 2010. While the automobile for Gary Winemaster and sporting event tickets are used for both business and personal purposes, the amounts reflected in the table above are the full amounts paid therefor by The W Group.

(2)

This amount consists of payments for life insurance premiums, mobile telephone service, dining-related expenses and other personal and entertainment expenses. In addition, this amount includes (1) $5,341 paid by The W Group in respect of gross-ups of taxes for The W Group’s fiscal year ended December 31, 2010, and (2) $27,381 for reimbursement of expenses incurred for professional services provided in connection with the restructuring of Mr. Somodi’s employment relationship with, and ownership interest in, The W Group.

(3)

This amount consists of payments for (a) Kenneth Winemaster’s personal automobile, including insurance premiums, gas, satellite radio, parking and other similar car-related expenses, (b) use of a company automobile by Kenneth Winemaster’s spouse, including insurance premiums, car payments, gas, parking and other similar car-related expenses, (c) mobile telephone service for Kenneth Winemaster and members of his family, (d) sporting event tickets, (e) interest payments on credit cards of Kenneth Winemaster, (f) dining-related expenses and (g) other personal and entertainment expenses. While the automobile for Kenneth Winemaster and sporting event tickets are used for both business and personal purposes, the amounts reflected in the table above are the full amounts paid therefor by The W Group.

Employment Agreements

Other than the employment agreement entered into with Mr. Somodi at the closing of the Reverse Merger described below, we do not have any employment agreements in effect with any of our executive officers.

 

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Mr. Somodi entered into an employment agreement with The W Group, dated as of April 16, 2005, which employment agreement was amended pursuant to the amendment to employment agreement, dated as of January 1, 2008 (the “Employment Agreement Amendment”). Mr. Somodi’s employment agreement, as amended by the Employment Agreement Amendment, provided for a minimum annual base salary of $500,000, discretionary bonus payments by The W Group as deemed appropriate by The W Group and life insurance premiums. Pursuant to the Employment Agreement Amendment, in The W Group’s fiscal year ended December 31, 2008, Mr. Somodi was awarded a cash bonus of $92,555, representing 25% of the prepaid interest savings resulting from the termination of The W Group’s credit facilities then in effect with Bank of America. The term of Mr. Somodi’s employment agreement commenced in April 2005 and expired in April 2010.

We entered into a new employment agreement with Mr. Somodi, dated April 29, 2011 and effective as of January 1, 2011. This employment agreement is scheduled to expire on December 31, 2012, and provides for an annual base salary of $500,000 in each of calendar years 2011 and 2012. Pursuant to the employment agreement, Mr. Somodi is further (1) eligible for a bonus for each of calendar years 2011 and 2012, as determined in the discretion of our board of directors, and (2) eligible for equity compensation under any equity plan established and maintained by us.

If Mr. Somodi’s employment is terminated, then under his employment agreement, Mr. Somodi will receive the compensation described below. If Mr. Somodi violates the employment agreement’s restrictions on competing with us or soliciting our employees, customers or suppliers, we will have the right to terminate payment or provision of the compensation described below and we will be entitled to reimbursement of any of these amounts that we have paid prior to such violation. If prior to the expiration of the term of the employment agreement we terminate Mr. Somodi without Cause (as defined in the employment agreement and described below) and Mr. Somodi executes a general release, then Mr. Somodi will be entitled to receive the remainder of his base salary he would have received if he had remained employed through and including December 31, 2012. If prior to the end of the term of the employment agreement, Mr. Somodi’s employment is terminated for Cause, Mr. Somodi will not be entitled to any compensation or other benefits, other than eligibility, to the extent permissible, for continued coverage under our health benefit plans. Upon the termination of Mr. Somodi’s employment with us, to the extent permissible, Mr. Somodi will be eligible for continued coverage under our health benefit plans, provided that Mr. Somodi reimburses us for the cost of any such continued coverage.

For purposes of Mr. Somodi’s employment agreement, “Cause” means a conviction by him of a felony, his gross negligence, willful misconduct or unlawful conduct which results in significant financial loss or liability to us, his disability, his liquidation or other transfer of an aggregate of more than fifty percent of any shares of our common Stock Mr. Somodi has received from Gary Winemaster pursuant to the purchase and sale agreement entered into between Mr. Somodi and Mr. Winemaster, his breach of any of the provisions in the employment agreement regarding confidentiality and restrictions on competing with us or soliciting our employees, customers or suppliers, and other customary events specifically set forth in the employment agreement.

Potential Payments Upon Termination or Change-in-Control

Prior to the Reverse Merger, The W Group paid premiums for life insurance policies on the lives of each of our current executive officers. However, no amounts are presented below for any of our executive officers other than Thomas Somodi, as Gary Winemaster and Kenneth Winemaster have historically funded premiums for such life insurance policies out of their respective base salaries. Further, pursuant to our employment agreement with Mr. Somodi entered into in connection with the closing of the Reverse Merger, Mr. Somodi is entitled to certain payments upon termination of his employment. See “—Employment Agreements” above for a description of payments to which Mr. Somodi is entitled pursuant to his employment agreement. Other than these arrangements, we currently do not have any compensatory plans or arrangements that provide for any payments or benefits upon the resignation, retirement or any other termination of any of our executive officers, as the result of a change in control, or from a change in any executive officer’s responsibilities following a change in control.

The table below provides a quantitative analysis of the amount of compensation payable to Thomas Somodi in each situation involving a termination of employment, assuming that each had occurred as of December 31, 2010.

 

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Fiscal 2010 Potential Payments Upon Termination or Change in Control

 

Name and Benefit		Death				Termination w/o Cause (other than Death) (1)				Termination with Cause (2)
Thomas Somodi
Life Insurance Policies		$	2,000,000	(3)		$	—			$	—
Base salary		$	—			$	1,000,000			$	—
Total:		$	2,000,000	(3)		$	1,000,000			$	—

 

(1)

Assumes our new employment agreement with Thomas Somodi entered into in connection with the closing of the Reverse Merger was in place and effective as of December 31, 2010. All amounts presented were determined in accordance with Mr. Somodi’s new employment agreement and assume that Mr. Somodi executes and delivers a general release in favor of us.

(2)	In the event Mr. Somodi’s employment is terminated for “Cause,” we will not have any further obligations with respect to Mr. Somodi’s employment (except for the payment of any base salary accrued through the date on which Mr. Somodi’s employment terminates).

(3)	Any such life insurance proceeds will be payable to the beneficiary of the policy in a single, lump-sum payment by the third-party insurance provider.

Director Compensation

During fiscal 2010, (1) no directors who were employees of The W Group were entitled to receive any compensation for serving as members of The W Group’s board of directors, and (2) no directors of Power Solutions International, Inc. (f/k/a Format, Inc.) were entitled to receive any compensation for serving as members of the board of directors of Format. During fiscal 2010, The W Group did not have a standard compensation arrangement for the non-employee members of the board of directors of The W Group. The table below summarizes the compensation earned by each non-employee director for service on the board of directors of The W Group or Format, as applicable, for the last fiscal year.

 

Name		Fees Earned or Paid in Cash				Stock Awards				Option Awards				Non-Equity Incentive Plan Compensation				Change in Pension Value and Nonqualified Deferred Compensation Earnings				All Other Compensation				Total
H. Samuel Greenawalt (1)			—				—				—				—				—			$	11,057	(2)		$	11,057
Kenneth Landini (1)		$	10,000				—				—				—				—				—			$	10,000
Robert Summers (3)			—				—				—				—				—				—				—
Peter Kristensen (4)			—				—				—				—				—				—				—

 

(1)	Includes compensation received in connection with his service on the board of directors of The W Group.

(2)	This amount consists of expenses related to use of an automobile for H. Samuel Greenawalt, including car payments and insurance premiums.

 

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(3)	Served as a member of the board of directors of Format, Inc. (n/k/a Power Solutions International, Inc.) until his resignation effective April 8, 2010.

(4)	Served as a member of the board of directors of Format, Inc. (n/k/a Power Solutions International, Inc.) until his resignation effective May 16, 2010.

We are currently re-evaluating our director compensation programs and intend to adopt new programs in the near future. We expect that such new policies will, among other things, entitle each non-employee director to receive an annual retainer and/or participation fees for attendance at regular and special meetings of our board of directors and, if we adopt an equity compensation plan, equity awards granted under such plan. Pursuant to these new compensation policies, we will not pay additional compensation to our executive officers for their services as directors.

 

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial ownership of our common stock and the Preferred Stock as of May 25, 2011, by the following individuals or groups: (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock and/or the Preferred Stock, as applicable, (2) each of our directors, (3) each of our executive officers, and (4) all of our directors and executive officers as a group. The table below further sets forth beneficial ownership information of our common stock and the Preferred Stock on a pro forma basis as if the Reverse Split occurred on or prior to May 25, 2011.

The information regarding beneficial ownership of our common stock reflects shares issuable upon conversion of Preferred Stock and in some cases (as indicated below), shares issuable upon exercise of Warrants. As described in greater detail below under “Description of Capital Stock – Description of the Preferred Stock – Series A Convertible Preferred Stock,” prior to the Reverse Split, the number of shares of our common stock into which the Preferred Stock is convertible is subject to limitations set forth in the Certificate of Designation. Immediately following the effectiveness of the Reverse Split, each issued and outstanding share of Preferred Stock will automatically convert into a number of shares of our common stock equal to $1,000 divided by the conversion price then in effect. The Warrants will be exercisable only following the effectiveness of the Reverse Split.

Unless otherwise indicated, to our knowledge, each person listed below has sole dispositive and voting power with respect to the shares of our common stock shown below as beneficially owned by such person, except to the extent authority is shared by spouses under applicable law and except for the shares of our common stock set forth next to our directors and executive officers listed as a group. Beneficial ownership and percentage have been determined in accordance with Rule 13d-3 under the Exchange Act and generally includes voting or investment power with respect to the securities. The information is not necessarily indicative of beneficial ownership for any other purpose.

As of May 25, 2011, (a) 10,770,083 shares of our common stock (336,597 shares of our common stock on a pro forma basis as if the Reverse Split was consummated on or prior to such date), and (b) 113,960.90289 shares of Preferred Stock, were issued and outstanding.

 

		Amount and Nature of Beneficial Ownership								Percent of Class								Pro Forma Amount and Nature of Beneficial Ownership (Giving Effect to Reverse Split) (3)								Pro Forma Percent of Class (Giving Effect to Reverse Split) (3)
Name and Address of Beneficial Owner (1)		Series A Convertible Preferred Stock				Common Stock (2)				Series A Convertible Preferred Stock				Common Stock (2)				Series A Convertible Preferred Stock				Common Stock				Series A Convertible Preferred Stock				Common Stock
Gary Winemaster			62,079.57914	(4)			27,283,588	(5)			54.47	%(4)			86.47	%(5)			—				5,376,425	(5)			—				54.68	%(5)
Thomas Somodi			9,596.09002	(6)			4,212,670	(7)			8.42	%(6)			30.13	%(7)			—				830,925	(7)			—				8.45	%(7)
Kenneth Winemaster			33,291.30775				14,645,578	(8)			29.21	%			66.83	%(8)			—				2,883,651				—				29.33	%
Kenneth Landini			590.01600				197,531	(9)			0.52	%			1.80	%(9)			—				49,168				—				0.50	%
H. Samuel Greenawalt			—				—				—				—				—				—				—				—
Austin W. Marxe and David M. Greenhouse (10)			7,000	(11)			2,343,526	(12)			6.14	%(11)			17.87	%(12)			—				875,002	(13)			—				8.64	%(13)
Park West Asset Management LLC			3,000	(15)			1,004,368	(16)			2.63	%(15)			8.53	%(16)			—				375,001	(17)			—				3.77	%(17)
Peter S. Park (14) All directors and executive officers as a group (5 persons)			95,960.90289				42,126,697	(18)			84.21	%			98.20	%(18)			—				8,309,244				—				84.50	%

 

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(1)	Unless otherwise indicated, the address of each person or entity is c/o Power Solutions International, Inc., 655 Wheat Lane, Wood Dale, IL 60191.

(2)	Reflects the shares of common stock issuable upon conversion of the Preferred Stock, subject to the limitations on conversion of the Preferred Stock set forth in the Certificate of Designation.

(3)	Includes the shares of our common stock issuable upon automatic conversion of each share of Preferred Stock upon effectiveness of the Reverse Split.

(4)	Includes 9,596.09002 shares of Preferred Stock acquired by Mr. Somodi pursuant to the Merger Agreement which Mr. Winemaster has agreed to purchase pursuant to the Purchase and Sale Agreement.

(5)

Includes 17,570,918 shares of our common stock issuable upon the conversion of 52,483.48912 shares of Preferred Stock held by Mr. Winemaster, giving effect to the limitations on conversion of the Preferred Stock (4,373,625 shares of our common stock giving effect to the Reverse Split). Also includes 3,212,670 shares of our common stock issuable upon conversion of 9,596.09002 shares of Preferred Stock, giving effect to the limitations on conversion of the Preferred Stock (799,675 shares of our common stock giving effect to the Reverse Split), and 1,000,000 shares of our common stock (31,250 shares of our common stock giving effect to the Reverse Split), in each case acquired by Mr. Somodi pursuant to the Merger Agreement, which Mr. Winemaster has agreed to purchase pursuant to the Purchase and Sale Agreement.

(6)

Includes 9,596.09002 shares of Preferred Stock acquired by Mr. Somodi pursuant to the Merger Agreement which Mr. Somodi has agreed to sell pursuant to the Purchase and Sale Agreement. Giving effect to the sale of such shares as if it occurred concurrently with the closing of the Reverse Merger, Mr. Somodi would not beneficially own any shares of Preferred Stock.

(7)

Includes 3,212,670 shares of our common stock issuable upon conversion of 9,596.09002 shares of Preferred Stock, giving effect to the limitations on conversion of the Preferred Stock (799,675 shares of our common stock giving effect to the Reverse Split), and 1,000,000 shares of our common stock (31,250 shares of our common stock giving effect to the Reverse Split), in each case acquired by Mr. Somodi pursuant to the Merger Agreement, which Mr. Somodi has agreed to sell pursuant to the Purchase and Sale Agreement. Giving effect to the sale of such shares as if it occurred concurrently with the closing of the Reverse Merger, Mr. Somodi would not beneficially own any shares of our common stock.

(8)	Includes 11,145,578 shares of our common stock issuable upon conversion of 33,291.30775 shares of Preferred Stock held by Mr. Winemaster, giving effect to the limitations on conversion of the Preferred Stock.

(9)	Includes 197,531 shares of our common stock issuable upon conversion of 590.01600 shares of Preferred Stock held by Mr. Landini, giving effect to the limitations on conversion of the Preferred Stock.

(10)

MGP Advisers Limited Partnership (“MGP”) is the general partner of the Special Situations Fund III QP, L.P. (“SSF III”). AWM Investment Company, Inc. (“AWM”) is the general partner of MGP, the general partner of and investment adviser to the Special Situations Cayman Fund, L.P. (“SSF Cayman”) and the investment adviser to SSF III and the Special Situations Private Equity Fund, L.P. (“SSF PE”). Austin W. Marxe and David M. Greenhouse are the principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities of each of the funds listed above. The address for Messrs. Marxe and Greenhouse is 527 Madison Avenue, Suite 2600, New York, NY 10022.

 

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(11)	Consists of (i) 4,900 shares of Preferred Stock held by SSF III, (ii) 1,400 shares of Preferred Stock held by SSF Cayman and (iii) 700 shares of Preferred Stock held by SSF PE.

(12)

Consists of (i) 1,640,468 shares of our common stock issuable upon conversion of shares of Preferred Stock held by SSF III, (ii) 468,705 shares of our common stock issuable upon conversion of shares of Preferred Stock held by SSF Cayman and (iii) 234,353 shares of our common stock issuable upon conversion of shares of Preferred Stock held by SSF PE, in each case giving effect to the limitations on conversion of the Preferred Stock.

(13)

Consists of (i) 408,334 shares of our common stock issuable upon conversion of shares of Preferred Stock and 204,167 shares of our common stock issuable upon exercise of Warrants held by SSF III, (ii) 116,667 shares of our common stock issuable upon conversion of shares of Preferred Stock and 58,333 shares of our common stock issuable upon exercise of Warrants held by SSF Cayman and (iii) 58,334 shares of our common stock issuable upon conversion of shares of Preferred Stock and 29,167 shares of our common stock issuable upon exercise of Warrants held by SSF PE.

(14)

Peter S. Park is the sole member and manager of Park West Asset Management LLC (“PWAM”), the investment manager of Park West Investors Master Fund, Limited (“PWIMF”) and Park West Partners International, Limited (“PWPI”), and Mr. Park and PWAM have voting and dispositive control over securities held by PWIMF and PWPI. The address for each of PWAM and Peter S. Park is c/o Park West Asset Management LLC, 900 Larkspur Landing Circle, Suite 165, Larkspur, CA 94939.

(15)	Includes 2,425 and 575 shares of Preferred Stock held by PWIMF and PWPI, respectively.

(16)	Includes an aggregate of 811,864 and 192,504 shares of our common stock issuable to PWIMF and PWPI, respectively, upon conversion of 2,425 and 575 shares of Preferred Stock, subject to limitations on conversion set forth in the Certificate of Designation.

(17)	Includes an aggregate of 125,000 shares of our common stock issuable upon exercise of the Warrants issued to PWPI and PWIMF at an exercise price of $13.00 per share (as adjusted for the Reverse Split).

(18)	Includes an aggregate of 32,126,697 shares of our common stock issuable upon conversion of an aggregate of 95,960.90289 shares of Preferred Stock, giving effect to the limitations on conversion of the Preferred Stock.

 

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Selling Securityholders

On April 29, 2011, we entered into the Private Placement Purchase Agreement with 29 accredited investors, pursuant to which we issued to the investors an aggregate of 18,000 shares of the Preferred Stock and Warrants to purchase initially an aggregate of 24,000,007 shares of our common stock (subject to adjustment), at a purchase price of $1,000 per share and related Warrant, receiving total gross proceeds of $18,000,000, in a transaction exempt from the registration requirements of the Securities Act and state securities laws. The shares of Preferred Stock issued in the Private Placement are initially convertible into an aggregate of 48,000,007 shares of our common stock, subject to the limitations on conversion set forth in the Certificate of Designation, at an initial conversion price of $0.375 per share (subject to adjustment, including upon the effectiveness of the Reverse Split, as set forth in the Certificate of Designation). Immediately following the effectiveness of the Reverse Split, each issued and outstanding share of Preferred Stock will automatically convert into a number of shares of our common stock equal to $1,000 divided by the conversion price then in effect.

For every one share of our common stock issuable upon conversion of shares of Preferred Stock purchased in the Private Placement, each investor in the Private Placement also received a Warrant to purchase initially one-half of a share of our common stock at an initial exercise price of $0.40625 per share, subject to adjustment, including upon the effectiveness of the Reverse Split, and subject to the limitations on exercise, in each case as set forth in the Warrants. Accordingly, the Warrants issued in the Private Placement represent the right to purchase initially an aggregate of 24,000,007 shares of our common stock, without giving effect to the limitations on exercise set forth in the Warrants. The Warrants are not exercisable prior to the effectiveness of the Reverse Split. In connection with the Private Placement, we also issued to Roth Capital Partners, LLC, as compensation for its role as placement agent in connection with the Private Placement, the Roth Warrant, representing the right to purchase initially 3,360,000 shares of our common stock, subject to the limitations on exercise set forth in the Roth Warrant, at an initial exercise price of $0.4125 per share and upon the terms and conditions set forth in the Roth Warrant. The Roth Warrant is not exercisable prior to the effectiveness of the Reverse Split. For a detailed description of the Preferred Stock, including the limitations on conversion and the adjustment provisions thereof, see “Description of Capital Stock – Description of the Preferred Stock – Series A Convertible Preferred Stock” below; for a detailed description of the Warrants, including the limitations on exercise and the adjustment provisions thereof, see “Description of Capital Stock – Description of the Warrants” below; and for a detailed description of the Roth Warrant, including the limitations on exercise thereof, see “Description of Capital Stock – Description of the Roth Warrant” below.

The securities covered by this prospectus are issuable from time to time upon conversion of the Preferred Stock and exercise of the Warrants and the Roth Warrant. The selling securityholders named below, or their respective successors, including transferees, may from time to time sell or otherwise dispose of, pursuant to this prospectus or a supplement to this prospectus, any or all of the securities they own. The securities covered hereby consist of:

 

•

48,000,007 shares of our common stock initially issuable upon conversion of 18,000 shares of Preferred Stock;

 

•

24,000,007 shares of our common stock initially issuable upon exercise of the Warrants; and

 

•

with respect to Roth Capital Partners, LLC, 3,360,000 shares of our common stock initially issuable upon exercise of the Roth Warrant.

The following table sets forth, as of May 25, 2011, (i) the number of shares of our common stock beneficially owned by each selling securityholder named below, (ii) the number of shares of our common stock that may be sold or otherwise disposed of by each of the selling securityholders named below pursuant to this prospectus, and (iii) the number of shares of our common stock, and the percent of the class, beneficially owned by each selling securityholder named below assuming all of the shares registered hereby are sold by the selling securityholders, in each case without giving effect to any limitations on conversion of Preferred Stock or any limitations on exercise of the Warrants or the Roth Warrant. The information set forth in the table below does not give effect to the Reverse Split.

 

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Unless otherwise indicated, to our knowledge, each person listed below has sole dispositive and voting power with respect to the shares of our common stock shown below as beneficially owned by such person, except to the extent authority is shared by spouses under applicable law and except for the shares of our common stock set forth next to our directors and executive officers listed as a group. Beneficial ownership and percentage have been determined in accordance with Rule 13d-3 under the Exchange Act (but without giving effect to any limitations on conversion of Preferred Stock or any limitations on exercise of the Warrants or the Roth Warrant) and generally includes voting or investment power with respect to the securities. The information is not necessarily indicative of beneficial ownership for any other purpose. Further, the inclusion of shares in the following table of those shares does not constitute an admission that the named selling securityholder is a direct or indirect beneficial owner of such shares.

As of May 25, 2011, 10,770,083 shares of our common stock were issued and outstanding.

Information in the table below, and under the heading “Material Relationship with Selling Securityholders,” has been provided to us by the selling securityholders. We do not know when or in what amounts the selling securityholders may sell or otherwise dispose of the shares of our common stock covered hereby. The selling securityholders may sell or otherwise dispose of all, some or none of the shares offered by this prospectus. Because the selling securityholders may sell or otherwise dispose of all, some, or none of the shares covered hereby, we cannot estimate the number of the shares that will be sold or otherwise disposed of by the selling securityholders pursuant to this prospectus. Accordingly, for purposes of this prospectus, we have assumed that all of the shares covered by this prospectus will be sold by the selling securityholders.

 

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Name		Number of Shares  of Common Stock Beneficially Owned Prior to This Offering (1)				Number of Shares  of Common Stock Offered Hereby (1)				Number of Shares  of Common Stock and Percent of Class After This Offering
Special Situations Fund III QP, L.P. (2)			19,600,000	(3)			19,600,000	(3)			—
Park West Investors Master Fund, Limited (4)			9,700,001	(5)			9,700,001	(5)			—
BTG Investments LLC (6)			6,656,001	(7)			6,656,001	(7)			—
Special Situations Cayman Fund, L.P. (2)			5,600,001	(8)			5,600,001	(8)			—
CCM Master Qualified Fund, Ltd. (9)			5,400,000	(10)			5,400,000	(10)			—
Roth Capital Partners, LLC (11)			3,360,000	(12)			3,360,000	(12)			—
Alder Capital Partners I, L.P. (13)			2,800,001	(14)			2,800,001	(14)			—
Special Situations Private Equity Fund, L.P. (2)			2,800,000	(15)			2,800,000	(15)			—
Park West Partners International, Limited (4)			2,300,001	(16)			2,300,001	(16)			—
Ardsley Partners Fund II, L.P. (17)			2,258,801	(18)			2,258,801	(18)			—
Ardsley Partners Institutional Fund, L.P. (19)			1,741,200	(20)			1,741,200	(20)			—
North Star Opportunity Fund, L.P. (21)			1,680,000	(22)			1,680,000	(22)			—
Delaware Charter G&T Cust. FBO Amir L. Ecker IRA			1,400,001	(23)			1,400,001	(23)			—
Hermes Partners, LP (24)			1,400,001	(25)			1,400,001	(25)			—
Kingsbrook Opportunities Master Fund, L.P. (26)			1,320,000	(27)			1,320,000	(27)			—
ACT Capital Partners L.P. (28)			1,200,000	(29)			1,200,000	(29)			—
Empery Asset Master, LTD (30)			1,000,001	(31)			1,000,001	(31)			—
Hudson Bay Master Fund, Ltd. (32)			1,000,001	(33)			1,000,001	(33)			—
Invision Capital LLC (34)			1,000,001	(35)			1,000,001	(35)			—
Mark Mays			1,000,001	(36)			1,000,001	(36)			—
Amir L. Ecker			600,000	(37)			600,000	(37)			—
Eric D. Rindahl			480,000	(38)			480,000	(38)			—
Gordon J. Roth			280,001	(39)			280,001	(39)			—
North Star Kelco Long Short Fund, L.P. (40)			240,000	(41)			240,000	(41)			—
John J. Weber			120,000	(42)			120,000	(42)			—
Theodore D. Roth			120,000	(43)			120,000	(43)			—
Cooper Family Trust dtd 08/01/04			120,000	(44)			120,000	(44)			—
J&V Schimmelpfennig Family Trust (45)			100,001	(46)			100,001	(46)			—
Jeffrey M. Ng			60,000	(47)			60,000	(47)			—
Ellis Living Trust dtd 04/08/11 (48)			24,000	(49)			24,000	(49)			—

 

(1)	Includes all shares of our common stock issuable upon conversion of shares of Preferred Stock and upon exercise of the Warrants and the Roth Warrant, in each case without giving effect to the limitations on conversion of Preferred Stock or on exercise of the Warrants and the Roth Warrant.

 

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(2)

MGP Advisers Limited Partnership (“MGP”) is the general partner of Special Situations Fund III QP, L.P. (“SSF III”). AWM Investment Company, Inc. (“AWM”) is the general partner of MGP, the general partner of and investment adviser to the Special Situations Cayman Fund, L.P. (“SSF Cayman”) and the investment advisor to SSF III and the Special Situations Private Equity Fund, L.P. (“SSF PE”). Austin W. Marxe and David M. Greenhouse are the principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities of each of the funds listed above.

(3)	Consists of (i) 13,066,667 shares of our common stock issuable upon the conversion of 4,900 shares of Preferred Stock held by SSF III and (ii) 6,533,333 shares of our common stock issuable upon the exercise of Warrants held by SSF III.

(4)

Peter S. Park is the sole member and manager of Park West Asset Management LLC (“PWAM”), the investment manager of Park West Investors Master Fund, Limited (“PWIMF”) and Park West Partners International, Limited (“PWPI”), and Mr. Park and PWAM have voting and dispositive control over securities held by PWIMF and PWPI.

(5)	Includes 6,466,667 shares of our common stock issuable upon conversion of 2,425 shares of Preferred Stock, and 3,233,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(6)

BTG Investments LLC is a wholly owned affiliate of Roth Capital Partners, LLC, which is a registered broker dealer and served as the placement agent for the Private Placement. Byron C. Roth and Gordon J. Roth share voting and dispositive control over securities held by BTG Investments LLC. Additionally, Gordon J. Roth individually beneficially owns 70 shares of Preferred Stock and 23,436 shares of our common stock issuable upon conversion of the Preferred Stock, without giving effect to the Reverse Split and subject to the limitations on conversion of Preferred Stock.

 

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(7)

Includes 4,437,334 shares of our common stock issuable upon conversion of 1,664 shares of Preferred Stock, and 2,218,667 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. BTG Investments LLC is engaged in the business of buying, holding and selling securities and has certified to us that (i) it purchased the shares being registered for resale in the ordinary course of business; and (ii) at the time of the purchase, it had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(8)	Consists of (i) 3,733,333 shares of our common stock issuable upon the conversion of 1,400 shares of Preferred Stock held by SSF Cayman and (ii) 1,866,667 shares of our common stock issuable upon the exercise of Warrants held by SSF Cayman.

(9)	Clint Coghill has investment and voting control over securities held by CCM Master Qualified Fund, Ltd.

(10)	Includes 3,600,000 shares of our common stock issuable upon conversion of 1,350 shares of Preferred Stock, and 1,800,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(11)

Byron C. Roth, Chief Executive Officer of Roth Capital Partners, LLC, owns 81.2% of CR Financial Holdings Inc., which owns 100% of Roth Capital Partners, LLC. Accordingly, Byron C. Roth exercises voting and dispositive control over these shares. Gordon J. Roth, Chief Financial Officer of Roth Capital Partners, LLC, owns 5.5% of CR Financial Holdings Inc. Additionally, Gordon J. Roth individually beneficially owns 70 shares of Preferred Stock and 23,436 shares of our common stock issuable upon conversion of the Preferred Stock, without giving effect to the Reverse Split and subject to the limitations on conversion of Preferred Stock. Each of Byron C. Roth and Gordon J. Roth disclaims beneficial ownership of the securities held by Roth Capital Partners, LLC.

(12)	Includes 3,360,000 shares of our common stock issuable upon exercise of the Roth Warrant, which was granted as compensation to Roth Capital Partners, LLC, a registered broker dealer, for its role as placement agent for the Private Placement.

(13)	Michael Licosati has investment and voting control over securities held by Alder Capital Partners I, L.P.

(14)	Includes 1,866,667 shares of our common stock issuable upon conversion of 700 shares of Preferred Stock, and 933,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(15)	Consists of (i) 1,866,667 shares of our common stock issuable upon the conversion of 700 shares of Preferred Stock held by SSF PE and (ii) 933,333 shares of our common stock issuable upon the exercise of Warrants held by SSF PE.

(16)	Includes 1,533,334 shares of our common stock issuable upon conversion of 575 shares of Preferred Stock, and 766,667 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(17)	Philip J. Hempleman has investment and voting control over securities held by Ardsley Partners Fund II, L.P.

(18)	Includes 1,505,867 shares of our common stock issuable upon conversion of 564.7 shares of Preferred Stock, and 752,934 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(19)	Philip J. Hempleman has investment and voting control over securities held by Ardsley Partners Institutional Fund, L.P.

(20)	Includes 1,160,800 shares of our common stock issuable upon conversion of 435.3 shares of Preferred Stock, and 580,400 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(21)	Kuby-Gottlieb Investments, the investment manager of North Star Opportunity Fund LP, has investment and voting control over securities held by North Star Opportunity Fund, LP. Eric Kuby is the President of Kuby-Gottlieb Investments.

(22)	Includes 1,120,000 shares of our common stock issuable upon conversion of 420 shares of Preferred Stock, and 560,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(23)	Includes 933,334 shares of our common stock issuable upon conversion of 350 shares of Preferred Stock, and 466,667 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(24)	Paul Flather has investment and voting control over securities held by Hermes Partners, LP.

 

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(25)	Includes 933,334 shares of our common stock issuable upon conversion of 350 shares of Preferred Stock, and 466,667 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(26)

Kingsbrook Partners LP (“Kingsbrook Partners”) is the investment manager of Kingsbrook Opportunities Master Fund LP (“Kingsbrook Opportunities”) and consequently has voting control and investment discretion over securities held by Kingsbrook Opportunities. Kingsbrook Opportunities GP LLC (“Opportunities GP”) is the general partner of Kingsbrook Opportunities and may be considered the beneficial owner of any securities deemed to be beneficially owned by Kingsbrook Opportunities. KB GP LLC (“GP LLC”) is the general partner of Kingsbrook Partners and may be considered the beneficial owner of any securities owned by Kingsbrook Partners. Ari J. Storch, Adam J. Chill and Scott M. Wallace are the sole managing members of Opportunities GP and GP LLC and as a result may be considered beneficial owners of any securities deemed beneficially owned by Opportunities GP and GP LLC. Each of Kingsbrook Partners, Opportunities GP, GP LLC and Messrs. Storch, Chill and Wallace disclaims beneficial ownership of these securities.

(27)	Includes 880,000 shares of our common stock issuable upon conversion of 330 shares of Preferred Stock, and 440,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(28)	Amir L. Ecker and Carol G. Frankenfeld, the general partners of ACT Capital Partners, L.P., share voting and investment control over securities held by ACT Capital Partners, L.P.

(29)	Includes 800,000 shares of our common stock issuable upon conversion of 300 shares of Preferred Stock, and 400,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(30)

Empery Asset Management LP, the authorized agent of Empery Asset Master Ltd (“EAM”), has discretionary authority to vote and dispose of the shares held by EAM and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by EAM. Mr. Hoe and Mr. Lane disclaim any beneficial ownership of these shares.

(31)	Includes 666,667 shares of our common stock issuable upon conversion of 250 shares of Preferred Stock, and 333,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(32)

Hudson Bay Capital Management LP, the investment manager of Hudson Bay Master Fund Ltd., has voting and investment power over securities held by Hudson Bay Master Fund Ltd. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Sander Gerber disclaims beneficial ownership over these securities.

(33)	Includes 666,667 shares of our common stock issuable upon conversion of 250 shares of Preferred Stock, and 333,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(34)	Robert Castillo has investment and voting control over securities held by Invision Capital LLC.

(35)	Includes 666,667 shares of our common stock issuable upon conversion of 250 shares of Preferred Stock, and 333,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(36)	Includes 666,667 shares of our common stock issuable upon conversion of 250 shares of Preferred Stock, and 333,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(37)	Includes 400,000 shares of our common stock issuable upon conversion of 150 shares of Preferred Stock, and 200,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(38)

Includes 320,000 shares of our common stock issuable upon conversion of 120 shares of Preferred Stock, and 160,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

 

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(39)

Includes 186,667 shares of our common stock issuable upon conversion of 70 shares of Preferred Stock, and 93,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(40)	Kuby-Gottlieb Investments, the investment manager of North Star Kelco Long Short Fund, L.P., has investment and voting control over securities held by North Star Kelco Long Short Fund, L.P. Eric Kuby is the President of Kuby-Gottlieb Investments.

(41)	Includes 160,000 shares of our common stock issuable upon conversion of 60 shares of Preferred Stock, and 80,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder.

(42)

Includes 80,000 shares of our common stock issuable upon conversion of 30 shares of Preferred Stock, and 40,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(43)

Includes 80,000 shares of our common stock issuable upon conversion of 30 shares of Preferred Stock, and 40,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(44)

Includes 80,000 shares of our common stock issuable upon conversion of 30 shares of Preferred Stock, and 40,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(45)	Joseph P. Schimmelpfennig and Vanessa R. Schimmelpfennig, trustees of J&V Schimmelpfennig Family Trust, share voting and investment control over securities held by J&V Schimmelpfennig Family Trust.

(46)

Includes 66,667 shares of our common stock issuable upon conversion of 25 shares of Preferred Stock, and 33,334 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(47)

Includes 40,000 shares of our common stock issuable upon conversion of 15 shares of Preferred Stock, and 20,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

(48)	Louis J. Ellis and Michaela E. Ellis, trustees of Ellis Living Trust dtd 04/08/11, share voting and investment control over securities held by Ellis Living Trust dtd 04/08/11.

(49)

Includes 16,000 shares of our common stock issuable upon conversion of 6 shares of Preferred Stock, and 8,000 shares of our common stock issuable upon exercise of a Warrant, in each case beneficially owned by the selling securityholder. The selling securityholder certified to us that such selling securityholder purchased the shares being registered for resale in the ordinary course of business and, at the time of the purchase, had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

Information about the selling securityholders may change over time, and changed information will be set forth in supplements to this prospectus if and when required.

 

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Material Relationship with Selling Securityholders

Pursuant to an engagement letter dated June 28, 2010, as amended by the letter agreement dated April 29, 2011 (the “Roth Engagement Letter”), The W Group engaged Roth Capital Partners, LLC to act as a financial advisor in connection with the Reverse Merger and as its exclusive placement agent in connection with the Private Placement. In connection with the consummation of the Reverse Merger and the Private Placement, we assumed The W Group’s obligations under the Roth Engagement Letter. Pursuant to the Roth Engagement Letter, we (1) paid Roth Capital Partners, LLC $570,109 as advisory fees for service by Roth Capital Partners, LLC as financial advisor in connection with the Reverse Merger, and (2) paid Roth Capital Partners, LLC $1,260,000 in fees, and issued to Roth Capital Partners, LLC the Roth Warrant, as compensation for service by Roth Capital Partners, LLC as the exclusive placement agent in connection with the Private Placement. Roth Capital Partners, LLC is a registered broker-dealer.

BTG Investments, LLC is a selling securityholder that is wholly-owned by Roth Capital Partners, LLC, and is engaged in the business of buying, holding and selling securities. In addition, each of Eric D. Rindahl, Gordon J. Roth, John J. Weber, Theodore D. Roth, Jeffrey M. Ng, Chad J. Cooper (a trustee of Cooper Family Trust dtd 08/01/04), Joe Schimmelpfennig (a trustee of J&V Schimmelpfennig Family Trust) and Louis Ellis (a trustee of Ellis Living Trust dtd 04/08/11) is an employee of Roth Capital Partners, LLC and a selling securityholder (or, in the case of each of Chad J. Cooper, Joe Schimmelpfennig and Louis Ellis, a trustee of a selling securityholder). Each such selling securityholder has certified to us that such selling securityholder acquired the shares being registered hereby for resale in the ordinary course of business, and at the time of such acquisition, such selling securityholder had no agreements or understandings, directly or indirectly, with any person to distribute such shares.

Each of the other selling securityholders has certified to us that such selling securityholder is not a broker-dealer and that such selling securityholder is either (a) not an affiliate of a broker-dealer or (b) is an affiliate of a broker-dealer, but acquired the shares being registered hereby for resale in the ordinary course of business, and at the time of such acquisition, such selling securityholder had no agreements or understandings, directly or indirectly, with any person to distribute such shares.

Further, pursuant to an engagement letter dated June 28, 2010 (the “Invision Engagement Letter”), The W Group engaged Invision Capital, to serve as its financial consultant in connection with the Private Placement. Invision Capital LLC is a selling securityholder. In connection with the consummation of the Reverse Merger and the Private Placement, we assumed The W Group’s obligations under the Invision Engagement Letter, and paid to Invision Capital an aggregate of $830,000 in cash fees for such consulting services. Invision Capital provides other financial and consulting services to us, including consulting fees provided in connection with the refinancing of our Prior Credit Agreement in 2008 for which Invision Capital received a fee of $729,000. Other consulting fees paid to Invision Capital totaled $7,000 and $25,000 in 2010 and 2008, respectively. We also individually paid Robert Castillo, principal at Invision Capital, consulting fees of $6,667 in 2010.

Except for the foregoing relationships, there are not and, since the closing of the Reverse Merger and the Private Placement until the date of this prospectus there have not been at any time any, relationships between us and any selling securityholder, other than any relationships directly relating to such selling securityholder’s investment in securities issued in the Private Placement.

 

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Certain Relationships and Related Party Transactions

Principal Purchase and Sale Transaction

The W Group and Thomas Somodi, its Chief Operating Officer and Chief Financial Officer, previously entered into (1) a subscription agreement, dated as of April 16, 2005, as amended by the amendment to subscription agreement, effective as of January 1, 2008 (the “Somodi Subscription Agreement”), and (2) an employment agreement, dated as of April 16, 2005, as amended by the amendment to employment agreement, effective as of January 1, 2008. See “Executive Compensation – Employment Agreements” for a description of this employment agreement between Mr. Somodi and The W Group. Pursuant to the Somodi Subscription Agreement, Mr. Somodi acquired shares of common stock of The W Group, which represented 10% of the issued and outstanding shares of common stock of The W Group as of the date of such agreement and immediately prior to the closing of the Reverse Merger, and the Somodi Subscription Agreement provided that, upon any issuance or change in the structure of capital stock, The W Group would make an equitable adjustment to the shares held by Mr. Somodi so that Mr. Somodi would maintain an interest equal to 10% of the fully-diluted capital stock of The W Group. The Somodi Subscription Agreement further provided (1) Mr. Somodi with the right to require The W Group to purchase his shares, and (2) The W Group with the right to require Mr. Somodi to sell his shares to The W Group, upon The W Group’s achievement of certain thresholds relating to the valuation of The W Group. Pursuant to the Somodi Subscription Agreement, Mr. Somodi further agreed to sell his shares, if requested by The W Group, to a third party in connection with a sale of The W Group.

Pursuant to the Merger Agreement, all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger converted into, and we issued to the three stockholders of The W Group, an aggregate of 10,000,000 shares of our common stock and 95,960.90289 shares of the Preferred Stock. Pursuant to the Purchase and Sale Agreement (the “Purchase and Sale Agreement”), entered into on April 28, 2011, and effective on the closing of the Reverse Merger, Gary Winemaster agreed to purchase from Mr. Somodi, and Mr. Somodi agreed to sell to Mr. Winemaster, 1,000,000 shares of our common stock and 9,596.09002 shares of Preferred Stock (in each case without giving effect to the Reverse Split), representing all of the shares of our common stock and the Preferred Stock acquired by Mr. Somodi pursuant to the Merger Agreement, at an initial closing to occur within 90 days following the closing of the Reverse Merger, in exchange for (1) a cash payment equal to $2,500,000, payable at such initial closing, (2) an additional cash payment equal to $1,750,000, payable after the earlier of the hiring by us of a new Chief Financial Officer (which we have agreed to endeavor to do as soon as reasonably possible) and April 29, 2013, two years after the closing of the Reverse Merger (provided that Mr. Winemaster has agreed to make such payment in no event later than the later of 60 days after such earlier date and eight months following the closing of the Reverse Merger), and (3) Mr. Winemaster’s agreement to transfer to Mr. Somodi shares of our common stock, or cash payment in lieu thereof, upon our achievement of certain market value per share of common stock milestones, as described in detail below (collectively, the “Principal Purchase and Sale Transaction”).

Pursuant to the terms of the Purchase and Sale Agreement, after the initial payment of $2,500,000 at the initial closing, approximately 41% of the shares agreed to be purchased by Mr. Winemaster (on a pro forma, as-converted basis, without giving effect to any limitations on conversion set forth in the Certificate of Designation) will be held in escrow until the remaining $1,750,000 payment has been delivered pursuant to the terms of the Purchase and Sale Agreement. At Mr. Winemaster’s election, in lieu of depositing such shares to be held in escrow, Mr. Winemaster may pledge such shares to Mr. Somodi to secure Mr. Winemaster’s obligation to make the remaining $1,750,000 payment to Mr. Somodi.

As additional consideration for the acquisition by Mr. Winemaster of the shares issued to Mr. Somodi in the Reverse Merger, Mr. Winemaster agreed to deliver to Mr. Somodi, within 90 days of the first date on which we first achieve common stock market value per share milestones as follows: (A) an aggregate of 3,933,333 shares of our common stock (122,917 shares giving effect to the Reverse Split) after the first period of 10 consecutive trading

 

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days after the effectiveness of the Reverse Split on each of at least seven of which the market value per share of the outstanding common stock (calculated in accordance with the Purchase and Sale Agreement) is at least $0.6356 ($20.3392 giving effect to the Reverse Split); (B) an additional aggregate of 4,720,000 shares of our common stock (147,500 shares giving effect to the Reverse Split) after the first period of 10 consecutive trading days after the effectiveness of the Reverse Split on each of at least seven of which the market value per share of the outstanding common stock (calculated in accordance with the Purchase and Sale Agreement) is at least $0.7945 ($25.424 giving effect to the Reverse Split); and (C) an additional aggregate of 3,146,656 shares of our common stock (98,333 shares giving effect to the Reverse Split) after the first period of 10 consecutive trading days after the effectiveness of the Reverse Split on each of at least seven of which the market value per share of the outstanding common stock (calculated in accordance with the Purchase and Sale Agreement) is at least $0.9534 ($30.5088 giving effect to the Reverse Split). All share numbers and share prices set forth above are subject to adjustment for stock splits, stock dividends and other similar transactions, as set forth in the Purchase and Sale Agreement. Mr. Winemaster may, at his sole option and in lieu of delivering shares of our common stock to Mr. Somodi as described above, elect to make a payment to Mr. Somodi equal to the then-market value of the shares Mr. Winemaster would otherwise be required to deliver pursuant to the provisions described above. Mr. Winemaster’s obligation will expire if we have not achieved the applicable market value per share of common stock milestones by the fifth anniversary of the closing of the Reverse Merger.

Prior to the closing of the Reverse Merger, and in connection with Mr. Winemaster and Mr. Somodi entering into the Purchase and Sale Agreement, (i) on April 28, 2011, The W Group and Mr. Somodi entered into a Termination Agreement, pursuant to which each of Mr. Somodi’s employment agreement with The W Group (the term of which expired in April 2010) and the Somodi Subscription Agreement, were terminated effective upon the closing of the Reverse Merger; and (ii) on April 29, 2011, we entered into a new employment agreement with Mr. Somodi, which sets forth the terms of Mr. Somodi’s employment with us. See “Executive Compensation – Employment Agreements” for a description of our new employment agreement with Mr. Somodi.

Other Transactions with The W Group

The W Group has engaged (and we continue to engage) Landini, Reed & Dawson, a certified public accounting and consulting firm, to prepare tax returns and to provide other tax advice and consultation services, including in respect of the Reverse Merger, the Private Placement and the other transactions consummated in connection therewith. Kenneth Landini, who was a director of The W Group prior to the consummation of the Reverse Merger and is a member of our board of directors, is a partner and co-founder of Landini, Reed & Dawson, P.C. During The W Group’s fiscal year ended December 31, 2010 (“fiscal 2010”) and three-month period ended March 31, 2011, Landini, Reed & Dawson, P.C. charged $123,223 and $48,780, respectively, for its services provided to The W Group during such periods.

For each of fiscal 2010 and The W Group’s fiscal years ended December 31, 2009 (“fiscal 2009”) and 2008 (“fiscal 2008”), William Winemaster (the father of Gary Winemaster and Kenneth Winemaster, our Chairman of the Board, Chief Executive Officer and President and our Senior Vice President and Secretary, respectively), serving as an employee performing consulting and advisory type services for The W Group and its subsidiaries, received (1) annual salaries of $138,158, $127,744 and $127,744, respectively, (2) payments for automobiles and related auto insurance premiums equal to $9,927, $12,767 and $12,643, respectively, and (3) payments related to mobile telephone service equal to $1,295, $1,240 and $1,361, respectively. It is anticipated that William Winemaster will continue to serve as an employee of The W Group performing consulting and advisory type services going forward, and that Mr. Winemaster’s compensation for our fiscal year ended December 31, 2011 will be consistent with his compensation for such services in fiscal 2010.

In fiscal 2010, fiscal 2009 and fiscal 2008, The W Group had outstanding loans to each of Gary Winemaster and Kenneth Winemaster in the aggregate principal amount of $156,024 and $67,969, respectively. These loan amounts did not bear interest and were payable on demand by The W Group. At December 31, 2010 and at

 

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March 30, 2011, the amounts outstanding on such notes were $156,024 and $67,969, respectively, which such amounts represent the largest principal amounts outstanding under these loans at any time during fiscal 2010, fiscal 2009 or fiscal 2008. Effective March 30, 2011 (prior to the consummation of the Reverse Merger), the board of directors of The W Group declared a non-cash offset dividend to each of Gary Winemaster and Kenneth Winemaster in amounts necessary to cancel the loans. Thomas J. Somodi, as a stockholder of The W Group, waived any right to receive any dividend payments as a result of the offset dividend received by Gary Winemaster. Kenneth Winemaster waived any right to receive any dividend in excess of the $67,969 offset dividend he received as a result of the offset dividend received by Gary Winemaster.

The W Group previously maintained a credit facility with Bank of America. In the year ended December 31, 2007 (“fiscal 2007”), H. Samuel Greenawalt, who is a member of our board of directors and continues to serve as a member of the board of directors of The W Group, obtained a line of credit and used the proceeds therefrom to guarantee The W Group’s obligations under its credit facility with Bank of America. As a condition to Mr. Greenawalt obtaining this personal line of credit and guaranteeing The W Group’s obligations to Bank of America, The W Group agreed to guarantee Mr. Greenawalt’s personal line of credit and pay interest on the proceeds from Mr. Greenawalt’s line of credit at a rate of 11% per annum. In fiscal 2007 and fiscal 2008, The W Group paid to Mr. Greenawalt $43,250 and $57,750, respectively, representing interest on the proceeds from Mr. Greenawalt’s personal line of credit. In fiscal 2008, Mr. Greenawalt’s guarantee obligations were terminated, and his personal line of credit was paid in full and cancelled, thereby releasing The W Group’s guarantee obligations with respect to Mr. Greenawalt’s personal line of credit.

Format, Inc. Transactions

From time to time prior to the consummation of the Reverse Merger, Ryan Neely, Format’s sole director and executive officer immediately prior to the closing of the Reverse Merger, loaned amounts to Format for working capital purposes, which loans did not bear interest and were due on demand. As of December 31, 2010 and immediately prior to April 29, 2011, the closing date of the Reverse Merger, the outstanding principal amount on such loans was $114,156. The largest principal amount outstanding under these loans at any time during fiscal 2010, fiscal 2009 or fiscal 2008, or during the period commencing January 1, 2011 and ending April 29, 2011, was $168,177. During the period commencing January 1, 2008 through April 29, 2011 (but before closing the Stock Repurchase), Format repaid $62,041 in principal amount in respect of these loans to Mr. Neely. In connection with the Reverse Merger and the Private Placement, Format entered into the Repurchase Agreement, pursuant to which Format repurchased and cancelled 3,000,000 shares of our common stock beneficially owned by Mr. Neely and his spouse, Michelle Neely, and Ryan and Michelle Neely released Format from any obligations Format had to them in respect of these loans (which, as of April 29, 2011, was $114,156 in principal amount), for aggregate consideration of $360,000. In addition, Ryan and Michelle Neely released Format from any obligations Format had to them in respect of any other amounts (including any accrued compensation) that may have at any time been owing from Format prior to the closing of the Reverse Merger. In connection with, but prior to, the closing of the Reverse Merger, Format used all of its available cash to settle all remaining liabilities that Format had prior to the consummation of the Reverse Merger.

Composition of the Board of Directors and Director Independence

We are not subject to listing requirements of any national securities exchange and, as a result, our board of directors is not currently required to be composed of a specified number of “independent directors.” Our board of directors has determined that Mr. H. Samuel Greenawalt is a non-employee director who meets the applicable independence requirements for directors of The NASDAQ Stock Market. Pursuant to the Private Placement Purchase Agreement, we agreed to take action such that, no later than 180 days following the closing of the Private Placement, our board of directors will consist of five or greater directors, a majority of whom will constitute “independent directors” as defined by the marketplace rules of The NASDAQ Stock Market. Additionally, in the event our common stock becomes listed on a national securities exchange, the composition of our board of directors, and any future audit committee, compensation committee, nominating and corporate governance committee and any

 

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other committee of our board of directors, will be subject to the corporate governance provisions of such exchange, including rules relating to the independence of directors. Pursuant to the Private Placement Purchase Agreement, we have agreed to use our reasonable best efforts to list our common stock for trading on a national securities exchange as soon as reasonably practicable after we meet the initial quantitative listing standards of any such exchange. However, we cannot be certain that we will meet such initial listing standards or receive approval to list our common stock on any national securities exchange.

In evaluating the composition of our board of directors, we may consider such factors as diversity of backgrounds, experience and competencies that our board of directors desires to have represented. These competencies may include independence; adherence to ethical standards; the ability to exercise business judgment; industry knowledge and experience and/or other relevant business or professional experience and the ability to offer our management meaningful advice and guidance based on that experience; and ability to devote sufficient time and effort to service as a director. We believe that each of the members of our board of directors possesses these qualities and has demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to our company and to our board of directors.

 

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Description of Capital Stock

Description of Our Common Stock

We are authorized to issue up to an aggregate of 50,000,000 shares of our common stock, par value $0.001 per share. As of May 25, 2011, an aggregate of 10,770,083 shares of our common stock were issued and outstanding. Our articles of incorporation, as amended, do 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 our board of directors out of legally available funds. However, the current policy of our board of directors is to retain earnings, if any, for our operations and expansion. Upon any liquidation, dissolution or winding-up of our company, the holders of our common stock are entitled to share ratably in all of our assets which are legally available for distribution, after payment of or provision for all liabilities and the preferences of any then outstanding shares of preferred stock. The holders of our common stock have no preemptive, subscription, redemption or conversion rights. All issued and outstanding shares of our common stock are fully-paid and non-assessable.

Description of the Preferred Stock

We are authorized to issue up to an aggregate of 5,000,000 shares of preferred stock, par value $0.001 per share, in one or more series as may be determined by our board of directors, which may establish from time to time the number of shares to be included in such series, and fix the designations, powers, preferences and rights of the shares of such series and the qualifications, limitations or restrictions thereof. Any preferred stock so established and designated by our board of directors may rank senior to our common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both. The issuance of shares of preferred stock, the existence of unissued preferred stock, or the issuance of rights to purchase such shares of preferred stock, may have the effect of delaying or deterring an unsolicited merger or other change of control transaction.

Series A Convertible Preferred Stock

In accordance with our articles of incorporation, our board of directors approved the filing of the Certificate of Designation designating and authorizing the issuance of up to 114,000 shares of Preferred Stock. As of May 25, 2011, an aggregate of 113,960.90289 shares of the Preferred Stock were issued and outstanding.

Each share of Preferred Stock is initially convertible into shares of our common stock at any time at the election of the holder thereof, subject to the limitations on conversion set forth in the Certificate of Designation (as described below), at an initial conversion price of $0.375 per share, subject to adjustments for non-cash dividends, distributions, stock splits or other subdivisions or reclassifications of our common stock. The Preferred Stock is also subject to full-ratchet anti-dilution whereby, upon the issuance (or deemed issuance) of shares of our common stock at a price below the then-current conversion price of the Preferred Stock (but not based upon the trading price of our common stock), subject to specified exceptions, the conversion price of the Preferred Stock will be reduced to the effective price of our common stock so issued (or deemed to be issued). Giving effect to the Reverse Split, as if it occurred immediately following the closing of the Reverse Merger and the Private Placement, the conversion price at which each share of Preferred Stock will convert into shares of our common stock would be $12.00 per share. As of any date prior to the effectiveness of the Reverse Split, no holder of Preferred Stock will have the right to, and we will not have any obligation to issue to any holder, shares of our common stock upon conversion of Preferred Stock in excess of the product (the product for any holder, the “Preferred Reservation Amount,” and the sum of the Preferred Reservation Amounts for each of the holders of Preferred Stock, the “Aggregate Preferred Reservation Amount”) of (1) the difference between the then-authorized number of shares of our common stock less an amount equal to one hundred and ten percent (110%) of the number of shares of our common stock outstanding as of the closing date of the Reverse Merger, multiplied by (2) a percentage equal to a fraction, the numerator of which is the number of shares of our common stock issuable upon conversion of the shares of Preferred Stock then held by such holder (without giving effect to any limitation on conversion thereof), and of which the denominator is the total number of shares of our common stock issuable upon conversion of all shares of Preferred Stock outstanding as of the closing of the Reverse Merger (without giving effect to any limitation on conversion thereof), giving effect to the

 

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consummation of the Reverse Merger and the Private Placement (the “Preferred Conversion Limitation”). We are obligated at all times prior to the effectiveness of the Reverse Split to reserve and keep available out of our authorized but unissued shares of our common stock a number of shares of our common stock equal to the Aggregate Preferred Reservation Amount, solely for the purpose of effecting the conversion of shares of Preferred Stock into shares of our common stock pursuant to the Certificate of Designation.

Immediately following the effectiveness of the Reverse Split, each issued and outstanding share of Preferred Stock will automatically convert into a number of shares of our common stock equal to $1,000 divided by the conversion price then in effect. Accordingly, immediately following the effectiveness of the Reverse Split, the aggregate of 113,960.90289 outstanding shares of Preferred Stock, representing all of the shares of Preferred Stock issued in the Reverse Merger and in the Private Placement, will automatically convert into an aggregate of 9,496,753 shares of our common stock (assuming a conversion price of $12.00 per share, giving effect to the Reverse Split, and assuming that no shares of Preferred Stock have previously been converted).

Each holder of a share of Preferred Stock is entitled to vote with the holders of our common stock as a single class on all matters voted on by holders of our common stock. Each share of Preferred Stock entitles the holder thereof to cast the number of votes equal to the total number of votes which could be cast in such vote by a holder of the number of shares of our common stock into which such shares of Preferred Stock are convertible as of the date immediately prior to the record date for such vote (subject to the Preferred Conversion Limitation). Upon any liquidation, dissolution or winding up of our company, each holder of Preferred Stock will be entitled to be paid, before any distribution or payment is made upon our common stock, an amount in cash equal to the sum of $1,000 plus the amount of any declared or accrued but unpaid dividends thereon as of such date, for each share of Preferred Stock held thereby (the “Preferred Liquidation Preference”), and such holder will not be entitled to any further payment.

No dividends are payable on the Preferred Stock, except that (1) if we pay dividends on our common stock, the Preferred Stock will participate as if, for purposes thereof, each share of Preferred Stock had converted into shares of our common stock after giving effect to the Reverse Split (i.e., without giving effect to the Preferred Conversion Limitation) as of the date immediately prior to the record date for such dividend, and (2) in the event the Reverse Split is not effective on or prior to August 27, 2011, each share of Preferred Stock will entitle the holder thereof to receive, when, as and if declared by our board of directors, non-cumulative cash dividends, accruing on a daily basis from August 27, 2011, through and including the date on which such dividends are paid, at the annual rate of two percent (2%) of the Preferred Liquidation Preference.

The holders of Preferred Stock are not entitled to any preemptive, subscription, redemption or other similar rights, and we do not have any right to redeem the Preferred Stock. All issued and outstanding shares of Preferred Stock are fully-paid and non-assessable.

Description of the Warrants

For every share of our common stock issuable upon conversion of Preferred Stock purchased in the Private Placement, each investor in the Private Placement also received a warrant to purchase one-half of a share of our common stock, at an initial exercise price of $0.40625 per share, subject to adjustment upon the effectiveness of the Reverse Split and for non-cash dividends, distributions, stock splits or other reorganizations or reclassifications of our common stock. The Warrants are also subject to full ratchet anti-dilution protection similar to the anti-dilution provisions of the Preferred Stock set forth in the Certificate of Designation. The Warrants represent the right to purchase initially an aggregate of 24,000,007 shares of our common stock; however, the Warrants are not exercisable prior to the effectiveness of the Reverse Split. Giving effect to the Reverse Split, as if it occurred immediately following the closing of the Reverse Merger and the Private Placement, the Warrants would represent the right to purchase an aggregate of 750,002 shares of our common stock, at an exercise price of $13.00 per share. The Warrants will expire on April 29, 2016.

 

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The Warrants further include a requirement that, from and after the effective date of the Reverse Split, we will keep reserved out of the authorized and unissued shares of our common stock sufficient shares to provide for the exercise of the Warrants.

Description of the Roth Warrant

Concurrently with the closing of the Reverse Merger, we issued to Roth Capital Partners, LLC, as compensation for its role as placement agent in the Private Placement, the Roth Warrant. The Roth Warrant represents the right to purchase initially an aggregate of 3,360,000 shares of our common stock, subject to the limitations on exercise set forth in the Roth Warrant, at an initial exercise price of $0.4125 per share, subject to adjustment upon the effectiveness of the Reverse Split and as otherwise set forth in the Roth Warrant. The Roth Warrant is not exercisable prior to the effectiveness of the Reverse Split. Giving effect to the Reverse Split, immediately following the closing of the Reverse Merger and the Private Placement, the Roth Warrant would represent the right to purchase an aggregate of 105,000 shares of our common stock, at an exercise price of $13.20 per share. The Roth Warrant will expire on April 29, 2016. The Roth Warrant includes a requirement that we reserve a sufficient number of shares of our common stock solely for the purpose of effecting the exercise of the Roth Warrant into shares of our common stock pursuant to the terms (and subject to the limitations) thereof.

Reverse Split and Migratory Merger

In connection with, and prior to the consummation of, the Reverse Merger, the board of directors of our company approved a 1-for-32 reverse stock split of issued and outstanding shares of our common stock, immediately following the effectiveness of which every 32 issued and outstanding shares of our common stock will automatically convert into one share of our common stock. Any shareholder of our company that would otherwise be entitled to a fraction of a share of our common stock (after aggregating all fractional shares of our common stock to be received by such holder) as a result of the Reverse Split, will receive an additional share of our common stock (i.e., the aggregate number of shares of our common stock of a shareholder resulting from the Reverse Split would be rounded up to the nearest whole number). The Reverse Split will not affect the number of authorized shares of capital stock of our company or the par value of our common stock.

Immediately following the effectiveness of the Reverse Split, each issued and outstanding share of Preferred Stock will automatically convert into a number of shares of our common stock equal to $1,000 divided by the conversion price then in effect.

Further, in connection with the Reverse Merger and the Private Placement, the board of directors of our company approved the merger of our company with and into a Delaware corporation that will be newly-created as a wholly owned subsidiary of our company, which merger will be effected for the purpose of changing our jurisdiction of incorporation from Nevada to Delaware (the “Migratory Merger”). The Reverse Split may be effected through the consummation of the Migratory Merger, whereby each 32 shares of our common stock would be exchanged for one share of common stock of the surviving entity in the Migratory Merger. In such case, the consummation of the Migratory Merger will constitute the Reverse Split. The consummation by our company of each of the Reverse Split and the Migratory Merger is subject to the approval of our shareholders.

In connection with the Private Placement, each of our current shareholders who was a stockholder of The W Group and who received shares in the Reverse Merger and Kenneth Landini, who received shares of Preferred Stock as a gift from Gary Winemaster and Kenneth Winemaster following the consummation of the Merger, entered into voting agreements (collectively, the “Voting Agreements”), pursuant to which such person agreed to vote his shares of our common stock and Preferred Stock, as applicable, in favor of the Reverse Split and the Migratory Merger. The persons who entered into the Voting Agreements hold, in the aggregate, a substantial majority of the voting securities of our company. Accordingly, approval of the Reverse Split and the Migratory Merger is assured.

 

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Pursuant to the Private Placement Purchase Agreement, we have agreed to file with the SEC within 60 days of the closing of the Reverse Merger, and deliver to our shareholders of record, a proxy statement on Schedule 14A (the “Proxy Statement”) for the purpose of submitting to our shareholders the approval of the Reverse Split and the Migratory Merger at a meeting of our shareholders. We have agreed to use our commercially reasonable best efforts to hold the meeting of our shareholders within 120 days after the closing of the Reverse Merger. Shareholders are urged to read the Proxy Statement, the documents incorporated by reference in the Proxy Statement, the other documents filed with the SEC and other relevant materials when they become available because they will contain important information about the Reverse Split and the Migratory Merger. Shareholders will be able to obtain these documents free of charge at the SEC’s website (http://www.sec.gov). The directors, executive officers and certain other members of management and employees of our company and its subsidiaries are participants in the solicitation of proxies in favor of approval of the Reverse Split and the Migratory Merger. Information about the directors and executive officers of our company is set forth in this Prospectus. Additional information regarding the interests of such participants will be included in the Proxy Statement and other relevant documents filed with the SEC when they become available.

Registration Rights

We entered into the Private Placement Registration Rights Agreement with the investors in the Private Placement and Roth Capital Partners, LLC, pursuant to which we agreed to file a registration statement on Form S-1 with the SEC covering the resale of all of the “Registrable Securities” (as defined below) (which includes the shares of our common stock issuable upon conversion of shares of Preferred Stock originally issued in the Private Placement and shares of our common stock issuable upon exercise of the Warrants originally issued in the Private Placement and the Roth Warrant), on or before the date which is 30 days after the closing date of the Private Placement (the “Filing Deadline”), and to use our commercially reasonable efforts to have such registration statement declared effective by the SEC as soon as practicable. We further agreed, within 30 days after we become eligible to use a registration statement on Form S-3 to register the Registrable Securities for resale, to file a registration statement on Form S-3 covering the Registrable Securities. Pursuant to the Private Placement Registration Rights Agreement, the holders of Registrable Securities are also entitled to certain piggyback registration rights. “Registrable Securities,” as contemplated by the Private Placement Registration Rights Agreement, means certain shares of our common stock, including the shares of our common stock issuable upon conversion of shares of Preferred Stock issued in the Private Placement and shares of our common stock issuable upon exercise of the Warrants issued with the Preferred Stock in the Private Placement and the Roth Warrant; provided, that, such shares shall cease to be a Registrable Security upon (A) sale pursuant to the registration statement or Rule 144 under the Securities Act, (B) such security becoming eligible for sale without restriction by the selling securityholder holding such security pursuant to Rule 144 under the Securities Act or (C) such shares otherwise becoming eligible for sale without restriction pursuant to Section 4(1) of the Securities Act, provided that, any restrictive legend on any certificate or other instrument representing such shares has been removed or there has been delivered to the transfer agent for such shares irrevocable documentation (including any necessary legal opinion) to the effect that, upon submission by the applicable selling securityholder of the certificate or instrument representing such security, any such restrictive legend shall be removed.

If a registration statement is not filed with the SEC on or prior to the Filing Deadline, or if (1) a registration statement covering the Registrable Securities is not declared effective by the SEC prior to the earlier of (A) five business days after the SEC informs us that no review of such registration statement will be made or that the SEC has no further comments on such registration statement, or (B) the 120^th day after the closing of the Private Placement, or (2) after a registration statement has been declared effective by the SEC, sales cannot be made pursuant to such registration statement for any reason, but excluding any period for which the use of any prospectus included in a registration statement has been suspended if and so long as certain conditions exist (which period may not be for more than 20 consecutive days or for a total of more than 45 days in any 12-month period), then we are required to make pro rata payments to each investor in the Private Placement, as liquidated damages, in an amount equal to 1.5% of the aggregate amount invested by such investor for each 30-day period (or pro rata for any portion thereof) following the date by which such registration statement should have been filed with the SEC, or been declared effective, as applicable.

 

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We are also obligated to maintain the effectiveness of the registration statement until the earliest of (1) the first date on which all Registrable Securities covered by such registration statement have been sold, (2) the first date on which all Registrable Securities covered by such registration statement may be sold without restriction pursuant to Rule 144 or (3) the first date on which none of the securities included in the registration statement constitute Registrable Securities.

In connection with the consummation of the Reverse Merger, we also entered into a registration rights agreement with Gary Winemaster, Kenneth Winemaster and Thomas Somodi (the “Shareholder Registration Rights Agreement”), pursuant to which we agreed to provide to such persons certain piggyback registration rights with respect to shares of our capital stock, including shares issuable upon exercise, conversion or exchange of securities, held by such persons at any time on or after the closing of the Reverse Merger. The piggyback registration rights under the Shareholder Registration Rights Agreement are subject to customary cutbacks and are junior to the piggyback registration rights granted to investors in the Private Placement and to Roth Capital Partners, LLC pursuant to the Private Placement Registration Rights Agreement.

Anti-Takeover Effects of our Articles of Incorporation, Our Amended and Restated Bylaws and Nevada Law; Anti-Takeover Effects of our Certificate of Incorporation, Bylaws and Delaware Law, following the consummation of the Migratory Merger

Classified Board of Directors. Pursuant to the terms of our articles of incorporation, our board of directors is classified with respect to the terms for which its members will hold office by dividing the members into three classes, with the terms of the directors of one class expiring at each annual meeting of our shareholders, subject to the appointment and qualification of their successors. As a result, the term for service on our board of directors will expire for only a portion of our board of directors at each annual shareholder meeting. The classification of our board of directors into separate classes with staggered terms may delay or prevent a change of our board of directors as a whole or our management or a change in control of our company. Pursuant to the Private Placement Purchase Agreement, however, we agreed to a form of certificate of incorporation for the surviving entity in the Migratory Merger, which certificate of incorporation will declassify our board of directors. Accordingly, upon the consummation of the Migratory Merger, pursuant to our certificate of incorporation then-in effect, each of our directors will then hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified.

Authorized but Unissued Shares; “Blank Check” Preferred Stock. We currently have authorized but unissued shares of our common stock which will be available for future issuance without any further vote or action by our shareholders. In addition, pursuant to the terms of our articles of incorporation, we are authorized to issue, without shareholder approval, up to an aggregate of 5,000,000 shares of preferred stock, par value $0.001 per share, in one or more series as may be determined by our board of directors, which may establish from time to time the number of shares to be included in such series, and fix the designations, powers, preferences and rights of the shares of such series and the qualifications, limitations or restrictions thereof. Any preferred stock so established and designated by our board of directors may rank senior to our common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both. The form of certificate of incorporation for the surviving entity in the Migratory Merger contains substantially identical provisions regarding the authorization of “blank check” preferred stock.

These shares of common stock and preferred stock may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of our common stock and our preferred stock, and our ability to fix the designations, powers, preferences and rights of shares of our preferred stock, could render more difficult or discourage an attempt to obtain control over us by means of a proxy contest, tender offer or merger, or otherwise.

Shareholder Action by Written Consent. Our articles of incorporation and bylaws, as amended, do not permit the shareholders of our company to consent in writing, without a meeting, to any action required to be taken or which may be taken at any annual or special meeting of our shareholders. The inability of our shareholders to act by

 

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written consent may have the effect of deterring hostile takeovers or delaying changes in control of our management. However, the forms of certificate of incorporation and bylaws for the surviving entity in the Migratory Merger, to which we agreed pursuant to the Private Placement Purchase Agreement, permit requisite stockholders to act by written consent.

Business Combinations. As a Nevada corporation, we are also subject to provisions of Nevada law which restrict shareholders beneficially owning 10% or more of our outstanding voting shares from engaging in certain business combinations without approval of our board of directors or the holders of our stock representing a majority of the voting power not beneficially owned by the interested shareholder. Our articles of incorporation contain a similar provision restricting shareholders beneficially owning 20% or more of our outstanding voting shares from engaging in certain business combinations without approval of our board of directors or the holders of our common stock representing two-thirds of the outstanding shares of common stock, subject to the voting rights of any issued and outstanding preferred stock. The form of certificate of incorporation for the surviving entity in the Migratory Merger, to which we agreed pursuant to the Private Placement Purchase Agreement, provides that we will not to be governed by the provisions of Section 203 of the DGCL, which would otherwise impose similar restrictions on business combinations with our stockholders.

 

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Plan of Distribution

The selling securityholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of our common stock or interests in shares of our common stock received after the date of this prospectus from a selling securityholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of our common stock or interests in shares of our common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

The selling securityholders may use any one or more of the following methods when disposing of shares or interests therein:

 

•

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

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block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

 

•

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

•

an exchange distribution in accordance with the rules of the applicable exchange;

 

•

privately negotiated transactions;

 

•

short sales effected after the date the registration statement of which this prospectus is a part is declared effective by the SEC;

 

•

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

•

through broker-dealers that agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;

 

•

a combination of any such methods of sale; and

 

•

any other method permitted by applicable law.

The selling securityholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling securityholders to include the pledgee, transferee or other successors in interest as selling securityholders under this prospectus. The selling securityholders also may transfer the shares of our common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling securityholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling securityholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

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The aggregate proceeds to the selling securityholders from the sale of our common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling securityholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the Warrants by payment of cash, however, we will receive the exercise price of the Warrants.

The selling securityholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule.

The selling securityholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling securityholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of the selling securityholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, our common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states our common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling securityholders and their affiliates. In addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling securityholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling securityholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling securityholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

We have agreed with the selling securityholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or Rule 144 under the Securities Act or (2) the date on which all of the shares may be sold without restriction pursuant to Rule 144 under the Securities Act, or (3) the first date on which none of the shares covered by this prospectus constitute Registrable Securities.

 

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Legal Matters

The validity of the shares of common stock offered hereby will be passed upon for us by our Nevada counsel, Woodburn and Wedge.

Experts

The financial statements as of December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010, included in this Prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the Registration Statement. Such financial statements have been so 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 with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. For further information about us and our common stock, you may refer to the registration statement.

You may read, without charge, and copy, at prescribed rates, all or any portion of the registration statement or any reports, statements or other information in the files at the public reference room at the SEC’s principal office at 100 F Street NE, Washington, D.C., 20549. You may request copies of these documents, for a copying fee, by writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the Internet website maintained by the SEC at http://www.sec.gov.

We are subject to the information and reporting requirements of the Securities Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can request copies of these documents, for a copying fee, by writing to the SEC. These reports, proxy statements and other information will also be available on the Internet website of the SEC referred to above and our website www.powergreatlakes.com (which is not part of this prospectus). We intend to furnish our shareholders with annual reports containing financial statements audited by our independent auditors.

 

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Index to Financial Statements

 

		Page
Financial Statements of Power Solutions International, Inc.
Unaudited Consolidated Balance Sheets of The W Group, Inc. as of March 31, 2011 and December  31, 2010			F-2
Unaudited Consolidated Statements of Operations of The W Group, Inc. for the three months ended March  31, 2011 and 2010			F-3
Unaudited Consolidated Statements of Stockholders’ Equity of The W Group, Inc. for the three months ended March 31, 2011			F-4
Unaudited Consolidated Statements of Cash Flows of The W Group, Inc. for the three months ended March  31, 2011 and 2010			F-5
The W Group, Inc. Notes to Consolidated Financial Statements			F-6
Report of Independent Registered Public Accounting Firm			F-11
Consolidated Balance Sheets of The W Group, Inc. as of December 31, 2010 and 2009			F-12
Consolidated Statements of Operations of The W Group, Inc. for the years ended December  31, 2010, 2009 and 2008			F-13
Consolidated Statements of Stockholders’ Equity of The W Group, Inc. for the years ended December 31, 2010, 2009 and 2008			F-14
Consolidated Statements of Cash Flows of The W Group, Inc. for the years ended December  31, 2010, 2009 and 2008			F-15
The W Group, Inc. Notes to Consolidated Financial Statements			F-16

 

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The W Group, Inc.

Unaudited Consolidated Balance Sheets

As of March 31, 2011 and December 31, 2010

(Dollar amounts in thousands except per share amounts)

 

		March 31, 2011				December 31, 2010
ASSETS
CURRENT ASSETS
Cash		$	—			$	—
Accounts receivable, net			18,506				16,282
Inventories			30,688				32,168
Prepaid and other			1,028				1,028
Deferred income taxes			755				687
Total current assets			50,977				50,165
PROPERTY AND EQUIPMENT, NET			2,826				2,883
OTHER NONCURRENT ASSETS			3,245				2,305
TOTAL ASSETS		$	57,048			$	55,353
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Cash overdraft		$	228			$	529
Income taxes payable			1,301				619
Current maturities of long-term debt and capital lease obligations			2,159				2,226
Line of credit			20,964				21,633
Accounts payable			18,288				16,681
Accrued liabilities			2,103				2,211
Total current liabilities			45,043				43,899
LONG-TERM OBLIGATIONS
Deferred revenue			189				189
Deferred income taxes			222				233
Long-term debt and capital lease obligations, net of current maturities			5,177				5,676
TOTAL LIABILITIES			50,631				49,997
Contingencies and Commitments
STOCKHOLDERS’ EQUITY
Common stock, $0.0001 par value: 3,500,000 shares authorized; 1,444,444 shares issued and outstanding			—				—
Additional paid-in capital			7				7
Retained earnings			6,410				5,349
			6,417				5,356
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	57,048			$	55,353

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

 

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The W Group, Inc.

Unaudited Consolidated Statements of Operations

For the three months ended March 31, 2011 and 2010

(Dollar amounts in thousands)

 

		March 31, 2011				March 31, 2010
Net sales		$	31,353			$	19,629
Cost of sales			25,374				16,575
Gross profit			5,979				3,054
Operating expenses
Engineering			992				714
Selling and service			1,392				1,171
General and administrative			1,302				725
Operating expenses			3,686				2,610
Operating income			2,293				444
Interest expense			629				512
Income (loss) before income taxes			1,664				(68	)
Income tax provision (benefit)			603				(13	)
Net income (loss)		$	1,061			$	(55	)

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

 

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The W Group, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

March 31, 2011

(Dollar amounts in thousands)

 

		Common Stock				Additional paid-in capital				Retained earnings				Total stockholders’ equity
Balance at December 31, 2010		$	—			$	7			$	5,349			$	5,356
Net income			—				—				1,061				1,061
Balance at March 31, 2011		$	—			$	7			$	6,410			$	6,417

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

 

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The W Group, Inc.

Unaudited Consolidated Statements of Cash Flows

Three months ended March 31, 2011 and 2010

(Dollar amounts in thousands)

 

		March 31, 2011				March 31, 2010
Cash flows from operating activities
Net income (loss)		$	1,061			$	(55	)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes			(79	)			45
Depreciation			181				199
Increase (decrease) in trade receivable allowances			64				(6	)
(Increase) decrease in assets
Accounts receivable			(2,288	)			16,708
Other receivables			—				—
Inventories			1,480				95
Prepaid and other			—				(538	)
Other assets			(154	)			374
Increase (decrease) in liabilities
Income taxes payable			682				(627	)
Accounts payable			1,364				(12,318	)
Accrued liabilities			(108	)			(161	)
Deferred revenue			—				—
Net cash provided by operating activities			2,203				3,716
Cash flows from investing activities
Purchases of property, plant and equipment and other			(314	)			(152	)
Increase in cash surrender value of life insurance			—				—
Net cash used in investing activities			(314	)			(152	)
Cash flows from financing activities
Decrease in cash overdraft			(301	)			(531	)
Net change in line of credit			(669	)			(2,620	)
Proceeds from long-term debt			43				52
Payments on long-term debt and capital lease obligations			(609	)			(465	)
Cash paid for financing fees			(353	)			—
Net cash used in financing activities			(1,889	)			(3,564	)
Change in cash			—				—
Cash at beginning of year			—				—
Cash at end of year		$	—			$	—
Supplemental disclosures of cash flow information
Cash paid for interest		$	580			$	453
Cash paid for income taxes		$	—			$	570
Supplemental disclosure of noncash transactions
Deferred Financing Fees		$	245			$	—
Dividends		$	224			$	—

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

 

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The W Group, Inc.

Notes to Consolidated Financial Statements

As of and for the three months ended March 31, 2011 and 2010

(Unaudited)

(Dollar amounts in thousands)

 

1.	Interim financial statements

The unaudited consolidated financial statements presented in this report include the accounts of The W Group, Inc. (“The W Group” or the “Company”) and its wholly-owned subsidiaries, Power Production, Inc., Power Great Lakes, Inc., Power Solutions, Inc., Power Global Solutions, Inc., Auto Manufacturing, Inc., Torque Power Source Parts, Inc., XISync, LLC, PSI International, LLC, and Power Properties, L.L.C. Collectively, these entities produce and distribute off-highway industrial engines and provide aftermarket support for the industrial engine market. All intercompany balances and transactions have been eliminated in the consolidation.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Accordingly, certain information related to the Company’s significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) has been condensed or omitted. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to fairly state, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented.

The preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2010.

 

2.	Summary of significant accounting policies

Revenue recognition

The W Group recognizes revenue upon transfer of title and risk of loss, which is when products are shipped, provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable and management believes collectability is reasonably assured. At the request of a customer, the Company may enter into a bill and hold arrangement, whereby the Company will recognize a sale under the same terms and conditions as any other sale, except that the products are held by the Company until the customer initiates the shipment of the product from the Company’s premises. Transfer of title and risk of loss pass to the customer at the time the bill and hold sale is recognized. Any product that has been sold under a bill and hold arrangement is segregated from the Company’s owned inventory.

The Company’s returned goods from customers are nominal.

The Company classifies shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred.

 

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Inventories

Inventory consists primarily of engines and parts. Engines are valued at the lower of cost plus estimated freight-in, as determined by specific serial number identification or market value. Parts are valued at the lower of cost (first-in, first-out) plus freight-in, or market value. The components of inventory were as follows:

 

		March 31, 2011				December 31, 2010
Raw material		$	26,371			$	26,156
Finished			4,317				6,012
Total		$	30,688			$	32,168

When necessary, the Company writes down the valuation of its inventory in an amount equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions.

Fair value of financial instruments

The Company’s financial instruments include accounts receivable, accounts payable, letters of credit, notes payable and capital lease obligations. The carrying amounts of accounts receivable and accounts payable approximate fair value because of their short-term nature. The carrying value of the line of credit, notes payable and capital lease obligations approximate fair value because the interest rates fluctuate with market interest rates or the fixed rates are based on current rates offered to the Company for debt with similar terms and maturities and the Company’s credit rating had not changed significantly since the origination of its line of credit, notes payable or capital lease obligations.

New accounting pronouncements

Revenue Recognition— In September 2009, the FASB reached a consensus on Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic No. 605)—Multiple-Deliverable Revenue Arrangements,” (ASU 2009-13). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either (i) vendor-specific objective evidence (VSOE) or (ii) third-party evidence (TPE), before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements. Overall arrangement consideration must be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. The application of this standard in the first quarter of 2011 had no material impact on the results of operations for the three months ended March 31, 2011.

 

3.	Subsequent events

On April 29, 2011, Power Solutions International, Inc. (formerly known as Format, Inc.) (“PSI Inc.”) completed a reverse merger transaction (“Reverse Merger”) in which PSI Merger Sub, Inc., a Delaware corporation that was newly-created as a wholly-owned subsidiary of PSI Inc., merged with and into The W Group, Inc. The W Group remained as the surviving corporation of the Reverse Merger and became a wholly-owned subsidiary of PSI Inc. Pursuant to the Reverse Merger agreement, all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger converted into, and PSI Inc. issued to the three stockholders of The W Group, an aggregate 10,000,000 shares of PSI Inc. common stock and 95,960.90289 shares of PSI Inc. preferred stock. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section 805, “Business Combinations” The W Group is considered the accounting acquiror in the Reverse Merger. The W Group is considered the acquiror for accounting

 

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purposes, and will account for the transaction as a reverse acquisition, because The W Group’s former stockholders received the greater portion of the voting rights in the combined entity and The W Group’s senior management represents all of the senior management of the combined entity. The Company expects that the acquisition will be accounted for as the recapitalization of The W Group since, at the time of the acquisition, PSI Inc., was a company with minimal assets and liabilities. Consequently, the assets and liabilities and the historical operations that will be reflected in PSI Inc.’s consolidated financial statements will be those of The W Group and will be recorded at the historical cost basis of The W Group.

Concurrent with the closing of the Reverse Merger, PSI Inc. and The W Group entered into a purchase agreement (“Private Placement”) whereby PSI Inc. completed the sale of an aggregate of 18,000 shares of PSI Inc. preferred stock together with private placement warrants representing the right to purchase an aggregate of 24,000,000 shares of PSI Inc. common stock, subject to certain limitations on exercise, and also issued a warrant to purchase common stock of PSI Inc. to ROTH Capital Partners, LLC in connection with the Private Placement. The shares of PSI Inc. preferred stock issued in the Private Placement are initially convertible into an aggregate of 48,000,000 shares of PSI Inc. common stock, subject to certain limitations and conditions. In consideration, PSI Inc. and The W Group received proceeds of $18,000 before estimated transaction fees, costs and expenses of approximately $4,800 in connection with the Reverse Merger and Private Placement.

On April 29, 2011, in connection with the closing of the Reverse Merger, PSI Inc. and The W Group entered into a loan and security agreement with Harris, N.A., (“Harris Agreement”) which replaced the existing loan and security agreement that The W Group had with its senior lender (“Prior Credit Agreement”) prior to the closing of the Reverse Merger. Pursuant to the Harris Agreement, among other things, the maximum loan amount was reduced from the maximum loan amount under The W Group’s Prior Credit Agreement to reflect The W Group’s repayment in full of its two previously outstanding term loans under the Prior Credit Agreement and the financial covenants under the Prior Credit Agreement were replaced with a new fixed charge coverage ratio covenant. The Harris Agreement provides for borrowings up to $35.0 million under a Revolving Line of Credit (“Line of Credit”) which is scheduled to mature on April 29, 2014. The Harris Agreement is collateralized by substantially all of the assets of PSI Inc. PSI Inc. is required to meet certain financial covenants, including a minimum monthly fixed charge coverage ratio and a limitation on annual capital expenditures. The Harris Agreement also contains customary covenants and restrictions applicable to PSI Inc., including agreements to provide financial information, comply with laws, pay taxes and maintain insurance, restrictions on the incurrence of certain indebtedness, guarantees and liens, restrictions on mergers, acquisitions and certain dispositions of assets, and restrictions on the payment of dividends and distributions. In addition, the Harris Agreement requires cash accounts to be held with Harris N.A. The cash deposits are swept by Harris N.A. daily and applied against the outstanding Line of Credit.

Under the Harris Agreement: (a) PSI Inc. is a party to the Harris Agreement and pledged all of its shares of The W Group to Harris N.A. as collateral for the line of credit; (b) there are no term loans; (c) the Line of Credit bears interest at Harris’ prime rate (3.25% at March 31, 2011) plus an applicable margin ranging from 0% to 0.50% or, at PSI Inc.’s option, a portion of the Line of Credit can be designated to bear interest at LIBOR plus an applicable margin ranging from 2.00% to 2.50%; (d) the limitation on annual capital expenditures was increased from the limitation under The W Group’s Prior Credit Agreement; (e) a maximum quarterly senior debt leverage ratio, which was included in the Prior Credit Agreement, was eliminated; and (f) a fixed charge coverage ratio similar to the fixed charge coverage ratio in the Prior Credit Agreement was included, except that this fixed charge coverage ratio under the Harris Agreement excludes historical debt service on the Term Notes (as discussed below) and certain other one-time expenses.

 

4.	Other noncurrent assets

Other noncurrent assets include the following:

 

		March 31, 2011				December 31, 2010
Deferred financing expenses		$	1,468			$	870
Loan origination fees, net			236				338
Other			1,541				1,097
Total		$	3,245			$	2,305

 

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Deferred financing expenses primarily consist of professional and consulting fees incurred in connection with the Reverse Merger and Private Placement completed on April 29, 2011 as described in Note 3. These deferred financing expenses will be allocated pro-rata as a direct reduction against equity or immediately expensed based upon the allocation of the proceeds received from the Private Placement.

Loan origination fees included in other assets represented the noncurrent portion of unamortized loan fees associated with the Prior Credit Agreement. The total unamortized loan origination fees were $503 and $558 as of March 31, 2011 and December 31, 2010, the current portion of which is classified in “Prepaid and other” on the balance sheet. As described in Note 3, the Company repaid its debt obligations under the Prior Credit Agreement effective April 29, 2011. Accordingly, the remaining unamortized loan fees associated with the Prior Credit Agreement were written off, effective upon the repayment of the obligations thereunder.

Other includes deferred emission certification costs, deposits and other costs.

 

5.	Line of credit

The Company’s primary sources of liquidity are cash flows from operations, principally collections of customer accounts receivable and borrowing capacity under its revolving credit facility. The Company’s existing and historical financing arrangements require that cash received by the Company be applied against its revolving line of credit. Accordingly, the Company does not maintain cash or cash equivalents on its balance sheet, but instead funds its operations through borrowings under its revolving line of credit.

The Company’s Prior Credit Agreement provided borrowings up to $29,000, bearing interest at the bank’s prime rate (3.25% at March 31, 2011 and December 31, 2010), plus an applicable margin ranging from 2.25% to 2.50%. At March 31, 2011 and December 31, 2010, the entire outstanding balance of $20,964 and $21,633, respectively, had been designated by the Company to bear interest at LIBOR as allowed under the Prior Credit Agreement. The unused line balance was $8,036 and $7,367 at March 31, 2011 and December 31, 2010, respectively. The interest rate on the line of credit was 5.50% at each of March 31, 2011 and December 31, 2010.

The line of credit under the Prior Credit Agreement was scheduled to mature on July 15, 2013, and was cross-defaulted with Term Notes A and B discussed below and collateralized by substantially all business assets. As discussed in Note 3, the revolving line of credit under the Prior Credit Agreement was repaid in full on April 29, 2011 and replaced with a revolving line of credit under the Harris Agreement as discussed in Note 3.

 

6.	Long-term debt

Long-term debt consisted of the following:

 

		March 31, 2011				December 31, 2010
Term Note A		$	5,144			$	5,638
Term Note B			2,070				2,100
Notes payable			82				86
Capital lease obligations			40				78
			7,336				7,902
Less current maturities			2,159				2,226
Total		$	5,177			$	5,676

Term Note A had an effective interest rate of 7.5% at March 31, 2011 and December 31, 2010. Term Note B had an effective interest rate of 5.5% at March 31, 2011 and December 31, 2010. As discussed in Note 3, Term Note A and Term Note B were repaid in full on April 29, 2011.

 

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7.	Income taxes

At the end of each interim period, the Company estimates its annual effective tax rate (“ETR”) and applies that rate to its interim earnings. The Company also records the tax impact of certain unusual or infrequently occurring items, including the effects of changes in valuation allowances and tax laws or rates, in the interim period in which they occur.

The computation of the annual estimated ETR at each interim period requires certain estimates and significant judgments, including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.

The Company’s ETR for the three months ended March 31, 2011 was 36.2% compared with 18.8% for the comparable prior year period. The Company’s ETR in 2010 was lower than the Company’s ETR in 2011 as the amount of tax credits expected to be generated and used for 2010 was significantly higher relative to the amount of taxable income generated for the year. In 2011, the Company’s ETR is expected to be higher than the ETR in 2010 as the Company expects that the proportion of credits generated and used will be lower relative to its taxable income for the year.

 

8.

Dividends

On March 30, 2011, the Company’s Board of Directors approved a dividend of $224 to two of the Company’s stockholders. The dividend was a noncash transaction from previously issued loans to two stockholders. The loans receivable due from the stockholders were classified as an offset of Additional Paid-in Capital on the Company’s balance sheet. The dividends were paid in the form of releasing the two stockholders from the repayment of the loans receivable. Accordingly, no cash was required to be exchanged in connection with the dividend, and there was no effect on stockholders’ equity as the loans receivable had been previously classified as an offset of Additional Paid-in Capital.

 

9.	Contingencies and commitments

The Company is involved in various legal proceedings arising in the normal course of conducting business. The resolution of such proceedings is not currently expected to have a material effect on the Company’s consolidated results of operations, financial condition or cash flows.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

The W Group, Inc.

Wood Dale, IL

We have audited the accompanying consolidated balance sheets of The W Group, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, such consolidated financial statements present fairly, in all material respects, the financial position of The W Group, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

Chicago, Illinois

May 3, 2011

 

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The W Group, Inc.

Consolidated Balance Sheets

December 31, 2010 and 2009

(Dollar amounts in thousands except per share amounts)

 

		2010				2009
ASSETS
CURRENT ASSETS
Cash		$	—			$	—
Accounts receivable, net			16,282				28,540
Inventories			32,168				31,167
Prepaid and other			1,028				495
Deferred income taxes			687				585
Total current assets			50,165				60,787
PROPERTY AND EQUIPMENT, NET			2,883				3,330
OTHER NONCURRENT ASSETS			2,305				1,469
TOTAL ASSETS		$	55,353			$	65,586
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Cash overdraft		$	529			$	649
Income taxes payable			619				1,290
Current maturities of long-term debt and capital lease obligations			2,226				2,218
Line of credit			21,633				22,409
Accounts payable			16,681				25,579
Accrued liabilities			2,211				1,549
Total current liabilities			43,899				53,694
LONG-TERM OBLIGATIONS
Deferred revenue			189				—
Deferred income taxes			233				290
Long-term debt and capital lease obligations, net of current maturities			5,676				7,815
TOTAL LIABILITIES			49,997				61,799
Contingencies and Commitments
STOCKHOLDERS’ EQUITY
Common stock, $0.0001 par value: 3,500,000 shares authorized; 1,444,444 shares issued and outstanding			—				—
Additional paid-in capital			7				7
Retained earnings			5,349				3,780
			5,356				3,787
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	55,353			$	65,586

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

 

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The W Group, Inc.

Consolidated Statements of Operations

Years Ended

December 31, 2010, 2009, and 2008

(Dollar amounts in thousands)

 

		2010				2009				2008
Net sales		$	100,521			$	82,902			$	125,318
Cost of sales			83,894				66,520				107,419
Gross profit			16,627				16,382				17,899
Operating expenses
Engineering			3,846				2,721				3,305
Selling and service			5,465				4,519				5,979
General and administrative			3,250				3,065				4,407
Operating expenses			12,561				10,305				13,691
Operating income			4,066				6,077				4,208
Interest expense			2,131				2,303				2,794
Income before income taxes			1,935				3,774				1,414
Income tax provision			366				1,387				750
Net income		$	1,569			$	2,387			$	664

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

 

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The W Group, Inc.

Consolidated Statements of Stockholders’ Equity

December 31, 2010, 2009, and 2008

(Dollar amounts in thousands)

 

		Common stock				Additional paid-in capital				Retained earnings				Total stockholders’ equity
Balance at December 31, 2007		$	—			$	7			$	729			$	736
Net income			—				—				664				664
Balance at December 31, 2008			—				7				1,393				1,400
Net income			—				—				2,387				2,387
Balance at December 31, 2009			—				7				3,780				3,787
Net income			—				—				1,569				1,569
Balance at December 31, 2010		$	—			$	7			$	5,349			$	5,356

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

 

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The W Group, Inc.

Consolidated Statements of Cash Flows

December 31, 2010, 2009, and 2008

(Dollar amounts in thousands)

 

		2010				2009				2008
Cash flows from operating activities
Net income		$	1,569			$	2,387			$	664
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes			(159	)			38				348
Depreciation			988				984				672
Increase (decrease) in trade receivable allowances			246				(120	)			103
(Increase) decrease in assets
Accounts receivable			12,012				(9,572	)			5,826
Other receivables			—				—				124
Inventories			(1,001	)			(4,861	)			7,361
Prepaid and other			(533	)			(72	)			(312	)
Other assets			76				360				169
Increase (decrease) in liabilities
Income taxes payable			(671	)			1,234				(9	)
Accounts payable			(9,255	)			13,218				(12,010	)
Accrued liabilities			463				(208	)			(249	)
Deferred revenue			189				—				—
Net cash provided by operating activities			3,924				3,388				2,687
Cash flows from investing activities
Purchases of property, plant and equipment			(541	)			(363	)			(579	)
Increase in cash surrender value of life insurance			(42	)			—				(16	)
Net cash used in investing activities			(583	)			(363	)			(595	)
Cash flows from financing activities
(Decrease) increase in cash overdraft			(120	)			(718	)			378
Net change in line of credit			(776	)			(592	)			(6,126	)
Proceeds from long-term debt			95				—				11,100
Proceeds from sale leaseback of equipment			—				—				409
Payments on long-term debt and capital lease obligations			(2,226	)			(1,645	)			(6,512	)
Cash paid for financing fees			(314	)			(70	)			(1,341	)
Net cash used in financing activities			(3,341	)			(3,025	)			(2,092	)
Change in cash			—				—				—
Cash at beginning of year			—				—				—
Cash at end of year		$	—			$	—			$	—
Supplemental disclosures of cash flow information
Cash paid for interest		$	1,899			$	1,772			$	2,825
Cash paid for income taxes		$	1,196			$	234			$	268
Supplemental disclosure of noncash transactions
Deferred Financing Fees		$	556			$	—			$	—

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

 

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The W Group, Inc.

Notes to Consolidated Financial Statements

December 31, 2010, 2009, and 2008

(Dollar amounts in thousands)

 

1.

Business

The W Group, Inc. (“The W Group” or the “Company”) is a producer and distributor of high-performance, emission-compliant, power solutions for original equipment manufacturers of off-highway industrial equipment (industrial OEMs). The W Group’s power systems are primarily spark-ignited, which run on alternative fuels such as natural gas and propane. The Company designs, develops, manufactures, distributes and provides after-market support for the Company’s power solutions for industrial OEMs in a wide range of industries with a diversified set of applications.

Financial Accounting Standards Board (FASB) Accounting Standards Codification ASC 280, “Segment Reporting” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis. The Company operates in one industry segment, which is the assembly and aftermarket support of power solutions for off-highway industrial equipment. Therefore, the Company has concluded that it has only one operating segment.

 

2.	Summary of significant accounting policies

Principles of consolidation

The consolidated financial statements include the accounts of The W Group, Inc., and its wholly-owned subsidiaries, Power Production, Inc., Power Great Lakes, Inc., Power Solutions, Inc., Power Global Solutions, Inc., Auto Manufacturing, Inc., Torque Power Source Parts, Inc., XISync, LLC, PSI International, LLC, and Power Properties, L.L.C. Collectively, these entities produce and distribute off-highway industrial engines and provide aftermarket support for the industrial engine market. All intercompany balances and transactions have been eliminated in the consolidation.

Use of estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Subsequent events

In preparing the accompanying consolidated financial statements, we evaluated the period from December 31, 2010 through May 3, 2011, the date which the financial statements were issued, for material subsequent events requiring recognition or disclosure. As of December 31, 2010, the Company was not in compliance with the quarterly fixed charge coverage ratio and the quarterly senior debt leverage ratio covenants of its credit agreement (“Prior Credit Agreement”), which includes the Company’s revolving line of credit (discussed in Note 3) and Term Notes A and B (collectively, the “Term Notes”) (discussed in Note 4). On January 20, 2011, the Company received a waiver from the bank for these defaults effective as of that date.

 

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On March 30, 2011, the Company’s Board of Directors approved a dividend of $224 to two of the Company’s stockholders. The dividend is a noncash transaction and arises from previously issued loans to two stockholders. The loans receivable due from the stockholders have been classified as an offset of Additional Paid-in Capital on the Company’s balance sheet. The dividends were paid in the form of releasing the two stockholders from the repayment of the loans receivable. Accordingly, no cash is required to be exchanged in connection with the dividend, and there is no effect on stockholders’ equity as the loans receivable have been previously classified as an offset of Additional Paid-in Capital.

On April 29, 2011, Power Solutions International, Inc. (formerly known as Format, Inc.) (“PSI Inc.”) completed a reverse merger transaction (“Reverse Merger”) in which PSI Merger Sub, Inc., a Delaware corporation that was newly-created as a wholly-owned subsidiary of PSI Inc., merged with and into The W Group, Inc. The W Group remained as the surviving corporation of the Reverse Merger and became a wholly-owned subsidiary of PSI Inc. Pursuant to the Reverse Merger agreement, in exchange for all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger, PSI Inc. issued an aggregate 10,000,000 shares of PSI Inc. common stock and 95,960.90289 shares of PSI Inc. preferred stock to the three stockholders of The W Group. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section 805, “Business Combinations” The W Group is considered the accounting acquiror in the Reverse Merger. The W Group is considered the acquiror for accounting purposes, and will account for the exchange transaction as a reverse acquisition, because The W Group’s former stockholders received the greater portion of the voting rights in the combined entity and The W Group’s senior management represents all of the senior management of the combined entity. The Company expects that the acquisition will be accounted for as the recapitalization of The W Group since, at the time of the acquisition, PSI Inc., was a company with minimal assets and liabilities. Consequently, the assets and liabilities and the historical operations that will be reflected in PSI Inc.’s consolidated financial statements will be those of The W Group and will be recorded at the historical cost basis of The W Group.

Concurrently with the closing of the Reverse Merger, PSI Inc. and The W Group entered into a purchase agreement (“Private Placement”) whereby PSI Inc. completed the sale of an aggregate of 18,000 shares of PSI Inc. preferred stock together with private placement warrants representing the right to purchase an aggregate of 24,000,000 shares of PSI Inc. common stock, subject to certain limitations on exercise, and also issued a Warrant to purchase common stock of PSI Inc. to ROTH Capital Partners, LLC in connection with the Private Placement. The shares of PSI Inc. preferred stock issued in the Private Placement are initially convertible into an aggregate of 48,000,000 shares of PSI Inc. common stock, subject to certain limitations and conditions. In consideration, PSI Inc. and The W Group received proceeds of $18,000 before estimated transaction fees, costs and expenses of approximately $4,800 in connection with the Reverse Merger and Private Placement.

On April 29, 2011, in connection with the closing of the Reverse Merger, PSI Inc. and The W Group entered into a loan and security agreement with Harris, N.A., (“Harris Agreement”) which replaced the existing loan and security agreement that The W Group had with its senior lender prior to the closing of the Reverse Merger. Pursuant to the Harris Agreement, among other things, the maximum loan amount was reduced from the maximum loan amount under The W Group’s Prior Credit Agreement to reflect The W Group’s repayment in full of its two previously outstanding term loans under the Prior Credit Agreement and the financial covenants under the Prior Credit Agreement were replaced with a new fixed charge coverage ratio covenant. The Harris Agreement provides for borrowings up to $35.0 million under a Revolving Line of Credit (“Line of Credit”) which is scheduled to mature on April 29, 2014. The Harris Agreement is collateralized by substantially all of the assets of PSI Inc. PSI Inc. is required to meet certain financial covenants, including a minimum monthly fixed charge coverage ratio and a limitation on annual capital expenditures. The Harris Agreement also contains customary covenants and restrictions applicable to PSI Inc., including agreements to provide financial information, comply with laws, pay taxes and maintain insurance, restrictions on the incurrence of certain indebtedness, guarantees and liens, restrictions on mergers, acquisitions and certain dispositions of assets, and restrictions on the payment of dividends and distributions. In addition, the Harris Agreement requires cash accounts to be held with Harris N.A. The cash deposits are swept by Harris N.A. daily and applied against the outstanding Line of Credit.

 

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Under the Harris Agreement: (a) PSI Inc. is a party to the Harris Agreement and pledged all of its shares of The W Group to Harris N.A. as collateral for the line of credit; (b) there are no term loans; (c) the Line of Credit bears interest at Harris’ prime rate (3.25% at December 31, 2010) plus an applicable margin ranging from 0% to 0.50% or, at PSI Inc.’s option, a portion of the Line of Credit can be designated to bear interest at LIBOR plus an applicable margin ranging from 2.00% to 2.50%; (d) the limitation on annual capital expenditures was increased from the limitation under The W Group’s Prior Credit Agreement; (e) a maximum quarterly senior debt leverage ratio, which was included in the Prior Credit Agreement was eliminated; and (f) a fixed charge coverage ratio similar to the fixed charge coverage ratio in the Prior Credit Agreement was included, except that, this fixed charge coverage ratio under the Harris Agreement excludes historical debt service on the Term Notes (as discussed below) and certain other one-time expenses.

Revenue recognition

The W Group recognizes revenue upon transfer of title and risk of loss, which is when products are shipped, provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable and management believes collectability is reasonably assured. At the request of a customer, the Company may enter into a bill and hold arrangement, whereby the Company will recognize a sale under the same terms and conditions as any other sale, except that the products are held by the Company until the customer initiates the shipment of the product from the Company’s premises. Transfer of title and risk of loss pass to the customer at the time the bill and hold sale is recognized. Any product that has been sold under a bill and hold arrangement is segregated from the Company’s owned inventory.

The Company’s returned goods from customers are nominal.

The Company classifies shipping and handling charges billed to customers as revenue. Shipping and handling costs paid to others are classified as a component of cost of sales when incurred.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are due under normal trade terms requiring payment within 30 to 150 days from the invoice date.

The W Group records an allowance for doubtful accounts for amounts due from third parties that are not expected to be collected. The Company estimates the allowance for doubtful accounts based upon historical experience and management review of specific customer balances. The activity in the Company’s allowance for doubtful accounts is as follows:

 

		2010				2009
Balance, beginning of year		$	411			$	531
Charged to expense			4				72
Write-offs			(75	)			(192	)
Balance, end of year		$	340			$	411

 

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Inventories

Inventory consists primarily of engines and parts. Engines are valued at the lower of cost plus estimated freight-in, as determined by specific serial number identification or market value. Parts are valued at the lower of cost (first-in, first-out) plus freight-in, or market value. The components of inventory were as follows at December 31:

 

		2010				2009
Raw material		$	26,156			$	28,385
Finished			6,012				2,782
Total		$	32,168			$	31,167

When necessary, the Company writes down the valuation of its inventory in an amount equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions.

Property, plant and equipment

 

		2010				2009
Building and improvements		$	1,899			$	1,882
Office furniture and equipment			2,633				2,551
Warehousing tooling and equipment			3,314				3,142
Transportation equipment			431				365
Construction in progress			160				130
			8,437				8,070
Accumulated depreciation			(5,814	)			(5,000	)
Property, plant and equipment, net			2,623				3,070
Land			260				260
Total		$	2,883			$	3,330

Property, plant and equipment are recorded at cost. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the initial lease term. Depreciation expense totaled $988, $984, and $672 for the years ended December 31, 2010, 2009, and 2008, respectively.

Depreciation of equipment acquired under a capital lease is provided using the straight line method over the shorter of the useful life of the equipment or the duration of the lease. The related depreciation for capital lease assets is included in depreciation expense. The carrying value of property under capital lease was $456 and $741 at December 31, 2010 and 2009, respectively, net of accumulated depreciation of $1,148 and $869, respectively.

Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.

 

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Estimated useful lives by major asset category are as follows:

 

Asset		Life (in years)
Buildings		39
Office furniture and equipment		8
Warehousing equipment and tooling		3-8
Transportation equipment		5
Leasehold improvements		8-10
Property under capital lease		3-8

Long-lived assets

Long-lived assets, such as property, plant and equipment and land, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no adjustments to the carrying value of long-lived assets during the years ended December 31, 2010 and 2009.

Other noncurrent assets

Other assets consist primarily of deferred emissions certification costs, loan origination fees and deferred financing expenses which are amortized over the periods for which benefits are expected to be realized.

The Company is required to certify that certain engines sold comply with various emissions laws, in accordance with regulations issued by the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB). Once issued, the emissions certifications for these engines are typically valid for periods of three to five years. The costs of obtaining the emissions certificates are classified as other assets and expensed through operating expenses over the estimated life of the respective certificate. Deferred emissions classified as noncurrent assets totaled $523 and $517 at December 31, 2010 and 2009, respectively. Estimated annual amortization of deferred emissions as of December 31, 2010 is as follows:

 

2011		$	481
2012			474
2013			49
		$	1,004

Loan origination fees are classified as assets and amortized over the lives of the related loans of three to five years. Unamortized loan fees totaled $558 and $788 at December 31, 2010 and 2009, respectively, net of accumulated amortization of $872 and $642, respectively. Amortization expense related to loan origination fees and classified as interest expense was $230, $502 and $350 for the years ended December 31, 2010, 2009, and 2008, respectively. Estimated annual amortization of amounts deferred as of December 31, 2010 is as follows:

 

2011		$	220
2012			220
2013			118
		$	558

Deferred financing expenses represent costs incurred in connection with the Reverse Merger discussed in the Subsequent events section above. Deferred financing costs incurred were $870 at December 31, 2010.

 

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Cash overdrafts

Under the Company’s cash management system, cash overdraft balances exist for the Company’s primary disbursement accounts. These overdrafts represent uncleared checks in excess of cash balances in the related bank accounts. Funds are transferred, from borrowings on our line of credit, to cover cash overdrafts on an as-needed basis to pay for clearing checks.

Warranty costs

The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a period of (i) one year from the date of shipment or (ii) six months from the date products are placed into service, whichever occurs first. Warranties for certified emission products are mandated by either the EPA and or the CARB and will be longer than the Company’s standard warranty on certain emission related products. The Company’s products also carry limited warranties from suppliers. Costs related to supplier warranty claims are borne by the supplier. The Company’s warranties apply only to the modifications it makes to supplier base products. The Company charges the estimated costs of warranty programs against income at the time products are shipped to customers. The Company assesses the warranty exposure using historical experience to estimate the remaining liability.

Research and development costs

The W Group expenses research and development costs when incurred except for initial emission certification costs which are capitalized and amortized over the estimated life of the certification. Research and development costs classified within engineering expenses in the consolidated statements of operations, consist primarily of wages related to engineering work and approximated $3,005, $2,387, and $2,623 for the years ended December 31, 2010, 2009, and 2008, respectively.

Concentrations

The W Group maintains cash balances in various accounts at one financial institution in the Midwest. Interest-bearing accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250 per institution and per depositor. In addition, FDIC insurance on noninterest-bearing accounts is unlimited through December 31, 2012. At December 31, 2010, the Company had no uninsured cash balances.

The W Group is exposed to potential credit risks associated with its accounts receivable. The Company performs ongoing credit evaluations of its customers and does not require collateral on its accounts receivable. The Company has not experienced significant credit-related losses to date.

Two customers (“Customer A”, and “Customer B”) individually accounted for more than 10% of the Company’s sales during one or more years for 2008 through 2010. Customer A represented 19%, 25% and 21% of consolidated net sales in 2010, 2009, and 2008, respectively. Customer B represented 11% of consolidated net sales in 2008.

Three customers (“Customer A” referred to above, “Customer C” and “Customer D”) individually accounted for more than 10% of consolidated accounts receivable at December 31, 2010 or 2009. At December 31, 2010 and 2009, Customer A represented 12% and 43% of consolidated accounts receivable. Customer C represented 14% of consolidated accounts receivable at December 31, 2010, and Customer D represented 12% and 15% of consolidated accounts receivable at December 31, 2010 and 2009, respectively.

Two vendors (“Vendor A” and “Vendor B”) individually accounted for more than 10% of the Company’s purchases during one or more years for 2008 through 2010. Vendor A accounted for 31%, 39% and 39% of the Company’s purchases in 2010, 2009, and 2008, respectively. Vendor B accounted for 16% of the Company’s purchases in 2010.

 

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Fair value of financial instruments

The Company’s financial instruments include accounts receivable, accounts payable, letters of credit, notes payable and capital lease obligations. The carrying amounts of accounts receivable and accounts payable approximate fair value because of their short-term nature. The carrying value of the line of credit, notes payable and capital lease obligations approximate fair value because the interest rates fluctuate with market interest rates or the fixed rates are based on current rates offered to the Company for debt with similar terms and maturities.

The Company maintained an interest-rate risk management strategy that used derivative instruments to minimize significant unanticipated earnings fluctuations caused by interest-rate volatility. The W Group’s goal was to lower the cost of borrowed funds designated to bear interest based upon the London InterBank Offered Rate (LIBOR). During 2007, the Company entered into an interest rate swap agreement related to its prior debt facility. The differential to be paid or received on the swap agreement was accrued as interest rates changed. The agreement was set to expire in August 2009 and had a fixed rate of 5.24%. The notional amount of the swap was $15,000. On July 15, 2008, the swap agreement was extinguished in conjunction with the Company’s debt refinancing. Upon extinguishment, a loss of $424 was realized.

Self-funded insurance

The W Group is self-insured for certain costs of its employee health insurance plan, although the Company obtains third-party insurance coverage to limit its exposure. The Company maintains a stop-loss insurance policy with individual and aggregate stop-loss coverage.

Income taxes

The W Group accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which The W Group expects those temporary differences to be recovered or settled. The Company recognizes the effects of a change in income tax rates on deferred tax assets and liabilities in its consolidated statements of operations in the period that includes the enactment date. The W Group records a valuation allowance to reduce the carrying amounts of deferred tax assets when, in the opinion of management, it is more likely than not that such assets will not be realized.

In determining the provision for income taxes, The W Group uses an annual effective income tax rate based on annual income, permanent differences between book and tax income and statutory income tax rates. The effective income tax rate also reflects the Company’s assessment of the ultimate outcome of tax audits. The W Group adjusts its annual effective income tax rate as additional information on outcomes or events becomes available. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur. The W Group reduces its net tax assets for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions the Company has taken. During interim reporting periods, income tax provisions are based upon the estimated annual effective tax rate of those taxable jurisdictions where The W Group conducts business.

New accounting pronouncements

Revenue Recognition—In September 2009, the FASB reached a consensus on Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic No. 605)—Multiple-Deliverable Revenue Arrangements,” (ASU 2009-13). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: (i) vendor-specific objective evidence (VSOE) or (ii) third-party evidence (TPE), before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been

 

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delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. Early adoption is permitted. This new update is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Based on the current nature of the Company’s operations, The W Group does not expect the adoption of this requirement will have a material effect on its consolidated financial statements.

 

3.	Line of credit

Our primary sources of liquidity are cash flows from operations, principally collections of customer accounts receivable and borrowing capacity under our revolving credit facility. Our existing and historical financing arrangements require that cash received by us be applied against our revolving line of credit. Accordingly, we do not maintain cash or cash equivalents on our balance sheet, but instead fund our operations through borrowings under our revolving line of credit.

Prior to August 20, 2009, the Company’s Prior Credit Agreement with a bank that provided for borrowings up to $37,500 bearing interest at the bank’s prime rate plus an applicable margin ranging from -0.25% to 0.00%. At the Company’s option, a portion of the line could have been designated to bear interest at LIBOR plus an applicable margin ranging from 2.25% to 2.50%. On August 20, 2009, the Prior Credit Agreement was amended to provide borrowings up to $29,000, bearing interest at the bank’s prime rate (3.25% at December 31, 2010 and 2009), plus an applicable margin ranging from 2.25% to 2.50%. At The W Group’s option, a portion of the line can be designated to bear interest at LIBOR, subject to a 2.00% floor, plus an applicable margin ranging from 3.25% to 3.50%. At December 31, 2010 and 2009, the entire outstanding balance of $21,633 and $22,409, respectively had been designated to bear interest at LIBOR. The unused line balance was $7,367 and $6,591 at December 31, 2010 and 2009, respectively. The interest rate on the line of credit was 5.50% at December 31, 2010 and 2009.

The line of credit of the Prior Credit Agreement is scheduled to mature on July 15, 2013, and is cross-defaulted with Term Notes A and B discussed below and collateralized by substantially all business assets. Borrowings under the line of credit of the Prior Credit Agreement are restricted by borrowing base calculations, as defined in the agreement. In addition, the Company is required to meet certain financial covenants, which include a minimum quarterly fixed charge coverage ratio, a maximum quarterly senior debt leverage ratio, and a limitation on annual capital expenditures. The Prior Credit Agreement also contains customary requirements and restrictions applicable to us, including agreements to provide financial information, comply with laws, pay taxes and maintain insurance, restrictions on the incurrence of certain indebtedness, guarantees and liens, restrictions on mergers, acquisitions and certain dispositions of assets, and restrictions on the payment of dividends and distributions.

As of December 31, 2010, the Company was not in compliance with the quarterly fixed charge coverage ratio and the quarterly senior debt leverage ratio covenants of the Prior Credit Agreement. On January 20, 2011, the Company received a waiver from the bank for the events of non-compliance.

 

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4.	Long-term debt

Long-term debt consisted of the following at December 31:

 

		2010				2009
Term Note A		$	5,638			$	7,237
Term Note B			2,100				2,220
Notes payable			86				—
Capital lease obligations			78				576
			7,902				10,033
Less current maturities			2,226				2,218
Total		$	5,676			$	7,815

Term Note A is payable in quarterly installments ranging from $213 to $629 plus interest at the prime rate plus an applicable margin of 4.25%, with the balance of the note due on July 13, 2013. At the option of the Company, a portion of this note can be designated to bear interest at LIBOR plus an applicable margin of 6.00%. At December 31, 2010, none of the outstanding balance had been designated to bear interest at LIBOR. The note is collateralized by substantially all business assets and cross-defaulted with the line of credit and Term Note B. The note is subject to the financial covenants discussed in Note 3. The interest rate was 7.50% at December 31, 2010 and 2009.

Term Note B is payable in quarterly installments of $30 plus interest at the prime rate plus an applicable margin ranging from 2.00% to 2.25%, with a balloon payment of $1,800 due at maturity on July 15, 2013. At the option of the Company, a portion of this note can be designated to bear interest at LIBOR plus an applicable margin ranging from 3.75% to 4.00%. At December 31, 2010, none of the Company’s outstanding balance had been designated to bear interest at LIBOR. This note is collateralized by substantially all business assets and cross-defaulted with the line of credit and Term Note A. The note is subject to the financial covenants discussed in Note 3. The interest rate was 5.5% at December 31, 2010 and 2009.

The capital lease obligation is due in 2011. The capital lease obligations at December 31, 2010 and 2009 had interest rates from 9.15% to 9.25%.

At December 31, 2010, the future maturities of long-term debt, excluding capitalized leases, consisted of the following:

 

2011		$	2,148
2012			2,375
2013			3,288
2014			11
2015			2
Total		$	7,824

 

5.

Leases

The W Group leases certain buildings and transportation equipment under various noncancelable operating lease agreements that contain renewal provisions. Rent expense under these leases approximated $1,436, $1,439 and $1,400 for the years ended December 31, 2010, 2009, and 2008, respectively.

 

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The future minimum lease payments due under operating leases by fiscal year at December 31, 2010, were as follows:

 

		Operating Leases
2011		$	1,184
2012			396
2013			45
2014			5
		$	1,630

The W Group also leases equipment under a capital lease maturing in 2011. The present value of the future minimum lease payments for this capital lease is $78.

 

6.	Defined contribution plan

The W Group sponsors a retirement savings plan for employees meeting certain eligibility requirements. Participants may choose from various investment options and can contribute an amount of their eligible compensation annually as defined by the plan document, subject to Internal Revenue Code limitations. The plan is funded by participant contributions and discretionary Company contributions. The Company made no discretionary contributions during 2010, 2009, or 2008.

 

7.	Income taxes

The provision for income taxes and the reconciliation of the income tax provision at the U.S. federal income tax rate of 34 percent to the actual effective tax rate were as follows as of December 31:

 

		2010								2009								2008
		Amount				Percent				Amount				Percent				Amount				Percent
Federal statutory rate		$	658				34.0	%		$	1,283				34.0	%		$	481				34.0	%
State income tax, net of federal effect			76				3.9				133				3.5				65				4.6
Research tax credits			(260	)			(13.4	)			(180	)			(4.8	)			(70	)			(4.9	)
Settlement of tax audits			—				—				—				—				178				12.6
Other, net			(108	)			(5.6	)			151				4.0				96				6.7
Tax provision		$	366				18.9	%		$	1,387				36.7	%		$	750				53.0	%

 

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Deferred taxes are the result of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities consisted of the following as of December 31:

 

		2010				2009
Allowances and bad debts		$	295			$	168
Accrued warranty			114				82
Accrued legal fees			13				54
Accrued vacation			175				136
Deferred revenue			49				—
Other			41				63
Estimated R&D credit carryforward			—				82
Total current deferred tax assets			687				585
Tax depreciation in excess of book			(233	)			(290	)
Total deferred tax liabilities			(233	)			(290	)
Net deferred tax assets		$	454			$	295

The current and deferred tax provision components are as follows:

 

		2010				2009				2008
Current tax expense
Federal		$	418			$	1,152			$	221
State			107				197				33
			525				1,349				254
Deferred tax expense (benefit)
Federal			(112	)			33				430
State			(47	)			5				66
			(159	)			38				496
		$	366			$	1,387			$	750

At December 31, 2010 and 2009, there was no deferred tax valuation allowance, as the Company believed it was more likely than not that earnings will be sufficient to realize the deferred tax assets.

Effective for its fiscal year ended December 31, 2007, the Company has complied with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (codified in FASB ASC Topic 740, Income Taxes), which requires that income tax positions must be more likely than not to be sustained based solely on their technical merits in order to be recognized. The Company has recorded no liability for uncertain tax positions. The Company has elected to record interest and penalties from unrecognized tax benefits in the tax provision.

The W Group files a consolidated income tax return in the U.S. federal jurisdiction and in various states. Because of closure of an Internal Revenue Service examination, The W Group is no longer subject to U.S. federal income tax examinations for years prior to 2008. The W Group believes that it is no longer subject to state income tax examinations for years prior to 2007.

 

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8.	Contingencies and commitments

The Company is involved in various legal proceedings arising in the normal course of conducting business. The resolution of such proceedings is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.

 

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Index to Unaudited Pro Forma Combined Financial Statements

 

		Page
Unaudited Pro Forma Combined Financial Statements of Power Solutions International, Inc.
Unaudited Pro Forma Combined Financial Statements as of March  31, 2011, and for the three months ended March 31, 2011 and for the year ended December 31, 2010			P-2

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined balance sheet combines the consolidated historical balance sheet of Format, Inc. and the consolidated historical balance sheet of The W Group, Inc., a Delaware corporation (“The W Group”) as of March 31, 2011, to reflect the completion of a reverse merger transaction (the “Reverse Merger”), in which PSI Merger Sub, Inc., (“Merger Sub”) a Delaware corporation that was newly-created as a wholly-owned subsidiary of Power Solutions International, Inc. (f/k/a Format, Inc.) (the “Company”) merged with and into The W Group, and The W Group remained as the surviving corporation of the Reverse Merger, becoming a wholly-owned subsidiary of the Company. Concurrent with the closing of the Reverse Merger, the Company completed a private placement (“Private Placement”) of shares of its newly designated Series A Convertible Preferred Stock and warrants to purchase shares of the Company’s common stock for gross proceeds of $18,000,000 and the Company completed the refinancing of its bank debt (“Bank Refinancing”). The pro forma combined balance sheet presented herein reflects the effects of the Reverse Merger, Private Placement and Bank Refinancing (collectively the “Transactions”) as if they had been consummated on March 31, 2011. The following unaudited pro forma combined statements of operations combine the historical statements of operations of Format, Inc. and The W Group for the three months ended March 31, 2011 and the year ended December 31, 2010, giving effect to the Transactions, as if they had occurred on January 1, 2010.

The following unaudited pro forma combined financial statements are presented to illustrate the estimated effects of the Transactions. The unaudited pro forma combined financial statements were prepared using the historical financial statements of Format, Inc. and The W Group as of and for the three months ended March 31, 2011, and for the year ended December 31, 2010.

The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the Transactions and factually supportable. Additionally, the pro forma adjustments related to the statements of operations are expected to have a continuing impact on the combined results and are based on available data and certain assumptions that we believe are reasonable. The number of shares of the Company’s common stock issuable upon conversion of shares of Series A Convertible Preferred Stock and exercise of warrants to purchase shares of the Company’s common stock presented in the following unaudited pro forma combined financial statements reflects rounding of fractional share amounts and aggregation among security holders (e.g., calculating shares of common stock issuable upon conversion of shares of Series A Convertible Preferred Stock held by a group of holders thereof, rather than on an individual shareholder basis). Accordingly, the aggregate number of shares of the Company’s common stock issuable upon conversion of outstanding shares of Series A Convertible Preferred Stock or exercise of warrants to purchase shares of the Company’s common stock may differ by a de minimis amount from the number presented in the unaudited pro forma combined financial statements.

The following information should be read in conjunction with the pro forma combined financial statements.

 

•

Accompanying notes to the unaudited pro forma combined financial statements

 

•

Separate historical financial statements of Format, Inc. for the year ended December 31, 2010 as filed in its annual report on Form 10-K with the Securities and Exchange Commission

 

•

Separate historical financial statements of Format, Inc. for the three months ended March 31, 2011 as filed in its quarterly report on Form 10-Q with the Securities and Exchange Commission

 

•

Separate historical financial statements of The W Group for the year ended December 31, 2010 and for the three months ended March 31, 2011 included in this prospectus.

The unaudited pro forma combined financial statements are presented for informational purposes only. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the Transactions been completed at the dates indicated. In addition, the unaudited pro forma combined financial statements do not purport to project the future financial position or operating results of the combined company.

 

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The unaudited pro forma combined financial statements were prepared using the reverse acquisition application of the acquisition method of accounting as described in ASC 805-40-05-2, with The W Group treated as the acquiror for U.S. GAAP accounting and financial reporting purposes. Accordingly, the unaudited pro forma combined financial statements are presented as a continuation of The W Group’s financial statements with an adjustment to reflect the issued equity capital of the former Format, Inc., the legal parent, including the equity issued by the Company to effect the business combination.

 

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UNAUDITED PRO FORMA

COMBINED BALANCE SHEET

OF

POWER SOLUTIONS INTERNATIONAL, INC.

MARCH 31, 2011

(Dollar amounts in thousands, except per share amounts)

 

		Historical								Pro Forma								Power Solutions International
		The W Group, Inc.				Format, Inc.				Adjustments				Notes				Combined
ASSETS
CURRENT ASSETS
Cash		$	—			$	69			$	(360	)			a			$	—
											(69	)			b
											18,000				d
											(4,183	)			f
											(7,214	)			g
											(5,869	)			g
											(374	)			h
Accounts receivable, net			18,506				—				—								18,506
Inventories			30,688				—				—								30,688
Prepaid expenses & other current assets			1,028				2				125				h				935
											(220	)			i
Deferred Income taxes			755				—				—								755
Total current assets			50,977				71				(164	)							50,884
PROPERTY AND EQUIPMENT, NET			2,826				3				—								2,829
OTHER NONCURRENT ASSETS			3,245				—				249				h				3,191
											(283	)			i
											(20	)			k
TOTAL ASSETS		$	57,048			$	74			$	(218	)						$	56,904
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Cash overdraft		$	228			$	—			$	—							$	228
Income taxes payable			1,301				2				(2	)			b				1,119
											(182	)			j
Current maturities of long-term debt and capital lease obligations			2,159				—				(2,095	)			g				64
Line of credit			20,964				—				(5,869	)			g				15,095
Accounts payable			18,288				106				(106	)			b				18,288
Due to related party			—				114				(114	)			a				—
Accrued liabilities			2,103				50				(50	)			a				2,103
Total current liabilities			45,043				272				(8,418	)							36,897
LONG-TERM OBLIGATIONS
Deferred income taxes			222				—				—								222
Private Placement warrants			—				—				2,888				e				2,888
Long-term debt and capital lease obligations, net of current maturities			5,177				—				(5,119	)			g				58
Deferred revenue			189				—				—								189
Total Liabilities			50,631				272				(10,649	)							40,254
SHAREHOLDERS’ EQUITY
Series A Convertible Preferred Stock, $0.001 par value: 114,000 shares authorized; 113,960.90289 shares issued and outstanding			—				—				—				c				—
											18,000				d				11,201
											(2,888	)			e
											(399	)			f
											(3,512	)			f
Common stock, $0.0001 par value: 3,500,0000 shares authorized; 1,444,444 shares issued and outstanding			—				—				—				c				—
Common stock: $0.001 par value: 50,000,000 shares authorized; 10,770,083 issued and outstanding			—				4				(3	)			a				11
											10				c
Roth warrant			—				—				399				f				399
Additional paid-in-capital			7				37				(30	)			a				4
											(10	)			c
Retained earnings (accumulated deficit)			6,410				(239	)			(163	)			a				5,035
											39				b
											(671	)			f
											(503	)			i
											182				j
											(20	)			k
			6,417				(198	)			10,431								16,650
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	57,048			$	74			$	(218	)						$	56,904

 

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UNAUDITED PRO FORMA

COMBINED STATEMENT OF OPERATIONS

OF

POWER SOLUTIONS INTERNATIONAL, INC.

THREE MONTHS ENDED MARCH 31, 2011

(Dollar amounts in thousands, except per share amounts)

 

		Historical								Pro Forma								Pre-Reverse Split Combined				Post-Reverse Split Combined
		The W Group, Inc.				Format, Inc.				Adjustments				Notes				Pro Forma				Pro Forma
Net sales		$	31,353			$	10			$	—							$	31,363			$	31,363
Cost of sales			25,374				—				—								25,374				25,374
Gross profit			5,979				10				—								5,989				5,989
Operating expenses
Engineering			992				—				—								992				992
Selling and service			1,392				—				—								1,392				1,392
General and administrative			1,302				33				—								1,335				1,335
Operating expenses			3,686				33				—								3,719				3,719
Operating income			2,293				(23	)			—								2,270				2,270
Interest expense			629				—				(193	)			l				317				317
											(95	)			l
											(55	)			m
											31				m
Other income			—				20				(20	)			n				—				—
Other expense			—				—				—								—				—
Income (loss) before income taxes			1,664				(3	)			292								1,953				1,953
Income tax provision			603				1				106				o				710				710
Net income (loss)		$	1,061			$	(4	)		$	186							$	1,243			$	1,243
Undistributed earnings (loss) (UEL)		$	1,061			$	(4	)		$	186							$	1,243			$	1,243
UEL allocable to Series A Convertible Preferred Shares															p			$	1,200
UEL allocable to Common Shares															p			$	43			$	1,243
Weighted average preferred shares outstanding:
Basic															q				113,961				—
Diluted																			113,961				—
Weighted average common shares outstanding:
Basic							3,770,083								r, s				10,770,083				9,833,333
Diluted							3,770,083												10,770,083				9,833,333
Undistributed Earnings (loss) per share – Basic
Series A Convertible Preferred Shares																		$	10.53			$	—
Common Shares																		$	0.00			$	0.13
Undistributed Earnings (loss) per share – Diluted
Series A Convertible Preferred Shares																		$	10.53			$	—
Common Shares																		$	0.00			$	0.13
Preferred Shares, if converted							303,895,741				96.58	%						$	1,200
							314,665,824
Common Shares							10,770,083				3.42	%						$	43
							314,665,824

 

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UNAUDITED PRO FORMA

COMBINED STATEMENT OF OPERATIONS

OF

POWER SOLUTIONS INTERNATIONAL, INC.

YEAR ENDED DECEMBER 31, 2010

(Dollar amounts in thousands, except per share amounts)

 

		Historical								Pro Forma				Notes				Pre-Reverse Split Combined				Post-Reverse Split Combined
		The W Group, Inc.				Format, Inc.				Adjustments								Pro Forma				Pro Forma
Net sales		$	100,521			$	78			$	—							$	100,599			$	100,599
Cost of sales			83,894				—				—								83,894				83,894
Gross profit			16,627				78				—								16,705				16,705
Operating expenses
Engineering			3,846				—				—								3,846				3,846
Selling and service			5,465				—				—								5,465				5,465
General and administrative			3,250				104				—								3,354				3,354
Operating expenses			12,561				104				—								12,665				12,665
Operating income (loss)			4,066				(26	)			—								4,040				4,040
Interest expense			2,131				—				(563	)			t				648				648
											(824	)			t
											(220	)			u
											124				u
Other income			—				1				—								1				1
Other expense			—				—				—								—				—
Income (loss) before income taxes			1,935				(25	)			1,483								3,393				3,393
Income tax provision			366				1				280				v				647				647
Net income (loss)		$	1,569			$	(26	)		$	1,203							$	2,746			$	2,746
Undistributed earnings (loss) (UEL)		$	1,569			$	(26	)		$	1,203							$	2,746			$	2,746
UEL allocable to Series A Convertible Preferred Shares															w			$	2,652			$	—
UEL allocable to Common Shares															w			$	94			$	2,746
Weighted average preferred shares outstanding:
Basic															x				113,961				—
Diluted																			113,961				—
Weighted average common shares outstanding:
Basic							3,770,083								y,z				10,770,083				9,833,333
Diluted							3,770,083												10,770,083				9,833,333
Undistributed Earnings (loss) per share – Basic
Series A convertible Preferred Shares																		$	23.27			$	—
Common Shares																		$	0.01			$	0.28
Undistributed Earnings (loss) per share – Diluted
Series A convertible Preferred Shares																		$	23.27			$	—
Common Shares																		$	0.01			$	0.28
Preferred Shares, if converted							303,895,741				96.58	%						$	2,652
							314,665,824
Common Shares							10,770,083				3.42	%						$	94
							314,665,824

 

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NOTES TO UNAUDITED PRO FORMA

COMBINED FINANCIAL STATEMENTS

 

1.	Description of Transaction and Basis of Presentation

On April 29, 2011, Power Solutions International, Inc. (f/k/a Format, Inc.) (the “Company”) completed a reverse merger transaction (the “Reverse Merger”) pursuant to an agreement and plan of merger (the “Merger Agreement”), in which PSI Merger Sub, Inc., a Delaware corporation that was newly-created as a wholly-owned subsidiary of the Company (“Merger Sub”), merged with and into The W Group, Inc., a Delaware corporation (“The W Group”), and The W Group remained as the surviving corporation of the merger, becoming a wholly-owned subsidiary of the Company. As a result, the historical financial statements of The W Group constitute the historical financial statements of the merged companies. The transaction is considered to be a capital transaction and as such is the equivalent to the issuance of common stock by The W Group for the net monetary assets of Format, Inc. accompanied by a re-capitalization. For accounting purposes, The W Group is treated as the continuing reporting entity.

Concurrent with the closing of the Reverse Merger, pursuant to a purchase agreement (the “Purchase Agreement”), the Company completed a private placement (“Private Placement”) of shares of its newly designated Series A Convertible Preferred Stock, liquidation preference of $1,000 per share (“Company Preferred Stock”), together with warrants (“Private Placement Warrants”) to purchase shares of the Company’s common stock (“Company Common Stock”), to accredited investors, receiving total gross proceeds of $18,000,000 at the closing of the Private Placement. The incremental costs of the transaction incurred by The W Group will be charged pro rata to equity and expenses based on the cash received and allocated between the Company Preferred Stock and the Private Placement Warrants. The transaction costs incurred by Format, Inc. (i.e., the Company prior to the closing of the Reverse Merger, which is also referred to herein as “Format”) will be expensed.

In connection with the Reverse Merger and the Private Placement, the Company entered into a stock repurchase and debt satisfaction agreement (“Repurchase Agreement”) with Ryan Neely, Format’s sole director and executive officer immediately prior to the closing of the Reverse Merger, and his wife, Michelle Neely. The Company repurchased 3,000,000 shares of Format common stock from Ryan Neely and Michelle Neely, which represented approximately 79.57% of the shares of Format common stock outstanding immediately prior to the Reverse Merger and the Private Placement (without giving effect to the 1-for-32 reverse stock split of the Company Common Stock to be consummated pursuant to the Purchase Agreement following the consummation of the Reverse Merger and the Private Placement (the “Reverse Split”)), and immediately thereafter these shares were cancelled, and Ryan Neely and Michelle Neely terminated all of their right, title and interest in and to, and released Format from any and all obligations it had with respect to, the loans made by Ryan Neely and Michelle Neely to Format (which as of March 31, 2011 was approximately $114,000), in exchange for a cash payment of $360,000. As part of the Repurchase Agreement, Ryan Neely also released Format from any other obligations owed to him which includes the balance of accrued liabilities on Format’s balance sheet of approximately $50,000.

The Reverse Merger and Private Placement occurred in a series of steps outlined below:

 

•

Pursuant to the Repurchase Agreement, the Company repurchased 3,000,000 shares of Format common stock from Ryan Neely and Michelle Neely, which represented approximately 79.57% of the shares of Company Common Stock outstanding and immediately thereafter cancelled these shares.

 

•

At the closing of the Reverse Merger, the Company issued an aggregate of 10,000,000 shares of Company Common Stock and 95,960.90289 shares of Company Preferred Stock in exchange for all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group. The Company Common Stock and Company Preferred Stock each have a par value of $0.001 per share. No cash consideration arose relating to this exchange.

 

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•

The Company received gross proceeds of $18,000,000 from the Private Placement of 18,000 shares of Company Preferred Stock and related Private Placement Warrants at a purchase price of $1,000 per share and related warrants. Each share of Company Preferred Stock is initially convertible into 2,666.666667 shares of Company Common Stock, subject to certain limitations, at an initial conversion price of $0.375 per share, subject to adjustment. The shares of Company Preferred Stock are initially convertible into an aggregate of 48,000,000 shares of Company Common Stock subject to certain limitations. For every share of Company Common Stock issuable upon conversion of Company Preferred Stock purchased in the Private Placement, each investor in the Private Placement also received a warrant to purchase initially one-half of a share of Company Common Stock at an initial exercise price of $0.40625, subject to certain adjustments. The Private Placement Warrants represent the right to purchase initially an aggregate of 24,000,000 shares of Company Common Stock, subject to limitations set forth in the Private Placement Warrants.

 

•

In connection with the Private Placement, the Company also issued to ROTH Capital Partners, LLC a warrant to purchase initially 3,360,000 shares of Company Common Stock, subject to certain limitations on exercise set forth in the Roth Warrant, at an initial exercise price of $0.4125 per share, subject to adjustment.

 

•

Concurrent with the Reverse Merger and the Private Placement, The W Group repaid its outstanding obligations with its former lender, Fifth Third Bank (“Prior Credit Agreement”) and entered into a new credit agreement (“Credit Agreement”) with Harris N.A. (“Harris”).

 

2.	Pro Forma Adjustments

There were no inter-company balances and transactions between Format, Inc. and The W Group as of the dates and for the periods of these pro forma combined financial statements, except for the payment of $20,000 in March 2011 by The W Group to Format as consideration for the extension of a deadline for the consummation of the Reverse Merger and related transactions, which has been eliminated in the pro forma financial statements.

The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had Format, Inc. and The W Group filed consolidated tax returns during the periods presented. The pro forma adjustments included in the unaudited pro forma combined financial statements are as follows:

Pro Forma Combined Balance Sheet Adjustments

 

a)

The terms of the Repurchase Agreement resulted in a cash payment to Ryan Neely of $360,000 to repurchase 3,000,000 shares of Company Common Stock from Ryan Neely and Michelle Neely, which represented approximately 79.57% of the shares of Company Common Stock outstanding immediately prior to the Reverse Merger and the Private Placement (without giving effect to the Reverse Split), and immediately thereafter these shares were cancelled, and Ryan Neely and Michelle Neely terminated all of their right, title and interest in and to and released Format from any and all obligations it had with respect to, the loans made by Ryan Neely and Michelle Neely to Format (which as of March 31, 2011 approximated $114,000), and also released Format from any other obligations owed to him which includes the balance of accrued liabilities on Format’s balance sheet of approximately $50,000 at March 31, 2011.

 

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b)

The remaining liabilities of Format as of March 31, 2011, which consisted of accounts payable, were settled with the available cash on Format’s balance sheet.

 

c)

Pursuant to the Merger Agreement, all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger converted into, and the Company issued, 10,000,000 shares of Company Common Stock and 95,960.90289 shares of Company Preferred Stock. The Company Common Stock and Company Preferred Stock each have a par value of $0.001 per share. No cash consideration arose from this conversion.

 

d)

The Company recorded gross proceeds of $18,000,000 from the Private Placement in which the Company issued 18,000 shares of Company Preferred Stock, together with Private Placement Warrants at a price of $1,000 per share and related Warrants. The Private Placement Warrants are further described in Note e.

 

e)

Private Placement Warrants issued with the 18,000 shares of Company Preferred Stock have a fair value of $2,887,500. Certain attributes of these Private Placement Warrants, including certain reset provisions, require the Company to record the warrants at fair value as a derivative liability. The value of the Private Placement Warrants was determined based upon an agreed-upon exercise price of the Private Placement Warrants; an agreed-upon value of the Company Preferred Stock and Private Placement Warrants, in aggregate by the accredited investors; and an assessment of the risk-free interest rate, anticipated volatility factor, and dividend yield, all incorporated into the valuation using the Black-Scholes option pricing model.

 

f)

The transaction costs incurred in connection with the Private Placement consist of cash costs of approximately $4,183,000 and the issuance of the Roth Warrant (with a fair value of approximately $399,000) to purchase the shares of Company Common Stock. The cash costs consist of approximately $1,830,000 of deferred fees to the placement agent, $1,460,000 of legal and accounting fees, $830,000 of consulting fees, and approximately $63,000 in other expenses associated with the transaction. The fair value of the Roth Warrant was recorded as an adjustment between the Roth Warrant (classified as equity) and Preferred Stock. The cash transaction costs were allocated on a pro-rata basis between Preferred Stock (approximately $3,512,000) and the Private Placement Warrants (approximately $671,000). The amounts allocated to the Private Placement Warrants are adjusted in retained earnings as the amounts are to be expensed upon completion of the Private Placement.

 

g)

To reflect the repayment in full of approximately $5,144,000 and $2,070,000 of Term Note A and Term Note B and $5,869,000 of borrowings under the revolving line of credit of The W Group with proceeds from the Private Placement.

 

h)

To reflect the payment of approximately $374,000 in loan issuance costs associated with the Company’s new Credit Agreement with Harris.

 

i)

To write off approximately $503,000 of unamortized loan fees associated with the repayment of the related term loans and revolving line of credit to Fifth Third Bank.

 

j)

To record a tax benefit of approximately $182,000 associated with the write-off of the remaining Fifth Third loan fees.

 

k)

To eliminate $20,000 of income received by Format from The W Group in connection with the Reverse Merger and Repurchase Agreement.

 

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Pro Forma Combined Statement of Operations Adjustments

Three months ended March 31, 2011

 

l)

To record the estimated interest expense reduction of (i) approximately $193,000 from the application of a portion of the net proceeds from the Private Placement to fully repay Term Note A and Term Note B and apply the remaining net proceeds against the revolving line of credit, as if these obligations had been repaid as of January 1, 2011 and (ii) approximately $95,000 representing the incremental interest expense reduction arising from an overall interest rate reduction of 2% attributable to the Bank Refinancing.

 

m)

To recognize approximately $31,000 of loan fee amortization associated with the Harris revolving line of credit, and to eliminate approximately $55,000 of loan fee amortization associated with the Prior Credit Agreement.

 

n)

To eliminate $20,000 of income recognized by Format and received from The W Group in connection with the Reverse Merger and Repurchase Agreement as identified in note k.

 

o)

To record the estimated additional tax expense of $106,000 arising from the taxable transactions identified in Notes l through n at the Company’s effective tax rate.

 

p)

Under the two-class method, 96.58% of the undistributed earnings were allocated to the Company Preferred Stock, and 3.42% were allocated to the Company Common Stock based upon the relative number of each type of stock to the total of the combined stock on a post conversion basis, because the Company Preferred Stock participates in earnings on a one-to-one basis with Company Common Stock, as if this stock had been converted. Thus, the Company Preferred Stock was allocated $1,200,000 of undistributed earnings, calculated as follows:

 

	113,960.90289			Company Preferred Stock
	2,666.66667			Conversion rate
	303,895,741			Converted Company Common Stock
	10,770,083			Company Common Stock
	314,665,824			Total Company Common Stock
	96.58	%		Percent allocable to Converted Company Common Stock
$	1,200,000			UEL to Converted Company Common Stock
	3.42	%		Percent allocable to Company Common Stock
$	43,000			UEL to Company Common Stock

 

q)

113,960.90289 shares of Company Preferred Stock represents the sum of 95,960.90289 shares issued to the three stockholders of The W Group upon conversion of all of their stock in The W Group in the Reverse Merger, plus the 18,000 shares of Company Preferred Stock issued in the Private Placement.

 

r)

10,770,083 shares of Company Common Stock represents the 10,000,000 shares issued to the three stockholders of The W Group upon conversion of all of their stock in The W Group in the Reverse Merger; plus the 770,083 remaining shares of Company Common Stock of Format, Inc., after the repurchase of 3,000,000 shares from its former director and officer, Ryan Neely and his wife, Michelle Neely.

 

s)

See post-Reverse Split earnings per share calculation which follows for the determination of 9,833,333 shares of post-Reverse Split Company Common Stock outstanding on a pro forma basis.

 

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Year ended December 31, 2010

 

t)

To record the estimated interest expense reduction of approximately $824,000 arising from the application of the proceeds from the Private Placement to fully repay Term Note A and Term Note B and apply the remaining proceeds against the revolving line of credit as if these obligations had been repaid as of January 1, 2010. Additional interest expense reduction of approximately $563,000 was estimated as arising from an overall interest rate reduction of 2% attributable to the Bank Refinancing.

 

u)

To recognize approximately $124,000 of loan fee amortization associated with the Harris revolving line of credit. To eliminate approximately $220,000 of loan fee amortization associated with the Prior Credit Agreement.

 

v)

To record the estimated additional tax expense of $280,000 arising from the taxable transactions identified in Notes t and u at the Company’s effective tax rate.

 

w)

Under the two-class method, 96.58% of the undistributed earnings were allocated to the Company Preferred Stock, and 3.42% were allocated to the Company Common Stock based upon the relative number of each type of stock to the total of the combined stock on a post conversion basis, because the Company Preferred Stock participates in earnings on a one-to-one basis with Company Common Stock, as if this stock had been converted. Thus, the Company Preferred Stock was allocated $2,652,000 of undistributed earnings, calculated as follows:

 

	113,960.90289			Company Preferred Stock
	2,666.66667			Conversion rate
	303,895,741			Converted Company Common Stock
	10,770,083			Company Common Stock
	314,665,824			Total Company Common Stock
	96.58	%		Percent allocable to Converted Company Common Stock
$	2,652,000			UEL to Converted Company Common Stock
	3.42	%		Percent allocable to Company Common Stock
$	94,000			UEL to Company Common Stock

 

x)

113,960.90289 shares of Company Preferred Stock represents the sum of 95,960.90289 shares issued to the three stockholders of The W Group as part of the exchange for all of their stock in The W Group in the Reverse Merger, plus the 18,000 shares of Company Preferred Stock issued in the Private Placement.

 

y)

10,770,083 shares of Company Common Stock represents the 10,000,000 shares issued to the three stockholders of The W Group as part of the exchange for all of their stock in The W Group in the Reverse Merger; plus, the 770,083 remaining shares of Company Common Stock of Format, Inc., after the repurchase of 3,000,000 shares from its former director and officer, Ryan Neely and his wife, Michelle Neely.

 

z)

See post-Reverse Split earnings per share calculation which follows.

 

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3.	Pro Forma Net Income (Loss) Per Share

The Company computes earnings per share by applying the guidance stated in ASC 260, Earnings per Share, to determine the net income (loss) available per share of its common stock. Pro forma earnings per share is calculated as if the Reverse Merger had occurred as of January 1, 2010, using the two-class method before taking into account the Reverse Split, because the convertible preferred shares participate in any undistributed earnings with the common shareholders. Upon the Reverse Split, the shares of Company Preferred Stock automatically convert to shares of Company Common Stock, as such, the pro forma net income (loss) per share is then calculated under the standard method, as consolidated net income available to common shareholders divided by the weighted average shares of Company Common Stock of Format, Inc. (the legal acquiror) immediately after the Reverse Split, which is also presumed to have occurred as of January 1, 2010. Diluted earnings per share, under both methods, is calculated by evaluating the dilutive effect of potential shares of Company Common Stock issuable per the terms of the Private Placement Warrants and the Roth Warrant.

Series A Convertible Preferred Stock

The Company Preferred Stock is convertible at the option of the holder at any time, subject to limitation based upon the shareholder’s proportion of the available shares for conversion, and will automatically convert to common shares upon effectiveness of the Reverse Split at a conversion price of $12.00 per share ($0.375 pre-Reverse Split). The conversion of all the preferred shares could be considered contingent upon a substantive event other than market price triggers, which, per ASC 260-10-45-43, requires that the converted shares not be included in diluted EPS until such time that the contingency (in this case, shareholder approval of the Reverse Split) has been met. However, approval of the Reverse Split is controlled by the majority shareholders of the Company, who have agreed to vote in favor of the Reverse Split pursuant to voting agreements entered into in connection with the Reverse Merger and the Private Placement, and have therefore substantially resolved the contingency. Accordingly, all shares of Company Preferred Stock have been evaluated for their dilutive effect in the calculation of pro forma diluted EPS.

The Company Preferred Stock is subject to full-ratchet anti-dilution whereby, upon the issuance (or deemed issuance) of shares of Company Common Stock at a price below the then-current conversion price of the Company Preferred Stock, subject to specified exceptions, the conversion price of the Company Preferred Stock shall be reduced to the effective price of Company Common Stock so issued (or deemed to be issued).

The Purchase Agreement also contains the following provision, which may be deemed to be a form of anti-dilution protection. If prior to the earlier of (1) the second anniversary of the date on which the initial Registration Statement is declared effective, as described previously in this document and (2) 180 days after the closing of a firm commitment public underwritten offering of equity securities resulting in gross proceeds of not less than $15.0 million, the Company issues equity securities in a public or private offering (or series of related offerings) resulting in gross proceeds of at least $5.0 million at or below a pre-determined effective price per share (“Reset Price”), the Company will have to issue to each investor in the Private Placement (1) additional shares of Company Common Stock so that after giving effect to such issuance, the effective price per share of Company Common Stock acquired by such investors in the Private Placement will be equal to the Reset Price and (2) additional Private Placement Warrants covering a number of shares of Company Common Stock equal to 50% of the shares of Company Common Stock issued pursuant to clause (1) above. This event of market-based contingency does not exist until the Company issues securities in an offering resulting in a price below the Reset Price upon the terms set forth in the Purchase Agreement. Management’s discretion in this matter, and the inability to determine the variable number of additional common shares to be issued, makes the adjustment for these potential shares indeterminable until such events occur. Thus, such potential shares are not considered in the diluted EPS calculation.

Lastly, the Company Preferred Stock grants voting rights and participation rights to dividends on par with Company Common Stock, with 2% preference dividends payable should the Reverse Split not be effective within 120 days after the Private Placement. Because the Company Preferred Stock participates in undistributed earnings with Company Common Stock, it is considered as a participating security under ASC 260-10-45 until such conversion occurs. Accordingly, the Company will apply the two-class method to calculate per share amounts for distributed and undistributed earnings available to each class of stock.

 

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Private Placement Warrants

For each share of Company Common Stock issuable upon conversion of shares of Company Preferred Stock purchased by investors in the Private Placement, investors in the Private Placement received warrants to acquire one-half share of the Company’s Common Stock at an exercise price of $0.40625 per share ($13.00 per share post-Reverse Split). An aggregate total of 24,000,000 shares (750,000 shares post-Reverse Split) can be initially purchased upon exercise of the Private Placement Warrants, but the Private Placement Warrants are not exercisable before the effective date of the Reverse Split, which the majority shareholders have agreed to vote in favor of pursuant to voting agreements. The Private Placement Warrants are subject to full-ratchet anti-dilution whereby, upon the issuance (or deemed issuance) of shares of Company Common Stock at a price below the then-current exercise price of the Private Placement Warrants, subject to specified exceptions, the exercise price of the Private Placement Warrants shall be reduced to the effective price of Company Common Stock so issued (or deemed to be issued). The treasury stock method has been applied to determine the number of treasury shares assumed to be purchased from the proceeds of warrant exercises, with any residual shares representing the incremental shares of Company Common Stock to be issued and included in diluted EPS. The average market price of the Company Common Stock during the reporting period is used to approximate the number of treasury shares repurchased from the proceeds of an assumed warrant exercise. Since the Company Common Stock was not actively traded during 2010 and the first three months of 2011, a recent valuation performed by independent consultants has been utilized and assumed to have remained the same throughout the period. The appraised fair value of $10.08 per common share results in an excess number of treasury shares purchased over the number of shares issued upon exercise of the Private Placement Warrants at $13.00 per share; thus, the Private Placement Warrants were not considered dilutive securities.

Roth Warrant

A warrant representing the right to purchase initially 3,360,000 shares of Company Common Stock at an initial exercise price of $0.4125 per share ($13.20 per share post-Reverse Split) was issued to Roth Capital Partners, LLC in their capacity as placement agent in the Private Placement. The Roth Warrant is not exercisable before the effective date of the Reverse Split, and thereafter, is exercisable immediately, and has been evaluated for its potentially dilutive effect using the treasury stock method. An excess number of treasury shares could be purchased with the proceeds from exercise of the Roth Warrant, resulting in exclusion of the Roth Warrant from diluted EPS.

Following is the calculation of earnings per common share utilizing the two-class method without effect to the Reverse Split:

 

(Dollar amounts in thousands, except per share amounts):		Three months ended March 31, 2011								Year ended December 31, 2010
Net Income						$	1,243							$	2,746
Less dividends paid:
Preferred		$	—							$	—
Common			—								—
Undistributed earnings						$	1,243							$	2,746
Allocation of undistributed earnings (Basic and diluted earnings per share amounts):
		Preferred Stock				Common Stock				Preferred Stock				Common Stock
Distributed earnings		$	—			$	—			$	—			$	—
Undistributed earnings			10.53				—				23.27				0.01
Totals		$	10.53			$	—			$	23.27			$	0.01

 

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Anti-dilutive potential common shares excluded from the diluted earnings per share computation:

Roth Warrant: 3,360,000 shares of Company Common Stock pre-Reverse Split; 105,000 shares post-Reverse Split; exercise price $13.20 post-Reverse Split; average share price $10.08

Private Placement Warrants: 24,000,000 shares of Company Common Stock pre-Reverse Split; 750,000 shares post-Reverse Split; exercise price $13.00 post-Reverse Split; average share price $10.08

On a post-Reverse Split basis, the Company Preferred Stock will no longer exist, and with no other participating securities, the standard EPS calculation would apply.

Because the preferred shares are convertible automatically upon the effectiveness of the Reverse Split, which is substantially imminent, the preferred shares are substantively equivalent to common shares on a post-Reverse Split basis, and are included as such in the basic earnings per share calculation on this basis.

Following is the calculation of earnings per share on a post-Reverse Split basis:

 

(Dollar amounts in thousands, except per share amounts)		Three months ended March 31, 2011				Year ended December 31, 2010
Post-Reverse Split
Numerator:
Net income (loss) available to common shareholders		$	1,243			$	2,746
Denominator:
Weighted-average common shares outstanding used for basic earnings per share:
Shares originally issued as common			336,565				336,565
Shares automatically converted to common			9,496,768				9,496,768
Weighted average common shares outstanding			9,833,333				9,833,333
Basic Earnings per Share		$	0.13			$	0.28
Effect of dilutive securities:
Outstanding private placement warrants			—				—
Outstanding Roth warrant			—				—
Weighted-average common and potential common shares outstanding for diluted earnings per share			9,833,333				9,833,333
Diluted Earnings per Share		$	0.13			$	0.28

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13.

Other Expenses of Issuance and Distribution.

Set forth below is an estimate of the approximate amount of fees and expenses payable by the registrant in connection with the issuance and distribution of the shares. The registrant will pay all of these expenses. All expenses other than the SEC registration fee are estimated.

 

		Approximate Amount
SEC Registration Fee		$	11,025
Accounting Fees and Expenses			45,000
Legal Fees and Expenses			100,000
Miscellaneous			7,000
Total		$	163,025

 

Item 14.

Indemnification of Directors and Officers

Section 78.7502 of the Nevada Revised Statutes, as amended (“the “NRS”), provides that a corporation may indemnify directors and officers as well as other employees and agents against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent of the corporation. Section 78.751 of the NRS provides that the indemnification pursuant to Section 78.7502 does not exclude any other rights to which those seeking indemnification may be entitled under the articles of incorporation, any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. The registrant’s amended and restated bylaws (i) provide for the indemnification of the registrant’s directors with regards to actions by or in the right of the registrant, (ii) provide for indemnification of the registrant’s directors to the fullest extent permitted by the registrant with regards to other actions, and (iii) allow the registrant to indemnify its officers, employees and agents to the extent determined by the registrant’s board of directors.

In addition, the registrant’s articles of incorporation provides that no director or officer of the registrant will be personally liable to the registrant or its shareholders for damages for breach of fiduciary duty as a director or officer, except for liability (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (ii) for the payment of dividends in violation of Nevada law.

The registrant may enter into indemnification agreements with each of the registrant’s directors and executive officers, which will provide for mandatory indemnification of an executive officer or a director made party to a proceeding by reason of the fact that the person is or was an executive officer or a director of ours, if the executive officer or director acted in good faith and in a manner the executive officer or director reasonably believed to be in, or not opposed to, the registrant’s best interests and, in the case of a criminal proceeding, the executive officer or director had no reasonable cause to believe that his or her conduct was unlawful. Such agreements would also obligate the registrant to advance expenses to an executive officer or a director who may have a right to be indemnified by the registrant; provided, that the executive officer or director will repay advanced expenses if it is ultimately determined that he or she is not entitled to indemnification. Under such agreements, the registrant’s

 

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executive officers and directors would also be entitled to indemnification and indemnification for expenses incurred as a result of acting at the registrant’s request as a director, an officer or an agent of an employee benefit plan or other partnership, corporation, joint venture, trust or other enterprise owned or controlled by the registrant.

Upon the consummation of the Migratory Merger, the registrant’s jurisdiction of incorporation will change from Nevada to Delaware, and the registrant will be subject to Section 145 of the Delaware General Corporation Law (“DGCL”). Section 145 of the DGCL provides rights of directors and officers to indemnification that are substantially similar to those provided by Sections 78.7502 and 78.751 of the NRS. Pursuant to the Private Placement Purchase Agreement, and in connection with the Migratory Merger, the registrant has also agreed to a form of a certificate of incorporation and bylaws for the surviving entity in the Migratory Merger. The form of certificate of incorporation for the surviving entity in the Migratory Merger (i) provides for the indemnification of the registrant’s directors with regards to actions by or in the right of the registrant, (ii) provides for the indemnification of the registrant’s directors to the fullest extent permitted by the DGCL with regards to other actions, and (iii) provides for the indemnification of the registrant’s officers, employees and agents to the extent determined by its board of directors.

In addition, the form of certificate of incorporation for the surviving entity in the Migratory Merger provides that the personal liability of the registrant’s directors is eliminated to the fullest extent permitted by the DGCL. The DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds, or (iv) for any transaction from which the director derives an improper personal benefit.

The registrant also maintains standard policies of insurance under which coverage is provided (a) to the registrant’s directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act, and (b) to the registrant with respect to payments which may be made by it to such officers and directors pursuant to the above indemnification provisions or otherwise as a matter of law.

 

Item 15.

Recent Sales of Unregistered Securities

During the past three years, the registrant has made the following sales of securities that were not registered under the Securities Act:

Reverse Merger

On April 29, 2011, Format, Inc. (n/k/a Power Solutions International, Inc.) entered into the Merger Agreement and consummated the Reverse Merger. Pursuant to the Merger Agreement, all of the outstanding shares of common stock of The W Group held by the three stockholders of The W Group at the closing of the Reverse Merger converted into, and Power Solutions International, Inc. issued to the three stockholders of The W Group, an aggregate of 10,000,000 shares of the registrant’s common stock and 95,960.90289 shares of the Preferred Stock.

The shares of Preferred Stock and shares of the registrant’s common stock issued to the former stockholders of The W Group in the Reverse Merger were not registered under the Securities Act or the securities laws of any state, and were in each case offered, sold and issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering, and Rule 506 of Regulation D promulgated thereunder, and the exemption from state securities law registration requirements provided by Section 18(b)(4)(D) of the Securities Act. The registrant relied on such exemptions based in part on written representations made by the former stockholders of The W Group in the respective transaction documents, including representations with respect to each stockholder’s status as an accredited investor and investment intent with respect to the acquired securities. To the extent that any shares of the registrant’s common stock are issued upon conversion of any shares of Preferred Stock issued in the Reverse Merger, such shares of the registrant’s common stock will be issued in transactions anticipated to be exempt from registration under Section 3(a)(9) of the Securities Act, because no commission or other remuneration will be paid in connection with such conversions and any resulting issuance of such shares of the registrant’s common stock.

 

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Private Placement

Substantially concurrently with the closing of the Reverse Merger, on April 29, 2011, the registrant entered into the Private Placement Purchase Agreement with 29 accredited investors and consummated the Private Placement, pursuant to which the registrant issued to these investors an aggregate of 18,000 shares of the Preferred Stock, together with Warrants, at a purchase price of $1,000 per share and related Warrant, receiving total gross proceeds of approximately $18,000,000. The shares of Preferred Stock issued in the Private Placement are initially convertible into an aggregate of 48,000,007 shares of the registrant’s common stock, subject to the limitations on conversion, and upon the terms and conditions set forth in the Certificate of Designation. For every one share of the registrant’s common stock issuable upon conversion of shares of Preferred Stock purchased in the Private Placement, each investor in the Private Placement also received a Warrant to purchase initially one-half of a share of the registrant’s common stock at an initial exercise price of $0.40625 per share, subject to adjustment as set forth in the Warrants. Accordingly, the Warrants issued in the Private Placement represent the right to purchase initially an aggregate of 24,000,007 shares of the registrant’s common stock, subject to the limitations on exercise set forth in the Warrants. In connection with the Private Placement, the registrant also issued to Roth Capital Partners, LLC a warrant to purchase initially 3,360,000 shares of the registrant’s common stock, subject to the limitations on exercise set forth in the Roth Warrant, at an initial exercise price of $0.4125 per share and upon the terms and conditions set forth in the Roth Warrant.

The shares of Preferred Stock issued in the Private Placement, the Warrants and the Roth Warrant were offered, sold and issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act, in each case as a transaction by an issuer not involving a public offering, and Rule 506 of Regulation D promulgated thereunder, and the exemption from state securities law registration requirements provided by Section 18(b)(4)(D) of the Securities Act. The registrant relied on such exemptions based in part on representations made by each of the investors in the Private Placement in the Private Placement Purchase Agreement, or in the case of Roth Capital Partners, LLC, in the Roth Warrant, including representations with respect to each investor’s status or the status of Roth Capital Partners, LLC, as applicable, as an accredited investor and investment intent with respect to the acquired securities. To the extent that any shares of the registrant’s common stock are issued upon conversion of any shares of Preferred Stock issued in the Private Placement, such shares of the registrant’s common stock will be issued in transactions anticipated to be exempt from registration under Section 3(a)(9) of the Securities Act, because no commission or other remuneration will be paid in connection with such conversions and any resulting issuance of such shares of the registrant’s common stock. To the extent any shares of the registrant’s common stock are issued upon the exercise of any of the Warrants, and to the extent any shares of the registrant’s common stock are issued upon the exercise of the Roth Warrant, such shares will be issued in transactions anticipated to be exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder or, in the case of “cashless exercise” of the Warrants or the Roth Warrant, as applicable, Section 3(a)(9) of the Securities Act.

 

Item 16.

Exhibits and Financial Statement Schedules

The Exhibits filed herewith are set forth on the Index to Exhibits filed as a part of this Registration Statement beginning on page II-6 hereof.

 

Item 17.

Undertakings

The undersigned registrant hereby undertakes:

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;

 

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(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 percent 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.

That, for the purpose of determining any liability under the Securities Act of 1933, as amended, 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.

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.

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 SEC such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, 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 Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

 

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SIGNATURES

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 Wood Dale, State of Illinois, on May 26, 2011.

 

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints each of Gary S. Winemaster and Thomas J. Somodi his true and lawful attorney-in-fact and agent, acting alone, with full power and substitution and resubstitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Registration Statement on Form S-1 (including any registration statement filed pursuant to Rule 462(b), (c) or (d) under the Securities Act of 1933, and all amendments thereto) and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Name		Title		Date
/s/    GARY S. WINEMASTER         Gary S. Winemaster		Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer)		May 26, 2011
/s/    THOMAS J. SOMODI         Thomas J. Somodi		Director, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)		May 26, 2011
/s/    KENNETH J. WINEMASTER         Kenneth J. Winemaster		Director, Senior Vice President and Secretary		May 26, 2011
/s/    KENNETH LANDINI         Kenneth Landini		Director		May 26, 2011
/s/    H. SAMUEL GREENAWALT         H. Samuel Greenawalt		Director		May 26, 2011

 

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INDEX TO EXHIBITS

 

Exhibit Number		Exhibit Description
2.1		Agreement and Plan of Merger between Format, Inc., PSI Merger Sub, Inc. and The W Group, Inc. (incorporated by reference from Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed May 5, 2011). †
3.1		Certificate of Designation of Series A Convertible Preferred Stock of Power Solutions International, Inc. (f/k/a Format, Inc.) (incorporated by reference from Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
3.2		Amended and Restated Bylaws of Power Solutions International, Inc. (f/k/a Format, Inc.) adopted April 29, 2011 (incorporated by reference from Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
5.1		Opinion of Woodburn and Wedge as to the validity of the shares registered.
10.1		Stock Repurchase and Debt Satisfaction Agreement, dated as of April 29, 2011, between Format, Inc. and Ryan Neely and Michelle Neely (incorporated by reference from Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.2		Termination Agreement, dated as of April 28, 2011, between The W Group, Inc. and Thomas Somodi, including the Purchase and Sale Agreement, dated as of April 28, 2011, between Gary Winemaster and Thomas Somodi referenced therein (incorporated by reference from Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.3		Employment Agreement, dated as of April 29, 2011, between Power Solutions International, Inc. and Thomas Somodi (incorporated by reference from Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.4		Purchase Agreement, dated April 29, 2011, among Format, Inc. and the investors in the private placement (incorporated by reference from Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.5		Form of Voting Agreement, dated April 29, 2011, between Power Solutions International, Inc. and each of Gary Winemaster, Kenneth Winemaster, Thomas Somodi and Kenneth Landini (incorporated by reference from Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.6		Form of Warrant, dated April 29, 2011, issued by Power Solutions International, Inc. to the investors in the private placement (incorporated by reference from Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.7		Warrant, dated April 29, 2011, issued by Power Solutions International, Inc. to ROTH Capital Partners, LLC (incorporated by reference from Exhibit 10.7 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.8		Form of Lock-Up Agreement entered into by each of Gary Winemaster, Kenneth Winemaster, Thomas Somodi and Kenneth Landini (incorporated by reference from Exhibit 10.8 to the registrant’s Current Report on Form 8-K filed May 5, 2011).

 

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10.9		Registration Rights Agreement, dated as of April 29, 2011, among Power Solutions International, Inc., the investors in the private placement and ROTH Capital Partners, LLC (incorporated by reference from Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.10		Registration Rights Agreement, dated as of April 29, 2011, among Power Solutions International, Inc. and Gary Winemaster, Kenneth Winemaster and Thomas Somodi (incorporated by reference from Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
10.11		Loan and Security Agreement, dated as of April 29, 2011, by and among Harris N.A., as agent for itself and other lenders party thereto, each of the lenders party thereto, Power Solutions International, Inc., The W Group, Inc., Power Solutions, Inc., Power Great Lakes, Inc., Auto Manufacturing, Inc., Torque Power Source Parts, Inc., Power Properties, L.L.C., Power Production, Inc., Power Global Solutions, Inc., PSI International, LLC and XISync LLC, and related documents (incorporated by reference from Exhibit 10.11 to the registrant’s Current Report on Form 8-K filed May 5, 2011). ††
10.12		Supply Agreement, dated December 11, 2007, by and between PSI International, LLC and Doosan Infracore Co., Ltd., as amended (incorporated by reference from Exhibit 10.12 to the registrant’s Current Report on Form 8-K filed May 5, 2011). ††
10.13		Distribution Agreement for Perkins Products, dated January 1, 2004, by and between Perkins Engines Inc. and Power Great Lakes, Inc., as amended (incorporated by reference from Exhibit 10.13 to the registrant’s Current Report on Form 8-K filed May 5, 2011). ††
16.1		Letter from Miller Cooper & Co., Ltd. to the Securities and Exchange Commission dated May 20, 2011 (incorporated by reference from Exhibit 16.1 to the registrant’s Current Report on Form 8-K/A filed May 20, 2011).
16.2		Letter from Jonathon P. Reuben, CPA, to the Securities and Exchange Commission dated May 5, 2011 (incorporated by reference from Exhibit 16.2 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
21.1		Subsidiaries of Power Solutions International, Inc. (incorporated by reference from Exhibit 21.1 to the registrant’s Current Report on Form 8-K filed May 5, 2011).
23.1		Consent of Deloitte & Touche LLP.
23.2		Consent of Woodburn and Wedge (contained in Exhibit 5.1).
24		Power of Attorney (see signature page).

 

†	Exhibits and schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to furnish a supplemental copy of an omitted exhibit or schedule to the SEC upon request.

††	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been separately filed with the Securities and Exchange Commission.

 

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