EX-20 3 dex20.htm AUDITORS' REPORT, FINANCIAL STATEMENTS AND RELATED FOOTNOTES Auditors' Report, Financial Statements and related footnotes

Exhibit 20

 

Report of Independent Registered Public Accounting Firm

 

To the Members of Armstrong-Americas I, LLC

Hinsdale, Illinois

 

We have audited the accompanying balance sheets of Armstrong-Americas I, LLC as of June 30, 2003, and the related consolidated statements of operations and cash flows, for each of the two years in the period ended June 30, 2003. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our 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 audits 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, the financial statements referred to above present fairly, in all material respects, the financial position of Armstrong Americas I, LLC as of June 30, 2003, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2003, in conformity with U.S. generally accepted accounting principles.

 

/s/ Blackman Kallick Bartelstein LLP

Chicago, Illinois

 

November 14, 2003, except for Note I, as to which the date is March 15, 2004


ARMSTRONG-AMERICAS I, LLC

 

BALANCE SHEET

 

AS OF JUNE 30, 2003

 

ASSETS         

CURRENT ASSETS

        

Cash and cash equivalents

   $ 423,944  

Accounts receivable:

        

Trade

     799,639  

Retainer held by bank

     80,826  

Current portion of net investment in finance leases

     5,950  

Inventory

     38,320  

Prepaid expenses and other current assets

     10,832  
    


TOTAL CURRENT ASSETS

     1,359,511  
    


FIXED ASSETS

        

Leased equipment

     7,202,671  

Accumulated depreciation

     (283,104 )
    


TOTAL FIXED ASSETS

     6,919,567  
    


OTHER ASSETS

        

Due from APP

     629,343  

Net investment in finance leases less current portion

     1,118,751  

Deferred costs net of accumulated amortization

     431,862  
    


TOTAL OTHER ASSETS

     2,179,956  
    


TOTAL ASSETS

   $ 10,459,034  
    


LIABILITIES AND MEMBERS’ EQUITY         

CURRENT LIABILITIES

        

Accounts payable-trade

   $ 1,161,614  

Accounts payable-related party

   $ 2,946,008  

Accrued expenses and other

     28,220  

Notes payable-Interim construction loan

     988,542  

Current maturities of capital leases

     449,829  
    


TOTAL CURRENT LIABILITIES

     5,574,213  

LONG-TERM CAPITAL LEASE OBLIGATIONS

     4,485,524  
    


TOTAL LIABILITIES

     10,059,737  
    


MEMBERS’ EQUITY:

        

Original Investment

     775,492  

Cumulative earnings

     623,805  

Return of original investment to Members

     (764,000 )

Dividends paid

     (236,000 )
    


TOTAL MEMBERS’ EQUITY

     399,297  
    


TOTAL LIABILITIES AND MEMBERS’ EQUITY

     10,459,034  
    


 

See Accompanying Notes to Financial Statements.

 

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ARMSTRONG-AMERICAS I, LLC

 

STATEMENTS OF OPERATIONS

 

     For the Years Ended June 30,

 
     2003

    2002

 

Revenues provided by services

   $ 12,939,372     $ 7,821,163  

Costs of services

     12,078,733       6,914,676  
    


 


Gross Profit

     860,639       906,487  
    


 


Costs and Expenses:

                

Professional fees

     95,289       127,434  

Depreciation and amortization

     268,967       204,769  

General and administrative

     71,125       101,957  
    


 


Total Expenses

     435,381       434,160  
    


 


PROFIT FROM OPERATIONS

     425,258       472,327  
    


 


Other items:

                

Gain on disposition of asset

     42,588       680  

Interest income

     46,472       35,290  

Interest (expense)

     (440,643 )     (47,814 )
    


 


TOTAL OTHER (EXPENSE) INCOME

     (351,583 )     (11,844 )
    


 


NET PROFIT

   $ 73,675     $ 460,483  
    


 


 

See Accompanying Notes to Financial Statements.

 

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ARMSTRONG-AMERICAS I, LLC

 

STATEMENTS OF CASH FLOWS

 

     Years Ended June 30,

 
     2003

    2002

 

Cash flow from operating activities:

                

Net profit

   $ 73,675     $ 460,483  

Adjustments to reconcile net profit to net cash (used in) generated from operations:

                

Revenue net of interest expense remitted by lessees for capital lease obligations

     (308,357 )     0  

Provision for depreciation and amortization

     268,967       204,769  

Decrease (increase) in accounts receivable

     374,083       (778,919 )

Decrease (increase) in inventory

     56,953       0  

Change in prepaid expenses and deferred items

     (137,527 )     (296,115 )

Change in accounts payable trade

     191,092       618,042  

Change in accounts payable to related party

     (934,422 )     654,844  

Change in accrued expenses and other, net

     (90,381 )     109,270  
    


 


Total adjustments

     (579,592 )     511,891  
    


 


Net cash (used in) generated from operations

     (505,917 )     972,374  

Cash flow from investing activities:

                

Purchase of fixed assets

     0       (4,206,188 )

Loan to Member

     (629,343 )     0  

Payments from lessees under finance leases net net of amortization of unearned income

     21,418       0  
    


 


Net cash (used in) investing activities

     (607,925 )     (4,206,188 )

Cash flow from financing activities:

                

Proceeds from bank financings

     1,548,601       3,667,365  

Proceeds from related party borrowing

     0       150,000  

Repayment of debt to related party

     (150,000 )     0  

Repayment of capitalized lease obligations

     0       (44,290 )

Distribution to Members

     (500,000 )     (150,000 )
    


 


Net cash generated from financing activities

     898,601       3,623,075  
    


 


Net (decrease) increase in cash and cash equivalents

     (215,241 )     389,261  

Cash and cash equivalents at beginning of year

     639,185       249,924  
    


 


Cash and cash equivalents at end of year

   $ 423,944     $ 639,185  
    


 


 

See accompanying Notes to Financial Statements

 

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ARMSTRONG-AMERICAS I, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

For the Years Ended June 30, 2003 and 2002

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of the Business

 

Armstrong-Americas I, LLC (the “LLC”) was formed in July 2000. The LLC is a special purpose joint venture between Americas Power Partners, Inc. (“APP”) and Armstrong Service, Inc. (“ASI”) a wholly-owned subsidiary of Armstrong International. The LLC is owned equally by both APP and ASI. See Note I.

 

The LLC was formed to develop, own and manage the assets that produce energy for several food processing plants that are owned by a large multi-national company.

 

The LLC designs and operates combined heat and power generation, waste heat recovery, thermal and electrically based cooling/refrigeration, steam, electric, chilled water distribution, energy storage, measurement, automation, process water treatment, wastewater treatment and pollution control.

 

Aspects of the LLC

 

The two current members of the LLC, APP and ASI, entered into and operate the LLC pursuant to a Limited Liability Agreement dated as of July 1, 2000 and as amended as of November 21, 2000 (the “Agreement”). By law, in a limited liability company, each member’s liability is limited to the capital it has invested in the company. Under the terms of the Agreement, both members have a 50% financial and voting interest in the LLC. The LLC is to exist for an undetermined period of time. Dissolution can occur only upon the unanimous written consent of all members. Under the terms of the Agreement, each member has appointed a manager to act on its behalf. The Agreement sets forth the various rights, obligations and duties that each member and manager has to the LLC. No manager or member has an exclusive duty to the LLC. Allocation of profits, losses and distributions is done in accordance with the Agreement. Should any member wish to sell its interest to a third party, all other members have the right of first refusal on any such transaction. The non-selling members can purchase the selling member’s interests on a basis pro rata to the capital accounts of the non-selling members. APP is responsible for the overall management of the LLC. ASI oversees the routine day-to-day activities at each plant site.

 

Use of Estimates

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include amounts based on informed estimates and judgments of management. Changes in such estimates may affect amounts reported in future periods.

 

Cash and Cash Equivalents

 

For purposes of the Statements of Cash Flows, all short-term investments in interest-bearing accounts and other instruments with an original maturity of three months or less are considered to be the equivalent of cash. The LLC maintains all its cash and cash equivalents in bank accounts which, at times, may exceed federally insured limits. The LLC has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents.

 

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Inventory

 

Inventory is valued at the lower of cost or market, using the first-in, first-out (FIFO) method.

 

Deferred Contract Costs

 

Initial direct costs associated with negotiating the LLC’s contracts are capitalized and amortized over the life of the respective agreements.

 

Revenue Recognition

 

The LLC has separate contracts for each plant whose assets the LLC owns and manages. Revenue is recognized as earned pursuant to energy service and utility requirements agreements as well as operations and maintenance agreements. The LLC evaluates the terms of these agreements individually to determine the applicable accounting treatment. Utilities and operations and maintenance revenue are recognized as they are earned. To the extent that these agreements provide for fixed minimum payments and terms, they are accounted for as leases. To the extent that an agreement provides for fixed minimum payments and terms that qualify as a capital lease as defined in Statement of Financial Accounting Standards No. 13, Accounting for Leases (SFAS 13”), the net investment in the contract is recorded on the balance sheet and unearned income is amortized over the term of the agreement using the interest method. Revenue from agreements that qualify as operating leases under SFAS 13 is recorded on a straight-line basis over the term of the contract. The LLC bills its customer in arrears. One of the operating leases referred to in Note D contains a guaranteed savings requirement as more fully described in Note F. This requirement could result in additional expense or revenue for the LLC in future years.

 

Fixed Assets

 

Fixed assets including capitalized equipment acquired by leases and improvements that significantly add to productive capacity or extend useful life, are recorded at cost. Depreciation expense, including the amortization of capital lease assets, is calculated for financial reporting purposes using the straight-line method based on the estimated useful life of each contract.

 

New Accounting Standards

 

In May 2003, the Emerging Issues Task Force (EITF) issued EITF No. 01-8, “Determining Whether an Arrangement Contains a Lease.” This issue is effective for (a) arrangements agreed to or committed to, if earlier, after the beginning of an entity’s next reporting period beginning after May 28, 2003, (b) arrangements modified after the beginning of an entity’s next reporting period beginning after May 28, 2003, and (c) arrangements acquired in business combinations initiated after the beginning of an entity’s next reporting period beginning after May 28, 2003.

 

The LLC has not entered into any arrangements subsequent to May 28, 2003; however, the LLC has modified two such arrangements subsequent to May 28, 2003. The LLC has reviewed these two arrangements and believes that both arrangements in light of EITF No. 01-8 and has concluded that both arrangements are lease arrangements.

 

NOTE B – CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents consist of the following as of June 30, 2003:

 

Cash in bank

   $ 9,524

Money market accounts

     414,420
    

     $ 423,944
    

 

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NOTE C – NOTES PAYABLE

 

The LLC has signed interim construction promissory notes with a bank totaling $988,542 as of June 30, 2003. The notes provide for monthly interest payments computed at the bank’s prime rate. Although these notes technically matured on September 30, 2002, they were informally extended by the LLC’s lender pending the receipt of proceeds of permanent sale-leaseback financing from the above referenced bank. This financing occurred on October 24, 2003. These notes were being used to finance part of $2,500,000 in capital expenditures for projects that were completed in the fourth quarter of fiscal 2003. The LLC received net proceeds of $907,716 when these interim notes were issued. The difference, which amounts to $80,826, was retained by the bank as additional collateral and is shown in the current asset section of the accompanying Balance Sheet as of June 30, 2003. This retained amount was offset against the gross promissory notes balance ($988,542) at the time that the permanent sale-leaseback financing occurred.

 

NOTE D – LEASES

 

Equipment Leased to Others

 

One of the LLC’s agreements with its customer meets the criteria of a direct financing lease. the other agreements are classified as operating leases.

 

Future minimum lease payments receivable under financing leases and non-cancelable operating leases as of June 30, 2003 and the net investment in the financing leases on that date are as follows:

 

Year Ending June 30,


   Financing Leases

   Operating Leases

2004

   $ 175,000    $ 1,082,186

2005

     175,000      1,082,186

2006

     175,000      1,082,186

2007

     175,000      1,082,186

2008

     175,000      1,082,186

Thereafter

     3,193,749      13,371,283
    

  

Total Minimum lease payments

   $ 4,068,749    $ 18,782,213
           

Less: unearned interest income

     2,944,048       
    

      

Net investment in financing leases

   $ 1,124,701       
    

      

 

Lease Obligations

 

The LLC has entered into leases for equipment all of which are classified as capital leases. The LLC has financed the majority of its equipment with the leasing subsidiary of a major bank. Under the terms of these transactions, assets with a cost of approximately $5,550,000 were financed as of June 30, 2003 under three separate “true leases”. As such, the bank/lessor owns the assets for tax purposes and is entitled to claim the tax benefits. The leases are net leases as all of the costs associated with the assets such as maintenance, insurance and property taxes are for the account of the LLC. Under each of these transactions, the LLC can elect to purchase the assets from the lessor at the end of a fixed term. These terms range from 56 to 86 months as of June 30, 2003. The purchase option prices range from 20% to 32.7% of the original cost of the equipment. The weighted average interest rate implicit in the leases is 5.98% per annum. The LLC has accounted for its repayment obligations under these transactions as capital lease obligations. The assets are included in Leased Equipment and Net investment in finance leases and the capital lease obligation is included in Long-term capital lease obligations and current maturities of capital leases on the accompanying Balance Sheet as of June 30, 2003.

 

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At June 30, 2003, future minimum lease payments under these leases are as follows:

 

 

Year Ending June 30


    

2004

   $ 750,743

2005

     750,743

2006

     750,743

2007

     750,743

2008

     841,413

Thereafter

     2,528,125
    

Total minimum lease payments

     6,372,510

Less amounts representing interest

     1,437,157
    

Present value of net minimum lease payments

     4,935,353

Less current maturities

     449,829
    

Long-term capital lease obligations

   $ 4,485,524
    

 

NOTE E – GUARANTEED SAVINGS OBLIGATION

 

Under the terms of a Utilities Requirement Agreement (the “URA”) with its customer, the LLC, among other things, agreed to purchase certain utility assets owned by the customer and to purchase and install certain Utility Conservation Measures (“UCM”) over the course of the following fiscal year. The total cost of the assets acquired and the UCM was approximately $2,500,000. It was believed that the installation of those UCM combined with the LLC’s operations and maintenance capabilities would result in the customer realizing annual savings that was initially targeted to be 5% less than the customer’s cost from the previous fiscal year. But, a pre-condition for the customer agreeing to the URA was that the LLC was required to guarantee those savings immediately upon signing the URA notwithstanding the fact that the vast majority of those savings could not be realized until such time as the UCM had been purchased and installed. Since the UCM were not completed and installed until May 2003, the LLC was not able to generate the level of savings required under the Agreement for the first fiscal period and therefore the LLC incurred a UCM savings obligation of $500,000. This amount is included in accounts payable in the Balance Sheet as of June 30, 2003 and costs of services in the Statement of Operations for the year then ended.

 

NOTE F – RELATED PARTY TRANSACTIONS

 

At June 30, 2003 the LLC owed ASI $2,910,008 and APP $36,000. These amounts are included in Accounts payable-related parties in the accompanying balance sheet as of June 30, 2003. The amount owed ASI includes interim billings for construction and project development costs of $ 2,662,231, interest of $ 91,000 and current billings for operations and maintenance services of $156,777. Of the $2,910,008 that was owed as of June 30, 2003, $ 1,000,000 was repaid primarily from the October 24, 2003 financing by the bank referred to in Note C. The amount due APP is for unpaid management fees that are allowed to be charged pursuant to an operating agreement in effect between the two members of the LLC.

 

As of June 30, 2003, the LLC has advanced APP $610,000 plus accrued interest of $19,343. The advances are evidenced by notes that bear interest at the rate of prime plus 2% per annum. The notes are payable on demand. The total receivable of $629,343 is included in the accompanying balance

 

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sheet as of June 30, 2003 and interest income of $19,343 is included in the accompanying statement of operations for the year ended June 30, 2003. The terms of the operating agreement between APP and ASI preclude one member from receiving a dividend or distribution without the other member receiving its allowable share at the same time. At the time that the LLC made the advances to APP, there was not sufficient cash available to make a similar distribution to ASI. In that case, the operating agreement calls for these advances to be evidenced by notes from the member to whom the advances were made.

 

NOTE G - INCOME TAXES

 

The LLC is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable by or provided for the LLC. Members are taxed individually on their share of the earnings of the LLC. The LLC’s net income or loss is allocated among the members in accordance with the operating agreement in effect between the members. Accordingly, the accompanying financial statements do not reflect a provision for income taxes.

 

NOTE H – OTHER CASH FLOW INFORMATION

 

The following table presents certain supplemental information concerning the LLC’s Statements of Cash Flows for the years ended June 30, 2003 and 2002:

 

     2003

   2002

Cash payments for interest

   $ 121,301    $ 379,014

Construction costs advanced by ASI

   $ 2,858,033      —  

Debt proceeds retained by bank

   $ 80,826      —  

Lease obligations paid by customers

   $ 308,357      —  

 

NOTE I – SUBSEQUENT EVENT

 

The Agreement was amended and restated to allow one of the two members, APP, a 51% majority voting interest in the LLC. The amended Agreement is dated and effective as of March 15, 2004.

 

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