SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24989
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AMERICAS POWER PARTNERS, INC.
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(Name of small business issuer in its charter)
Colorado 05-0499526
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
710 North York Road, Hinsdale, Illinois 60521
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 630/325-9101
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $ $8,180,070
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As of September 30, 2002, the registrant had 7,138,100 shares of its
Common Stock, no par value, outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant
as of that date is $177,606.
TABLE OF CONTENTS
Page
PART I
Disclosure Regarding Forward-Looking Statements 2
Item 1. Description of Business 2
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 9
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7. Financial Statements 16
Item 8. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 16
PART III
Item 9. Directors and Executive Officers of the Company 16
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners
and Management 22
Item 12. Certain Relationships and Related Transactions 24
PART IV
Item 13. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 25
Independent Auditor's Report, Consolidated Financial Statements
and Notes to Consolidated Financial Statements
1
Part I
Disclosure Regarding Forward-Looking Statements
This Annual Report includes historical information as well as statements
regarding the Company's future expectations. Important factors that could cause
actual results to differ materially from those discussed in forward-looking
statements include: supply/demand for products, competitive pricing pressures,
availability of capital on acceptable terms, continuing relationships with
strategic partners, dependence on key personnel, changes in industry laws and
regulations, competitive technology, and failure to achieve cost reduction
targets or complete construction projects on schedule. The Company believes in
good faith that the forward-looking statements in this Annual Report have a
reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in records and other data available
from third parties, but such forward looking statements are not guarantees of
future performance and actual results may differ materially from any results
expressed or implied by such forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Americas Power Partners, Inc. (the "Company" or "APP") was incorporated in April
1998 with a charter to provide on-site utilities for industrial, commercial and
institutional clients. The Company intends to become a leading independent power
producer engaged in the business of developing, acquiring, owning and managing
the operation of energy systems, including existing facilities and cogeneration
plants which produce electricity and thermal energy for sale under long-term
contracts. The Company seeks long-term all-requirements contracts generally in
the range of 12 to 25 years for energy and utility services with its clients.
The Company is developing the capacity to serve domestic and international
clients from its headquarters in Hinsdale, Illinois and regional offices in
Renfrew, Pennsylvania, and Stuart, Florida. In addition, the Company has the
ability to provide services to its customers through four US service offices and
300 global distributorships of its strategic partner, Armstrong International,
Inc. ("Armstrong").
The Company will employ and partner with on-site utility specialists whose
skills include design, operation and financing of 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. The Company's key alliance is with Armstrong Services
Inc. ("ASI"), a wholly owned subsidiary of Armstrong, a company with a 100-year
history as a supplier of steam equipment and services to the power
2
industry. Armstrong distributors and representatives are in frequent contact
with virtually every North America steam user as providers of product and
technical solutions to steam distribution issues. Armstrong has invested in APP
and has expanded the role of its distributors and representatives to lead
generation and development of energy services contracts.
APP offers three distinct products that target the energy requirements of the
industrial, institutional and commercial market:
. Cogeneration Projects
. Utility Optimization
. Utility Monetization
APP seeks to utilize its knowledge and expertise to fulfill client energy needs,
while using less fossil fuel, and thereby lowering fuel costs. APP finances the
capital improvements necessary to provide its products which enables its
customers to avoid capital expenditures in non-core activities. Customers can
focus on their core business, while APP focuses on providing energy and utility
services. This outsourcing arrangement allows the customer to focus their
capital and management efforts on their products while relying on APP for more
reliable, less costly operations of their utility systems. The Company may
assist its customers with fuel supply and electric power purchasing and APP may
share in certain energy cost savings.
APP achieves energy savings with a variety of approaches, but seeks to combine
heat and power generation in each case, in order to capture fuel energy that is
wasted in conventional central generation of electricity only. APP's approach is
not limited to any specific fuel or technology, but is instead based on the
needs of the individual customer, and the need to reduce fossil fuel consumption
and related costs.
Cogeneration
The Company plans on expanding its utility monetization relationships by
acquiring, developing, owning, operating and maintaining inside-the-fence
cogeneration power plants to improve electricity reliability and availability.
APP also plans to develop cogeneration power plants independent of the utility
optimization and monetization programs in the domestic United States.
The Company believes that the restructuring of the electric utility industry
will open significant new opportunities to companies like APP in the development
of cogeneration projects that free customers from the need to rely on local
utilities, as well as provide the customer the advantages of reliability and
cost savings that result from having captive, on-site, distributed generation
facilities. In addition, the Company plans to capitalize on the efficiency
benefits that current cogeneration technology provides relative to conventional
power plants, which generally operate at 25% to 50% less efficiency. The Company
plans to initially focus its cogeneration project development in the "middle
market" by developing projects of less than 100 MW rated capacity, in comparison
to the typical range of 500 MW to 1,000 MW for their large competitors.
3
The Company believes it will have many opportunities to develop inside-the-fence
cogeneration projects at the plant facilities where it has utility optimization
or monetization programs. In these cases, the customer will enter into long-term
contracts at favorable rates while still enjoying significant savings from
retail rates charged by the local utility companies and the substantial benefits
from reliability of operating its own project.
APP also expects to acquire, develop, own and operate dedicated cogeneration
plants at various locations throughout the United States. These projects,
anticipated to range from approximately 5 MW to 100 MW, may be dedicated to
selling all of the electrical and thermal output to a single end-user, selling
all of the output to one or more wholesale marketing organizations, or a
combination thereof. In all cases, at least initially, the Company plans to
avoid the risks associated with merchant power plants, which sell their output
on a spot basis without contracts, by entering into 10 to 20 year term
contracts.
Utility Optimization
Through Armstrong-Americas I, LLC (the "LLC"), the Company's 50% owned limited
liability company whose other owner is ASI, the utility optimization program is
designed for customers who prefer to continue owning and operating their own
steam, electric, air, water and condensate return utility systems. In these
cases, the Company provides intellectual capital and financial resources to
upgrade the systems. The Company relies on ASI personnel where appropriate to
supervise the installation of improvements and to provide maintenance. The
Company earns a return on its investment through utility optimization and
services agreements, which provide for the following:
. A thorough review of a client's entire energy usage system to identify
specific projects that will improve the utility system.
. An agreement for a maintenance contract.
. Purchase of asset additions and improvements necessary to achieve the
identified energy savings.
. The customer is typically provided a net positive cash flow from
reduced utility operating budgets and avoidance of any up front capital
outlays.
. Additional system improvements will be analyzed and implemented at the
client's request.
Utility Monetization
Under the Utility Monetization program, the Company purchases the client's
existing power plant assets and incorporates improvements in the utility and
distribution system (which could include the building of cogeneration power
plants), and assumes ownership and operation of the plant. The Company enters
into long-term agreements to sell steam, electricity, compressed air, water and
wastewater treatment to the facility.
4
This program provides benefits to the customer, including:
. The Company purchases the existing power plant equipment, invests in
efficiency and reliability enhancements and operates and maintains the
entire utility system.
. The Company pays for needed fuel, electricity, water, and wastewater,
which produce final energy products on site.
. The Company takes responsibility for those risks it can control
including conversion efficiency, labor productivity, reliability, and
steam and power quality. The customer remains at risk for inflation and
changes in purchased commodity prices, but will generally need less
purchased commodities per unit of production or other benchmark, due to
the Company's efficiency improvements. The Company is compensated for
all energy and utility costs.
MARKET AND INDUSTRY
The U.S. market currently spends an estimated $220 billion on electricity and
produces an amount of thermal energy valued at $170 billion annually. Consumers
for the most part still separately convert purchased energy to steam, chilled
water and compressed air, and employ personnel and capital resources to
distribute steam, chilled water, electricity and compressed air throughout their
facilities. U.S. spending for the full utility process, from fuel and commodity
procurement to provision of comfort and process energy, exceeds $500 billion per
year.
In the early days of electricity development, governments believed that the
generation of electricity was a natural monopoly, and to induce rapid deployment
of electric power, awarded exclusive franchises for each territory. By 1977, 96%
of U.S. electric power was produced by one of the 2,800 monopoly electric
company plants. In 1978, Congress passed the Public Utility Regulatory Policies
Act ("PURPA"), enabling non-monopoly generation by Independent Power Producers.
Subsequent federal legislation further weakened the monopoly protection afforded
electric utilities and, on March 1, 1998, Massachusetts became the first state
to open its entire electric market to competition. California followed on March
30, 1998, and by June 30, 2000, over half of the states had legislatively or
administratively eased restrictions to competition in electric power generation.
The earliest electric generation plants converted only about 8% of the fuel
energy to electric power (a term referred to as "efficiency"). Over time,
efficiencies rose to approximately 33% in the standard single cycle fossil
fueled plants, with 67% of the energy in the fuel wasted at these generating
plants. By the 1970s, industry participants had developed combined cycle heat
and power plants which achieve efficiencies of 65% to 97% by generating power
near thermal users and then providing normally wasted heat to those users. These
highly efficient cogeneration power plants operate with a "heat
5
rate" as low as 7,000 to 8,000 BTUs which is more than twice as efficient as the
old gas fired plants and results in the more efficient cogeneration plants being
able to sell their output when the less efficient plants may be shut down when
demand is low. The Company believes that historic monopoly protection of
generation and distribution, and the resulting barriers to efficient generation,
will continue to be eased, making on-site combined heat and power generation
more financially attractive, leading in turn to significant shifts from central
to distributed generation.
The generation of hot water and/or low-pressure steam needed for process heating
is less complex and capital intensive than the combined generation of heat and
power. Consequently, processing industries, commercial establishments and
institutions such as hospitals and universities generate their own thermal
energy, using their own capital and labor. Under historic regulation of
third-party electric generation, these firms and institutions opted to generate
only thermal energy within their facilities while purchasing electric power from
the local utility, but this fails to extract the full value potential of fuel.
With easing of monopoly restrictions, combined heat and power production has
risen from 4% of U.S. power production in 1977 to 9% in 1999. The U.S.
Department of Energy has set a goal of doubling U.S. combined heat and power
production over the next ten years, to 18-19% of total generation.
The Company believes that it is economically feasible to generate 50 to 60% of
all U.S. power at combined heat and power plants located at or near large
thermal users' sites. However, the conversion of existing thermal only power
plants to more efficient and cleaner combined heat and power plants is complex
and capital intensive. Global competition has forced most firms and institutions
to focus on their core activities rather than expending resources on thermal and
electric generation and distribution, leading to some outsourcing of these
activities. This creates, in the Company's view, an opportunity to develop
combined heat and power plants and optimize the combined generation and
distribution of energy products within its customer's facilities.
The Company believes that the market for the power management service industry
is expanding at a rapid rate, and that both competitive pressure to reduce costs
and government mandates to reduce pollution will increase the use of third party
energy professionals to manage campus utility plants. In addition, many firms
and institutions depend on boilers that are technically and economically
obsolete, difficult to operate and maintain, and polluting. A great deal of the
power generation equipment at U.S. process plants must soon be upgraded or
replaced to avoid costly downtime and environmental fines. APP believes it can
continue to find significant opportunities to achieve cost savings in most
utility systems while meeting all environmental requirements.
STRATEGIC ALLIANCES
The Company has a strategic alliance with ASI, a subsidiary of Armstrong
International, Inc., a 100-year-old, privately held U.S. multi-national
manufacturer of steam specialty products and provider of steam system services
to improve system efficiency. Armstrong personnel have extensive experience in
steam distribution, energy
6
management, project management and construction of on-site utility plants.
Armstrong has certified boiler specialists with experience in process and design
engineering, power generation/boiler design and cogeneration.
ASI provides the Company with business development support through Armstrong's
worldwide network of direct sales and independent representatives. Upon
completion of a transaction, ASI typically coordinates and/or implements all of
the site projects, along with providing operations, maintenance and sustaining
engineering for the Company's customers.
COMPETITION
In the past decade, many companies have formed corporate divisions to manage
their plants' utility and energy systems and purchasing requirements, in order
to better control energy requirements and cost. For the immediate future, the
Company's principal competition will continue to be the in-house operation of
the utility plant with most electricity purchased from the grid. More recently,
some companies are beginning to outsource portions or all of these
responsibilities to third parties like APP. The Company believes that effective
energy management involves expertise not only in energy supply and production,
but also in its distribution within the end user facility. The Company believes
that many potential competitors have an interest only in supplying the
electricity, fuel or water required by a plant and that some may assist with
energy generation and production, but most stop short of distribution skills.
APP believes that, as a result of its alliance with ASI, it is in a unique
position and may benefit from its understanding of energy distribution within a
process plant. Competitors most likely will refine their strategies and grow,
and other firms will enter the market, offering competitive services. Currently,
several of the Company's competitors have higher market profiles and
significantly greater financial resources than the Company.
DOMINANT PLAYERS
The Company believes that no firm yet has what could be termed a dominant role
in the emerging market of utility outsourcing and energy services. Various
strategies are being offered by several companies, based on a single existing
strength such as commodity management or trading, in operations, or in specific
technologies. APP differentiates itself by focusing on energy savings, thus
reducing overall utility costs. This strategy is complemented with the ability
to co-generate electricity for the industrial user with the most efficient use
of fuel.
Furthermore, the easing of monopoly protection will continue to subject electric
utility managements to possible loss of market share, and may, in the Company's
opinion, encourage these utilities to enter the energy services market,
especially in other utility territories.
7
PROPRIETARY RIGHTS
The Company has no patents, trademarks, licenses or royalty agreements. The
Company relies on trade secrets and proprietary know-how. There can be no
assurance that the trade secret or propriety nature of such information will not
wrongfully be breached by employees, consultants, advisors or others, or that
the Company's trade secrets or propriety know-how will not otherwise become
known or be independently developed by competitors in such a manner that the
Company has no practical recourse.
BACKLOG
As of June 30, 2002, the Company had signed long-term contracts for the
optimization and monetization of client power plants that represent future
minimum service revenue of $66,591,000 over the next 25 years.
RAW MATERIALS AND SUPPLIERS
In providing its optimization and monetization services, the Company is not
directly dependent upon raw materials or supplies, specifically electric, gas,
steam or water energy sources. However, since the Company's services to most
clients involve consulting as to the most inexpensive sources of such energy,
changes in the supply and pricing of these commodities may have an impact on the
Company's operations. Customer reliance on sole or limited sourcing for some
commodities does present risk that adequate alternative supplies or timely
deliveries will interfere with successful new project development.
HUMAN RESOURCES
As of June 30, 2002, the Company had four full-time employees situated in
offices in Hinsdale, Illinois, Renfrew, Pennsylvania, and Stuart, Florida. None
of the Company's employees are covered by collective bargaining agreements. The
Company's success will depend in part on its continued ability to attract and
retain high quality employees. The Company considers its relations with
employees to be good.
Effective July 1, 2001 and October 1, 2001, respectively, the Company's
President and Chief Operating Officer and its Chairman and Chief Executive
Officer each worked in those capacities under separate leased employee
agreements. The Company utilized the services of the President/COO under a
leased employee agreement with Armstrong. The Company utilized the services of
the Chairman/CEO under a leased employee agreement with a company that is an
investor in the Company and is partially owned by one of the Company's
directors.
8
ENVIRONMENTAL COMPLIANCE
Under the terms of the Company's contracts with clients, responsibility for
environmental matters relating to purchased assets is retained by the clients
for a stipulated period of time. Accordingly, there were no environmental
matters that would have a material effect on the financial statements as of June
30, 2002.
ITEM 2. DESCRIPTION OF PROPERTY
As of June 30, 2002, the Company leases approximately 600 square feet of office
space in Hinsdale, Illinois under a month-to-month lease arrangement. The lessor
of this building is a firm partially owned by one of the Company's directors.
There are no formal lease arrangements in connection with the Company's offices
in Renfrew, Pennsylvania or Stuart, Florida. The Company believes that all of
the facilities are adequate to meet its needs for the foreseeable future, and
that suitable replacement space is readily available.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Company or any of its
properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended June 30, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the over-the-counter Bulletin
Board market under the symbol "APPN" on January 24, 2000.
9
QUARTERLY COMMON STOCK PRICE RANGES
Fiscal
Quarter High Low
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Year ended June 30, 2002:
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1st (July 1- Sept 30) $ 0.75 $ 0.12
2nd (Oct.1 - Dec. 31) $ 0.22 $ 0.03
3rd (Jan.1-Mar. 31) $ 0.42 $ 0.03
4th (Apr.1-Jun. 30) $ 0.40 $ 0.06
Year ended June 30, 2001:
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1st (July 1- Sept 30) $ 3.25 $ 0.88
2nd (Oct.1 - Dec. 31) $ 2.88 $ 0.75
3rd (Jan.1-Mar. 31) $ 1.50 $ 0.13
4th (Apr.1-Jun. 30) $ 0.63 $ 0.13
Such over-the-counter market quotations reflect inter-dealer prices, without
retail markup, markdown or commission, and may not necessarily represent actual
transactions.
As of June 30, 2002, the number of holders of record of the Common Stock of the
Company was 154.
The Company has never paid any cash dividends on its Common Stock in the past
and anticipates that, for the foreseeable future, all earnings, if any, will be
retained to finance growth and to meet working capital requirements.
There was no common stock issued or redeemed during the year ended June 30,
2002.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company, including the notes thereto, which appear elsewhere
in this annual report.
Results of Operations.
During the period from January 27, 1998 (date of inception) through December 31,
1999, the Company engaged in no significant operations other than organizational
activities, acquisition of capital and preparation for registration of its
securities under the Securities Exchange Act of 1934, as amended. The Company
recorded no revenues during this period.
10
During the third quarter of the year ended June 30, 2000, the Company signed its
first two long-term contracts for the monetization and optimization of steam
generation facilities, and recognized $124,213 of revenue associated with those
contracts. Three additional long-term contracts were signed during the year
ended June 30, 2001. Those two contracts plus the contracts signed during the
year ended June 30, 2000, resulted in revenues of $5,619,971 for the year ended
June 30, 2001. Two more long-term contracts were signed during the year ended
June 30, 2002. Both contracts signed during the year ended June 30, 2002 and one
of the contracts signed during the year ended June 30, 2001 were signed between
Armstrong-Americas I, LLC, ("LLC") the Company's 50% owned limited liability
corporation, and a major food processing company. This customer is the Company's
largest customer. As a result of this growth, the Company recorded revenues of
$8,180,070 during the year ended June 30, 2002.
During the year ended June 30, 2002, the Company incurred a net loss of $952,139
compared to a net loss of $3,820,980 during the year ended June 30, 2001 and a
loss of $2,225,971 for the year ended June 30, 2000.
The following is a discussion of the reasons for significant variances in the
Company's expenses and other items over the last three fiscal periods:
Payroll and employee benefits
Fiscal 2002 compared to Fiscal 2001
This category of the Company's expenses decreased a total of $953,000 compared
to the year ended June 30, 2001. During the year ended June 30, 2002, the
Company maintained a level of four employees during the year. In the year ended
June 30, 2001, the Company began the year with seven employees and at one point
had ten employees. Significant cost cutting measures were commenced in the
latter part of the year ended June 30, 2001 resulting in the reduction to four
employees as of June 30, 2001. The Company's current employees consist of its
President and COO, its Chairman and CEO (both of whom are leased employees), its
Controller and its Project Developer. No significant changes in the number of
employees is expected in the near future.
Fiscal 2001 compared to Fiscal 2000
Payroll and employee benefit expense for the year ended June 30, 2001 increased
$1,141,000 over the prior fiscal year. As previously mentioned, the Company
began fiscal 2001 with seven employees, had ten employees as of December 2000,
and, as a result of the sale of assets and the resignations of four employees
effective January 15, 2001 as well as other terminations, there were four
employees on the payroll at June 30, 2001. Payroll expense for the year ended
June 30, 2001 increased approximately $357,000 over the previous year as a
result of a provision for deferred compensation required by an agreement signed
with an officer in September 2000 and terminated in January 2001 (see Notes to
Consolidated Financial Statements). In addition, as of June 30, 2001, the
Company recorded a provision for future payroll and benefit costs of $286,000
associated with the employment contract of another terminated officer.
Sales Development and Financing Expense
11
Fiscal 2002 compared to Fiscal 2001
During the year ended June 30, 2002, the Company recorded only $115,873 in sales
development fees compared to $737,296 in the fiscal year ended June 30, 2001.
The fiscal 2001 fees included non-recurring fees of $704,763 charged to the
Company by Armstrong and paid through the issuance of the Series B Preferred
stock in June 2001.
Fiscal 2001 compared to Fiscal 2000
On June 28, 2001, the board of directors approved the issuance of 3 million
shares of Series B Preferred Stock and the signing of the Series B Preferred
Stock Purchase Agreement in exchange for certain sales development and financing
costs, valued at $468,000 and $236,763, respectively, from Armstrong. In
addition, the LLC paid sales development costs of $30,000 to the same firm
during fiscal 2001. The financing expense represents the fees associated with
funds advanced by the investor to the Company for working capital purposes and
in connection with client monetization projects and the guarantee of a line of
credit.
Management and consulting fees
Fiscal 2002 compared to Fiscal 2001
For the year ended June 2001, the Company utilized the services of a consulting
firm and from July 1, 2000 until November 2000 the Company paid three
officers/directors of the Company fees relating to the business development and
management of the Company. Expenses of $582,828 were incurred during fiscal 2001
as a result of these agreements. None of those agreements were in force during
the year ended June 30, 2002.
Fiscal 2001 compared to Fiscal 2000
Management and consulting fees decreased approximately $102,700 for the year
ended June 30, 2001, compared to the prior year, principally as a result of the
following (see Notes to Consolidated Financial Statements):
. Cancellation in November 2000 of independent contractor agreements
with three individuals who were officers and directors of the
Company.
. Renegotiation of a contract with the venture capital/management
firm responsible for organizing the August 1999 reverse merger
with a publicly-traded corporate entity and certain other capital
formation activities.
As further described in the Notes to Consolidated Financial Statements, as of
June 30, 2000, the venture capital/management firm agreed to reduce and refund
to the Company $306,600 of the consulting fees it received in fiscal 2000. The
board of directors subsequently forgave the outstanding balance of this
receivable in consideration for the firm canceling the Company's corporate
office lease, and, accordingly, $298,400 was written-off in fiscal 2001.
Write-off project contract costs
Fiscal 2002 compared to Fiscal 2001
No project costs were written off during fiscal 2002. In fiscal 2001, $109,864
of such costs were expensed.
12
Fiscal 2001 compared to Fiscal 2000
During the period of three months ended September 30, 2000, management concluded
that several client projects were no longer economically feasible or did not
justify further investment of resources and, accordingly, approximately $104,200
of previously deferred development costs relating to these projects were
written-off. In subsequent periods, the Company received a $20,000 vendor
retainer credit to apply against the aforementioned charge and also determined
that an additional $25,600 would be written off in the third and fourth quarters
of 2001.
Other professional fees
Fiscal 2002 compared to Fiscal 2001
Other professional fees decreased approximately $318,000 in fiscal 2002. The
reduction is due primarily to a cut back in the use of outside accounting,
public relations, legal and investment bankers. Fees for these professionals
amounted to $522,000 in fiscal 2001 versus $204,000 in fiscal 2002.
Fiscal 2001 compared to Fiscal 2000
For the year ended June 30, 2001, professional fees decreased approximately
$235,200 compared to the prior year as a result of the decisions in the fourth
quarter of the prior fiscal year to internally perform the Company's legal
function and to reduce public relation activities subsequent to the first
quarter of fiscal 2001.
General and administrative
Fiscal 2002 compared to Fiscal 2001
General and administrative expense decreased approximately $130,000 from fiscal
2001. This reduction is due primarily from a reduction in rent and travel
expense.
Fiscal 2001 compared to Fiscal 2000
General and administrative expenses for the year ended June 30, 2001 increased
approximately $136,300 over the prior year amount with the additional
expenditures relating to increased personnel during the middle of the year,
rental of new office facilities, depreciation of Company-owned and client-leased
equipment, accounting fees associated with the reporting requirements of a
publicly-held company, and the initiation of marketing programs. However, these
expenses for the period of three months ended June 30, 2001 were the lowest of
the year's four quarters as a result of the decrease in general and
administrative expenses associated with the previously described reduction in
staff effective January 15, 2001 (see Notes to Consolidated Financial
Statements).
13
Interest Income
Fiscal 2002 compared to Fiscal 2001
Interest income declined $26,000 in the year ended June 30, 2002 from the
preceding year ended June 30, 2001. During the 2001 year, the Company accrued
interest on an employee note in the amount of $22,400. No such interest was
earned during the year ended June 30, 2002.
Fiscal 2001 compared to Fiscal 2000
Interest income increased approximately $35,000 during the year ended June 30,
2001 over the corresponding prior year amount as a result of the higher cash
balances provided from the proceeds from the sale of $2 million of Common Stock
to a new chief executive officer in September 2000, and the outside investment
made in Armstrong-Americas I, LLC in that same month.
Interest Expense
Fiscal 2002 compared to Fiscal 2001
Interest expense increased approximately $77,000 due to the increase in
long-term debt that resulted from the continued expansion of the Company's
capital projects.
Fiscal 2001 compared to Fiscal 2000
Interest expense for the year ended June 30, 2001 increased $74,900 as a result
of a bank loan used to finance a client project early in the current fiscal year
and capital leases for equipment signed subsequent to December 1999.
Provision for doubtful accounts
Fiscal 2002 compared to Fiscal 2001
The Company fully wrote off its investment in a contract with one of its
customers that filed for bankruptcy in August 2002. This write off was accounted
for by providing a $245,000 reserve for doubtful accounts. In addition, the
Company wrote off a small $8,000 balance due from another customer in fiscal
2002.
Minority Shareholder's interest in earnings of LLC
Fiscal 2002 compared to Fiscal 2001
Due to the addition of two more contracts making a total of three contracts that
are included in the LLC and the full year of activity in the first contract
(only nine months were included in fiscal 2001), the amount of profit recorded
by the LLC was $460,000 versus $90,000 in fiscal 2001. The Company records 100%
of the LLC's revenues and expenses, then allocates one-half of that net profit
($230,241 in fiscal 2002 and $44,825 in fiscal 2001) to the minority
shareholder.
Liquidity and Capital Resources
Since its inception in April 1998, the Company has incurred an aggregate net
loss of $7,562,074 and at June 30, 2002, the Company has a working capital
deficiency of approximately $3,044,000. However, the Company reduced its net
loss over 75% from $3,820,980 in the year ended June 30, 2001 to $952,139 in the
year ended June 30, 2002.
14
51% of the Company's current liabilities and approximately $2,686,000 of its
working capital deficiency is attributable and due to related parties (Armstrong
and ASI), one of whom is also a significant investor in the Company's preferred
stock. In addition, $847,115 of current liabilities is currently in the form of
short-term construction notes issued to a bank. These notes are likely to
convert into long-term obligations upon the completion of certain construction
projects for the Company's major customer.
Notwithstanding these mitigating factors, the Company, nevertheless, has been
forced during fiscal 2002 and 2001 to rely in part on advances evidenced in the
form of notes payable to Armstrong to finance its operations and sales
development activities. These notes, in aggregate, amounted to $960,500 plus
accrued interest as of June 30, 2002. Armstrong is not expected to continue to
significantly provide such financings in the future. The Company has actively
been searching for and has identified certain potential strategic and equity
partners. In addition, the Company has made specific plans and is attempting to
execute a strategy to insure its future viability. The Company is confident that
it will be able to execute its plans and be able to attract and retain strategic
and equity partners. But, there can be no assurance that it will do so.
Future projects are anticipated to require debt financings as well.
Historically, the Company has not had difficulty finding debt financing for its
projects as the cash flow relative to the loans have been adequate to induce
lenders to finance the Company's projects.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." In June
2000,the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and
Certain Hedging Activities an amendment of SFAS No. 133," (SFAS No. 138), which
was required to be adopted in years beginning after June 15, 2000. One of the
primary amendments to SFAS No. 133 establishes a "normal purchases and normal
sales" exception. This exception permits companies to exclude contracts, which
provide for the purchase or sale of something other than a financial derivative
instrument that will be delivered in quantities that are expected to be used or
sold by the entity over a reasonable period of time in the normal course of
business operations. The adoption of SFAS No. 133 as amended by SFAS No. 138
will not have an impact on the financial statements, as the Company does not
currently hold any derivative instruments.
In July 2001, the FASB issued SFAS No. 142, " Goodwill and Other Intangible
Assets," effective for years beginning after December 15, 2001. Under the new
rules, goodwill and certain intangible assets will no longer be amortized, but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
Adoption is required for fiscal years beginning after December 15, 2001. The
company does not believe that the adoption of this SFAS will have an effect on
its financial statements.
15
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which is effective for years beginning after May 15, 2002. Under the new
pronouncement, an inconsistency between the required accounting for
sale-leaseback transactions was eliminated. The Company does not believe that
the adoption of this SFAS will have an effect on its financial statements.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and the report of Blackman Kallick
Bartelstein LLP, independent auditors, with respect thereto, referred to in the
Index to Financial Statements, appear elsewhere in this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors consists of a total of seven members, whose term of
office is the earlier of one-year or until their successor is elected. The
following table sets forth information concerning executive officers and
directors of the Company, including their ages and positions with the Company as
of September 30, 2002:
Name Age Position
---- --- --------
Mark A. Margason 46 Chairman of the Board of Directors and
Chief Executive Officer
Gordon B. Mendelson 58 Chief Operating Officer, President,
and Director
Douglas V. Bloss 44 Director
Theodore Bogard 48 Director
Don A. Etheredge 52 Director
James F. Purser 52 Director
Thomas W. Smith 44 Director
Jerome P. Frett 52 Controller
Mark A. Margason was elected to serve as Chairman of the Board of Directors of
Americas Power Partners, Inc. on April 19, 2001 and Chief Executive Officer of
the Company on June 27, 2001. Mr. Margason previously resigned his position as
Chief Executive Officer of the Company on September 12, 2000, but continued as a
Director,
16
which he has served as since the Company's inception. Previously, Mr. Margason
was a Vice President at Citicorp North America from 1986 to 1991, and a Vice
President at Mellon Bank N.A. from 1982 to 1986. He was employed at American
National Bank and Trust Company of Chicago from 1979 to 1982. Mr. Margason
currently is a director of MPI Investment Management, Inc., MPI Venture
Management, LLC, and AEI Environmental, Inc.
Gordon B. Mendelson was appointed to the board of directors on April 19, 2001
and was elected President and Chief Operating Officer on June 14, 2001.
Previously he was Senior Vice President - Finance and Business Development of
Armstrong Service, Inc. from 1999 to 2001 and, in this capacity, he consulted
with the Company since January 2001. As an executive with LTV from 1995 to 1998,
he lead a team responsible for developing greenfield manufacturing facilities in
China and Trinidad, as well as being a member of the Iron Carbide Plant
(Trinidad) Operating Board. From 1989 to 1995, he was director of worldwide
independent power at Babcock & Wilcox Company, where his accomplishments
included the purchase and development of several independent power projects
totaling 150 MW. He began his professional career at Westinghouse Electric
Corporation in 1966, where he worked in various managerial positions until 1988
and was responsible for total contract management of $2 billion of international
fossil and nuclear turnkey power projects. Mr. Mendelson is a member of the
Pennsylvania Bar Association.
Douglas V. Bloss has been a director of the Company since September 11, 2000. He
is President of Armstrong Service, Inc., and Director and Corporate Vice
President of Marketing and Sales for Armstrong International, Inc. Mr. Bloss has
been employed with Armstrong International, Inc. in various marketing capacities
since 1980.
Theodore Bogard has been a director of the Company since its inception and was
Vice President of Project Development of the Company until October 31, 2000. Mr.
Bogard is president of F. Drake and Company, Inc., an independent consulting
firm that specializes in cogeneration projects, bio-mass projects and wind
projects. F. Drake and Company has strategic power development relationships
with Native American Counsels. From 1996 to 1999, he was an officer of a
predecessor company to the Company and was responsible for power development in
South America. Prior to 1996, he was a partner in a commercial real estate
development company in Atlanta, Georgia for eight years.
Don A. Etheredge was elected a director of the Company on June 27, 2001. He
presently is President of ExoLink Corporation, which he founded in 1996. ExoLink
Corporation provides transaction and business process services to trading
companies operating in competitive energy markets. Mr. Etheredge has been
actively engaged in assessing, developing and implementing solutions in both
regulated and deregulated utility markets since 1989. He has also provided
information systems consulting services to small and medium sized businesses
engaged in agri-business, oil and gas production, and public accounting.
17
James F. Purser was elected a director of the Company on June 27, 2001. Since
1997, Mr. Purser has been an independent financial consultant and a partner with
Tatum CFO Partners, LLP and Chief Financial Officer of Cross Continent Auto
Retailers, Inc., a publicly traded automobile-retailing firm. Prior to that, Mr.
Purser was with Atmos Energy Corporation, where he served in several capacities
including Executive Vice President and Chief Financial Officer. From 1973 and
1986, Mr. Purser was employed by Southern Union Company, Inc. as Executive Vice
President of Oil & Gas Operations.
Thomas W. Smith was employed as President of the Company from May 1999 to June
2001. He was elected to serve as a director of the Company on September 13,
2000. Since June 2001, he has been an independent consultant to companies in the
energy field. From 1996 to 1998, Mr. Smith was a partner with Alternative Energy
Consultants and from 1993 to 1995 he was Vice President of Business Development
for Polsky Energy Corporation. Previous experience includes Vice President Sales
and Marketing for U. S. Turbine, Vice President Sales and Marketing of
International Power Technology, and Sales Manager of Westinghouse Electric
Corporation.
Jerome P. Frett, a certified public accountant, has served as Controller of the
Company since June 2002. Prior to that time from 1995 until 2002, Mr. Frett
performed consulting work and also served as the Controller and General Manager
for Art Wire Works, a manufacturing company in Chicago, IL. From 1985 until
1995, Mr. Frett was a consultant to financially troubled companies and in 1988
he co-founded Stratford Partners, Inc. a firm that specializes in providing
services to financially troubled companies. From 1976 until 1985, Mr. Frett was
the Controller for North American Car Corporation, a railcar leasing company. He
was employed as a senior auditor for Arthur Andersen & Co. from 1972 until 1976.
There are no family relationships between any of the directors or officers of
the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total annual
compensation paid or accrued by the Company to or for the account of the chief
executive officer and each other executive officer whose total cash compensation
exceeded $100,000 for any of the past three fiscal years (the Company had no
payroll for the fiscal year ended June 30, 1999):
18
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------------------
Name and Other
--------
Principal Position Year Salary Bonus Compensation
------------------ ---- ------ ----- ------------
Mark A. Margason /(1)/ 2002 $180,000 - -
Chairman & CEO 2001 - - $ 43,000
2000 - - $130,140
Thomas R. Casten /(2)/ 2002 - - -
Chairman & CEO 2001 $174,904 $182,192 -
2000 - - -
Gordon B. Mendelson /(3)/ 2002 $180,000 - -
COO and President 2001 - - -
2000 - - -
Thomas W. Smith /(4)/ 2002 - - -
President 2001 $271,667 - $280,000
2000 $160,000 - -
John K. Leach /(5)/ 2002 - - -
Vice President 2001 $176,538 - -
and General Counsel 2000 - - -
Tom F. Perles /(6)/ 2002 $110,000 - -
Chief Accounting 2001 - - -
Officer 2000 - - -
19
LONG TERM
COMPENSATION
-------------------------------------------------------------------------
AWARDS PAYOUTS
------------------------------------------- -----------
Securities
Restricted Underlying
Name and Stock Options/ LTIP All Other
--------
Principal Position Year Awards SARs Payouts Compensation
------------------ ---- ------ ---- ------- ------------
Mark A. Margason /(1)/ 2002 - - - -
Chairman & CEO 2001 - 100,000 - -
Thomas R. Casten /(2)(7)/ 2002 - - - -
Chairman & CEO 2001 - 400,000 - -
Gordon B. Mendelson /(3)/ 2002 - - - -
COO and President 2001 - 600,000 - -
Thomas W. Smith /(4)(7)/ 2002 - - - -
President 2001 - 341,445 - -
John K. Leach /(5)(7)/ 2002 - - - -
Vice President 2001 - 140,000 - -
and General Counsel
Tom F. Perles /(6)(7)/ 2002 - - - -
Chief Accounting 2001 - 5,000 - -
Officer
/(1)/ Mark A. Margason was elected to serve as chief executive officer of the
Company on June 27, 2001. Mr. Margason previously resigned his position as
chief executive officer of the Company on September 11, 2000, but
continued as a director. Mr. Margason was compensated during this period
under a three year Independent Contractor Agreement dated July 1, 1999,
which provided for monthly compensation of $10,000 and an automobile
allowance that amounted to $3,000 and $10,140 in fiscal 2001 and 2000,
respectively, and is included in reported other compensation. The
Independent Contractor Agreement was terminated in November 2000.
Effective July 1, 2001, Mr. Margason's annual compensation was established
at $180,000. On October 1, 2001, the Company entered into an agreement to
lease Mr. Margason's services from MPI Venture Management, Inc. for
$16,875 per month. This includes a base salary of $15,000 per month and
employee benefits of $1,875 per month.
/(2)/ Thomas R. Casten was employed September 11, 2000 as chief executive
officer in accordance with the terms of a three year employment agreement
with the Company, which also provided he would be named as a member and
the chairman of the Company's board of directors. Mr. Casten's employment
agreement provided that he
20
was to earn a base compensation during the first year of $480,000 and a
bonus of $500,000 ratably over the period, and that the salary and bonus,
plus interest thereon, would be paid pursuant to a non-qualified deferred
compensation plan. Mr. Casten resigned effective January 15, 2001, and
his employment agreement and the non-qualified deferred compensation plan
were terminated on that date. No obligation to pay the aforementioned
amounts survived the termination.
/(3)/ Gordon B. Mendelson was elected president and chief operating officer on
June 14, 2001, and received no compensation during the fiscal year ended
June 30, 2001. Effective July 1, 2001, the Company entered into an
agreement to lease Mr. Mendelson's services from Armstrong International,
Inc. for $16,875 per month. This includes a base salary of $15,000 per
month and employee benefits of $1,875 per month.
/(4)/ Thomas W. Smith entered into an employment agreement with the Company
dated May 1, 1999, which was superceded by an employment agreement dated
September 18, 2000 and provided that he would be employed as president of
the Company for annual compensation of $280,000. Mr. Smith's contract was
terminated by the board effective June 14, 2001. At the time of his
termination, he was given a severance package of $280,000. This amount
was accrued as of June 30, 2001. He was paid $268,333 during fiscal 2002
pursuant to this agreement.
/(5)/ John K. Leach was hired as Vice President General Counsel in June 2000.
Mr. Leach resigned his position in June 2001.
/(6)/ Tom F. Perles was chief financial officer of MPI Venture Management, LLC.
He served as chief accounting officer of the Company under a leased
employee arrangement until January 1, 2002. He then became an employee of
the Company until he was terminated on June 15, 2002.
/(7)/ Options were forfeited 90 days after the employees' termination of
employment.
Their were no individual grants of stock options made by the Company during the
fiscal year ended June 30, 2002 to executive officers.
The following table summarizes for each of the chief executive officer and other
named executive officers (i) the total number of shares received upon exercise
of stock options during the fiscal year ended June 30, 2001, (ii) the aggregate
dollar value realized upon such exercise, (iii) the total number of unexercised
options, if any, held at June 30, 2001 and (iv) the value of unexercised
in-the-money options, if any, held at June 30, 2001. In-the-money options are
options where the fair market value of the underlying securities exceeds the
exercise or base price of the option. The aggregate value realized upon exercise
of a stock option is the difference between the aggregate exercise price of the
option and the fair market value of the underlying stock on the date of
exercise. The value of unexercised, in-the-money options at fiscal year-end is
the difference between the exercise price of the option and the fair market
value of the underlying stock on June
21
30, 2001, which was $0.65 per share. With respect to unexercised, in-the-money
options, the underlying options have not been exercised, and actual gains, if
any, on exercise will depend on the value of the Company's Common Stock on the
date of exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares at FY-end at FY-end
Acquired On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- -------- -------- ------------- -------------
Mark A. Margason - - 100,000/ $0/
0 $0
Gordon B. Mendelson - - 600,000/ $0/
0 $0
Compensation of Directors
On May 1, 2002, two outside directors received options to purchase 20,000 shares
each of the Company's common stock. The option price for each share was $0.50
per share. At the time of the grant of the options, the market value of the
Company's common stock was $0.10.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information as of September 30, 2002
regarding the beneficial ownership of the Company's capital stock for (a) each
person known by the Company to own beneficially five percent or more of its
voting capital stock, and (b) each director and executive officer listed in the
Summary Compensation Table (earning in excess of $100,000 annually). Except
pursuant to applicable community property laws and except as otherwise
indicated, each shareholder identified in the table possesses sole voting and
investment power with respect to his or her shares. Unless otherwise indicated,
the address of the beneficial owners is: c/o Americas Power Partners, Inc., 710
North York Road, Hinsdale, Illinois 60521.
22
NUMBER OF SHARES BENEFICIALLY OWNED AND PERCENT OF CLASS
Percent of Percent of
Name and Address of Preferred Preferred Common Common
Beneficial Owner Stock Stock Stock Stock
---------------- ----- ----- ----- -----
Five Percent Stockholders:
Armstrong International, Inc. /(1)/ 4,931,230 77.2% 4,931,230 40.9%
2081 S. East Ocean Blvd.
Stuart, FL 34996
Merrill Armstrong /(2)/ 970,183 15.2% 970,183 12.0%
2081 S. East Ocean Blvd.
Stuart, FL 34996
Armstrong International, Inc. /(3)/ 333,807 5.2% 333,807 4.5%
Employees Pension Plan
2081 S. East Ocean Blvd.
Stuart, FL 34996
David W. Pequet /(4)/ - - 2,257,233 30.8%
710 North York Road
Hinsdale, IL 60521
MPI Venture Management, LLC /(5)/ - - 1,746,737 24.1%
710 North York Road
Hinsdale, IL 60521
Officers and Directors:
Douglas Bloss /(6)/ 156,488 2.4% 156,488 2.1%
Theodore Bogard - - 808,269 11.3%
Mark Margason /(7)/ - - 2,257,235 30.8%
Gordon Mendelson /(8)/ - - 602,000 7.8%
James Purser - - 0 0.0%
Thomas Smith - - 900,000 12.6%
Don Etheridge /(9)/ - - 20,000 0.3%
James Purser /(9)/ - - 20,000 0.3%
Officers and Directors
as a group /(10)/ 156,488 2.4% 4,763,992 58.6%
(includes eight individuals)
710 North York Road
Hinsdale, IL 60521
23
/(1)/ The shares of Common Stock and percent thereof reported for Armstrong
International, Inc. include 4,931,230 shares of Preferred Stock held by
the corporation that are convertible within 60 days into an equal number
of shares of Common Stock.
/(2)/ The shares of Common Stock and percent thereof reported for Merrill
Armstrong include 970,183 shares of Preferred Stock held by such person
that are convertible within 60 days into an equal number of shares of
Common Stock.
/(3)/ The shares of Common Stock and percent thereof reported for Armstrong
International, Inc. Employees Pension Plan include 333,807 shares of
Preferred Stock held by that entity that are convertible within 60 days
into an equal number of shares of Common Stock.
/(4)/ Shares reported for David W. Pequet include 410,496 shares held by the
Pequet Family Limited Partnership, options for 100,000 shares of Common
Stock, and 1,646,737 shares and options for an additional 100,000 shares
in the name of MPI Venture Management LLC. The general partner of the
Pequet Family Limited Partnership is David W. Pequet.
/(5)/ Messrs. Margason and Pequet are controlling members of MPI Venture
Management, LLC. The shares reported include options for 100,000 shares
of Common Stock.
/(6)/ The shares of Common Stock and percent thereof reported for Douglas
Bloss include 156,488 shares of Preferred Stock held by such person that
are convertible within 60 days into an equal number shares of Common
Stock.
/(7)/ Shares reported for Mark A. Margason include 410,498 shares held by the
Margason Family Limited Partnership, options for 100,000 shares of
Common Stock, and 1,646,737 shares and options for an additional 100,000
shares in the name of MPI Venture Management LLC. The general partner of
the Margason Family Limited Partnership is Mark A. Margason.
/(8)/ Shares reported for Gordon B. Mendelson include options for 600,000
shares of Common Stock.
/(9)/ Shares reported for Don Etheridge and James Purser include options for
40,000 shares (20,000 shares to each director) of Common Stock.
/(10)/ The shares of Common Stock and percent thereof reported for the officers
and directors as a group include 156,488 shares of Preferred Stock that
are convertible within 60 days into an equal number of shares of Common
Stock and options for 840,000 shares of Common Stock that are
exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into certain transactions with major shareholders,
directors and officers during the two most recent fiscal years, which are
summarized in the Notes to Consolidated Financial Statements included elsewhere
in this Form 10-KSB.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16 of the Securities Exchange Act of 1934 ("Exchange Act") requires
directors, executive officers, and persons who own more than 10 percent of a
registered class of equity securities to file with the Commission initial
reports of beneficial ownership (Form 3) and reports of changes in beneficial
ownership (Forms 4 and 5) of the Company's
24
Common Stock and other equity securities. Officers, directors, and greater than
10 percent shareholders are required by the Commission's regulations to furnish
the Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, all directors, officers, and holders of more than 10
percent of Common Stock filed all reports required by Section 16(a) of the
Exchange Act during the Company's most recent fiscal year, except that the
Company has been unable to confirm that certain of the current and former
directors and officers have completed all filings required by Section 16A.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
The following documents are filed as part of this report:
Independent Auditors' Report
Consolidated Balance Sheets - June 30, 2002 and 2001
Consolidated Statements of Operations - For the Fiscal Years Ended June
30, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity - For the
Fiscal Years Ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - For the Fiscal Years Ended June
30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the fourth
quarter ended June 30, 2002.
(c) Exhibits.
Exhibit
Number Description
------ -----------
11. Statement re: computation of per share earnings.
21. Subsidiaries of Issuer
23. Consent of Independent Accountants
25
SIGNATURES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
I, Mark A. Margason, certify, pursuant to the 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Americas Power Partners, Inc. on Form 10-KSB for the fiscal year ended
June 30, 2002 fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934 and that the information contained in
such Form 10-KSB fairly presents in all material respects the financial
condition and results of operations of Americas Power Partners, Inc.
AMERICAS POWER PARTNERS, INC.
Date: October 15, 2002 /s/ Mark A. Margason
--------------------
Mark A. Margason
Chairman of the Board and
Chief Executive Officer
I, Jerome P. Frett, certify, pursuant to the 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Americas Power Partners, Inc. on Form 10-KSB for the fiscal year ended
June 30, 2002 fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934 and that the information contained in
such Form 10-KSB fairly presents in all material respects the financial
condition and results of operations of Americas Power Partners, Inc.
Date: October 15, 2002 /s/ Jerome P. Frett
----------------------
Jerome P. Frett
Controller
26
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title
/s/ Mark A. Margason Chairman of the Board and Chief
---------------------- Executive Officer and Director
Mark A. Margason (Principal Executive Officer)
/s/ Gordon B. Mendelson Chief Operating Officer, President
-------------------------- and Director
Gordon B. Mendelson
________________________ Director
Douglas V. Bloss
/s/ Theodore Bogard Director
-----------------------
Theodore Bogard
/s/ Don A. Etheredge Director
----------------------
Don A. Etheredge
________________________ Director
James F. Purser
________________________ Director
Thomas W. Smith
/s/ Jerome P. Frett Controller
---------------------------
Jerome P. Frett
27
Independent Auditor's Report
Board of Directors and Stockholders
Americas Power Partners, Inc.
Hinsdale, Illinois
We have audited the accompanying consolidated balance sheets of Americas Power
Partners, Inc. as of June 30, 2002 and 2001, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2002. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Americas Power
Partners, Inc. as of June 30, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
2002, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note J to the
consolidated financial statements, the Company has incurred significant losses
from operations and has a deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note J. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
September 27, 2002
AMERICAS POWER PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------
2002 2001
------ ------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 697,176 $ 276,687
Accounts receivable:
Trade 1,252,852 575,445
Retainer held by bank - 244,937
Current portion of net investment
in finance leases 360,808 145,129
Reserve for doubtful accounts (245,337) -
Inventory 95,273 95,273
Prepaid expenses and other current assets 39,787 77,015
---------- ----------
TOTAL CURRENT ASSETS 2,200,559 1,414,486
FIXED ASSETS
Leased equipment 3,929,169 843,288
Office equipment and leasehold improvements 153,590 152,525
---------- ----------
4,082,759 995,813
Accumulated depreciation (121,772) (75,623)
---------- ----------
TOTAL EQUIPMENT AND FIXTURES 3,960,987 920,190
OTHER ASSETS
Construction projects in process - 868,051
Net investment in finance leases
less current portion 2,001,798 575,140
Deferred costs net of amortization 409,392 297,965
---------- ----------
TOTAL OTHER ASSETS 2,411,190 1,741,156
---------- ----------
TOTAL ASSETS $8,572,736 $4,075,832
========== ==========
See accompanying Notes to Consolidated Financial Statements
1
AMERICAS POWER PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
------------------------------
2002 2001
------ ------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,208,400 $ 782,711
Due to related parties 1,725,745 976,360
Accrued expenses and deferred revenue 96,935 4,288
Notes payable
Interim construction loan 847,115 1,224,687
Related party 960,500 237,500
Current maturities of long-term debt
and capital leases 405,900 133,691
----------- -----------
TOTAL CURRENT LIABILITIES 5,244,595 3,359,237
LONG-TERM OBLIGATIONS
Debt 275,011 407,353
Deferred revenue 56,443 -
Capital lease 3,505,687 21,346
----------- -----------
TOTAL LONG-TERM OBLIGATIONS 3,837,141 428,699
----------- -----------
TOTAL LIABILITIES 9,081,736 3,787,936
----------- -----------
MINORITY INTEREST 412,812 257,569
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY
Convertible Preferred Stock, no par value,
10,000,000 shares authorized:
Series A: authorized - 2,725,000 shares
Issued and outstanding - 2,709,519 shares 3,952,250 3,952,250
Series B: authorized - 3,000,000 shares
Issued and outstanding - 3,000,000 shares 704,763 704,763
Common Stock, no par value,
Authorized - 40,000,000 shares;
Issued and outstanding - 7,138,100 shares 1,983,249 1,983,249
Accumulated deficit (7,562,074) (6,609,935)
----------- -----------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (921,812) 30,327
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY $ 8,572,736 $ 4,075,832
=========== ===========
See accompanying Notes to Consolidated Financial Statements
2
AMERICAS POWER PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-----------------------------------------------------------
2002 2001 2000
------ ------ ------
Revenues provided by services $ 8,180,070 $ 5,619,971 $ 124,213
Costs of services 7,043,404 5,208,179 106,447
----------- ----------- -----------
Gross Profit 1,136,666 411,792 17,766
Costs and Expenses:
Payroll and employee benefits 663,839 1,617,239 476,048
Sales development and financing fees 115,873 737,296 -
Management and consulting fees - 582,828 685,529
Write off of project contract costs - 109,864 -
Professional fees 203,707 522,411 458,830
Depreciation expense 249,120 218,083 10,157
Provision for doubtful accounts 252,837 - -
General and administrative 257,491 387,175 640,047
----------- ----------- -----------
Total Expenses 1,742,867 4,174,896 2,270,611
----------- ----------- -----------
LOSS FROM OPERATIONS (606,201) (3,763,104) (2,252,845)
Other items:
Other income 680 - -
Interest income 38,142 64,422 29,406
Interest (expense) (154,519) (77,473) (2,532)
----------- ----------- -----------
TOTAL OTHER (EXPENSE) INCOME (115,697) (13,051) 26,874
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (721,898) (3,776,155) (2,225,971)
Less minority shareholder's interest in earnings
of limited liability corporation 230,241 44,825 -
----------- ----------- -----------
NET LOSS ($952,139) ($3,820,980) ($2,225,971)
=========== =========== ===========
Net loss per share - basic and diluted ($0.13) ($0.46) ($0.31)
Weighted average number of common shares outstanding 7,138,100 8,291,393 7,094,321
See accompanying Notes to Consolidated Financial Statements
3
AMERICAS POWER PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Years Ended June 30, 2002, 2001 and 2000
Convertible Preferred Stock Retained Total
---------------------------------
Series A Series B Common Stock Earnings Stockholders'
--------- --------- -------------
Shares Amount Shares Amount Shares Amount (Deficit) (Deficit) Equity
------- ------- ------- ------- ------- ------- ---------- ----------------
BALANCE AT JUNE 30, 1999 753,9194 $ 752,250 (562,984) $ 189,266
Common Stock (no par value)
of Oak Brook Capital II,
Inc. 1,228,000
Correction of founders'
shares issued (210)
Common Stock retired at
time of merger (543,9194) (752,250) (752,250)
Common Stock issued at
time of merger 5,439,194 752,250 752,250
Shares issued to founders 1,175,000 11,750 11,750
Shares issued for
compensation and services 35,000 92,500 92,500
Preferred Stock issued and
exchanged for Common
Stock 2,709,519 $3,952,250 (521,694) (952,250) 3,000,000
Common Stock issued for cash 224,100 555,450 555,450
Net loss for year ended
June 30, 2000 (2,225,971) (2,225,971)
---------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 2,709,519 $3,952,250 7,579,600 $ 459,700 $(2,788,955) $ 1,622,995
See accompanying Notes to Consolidated Financial Statements.
4
AMERICAS POWER PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(CONTINUED)
Years Ended June 30, 2002, 2001 and 2000
Convertible Preferred Stock Retained Total
-----------------------------------
Series A Series B Common Stock Earnings Stockholders'
----------------- ----------------- ------------------
Shares Amount Shares Amount Shares Amount (Deficit) (Deficit) Equity
-------- -------- -------- -------- ------- -------- --------- ----------------
Balance at July 1, 2000 2,709,519 $3,952,250 7,579,600 $ 459,700 $(2,788,955) $ 1,622,995
Common Stock issued for:
Cash 1,600,000 2,000,000 2,000,000
Promissory note 800,000 1,000,000 1,000,000
Services 137,500 105,500 105,500
Purchase of Common Stock in
exchange for:
Promissory note and
Company assets (2,899,000) (1,488,714) (1,488,714)
Receivable from
related party (80,000) (93,237) (93,237)
Preferred Stock issued for
sales development and
financing fees 3,000,000 704,763 704,763
Net loss for year ended
June 30, 2001 (3,820,980) (3,820,980)
------------------------------------------------------------------------------------------------
Balance June 30, 2001 2,709,519 $3,952,250 3,000,000 $704,763 7,138,100 $ 1,983,249 $(6,609,935) $ 30,327
Net loss for year ended
June 30, 2002 (952,139) (952,139)
------------------------------------------------------------------------------------------------
Balance June 30, 2002 2,709,519 $3,952,250 3,000,000 $704,763 7,138,100 $ 1,983,249 $(7,562,074) $ (921,812)
================================================================================================
See accompanying Notes to Consolidated Financial Statements.
5
AMERICAS POWER PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flow from operating activities:
Net loss ($952,139) ($3,820,980) ($2,225,971)
Adjustments to reconcile net loss
to net cash used in operations:
Provision for depreciation and amortization 249,120 218,083 10,157
Provision for doubtful accounts 252,837 - -
Minority interest's profit 230,241 44,825 -
Gain on sale leaseback (680) - -
Loss on sale of equipment - 65,325 -
Preferred stock issued for sales development and financing - 704,763 -
Common stock issued for compensation and
services - net of Common Stock to be returned in 2000 - 105,500 104,250
Redemption of Common Stock in exchange for assets - 103,286 -
Change in accounts receivable (677,407) (36,873) (75,588)
Change in inventory - (95,273) -
Change in prepaid expenses and deferred items (74,199) (185,861) (278,131)
Change in accounts payable 425,689 638,893 182,004
Change in accounts payable to related party 749,385 - -
Change in accrued expenses 92,647 290,680 3,432
Change in deferred revenue 56,443 - -
Other, net (6,818) - -
----------- ----------- -----------
Total adjustments 1,297,258 1,853,348 (53,876)
----------- ----------- -----------
Net cash generated (used) in operations 345,119 (1,967,632) (2,279,847)
Cash flow from investing activities:
Purchase of fixed assets (4,164,940) (2,144,646) (802,334)
Payments from lessees under finance leases 100,737 146,424 68,735
Proceeds from sale of fixed assets - 12,475 -
----------- ----------- -----------
Net cash used in investing activities (4,064,203) (1,985,747) (733,599)
Cash flow from financing activities:
Proceeds from bank financings 3,667,365 1,552,442 -
Proceeds from related party borrowing 723,000 237,500 107,774
Proceeds of investment from minority shareholder - 387,746 -
Proceeds from issuance of common stock - 2,000,000 555,450
Payment for redemption of Common stock - (342,000) -
Payment on note relating to assets exchanged - (250,000) -
Proceeds from issuance of preferred stock - - 3,000,000
Repayment of debt obligation to bank (175,792) (132,131) (4,927)
Distribution to minority shareholder (75,000) (175,000) -
----------- ----------- -----------
Net cash generated from financing activities 4,139,573 3,278,557 3,658,297
Net Increase (Decrease) in cash 420,489 (674,822) 644,851
Cash at beginning of year 276,687 951,509 306,658
----------- ----------- -----------
Cash at end of year $ 697,176 $ 276,687 $ 951,509
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
6
AMERICAS POWER PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
Americas Power Partners, Inc. (the "Company" or "APP") was incorporated in April
1998 with a charter to provide on-site utilities for industrial, commercial and
institutional clients. The Company intends to become a leading independent power
producer engaged in the business of developing, acquiring, owning and managing
the operation of energy systems, including existing facilities and cogeneration
plants which produce electricity and thermal energy for sale under long-term
contracts. The Company seeks long-term all-requirements contracts generally in
the range of 12 to 25 years for energy and utility services with its clients.
The Company employs and partners with on-site utility specialists whose skills
include design, operation and financing of 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.
The Company has formed strategic alliances with several recognized energy
companies in the areas of power plant optimization, operations and maintenance,
fuel supply and electric power marketing. The Company's strategic partners bring
key skill sets to the development process and have provided the Company with
project opportunities from their established customer bases. The Company
generates revenue from fees produced from structuring and financing these energy
projects. All of the Company's customers are in the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its 50%-owned limited liability corporation, Armstrong-Americas I, LLC (the
"LLC"), which was incorporated in September 2000. The LLC owns the Company's
interests in assets relating to power plant system projects in place or in
progress for the Company's largest customer. The other member of the LLC is
Armstrong Service Inc. ("ASI"), a wholly owned subsidiary of Armstrong
International ("Armstrong"), an investor in the Company's Preferred Stock. The
limited liability corporation agreement provides that the Company has management
control over the operations of the LLC. All material intercompany accounts and
transactions are eliminated in consolidation.
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.
Change in Accounting Treatment
Beginning in April 2002, the Company began to account for certain billings for
operations and maintenance costs and utilities costs differently than it had
prior to that time. The Company has
7
elected to reclassify those billings to its customers as revenue and to expense
costs incurred for those services as costs of services. Prior to April 2002, it
had been the Company's policy to net these revenues and costs with the resultant
amount, if any, included as revenue or expense as the case may be. The Company
believes that this method of recognizing revenue and expense more accurately
reflects the operations of the business. As a result of this prior year
reclassification, the Statement of Operations for the year ended June 30, 2001
has been restated. Both revenues and costs of services have been increased by
$4,541,020 (which includes approximately $337,000 for operations and maintenance
costs and approximately $4,204,000 for utilities costs) to give effect to this
change. The net loss reported for June 30, 2001 has not been affected by this
change.
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 Company
maintains all its cash and cash equivalents in bank accounts which, at times,
may exceed federally insured limits. The Company 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.
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 Company's contracts are
capitalized and amortized over the life of the respective agreements.
Revenue Recognition
Most of the revenue recognized by the Company is earned pursuant to energy
service and utility requirement agreements as well as operations and maintenance
agreements that the Company executes with its customers. The Company 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 Company grants credit to all of its
customers.
Equipment and Fixtures
Equipment and fixtures, 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 lives of the assets as
follows: computer equipment - five years; office equipment - seven years; leased
equipment - the respective lease period.
Per Share of Common Stock
Income (loss) per common share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. When
dilutive, stock options, warrants and
8
convertible Preferred Stock are included as share equivalents using the treasury
stock method in the calculation of diluted earnings per share. For the years
ended June 30, 2002, 2001 and 2000, the diluted loss per share computation was
anti-dilutive; therefore, the amount reported for basic and diluted loss per
share is the same.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." In June
2000,the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and
Certain Hedging Activities an amendment of SFAS No. 133," (SFAS No. 138), which
was required to be adopted in years beginning after June 15, 2000. One of the
primary amendments to SFAS No. 133 establishes a "normal purchases and normal
sales" exception. This exception permits companies to exclude contracts, which
provide for the purchase or sale of something other than a financial derivative
instrument that will be delivered in quantities that are expected to be used or
sold by the entity over a reasonable period of time in the normal course of
business operations. The adoption of SFAS No. 133 as amended by SFAS No. 138
will not have an impact on the financial statements, as the Company does not
currently hold any derivative instruments.
In July 2001, the FASB issued SFAS No. 142, " Goodwill and Other Intangible
Assets," effective for years beginning after December 15, 2001. Under the new
rules, goodwill and certain intangible assets will no longer be amortized, but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
Adoption is required for fiscal years beginning after December 15, 2001. The
company does not believe that the adoption of this SFAS will have an effect on
its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which is effective for years beginning after May 15, 2002. Under the new
pronouncement, an inconsistency between the required accounting for
sale-leaseback transactions was eliminated. The Company does not believe that
the adoption of this SFAS will have an effect on its financial statements.
NOTE B - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
June 30
-------
2002 2001
---- ----
Cash in bank (overdraft) $ (8,490) $ (63,351)
Money market accounts 705,666 340,038
--------- ---------
$ 697,176 $ 276,687
========= =========
NOTE C - NOTES PAYABLE
The LLC has signed two interim promissory notes with a bank, totaling $847,115.
The notes provide for monthly interest payments computed at the bank's prime
rate and technically matured on September 30, 2002. The Company and the bank
have informally agreed to extend the term of the two notes pending the
occurrence of another transaction (currently expected to occur on November
9
30, 2002) that may provide for the re-financing and/or repayment of this
obligation. The notes are being used to finance part of a planned $2,500,000 in
capital expenditures for projects that are expected to be complete in fiscal
2003. Notwithstanding the aforementioned November 2002 transaction, both the
bank and the Company expect that all of the assets from this project will be
sold to the bank and then leased back to the Company under a long-term lease
agreement.
The Company is also obligated to a bank for a loan in the principal amount of
$407,352. The proceeds of that loan were used to finance the acquisition of an
optimization project in 2000. As of June 30, 2002, 35 monthly payments of
$13,593 remained including interest at 10.5% per annum. However, on September 5,
2002, the loan was re-negotiated resulting in a reduction in the interest rate
to 5.75% per annum. The term of the loan remained the same. However, as a result
of the interest rate reduction, the monthly payments were reduced to $12,798.
From March 2001 through November 2001, the Company borrowed a total of $810,500
from a company that is the investor in the Company's Preferred Stock. $573,000
of this amount was borrowed during the year ended June 30, 2002. The proceeds
were used to finance sales development fees, payroll and other administrative
costs. In addition, in April 2002, the Company borrowed an additional $150,000
from the same entity to finance the initial purchase of equipment for the
aforementioned $2,500,000 in capital projects. Both loans are evidenced by
notes. The notes mature on November 15, 2002 and they bear interest at prime
plus 2%.
Annual maturities for the Company's long-term debt exclusive of the related
party debt and the $847,115 in bank notes (which, as previously stated, are
expected to be converted into a long-term lease) for the next three fiscal years
are as follows:
Year Ending June 30
-------------------
2003 $ 132,341
2004 141,715
2005 133,296
---------
Total Long term debt $ 407,352
=========
NOTE D - LEASES
Equipment Leased to Others
The Company leases equipment to customers under optimization and monetization
agreements. Some of these agreements meet the criteria of a financing lease and
other agreements are classified as operating leases.
Future minimum lease payments receivable under financing leases and
non-cancelable operating leases as of June 30, 2002 and the net investment in
the financing leases on that date are as follows:
Year Ending June 30, Financing Leases Operating Leases
-------------------- ---------------- -----------------
2003 $ 870,708 $ 568,932
2004 870,708 568,932
2005 801,973 568,932
2006 705,744 568,932
2007 705,744 568,932
Thereafter 12,644,996 5,141,121
----------- ------------
Total Minimum lease payments $16,599,873 $ 7,985,781
============
Less: unearned interest income 11,730,120
10
Less: amount representing incomplete
projects (See (a) below) 2,507,147
-----------
Net investment in financing leases $ 2,362,606
===========
(a) Minimum lease payments include future amounts due for
projects that the Company has not completed. A future
liability for the cost of those projects is created on the
books and records of the Company at the time that the
finance leases are recorded. However, at June 30, 2002,
$2,507,147 of that liability had not yet been incurred,
even though equipment is being used and lease payments are
being made. Thus, the Company has reduced its net
investment in finance leases to reflect the incomplete
projects.
Lease Obligations
The Company has entered into leases for equipment some of which are classified
as capital leases and certain other leases that are operating leases. At June
30, 2002, the future minimum lease payments under these leases are as follows:
Year Ending June 30 Operating Leases Capital Leases
------------------- ---------------- --------------
2003 $ 12,337 $ 558,059
2004 6,101 531,483
2005 6,101 531,483
2006 2,034 531,483
2007 0 531,483
Thereafter 0 2,690,192
-------------------------------
Total minimum lease payments $ 26,573 5,374,183
===========
Less amounts representing interest 1,594,937
----------
Present value of net minimum lease payments 3,779,246
Less current maturities 273,559
----------
Long-term capital lease obligations $3,505,687
==========
During fiscal 2001, the Company entered into a five-year lease agreement for its
corporate office space with a related party firm owned by one of the Company's
directors. The lease provided for minimum annual rentals of $122,500. This lease
was cancelled in June 2001 and the Company and the related party consulting firm
agreed to lease the space for a reduced amount on a month-to-month basis.
Rental expense incurred for operating leases was $18,919, $124,279 and $44,300
for the years ended June 30, 2002, 2001 and 2000, respectively.
On June 1, 2002, the Company entered into a "sale and leaseback" of one of its
power plant equipment projects with a bank. The assets were sold for $3,800,000
resulting in a gain of approximately $65,000. This gain has been deferred and
will be amortized over the life of the lease. No cash was realized from this
sale as the initial purchase of the assets by the Company had previously been
financed by the same bank using interim notes. As of June 30, 2002, 95 monthly
rent payments of $44,290 remained with a balloon payment of $1,140,000 due after
the 95/th/ payment.
11
The Company has accounted for the leaseback as a capital lease obligation. The
interest rate implicit in the lease is 7.7% per annum. The assets are included
in Leased Equipment and the capital lease obligation is included in Long-term
obligations on the Balance Sheet of the Company.
NOTE E - DISPOSITION OF CERTAIN ASSETS AND
TERMINATION OF EMPLOYMENT AGREEMENTS
In January 2001, the Company entered into an agreement that provided for the
following:
. The redemption of 1,699,000 shares of Common Stock from the Company's
chief executive officer and its chairman of the board of directors and
another employee in exchange for the transfer of certain of the
Company's assets to a newly formed company. The assets included certain
accounts receivable, development rights, and engineering and
environmental studies net of all related liabilities and certain office
equipment and fixtures, plus cash and a note totaling $592,000.
. The resignation of the chief executive officer and four other
employees, effective January 15, 2001. The chief executive officer's
employment and deferred compensation agreements were terminated and the
Company accepted and returned to the treasury 1,200,000 shares of
. Common Stock in full satisfaction of the chief executive officer's
$1,000,000 promissory note payable to the Company.
. Provisions for cooperation between the two companies on certain future
joint projects, as well as non-compete provisions on others.
NOTE F - INCOME TAXES
The deferred tax assets, net of valuation allowances, in the accompanying
balance sheets includes the following components:
June 30,
------------------------
2002 2001
----- -----
Deferred tax assets 2,811,390 2,465,414
Valuation allowance (2,811,390) (2,465,414)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
The Company has loss carry-forwards totaling $6,838,616 that may be offset
against future taxable income. If not used, the carry forwards will expire as
follows:
Year Ending June 30
-------------------
2019 $ 115,140
2020 2,302,299
2021 3,369,251
2022 1,051,926
------------
$ 6,838,616
============
12
Deferred tax assets are comprised of primarily net operating loss
carry-forwards, fixed assets, provision for doubtful accounts and organization
costs.
The income tax provision differs from the expense that would result from
applying federal statutory rates to income (loss) before income taxes because
the aforementioned valuation allowance has been provided to reduce the deferred
tax assets to zero.
NOTE G - RELATED PARTY TRANSACTIONS
In 1999, the Company entered into a three-year contract with a management
consulting firm owned by two officers and directors of the Company that provided
for payment of various consulting fees. The contract provided for minimum
monthly consulting fees of $15,000 and an annual expense allowance of $125,000.
The agreement also provided for additional minimum consulting fees totaling
$150,000 upon completion of a reverse merger plus 550,000 shares of the
Company's Common Stock. This contract was amended in fiscal 2001 to provide for
a monthly consulting fee of $25,000 effective January 1, 2001. The contract was
cancelable by either party on 30-days notice, and the agreement was subsequently
terminated effective June 30, 2001.
The Company also entered into independent contractor agreements in 1999 with
three individuals who were officers and directors of the Company. These
agreements provided for consulting services related to business development and
the day-to-day management of the Company. Each agreement provided for a monthly
payment to the independent contractor of $10,000, plus an automobile allowance.
These contracts were cancelled in November 2000.
In September 2000, the Company signed an executive employment agreement with its
former chief executive officer. Concurrently, the former officer acquired
2,400,000 shares of Common Stock for $2,000,000 cash and a $1,000,000 promissory
note. The note was secured by 1,200,000 of the underlying shares. As part of
this transaction, the officer agreed to defer the payment of his first year
salary. In January 2001, that agreement was cancelled and the note was deemed to
have been repaid with the return to the treasury of 1,200,000 shares of common
stock. See Note E for further details.
Later in 2000, the board of directors engaged a special committee to review
related party transactions that occurred during a period when all of the
Company's directors also were consultants or employees of the Company. In
November, 2000, the board approved the report of the committee. Among other
matters, the board authorized the following:
(1) Reimbursement of a consulting fee of $300,000 that the Company had
paid to a consulting firm in connection with the raising of preferred
equity and fees of $205,770 relating to a reverse merger that had
occurred in 1999. The Company accrued this reimbursement during the
year ended June 30, 2000 and was reimbursed in the year ended June 30,
2001;
(2) The board agreed to renegotiate payments for past services and
amend and extend the contract with the related party consulting firm
referred to above. In consideration for this, the consulting firm
agreed to reduce its past consulting fees by $306,639, the recovery of
which the Company accrued as of June 30, 2000. In April 2001, the board
agreed to forgive that outstanding balance from the consulting firm in
consideration for cancellation of past due rent on the Company's
corporate office space, early termination of the related office lease,
and the cancellation of 250,000 options for Company stock owned by the
related party firm;
13
(3) The re-negotiation of an employment contract of an officer and
director of the Company that resulted in a receivable to the Company of
$93,237. This receivable was satisfied in the year ended June 30, 2001
by the transfer of 80,000 shares of Common Stock to the treasury.
Effective July 1, 2001, the Company entered into a Leased Employment Agreement
with the Company's preferred stock investor. The agreement provided for the
investor to provide a full time individual to assume the role of President and
Chief Operating Officer. In addition, with respect to the Chief Executive
Officer, effective October 1, 2001, the Company entered into a second Leased
Employment Agreement with the a consulting firm that is partially owned by the
Chief Executive Officer. The agreement provided for the firm to provide a full
time individual to assume that role. This individual also fulfills the role of
Chairman of the board of directors. The Company recorded $354,375 as expense
during the year ended June 30, 2002 under these two contracts. This amount is
included in Payroll and employee benefits in the Consolidated Statements of
Operations.
During the fiscal years ended June 30, 2002, 2001 and 2000, the Company incurred
the following expense (net of recoveries in fiscal 2000 referred to above) in
connection with the aforementioned consulting agreements:
Years Ended June 30,
--------------------------------
2002 2001 2000
---- ---- ----
Leased employee fees $354,375 $ - $ -
Management consulting fees and expenses 276,466 163,480
Consulting regarding merger - - 205,770
Independent contractor fees - 84,500 353,000
Write-off of receivable from related party - 298,402 -
-------- -------- --------
TOTAL $354,375 $659,368 $722,250
======== ========= ========
In January 2000, the Company issued 2,709,519 shares of its Series A Preferred
Stock to a company, certain officers of that company and a subsidiary of that
company. (The subsidiary and the Company have entered into "partnering"
arrangements in connection with the operation of certain contracts with the
Company's customers.) In exchange for the Preferred Stock, the Company received
521,694 shares of its previously issued Common Stock, plus $3 million in cash.
The Series A Preferred Stock Purchase Agreement (the "Series A Agreement")
provides that the Series A preferred stock is convertible into the Company's
common stock at a conversion price that ensures that, upon conversion, the
previous preferred stockholders retain the same 21.55% common stock ownership
interest upon the issuance of an additional $2 million in common stock and/or
equivalents, as existed at the time the Agreement was signed. Each share of
Series A preferred stock will automatically convert into common stock, if not
previously converted, on the earlier to occur of January 31, 2005 or a change in
control of the investor company.
In June 2001, the board of directors approved an amendment to the Company's
articles of incorporation authorizing the issuance of 3 million shares of Series
B preferred stock and the signing of the Series B Preferred Stock Purchase
Agreement (the "Series B Agreement") with the same investor referred to above.
The shares were issued in exchange for the forgiveness of sales development and
financing costs (relating to loans and guarantees) aggregating $704,763. The
terms of the Series B Agreement are similar to the aforementioned Series A
Agreement, in that the Series B preferred stockholders retain their same19.6%
Common Stock ownership interest upon the issuance of common shares and/or
equivalents aggregating at least $5 million through February 28, 2002 as
14
existed at the time the Series B Agreement was signed. The automatic conversion
provision is effective, if not previously converted, on the earlier of June 28,
2006 or a change in control of the investor company.
Optimization and monetization projects as well as operations and maintenance
work that the Company performed for its customers during the fiscal years ended
June 30, 2002, 2001 and 2000 included $5,179,039, $1,747,738 and $693,434,
respectively, that was billed to the Company by ASI. Of these amounts,
$1,217,070, $449,164 and $22,123 was recorded as revenue and expense in the
years ended June 30, 2002, 2001 and 2000, respectively. As of June 30, 2002 and
2001, the Company owed $1,725,745 and $976,360, respectively, to related parties
primarily in connection with these items.
At June 30, 2001, the Company accrued the future payroll and benefit costs of
$280,000 associated with the employment contract of a former officer/director.
This amount is included in Payroll and employee benefits for the year ended June
30, 2001 in the Consolidated Statements of Operations. The Company paid $268,333
of this amount during the year ended June 30, 2002.
NOTE H - CUSTOMER CONCENTRATION
Sales to the Company's largest customer amounted to 93.8% of total sales for the
year ended June 30, 2002, 90.8% for the year ended June 30, 2001 and 0% for the
year ended June 30, 2000. Receivable balances for that customer amounted to
73.9% and 54.8 % of total receivables as of the year ended June 30, 2002 and
2001, respectively.
NOTE I- STOCK OPTIONS
The Company has granted stock options to certain key employees, consultants and
board members in connection with the November, 2000 Equity Incentive Plan
("Plan"), which provides for the grant of incentive stock options, nonqualified
stock options, restricted stock options and other stock awards. Under the Plan,
a maximum of 3,500,000 options to purchase shares may be granted at prices not
less than 100% of the fair market value of the Common Stock subject to option on
the date of grant. The vesting terms range from immediate to three years. The
following summarizes the options activity during the years ended June 30, 2002
and 2001:
June 30, 2002 June 30, 2001
--------------------- -----------------------
Number Wgt. Avg. Number Wgt. Avg.
of Shares Exercise of Shares Exercise
--------- Price ---------- Price
--------- ---------
Number outstanding 2,142,645 $0.82 2,731,746 $1.25
at beginning of year
Granted during the year 40,000 $0.50 1,100,000 $0.50
Granted during the year - - 100,000 $0.25
Forfeited during the year (965,045) $0.98 (1,789,101) $1.25
-------------------------------------------------
Number outstanding
at end of year 1,217,600 $0.68 2,142,645 $0.82
========= ===== ========= =====
Able to be exercised
at end of year 1,043,400 $0.70 1,248,400 $0.93
========= ===== ========= =====
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The options outstanding and exercisable by price range as of June 30, 2002 were
as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ---------------------
Number Weighted
Outstanding Average Weighted Weighted
Range of as of Remaining Average Average
Exercise Prices June 30, 2002 Contractual Life Exercise Price Shares Exercise Price
--------------- ------------- ---------------- -------------- ------ --------------
$ 0.25 100,000 9.0 Yrs. $ 0.25 100,000 $ 0.25
0.50 795,000 8.8 Yrs. 0.50 625,000 0.50
1.25 322,600 8.4 Yrs. 1.25 318,400 1.25
--------- -------------------------------------------------------------
1,217,600 8.7 Yrs. $ 0.68 1,043,400 $ 0.70
========= ========= ====== ========= ======
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method under Accounting Principles Opinion No. 25,
Accounting for Stock Issued to Employees. Consequently, compensation expense
relative to stock issuances represents the excess, if any, of the fair market
value of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. If compensation expense for the
Company's stock options issued in the fiscal year ended June 30, 2002 and 2001
had been determined based on the fair value method of accounting, as defined in
Statement of Financial Accounting Standards No, 123, Accounting for Stock-Based
Compensation, the Company's net loss and net loss per share would have
increased, as indicated in the following:
2002 2001
---- ----
Net loss - as reported $(952,139) $(3,820,980)
Net loss - pro forma $(996,295) $(4,633,346)
Net loss per share - as reported:
Basic and diluted $ (0.13) $ (0.46)
Net loss per share - pro forma:
Basic and diluted $ (0.14) $ (0.56)
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes Option Pricing Method with the following assumptions:
2002 2001
---- ----
Expected dividend yields 0.00% 0.00%
Expected stock price volatility 2.704% 2.53%
Risk-free interest rates 4.09 - 11.63% 9.38-12.0%
Expected life of options (in years) 2-5 2-7
NOTE J - LIQUIDITY
Since its inception in April 1998, the Company has incurred an aggregate net
loss of $7,562,074 and at June 30, 2002, the Company has a working capital
deficiency of $3,044,000. However, the Company reduced its net loss over 75%
from $3,820,980 in the year ended June 30, 2001 to $952,139 in the year ended
June 30, 2002. 51% of the current liabilities and $2,686,000 of the working
capital deficiency is attributable and due to related parties that are also
significant investors in the Company's preferred stock. In addition, $847,115 of
current liabilities is currently in the form of short-term construction notes
issued to a bank. As previously noted, these notes are not expected to
16
be called by the Bank in the next year. Rather, they are likely to convert into
long-term obligations upon the completion of the construction later in fiscal
2003.
Notwithstanding these mitigating factors, the Company, nevertheless, has been
forced to rely in part on advances from a related party and distributions from
the LLC to finance its operations and sales development activities. Future
projects are anticipated to require debt financing and equity capital
investment. Historically, the Company has not had difficulty finding bank
financing for its projects as the cash flow coverage relative to the loans have
been adequate to induce lenders to finance the Company's projects. The Company
has actively been searching for and has identified certain potential strategic
and equity partners. In addition, the Company has made specific plans and is
attempting to execute a strategy to insure its future viability. The Company is
confident that it will be able to execute its plans and be able to attract and
retain strategic and equity partners. But, there can be no assurance that it
will do so.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. While the Company is
expending its best efforts to consummate the raising of equity capital, there
can be no assurance that it will be successful in doing so. The aforementioned
losses and deficit raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE K - SUPPLEMENTAL DISCLOSURE
The following table presents certain supplemental information concerning the
Company's Consolidated Statements of Cash Flows:
Years Ended June 30,
---------------------------------
2002 2001 2000
---- ---- ----
Interest expense paid $104,634 $ 73,185 $ 2,532
Additional non-cash financing and investment
activities:
Capital lease obligations for equipment - 34,200 27,578
Common stock acquired in exchange for
reduction of receivable from
related party - (93,237) -
Common stock issued in exchange for
promissory note - 1,000,000 -
Common stock acquired in exchange for
cancellation of promissory note - (1,000,000) -
NOTE L - RECLASSIFICATION
For comparability, the 2001 and 2000 financial statements reflect
reclassifications where appropriate to conform to the financial statement
presentation used in 2002.
17