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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended December
31, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
____ to ____
Commission file number 0-13865
ICC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2368845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
441 North 5th Street, Suite 102
Philadelphia, Pennsylvania 19123
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 625-0700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
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 periods 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 21, 1997 was $93,313,956.
As of March 21, 1997, 21,337,654 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Definitive Proxy Statement for its 1997 Annual Meeting to be filed
within 120 days of the Company's fiscal year ended December 31, 1996 is
incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
ICC Technologies, Inc. (the "Company") through its joint venture
Engelhard/ICC ("the Partnership") with Engelhard Corporation ("Engelhard"),
designs, manufactures and markets innovative climate control systems to
supplement or replace conventional air conditioning systems. The Partnership's
climate control systems are based on proprietary desiccant technology initially
developed by the Company, licensed honeycomb rotor technology and Engelhard's
patented titanium silicate desiccant, ETS(TM). The Partnership's climate control
systems are designed to address indoor air quality, energy and environmental
concerns and regulations currently affecting the air conditioning market. The
Partnership currently markets its systems to certain targeted applications
within the commercial air conditioning market in North America and Asia-Pacific.
The Company believes that the Partnership's climate control systems create
a more comfortable environment, more effectively control humidity, improve
indoor air quality, reduce energy consumption, reduce operating costs, address
certain environmental concerns and provide customers a choice from a variety of
energy sources such as natural gas, steam, waste heat or electricity.
The Company was incorporated in 1984 under the name "International
Cogeneration Corporation." Initially, the Company designed, manufactured and
sold cogeneration equipment. The Partnership's proprietary desiccant cooling
design was initially developed by the Company as an extension of its
cogeneration business. In 1990, the Company changed its strategy and began to
design, manufacture and market climate control equipment based upon desiccant
technology, at which time the Company also changed its name to "ICC
Technologies, Inc." The Company has since discontinued its cogeneration
business.
In May 1992, the Company entered into a joint development agreement with
Engelhard in order to design a desiccant-based climate control system utilizing
ETS(TM). The Company and Engelhard formed the Partnership in February 1994,
which replaced the joint development agreement and succeeded to the
desiccant-based climate control business which had been conducted by the
Company. In connection with the formation of the Partnership, the Company
granted Engelhard an option to acquire the Company's interest in the Partnership
in installments commencing on December 31, 1997 and extending through December
31, 2000. See "Business - The Partnership".
MARKET OVERVIEW
The Company estimates that the worldwide annual market for residential and
commercial air conditioning systems was approximately $30 billion in 1996 and is
expected to grow to approximately $39 billion by the year 2000. The
Asian-Pacific Market is identified as the fastest growing region for residential
and commercial air conditioning systems. The Partnership has specifically
targeted certain applications within the commercial air conditioning market in
North America and Asia-Pacific. The Company estimates that the worldwide
commercial air conditioning market is expected to grow to approximately $13
billion by the year 2000, and the Company expects the Partnership's
desiccant-based systems to compete in a broader segment of this market as
awareness and acceptance of the Partnership's systems grow and their initial
cost declines.
The Company estimates that the Asian-Pacific commercial air conditioning
market was approximately $4 billion in 1996 and is expected to increase to
approximately $6 billion by the year 2000. Many of the Asian-Pacific countries
are located in humid climates where the Partnership's climate control systems
are most effective. The Asian-Pacific market is dominated by Japan, which
predominantly utilizes natural gas powered air conditioning systems. As in
Japan, many countries throughout Asia-Pacific are experiencing shortages of
electricity, creating a demand for air conditioning systems powered by
alternative energy sources.
The Company estimates that the North American commercial air conditioning
market was approximately $3 billion in 1996 and is expected to increase to
approximately $4 billion by the year 2000. Air conditioning systems in North
America predominately utilize electric powered systems. The Partnership's
strategy is to continue to target commercial applications in which humidity
control, indoor air quality and energy consumption
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are important health issues or a significant cost of business. Indoor air
quality has become an important issue currently affecting the air conditioning
industry in the United States. Fungal and microbial growth in damp duct work and
the build-up of pollutants from furniture, appliances and other equipment in
recirculated air can lead to unhealthy indoor environments sometimes identified
as 'Sick Building Syndrome.' To combat this problem,the American Society of
Heating, Refrigeration and Air Conditioning Engineers ("ASHRAE") issued
standards to increase the amount of fresh air brought into buildings by as much
as 200 to 300% as compared to prior ventilation standards. These standards have
been incorporated into many state and local building codes throughout the United
States for new construction. New revised standards are under consideration to
limit space relative humidity to less than sixty percent. See "Business --
Government Regulations."
International accords which address various energy and environmental
concerns are also having an impact on air conditioning markets throughout the
world. Under the 1987 Montreal Protocol, as amended, approximately 130 signatory
countries have agreed to halt all production of ozone-destroying CFCs commencing
in 1996. As a result, the Company believes there is an increased demand for new
equipment to replace CFC-based air conditioning equipment. See "Business --
Government Regulations."
DESICCANT TECHNOLOGY
Comfort is directly affected by both temperature and humidity. People are
generally more comfortable in less humid environments. Lower humidity allows
water to evaporate from the skin, causing a cooling effect. Conventional air
conditioning systems reduce indoor temperature and humidity by cooling air. In
conventional air conditioning humidity control is principally a by-product of
the cooling process when moisture condenses on the cooling coil. In conditions
where significant humidity reduction is desired, conventional air conditioning
systems must often cool indoor air below desired levels, thereby consuming
additional energy. Desiccant systems, however, remove humidity independently of
cooling without overcooling the air, thereby generally consuming less energy
than conventional air conditioning.
Desiccant technology has been in existence for more than 50 years. A
desiccant is a generic term for any drying agent that removes moisture from the
air. Prior desiccant-based equipment met limited success and market acceptance
outside of industrial drying applications because of less effective desiccants
and rotors, higher maintenance costs, inefficient designs, and high initial and
operating costs. The Company believes that the Partnership's climate control
system design, which incorporates Engelhard's ETS(TM) desiccant and a small
cell, honeycomb substrate material used in the manufacture of the Partnership's
desiccant and heat exchange rotors, has principally overcome these problems and
in many applications is an energy efficient and environmentally safer supplement
or alternative to conventional air conditioning systems.
ETS(TM) is a white crystalline powder, classified as a molecular sieve.
Molecular sieves are capable of differentiating chemicals on a
molecule-by-molecule basis and, therefore, can be designed to remove single
compounds, such as water, from liquids and gases. ETS(TM) is unique in its
capabilities to release moisture at lower regeneration temperatures, thereby
requiring less energy than other desiccants. The heat necessary to remove the
moisture can be provided by almost any source of heat capable of generating
temperatures of at least 140(Degree)F. As a result, the Partnership's systems
can use a wider variety of heat sources, including waste heat, than other
desiccant-based systems.
The Partnership's systems utilize two wheel-shaped rotors with honeycomb
passages. The honeycomb substrate material used to make the rotors is
manufactured through a licensed proprietary process for manufacturing
lightweight structural honeycomb core. This substrate material offers lighter
weight, superior airflow and more efficient heat and moisture transfer than the
corrugated rotors used by the Partnership's competitors. The Company believes
that the Partnership's honeycomb rotors are unique and would be difficult and
costly for competitors to duplicate.
The first rotor in the Partnership's two rotor systems is coated with
ETS(TM) and the second serves as a heat exchange rotor. Recirculated air (air
from the building), or up to 100% fresh air, is first dehumidified by passing it
through a slowly rotating rotor treated with ETS(TM) that adsorbs airborne
moisture, and thereby raises the temperature in proportion to the reduction in
humidity. As the desiccant rotor rotates to the other side of the unit, heated
air is blown through the desiccant rotor which releases the moisture from the
ETS(TM), regenerating the desiccant rotor for further dehumidification. The
warm, dehumidified air is next cooled by passing it through a similar rotor
which has not been coated with ETS(TM). Depending upon climatic conditions, the
temperature of the
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process air is generally reduced to a temperature approximately 10% lower than
outside air temperature. The heat exchange rotor is cooled by an evaporative
cooler on the other side of the unit. The moderate temperature, dry air can be
cooled further by partially rehumidifying the air through an evaporative cooler,
which does not use any refrigerants, or a smaller cooling coil than would be
required by a conventional air conditioning system. The process air is then
delivered to the building by the normal system of fans and ducts.
The Company believes that the Partnership's systems provide the following
features and benefits:
- More Effective Control of Humidity -- The Partnership's systems are
more effective at controlling humidity than conventional,
refrigerant-based air conditioning systems which control humidity
primarily as a by-product of the cooling process when moisture
condenses on the cooling coil. As a result, in conditions where
significant humidity reduction is desired, conventional air
conditioning systems must often cool air below desired temperature
levels. Drier air is generally more comfortable for a building's
occupants and is more efficient to cool. Humidity control is also
important in a variety of commercial applications, such as
supermarkets, and in certain manufacturing processes.
- Improved Indoor Air Quality -- Ventilation standards recommended by
ASHRAE and incorporated into many state and local building codes
throughout the country for new building construction now require
that as much as 200 - 300% more fresh air be circulated into
buildings compared to prior ventilation standards to reduce indoor
air pollutants associated with "Sick Building Syndrome." The
Partnership's climate control systems are designed to process the
humidity introduced by increased ventilation and, accordingly,
enable a building to meet or exceed these standards. In addition,
lower humidity levels reduce airborne bacteria, mold, mildew and
fungi, another major source of indoor air quality problems.
- Energy Efficient and Cost Effective -- Less humid air requires less
energy to cool than more humid air. By dehumidifying air before
cooling, the Partnership's systems, even with a post-cooling option,
consume less energy and are more cost effective to operate than
conventional air conditioning systems alone. As a supplement to
conventional air conditioning, by first dehumidifying the air, the
Partnership's systems are designed to improve the efficiency of
existing conventional air conditioning and thereby result in
downsizing of total air conditioning requirements.
- Versatile and Reliable -- The Partnership's systems are available in
natural gas, electric, steam or waste heat models and in several
sizes which process from 2,000 to 13,000 cubic feet of air per
minute. The ability to choose from a variety of energy sources
allows customers to select the most cost-effective energy source in
their area at the time of purchase. The systems are also expected to
require less maintenance than conventional equipment because of
simplicity of design and fewer moving parts.
- Environmentally Safer -- Conventional air conditioning systems
utilize refrigerants, such as CFCs, HCFCs and HFCs, which damage
stratospheric ozone or contribute to global warming. Because the
Partnership's systems dehumidify the air before it is cooled by a
post-cooling option in the system or in conjunction with a
conventional air conditioning system, the cooling coil and
compressor included generally are smaller, than would otherwise be
required in a conventional air conditioning system, thereby
utilizing less refrigerant.
- Year-round Performance -- The Partnership's systems provide
year-round indoor climate control. In hot, humid weather they supply
cool, dry air. In cool, "clammy" weather they supply warm, dry
air. In cold weather the systems can supply heat.
BUSINESS STRATEGY
The Partnership's strategy is to target specific applications within the
commercial air conditioning market in which humidity control, indoor air quality
and energy consumption are important health issues or a significant cost of
business. Although the Partnership markets its systems primarily as a supplement
to conventional air conditioning systems, the Company believes that as market
awareness and acceptance grows and the initial price of its systems declines,
the Partnership will market its climate control systems as a replacement for
conventional air conditioning systems in a broader segment of commercial
applications. The Partnership is also attempting to develop a residential unit
with one of its international joint venture partners but currently does not have
a residential unit to offer for sale. The Partnership is pursuing the following
strategies:
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- Establish Strategic Relationships with Domestic and International
Manufacturers and Distributors of Air Conditioning Equipment -- The
Partnership has developed strategic relationships with various major
corporations in Asia-Pacific and is in discussions with a number of
domestic and international manufacturers and distributors of air
conditioning equipment. During 1996 the Partnership signed a joint
market development agreement with Carrier's Asia-Pacific Operations
(APO). The agreement, which covers most of the Asia-Pacific market,
extends through March 1998 and is intended to allow Carrier APO to
make a comprehensive assessment of the marketability of the
Partnership's desiccant-based air conditioning and climate control
systems. The Partnership has a licensing agreement with Chung-Hsin,
Taiwan's largest air conditioning manufacturer The Partnership plans
to enter into additional licenses or joint venture arrangements. The
Partnership has marketing relationships with Samsung in South Korea
and Nichimen in Japan. Japan and South Korea are the first and sixth
largest air conditioning markets, respectively. The Partnership is
also working with AB Air Technologies Ltd. ("AB Air") in Israel to
develop the market in Israel. AB Air is building systems in Israel
using the Partnership's proprietary rotors. The Partnership believes
that the reputation and resources of its licensees and joint venture
partners will accelerate market acceptance and awareness for its
products.
- Reduction of Manufacturing Costs -- The Partnership reduced the cost
of its systems in the latter half 1996 and expects to further reduce
manufacturing and material costs through production innovations,
efficiencies and materials improvement and substitutes.
- Acquisition of an Air Conditioning Manufacturer -- The Company
believes that the acquisition of an air conditioning manufacturer is
important to the Partnership's overall strategy of developing market
awareness of its products, increasing production and distribution
capabilities and offering its customers a more complete solution to
their climate control needs. Currently, there are no firm
commitments or agreements to acquire an air conditioning
manufacturer and there can be no assurance that any agreements will
be executed or any acquisition will be consummated.
- Target Specific Commercial Applications -- The Partnership's
strategy is to continue to market its climate control systems to
users in which humidity control, indoor air quality and energy
consumption are important health issues or a significant cost of
business. The primary applications targeted by the Partnership and
the benefits that its systems can provide include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Segment Benefits
- --------------------------------------------------------------------------------
<S> <C>
Supermarkets Reduces frost and condensation on refrigerated
goods, which improves appearance and extends shelf
life as a result of fewer defrost cycles. Also,
improves comfort in refrigerated aisles and
increases efficiency of refrigerated cases.
- --------------------------------------------------------------------------------
Schools Reduces bacteria and fungus in the building and its
heating, ventilation and air conditioning ("HVAC")
system.
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Theaters Improves comfort and indoor air quality.
- --------------------------------------------------------------------------------
Restaurants Provides building pressurization to compensate for
concentration of kitchen exhaust and reduces
cooking odors and improves comfort.
- --------------------------------------------------------------------------------
Health Care Reduces bacteria and fungus in the building
and its HVAC system. Allows for warmer temperatures
at lower humidity for greater comfort of patients,
doctors and other health care workers.
- --------------------------------------------------------------------------------
Hotels Reduces mold and mildew and improves comfort.
- --------------------------------------------------------------------------------
Manufacturing Reduces concentration of volatile organic compounds
generated in the manufacturing process and improves
comfort for workers. May be particularly important
to humidity-sensitive manufacturing processes.
- --------------------------------------------------------------------------------
</TABLE>
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PRODUCTS
The Partnership currently manufactures and sells two types of
desiccant-based climate control systems, the "Desert Cool(TM)" and "Desert
Breeze(TM)," which differ based upon function and energy source. All of the
systems now incorporate the Partnership's proprietary honeycomb rotors and
Engelhard's ETS(TM). The Partnership's systems are currently being marketed as
energy efficient supplements to enhance the performance of, or partially
replace, existing conventional air conditioning systems. The Desert Cool(TM)
systems typically operate on natural gas, but are also available in steam or
waste heat operated models, and also have gas heating capabilities. Consistent
with general industry practices, the Partnership warrants its systems for one
year from the date of installation and warrants its desiccant and heat exchange
rotors for an additional four years. No significant warranty claims have been
experienced by the Partnership or the Company to date.
The Desert Cool(TM) system is designed to cool commercial applications
with the flexibility of utilizing any combination of circulated or fresh air.
The Desert Cool(TM) can displace up to 250 tons of conventional cooling with the
number of units required for each application depending on the size and
configuration of the building. The Desert Cool(TM) systems also includes the
larger systems which were formerly offered as DESI/AIR(R) systems.
The Desert Breeze(TM) system, the first all-electric desiccant-based
climate control system prototype was introduced in 1995. An all-electric model
is important to compete in those markets where electricity is the only or most
practical source of energy. Currently, the majority of air conditioning systems
worldwide are electric powered. The Desert Breeze(TM) product line is being
further expanded and will now be actively marketed in 1997 whereby it is
anticipated it will be able to displace up to 70 tons of conventional cooling.
Desert Breeze(TM) is designed to cool commercial applications with the
flexibility of utilizing either circulated or fresh air. Unlike the
Partnership's natural gas systems, the electric units combine desiccant
technology with conventional coils and compressors which provide heat to
regenerate the desiccant rotors and partially cool the process air. An
additional conventional coil may be added to provide further post-cooling as in
the natural gas units. The system can use smaller compressors with HCFC
refrigerant than conventional air conditioning equipment, reducing the amount of
refrigerant required and power usage and peak kilowatt demand. The system is
also currently designed to allow for use of HFC refrigerant.
SALES AND MARKETING
Currently, the Partnership markets its systems to specific applications in
the commercial air conditioning market in which its systems offer the greatest
advantages compared to conventional air conditioning systems. To date, the
Partnership has marketed its systems primarily as a supplement to, or partial
replacement of, conventional air conditioning systems. Since the Partnership's
products utilize an emerging technology, potential customers carefully evaluate
and, in most cases, purchase the Partnership's systems for testing before
committing to further purchases. The Partnership sells its systems principally
to end users either directly or through independent manufacturers
representatives who purchase units at a discount or receive a commission. The
Partnership has developed separate plans and departments for domestic and
international sales and marketing.
United States. The Partnership employs a direct sales staff of six sales
people and approximately 50 independent manufacturers' representatives to market
its systems in the United States. The direct sales staff markets the systems to
supermarket chains and national retailers, and oversees the manufacturers
representatives. The Partnership's manufacturers' representatives market to
regional customers and to national accounts which are not assigned to the direct
sales staff. At present, a majority of the manufacturers' representatives are
located in the southern and eastern regions of the country. The Partnership
plans to increase its sales staff and upgrade its manufacturers' representative
network.
Gas and electric utilities have supported the Partnership's efforts to
create market awareness and acceptance for the Partnership's systems. The Gas
Research Institute has funded the independent testing results have validated the
performance of ETS(TM) in the Partnership's natural gas systems. The Department
of Energy is currently funding the testing of the Partnership's rotors for
validation of performance. In addition, gas utilities sponsored the initial test
sites for the Desert Cool(TM) system, and have formed a consortium, under the
auspices of the American Gas Cooling Center to promote the Partnership's natural
gas systems. The consortium, with various utilities currently participating,
provides financial incentives and sponsors training programs for engineers and
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building owners. The Desert Cool(TM) system became the first desiccant-based
unit ever to receive the 'Blue Star' certification for safety and quality from
the American Gas Association.
Similarly, several electric companies and research organizations are
promoting the Desert Breeze(TM) system. Southern Company, a major electric
company in the southeastern United States, assisted in the development of the
Desert Breeze(TM) system, and various electric utilities are participating in
various projects that promote the Desert Breeze(TM) system. The Company has also
received financial support from the Electric Power Research Institute for field
trial demonstration the results of which have validated the performance of the
Partnership's electric systems.
International. International sales and marketing efforts have focused on the
high humidity, rapidly developing regions of the Asian-Pacific market. In this
region, manufacturing and industrial companies are generally interested in the
Partnership's systems to improve workers' comfort by lowering humidity. The
Partnership has manufactured and sold units assembled in the Partnership's
Philadelphia manufacturing facility to customers in Japan, South Korea, Taiwan
and Thailand through its licensing and distribution agreements or relationships
described below. The Partnership plans to continue to market, sell and, in
certain situations, assemble its climate control systems through licensing
arrangements or joint ventures with other major companies in Asia-Pacific.
During 1996 the Partnership signed a joint market development agreement
with Carrier's Asia-Pacific Operations (" Carrier APO"). The agreement, which
covers a significant portion of the Asia-Pacific air conditioning market,
extends through March 1998 and is intended to allow Carrier APO to make a
comprehensive assessment of the marketability of the Partnership's
desiccant-based air conditioning and climate control systems. The license
portion of the agreement grants Carrier APO exclusive rights to sell the
Partnership's proprietary desiccant systems and equipment intially in 21 Asian
markets, under the Carrier brand name. The agreement also grants Carrier APO
exclusive assembly rights in South Korea, Australia and Malaysia. The Carrier
plants will assemble the Partnership's proprietary kits, which includes rotor
and cassette components, supplied from the Partnership's facilities. The Company
believes that the successful field testing demonstration evaluated by Carrier in
1996 helped lead to the joint market development agreement with APO. Initially,
sales and marketing efforts will target five countries: China, South Korea,
Thailand, Australia and Malaysia. Carrier APO has assigned a dedicated team to
direct the sales and management aspects of this program. Although it is
anticipated that this agreement will develop into long-term orders for the
Partnership, there can be no assurances that this will result in future orders.
The Partnership did not sell any units in 1996 to Carrier APO under the joint
market development agreement.
Carrier APO will have non-exclusive right to assemble the Partnership's
systems in Japan. Engelhard/ICC will continue to distribute units in Japan
through its marketing partner Nichimen Engine Sales Co., a division of the
approximately $60 billion Nichimen Corporation.
In 1995, the Partnership entered into a license agreement with Chung-Hsin,
Taiwan's largest air conditioning manufacturer, pursuant to which Chung-Hsin has
been granted an exclusive license to manufacture and sell the Partnership's gas
and electric systems in Taiwan for a period of up to five years based on
achieving certain sales targets, and a non-exclusive license to manufacture and
sell such systems in mainland China. In consideration for such license,
Chung-Hsin paid the Partnership an initial fee of $500,000 and is required to
pay a royalty of 2.5% of Chung-Hsin's sales of all desiccant-based climate
control systems utilizing the Partnership's technology which are manufactured
and sold by Chung-Hsin. Pursuant to a supply agreement, Chung-Hsin is required
to purchase its desiccant and heat-exchange rotors from the Partnership. The
Partnership also has the option to purchase systems manufactured by Chung-Hsin
for resale in other Asian-Pacific countries. No units were sold to Chung-Hsin in
1996.
Nichimen, a Japanese trading company with approximately $60 billion in
annual sales, has been appointed a non-exclusive distributor of the
Partnership's systems in Japan. Nichimen has established relationships with
Osaka Gas, Tokyo Gas, Toho Gas, Yamaha Engine (heat pump manufacturer) and has
established a national distribution network for the Partnership's systems. No
assurance can be given as to whether any significant number of natural gas
systems will be sold through Osaka Gas. Tokyo Gas is the largest and Osaka Gas
is the second largest seller of natural gas in Japan and as part of their
marketing programs promote and sell natural gas operated equipment to promote
the use of natural gas.
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The Partnership has a marketing relationship with Samsung to sell its
systems for its locations primarily in South Korea and other international
locations. There are no assurances that Samsung will continue to purchase
systems from the Partnership.
The Partnership's joint development program with AB Air in Israel for the
development of a residential desiccant-based, all electric unit has not resulted
in the development of such unit. Joint development activities on the residential
unit with AB Air are currently not active. The Company had funded $89,000 in
1996 to AB Air in connection with the joint development program. Additional
funding by the Company to AB Air is not anticipated.
Export sales of equipment, primarily to the Asia Pacific market, were
approximately $1,457,000, $643,000 and $238,000 in 1996, 1995 and 1994,
respectively.
Backlog. As of March 21, 1997, the Partnership's backlog of purchase
orders for climate control equipment was approximately $3,000,000.
MANUFACTURING
At its Miami facility, the Partnership manufactures all of its proprietary
honeycomb desiccant and heat-exchange rotors and coats the desiccant rotors with
ETS(TM). The Partnership also manufactures certain other parts and assembles,
tests and ships completed systems from its leased manufacturing facility in
Philadelphia, Pennsylvania. The Partnership plans to expand its Philadelphia
area assembly manufacturing capacity and through a consolidation of its current
operations at a larger facility in the suburbs of Philadelphia to support
anticipated growth. See "Business -- Properties."
In December 1994, the Partnership acquired for $8 million in cash, the
real property and substantially all of the assets of Ciba-Geigy's manufacturing
facility in Miami, from which the Partnership had been purchasing the honeycomb
substrate currently used in producing the Partnership's desiccant and
heat-exchange rotors. The Partnership sought to manufacture its own substrate
and rotors to lower production costs, further improve the rotors and expand
production capacity to meet potential market demand. In addition, the
acquisition gave the Partnership more control of a critical technology and
manufacturing process for its current products. The Partnership acquired a
perpetual, exclusive technology license for the proprietary process to
manufacture such small cell, honeycomb substrate for use in air cooling,
conditioning and dehumidification applications, and certain other fluid
applications. In connection with the acquisition of the Miami facility, the
Partnership entered into a five-year requirements contract to continue to supply
Ciba-Geigy with the honeycomb substrate material for the aerospace industry. As
a result of the combination of the composite businesses of Ciba-Geigy and Hexcel
Corporation the combined businesses operate now under the name Hexcel. All
rights and obligations under the requirements contract were assigned to Hexcel.
The Partnership is required to make available to Hexcel in each year of the
contract certain percentages of the Miami facility's production capacity,
ranging from 75% in 1996 to 30% in 2000. The contract is subject to early
termination by Hexcel at any time after 18 months, upon six months' notice.
As described above, the Partnership has entered into several licensing
arrangements with respect to manufacturing or marketing its products. The
Partnership may also license, or otherwise permit, other companies in the United
States or internationally to manufacture its systems but the Partnership expects
to continue to remain the exclusive manufacturer of the desiccant and heat
exchange rotors for such licensees.
SUPPLIES AND MATERIALS
Except as described below, the Partnership generally uses standard parts
and components in the manufacture of its systems and obtains such parts and
components from various independent suppliers. The Company believes the
Partnership is not highly dependent on any specific supplier and could obtain
similar components from other suppliers, except for the substrate material used
in its rotors and ETS(TM).
The Partnership purchases a proprietary strong, lightweight material from
a single supplier which is used as the base material in manufacturing the
honeycomb substrate for the Partnership's desiccant and heat-exchange rotors.
While this material is critical in the manufacture of the rotors and the
Partnership does not have a contractual agreement with such supplier, the
Company believes that the Partnership can obtain all of its requirements for
such material from such supplier for the foreseeable future.
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ETS(TM) is a patented desiccant material manufactured exclusively by
Engelhard. Pursuant to the Engelhard Supply Agreement, the Partnership has
agreed to purchase exclusively from Engelhard all of the ETS(TM) or any improved
desiccant material developed by Engelhard that the Partnership may require in
connection with the conduct of the Partnership's business. In turn, Engelhard
has agreed to sell to the Partnership its total requirements for ETS(TM) or any
improved desiccant material developed by Engelhard. The price for ETS(TM) is
adjusted as of January 1 of each year during the term of the Engelhard Supply
Agreement, which initially expires December 31, 1997, but may be extended by
either party for additional two-year periods up to December 31, 2003. The
Engelhard Supply Agreement does not include specific purchase prices but does
contain a 'competitive offer' provision, whereby the Partnership is able to
purchase from third parties similar desiccant products that are equal to or
better than the products sold by Engelhard should they become available, at a
price that is lower than the price established for ETS(TM) or any improved
desiccant material sold by Engelhard under the Engelhard Supply Agreement,
provided, however, that (i) Engelhard has the right to meet such 'competitive
offer' in all material respects and (ii) any such third party offer must be able
to meet the Partnership's requirements for such desiccants in all material
respects in order to be considered a 'competitive offer.'
THE PARTNERSHIP
The Company and Engelhard formed the Partnership in February 1994 to
pursue the desiccant air conditioning business which previously had been
conducted by the Company. In exchange for a 50% interest in the Partnership, the
Company transferred to the Partnership substantially all of its assets relating
to its desiccant-based air conditioning business, subject to certain
liabilities. Engelhard, in exchange for a 50% interest in the Partnership, (i)
contributed $8,600,000 in capital to the Partnership, (ii) entered into the
Engelhard Supply Agreement and the Engelhard License Agreement for ETS(TM) and
(iii) agreed to provide credit support to the Partnership in the amount of
$3,000,000. In addition, Engelhard extinguished a $900,000 obligation due to it
by the Company.
Pursuant to the Partnership Agreement, the Partnership is managed by a
Management Committee comprised of two members, one selected by each of the
Company and Engelhard. Irwin L. Gross, Chairman and President is the Company's
representative. Mr. Gross is also the Chief Executive Officer of the Partnership
and has an employment agreement with the Partnership that expires in 1999.
In accordance with the Partnership Agreement, the Company has granted
Engelhard options to acquire up to all of the Company's interest in the
Partnership at the rate of 25% of such interest per year, with each such 25%
option exercisable commencing in 1998 and extending through and including 2001,
based on a price equal to 95% of the fair market value of the Partnership as of
the preceding December 31, determined by an investment banking firm selected by
the Company and Engelhard. Upon the occurrence of an event of default by the
Company under the Partnership Agreement (including bankruptcy of the Company or
failure by the Company to comply with, or a violation of, any material term or
condition of the Partnership Agreement which is not cured within a 45-day
period), Engelhard may accelerate the option. In addition, Engelhard's purchase
options are cumulative and any option unexercised as of the end of the exercise
period may be exercised as of any future exercise period, provided that all
previously unexercised options must be exercised and all options automatically
expire if Engelhard does not elect to exercise both of its first two options.
There can be no assurances as to whether Engelhard will or will not exercise any
or all of its options to purchase the Company's interest in the Partnership. In
the event that Engelhard's interest in the Partnership increases to more than
70%, Engelhard will be entitled to designate an additional member to the
Management Committee and thereby will control the management of the Partnership.
The Partnership entered into a Royalty Agreement as of February 7, 1994
with James Coellner and Dean Calton, engineers and employees of the Partnership
and former employees of the Company. Pursuant to the Royalty Agreement, in
exchange for their patents and trade secrets, Messrs. Coellner and Calton are
each entitled to receive royalty payments from the Partnership equal to 0.5% of
the Partnership's net revenues received from sales of separate components,
royalties and one-time payments for licensed technology and sales of desiccant
cooling and air treatment systems to the extent such revenues result from the
utilization of technology developed by such individual. The royalty payments do
not commence until the first year in which the net revenues of the Partnership
exceed $15 million. The maximum amount of combined royalty payments to be made
under the Royalty Agreement shall not exceed $5 million in the aggregate and
$300,000 for any one year. No royalty is payable for any year in which the
Partnership had no net income (or would have had no net income after giving
effect to such payments) or if, after giving effect to such royalty payments,
the Partnership had no net income on
9
<PAGE> 10
a cumulative basis since its inception; provided that to the extent any royalty
payments otherwise payable are not required to be made due to such restrictions,
such payments shall be carried forward and made with respect to the next
subsequent year or years in which the aforementioned restrictions are satisfied.
The Royalty Agreement terminates on December 31, 2010 or, with respect to either
employee, the termination of employment of such individual, voluntarily or for
cause, prior to February 7, 1999.
PATENTS AND PROPRIETARY INFORMATION
The Partnership's ability to compete effectively with other manufacturers
of climate control equipment is dependent upon, among other things, a
combination of (i) the Partnership's proprietary desiccant system design, (ii)
Engelhard's patented ETS(TM) and (iii) Hexcel's proprietary process licensed to
the Partnership and utilized in manufacturing the small cell, honeycomb
substrate material used to make the Partnership's rotors. The Partnership has
been issued eight United States patents covering certain of its desiccant
technology. Several U.S. and foreign patent applications are pending which are
directed to the products manufactured and sold by the Partnership and additional
patent filings are expected to be made in the future.
The Company was granted one U.S. patent expiring in 2010, which it
assigned to the Partnership, related to using a microprocessor to control the
desiccant cooling systems in order to increase the energy efficiency or
effectiveness of the desiccant cooling process. The Partnership was granted
seven U.S. patents expiring between 2013 and 2015, protecting the Partnership's
intellectual property. The patents granted relate to the Partnership's desiccant
climate control systems which the Partnership believes provides it with
meaningful exclusivity rights. Similar patents have also been applied for by the
Partnership in selected Asia-Pacific rim countries.
Under the Engelhard License Agreement, Engelhard granted the Partnership
an exclusive, royalty-free license during the existence of the Partnership to
use Engelhard's proprietary technology relating to ETS(TM) for use in the
Partnership's business, including heating, ventilation and air conditioning
applications. The license also includes any new technology conceived by
Engelhard's employees or representatives after execution of the Engelhard
License Agreement, which is developed for use by the Partnership in connection
with the Partnership's business. In turn, the Partnership has agreed not to
license or grant any rights in technology owned by the Partnership to any person
or entity, except that the Partnership will grant Engelhard or the Company, upon
request, a non-exclusive license to make, utilize and sell Partnership
technology in any business other than the Partnership's business at a reasonable
royalty rate to be negotiated at the time of the grant of such license. See
'Business --Supplies and Materials.'
In connection with the acquisition of Ciba-Geigy's manufacturing facility
in Miami, the Partnership acquired an exclusive, perpetual technology license to
use Hexcel's (successor to Ciba-Geigy) proprietary process in air cooling,
conditioning and dehumidifying applications, which is currently necessary to
manufacture the small cell, honeycomb substrate material used in manufacturing
the Partnership's proprietary desiccant and heat exchange rotors. See "Business
- -- Manufacturing."
The Partnership has filed trademark applications for "Desert Cool(TM)" and
"Desert Breeze(TM)" in the United States and overseas for heating, ventilation
and air conditioning systems.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Partnership's engineering, research and development activities focus
on designing systems for specific applications as well as improving the
performance and efficiency and lowering the costs of its climate control
systems.
COMPETITION
The Partnership competes against other manufacturers of conventional and
desiccant-based air conditioning systems primarily on the basis of capabilities,
performance, reliability, price and operating efficiencies. The Partnership
competes with numerous other manufacturers in the conventional heating,
ventilation and air conditioning equipment industry, including Trane Company,
York International Corporation, Carrier and others that have significantly more
resources and experience in designing, manufacturing and marketing of air
conditioning systems than does the Partnership. The Company believes the
Partnership's systems provide the following advantages over conventional air
conditioning systems: more effectively control humidity; improve
10
<PAGE> 11
indoor air quality; reduce energy consumption; offer energy versatility; and
reduce the amount of refrigerants required. The Partnership also competes with
several companies selling desiccant-based climate control systems, including
Munters Corporation and Semco Incorporated. However, the Company believes its
systems perform better and are more economical to operate than competing
desiccant-based systems due to its honeycomb rotors and Engelhard's ETS(TM).
EMPLOYEES
Effective February 7, 1994, substantially all of the employees of the
Company became employees of the Partnership. The Company employed five full-time
persons and the Partnership employed 138 full-time persons as of December 31,
1996, none of whom are represented by unions. The Partnership furloughed
approximately 40 manufactacturing employees at the end of December 1996;
however, approximately half of the manufacturing employees furloughed have been
recalled to date.
GOVERNMENT REGULATION
In recent years, increasing concern about damage to the earth's ozone
layer caused by ozone depleting substances has resulted in significant
legislation governing the production of products containing CFCs. Under the
Montreal Protocol on Substances that Deplete the Ozone Layer, as amended in 1992
(the 'Montreal Protocol'), the approximately 130 signatory countries have agreed
to cease all production and consumption of CFCs, some of which are utilized in
air conditioning and refrigeration equipment. The Montreal Protocol has been
implemented in the United States through the Clean Air Act and the regulations
promulgated thereunder by the Environmental Protection Agency (the 'EPA'). The
production and use of refrigerants containing CFCs are subject to extensive and
changing federal and state laws and substantial regulation under these laws by
federal, state and local government agencies. In addition to the United States,
Japan, mainland China, Israel and Thailand are among the signatories to the
Montreal Protocol. The manner in which other countries implement the Montreal
Protocol could differ from the approach taken in the United States.
As a result of the regulation of CFCs, the air conditioning and
refrigeration industries are turning to substitute substances such as HCFCs,
HFCs and light hydrocarbons. HCFCs have 1 to 10% of the ozone-depleting
potential of CFCs. However, the production of HCFCs for use in new equipment is
currently scheduled to be phased out as of the year 2020 and the production of
HCFCs for the servicing of existing equipment is currently scheduled to be
phased out as of the year 2030 in the United States and other signatory
countries pursuant to the Montreal Protocol. As discussed below, pursuant to the
1992 Rio Accord, reduction of the use of HFCs is also being considered because
of their substantial global warming potential.
The Framework Convention on Climate Change (the '1992 Rio Accord') and
related conferences and agreements focused on the link between economic
development and environmental protection. Under the Rio Accord, approximately
180 signatory countries have agreed to establish a process by which they can
monitor and control the emission of 'greenhouse gases,' defined as gaseous
constituents of the atmosphere that absorb and re-emit infrared radiation, which
include HFCs. Parties to the 1992 Rio Accord must provide national inventories
of 'sources' (which release greenhouse gases, aerosols or precursors thereof
into the atmosphere) and 'sinks' (which remove greenhouse gases, aerosols or
precursors thereof from the atmosphere), and regular reports on policies and
measures which limit the emissions by sources and enhance the removal by sinks
of gases not controlled by the Montreal Protocol. No given level or specific
date for the control of greenhouse gas emissions have been explicitly provided,
although the United States government submitted a plan to the Rio Standing
Committee on its proposal for achieving this goal by the year 2000 and Articles
2(a) and (b) of the 1992 Rio Accord indicated there was an initial goal of
returning to 1990 levels of greenhouse gas emissions by the year 2000.
The Clean Air Act now requires the recycling and recovery of all
refrigerants used in residential and commercial air conditioning and
refrigeration systems. As a result, there are increasing costs involved in the
manufacturing, handling and servicing of refrigerant-based equipment. In the
Partnership's systems, the cooling coils and compressors included as a
post-cooling option in non-electric models are smaller, and in electric models
generally are smaller, than would otherwise be required in a conventional air
conditioning system, and therefore require less refrigerants.
The indoor air quality standards in the United States, as set forth by
ASHRAE Standard 62-1989 Ventilation for Acceptable Indoor Air Quality, now
require that up to 200-300% more fresh air be introduced into buildings
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<PAGE> 12
as compared to prior regulations. The purpose of such standards is to specify
minimum ventilation levels and indoor air quality levels in order to minimize
the potential for adverse health effects typically associated with 'Sick
Building Syndrome.' According to a recent study by the National Conference of
States on Building Codes and Standards, Inc. (the 'NCSBCS Study'), there are 30
states which have incorporated the ASHRAE 62-1989 ventilation standards in one
form or another as mandatory building code requirements into their respective
building codes (including energy and mechanical codes) for new construction of
certain and, in some cases, all types of buildings. Of such states, 18 states
require mandatory compliance with ASHRAE 62-1989 by all local jurisdictions and
an additional seven states require all local jurisdictions which elect to adopt
a building code to comply, at a minimum, with ASHRAE 62-1989. According to the
NCSBCS Study, there are ten other states which, while not adopting ASHRAE
62-1989 into their building codes, have referenced ASHRAE 62-1989 as a
recognized industry standard. Of the remaining 10 states, five states have
adopted building codes with ventilation requirements similar to those of ASHRAE
62-1989 and several major cities in the remaining five states either reference
ASHRAE 62-1989 as an industry standard or set similar ventilation requirements
according to the NCSBCS Study. In addition, the Company believes that due to
liability concerns and customer demands, it is an increasingly standard
engineering practice throughout the country to incorporate the ASHRAE
ventilation standards in new commercial building construction even when not
required by applicable building codes, and the Company believes that the
Partnership's business prospects are enhanced because the Partnership's climate
control systems currently enable buildings to meet or exceed such standards.
A new revised standard under consideration, ASHRAE 62-1989R, would limit
space relative humidity to 60% or less, the Company believes that the
Partnership's climate control systems currently enable buildings to meet or
exceed such standards.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Except for historical matters contained herein, the matters discussed in
this Form 10-K are forward-looking and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned that these forward-looking statements reflect numerous assumptions and
involve risks and uncertainties which may affect the Company's or the
Partnership's business, financial position and prospects and cause actual
results to differ materially from these forward-looking statements. The
assumptions and risks include sufficient funds to finance working capital and
other financing requirements of the Company and the Partnership, market
acceptance of the Partnership's products, dependence on proprietary technology,
competition in the air conditioning industry and others set forth in the
Company's filings with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The principal executive offices of both the Company and the Partnership
are currently located at 441 North 5th Street, Suite 102, Philadelphia,
Pennsylvania 19123. The Partnership currently has approximately 15,000 square
feet of office space under a month-to-month lease at this location. The Company
occupies office space within the Partnership's offices and is charged for such
space proportionately. The Partnership's lease requires a monthly rental payment
of approximately $10,000 plus utility and tax costs, of which the Company's
share is approximately $1,000 per month, plus its proportionate share of utility
and tax costs.
The Partnership currently assembles its systems at a 55,000 square foot
manufacturing facility located in Philadelphia, Pennsylvania leased by the
Partnership through March 31, 1998. Additionally, the Partnership rents various
storage facilities under short-term leases to serve as depots for parts and
supplies. In April 1997, the Company and Partnership will relocate its principal
executive offices and related manufacturing facility in Philadelphia to a
138,000 square foot facility located in Hatboro, Pennsylvania. The Hatboro
facility will enable the Partnership to consolidate all Philadelphia operations
in one building versus four separate buildings in various locations.
The Partnership currently produces the small cell, honeycomb substrate
material and the desiccant and heat-exchange rotors in its 75,000 square feet
manufacturing facility in Miami, Florida and had leased a 24,000 square foot
storage facility and parking lot adjacent to the manufacturing facility.
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ITEM 3. LEGAL PROCEEDINGS
In February 1997, the Company, together with its wholly-owned subsidiary,
ICC Desiccant Technologies, Inc. ("I Partner"), and Engelhard/ICC (the
"Plaintiffs"), filed a Complaint in the Court of Common Pleas, Philadelphia
County (February Term, 1997, No. 496)(the "Complaint") against Engelhard
Corporation, ("Engelhard") and its wholly-owned subsidiary, Engelhard Sensor
Technologies, Inc. (the "Defendants"). The Complaint asserts that, in forming
the E/ICC joint venture, the parties agreed not to directly or indirectly,
without the prior written consent of E/ICC, I Partner (or E Partner), and ICC
(or Engelhard) have any interest in any business or other activity which will
conflict with the Partnership Business, as such term is defined in the Joint
Venture Asset Transfer Agreement dated September 8, 1993. Prior to September
26, 1996, the Company became aware, and also informed Engelhard of certain
infrared gas sensor technology owned by Telaire Systems, Inc. ("Telaire") which
could be employed in furtherance of E/ICC's business. On or before September
26, 1996, Engelhard acquired substantially all of the assets of Telaire through
Engelhard Sensor, its new wholly owned subsidiary. Immediately after the Company
became aware of this acquisition, the Company demanded that Engelhard afford
E/ICC an opportunity to review the due diligence materials and acquisition
agreement related to Engelhard's acquisition of Telaire and acknowledge E/ICC's
rights to acquire Telaire from Engelhard. Despite continuing demands, Engelhard
to this date has failed and refused to respond to the Company's demands.
Specifically, the Plaintiffs assert in the Complaint that, as a result of
the acquisition of Telaire, the Defendants: (i) breached the terms of the Joint
Venture Asset Transfer Agreement, (ii) breached their fiduciary duty owed to
the Company, I Partner and E/ICC not to take any action, whether direct or
indirect, for their own benefit and in contradiction of E/ICC's business, (iii)
breached the parties' implied covenant of good faith and fair dealing, (iv)
have tortiously interfered with I Partner's and E/ICC's prospective economic
advantage, and (v) have been unjustly enriched.
In connection with these assertions, the Plaintiffs have requested the
following remedies from the court: (i) declare that the defendants have
breached the aforementioned duties and obligations, (ii) enjoin Engelhard and
its subsidiaries from licensing or otherwise selling, marketing or transferring
the technology it acquired from Telaire without the written consent of the
Plaintiffs, (iii) require Engelhard and its subsidiaries to disclose all
information concerning its acquisition of the assets of Telaire, (iv) require
Engelhard and its subsidiaries to make an accounting of all profits derived
from Engelhard's use of Telaire's technology, and (v) compensatory and punitive
damages.
Aside from the preceding claim, the Company is not engaged in any material
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ICC's Common Stock trades on the Nasdaq National Market under the symbol
ICGN. Prior to Feruary 15, 1996 the Company's Stock was listed on the Nasdaq
Small Cap Market. Based on reports provided by Nasdaq, the range of high and low
bids for ICC's Common Stock for the two most recent fiscal years are as follows:
<TABLE>
<CAPTION>
1996
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
High Bid: $7.75 $9.25 $10.00 $12.38
Low Bid: $4.88 $5.25 $ 5.38 $ 6.38
1995
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
High Bid: $15.38 $18.38 $15.50 $13.63
Low Bid: $10.25 $13.88 $11.50 $ 7.81
</TABLE>
The above quotations reported by Nasdaq represent prices between dealers
and do not include retail mark-ups, mark-downs or commissions. Such quotations
may not represent actual transactions. On March 21, 1997, the last reported sale
price for the Common Stock was $5.38 per share.
As of March 21,1997, ICC had approximately 1,300 recordholders of Common
Stock. This number was derived from the Company's stockholder records, and does
not include beneficial owners of the Common Stock whose shares are held in the
names of various dealers, clearing agencies, banks, brokers, and other
fiduciaries. The Company believes that the number of beneficial owners of its
Common Stock exceeds 12,000. Holders of Common Stock are entitled to share
ratably in dividends, if and when declared by the Board of Directors. Other than
an in-kind warrant dividend declared by the Board of Directors in June 1990, the
Company has never paid a dividend on its Common Stock and it is unlikely that
any dividends will be paid in the foreseeable future. The payment of cash
dividends on the Common Stock will depend on, among other things, the earnings,
capital requirements and financial condition of the Company and the Partnership,
and general business conditions. In addition, future borrowings or issuances of
Preferred Stock may prohibit or restrict the Company's ability to pay or declare
dividends.
In connection with the completion of the Company's 2,500,000 share
secondary offering in February 1996, the Company declared and paid the accrued
dividends on the Preferred Stock which amounted to approximately $1,044,000.
Subsequent to the completion of the secondary offering, all outstanding shares
of Preferred Stock were either redeemed in cash or converted into Common Stock.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from financial
statements that have been audited by the Company's Independent Accountants,
whose reports thereon include an explanatory paragraph regarding substantial
doubt about the Company's ability to continue as a going concern. There were no
cash dividends paid to holders of Common Stock in any of these years. The data
should be read in conjunction with the Company's financial statements and the
notes thereto included elsewhere in this Form 10-K.
(ALL AMOUNTS EXPRESSED IN DOLLARS EXCEPT WEIGHTED AVERAGE SHARES OUTSTANDING)
<TABLE>
<CAPTION>
Year Ended December 31:
----------------------------------------------------------------------------
INCOME STATEMENT DATA: 1996(1) 1995(1) 1994(1) 1993 1992
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues(2) $ 688,411 $ 362,153 $ 162,285 $ 1,216,032 $ 962,185
Expenses(3) 7,843,020 6,685,526 4,553,367 5,273,884 3,529,058
----------- ----------- ----------- ----------- -----------
Net Loss (7,154,609) (6,323,373) (4,391,082) (4,057,852) (2,566,873)
Cumulative Preferred Stock
Dividend Requirement (49,655) (301,413) (227,750) (261,500) (241,938)
----------- ----------- ----------- ----------- -----------
Net Loss Applicable to
Common Stockholders $(7,204,264) $(6,624,786) $(4,618,832) $(4,319,352) $(2,808,811)
=========== =========== =========== =========== ===========
Loss per Common Share $ (.35) $ (.47) $ (.41) $ (.51) $ (.47)
Weighted Average
Shares Outstanding 20,322,952 14,072,867 11,390,981 8,550,852 5,978,505
</TABLE>
<TABLE>
<CAPTION>
December 31:
-----------------------------------------------------------------------------
BALANCE SHEET DATA: 1996(1) 1995(1) 1994(1) 1993 1992
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $12,250,865 $4,796,426 $2,397,522 $2,564,302 $ 997,632
Working Capital (Deficit) 9,661,805 1,827,797 1,072,485 1,206,700 (416,301)
Long-term Obligations 0 0 150,000 650,000 300,000
Total Liabilities 2,179,467 3,262,614 426,782 1,520,631 1,458,648
Stockholders' Equity (Deficit) 10,071,398 1,533,812 1,970,740 1,043,671 (461,016)
</TABLE>
(1) -On February 7, 1994, the Company transferred its desiccant climate
control business in exchange for a 50% interest in the Partnership. The
data should be read in conjunction with the Partnership's financial
statements and the notes thereto included elsewhere in this Form 10-K.
(2) -Revenues consist of interest income and other income. For periods prior
to the formation of the Partnership on February 7, 1994 revenues include
sale of equipment.
(3) -Expenses consists of equity interest in net loss of Engelhard/ICC,
general and administrative expense and interest expense. For periods prior
to the formation of the Partnership on February 7, 1994 expenses includes
cost of goods sold and other operating expenses.
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<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, through the Partnership, designs, manufactures and markets
innovative climate control systems to supplement or replace conventional air
conditioning systems. The Partnership's climate control systems are based on
proprietary desiccant technology initially developed by the Company, a licensed
honeycomb rotor technology and Engelhard's patented titanium silicate desiccant,
ETS(TM).
Pursuant to the formation of the Partnership on February 7, 1994, the
Company transferred its assets related to its desiccant climate control
business, subject to certain liabilities, to the Partnership in exchange for a
50% interest in the Partnership through its wholly-owned subsidiary, ICC
Desiccant Technologies, Inc. Engelhard, in exchange for a 50% interest in the
Partnership, contributed capital to the Partnership, entered into the Engelhard
Supply Agreement to sell ETS(TM) to the Partnership and entered into the
Engelhard License Agreement granting the Partnership an exclusive royalty-free
license to use ETS(TM) in the Partnership's business, including heating,
ventilation and air conditioning. The desiccant climate control business
conducted by the Company prior to the formation of the Partnership is now being
conducted by the Partnership, and the Company has become principally a holding
company. Further, substantially all of the employees of the Company became
employees of the Partnership and the leases for the space occupied by, and
certain other obligations of, the Company were assumed by the Partnership.
Since the formation of the Partnership, the Company's sole activities have
related to its participation in the management of the Partnership and the sale
of the Company's remaining cogeneration assets. The Company is not permitted to
engage directly or indirectly in any activities which would conflict with the
Partnership's business as long as the Partnership is in effect, but the Company
is not precluded from engaging in other activities. The Company currently does
not have any plans to engage in other activities and, therefore, is not expected
to generate any significant revenues, although it will continue to incur general
and administrative expenses.
The Company accounts for its 50% interest in the Partnership under the
equity method of accounting for investments. At February 7, 1994, the date of
formation of the Partnership ('Formation'), the Company's investment in the
Partnership was approximately $0. The Company had no obligation or commitment to
provide additional financing to the Partnership and losses of the Partnership
were not recognized through the period ended September 30, 1994. During the
fourth quarter of 1994, the Company and Engelhard each loaned the Partnership
$4,000,000 to acquire a manufacturing facility in Miami, Florida. As a result,
and because the Company expects to continue to fund the Partnership's
activities, the Company has and will continue to recognize its share of the
losses of the Partnership.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
The Partnership's revenue for the year ended December 31, 1996 increased
$1,560,330 to $10,504,609 from $8,944,279 for the year ended December 31, 1995.
This increase in revenues is due primarily to increased equipment sales, the
effects of which more than offset a decline in sale of substrate and the receipt
of a non-recurring licensing fee in 1995. Equipment sales increased 138% to
approximately $6.1 million in 1996 compared to approximately $2.6 million in
1995. The sale of substrate from the Miami plant to Hexcel pursuant to a supply
agreement decreased to approximately $4.3 million in 1996 from $5.8 million in
1995. In 1995 a non-recurring licensing fee of $500,000 from Chung-Hsin was
earned while no licensing fees were earned in 1996. The Partnership's gross loss
for the year ended December 31, 1996 increased $1,332,134 to $3,271,850 from
$1,939,716 for the year ended December 31,1995. The increase in gross loss is
due primarily to reduced margins on the sale of substrate of approximately
$400,000 resulting from a decline in substrate sales, an increase in the
provision for inventory obsolescence of $341,000 and receipt in 1995 of the
non-recurring licensing fee of $500,000.
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<PAGE> 16
Continued negative margins have occurred due to sales volumes being lower
than the Partnership's capacity to produce its climate control systems and
revenues were not sufficient to cover both fixed and variable costs of
production. Furthermore, the equipment produced by the Partnership has been
subject to numerous improvements and modifications which has increased costs
incurred in the production process.
The Partnership's operating expenses increased $957,919 to $8,880,844 for
the year ended December 31, 1996 compared to $7,922,925 for the year ended
December 31, 1995, due to higher general and administrative, marketing and
engineering costs. General and administrative costs increased approximately
$767,000 due primarily to increased payroll and severance costs. Marketing
expenses increased approximately $152,000 as a result of increased marketing
efforts and increased sales and marketing personnel. Engineering costs increased
approximately $117,000. The loss from operations for the year ended December
31,1996 increased $2,290,053 to $12,152,694 compared to $9,862,641 for the year
ended December 31, 1995.
The Partnership's net loss increased $2,017,441 to $12,589,664 for the year
ended December 31, 1996 from $10,572,223 for the year ended December 31, 1995
due to the increase in the loss of operations of $2,290,053 discussed above
which more than offset a $272,612 decrease in interest expense resulting
primarily from reduced interest rates.
The Company realized an increase in interest and other income of $326,258
to $688,411 for the year ended December 31, 1996 as compared to $362,153 for the
year ended December 31,1995, which was primarily attributable to an increase in
the average balance of cash equivalents resulting from the investing of the
proceeds from the secondary public offering in the first quarter for the year
ended December 31, 1996. The Company's increase in its 50% equity interest in
the net loss of the Partnership increased $1,008,720 to $ 6,294,832 for the year
ended December 31, 1996 as compared to $5,286,112 for the year ended December
31, 1995. The Company's general and administrative expenses increased $162,430
to $1,545,594 for the year ended December 31, 1996 compared to $1,383,164 for
the same period in 1995 primarily the result of an increased payroll and other
administrative costs.
The Company's net loss for the year ended December 31, 1996 increased
$831,236 to $7,154,609 from $6,323,373 for the same period in 1995. Net loss per
share of Common Stock decreased $.12 to $.35 for the year ended December 31,
1995 from $.47 for the same period in 1995 primarily the result of additional
shares outstanding resulting from the public secondary offering.
Years Ended December 31, 1995 and 1994
The Partnership's revenue for the year ended December 31, 1995 increased
$7,323,893 to $8,944,279 from $1,620,386 for the period from Formation to
December 31, 1994 due to the fabrication of substrate for Ciba-Geigy pursuant to
a supply agreement (the rights and obligations of which were subsequently
assigned to Hexcel in 1995), increased equipment sales and licensing fees. The
increase was attributable to revenue of $5,801,666 from the fabrication of
substrate for Ciba-Geigy and the increase of $1,028,439 in equipment sales and
$500,000 in licensing fees. The Partnership recorded a gross loss of $1,939,716
for the year ended December 31,1995 compared to a gross profit of $28,565 for
the period from Formation to December 31, 1994. The gross loss was due primarily
to increases in manufacturing costs of equipment in anticipation of future
growth without a corresponding increase in equipment sales, which was partially
offset by the licensing fees and provision for reducing inventory to the lower
of cost or market recorded in 1995.
The Partnership's operating expenses increased $2,194,639 to $7,922,925 in
the year ended December 31, 1995 compared to $5,728,286 for the period from
Formation to December 31, 1994, due to higher marketing, research and
development, and general and administrative costs. Marketing expenses increased
$1,350,981 as a result of increased marketing efforts and increased sales and
marketing personnel. Research and development expenses increased $238,943 due to
an increase in the number of research personnel and increased testing of
equipment by independent laboratories. Engineering costs decreased $296,867 in
this period. General and administrative expenses increased $901,582 primarily
due to the addition of general and administrative personnel, amortization of
intangibles incurred in connection with the Miami plant acquired in December
1994. The loss from operations for the year ended December 31, 1995 increased
$4,162,920 to $9,862,641 compared to $5,699,721 for the period from Formation to
December 31, 1994.
The Partnership's net loss increased $4,947,378 to $10,572,223 for the year
ended December 31, 1995 from $5,624,845 for the period from Formation to
December 31, 1994 due to the loss from operations and an increase in net
interest expense of $784,458 from additional borrowings.
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<PAGE> 17
The Company generated nominal revenues of $9,000 for the year ended
December 31, 1995 which were attributable to the sale of cogeneration spare
parts compared to revenues of $88,360 for the same period in 1994 which were
attributable to sales of desiccant climate control systems prior to the
formation of the Partnership on February 7, 1994.
The Company's expenses relating to marketing, engineering and development
decreased or were eliminated in 1995 as compared to 1994 primarily as a result
of the transfer of substantially all operations to the Partnership on February
7, 1994. The Company's general and administrative expenses decreased $343,169 to
$1,383,164 for the year ended December 31, 1995 compared to $1,726,333 for the
same period in 1994 as a result of a reduction in professional fees offset by
increased payroll expenses and other administrative costs. The Company recorded
an expense of $75,000 in 1995 for services rendered by an investor relations
firm. Pursuant to an agreement with such firm, the obligation was satisfied by
the issuance of 26,653 shares of Common Stock. Consulting expenses of $37,500
were recognized in 1995 for warrants granted in connection with the March 1995
private placement of 300,000 shares of Common Stock.
The Company's net loss for the year ended December 31, 1995 increased
$1,932,291 to $6,323,373 from $4,391,082 for the same period in 1994. This
increase in loss was attributable to the increase in the Company's 50% interest
in the Partnership's loss of $2,473,689 to $5,286,112 for the year ended
December 31, 1995 as compared to $2,812,423 for the same period in 1994 offset
by a decline in operating costs primarily as a result of the transfer of
substantially all operations to the Partnership on February 7, 1994. Net loss
per share of Common Stock increased $.06 to $.47 for the year ended December 31,
1995 from $.41 for the same period in 1994.
The Company's and the Partnership's operations have not been significantly
affected by inflation.
Liquidity and Capital Resources
The Partnership's cash and cash equivalents increased to $1,192,997 at
December 31, 1996 from $346,480 at December 31, 1995. The increases were due to
capital contributions from the Company and Engelhard funding the Partnership's
net losses and capital investments. The Partnership is expected to require
additional financing to support anticipated growth and will be dependent on the
Company and Engelhard to provide additional financing to support its current
operations and future expansion. There can be no assurance that the Company or
Engelhard will be willing, or able, to provide such additional financing.
Net cash used in operating activities by the Partnership was $12,441,884
for the year ended December 31, 1996 due to the net loss of $12,589,664, net
working capital needs of $2,205,778 which offset noncash charges of $2,353,558.
Net working capital utilized was primarily the result of increases in inventory
and receivables which offset the increase in payables related to the increased
sales. Net cash used in investing activities by the Partnership was $716,703 for
the year ended December 31, 1996. Net cash used in investing activities was
primarily the result of additional equipment and fixtures which was offset by
drawn cash held in escrow. Operating and investing activities were financed by
$14 million in capital contributions equally by the Company and Engelhard.
Subsequent to December 31, 1996, each partner made capital contributions of
$1,000,000 for the general working requirements of the Partnership.
The Partnership's cash and cash equivalents decreased to $346,480 at
December 31, 1995 from $648,451 at December 31, 1994 and $8,633,000 contributed
from Engelhard at Formation. The decreases were due to the Partnership's net
losses, working capital requirements and capital investments incurred in
connection with the expansion of the Partnership's business since Formation,
which were partially financed by loans and capital contributions from the
Company and Engelhard. The Partnership is expected to require additional
financing to support anticipated growth and will be dependent on the Company and
Engelhard to provide additional financing to support its current operations and
future expansion. There can be no assurance that the Company or Engelhard will
be willing, or able, to provide such additional financing.
Net cash used in operating activities by the Partnership was $12,105,251
for the year ended December 31, 1995 due to the net loss of $10,572,223, net
working capital needs of $3,265,030 which offset noncash charges of $1,732,002.
Net working capital utilized was primarily the result of increases in inventory
and receivables related to the increased sales. Capital expenditures of
approximately $1,400,000 were incurred primarily for machinery and equipment.
Net cash used in operating activities and capital expenditures were
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<PAGE> 18
financed with net borrowings of $7,194,988 and capital contributions aggregating
$6,000,000 from the Company and Engelhard.
In April 1995, the Partnership obtained financing from the issuance of $8.5
million in industrial development revenue bonds. The proceeds of these bonds
were utilized to repay a portion of the loan provided by the general partners
and to fund improvements and capital expenditures at the Miami facility. The
Company guaranteed 50% of the Partnership's indebtedness associated with the
industrial development revenue bonds and established an irrevocable letter of
credit for $2,500,000 to support its portion of the guarantee, which is
collateralized by a $2,500,000 certificate of deposit. In May 1995, each general
partner was repaid $1,500,000 of the $8,000,000 aggregate loan from the Company
and Engelhard made in December 1994, of which the remaining amount, $2,500,000
for each general partner, was converted into an investment in the Partnership.
During 1995, each partner made capital contributions of $3,000,000 to the
Partnership. In addition, the Partnership borrowed $2,750,000 from a bank
through a short-term loan.
Net cash used in operating activities by the Partnership was $6,571,000 for
the period from Formation to December 31, 1994 as a result of the net loss,
before depreciation and amortization, of $5,376,000 and net working capital
needs of $1,195,000 primarily to build inventory and for accounts receivable
which increased with sales. Capital expenditures were $9,361,000 for the period
from Formation to December 31, 1994, primarily due to the acquisition of a
manufacturing facility for $8,000,000 in December 1994 and capital expenditures
of $980,000. The Company and Engelhard financed the Partnership's operating and
investing activities in 1994 with the initial capital contribution of $8,633,000
from Engelhard upon the formation of the Partnership and loans of $4,000,000
from each of the Company and Engelhard in December 1994 to acquire the
Ciba-Geigy manufacturing facility.
The Company's cash and cash equivalents amounted to $9,641,114, $1,573,475
and $1,114,000 at December 31, 1996, 1995 and 1994, respectively. The cash
utilized in the Company's operating and investing activities was financed
primarily through proceeds from the issuance of Common Stock from the public
secondary offering in February 1996 and exercise of stock options and warrants.
Management believes the Partnership will require additional capital
contributions during 1997, and the Company plans to satisfy its 50% portion of
such capital contribution requirements from its available cash and cash
equivalents. To the extent Partnership capital contributions in excess of the
net proceeds are required, or the Company requires additional funds to continue
its activities, the Company would expect to satisfy such requirements by seeking
equity financing. The Company's ability to successfully obtain equity financing
in the future is dependent in part on market conditions and the performance of
the Partnership. There can be no assurance that the Company will be able to
obtain equity financing in the future.
The Partnership's ability to generate sufficient cash for the next twelve
months to support its operations is primarily dependent on increased sales. The
Partnership anticipates it can increase sales through additions to its sales
staff, an expansion of the manufacturer's representative network, establishment
of strategic relationships with air conditioning manufacturers and distributors
and through targeted marketing of its products to end users. The Partnership
also expects to improve cash flow by reducing manufacturing costs through
process improvements, product design changes and increased unit production. If
the Partnership is unable to generate sufficient cash to support its operations
through increased sales and cost reductions it will then be dependent on funding
from the general partners. The Company believes that it has adequate cash to
support its share of the Partnership's and its operations for 1997.
Net cash used in operating activities by the Company was $711,675 for the
year ended December 31, 1996 due to the net loss, before non-cash charges and
the Company's 50% share of the net loss of the Partnership, of $845,687 and net
working capital provided of $134,012. The Company made additional capital
contributions of $7,000,000 to the Partnership during 1996. Net cash used in
operating activities and for investments in the Partnership were financed
through the issuance of Common Stock through proceeds from the issuance of
Common Stock from the public secondary offering in February 1996 and exercise of
stock options and warrants. Net cash provided by financing activities was
approximately $15.8 million of which approximately $17.3 was provided from the
issuance of Common Stock which was offset by the cash redemption of Preferred
Stock of approximately $981,000 and cash dividend on Preferred Stock of
approximately $395,000.
Net cash used in operating activities by the Company was $1,297,534 for the
year ended December 31, 1995 due to the net loss, before non-cash charges and
the Company's 50% share of the net loss of the Partnership, of $914,170 and net
working capital needs of $383,364 since the Company transferred its desiccant
climate control business to the Partnership in February 1994. The Company was
repaid $1,500,000 (and converted $2,500,000 to a capital contribution to the
Partnership) of the $4,000,000 loan extended to the Partnership to acquire the
Ciba-Geigy manufacturing facility in May 1995. The Company made additional
capital contributions of $3,000,000 to the Partnership and supported a portion
of its guarantee of the $8,500,000 industrial development revenue bonds issued
by the Partnership with a $2,500,000 irrevocable letter of credit collateralized
with a certificate of deposit for a like amount. Net cash used in operating
activities and for investments in the Partnership were financed by issuing
Common Stock for net proceeds of $5,761,445 for the year ended December 31,
1995.
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<PAGE> 19
In March 1995, the Company raised net proceeds of $3,010,000 in a private
placement of 300,000 shares of Common Stock at $11 per share. The Company
granted warrants to purchase 375,000 shares of Common Stock at $9 per share to
the finder in connection with the private placement. During the year ended
December 31, 1995, the Company received proceeds of approximately $2,781,353
from the exercise of stock options and warrants to purchase approximately
1,151,833 shares of Common Stock.
Net cash used in operating activities by the Company was $1,373,000 for the
year ended December 31, 1994 due to the net loss, before non-cash charges and
the Company's 50% share of the net loss of the Partnership, of $1,239,000 and
net working capital needs of $134,000 since the Company transferred its
desiccant climate control business to the Partnership in February 1994. The
Company and Engelhard each extended a $4,000,000 loan to the Partnership to
acquire the Ciba-Geigy's Miami substrate manufacturing plant in December 1994.
Net cash used in operating activities and for investments in the Partnership
were financed by issuing Common Stock and warrants for net proceeds of
$5,139,000 and from borrowings of $400,000 from Engelhard.
In June 1994, the Company sold 1,100,000 shares of Common Stock at $3.56
per share for net proceeds of $3,489,000, and two directors each sold 150,000
shares of Common Stock at the same price for aggregate cash proceeds to each of
$534,000. Pursuant to an agreement between the Company and the two directors,
the Company agreed to pay all commissions and expenses incurred in connection
with the offering. For financial advisory services related to the offering, the
Company granted to an individual, who subsequently became a director, warrants
to purchase 215,000 shares of Common Stock, which have exercise prices ranging
from of $3.25 to $4.75 per share and expire in 1999. During 1994, the Company
received $1,543,000 in cash for 732,000 shares of Common Stock upon the exercise
of stock options. Also during 1994, the Company received net proceeds of
$286,000 upon the exercise of warrants to acquire 187,000 shares of Common Stock
granted to placement agents in connection with the March and April 1993 private
placements referred to below.
The independent accountants' report on the audit of the Company's 1996
financial statements includes an explanatory paragraph regarding substantial
doubt about the Company's ability to continue as a going concern. The Company's
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has incurred cumulative losses since
inception amounting to approximately $41 million through December 31, 1996. In
order to continue operations, the Company has had to raise additional capital to
offset cash consumed in operations and support of the Partnership. The Company's
continuation as a going concern is dependent upon its ability to: (i) generate
sufficient cash flows to meet its obligations on a timely basis; (ii) obtain
additional financing or refinancing as may be required; and (iii) ultimately,
attain profitable operations and positive cash flow from its operations and its
investment in the Partnership. The independent accountants' report on the audit
of the Partnership's 1996 financial statements also includes an explanatory
paragraph regarding substantial doubt about the Partnership's ability to
continue as a going concern. The Partnership's continuation as a going concern
will remain dependent upon its ability to: (i) generate sufficient cash flows to
meet its obligations on a timely basis; (ii) obtain additional financing or
refinancing as may be required; and (iii) ultimately, attain profitable
operations and positive cash flow from operations.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 ("SFAS 128") on earnings per share. The
new statement prescribes the method by which basis for computing the dilutive
effect of outstanding options and warrants. SFAS 128 requires the ommission of
securities which would have an antidilutive effect on the computation of
earnings per share. The new pronouncement is effective for the year ended 1997.
The Company believes that the new pronouncement will not have a significant
impact on its calculation of earnings per share.
Safe Harbor for Forward-Looking Statements
Except for historical matters contained herein, the matters discussed in
this Form 10-K are forward-looking and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned that these forward-looking statements reflect numerous assumptions and
involve risks and uncertainties which may affect the Company's or the
Partnership's business, financial position and prospects and cause actual
results to differ materially from these forward-looking statements. The
assumptions and risks include sufficient funds to finance working capital and
other financing requirements of the Company and the
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<PAGE> 20
Partnership, market acceptance of the Partnership's products, dependence on
proprietary technology, competition in the air conditioning industry and others
set forth in the Company's filings with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by this Item
8 are set forth in Item 14 of this Form 10-K Report. All information which has
been omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information with respect to each director and
executive officer is contained in the Company 's definitive Proxy Statement in
connection with its Annual Meeting to be filed within 120 days of the
Registrant's year ended December 31, 1996 ("1997 Annual Meeting"), which is
hereby incorporated by reference in this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The required information with respect to executive
compensation is contained in the Company's definitive Proxy Statement in
connection with its 1997 Annual Meeting to be filed within 120 days of the
Registrant's year ended December 31, 1996, which is hereby incorporated by
reference in this Form 10-K Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information with respect to security ownership of
certain beneficial owners and management is contained in the Company's
definitive Proxy Statement in connection with its 1997 Annual Meeting to be
filed within 120 days of the Registrant's year ended December 31, 1996, which is
hereby incorporated by reference in this Form 10-K Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information with respect to certain relationships
and related transactions is contained in the Company's definitive Proxy
Statement in connection with its 1997 Annual Meeting to be filed within 120 days
of the Registrant's year ended December 31, 1996, which is hereby incorporated
by reference in this Form 10-K Annual Report.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following is a list of certain documents filed as a part
of this Form 10-K Report:
(1) Financial Statements of the Registrant.
(I) Report of Independent Accountants
(ii) Consolidated Balance Sheets at December 31, 1996
and 1995.
(iii) Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994.
(iv) Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1995 and 1994.
(v) Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994.
(vii) Notes to Consolidated Financial Statements.
All other schedules specified in Item 8 or Item 14(d) of Form 10-K are omitted
because they are not applicable or not required, or because the required
information is included in the Financial Statements or notes thereto.
(b) Reports on Form 8-K
None
(c) The following table sets forth those exhibits filed pursuant
to Item 601 of Regulation S-K. Exhibits identified with an
asterisk ("*") below comprise executive compensation plans and
arrangements:
Exhibit Description
------- -----------
2.1 Joint Venture Asset Transfer Agreement between Engelhard and
Engelhard DT, Inc. and the Company and ICC Desiccant
Technologies, Inc., dated September 8, 1993, was filed as
Exhibit A to the Company's Definitive Proxy Statement dated
December 23, 1993 for Stockholders Meeting held January 17,
1994 and is hereby incorporated by reference.
2.2 Amendment dated December 20, 1993 to Joint Venture Asset
Transfer Agreement between Engelhard and Engelhard DT, Inc.
and the Company and ICC Desiccant Technologies, Inc., dated
September 8, 1993, was filed as an exhibit to the Company's
registration statement filed on Form S-2 declared effective
February 14, 1996 (registration number 33-80223) and is hereby
incorporated by reference.
2.3 Agreement for Purchase and Sale of Assets by and between the
Partnership and Ciba-Geigy dated November 29, 1994 was filed
as Exhibit 10(p) to the Company's Form 10-K for the year ended
December 31, 1994 and is hereby incorporated by reference.
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3.1 Articles of Incorporation and Bylaws. Incorporated by
reference from ICC's Form 10 filed on September 16, 1985.
3.2 Amendment to Articles of Incorporation changing name to ICC
Technologies, Inc. Incorporated by reference from ICC's Form
8-K dated June 12, 1990.
4.1 The Company's Certificate of Designation for Series F
Preferred Stock and Series G Convertible Preferred Stock, was
filed as an Exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1989 and is hereby incorporated by
reference.
4.2 The Company's Certificate of Designation for Series H
Convertible Preferred Stock, was filed as an Exhibit to the
company's Form 8-K dated March 26, 1991 and is hereby
incorporated by reference.
4.3 The Company's Certificate of Designation for Series I
Preferred Stock, was filed as an Exhibit to the Company's Form
8-K dated March 12, 1992 and is hereby incorporated by
reference.
4.4 ICC Technologies, Inc. Certificate of Designation for Series J
Preferred Stock. Incorporated by reference from ICC's Form 8-K
dated June 8, 1992.
9.1 Form of voting trust agreement between RIT Capital Partners,
plc, Warburg, Pincus Capital Company L.P. and ICC
Technologies, Inc. Incorporated by reference from ICC's Form
10-K for the fiscal year ended December 31, 1989.
10.1 Lease Agreement for the Partnership's Executive Offices dated
June 14, 1989. Incorporated by reference from ICC's Form 8-K
dated June 12, 1990.
10.2 The Company's Incentive Stock Option Plan, as amended was
filed as Exhibit 4(g) to the Company's Registration Statement
on Form S-8, No. 33-85636 filed on October 26, 1994 and is
hereby incorporated by reference.
10.3 The Company's Nonqualified Stock Option Plan, as amended and
restated, was filed as Exhibit C to the Company's Definitive
Proxy Statement dated November 18, 1994 for Stockholders
Meeting held December 15, 1994 and is hereby incorporated by
reference.
10.4 ICC Technologies, Inc., Equity Plan for Directors Incorporated
by reference from ICC's Definitive Proxy Statement dated
November 18, 1994 for Stockholders Meeting held December 15,
1994.
10.5 Agreement to Restructure and Retire ICC Technologies, Inc.
Lease Financing Obligations to Textron Financial Corporation.
Incorporated by reference from ICC's Form 8-K filed June 12,
1990.
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10.6 Conversion and Waiver Agreement between RIT Capital Partners,
plc, Warburg, Pincus Capital Company L.P. and ICC
Technologies, Inc. dated June 6, 1990 including all exhibits
thereto. Incorporated by reference from ICC's Form 10-K for
the fiscal year ended December 31, 1989.
10.7 Joint Development Program Agreement between ICC Technologies
Inc., and Engelhard Corporation dated May 26, 1992.
Incorporated by reference from ICC's Form 10-K for the fiscal
year ended December 31, 1992.
10.8 Employment Agreement between William A. Wilson and ICC
Technologies Inc., dated July 2, 1991 Incorporated by
reference from ICC's Quarterly Report on Form 10-Q for period
ended September 30, 1991.
10.9 Amendment dated February 28, 1994 to Employment Agreement
between William A. Wilson and ICC Technologies Inc.
incorporated by reference from ICC's Form 10-K for the fiscal
year ended December 31, 1994.
10.10 General Partnership Agreement of Engelhard/ICC ,between
Engelhard DT Inc. and ICC Desiccant Technologies, Inc., dated
February 7, 1994 was filed as an exhibit to the Company's
registration statement filed on Form S-2 declared effective
February 14, 1996 (registration number 33-80223) and is hereby
incorporated by reference.
10.11 Technology License Agreement between Engelhard Corporation and
ICC Technologies, Inc., and Engelhard/ICC, dated February 7,
1994 was filed as Exhibit 10(j) to the Company's Form 10-K for
the fiscal year ended December 31, 1993 and is hereby
incorporated by reference.
10.12 Supply Agreement between Engelhard/ICC and Engelhard
Corporation dated February 7, 1994. Incorporated by reference
from ICC's Form 10-K for the fiscal year ended December 31,
1993.
10.13 Employment Agreement between Irwin L. Gross and the
Partnership dated February 8, 1994. Incorporated by reference
from ICC's Form 10-K for the fiscal year ended December 31,
1993.
10.14 Royalty Agreement between Engelhard/ICC and James Coellner and
Dean Calton dated February 8, 1994. Incorporated by reference
from ICC's Form 10-K for the fiscal year ended December 31,
1993.
10.15 Lease Agreement for the Partnership's manufacturing space,
dated March 25, 1993. Incorporated by reference from ICC's
Form 10-K for the fiscal year ended December 31, 1993.
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<PAGE> 24
10.16 License Agreement by and between the Partnership and Ciba
Composites Anaheim, a business unit of Ciba Composites, a
Division of Ciba-Geigy, dated November 29, 1994, was filed as
Exhibit 10.1 to the Company's 10-Q for period ended September
30, 1995 and is hereby incorporated by reference.
10.17 Manufacturing and Supply Agreement by and between the
Partnership and Ciba Composites Anaheim, a business unit of
Ciba Composites, a Division of Ciba-Geigy, dated November 29,
1994, was filed as Exhibit 10.2 to the Company's 10-Q for
period ended September 30, 1995 and is hereby incorporated by
reference.
10.18 Technical Information, Trademark and Patent License Agreement
by and between the Partnership and Chung-Hsin, dated March 27,
1995, was filed as Exhibit 10.3 to the Company's 10-Q for
period ended September 30, 1995 and is hereby incorporated by
reference.
10.19 Supply Agreement by and between the Partnership and
Chung-Hsin, dated March 27, 1995, was filed as Exhibit 10.4 to
the Company's 10-Q for period ended September 30, 1995 and is
hereby incorporated by reference.
10.20 Agreement by and among Engelhard, the Company and the
Partnership, dated April 1, 1995 relating to the Dade County
Industrial Development Revenue Bonds, was filed as Exhibit
10.5 to the Company's 10-Q for period ended September 30, 1995
and is hereby incorporated by reference.
10.21 Memorandum of Understanding by and between the Partnership and
Samsung, dated June 30, 1995, was filed as Exhibit 10.6 to the
Company's 10-Q for period ended September 30, 1995 and is
hereby incorporated by reference.
10.22 Form of Amendment dated August 9, 1995 to Agreement of October
6, 1991 regarding formation of ICC International by and
between the Partnership and AB Air was filed as Exhibit 10.7
to the Company's 10-Q for period ended September 30, 1995 and
is hereby incorporated by reference.
10.23 Agreement Regarding Joint Development Program between the
Partnership and AB Air dated August 21, 1995 was filed as an
exhibit to the Company's registration statement filed on Form
S-2 declared effective February 14, 1996 (registration number
33-80223) and is hereby incorporated by reference.
10.24 Form of Amendment assignment and transfer to Hexcel all
contracts between Engelhard/ICC and Ciba-Geigy, dated October
19, 1995, was filed as Exhibit 10.24 to the Company's 10-K
for the year ended December 31, 1996 and is incorporated
herein by reference.
10.25 Asia Pacific Market Development Agreement between Carrier APO
and the Partnership dated September 12, 1996, was filed as
Exhibit 10.25 to the Company's 10-K for the year ended
December 31, 1996 and is incorporated herein by reference.
10.26 Agreement of Lease Between 330 South Warminster Associates,
L.P. as Landlord and Engelhard/ICC as Tenant, including lease
guarantee, dated February 4, 1997, was filed as Exhibit 10.26
to the Company's 10-K for the year ended December 31, 1996
and is incorporated herein by reference.
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21 Subsidiaries of ICC Technologies, Inc. ICC Desiccant
Technologies, Inc.
23 Consent of Coopers & Lybrand L.L.P., Independent Accountants
27 Financial Data Schedule
(d) The following is a list of certain documents required by Regulation S-X
consisting of financial statements of the fifty percent owned general
partnership Engelhard/ICC included in this Form 10-K Annual Report:
(1) Financial Statements.
(i) Report of Independent Accountants
(ii) Balance Sheet at December 31, 1996 and 1995.
(iii) Statements of Operations for the years ended December 31, 1996
and 1995 and the period February 7, 1994 (date of formation)
to December 31, 1994.
(iv) Statements of Changes in Partners' Capital for the years ended
December 31, 1996 and 1995 and for the period February 7, 1994
(date of formation) to December 31, 1994.
(v) Statements of Cash Flows for the years ended December 31, 1996
and 1995 and for the period February 7, 1994 (date of
formation) to December 31, 1994.
(vii) Notes to Financial Statements.
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<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders of ICC Technologies
We have audited the accompanying consolidated balance sheets of ICC
Technologies, Inc. (ICC) as of December 31, 1996 and 1995 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of ICC'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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ICC
Technologies, Inc. as of December 31, 1996 and 1995 and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that ICC will continue as a going concern. As discussed in Note 1, ICC incurred
losses accumulating to $40,700,328 through December 31, 1996. This factor, among
others, raises substantial doubt about ICC's ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 1.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 19 , 1997
26
<PAGE> 27
ICC TECHNOLOGIES, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 9,641,114 $ 1,573,475
Receivables -
Employees 0 28,667
Engelhard/ICC 0 160,973
Prepaid expenses and other 108,161 530,131
------------ ------------
Total current assets 9,749,275 2,293,246
RESTRICTED CASH EQUIVALENTS 2,500,000 2,500,000
PROPERTY AND EQUIPMENT, net 1,590 3,180
------------ ------------
Total assets $ 12,250,865 $ 4,796,426
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 22,210 $ 28,358
Payable to Engelhard/ICC 17,035 0
Current portion of note payable to stockholder 0 150,000
Accrued liabilities 48,227 287,091
------------ ------------
Total current liabilities 87,472 465,449
------------ ------------
LOSSES OF ENGELHARD/ICC IN EXCESS OF INVESTMENTS 2,091,997 2,797,165
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Series F, authorized 6,885 shares, issued and outstanding 0
shares at December 31, 1996 and 135 shares at December
31, 1995 (liquidation value $256,270
at December 31, 1995) 0 1
Series G Convertible, authorized 400 shares, issued and outstanding 0 shares
at December 31, 1996 and 350 shares at December 31, 1995
(liquidation value $664,404 at December 31, 1995) 0 4
Series H Convertible, authorized 1,500 shares, issued and outstanding 0 shares
at December 31, 1996 and 1,500 shares at December 31, 1995 0 15
Series I, authorized 500 shares, issued and outstanding 0 shares at December 31,
1996 and 500 shares at December 31, 1995 0 5
Series J, authorized, 225 shares, issued and outstanding 0 shares at December 31,
1996 and 225 shares at December 31, 1995 0 2
Common stock, $.01 par value, authorized 50,000,000 shares,
issued 21,282,354 shares at December 31, 1996 and 14,692,193
shares at December 31, 1995 212,824 146,923
Additional paid-in capital 50,730,330 35,104,011
Accumulated deficit (40,700,328) (33,545,719)
Less: Treasury common stock, at cost, 66,227 shares (171,430) (171,430)
------------ ------------
Total stockholders' equity 10,071,396 1,533,812
------------ ------------
Total liabilities and stockholders' equity $ 12,250,865 $ 4,796,426
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-27-
<PAGE> 28
ICC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Interest and other income $ 688,411 $ 362,153 $ 162,285
EXPENSES:
Equity interest in net loss of Engelhard/ICC 6,294,832 5,286,112 2,812,423
General and administrative 1,545,594 1,383,164 1,726,333
Interest 2,594 16,250 14,611
------------ ------------ ------------
Total expenses 7,843,020 6,685,526 4,553,367
------------ ------------ ------------
NET LOSS $ (7,154,609) $ (6,323,373) $ (4,391,082)
CUMULATIVE PREFERRED STOCK
DIVIDEND REQUIREMENTS (49,655) (301,413) (227,750)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (7,204,264) $ (6,624,786) $ (4,618,832)
============ ============ ============
NET LOSS PER COMMON SHARE $ (0.35) $ (0.47) $ (0.41)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES 20,322,952 14,072,867 11,390,981
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-28-
<PAGE> 29
ICC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Common Additional Treasury
Preferred Stock Paid-in Accumulated Stock,
Stock ($.01 par value) Capital Deficit at Cost
--------- -------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 101 $ 99,693 $ 23,946,571 $(22,831,264) $(171,430)
Conversion of 600 shares Series H preferred stock into
300,000 shares of common stock (6) 3,000 (2,994) 0 0
Issuance of 1,100,000 shares of common stock through
a private placement, net of offering expenses 0 11,000 3,477,920 0 0
Issuance of 919,354 shares of common stock through
exercise of stock options and warrants 0 9,194 1,640,837 0 0
Issuance of warrants to purchase 40,000 shares
of common stock 0 0 179,200 0 0
Net loss 0 0 0 (4,391,082) 0
----- -------- ------------ ------------ ---------
BALANCE, DECEMBER 31, 1994 95 122,887 $ 29,241,534 $(27,222,346) $(171,430)
Issuance of 925,000 shares of common stock to redeem
6750 shares of Series F preferred stock (68) 9,250 (9,182) 0 0
Issuance of 1,151,908 shares of common stock through
exercise of stock options and warrants 0 11,519 2,769,834 0 0
Issuance of 300,000 shares of common stock through
a private placement, net of offering expenses 0 3,000 3,027,092 0 0
Issuance of 26,653 shares of common stock for
services rendered 0 267 74,733 0 0
Net loss 0 0 0 (6,323,373) 0
----- -------- ------------ ------------ ---------
BALANCE, DECEMBER 31, 1995 $ 27 $146,923 $ 35,104,011 $(33,545,719) $(171,430)
Issuance of 2,686,813 shares of common stock through
a secondary offering, net of offering expenses 0 26,868 16,739,905 0 0
Issuance of 3,772,045 shares of common stock through
conversion and redemption of the outstanding
preferred stock (27) 37,720 (1,413,573) 0 0
Issuance of 131,300 shares of common stock through
exercise of stock options and warrants 0 1,313 299,987 0 0
Net Loss 0 0 0 (7,154,609) 0
===== ======== ============ ============ =========
BALANCE, DECEMBER 31, 1996 $ 0 $212,824 $ 50,730,330 $(40,700,328) $(171,430)
===== ======== ============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
BALANCE, DECEMBER 31, 1993 $ 1,043,671
Conversion of 600 shares Series H preferred stock into
300,000 shares of common stock 0
Issuance of 1,100,000 shares of common stock through
a private placement, net of offering expenses 3,488,920
Issuance of 919,354 shares of common stock through
exercise of stock options and warrants 1,650,031
Issuance of warrants to purchase 40,000 shares
of common stock 179,200
Net loss (4,391,082)
------------
BALANCE, DECEMBER 31, 1994 $ 1,970,740
Issuance of 925,000 shares of common stock to redeem
6750 shares of Series F preferred stock 0
Issuance of 1,151,908 shares of common stock through
exercise of stock options and warrants 2,781,353
Issuance of 300,000 shares of common stock through
a private placement, net of offering expenses 3,030,092
Issuance of 26,653 shares of common stock for
services rendered 75,000
Net loss (6,323,373)
------------
BALANCE, DECEMBER 31, 1995 $ 1,533,812
Issuance of 2,686,813 shares of common stock through
a secondary offering, net of offering expenses 16,766,773
Issuance of 3,772,045 shares of common stock through
conversion and redemption of the outstanding
preferred stock (1,375,880)
Issuance of 131,300 shares of common stock through
exercise of stock options and warrants 301,300
Net Loss (7,154,609)
============
BALANCE, DECEMBER 31, 1996 $ 10,071,396
============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-29-
<PAGE> 30
ICC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (7,154,609) $(6,323,373) $(4,391,082)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,590 1,591 49,181
Equity interest in net loss of Engelhard/ICC 6,294,832 5,286,112 2,812,423
Common stock and warrants issued for services rendered 12,500 112,500 179,200
Provision for doubtful accounts 0 0 16,112
Increase in inventory reserve 0 9,000 95,000
(Increase) decrease in:
Receivables 189,640 (36,878) 67,321
Inventories 0 7,960 (67,664)
Prepaid expenses and other 172,349 (464,921) (23,873)
Increase (decrease) in:
Accounts payable and accrued expenses (227,977) 110,475 (109,336)
------------ ----------- -----------
Net cash used in operating activities (711,675) (1,297,534) (1,372,718)
------------ ----------- -----------
Cash Flows from Investing Activities:
Capital contribution to Engelhard/ICC (7,000,000) (3,000,000) 0
Repayment of loans from (Loans to) Engelhard/ICC 0 1,500,000 (4,000,000)
Purchase of restricted certificate of deposit 0 (2,500,000) 0
Purchases of property and equipment, net 0 (4,771) (9,300)
------------ ----------- -----------
Net cash used in investing activities (7,000,000) (4,004,771) (4,009,300)
------------ ----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants, net 17,305,194 5,761,445 5,138,951
Cash redemption of Preferred Stock (981,270) 0 0
Cash dividend on Preferred Stock (394,610) 0 0
Repayments of borrowings from stockholders (150,000) 0 (185,272)
Borrowings from Engelhard Corporation, net 0 0 400,000
------------ ----------- -----------
Net cash provided by financing activities 15,779,314 5,761,445 5,353,679
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 8,067,639 459,140 (28,339)
Cash and Cash Equivalents, Beginning of Period 1,573,475 1,114,335 1,142,674
------------ ----------- -----------
Cash and Cash Equivalents, End of Period $ 9,641,114 $ 1,573,475 $ 1,114,335
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-30-
<PAGE> 31
ICC TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
ICC Technologies, Inc. (the 'Company' or 'ICC') is a Delaware
corporation. On February 7, 1994, the Company and Engelhard
Corporation, through their respective subsidiaries, formed a
Pennsylvania General Partnership named 'Engelhard/ICC' (the
'Partnership'). In exchange for a 50% interest in the Partnership,
the Company transferred to the Partnership substantially all of its
assets, with the exception of cash and certain other assets not
related to the desiccant air conditioning business, subject to
certain liabilities; Engelhard Corporation, in exchange for a 50%
interest in the Partnership, (a) contributed to the Partnership
approximately $8,600,000, (b) entered into a Supply Agreement
pursuant to which it agreed to supply desiccants to the Partnership,
(c) entered into a Technology License Agreement pursuant to which
Engelhard Corporation and the Partnership licensed to each other
certain technology rights, and (d) agreed to provide credit support
to the Partnership in the amount of $3,000,000. In addition,
Engelhard Corporation extinguished a $900,000 obligation due to it
by the Company.
The Partnership was formed on February 7, 1994 to engage in the
business of designing, manufacturing and marketing climate control
systems to supplement or replace conventional air conditioning
systems ('Partnership Business'). The desiccant air conditioning
business conducted by the Company prior to the formation of the
Partnership is now being conducted by the Partnership. As a result,
the Company has become principally a holding company, owning a 50%
interest in the Partnership. Although the Company is not permitted
to engage directly or indirectly in any activities which would
conflict with the Partnership Business as long as the Partnership is
in effect, the Company is not precluded from engaging in other
activities.
Prior to the formation of the Partnership, the Company was engaged
in the business of designing, manufacturing and marketing
environmentally beneficial and energy efficient, desiccant cooling
systems for climate control for commercial buildings. The Company's
desiccant cooling products were marketed primarily to operators of
supermarkets and department stores, manufacturers, and to users of
other types of air conditioning and dehumidification products. The
Company expects the Partnership to continue such business and to
market its products to such potential users.
The Company believes that the desiccant cooling system it has
developed and which the Partnership is now further developing, is an
innovative and energy efficient technology for providing cooling and
heating for commercial facilities.
Going Concern
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
Revenues and the Company's share of results of operations of
Engelhard/ICC have been insufficient to cover costs of operations
for the year ended December 31, 1996. The Company has incurred
cumulative losses since inception of $40,700,328 through December
31, 1996. In order to continue operations, the Company has had to
raise additional capital to offset cash consumed in operations and
the support of the Partnership. Until the Partnership generates
positive cash flows from operations, it will be primarily dependent
upon its partners to provide any required working capital. The
Company's continuation as a going concern is dependent on its
ability to: (i) generate sufficient cash flows to meet its
obligations on a timely basis, (ii) obtain additional financing as
may be required, and (iii) ultimately attain profitable operations
and positive cash flows from operations and its investment in the
Partnership. The accompanying financial statements do not include
any adjustments that may result from the Company's inability to
continue as a going concern.
The Partnership's ability to generate sufficient cash for the next
twelve months to support its operations is primarily dependent on
increased sales. The Partnership anticipates it can increase sales
through additions to its sales staff, an expansion of the
manufacturer's representative network, establishment of strategic
relationships with air conditioning manufacturers and distributors
and through targeted marketing of its products to end users. The
Partnership also expects to improve cash flow by reducing
manufacturing costs through process improvements, product design
changes and increased unit production. If the Partnership is unable
to generate sufficient cash to support its operations through
increased sales and cost reductions it will then be dependent on
funding from the general partners.
Management believes the Company has adequate working capital for at
least the next fiscal year to support its half of the estimated
future financing requirements of the Partnership and to fund the
31
<PAGE> 32
Company's working capital requirements; however, there can be no
assurance that the Company will have adequate capital to finance the
requirements of the Partnership or fund its own working capital
requirements.
(2) THE PARTNERSHIP
On February 7, 1994 ICC and Engelhard, through their respective
subsidiaries, formed a Pennsylvania general partnership named
Engelhard/ICC (the "Partnership"). In exchange for a 50% interest in
the Partnership, ICC transferred to the Partnership, through ICC's
wholly-owned subsidiary, ICC Desiccant Technologies Inc.,
substantially all of its assets, with the exception of cash and
certain other assets not related to the desiccant air conditioning
business, subject to certain liabilities. The assets and liabilities
were transferred by the Company at historical cost with no gain or
loss being recorded by the Company. The investment in the
Partnership is accounted for under the equity method of accounting.
The following are the summarized financial results of the
Partnership:
<TABLE>
<CAPTION>
Year ended Year ended Period ended
---------- ---------- ------------
December 31, December 31, December 31,
------------ ------------ ------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues $ 10,504,609 $ 8,944,279 $ 1,620,386
Loss from operations (12,152,694) (9,862,641) (5,699,792)
Net loss $(12,589,664) $(10,572,223) $(5,624,845)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET INFORMATION: December 31, December 31,
-------------------------- ------------ ------------
1996 1995
---- ----
<S> <C> <C>
Cash $ 1,192,997 $ 346,480
Receivables 2,640,804 2,057,420
Inventory 4,570,952 3,385,125
Other current assets 278,762 158,939
Cash held in escrow 307,476 865,744
Property, plant and equipment 7,990,125 8,263,642
Other noncurrent assets 1,978,115 1,802,155
----------- -----------
Total assets $18,959,231 $16,879,505
=========== ===========
Accounts payable and accrued expenses $ 1,885,596 $ 1,153,885
Payable to general partners 298,084 365,509
Debt 11,456,859 11,451,755
Notes payable to general partners 0 0
Partners' capital 5,318,692 3,908,356
----------- -----------
Total liabilities and equity $18,959,231 $16,879,505
=========== ===========
</TABLE>
In December 1994, the Partnership acquired for approximately $8.2
million in cash, the real property and substantially all other manufacturing
assets of an existing manufacturing facility located in Miami, Florida from
Ciba-Geigy Corporation ("Ciba"), which currently produces the small cell,
honeycomb structures that are the base material of the desiccant and thermal
rotors that are an integral part of the Partnership's products. The former Ciba
plant produced primarily large cell substrate which the Partnership is
prohibited to produce or sell other than to Ciba. The Partnership also
acquired, as part of the transaction, an exclusive technology license to use
Ciba's proprietary process which is necessary to manufacture such small cell,
honeycomb structures. As a result of the combination of the composite
businesses of Ciba-Geigy and Hexcel Corporation the combined businesses operate
now under the name Hexcel. All rights and obligations under the requirements
contract were assigned to Hexcel. The Company's and the Partnership's
management believe that the acquisition gives the Partnership complete control
of the critical technologies and manufacturing processes for its current
products as well as those in the foreseeable future. Assets acquired consisted
of approximately $6.9 million of plant, property and equipment and $1.3 million
of intangibles.
32
<PAGE> 33
To finance the acquisition, the Company and Engelhard each lent to
the Partnership $4,000,000 ("General Partners' Bridge Loan"). The
loans, were evidenced by promissory notes with interest payable
monthly at the Prime Rate plus 1%. The General Partners' Bridge Loan
resulted in the Company increasing its investment in the Partnership
as well as recording its proportionate share of previously
unrecognized accumulated losses at that time. In May 1995,
$1,500,000 of the bridge loan was repaid to each general partner.
The remaining $2,500,000 for each general partner was converted into
an investment in the Partnership.
In April 1995, the Partnership obtained financing from the issuance
of $8,500,000 of industrial development revenue bonds. The proceeds
of these bonds were used to repay $3,000,000 of the General
Partners' Bridge Loan, $1,500,000 to each general partner, and
provide for improvements and capital equipment at the Miami
facility. As of December 31, 1996, $307,476 of proceeds were held in
escrow and will be released upon the Partnership's incurring
qualified expenditures.
In May 1995, the Company guaranteed 50% of the Partnership's
indebtedness associated with the industrial development revenue
bonds. The Company has established an irrevocable letter of credit
for $2,500,000 to support its portion of the guarantee. The
Company's letter of credit is collateralized by cash equivalents in
the amount of $2,500,000. Although the bonds do not begin to mature
until April 2000, there can be no assurance that the Partnership
will be able to generate sufficient cash from operations to cover
the debt service on the bonds. If the Partnership defaults on the
bonds and they become due, the Company will become responsible for
repayment for at least a portion of that amount and possibly
additional amounts.
During 1996, capital contributions of $7,000,000 to the Partnership
were made by each partner. Subsequently, in January and March 1997,
an additional $1 million in capital contributions to the Partnership
were made by each partner. During 1995, capital contributions of
$3,000,000 to the Partnership were made by each partner.
In connection with the formation of the Partnership, the Company
granted Engelhard options to acquire up to all of the Company's
interest in the Partnership at the rate of 25% of such interest per
year starting on December 31, 1997, with each option exercisable
based upon a price equal to 95% of the fair market value of the
Partnership as determined by an investment banking firm selected by
the Company and Engelhard. Upon the occurrence of an event of
default by the Company under the Partnership Agreement (including
bankruptcy of the Company or violation of or failure by the Company
to comply with any material term or condition of the Partnership
Agreement which is not cured within a 45-day period), Engelhard's
options can be accelerated. There can be no assurance whether
Engelhard will or will not exercise any or all of its options to
purchase the Company's interest in the Partnership or that the
valuation assigned the Company's interest will be sufficient to
generate an acceptable return to investors.
The Company's proportionate share of losses of the Partnership are
$6,294,832, $5,286,112 and $2,812,423 for the year ended December
31, 1996, 1995 and 1994, respectively. The Partnership has incurred
cumulative losses of approximately $28,800,000 since inception. The
Company's share of the cumulative losses have resulted in
recognition of losses in excess of the Company's investment in the
Partnership of $2,091,977 and 2,797,165 for 1996 and 1995,which has
been reflected as a liability in the balance sheet.
Payables to the Partnership amounted to $17,035 at December 31,
1996. Receivables from the Partnership were $160,973 and $124,095 at
December 31, 1995 and 1994, respectively. Interest income earned
from the Partnership amounted to approximately $164,000 in 1995. In
1994, the Company received $250,000 in connection with the formation
of the Partnership for reimbursement of certain expenses incurred in
connection with the Joint Development Program efforts which preceded
the formation of the Partnership. The Partnership provided
approximately $95,000, $83,000 and $91,000 in various administrative
office support services to the Company in 1996, 1995 and 1994,
respectively. The general partners are guarantors of the
Partnership's long term debt which amounts to approximately
$8,700,000 as of December 31, 1996. Engelhard is guarantor of the
Partnership's short-term loan which amounts to $2,750,000 as of
December 31, 1996.
33
<PAGE> 34
In order to provide capacity and consolidate the Philadelphia office
and manufacturing operations, the Partnership entered into a ten-year
lease commitment which begins April 1997, for approximately 140,000
square feet of office, manufacturing and assembly space. Annual lease
obligation of the Partnership for the new facility for the first
five-years are approximately $500,000 per year. The lease can be
terminated after the fifth year. The general partners are guarantors of
the Partnership's lease obligations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents for the purpose
of determining cash flows. The carrying amount approximates the fair
value due to the short-term maturity of these instruments.
Property and Equipment
Property and equipment are stated at cost. Costs of major additions and
improvements are capitalized and replacements, maintenance and repairs,
which do not improve or extend the life of the respective assets, are
charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of
the property and equipment and the related accumulated depreciation are
removed from the respective accounts, and any resulting gains or losses
are reflected in operations.
Depreciation is computed using the straight-line method over the
estimated useful lives of three to seven years.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled.
Net Loss Per Common Share
The net loss per common share is based on the weighted average number
of shares of Common Stock outstanding during each year. Stock options,
warrants and convertible preferred stock have not been included, since
they are antidilutive. Cumulative dividends on the Preferred Stock
amounting to approximately $50,000, $301,000 and $228,000 for the
periods ended December 31, 1996, 1995 and 1994 , respectively, have
been added to the net loss for determining the net loss applicable to
common stockholders in computing the net loss per common share for each
respective period. The computations of fully diluted loss per share
were antidilutive; therefore, the amounts reported herein for primary
and fully diluted loss per share are the same.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No.128 ("SFAS 128") on
earnings per share. The new pronouncement prescribes the method of
computing basic and diluted earnings per share. While computing diluted
earnings per share no effect would be given to conversions, exercises
or contingent issuances of securities that would have an antidilutive
effect on earnings per share. The new pronouncement is effective for
the year ended December 31, 1997. The Company believes that the new
pronouncement will not have a significant impact on its calculation of
earnings per share as compared to its present method.
34
<PAGE> 35
Concentration of Credit Risk
The Company invests its cash primarily in deposits or commercial paper
with major banks or institutions. At times, deposits may be in excess
of federally insured limits. The Company obtains commercial paper
primarily with maturities of 30 days or less and with very high credit
ratings. The Company does not anticipate nonperformance by any of the
counterparties to the financial instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassification
Certain reclassifications have been made to the 1995 and 1994
presentations to conform with the 1996 presentation.
(4) SUPPLEMENTAL CASH FLOWS AND EQUITY DISCLOSURE:
Cash paid during the year for interest was $67,985, $0 and $35,628, in
1996, 1995 and 1994, respectively.
Included in the Statement of Cash Flows for 1996 were net cash proceeds
of approximately $16,700,000 from the issuance of 2,686,813 shares of
Common Stock in connection with a secondary offering. In connection
with the offering, all outstanding Preferred Stock was converted into
3,609,696 shares of Common Stock or redeemed in cash for $981,270. In
addition accrued dividends on the Preferred Stock amounting to
approximately $1,044,000 were declared and paid in cash, except for
$649,396 of such dividends associated with the Series H Preferred Stock
were paid in the form of 162,349 shares of Common Stock in accordance
with the original terms of such series. Also included were cash
proceeds of $301,300 from the issuance of 131,000 shares of Common
Stock upon exercise of stock options and warrants. Excluded from the
Statement of Cash Flows in 1996 were the effects of certain non-cash
financing transactions related to $12,500 of compensation expenses
related to the grant of warrants to purchase 375,000 shares of Common
Stock in connection with the private placement of 300,000 shares of
Common Stock in March 1995.
Included in the Statement of Cash Flows for 1995 were net cash proceeds
of $2,980,092 from the issuance of 300,000 shares of Common Stock. Also
included were cash proceeds of $2,781,353 from the issuance of
1,151,833 shares of Common Stock upon exercise of stock options and
warrants. Excluded from the Statement of Cash Flows in 1995 were the
effects of certain non-cash financing transactions related to: the
issuance of 925,000 shares of Common Stock to redeem 6,750 shares of
Series F Preferred Stock; the issuance of 26,653 shares of Common Stock
for $75,000 of investor relation services performed from 1993 through
1995 and $37,500 of compensation expenses related to the grant of
warrants to purchase 375,000 shares of Common Stock in connection with
the private placement of 300,000 shares of Common Stock in March 1995.
Included in the Statement of Cash Flows for 1994 were cash proceeds of
$3,488,920 from the issuance of 1,100,000 shares of Common Stock. Also
included were cash proceeds of $1,650,031 from the issuance of 919,354
shares of Common Stock upon exercise of stock options and warrants.
Excluded from the Statement of Cash Flows in 1994 were the effects of
certain non-cash financing transactions related to the conversion of
600 shares of Series G Convertible Preferred Stock into 300,000 shares
of Common Stock. Also the Company transferred to the Partnership, upon
formation, approximately $60,000 of net liabilities which consisted of
approximately: $240,000 in receivables; $490,000 of
35
<PAGE> 36
inventory; $290,000 of property and equipment; $180,000 in other
assets; $360,000 in accounts payable and accrued liabilities and
$900,000 of notes payable to Engelhard.
(5) INVENTORIES:
Inventories comprised of cogeneration equipment and related parts that
had been recorded at their net realizable value. At December 31, 1996
and 1995 the Company had no inventory. At December 31, 1994 the
Company's inventory balance of $16,960 was net of a reserve for
obsolete inventory of approximately $430,000. Obsolete inventory of
$439,000 was written off against the corresponding inventory reserve in
1995. For the years ended 1995 and 1994, the Company made provisions of
approximately $9,000 and $95,000 for inventory obsolescence.
(6) PROPERTY AND EQUIPMENT:
Property and equipment, net, comprise the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
------- -------
<S> <C> <C>
Office and computer
equipment $ 3,815 $ 3,815
Furniture and fixtures 956 956
------- -------
4,771 4,771
Less-Accumulated depreciation (3,181) (1,591)
------- -------
$ 1,590 $ 3,180
======= =======
</TABLE>
The Company retired $66,106 of equipment in the year ended December 31,
1995 resulting in no gain or loss on retirement .
(7) ACCRUED LIABILITIES:
Accrued liabilities comprise of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Professional fees $ 23,500 $ 23,000
Offering Costs 0 160,914
Accrued interest 0 65,392
Other 24,727 37,785
-------- --------
$ 48,227 $287,091
======== ========
</TABLE>
(8) NOTES PAYABLE TO STOCKHOLDER:
Notes payable to stockholder comprise the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- --------
<S> <C> <C>
Notes payable to stockholder $0 $150,000
== ========
</TABLE>
In connection with the secondary offering of 2,500,000 shares of Common
Stock in February 1996 (note 9), the note payable to stockholder was
repaid and the note was canceled.
36
<PAGE> 37
Interest expense on all stockholder loans were $2,594, $16,250 and
$14,611 in 1996, 1995 and 1994, respectively.
(9) STOCK TRANSACTIONS:
In February 1996, the Company issued 2,500,000 shares in a secondary
offering at $7 per share less underwriting discounts and commissions of
$.49 per share. Proceeds of $16,275,000 were offset by costs of
approximately $750,000 incurred in connection with the offering. In
connection with the offering, all outstanding Preferred Stock was
converted into 3,609,696 shares of Common Stock or redeemed in cash for
$981,270. In addition, accrued dividends on the Preferred Stock
amounting to approximately $1,044,000 were declared and paid in cash,
except for $649,396 of dividends associated with the Series H Preferred
Stock were paid in the form of 162,349 shares of Common Stock in
accordance with the original terms of such series. As a result of such
conversion and redemption of Preferred Stock, there are currently no
shares of Preferred Stock outstanding. The Company plans to use the
remaining net proceeds from the offering to fund primarily its half of
the estimated future financing requirements of the Partnership and to
fund the Company's working capital requirements. In April 1996, the
underwriters of the secondary offering exercised their overallotment
option and purchased 186,813 of Common Stock for proceeds of
approximately $1.2 million after underwriting discounts and
commissions. As of December 31, 1995, approximately $400,000 of
offering costs were included in other assets which was offset against
additional paid in capital in 1996 when the proceeds of the offering
were received.
The Company received proceeds of approximately $183,000 from the
exercise of stock options to purchase approximately 106,000 shares of
Common Stock granted under its option plans during 1996. The Company
received proceeds of approximately $119,000 from the exercise of
warrants to purchase approximately 25,000 shares of Common Stock during
1996.
In March 1995, pursuant to a private placement, the Company issued
300,000 shares of Common Stock for gross proceeds of $3,300,000. At
closing, cash of $1,100,000 was received along with a $2,200,000
promissory note. Costs of the offering amounted to approximately
$320,000. In August 1995, the promissory note was paid. In connection
with the private placement, the Company issued warrants to purchase
375,000 shares of Common Stock at $9 per share to the placement agent.
The Company received proceeds of approximately $1,954,000 from the
exercise of stock options to purchase approximately 912,000 shares of
Common Stock granted under its option plans for 1995. The Company
received proceeds of approximately $828,000 from the exercise of
warrants to purchase approximately 240,000 shares of Common Stock for
1995.
In June, 1994, the Company sold 1,100,000 shares of common stock at a
purchase price of $3.56 per share for aggregate cash proceeds of
$3,916,000, and two directors each sold 150,000 shares, at a purchase
price of $3.56 for aggregate cash proceeds to each of $534,000.
Pursuant to an agreement between the Company and the two directors, the
Company agreed to pay all commissions and expenses incurred in
connection with the offering. Accordingly, the net proceeds to the
Company, after payment of such commissions and expenses, were
$3,488,920. In connection with the offering the Company granted to an
individual, who subsequently became a director, for financial advisory
services, warrants for the purchase of 215,000 shares of common stock.
Those warrants have an exercise price of $3.25 - $4.75 per share and
expire in 1999.
(10) STOCK OPTIONS AND WARRANTS:
The Company provides an incentive and a nonqualified stock option plan
for directors, officers, and key employees of the Company and others.
Under these plans, options may be granted for the purchase of up to
6,850,000 shares of Common Stock. The number of options to be granted
and the option prices are determined by the Stock Option Committee of
the Board of Directors in accordance with the terms of the plans.
Options expire 10 years after the date of grant. Under the terms of the
Incentive Stock Option Plan, the option price cannot be less than 100%
of the fair market value of the Common
37
<PAGE> 38
Stock on the date of the grant. Incentive stock options are
exercisable based on a vesting schedule from the grant date. Under the
Nonqualified Stock Option Plan, the option price as determined by the
Stock Option Committee may be greater or less than the fair market
value of the Common Stock as of the date of the grant, and the options
are generally exercisable for three to five years subsequent to the
grant date. The Company had reserved 1,750,000 and 5,100,000 shares of
Common Stock reserved for the Company's Incentive Stock Option Plan and
Nonqualified Stock Option Plan, respectively.
The Company also authorized in 1994 the Equity Plan For Directors. The
Equity Plan For Directors is a fixed stock option plan whereby vesting
is dependent upon the performance of the market price of the Common
Stock. Under the Equity Plan For Directors, options may be granted for
the purchase of up to 500,000 shares of Common Stock to outside
directors. Under the terms of the Equity Plan For Directors, the option
price cannot be less than 100% of the fair market value of the Common
Stock on the date of the grant.
Information with respect to stock options is summarized as follows:
<TABLE>
<CAPTION>
Available for Outstanding Exercisable Weighted Average
------------- ----------- ----------- ----------------
Grant Options Options Exercise Price
----- ------- ------- --------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 1,203,539 3,750,775 $ 2.14
Additional shares Authorized in 1994 1,500,000
Granted (1,295,000) 1,295,000 $ 5.69
Canceled 502,403 (502,403) $ 2.75
Exercised 0 (753,300) $ 1.46
--------- ---------
BALANCE AT DECEMBER 31, 1994 1,910,942 3,811,019 $ 3.39
Exercisable at December 31, 1994 1,219,784 $ 2.22
=========
Granted (21,940) 21,940 $10.37
Canceled 0 0 $ 0
Exercised 0 (909,333) $ 2.16
--------- ---------
BALANCE AT DECEMBER 31, 1995 1,889,002 2,923,625 $ 3.83
Exercisable at December 31, 1995 1,242,885 $ 2.86
=========
Granted (356,000) 356,000 $ 6.23
Canceled 163,000 (163,000) $ 5.65
Exercised 0 (106,300) $ 1.72
--------- ---------
BALANCE AT DECEMBER 31, 1996 1,696,002 3,010,325 $ 4.09
========= =========
Exerciseable at December 31, 1996 1,498,173 $ 3.08
=========
</TABLE>
At December 31, 1997, the options groups outstanding based on ranges
of exercise prices is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Range of Exercise Number Weighted Weighted- Number Weighted-
Price Outstanding Average Average Exercisable Average
Remaining Life Exercise Price Exercise Price
(Years)
---------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.01-$2.50 988,258 5.22 $1.99 714,658 $1.81
$2.60-$5.50 1,147,127 6.04 $4.21 612,127 $3.67
$5.60-$8.13 753,000 7.99 $5.87 147,000 $5.72
$8.25-$12.75 121,940 8.57 $8.99 24,388 $9.35
--------- ---- ----- --------- -----
3,010,325 6.36 $4.09 1,498,173 $3.08
</TABLE>
38
<PAGE> 39
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans.
Had compensation cost for the Company's stock option plans been
determined consistent with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based compensation", the
Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net Loss: As Reported $7,154,609 $6,323,373
Pro Forma $7,351,632 $6,349,094
Net Loss Applicable to Common Stockholders: As Reported $7,204,264 $6,624,786
Pro Forma $7,401,287 $6,650,507
Net Loss per share: As Reported $ 0.35 $ 0.47
Pro Forma $ 0.36 $ 0.47
</TABLE>
The fair value of each option for 1996 and 1995 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: dividend yield
of 0% for all years; expected volatility of 69.7%; risk-free interest
rates ranging from 5.4% to 7.2%; and expected lives of 6 years. The
weighted average fair value of options on the date of grant during 1996
and 1995 was $3.64 and $6.25, respectively.
In connection with the settlement of a claim in 1994, Common Stock
warrants to purchase 40,000 shares of Common Stock were issued. The
Company had the following Common Stock warrants outstanding at December
31, 1996, 1995, and 1994, respectively:
<TABLE>
<CAPTION>
Warrants outstanding
--------------------
Number Weighted Average
------ ----------------
Exercise Price
--------------
<S> <C> <C>
December 31, 1996
Consultants 525,000 $9.44
Officers and directors 915,000 $2.66
---------
1,440,000 $5.13
=========
December 31, 1995
Consultants 550,000 $9.22
Officers and directors 915,000 $2.66
---------
1,465,000 $5.12
=========
December 31, 1994
Consultants 265,000 $3.57
Officers and directors 965,000 $2.77
---------
1,230,000 $2.94
=========
</TABLE>
(11) 401(k) PROFIT SHARING PLAN:
The Company sponsors for all employees a 401(k) Profit Sharing Plan
("the Plan") which was amended January 1, 1995. Under the Plan, an
employee may elect to contribute on a pre-tax basis to a retirement
account up to 15% of the employee's compensation up to the maximum
annual contributions permitted by the Internal Revenue Code. The
Company matches 50% of each participants contributions up to a maximum
of 4% of the participant's compensation. Each employee is fully vested
at all times with respect to his or her contributions. The Company's
contribution and administration expense was approximately $6,000 for
each of the years ended December 31, 1996 and 1995.
39
<PAGE> 40
(12) COMMITMENTS AND CONTINGENCIES
Claims and Legal Actions:
In February 1997, the Company and filed a complaint asserting a claim
against Engelhard's acquisition of Telaire Systems, Inc. Aside from the
preceding claim, the Company is not engaged in any material lawsuits.
(13) INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation
allowance has been provided on the net deferred tax assets due to the
uncertainty of realization.
Temporary differences and carryforwards which give rise to deferred tax
assets at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforward $ 12,798,000 $ 10,180,000
Other 10,000 10,000
------------ ------------
$ 12,808,000 $ 10,190,000
Less valuation allowance (12,808,000) (10,190,000)
------------ ------------
Total $ 0 $ 0
============ ============
</TABLE>
The Company has incurred losses since inception. At December 31, 1996
the Company has federal net operating loss carryforwards of
approximately $33 million, which begin to expire in 1999. The
availability and use of losses against future taxable income, if any,
may be limited by Internal Revenue Code Section 382 as a result of
certain changes in ownership that have occurred.
(14) OPERATING STATEMENT INFORMATION:
Selected operating statement information for each of the three years in
the period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs $ 0 $ 0 $ 1,411
Advertising $ 0 $ 0 $12,031
Amortization:
Patent and software $ 0 $ 0 $ 1,650
</TABLE>
For the year ended December 31, 1995, the Company's reserve for
doubtful accounts was $0. During 1994, the provision for doubtful
accounts was increased by approximately $18,000 which was included in
the general and administrative expense in the accompanying Statement of
Operations. In 1995 accounts receivable deemed uncollectible and
charged to the reserve for doubtful accounts amounted to approximately
$19,000. In connection with the formation of the Partnership in 1994,
$32,000 of the reserve for doubtful accounts was transferred to the
Partnership along with the related receivables.
40
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners of Engelhard/ICC
We have audited the accompanying balance sheets of Engelhard/ICC (Partnership)
as of December 31, 1996 and 1995 and the related statements of operations,
changes in partners' capital and cash flows for the years ended December 31,
1996 and 1995 and the period February 7, 1994 (date of formation) to December
31, 1994. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Engelhard/ICC as of December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 and for the period February 7, 1994 (date
of formation) to December 31, 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1, the
Partnership incurred losses accumulating to $28,786,732 through December 31,
1996 and it is primarily dependent upon its partners for financial support.
These factors, among others, raise substantial doubt about the Partnership's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 19, 1997
41
<PAGE> 42
ENGELHARD/ICC
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,192,997 $ 346,480
Accounts receivable, net of allowance for doubtful accounts of
$39,786 and $40,000 respectively 2,623,769 2,057,420
Accounts receivable - ICC Technologies, Inc. 17,035 0
Inventories 4,570,952 3,385,125
Prepaid expenses and other 278,762 158,939
----------- -----------
Total current assets 8,683,515 5,947,964
PROPERTY, PLANT AND EQUIPMENT, net 7,990,125 8,263,642
CASH HELD IN ESCROW 307,476 865,744
PURCHASED INTANGIBLES, net 991,883 1,117,631
OTHER ASSETS, net 986,232 684,524
----------- -----------
Total assets $18,959,231 $16,879,505
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts Payable:
Trade $ 1,404,366 $ 800,289
ICC Technologies, Inc. 0 160,973
Engelhard Corporation 298,084 204,536
Accrued liabilities 481,230 353,596
Short-term loan 2,750,000 2,750,000
Current portion of long term debt 64,529 51,870
----------- -----------
Total current liabilities 4,998,209 4,321,264
----------- -----------
LONG-TERM DEBT 8,642,330 8,649,885
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 5,318,692 3,908,356
----------- -----------
Total liabilities and partners' capital $18,959,231 $16,879,505
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 43
ENGELHARD/ICC
STATEMENT OF OPERATIONS
for the year ended December 31, 1996 and 1995 and
for the period February 7, 1994 (date of formation) to December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES $ 10,504,609 $ 8,944,279 $ 1,620,386
COST OF GOODS SOLD 13,776,459 10,883,995 1,591,821
------------ ------------ -----------
Gross Profit (3,271,850) (1,939,716) 28,565
------------ ------------ -----------
OPERATING EXPENSES:
Marketing 3,563,817 3,412,008 2,061,027
Engineering 1,053,809 936,415 1,233,282
Research and Development 1,055,758 1,133,780 894,837
General and administrative 3,207,460 2,440,722 1,539,140
------------ ------------ -----------
Total operating costs 8,880,844 7,922,925 5,728,286
------------ ------------ -----------
Loss from operations (12,152,694) (9,862,641) (5,699,721)
INTEREST:
Interest income 94,766 50,679 138,718
Interest expense (531,736) (760,261) (63,842)
------------ ------------ -----------
(436,970) (709,582) 74,876
------------ ------------ -----------
NET LOSS $(12,589,664) $(10,572,223) $(5,624,845)
============ ============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
-43-
<PAGE> 44
ENGELHARD/ICC
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1996 and 1995
for the period February 7, 1994 (date of formation) to December 31, 1994
<TABLE>
<CAPTION>
--------------
<S> <C>
Capital contributed by Engelhard, cash $ 8,633,434
Net assets of ICC transferred, excluding $900,000 note payable to Engelhard
contributed to partners' capital 839,322
Equalization amount due ICC at formation (389,322)
Residual funds from joint development program contributed to partners'
capital 21,990
Net Loss of Partnership (5,624,845)
-------------
Partners' capital, December 31, 1994 3,480,579
Conversion of general partners' loan to partners' capital 5,000,000
Capital Contributions 6,000,000
Net Loss of Partnership (10,572,223)
-------------
Partners' capital, December 31, 1995 3,908,356
Capital Contributions 14,000,000
Net Loss of Partnership (12,589,664)
-------------
Partners' capital, December 31, 1996 $ 5,318,692
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-44-
<PAGE> 45
ENGELHARD/ICC
STATEMENT OF CASH FLOWS
for the year ended December 31, 1996 and 1995 and
for the period February 7, 1994 (date of formation) to December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(12,589,664) $(10,572,223) $ (5,624,845)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,178,690 940,333 224,516
Provision for doubtful accounts 40,000 31,104 0
Provisions for inventory obsolescence and valuation 941,030 600,000 0
Amortization 170,367 160,565 24,219
Write-off of equipment 23,471 0 0
(Increase) decrease in:
Receivables (606,349) (1,424,973) (426,602)
Inventories (2,126,857) (1,545,616) (1,950,797)
Prepaid expenses and other (119,823) (83,103) (49,346)
Increase (decrease) in:
Accounts payable 604,077 (509,281) 1,049,231
Payables to ICC Technologies, Inc. (178,008) 36,878 (15,227)
Payables to Engelhard Corporation 93,548 141,697 62,839
Accrued expenses and other liabilities 127,634 119,368 134,649
------------ ------------ ------------
Net cash used in operating activities (12,441,884) (12,105,251) (6,571,363)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (928,644) (1,257,464) (7,879,939)
Purchases of intangibles (346,327) (134,244) (1,480,715)
Cash held in escrow 558,268 (865,744) 0
------------ ------------ ------------
Net cash used in investing activities (716,703) (2,257,452) (9,360,654)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from long-term debt 57,072 69,956 175,044
Repayments of long-term debt (51,968) (43,245) 0
Proceeds from issuance of bonds 0 8,500,000 0
Bond issuance costs 0 (215,979) 8,633,434
Capital contributions by general partners 14,000,000 6,000,000 0
Proceeds from short-term debt 0 2,750,000 0
Proceeds from Joint Development Program (at formation) 0 0 21,990
Equalization payment to ICC 0 0 (250,000)
Proceeds from (repayment of) notes payable to general partners 0 (3,000,000) 8,000,000
------------ ------------ ------------
Net cash provided by financing activities 14,005,104 14,060,732 16,580,468
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 846,517 (301,971) 648,451
Cash and Cash Equivalents, Beginning of Period 346,480 648,451 0
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 1,192,997 $ 346,480 $ 648,451
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-45-
<PAGE> 46
ENGELHARD/ICC
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS:
Business and Formation and Going Concern
Engelhard/ICC (the "Partnership") is a Pennsylvania general
partnership. The Partnership is engaged in the business of designing,
manufacturing and marketing climate control systems to supplement or
replace conventional air conditioning systems. The Partnership
currently markets its systems to certain targeted applications within
the commercial air conditioning market primarily in North America and
Asia-Pacific. On February 7, 1994, ICC Technologies, Inc. ("ICC") and
Engelhard Corporation ("Engelhard"), through their respective
subsidiaries (the "general partners"), formed the Partnership. The
desiccant air conditioning business conducted by ICC Technologies, Inc.
prior to the formation of the Partnership is now being conducted by the
Partnership.
The general partners both have an equal 50% interest in the
Partnership. In exchange for its 50% interest in the Partnership, ICC
Technologies, Inc. transferred to the Partnership substantially all of
its assets, with the exception of cash and certain other assets not
related to the desiccant air conditioning business, subject to certain
liabilities; Engelhard Corporation, in exchange for a 50% interest in
the Partnership, (a) contributed to the Partnership approximately
$8,600,000, (b) entered into a Supply Agreement pursuant to which it
agreed to supply desiccants to the Partnership, (c) entered into a
Technology License Agreement pursuant to which Engelhard Corporation
and the Partnership licensed to each other certain technology rights,
and (d) agreed to provide credit support to the Partnership in the
amount of $3,000,000. Pursuant to their agreement to provide credit
support, Engelhard has guaranteed the short-term loan of $2,750,000 at
December 31, 1996.
ICC Technologies, Inc. transferred to the Partnership, upon formation,
approximately $60,000 of net liabilities which consisted of
approximately: $240,000 in receivables; $490,000 of inventory; $290,000
of property and equipment; $180,000 in other assets; $360,000 in
accounts payable and accrued liabilities; and $900,000 notes payable to
Engelhard Corporation. The amounts transferred were recorded at ICC
Technologies' historical cost.
Going Concern
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Partnership has incurred cumulative losses from
its formation to December 31, 1996 of $28,786,732 and has been
primarily dependent on its partners for financial support. Until the
Partnership generates sufficient cash flows from operations, it will be
primarily dependent upon the partners to provide financial support.
Revenues have been insufficient to cover costs of operations for the
Partnership. The Partnership's continuation as a going concern is
dependent on its ability to: (i) generate sufficient cash flows to meet
its obligations on a timely basis, (ii) obtain additional financing as
may be required, and (iii) ultimately attain profitable operations and
positive cash flows from operations.
The Partnership's ability to generate sufficient cash for the next
twelve months to support its operations is primarily dependent on
increased sales. The Partnership anticipates it can increase sales
through additions to its sales staff, an expansion of the
manufacturer's representative network, establishment of strategic
relationships with air conditioning manufacturers and distributors and
through targeted marketing of its products to end users. The
Partnership also expects to improve cash flow by reducing manufacturing
costs through process improvements, product design changes and
increased unit production. If the Partnership is unable to generate
sufficient cash to support its operations through increased sales and
cost reductions it will then be dependent on funding from the general
partners.
The Partnership obtained third party financing through the issuance of
industrial development bonds in 1995 (see note 7). During the year 1996
and 1995 the Partnership received capital contributions of $14,000,000
and $6,000,000, respectively, from its partners. The Partnership
expects that its partners will continue to provide sufficient financial
support until the operations of the Partnership generate sufficient
cash flow and such support is no longer required; however, there can be
no assurance that the Partnership will receive sufficient financial
support, generate sufficient cash flow or obtain sufficient funds from
other sources.
46
<PAGE> 47
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements include the accounts of the Partnership for
the years ended December 31, 1996 and 1995 and the period from February
7, 1994 (date of formation) to December 31, 1994 (the "period ended
December 31, 1994").
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents for the purpose
of determining cash flows. The carrying amount approximates fair value
due to the short-term maturity of these instruments.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Assets under capital
lease are recorded at the present value of the future lease payments.
Costs of major additions and improvements are capitalized and
replacements, maintenance and repairs, which do not improve or extend
the life of the respective assets, are charged to operations as
incurred.
When an asset is sold, retired or otherwise disposed of, the cost of
the property and equipment and the related accumulated depreciation are
removed from the respective accounts, and any resulting gains or losses
are reflected in operations.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leased assets under capital
leases are amortized over the period of the lease or the service lives
of the improvements, whichever is shorter, using the straight-line
method.
Purchased Intangible Assets
Purchased intangible assets, consisting primarily of a license
agreement acquired in connection with the acquisition of certain assets
(See note 6), are amortized over ten years using the straight-line
method.
Patents
Patents are amortized over their estimated useful lives not exceeding
seventeen years using the straight-line method.
Bond Issuance Costs
Bond issuance costs are deferred and amortized over the life of the
bonds using the straight-line method. Amortization of bond issuance
costs is included in interest expense.
Income Taxes
Partnership income, if any, is taxable to the general partners.
Accordingly, no provision for income taxes has been made by the
Partnership.
47
<PAGE> 48
Revenue Recognition
Revenues are recognized when equipment is shipped for equipment
sales contracts, and when equipment is installed and operating for
installation contracts. Maintenance service revenue is recognized
when services provided are complete. Processing fees for fabricating
raw materials into substrate are recognized in revenue in the period
the substrate material is shipped.
Research and Development Costs
Research and development costs are expensed as incurred. Research
and development costs amounted to approximately $953,000, $1,134,000
and $895,000 for the year ended December 31, 1996 and 1995 and the
period ended December 31, 1994, respectively.
Warranty
The Partnership's warranty on its equipment is for eighteen months
from date of shipment or one year from date of original
installation, except for desiccant or thermal rotors which are
warranted for five years from the date of shipment. The Partnership
records a reserve for the estimated cost of repairing or replacing
any faulty equipment covered under the Partnership's warranty.
Concentration of Credit Risk
The Partnership invests its cash primarily in deposits with major
banks at times, these deposits may be in excess of federally insured
limits. The Partnership has sold its equipment and services to
end-users in retail industry, primarily in the continental United
States and Asia-Pacific rim. Concentration of credit risk with
respect to trade receivables is moderate due to the relatively
diverse customer base. At December 31, 1996, the Partnership had
trade receivables of approximately $549,000 from one customer.
During 1996, revenues from this customer amounted to approximately
$4.3 million, which represents approximately 41% of the Partnership
revenues. Trade receivables from this customer were current at
December 31, 1996. Ongoing credit evaluations of customers'
financial condition are performed and generally no collateral is
required. The Partnership maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded
management's expectations. The partnership does not anticipate non
performance by any of the counterparties that have been granted
credit or hold instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Long-lived Assets
The Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," effective for fiscal years
beginning after December 15, 1995. The Statement requires long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. The
Partnership adopted SFAS No. 121 effective January 1, 1996, and is
not aware of any events or circumstances which indicate the
existence of an impairment which would be material to the
Partnership's financial statements.
48
<PAGE> 49
(3) INVENTORIES:
Inventories comprise the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Raw materials and purchased parts $ 2,013,913 $1,115,561
Work-in-process 1,547,641 1,212,087
Finished goods 1,591,228 1,147,477
----------- ----------
5,152,782 3,475,125
Less: Allowance for inventory obsolescence (581,830) (90,000)
=========== ==========
$ 4,570,952 $3,385,125
=========== ==========
</TABLE>
Inventory is net of an allowance for inventory obsolescence of
$581,830, and $90,000 as of December 31, 1996 and 1995,
respectively. The Partnership recorded a provision of $941,000 and
$600,000 for inventory obsolescence and valuation which has been
included in cost of goods sold in the statements of operations for
1996 and 1995, respectively. In 1996 and 1995 the Partnership
wrote-off approximately $449,000 and $558,000, respectively, of
obsolete inventory against the allowance for inventory obsolescence.
Raw materials purchased from Engelhard amounted to approximately
$272,000, $86,000 and $169,000 for the years ended December 31, 1996
and 1995 and for the period ended December 31, 1994, respectively.
The Partnership designs, manufactures and markets desiccant based
climate control systems which have not yet achieved consistent sales
levels and consistent product mix. The Partnership's products are
also subject to change due to technological improvements.
Consequently, the Partnership may from time to time have inventory
levels in excess of its short-term needs. Items in inventory may
become obsolete due to changes in technology or product design.
Management has developed a program to monitor inventory levels;
however, it is possible that a material loss could ultimately result
in the disposal of excess inventory or due to obsolescence.
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, Plant and equipment, net, consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Land $ 390,000 $ 390,000
Building 1,779,721 1,622,569
Machinery and equipment 7,607,702 7,455,831
Furniture, fixtures and
leasehold improvements 794,912 305,169
------------ -----------
10,572,335 9,773,569
Less- accumulated depreciation (2,582,210) (1,509,927)
============ ===========
$ 7,990,125 $ 8,263,642
============ ===========
</TABLE>
The Partnership incurred $ 651,774 of construction and installation
costs in progress associated with equipment which had not been
placed in service as of December 31, 1995. Machinery and equipment
purchased through or from Engelhard amounted to approximately
$36,000 in 1995.
49
<PAGE> 50
(5) OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Patents and Trademarks $ 877,623 $ 531,297
Bond Issue Costs 219,483 215,979
Deposits 33,854 32,628
Other 2,000 1,200
----------- ---------
1,132,960 781,104
Accumulated amortization (146,728) (96,580)
---------
$ 986,232 $ 684,524
=========== =========
</TABLE>
(6) ASSET ACQUISITION:
On December 1, 1994, the Partnership acquired for approximately $8.2
million in cash, real property and substantially all other
manufacturing assets of an existing manufacturing facility located in
Miami, Florida from Ciba-Geigy Corporation ("Ciba"), which currently
produces the small cell, honeycomb structures that are the base
material of the desiccant and thermal rotors that are an integral part
of the Partnership's products. The former Ciba plant produced primarily
large cell substrate which the Partnership is prohibited to produce or
sell other than to Ciba. The Partnership also acquired, as part of the
transaction, an exclusive technology license to use Ciba's proprietary
process which is necessary to manufacture such small cell, honeycomb
structures. Assets acquired consisted of approximately: $6.9 million of
Plant, Property and Equipment and $1.3 million of intangibles.
To finance the acquisition, the general partners each lent to the
Partnership $4,000,000 ("General Partners' Loan") bearing interest
payable monthly at the Prime Rate plus 1%. In April 1995, the
Partnership obtained financing from the issuance of $8,500,000 of
industrial development revenue bonds (see note 7). In 1995, the
proceeds of these bonds were used to repay $3,000,000 of the General
Partners' Loan, $1,500,000 to each general partner, and provide for
improvements and capital equipment at the Miami facility.
(7) LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Industrial development revenue bonds; interest determined weekly
and payable weekly; bonds mature on April 2020, but are subject
to redemption at the option of the
Partnership from April 2000 $ 8,500,000 $ 8,500,000
Notes payable
due April 2000; interest at 2% per annum; interest payable
monthly; interest and principal payable in equal monthly
installments over 60-month period
commencing April 1995 138,649 180,642
Other 68,210 21,113
------------ -----------
8,706,859 8,701,755
Less- Current portion (64,529) (51,870)
------------ ------------
$ 8,642,330 $ 8,649,885
============ ============
</TABLE>
50
<PAGE> 51
In connection with the issuance of the industrial revenue bonds (see
note 6), cash of $307,476 is held in escrow pending the Partnership's
incurrence of certain qualified expenditures.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 64,529
1998 55,983
1999 56,001
2000 18,932
2001 11,414
thereafter 8,500,000
------------
$ 8,706,859
============
</TABLE>
The general partners are guarantors on the long-term debt.
Substantially all of the assets are placed as collateral under the
various debt agreements. In addition, Engelhard is the guarantor on the
short-term loan which amounts to $2,750,000 as of December 31, 1996.
The short-term loan is payable on demand with the interest rate
adjusted on a weekly basis. The interest rate at December 31, 1996 was
5.875%. The fair value of the Partnership's debt was determined by
reference to quotations available in markets where similar issues are
traded. The interest on the long-term debt is adjusted weekly to
current market rates. The estimated fair values of long-term debt at
December 31, 1996 approximates the carrying amount.
(8) REVENUES:
Revenues comprise of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Equipment sales $ 6,097,736 $2,558,250 $1,529,811
Substrate processing 4,302,233 5,801,666 35,345
Licensing fees -- 500,000 --
Maintenance and service 104,640 84,363 55,230
----------- ---------- ----------
$10,504,609 $8,944,279 $1,620,386
=========== ========== ==========
</TABLE>
The Partnership fabricates large cell honeycomb substrate materials at
its Miami facility under a Manufacturing and Supply Agreement with
Ciba-Geigy Corporation ("Ciba"'). All rights and obligations under this
agreement were assigned to Hexcel Corporation by Ciba. Hexcel provides
the raw materials to be fabricated into large cell honeycomb substrate
and retains title to the raw materials, work-in-process and finished
goods. The Partnership receives processing fees for fabricating the raw
materials into large cell honeycomb substrate. Processing fees are
recognized in revenues in the period the fabricated substrate material
is shipped. The Manufacturing and Supply Agreement is for a period of
five years. The Partnership is in the third year of performing services
under such Agreement. Export sales of equipment were approximately
$1,457,000 , $643,000 and $238,000 in 1996, 1995 and 1994,
respectively.
(9) PARTNERS' CAPITAL:
During 1996, $7,000,000 was contributed by each of the general
partners. In January and March 1997, additional capital contributions
of $1,000,000 were contributed by each of the general partners.
During 1995, $3,000,000 was contributed by each of the general
partners. In conjunction with the General Partners' Loan of $8,000,000
and issuance of $8,500,000 of industrial development revenue bonds (see
note 6), $3,000,000 was repaid to each general partner and the
remaining $5,000,000
51
<PAGE> 52
outstanding balance on the loan was converted into a capital
contribution, $2,500,000 for each general partner in 1995.
(10) RELATED PARTY TRANSACTIONS:
The Partnership provided approximately $95,000,$83,000 and
$91,000 in various administrative office support services to ICC
during the year ended December 31, 1996, 1995 and the period ended
December 31, 1994, respectively. Engelhard provided approximately
$504,000, $351,000 and $ 297,000 in various administrative office
support services to the Partnership during the year ended December
31, 1995 and the period ended December 31, 1994, respectively.
Engelhard provided approximately $17,000, $162,000 and $ 320,000 in
research and development to the Partnership during the year ended
December 31, 1996 and 1995 and the period ended December 31, 1994,
respectively. ICC provided approximately $47,000 and $72,000 in
various administrative office support services to the Partnership
during the year ended December 31, 1996 and 1995, respectively. The
Partnership incurred approximately $328,000 and $ 63,000 during the
year ended December 31, 1995 and the period ended December 31, 1994,
respectively, of interest expense to the general partners in
connection with the $8,000,000 General Partners' Loan (see note 6).
In accordance with the Transfer Agreement entered into by the
general partners, a distribution of approximately $140,000 was paid
to ICC in 1995.
(10) SUPPLEMENTAL CASH FLOW DISCLOSURES:
Excluded from the Statement of Cash Flows for the year ended
December 31, 1996 was the write-off of $449,200 of inventory and
$40,214 of bad debts.
Excluded from the Statement of Cash Flows for the year ended
December 31, 1995 was the conversion of $5,000,000 of General
Partners' Loans to Partners' Capital and the write-off of $14,283 of
bad debts.
Excluded from the Statement of Cash Flows for the period ended
December 31, 1994, were the effects of assets and liabilities
transferred to the Partnership from ICC which consisted of
approximately $240,000 in receivables; $490,000 of inventory;
$290,000 of property and equipment; $180,000 in other assets;
$360,000 in accounts payable and accrued liabilities; and $900,000
notes payable to Engelhard.
Cash paid for interest amounted to approximately $516,394 and
$823,000 for the years ended December 31, 1996 and 1995,
respectively.
(11) 401(k) PROFIT SHARING PLAN:
Effective January 1, 1995, the Partnership provides for all
employees a 401(k) Profit Sharing Plan ("the Plan"). Under the Plan,
an employee may elect to contribute on a pre-tax basis to a
retirement account up to 15% of the employee's compensation up to
the maximum annual contributions permitted by the Internal Revenue
Code. The Partnership matches 50% of each participants contributions
up to a maximum of 4% of the participant's compensation. Each
employee is fully vested at all times with respect to his or her
contributions. The Partnership's contribution and administration
expense was approximately $95,000 and $80,000 for the years ended
December 31, 1996 and 1995, respectively.
52
<PAGE> 53
(11) COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Partnership has operating lease commitments for its facilities,
vehicles and certain equipment. In certain instances, these leases
contain purchase and renewal options, both of which are at fair market
value. The Partnership's offices are leased on a month-to-month basis.
The future minimum lease payments for these leases at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 357,240
1998 526,440
1999 523,843
2000 521,321
2001 513,918
</TABLE>
Rent expense under these operating leases was $469,580, $224,634 and
$188,158 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In order to provide capacity and consolidate the Philadelphia office
and manufacturing operations, the Partnership entered into a ten-year
lease commitment which begins April 1997, for approximately 140,000
square feet of office, manufacturing and assembly space. The lease
can be terminated after the fifth year. The Partnership is responsible
for paying its allocable portion of all real estate taxes, water and
sewer rates, and common expenses. The obligations under the lease
agreement are guaranteed by the general partners.
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant): ICC Technologies, Inc.
-------------------------------------
By: /s/ Irwin L. Gross
-------------------------------------
(Signature)
Name and Title: Irwin L. Gross, Chairman of the Board
-------------------------------------
Date: January 26, 1998
-------------------------------------
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 CAPACITY DATE
- --------- -------- ----
/s/Irwin L. Gross Chairman of the Board January 26, 1998
- --------------------------- President and Chief
Irwin L. Gross Executive Officer
/s/William A. Wilson Vice Chairman of the Board January 26, 1998
- --------------------------- and Director
William A. Wilson
/s/Manfred Hanuschek Chief Financial Officer January 26, 1998
- ---------------------------
Manfred Hanuschek
/s/Albert Resnick Director and Secretary January 26, 1998
- ---------------------------
Albert Resnick
/s/Andrew L. Shapiro Director January 26, 1998
- ---------------------------
Andrew L. Shapiro
/s/Stephen Schachman Director January 26, 1998
- ---------------------------
Stephen Schachman
/s/Mark Hauser Director January 26, 1998
- ---------------------------
Mark Hauser
/s/Charles Condy Director January 26, 1998
- ---------------------------
Charles Condy
/s/Robert Aders Director January 26, 1998
- ---------------------------
Robert Aders
54
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
ICC Technologies, Inc. (the "Company") on Form S-8 (File Nos. 33-37036,
33-37037, 33-85634, 33-85636, 33-89122 and 33-89124) of our report, which
includes an explanatory paragraph which refers to conditions that raise
substantial doubt about the Company's ability to continue as a going concern,
dated March 19, 1997, on our audits of the consolidated financial statements of
ICC Technologies, Inc. as of December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994, which report is included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1996. We also
consent to the incorporation by reference in the Registration Statements (set
forth above) of the Company of our report, which includes an explanatory
paragraph which refers to conditions that raise substantial doubt about
Engelhard/ICC's ability to continue as a going concern, dated March 19, 1997, on
our audits of the financial statements of Engelhard/ICC as of December 31, 1996
and 1995 and for the years ended December 31, 1996 and 1995, which report is
also included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 28, 1998
