SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 1998
ICC Technologies, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
0-13865 23-368845
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
330 South Warminster Road, Hatboro PA 19040
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(Address of principal executive offices, including zip code)
(215) 682-6600
-------------------------------
(Registrant's telephone number)
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(Former name or former address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
General
On February 27, 1998, pursuant to a Master Agreement dated as of
November 17, 1997 by and among ICC Technologies, Inc. ("ICC"), Engelhard
Corporation ("Engelhard") and Engelhard/ICC, a joint venture owned equally by
ICC and Engelhard ("E/ICC"), the parties effectuated a restructuring of E/ICC by
providing in substance for:
(a) the division of E/ICC into two separate operating limited
partnerships, one to manufacture and market complete, active Climate
Control Systems (herein defined) ("Fresh Air Solutions, L.P."), and the
other to manufacture and market the heat-exchange and desiccant coated
wheel-shaped rotors that are components of the Climate Control Systems
("Engelhard Hexcore, L.P."); and
(b) the exchange by ICC and Engelhard of certain of their
respective interests in each partnership and the payment by Engelhard
to ICC of approximately $18,600,000, such that after the exchanges:
(i) ICC now owns 90% of Fresh Air Solutions, L.P.
and 20% of Engelhard Hexcore, L.P.; and
(ii) Engelhard now owns 80% of Engelhard Hexcore,
L.P. and 10% of Fresh Air Solutions, L.P. (the
"Restructuring"), all as more fully described
below.
The Master Agreement and transactions contemplated thereby were
approved by the stockholders of ICC at a Special Meeting of Stockholders held on
February 23, 1998.
The Master Agreement and E/ICC Restructuring Transactions
ICC and Engelhard each owned, indirectly, a 50% general partner
interest in Engelhard/ICC, which was formed in February 1994 to design,
manufacture and sell desiccant climate control systems and desiccant and
heat-exchange wheel components for the dehumidification and cooling markets, the
industrial drying/dehumidification market and the air conditioning and microbe
reduction market for health care facilities.
On February 27, 1998, ICC and Engelhard effected the Restructuring of
E/ICC in accordance with the Master Agreement, pursuant to which, among other
things, E/ICC transferred all of its assets, including the lease and leasehold
improvements in E/ICC's facility in Hatboro, Pennsylvania, and liabilities
related to the design, manufacture, assembly, marketing and sale of Climate
Control Systems (the "Box Business") to a newly formed limited partnership under
the laws of the Commonwealth of Pennsylvania, Fresh Air Solutions, L.P. in
accordance with the terms of a Contribution Agreement, dated November 17, 1997
between E/ICC and Fresh Air Solutions, L.P. (the "Contribution Agreement"). Upon
the closing of the Master Agreement, ICC Desiccant Technologies, Inc. ("I
Partner"), a wholly-owned subsidiary of ICC, became the sole general partner of
Fresh Air Solutions, L.P. with a 1% general partnership interest and a limited
partner of Fresh Air Solutions, L.P. with an 89% limited partnership interest.
Engelhard DT, Inc. ("E Partner"), a wholly-owned subsidiary of Engelhard, became
the other limited partner of Fresh Air Solutions, L.P. with a 10% limited
partnership interest.
E/ICC retained those assets and liabilities related to the design,
manufacture, assembly, marketing and sale of products fabricated from honeycomb
substrates and any and all rotors or wheels or similar products used in Climate
Control Systems (the "Wheel Business") and has been converted into a limited
partnership under the laws of the State of Delaware, Engelhard Hexcore, L.P.
Immediately prior to such conversion, I Partner assigned 60% of its interest in
E/ICC (30% of the aggregate partnership interest in E/ICC) to a newly-formed
limited partnership under the laws of the Commonwealth of Pennsylvania, ICC
Investment LP, an affiliate of ICC, which sold such interest to E Partner for
approximately $18.6 million at Closing pursuant to the terms of an E/ICC
Purchase and Sale Agreement, dated November 17, 1997, between E Partner and ICC
Investment LP (the "E/ICC Purchase and Sale Agreement"). As a result of the
Restructuring, Engelhard's wholly-owned subsidiary, E Partner, is the sole
general partner of Engelhard Hexcore, L.P. with a 1% general partnership
interest and a limited partner of
<PAGE>
Engelhard Hexcore, L.P. with a 79% limited partnership interest. I Partner is
the other limited partner of Engelhard Hexcore, L.P. with a 20% limited
partnership interest.
In determining the fairness of the transactions contemplated by the
Master Agreement to ICC's stockholders, the Board of Directors of ICC examined,
among other things, E/ICC's and ICC's current business and financial positions,
including the ability to fund future operating needs, business strategy and
prospects, including the potential value to stockholders of ICC of separating
the Box Business and Wheel Business, the market outlook for the Box Business and
Wheel Business, the market price of ICC's Common Stock, the advantages and
disadvantages experienced by ICC in having Engelhard as a partner in the E/ICC
structure, the importance of having control over the management of the Box
Business and certain other factors which it deemed relevant to its
deliberations, none of which was material either individually or in the
aggregate. Based upon those factors, ICC entered into "arms length" negotiations
with Engelhard and entered into an agreement which it deemed to be fair,
reasonable and in the best interests of ICC's stockholders. Neither Engelhard
nor ICC engaged an investment banking firm to value the businesses during or in
furtherance of their negotiations of the Restructuring, but subsequent to the
establishment of the principal terms of the Restructuring by the parties, ICC
engaged Howard, Lawson & Company, a private investment bank, for the sole
purpose of assisting it in determining the fair market values of the Box and
Wheel Businesses for financial reporting purposes. After a review of the
relevant issues, Howard, Lawson & Company concluded that, because the nature and
prospects of the Box Business and Wheel Business, in each case, are highly
speculative and any indication of value premised on future operating results for
each business would be speculative, fair market value could not be determined in
either case within reasonable limits.
Business of ICC after Closing
Following the Closing of the Restructuring of E/ICC, the Box Business
formerly operated by E/ICC is now being operated by Fresh Air Solutions, L.P.,
in which ICC's wholly-owned subsidiary, I Partner, is the sole general partner
with complete management control and ownership of a 90% interest in Fresh Air
Solutions, L.P. ICC also holds a passive 20% limited partnership interest in
Engelhard Hexcore, L.P., which now operates the Wheel Business formerly
conducted by E/ICC. ICC may enter any other business it deems appropriate,
whether or not related to the Box Business, except that it may not be a reseller
of wheel-shaped rotors acquired under the Rotor Supply Agreement with Engelhard
Hexcore, L.P. other than as a component in the production and sale of Climate
Control Systems, which are defined as all air conditioning or air treatment
systems (whether pre-assembled units or kits that are to be assembled by
distributors, licensees, or customers) that cool, dehumidify, dry, heat and/or
filter air, by passing through one or more wheel-shaped rotors, which rotors may
or may not be treated with a desiccant material, or in other limited
circumstances. ICC is continuing to explore certain acquisition opportunities
which would help to broaden its product offerings or permit ICC to enter new
areas of business, however, to date, it has not entered into any agreements or
commitments to engage in any other activities.
The Box LP Limited Partnership
The Fresh Air Solutions Limited Partnership Agreement (the "Fresh Air
Solutions Limited Partnership Agreement"), which governs the operation of Fresh
Air Solutions, L.P., a newly-formed Pennsylvania limited partnership, provides
that: (i) Fresh Air Solutions, L.P. will be managed solely by I Partner, a
wholly-owned subsidiary of ICC, without interference by Engelhard or any of its
affiliates; (ii) any investments of property or cash in Fresh Air Solutions,
L.P. by ICC or its affiliates shall not dilute E Partner's percentage interest
in Fresh Air Solutions, L.P., (iii) the general partner and its Affiliates may
make loans to Fresh Air Solutions, L.P. which loans, together with interest,
shall be taken into account in determining the fair market value of Fresh Air
Solutions, L.P. for purposes of I Partner's buyout option discussed below; and
(iv) I Partner shall have an option, to be exercisable on January 1, 2004, to
acquire 100% of E Partner's interest in Fresh Air Solutions, L.P. at a price
equal to 95% of the fair market value of Fresh Air Solutions, L.P. on the date
of exercise of the option multiplied by E Partner's percentage interest in Fresh
Air Solutions, L.P.
The Wheel LP Limited Partnership.
Pursuant to the Master Agreement, E/ICC has been converted into a
Delaware limited partnership, and the Engelhard Hexcore Limited Partnership
Agreement (the "Engelhard Hexcore Limited Partnership Agreement") shall govern
the operation of Engelhard Hexcore, L.P. The Engelhard Hexcore Limited
Partnership Agreement is substantially similar to the Fresh Air Solutions
Limited Partnership
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Agreement and provides that: (i) Engelhard Hexcore, L.P. will be managed solely
by E Partner, a wholly-owned subsidiary of Engelhard, without interference by
ICC or any of its affiliates; (ii) any investments of property or cash in
Engelhard Hexcore, L.P. by Engelhard or its affiliates shall not dilute I
Partner's percentage interest in Engelhard Hexcore, L.P.; (iii) the general
partner and its affiliates may make loans to Engelhard Hexcore, L.P. which
loans, together with interest, shall be taken into account in determining the
fair market value of Engelhard Hexcore, L.P. for purposes of E Partner's buyout
option discussed below; and (iv) E Partner shall have an option, to be
exercisable on January 1, 2004, to acquire 100% of I Partner's interest in
Engelhard Hexcore, L.P. at a price equal to 95% of the fair market value of
Engelhard Hexcore, L.P. on the date of exercise of the option multiplied by I
Partner's percentage interest in Engelhard Hexcore, L.P.
Certain Related Agreements
Rotor Supply Agreement. In connection with the consummation of the
Restructuring of E/ICC pursuant to the Master Agreement, on February 27, 1998
Engelhard Hexcore, L.P. entered into a Rotor Supply Agreement (the "Rotor Supply
Agreement") with Fresh Air Solutions, L.P. Pursuant to the Rotor Supply
Agreement, Engelhard Hexcore, L.P. shall supply Fresh Air Solutions, L.P.'s
total requirements for heat-exchange and desiccant wheel-shaped rotors. In turn,
Fresh Air Solutions, L.P. shall be obligated to purchase its total requirements
for heat-exchange and desiccant wheel-shaped rotors from Engelhard Hexcore, L.P.
All wheel-shaped rotors purchased under the Rotor Supply Agreement will be sold
at prices which are lower than the best prices Engelhard Hexcore, L.P. will
offer its other customers for such rotors. The term of the Rotor Supply
Agreement is fifteen (15) years.
Cassette Supply Agreement. In connection with the consummation of the
Restructuring of E/ICC pursuant to the Master Agreement, on February 27, 1998
Fresh Air Solutions, L.P. and Engelhard Hexcore, L.P. entered into the Cassette
Supply Agreement (the "Cassette Supply Agreement"), whereby Fresh Air Solutions,
L.P. will supply Engelhard Hexcore, L.P. with cassettes, which consist of a
sheetmetal or other structure that holds a rotor, coated or uncoated with
ETS(TM), supported by casters or a hub, which itself consist of seals, drive
motor, belt and other components required to conduct heat or mass transfer, as
currently designed and with any modifications to such design made within twelve
months from the date of the agreement. Cassettes sold under this agreement will
be at prices which are more favorable to Engelhard Hexcore, L.P. than to other
customers of Fresh Air Solutions, L.P. for such products. The term of the
Cassette Supply Agreement is five (5) years.
Sensor Supply Agreement. In connection with the consummation of the
Restructuring of E/ICC pursuant to the Master Agreement, on February 27, 1998
Engelhard Sensor Technologies, Inc., which is a subsidiary of Engelhard ("Sensor
Technologies"), entered into a Sensor Supply Agreement ("Sensor Supply
Agreement") with Fresh Air Solutions, L.P., pursuant to which Sensor
Technologies will sell certain humidity and dew point infrared sensors that are
manufactured by Sensor Technologies to Fresh Air Solutions, L.P. for use in the
Box Business. The price to be paid for such products shall be more favorable to
Fresh Air Solutions, L.P. than the price offered by Sensor Technologies to its
other customers for such products. The term of the Sensor Supply Agreement is
five (5) years.
Substrate Supply Agreement. In connection with the consummation of the
Restructuring of E/ICC pursuant to the Master Agreement, on February 27, 1998
Engelhard Hexcore, L.P. entered into a Substrate Supply Agreement (the
"Substrate Supply Agreement") with Engelhard, pursuant to which Engelhard
Hexcore, L.P. will supply Engelhard's total requirements for substrates and
related materials. Such substrates or related materials will be sold to
Engelhard at prices which are more favorable to Engelhard than to other
customers of Engelhard Hexcore, L.P. for such products.
Desiccant Supply Agreement Novation. As part of the Restructuring of
E/ICC, Engelhard, E/ICC and Engelhard Hexcore, L.P. executed a Novation relating
to that certain Supply Agreement dated February 7, 1994 between Engelhard and
E/ICC for the supply of desiccant materials (the "Desiccant Supply Agreement").
The effect of this Novation will be that, effective after the Restructuring, the
Desiccant Supply Agreement will be between Engelhard and Engelhard Hexcore, L.P.
on the same terms and conditions set forth in the original Desiccant Supply
Agreement with the term of such agreement extended through February 27, 2012.
Thus, Engelhard Hexcore, L.P. will be obligated to purchase exclusively from
Engelhard all desiccant or drying materials or agents used in any adsorption
system that Engelhard Hexcore, L.P. may require in connection with the conduct
of the Wheel Business, subject to a "competitive offer" provision which will
enable Engelhard Hexcore, L.P. to purchase from third parties
3
<PAGE>
similar products at such prices, if available, subject to certain conditions. In
turn, Engelhard will be obligated to sell to Engelhard Hexcore, L.P. its total
requirements for such products.
Box Technology License Agreement. In connection with the consummation
of the Restructuring of E/ICC pursuant to the Master Agreement, on February 27,
1998 Fresh Air Solutions, L.P. entered into the Box Technology License Agreement
(the "Box Technology License") with Engelhard Hexcore, L.P., pursuant to which
Fresh Air Solutions, L.P. granted to Engelhard Hexcore, L.P. a nonexclusive,
royalty free, world-wide, perpetual license, with the further right to
sublicense, to all technology relating to the Box Business which is owned by
Fresh Air Solutions, L.P., and all improvements to such technology that are
conceived by employees of Fresh Air Solutions, L.P. and are subject to patents
or patent applications filed within twelve (12) months after execution of the
Box Technology License, other than improvements used solely on gas platform
systems. Engelhard Hexcore, L.P. may, however, only use such technology in the
Box Business and businesses ancillary or reasonably related to the Box Business.
Wheel Technology License Agreement. In connection with the consummation
of the Restructuring of E/ICC pursuant to the Master Agreement, on February 27,
1998 Fresh Air Solutions, L.P. and Engelhard Hexcore, L.P. entered into the
Wheel Technology License Agreement (the "Wheel Technology License"), pursuant to
which Engelhard Hexcore, L.P. granted Fresh Air Solutions, L.P. a nonexclusive,
royalty free, world-wide, perpetual license with the further right to
sublicense, for technology specifically covered by certain patents relating to
the Wheel Business and owned by Engelhard Hexcore, L.P. (which will not include
Hexcel's proprietary process utilized in manufacturing the small cell, honeycomb
substrate material used to make E/ICC's rotors which are licensed to Engelhard
Hexcore, L.P.) and any improvements to such technology conceived by employees or
representatives of Engelhard Hexcore, L.P. that are subject to patents or patent
applications within the twelve (12) month period after the signing of the
agreement. Fresh Air Solutions, L.P. may, however, utilize such technology only
in connection with the Box Business and businesses ancillary or reasonably
related to the Box Business.
E/ICC License Agreement. In connection with the consummation of the
Restructuring of E/ICC pursuant to the Master Agreement, on February 27, 1998
Fresh Air Solutions, L.P. entered into the E/ICC License Agreement (the "E/ICC
License") with Engelhard, pursuant to which Engelhard granted Fresh Air
Solutions, L.P. a non-exclusive, royalty free license to use the name
"Engelhard" as part of the "Engelhard/ICC" mark. The term of the E/ICC License
is two and one half years. If Fresh Air Solutions, L.P. uses the "Engelhard/ICC"
mark in writing for any purpose (except for use on products produced by Fresh
Air Solutions, L.P., product packaging material or existing signage at Fresh Air
Solutions, L.P.'s Hatboro facility), such use shall be accompanied with a
notation that Engelhard Corporation is a 10% passive investor in Fresh Air
Solutions, L.P. and is in no way involved in the business, operations,
management or control of Fresh Air Solutions, L.P.
Referral Agreement. In connection with the consummation of the
Restructuring of E/ICC pursuant to the Master Agreement, on February 27, 1998
Engelhard Hexcore, L.P. entered into a Referral Agreement (the "Referral
Agreement") with Fresh Air Solutions, L.P., whereby Fresh Air Solutions, L.P.
will sell climate control systems to customers referred to it by Engelhard
Hexcore, L.P. in order to assist Engelhard Hexcore, L.P. in generating interest
in the purchase of rotors by such customers. Climate control systems shall be
sold pursuant to the Referral Agreement on the same pricing, payment and invoice
terms as in effect from time to time by Fresh Air Solutions, L.P. for its
wholesale customers. Additionally, Engelhard Hexcore, L.P. will be able to have
continued, unhindered access to each customer after consummation of any sale
effected in accordance with this Referral Agreement but will in no event be
entitled to a commission for any sale thereunder. Engelhard Hexcore, L.P.
specifically acknowledges in the Referral Agreement that sales to customers it
refers to Fresh Air Solutions, L.P. shall be limited in nature.
General Releases. Upon consummation of the Restructuring of E/ICC,
Engelhard, E Partner and Sensor Technologies entered into a General Release,
under which ICC, I Partner, ICC Investment LP and E/ICC have been released from
any claims and liability related to any matter, including the management of
E/ICC and the matters at issue in the litigation between such parties related to
Engelhard's acquisition of Telaire Systems, Inc. (the "Released Claims"). In
addition, E/ICC entered into a General Release of Engelhard, E Partner, Sensor
Technologies, Telaire Systems, Inc., ICC, ICC Investment LP and I Partner for
any and all Released Claims. Finally, ICC, ICC Investment LP and I Partner
executed a General Release of Engelhard, E Partner, Sensor Technologies, Telaire
Systems, Inc. and E/ICC for any and all Released Claims.
4
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Accounting Treatment
The acquisition of the partnership interests in Fresh Air Solutions,
L.P. by ICC will be accounted for under the purchase method of accounting. The
non-monetary considerations exchanged for the ownership interests in Fresh Air
Solutions, L.P. and Engelhard Hexcore, L.P. were based upon the recorded
amounts.
Federal Income Tax Consequences
In evaluating the consequences of the Restructuring of E/ICC under the
Internal Revenue Code of 1986, as amended, ICC has come to believe that E/ICC's
transfer of certain of its assets, subject to certain liabilities, to Fresh Air
Solutions, L.P. will constitute a tax free division of the partnership. ICC also
believes that the subsequent distribution by E/ICC of its entire limited
partnership interest in Fresh Air Solutions, L.P. to I Partner and E Partner
will be tax free. Further, the distribution of assets by E/ICC to Fresh Air
Solutions, L.P. will cause I Partner and E Partner's basis in their respective
partnership interests in E/ICC to be reduced by the adjusted basis of the assets
distributed, but not below zero. The reduction in liabilities as the result of
the transfer to Fresh Air Solutions, L.P. is treated as a distribution of money,
which could cause recognition of gain. ICC believes that some gain may be
recognized as a result thereof.
In addition, ICC believes that I Partner's transfer of a portion of its
interest in E/ICC to ICC Investment LP and ICC Investment LP's subsequent
transfer of such interest to E Partner will constitute a sale of such interest
to E Partner. The sale will produce gain to ICC Investment LP, and through its
ownership of ICC Investment LP and its partners, ICC will report such gain to
the extent that the cash consideration exceeds the adjusted tax basis of the
partnership interest sold to E Partner. ICC believes that some of the gain may
be ordinary income if the partnership owns unrealized receivables or inventory
items. Conversely, ICC believes that the conversion of E/ICC into a limited
partnership interest is not considered an exchange of a partnership interest,
and therefore no gain or loss results. In addition, the partners' bases and
holding periods in their partnership interests will not be affected
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
The financial statements required pursuant to Item 7(a) of Form 8-K
upon giving effect to the consummation of the partnership Restructuring of E/ICC
contemplated by the Master Agreement were filed as part of the audited balance
sheets of E/ICC as of December 31, 1997 and 1996, and the related audited
statements of operations, changes in partners' capital and cash flows for the
years ended December 31, 1997, 1996 and 1995, which are included in ICC's annual
report on Form 10-K for the year ended December 31, 1997 at pages 46 through and
including page 58 therein, and are hereby incorporated herein by reference and
made a part hereof.
(b) Pro Forma Financial Information.
The pro forma financial information required pursuant to Item 7(b) of
Form 8-K upon giving effect to the consummation of the partnership Restructuring
of E/ICC contemplated by the Master Agreement, including the pro forma
consolidated balance sheet of ICC as of December 31, 1997 and pro forma
consolidated statement of operations of ICC for the year ended December 31,
1997, was filed as Exhibit 99 to ICC's annual report on Form 10-K for the year
ended December 31, 1997, and is hereby incorporated herein by reference and made
a part hereof.
(c) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Master Agreement dated as of November 17, 1997, by and among
ICC Technologies, Inc., ICC Investment, L.P., ICC Desiccant
Technologies, Inc., and Engelhard Corporation, Engelhard DT,
Inc., and Engelhard/ICC was filed as Exhibit "B" to ICC
Technologies, Inc.'s definitive Proxy Statement dated February
3, 1998 for the Special Meeting of Stockholders held on
February 23, 1998 and is hereby incorporated herein by
reference.
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2.2 Contribution Agreement dated as of November 17, 1997, between
Engelhard/ICC and Fresh Air Solutions, L.P. was filed as
Exhibit "C" to ICC Technologies, Inc.'s definitive Proxy
Statement dated February 3, 1998 for the Special Meeting of
Stockholders held on February 23, 1998 and is hereby
incorporated herein by reference.
99.1 The audited balance sheets of E/ICC as of December 31, 1997
and 1996, and the related audited statements of operations,
changes in partners' capital and cash flows of E/ICC for the
years ended December 31, 1997, 1996 and 1995, which were filed
as part of ICC's annual report on Form 10-K for the year ended
December 31, 1997.
99.2 The pro forma consolidated balance sheet of ICC as of December
31, 1997 and pro forma consolidated statement of operations of
ICC for the year ended December 31, 1997, which were filed as
Exhibit 99 to ICC's annual report on Form 10-K for the year
ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
ICC TECHNOLOGIES, INC.
----------------------
Registrant
By: /s/ Manfred Hanuschek
------------------------------------------
Manfred Hanuschek, Chief Financial Officer
Date: April 29, 1998
Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners of Engelhard/ICC
We have audited the accompanying balance sheets of Engelhard/ICC (Partnership)
as of December 31, 1997 and 1996, and the related statements of operations,
changes in partners' capital and cash flows for the years ended December 31,
1997, 1996 and 1995. 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, 1997 and 1996, the results of its operations and its cash flows for the
years ended December 31, 1997, 1996 and 1995 in conformity with generally
accepted accounting principles.
As more fully described in Notes 1 and 15, on February 27, 1998, the Partners
terminated the Partnership and divided its net assets into two separate limited
partnerships.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 20, 1998
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ENGELHARD/ICC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 275,717 $ 1,192,997
Accounts receivable, net of allowance for doubtful accounts
of $444,823 and $39,786, respectively 2,118,138 2,623,769
Accounts receivable - ICC Technologies, Inc. 17,720 17,035
Inventories 3,061,684 4,570,952
Prepaid expenses and other 79,859 278,762
----------- ------------
Total current assets 5,553,118 8,683,515
Property, plant and equipment, net 9,496,897 7,990,125
Cash held in escrow 15,010 307,476
Purchased intangibles, net 866,116 991,883
Other assets, net 830,469 986,232
----------- ------------
Total assets 16,761,610 $189,959,231
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term loan 2,750,000 2,750,000
Current portion of long term debt 69,557 64,529
Accounts Payable:
Trade 965,755 1,404,366
Engelhard Corporation 0 298,084
Accrued liabilities 3,802,839 481,230
----------- -----------
Total current liabilities 7,588,151 4,998,209
----------- -----------
Long-term debt 8,629,128 8,642,330
----------- -----------
Partners' capital 544,331 5,318,692
----------- -----------
Total liabilities and partners' capital $16,761,610 $18,959,231
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
ENGELHARD/ACC
STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 12,239,012 $ 10,504,609 $ 8,944,279
Cost of goods sold 17,460,782 13,776,459 10,883,995
------------ ------------ ------------
Gross loss (5,221,770) (3,271,850) (1,939,716)
------------ ------------ ------------
Operating expenses:
Marketing 4,105,228 3,563,817 3,412,008
Engineering 2,074,295 1,053,809 936,415
Research and development 901,523 1,055,758 1,133,780
General and administrative 3,940,813 3,207,460 2,440,722
------------ ------------ ------------
Total operating expenses 11,021,859 8,880,844 7,922,925
------------ ------------ ------------
Loss from operations (16,243,629) (12,152,694) (9,862,641)
------------ ------------ ------------
Interest:
Interest income 54,472 94,766 50,679
Interest expense (535,204) (531,736) (760,261)
(480,732) (436,970) (709,582)
------------ ------------ ------------
Net loss $(16,724,361) $(12,589,664) $(10,572,223)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
ENGELHARD/ICC
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
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 (10,572,223)
------------
Partners' capital, December 31, 1995 3,908,356
Capital contributions 14,000,000
Net loss (12,589,664)
------------
Partners' capital, December 31, 1996 5,318,692
Capital contributions 11,950,000
Net loss (16,724,361)
------------
Partners' capital, December 3 1, 1997 $ 544,331
============
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
ENGELHARD/ICC
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,724,361) $(12,589,664) $(10,572,223)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,557,739 1,349,057 1,100,898
Provision for doubtful accounts 443,356 40,000 31,104
Provisions for inventory obsolescence and valuation 1,278,040 941,030 600,000
Write-off of equipment and other assets 446,838 23,471 0
Gain on sale of assets (18,000) 0 0
(Increase) decrease in:
Receivables 111,885 (606,349) (1,424,973)
Inventories 231,228 (2,126,857) (1,545,616)
Prepaid expenses and other 198,903 (119,823) (83,103)
Increase (decrease) in:
Accounts payable (457,577) 604,077 (509,281)
Payables to ICC Technologies, Inc. (31,191) (178,008) 36,878
Payables to Engelhard Corporation (298,996) 93,548 141,697
Accrued expenses and other liabilities 3,322,380 127,634 119,368
------------ ------------ ------------
Net cash used in operating activities (9,939,756) (12,441,884) (12,105,25l)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,087,444) (928,644) (1,257,464)
Purchases of intangibles (142,371) (346,327) (134,244)
Proceeds from sale of assets 18,000 0 0
Cash held in escrow 292,466 558,268 (865,744)
------------ ------------ ------------
Net cash used in investing activities (2,919,349) (716,703) (2,257,452)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,458 57,072 69,956
Repayments of long-term debt (48,633) (51,968) (43,245)
Proceeds from issuance of bonds 0 0 8,500,000
Bond issuance costs 0 0 (215,979)
Capital contributions by general partners 11,950,000 14,000,000 6,000,000
Proceeds from short-term debt 0 0 2,750,000
Repayment of notes payable to general partners 0 0 (3,000,000)
------------ ------------ ------------
Net cash provided by financing activities 11,941,825 14,005,104 14,060,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (917,280) 846,517 (301,971)
Cash and cash equivalents, beginning of period 1,192,997 346,480 648,451
------------ ------------ ------------
Cash and cash equivalents, end of period $ 275,717 $ 1,192,997 $ 346,480
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
ENGELHARD/ICC
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS:
Partnership Operations and Restructuring
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.
On February 27, 1998, ICC and Engelhard restructured the Partnership
(the "Restructuring"). The Partnership was terminated and its net
assets were divided into two separate operating limited partnerships,
one to manufacture and market complete, Active Climate Control Systems
under the name Fresh Air Solutions, LP and the other to manufacture and
market heat-exchange and desiccant coated wheel-shaped rotors, which
are components of the climate control systems, under the name Engelhard
HexCore, LP. ICC has a 90% ownership interest and control of Fresh Air
Solutions, LP. Engelhard retains a 10% interest in Fresh Air Solutions.
Engelhard has an 80% ownership interest and control of Engelhard
HexCore LP. ICC retains a 20% equity interest in Engelhard HexCore, LP.
Fresh Air Solutions will purchase rotors exclusively from Engelhard
HexCore, LP. Engelhard will continue its guarantee of the lease on
Fresh Air Solutions, LP's facility until April 2002 (Note 15) and will
continue to guarantee $2,000,000 of Fresh Air Solutions, LP's debt with
the guarantee being reduced to $1,000,000 after February 1999 and
completely terminated after February 2000. Going forward, the financial
statements of Fresh Air Solutions and Engelhard HexCore will be
consolidated into their majority owners' financial statements, ICC and
Engelhard respectively.
In connection with the Restructuring, Engelhard HexCore and Fresh Air
Solutions entered into a rotor supply agreement whereby Engelhard
HexCore will supply Fresh Air Solutions with its heat-exchange and
desiccant rotor requirements. Fresh Air Solutions will be obligated to
purchase its rotor requirements from Engelhard HexCore. All rotors will
be sold at prices which are lower than the best price Engelhard HexCore
offers to other customers. The rotor supply agreement is for a period
of fifteen years. Furthermore, Engelhard HexCore and Fresh Air
Solutions entered into reciprocal technology license agreements whereby
nonexclusive, royalty free, perpetual license with the further right to
sublicense, technology related to Engelhard HexCore and Fresh Air
Solutions subject to patents or patent applications existing or filed
within one year of the Restructuring. Fresh Air Solutions was also
granted a royalty free license to use "Engelhard" as part of the
"Engelhard/ICC" mark for a thirty month period following the
Restructuring. See note 15 for financial information related to Fresh
Air Solutions and Engelhard HexCore.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting and include the accounts of the Partnership for the years
ended December 31, 1997, 1996 and 1995. Subsequent to 1997, the
Partnership was restructured (Note 1 and Note 15) into two separate
limited partnerships.
51
<PAGE>
Cash and Cash Equivalents
The Partnership 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.
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.
52
<PAGE>
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs amounted to approximately $902,000, $953,000 and
$1,134,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
Warranties
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. During 1997, the Partnership
identified odor creation problems and other quality control issues
related to certain units it manufactured. As a result, management
recorded a provision of $2.2 million related to expenses to be incurred
to address these problems.
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 the 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, 1997, the Partnership had trade receivables of
approximately $1,000,124 from one customer. During 1997, revenues from
this customer amounted to approximately $5.8 million, which represents
approximately 48% of the Partnership revenues. Trade receivables from
this customer were current at December 31, 1997. 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
In accordance with the Statement of Financial Accounting Standards SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Partnership reviews
long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. The Partnership is not
aware of any events or change in circumstances which indicate the
existence of an impairment of assets which would be material to the
Partnership's financial position or results of operatons.
53
<PAGE>
(3) INVENTORIES:
Inventories comprise the following:
December 31, December 31,
1997 1996
------------ ------------
Raw materials and purchased parts $ 1,721,311 $ 2,013,913
Work-in-process 1,504,116 1,547,641
Finished goods 309,128 1,591,228
----------- -----------
3,534,555 5,152,782
Less: Allowance for inventory obsolescence (472,871) (581,830)
=========== ===========
$ 3,061,684 $ 4,570,952
=========== ===========
Inventory is net of an allowance for inventory obsolescence of
$472,871, and $581,830 as of December 31, 1997 and 1996, respectively.
The Partnership recorded provisions of $1,278,040 and $941,000 for
inventory obsolescence and valuation which have been included in cost
of goods sold in the statements of operations for 1997 and 1996,
respectively. In 1997 and 1996, the Partnership wrote-off
approximately $1,387,000 and $449,000, respectively, of obsolete
inventory against the allowance for inventory obsolescence.
Raw materials purchased from Engelhard amounted to approximately
$155,000, $272,000 and $86,000 for the years ended December 31, 1997,
1996 and 1995, 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 at
December 31:
1997 1996
------------ -----------
Land $ 390,000 $ 390,000
Building 1,805,741 1,779,721
Machinery and equipment 9,740,532 7,607,702
Furniture, fixtures and
leasehold improvements 1,113,589 794,912
----------- -----------
13,049,862 10,572,335
Less- accumulated depreciation (3,552,965) (2,582,210)
----------- -----------
$ 9,496,897 $ 7,990,125
=========== ===========
54
<PAGE>
(5) OTHER ASSETS:
Other assets consist of the following at December 31:
1997 1996
---------- ----------
Patents and Trademarks $ 767,478 $ 877,623
Bond Issue Costs 219,483 219,483
Deposits 410 33,854
Other 24,217 2,000
---------- ----------
1,011,588 1,132,960
Accumulated amortization (181,119) (146,728)
---------- ----------
$ 830,469 $ 986,232
========== ==========
(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 8). 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) ACCRUED LIABILITIES:
Accrued liabilities consist of the following at December 31:
1997 1996
---------- --------
Accrued expenses $2,837,272 $168,987
Payroll and employee benefits 748,051 130,301
Commissions 141,251 168,891
Customer deposits 76,265 13,051
---------- --------
$3,802,839 $481,230
========== ========
55
<PAGE>
(8) LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31:
1997 1996
----------- -----------
<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 99,418 138,649
Other 99,267 68,210
----------- -----------
8,698,685 8,706,859
Less- current portion (69,557) (64,529)
----------- -----------
$ 8,629,128 $ 8,642,330
=========== ===========
</TABLE>
In connection with the issuance of the industrial revenue bonds (see
note 6), cash of $15,015 is held in escrow pending the Partnership's
incurrence of certain qualified expenditures.
Maturities of long-term debt for each of the next five years are as
follows:
1998 $69,557
1999 64,093
2000 26,024
2001 19,506
2002 19,505
Thereafter 8,500,000
-----------
$ 8,698,685
===========
The general partners are guarantors on the long-term debt.
Substantially all of the assets are pledged 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, 1997.
The short-term loan is payable on demand with the interest rate
adjusted on a weekly basis. The interest rate at December 31, 1997 was
6.0625%. The interest on the long-term debt is adjusted weekly to
current market rates. The fair value of the Partnership's debt was
determined by reference to quotations available in markets where
similar issues are traded. The estimated fair values of long-term debt
at December 31, 1997 approximates the carrying amount. In connection
with the Restructuring of the Partnership, Engelhard remained as
guarantor of up to $2 million on the short-term debt that was
transferred to Fresh Air Solutions and became sole guarantor on the
$8.5 million industrial revenue bond which was transferred to Engelhard
HexCore.
(9) REVENUES:
Revenues are comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Equipment sales $ 6,311,235 $ 6,097,736 $ 2,558,250
Substrate processing 5,823,538 4,302,233 5,801,666
Licensing fees 0 0 500,000
Maintenance and service 104,239 104,640 84,363
------------ ------------ -----------
$ 12,239,012 $ 10,504,609 $ 8,944,279
============ ============ ===========
</TABLE>
The Partnership fabricates large cell honeycomb substrate materials at
its Miami facility under a Manufacturing and Supply Agreement with
Hexcel Corporation ("Hexcel"'). Hexcel provides the raw materials to be
fabricated into large cell honeycomb substrate and retains title to the
raw materials,
56
<PAGE>
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
fourth year of performing services under such Agreement. Export sales
of equipment were approximately $1,283.000, $1,457,000, and $643,000 in
1997, 1996 and 1995, respectively.
(10) PARTNERS' CAPITAL:
During 1997, $6,775,000 was contributed by the Company and $5,175,000
by Engelhard. During 1996 and 1995, $7,000,000 and $3,000,000
respectively was contributed by each of the general partners to the
Partnership. 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 outstanding balance on the loan was converted
into a capital contribution, $2,500,000 for each general partner in
1995.
(11) RELATED PARTY TRANSACTIONS:
The Partnership provided approximately $78,000, $95,000, and $83,000 in
various administrative office support services to ICC during the years
ended December 31, 1997, 1996 and 1995, respectively. Engelhard
provided approximately $298,000, $504,000, and $351,000 in various
administrative office support services to the Partnership during the
years ended December 31, 1997, 1996 and 1995, respectively. Engelhard
provided approximately $8,000, $17,000, and $162,000 in research and
development to the Partnership during the years ended December 31,
1997, 1996 and 1995, respectively. ICC provided approximately $78,000,
$47,000 and $72,000 in various administrative office support services
to the Partnership during the year ended December 31, 1997, 1996, and
1995, respectively. The Partnership incurred approximately $328,000
during the year ended December 31, 1995, 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.
(12) SUPPLEMENTAL CASH FLOW DISCLOSURES:
Excluded from the Statement of Cash Flows for the year ended December
31, 1997 was the write-off of $1,386,999 of inventory and $38,319 of
bad debts.
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.
Cash paid for interest amounted to approximately $504,000, $516,000 and
$823,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(13) 401(K) PROFIT SHARING PLAN:
The Partnership provides a benefit for all employees through 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 participant's 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
57
<PAGE>
$104,380, $95,000 and $80,000 for the years ended December 31, 1997 and
1996, and 1995, respectively.
(14) 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, 1997
are as follows:
1998 $ 526,440
1999 523,843
2000 521,321
2001 513,918
2002 214,130
Rent expense under these operating leases was $655,551, $469,580, and
$224,634 for the years ended December 31, 1997, 1996 and 1995,
respectively.
In order to provide capacity and consolidate the Philadelphia office
and manufacturing operations, the Partnership entered into a ten-year
lease commitment which began 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, ICC and Engelhard
(15) RESTRUCTURING OF PARTNERSHIP:
As indicated in Note 1, on February 27, 1998, ICC and Engelhard
terminated the Partnership into two limited partnerships, Fresh Air
Solutions, LP and Engelhard HexCore LP. The historical information
related to Fresh Air Solutions and Engelhard HexCore have been
designated as "Box Business" and "Wheel Business", respectively in the
accompanying financial presentations. The following financial
statements of Box business and Wheel business have been prepared from
the historical financial statements of the Partnership and contain
certain adjustments to carve out assets, liabilities, net assets,
revenues, expenses and cash flows between the two businesses.
Balance Sheets
As of December 31, 1997
Box Business Wheel Business Partnership
------------ -------------- -----------
Cash $ 235,432 $ 40,285 $ 275,717
Receivables 1,043,734 1,092,124 2,135,858
Inventory 2,101,894 959,790 3,061,684
Other current assets 62,965 16,894 79,859
Property, plant and
equipment 2,634,389 6,862,508 9,496,897
Cash held in escrow -- 15,010 15,010
Other noncurrent assets 539,827 1,156,758 1,696,585
----------- ----------- -----------
Total assets $ 6,618,241 $10,143,369 $16,761,610
=========== =========== ===========
Current liabilities 4,306,795 461,799 4,768,594
Short-term loan 2,750,000 -- 2,750,000
Long-term loan 198,685 8,500,000 8,698,685
Partners' capital
(deficit) (637,239) 1,181,570 544,331
----------- ----------- -----------
Total liabilities
and capital $ 6,618,241 $10,143,369 $16,761,610
=========== =========== ===========
<TABLE>
<CAPTION>
Statements of Operations
for the year ended
December 31, 1997
Box Business Wheel Business Eliminations Partnership
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 6,415,474 $ 6,926,538 $ (1,103,000) $ 12,239,012
Cost of goods sold 11,661,030 6,902,752 (1,103,000) 17,460,782
------------ ------------ ------------ ------------
Gross profit (loss) (5,245,556) 23,786 -- (5,221,770)
------------ ------------ ------------ ------------
Operating expenses:
Marketing 4,105,228 4,105,228
Engineering 2,074,295 2,074,295
Research and development 901,523 901,523
General and
administrative 3,799,838 140,975 3,940,813
------------ ------------ ------------
Loss from operations (16,126,440) (117,189) (16,243,629)
------------ ------------ ------------
Interest expense 136,283 344,449 480,732
------------ ------------ ------------ ------------
Net loss $(16,262,723) $ (461,638) -- $(16,724,361)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
for the year ended December 31, 1997
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operation activities:
Net loss $(16,262,723) $ (461,638) $(16,724,361)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 692,641 865,098 1,557,739
Provision for doubtful accounts 443,356 -- 443,356
Provisions for inventory obsolescence and
valuation 1,278,040 -- 1,278,040
Write-off of equipment and other assets 364,201 82,637 446,838
Gain on sale of assets -- (18,000) (18,000)
(Increase) decrease in current assets 635,470 (93,454) 542,016
Current liabilities increase (decrease) 2,545,000 (10,384) 2,534,616
------------ ------------ ------------
Net cash (used in) provided by
operating activities (10,304,015) 364,259 (9,939,756)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,490,707) (596,737) (3,087,444)
Purchases of intangibles (103,203) (39,168) (142,371)
Proceeds from sale of assets -- 18,000 18,000
------------ ------------ ------------
Cash held in escrow -- 292,466 292,466
------------ ------------ ------------
Net cash used in investing activities (2,593,910) (325,439) (2,919,349)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,458 -- 40,458
Repayments of long-term debt (48,633) -- (48,633)
Capital contributions by general partners 11,950,000 -- 11,950,000
------------ ------------ ------------
Net cash provided by financing activities 11,941,825 -- 11,941,825
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (956,100) 38,820 (917,280)
Cash and cash equivalents, beginning of period 1,191,532 1,465 1,192,997
------------ ------------ ------------
Cash and cash equivalents, end of period $ 235,432 $ 40,285 $ 275,717
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Balance Sheets
As of December 31, 1996 Box Business Wheel Busisness Partnership
------------ --------------- -----------
<S> <C> <C> <C>
Cash $ 1,191,532 $ 1,465 $ 1,192,997
Receivables 2,091,908 548,896 2,640,804
Inventory 3,435,349 1,135,603 4,570,952
Other current assets 265,444 13,318 278,762
Property, plant and equipment 917,593 7,072,532 7,990,125
Cash held in escrow -- 307,476 307,476
Other noncurrent assets 719,550 1,258,565 1,978,115
----------- ----------- -----------
Total assets $ 8,621,376 10,337,855 18,959,231
=========== =========== ===========
Current liabilities 1,989,033 194,647 2,183,680
Short-term loan 2,750,000 -- 2,750,000
Long-term loan 206,859 8,500,000 8,706,859
Partners' capital 3,675,484 1,643,208 5,318,692
----------- ----------- -----------
Total liabilities
and net assets $ 8,621,376 $10,337,855 $18,959,231
=========== =========== ===========
</TABLE>
Statements of Operations
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Box Business Wheel Business Eliminations Partnership
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 6,202,609 $ 6,032,000 $ (1,730,000) $ 10,504,609
Cost of goods sold 9,190,145 6,316,314 (1,730,000) 13,776,459
------------ ------------ ------------ ------------
Gross profit (loss) (2,987,536) (284,314) -- (3,271,850)
------------ ------------ ------------ ------------
Operating expenses:
Marketing 3,563,817 -- 3,563,817
Engineering 1,053,809 -- 1,053,809
Research and development 1,055,758 -- 1,055,758
General and administrative 3,068,859 138,601 3,207,460
------------ ------------ ------------
Loss from operations (11,729,779) (422,915) (12,152,694)
------------ ------------ ------------
Interest expense 98,872 338,098 436,970
------------ ------------ ------------ ------------
Net loss $(11,828,651) $ (761,013) -- $(12,589,664)
============ ============ ============ ============
</TABLE>
Condensed Statements of Cash Flows
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,828,651) $ (761,013) $(12,589,664)
Adjustments to reconcile net loss to
net cash (used in)
Provided by
Operating activities:
Depreciation and amortization 581,092 767,965 1,349,057
Provision for doubtful accounts 40,000 -- 40,000
Provisions for inventory
obsolescence and valuation 941,030 -- 941,030
Write-off of equipment 23,471 -- 23,471
(Increase) decrease in current assets (3,038,921) 185,892 (2,853,029)
Increase (decrease) in current liabilities 641,348 5,903 647,251
------------ ------------ ------------
Net cash (used in) provided by
operating activities (12,640,631) 198,747 (12,441,884)
Cash flows from investing activities: (211,189) (717,455) (928,644)
Purchases of property, plant and equipment (305,799) (40,528) (346,327)
Purchases of intangibles -- 558,268 558,268
------------ ------------ ------------
Cash held in escrow (516,988) (199,715) (716,703)
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt 57,072 -- 57,072
Repayments of long-term debt (51,968) -- (51,968)
Capital contributions by general partners 14,000,000 -- 14,000,000
---------- ------------ ------------
Net cash provided by financing activities 14,005,104 -- 14,005,104
Net increase (decrease) in cash and cash equivalents 847,485 (968) 846,517
Cash and cash equivalents, beginning of period 344,047 2,433 346,480
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,191,532 $ 1,465 $ 1,192,997
============ ============ ============
</TABLE>
Statements of Operation
for the year December 31, 1995
<TABLE>
<CAPTION>
Box Business Wheel Business Elimination Partnership
------------ -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,142,613 $ 6,768,666 (967,000) $ 8,944,279
Cost of goods sold 5,190,059 6,660,936 (967,000) 10,883,995
------------ ------------ --------- ------------
Gross profit (loss) (2,047,446) 107,730 -- (1,939,716)
------------ ------------ --------- ------------
Operating expenses:
Marketing 3,412,008 3,412,008
Engineering 936,415 936,415
Research and development 1,133,780 1,133,780
General and
administrative 2,305,888 134,834 2,440,722
------------ ------------ ------------
Loss from operations (9,835,537) (27,104) (9,862,641)
Interest expense 438,447 271,135 709,582
------------ ------------ --------- ------------
Net loss $(10,273,984) $ (298,239) $(10,572,223)
============ ============ ========= ============
</TABLE>
Statements of Cash Flows
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Cash flows from operating activities: Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Net loss $(10,273,984) $ (298,239) $(10,572,223)
Adjustments to reconcile net loss to net cash
used in
Operating activities:
Depreciation and amortization 401,851 699,047 1,100,898
Provision for doubtful accounts 31,104 -- 31,104
Provisions for inventory obsolescence and
valuation 600,000 -- 600,000
(Increase) decrease in current assets (758,389) (2,295,303) (3,053,692)
Current liabilities increase (decrease) (405,374) 194,036 (211,338)
------------ ------------ ------------
Net cash used in operating
activities (10,404,792) (1,700,459) (12,105,251)
Cash flows from investing activities
Purchases of property, plant and equipment (572,097) (685,367) (1,257,464)
Purchases of intangibles (102,544) (31,700) (134,244)
Cash held in escrow -- (865,744) (865,744)
------------ ------------ ------------
Net cash used in investing
activities (674,641) (1,582,811) (2,257,452)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 69,956 -- 69,956
Repayments of long-term debt (43,245) -- (43,245)
Proceeds from issuance of bonds -- 8,500,000 8,500,000
Transfer of bond proceeds between businesses 5,000,000 (5,000,000) --
Bond issuance costs (215,979) (215,979)
Capital contributions by general partners 6,000,000 -- 6,000,000
Proceeds from short-term debt 2,750,000 -- 2,750,000
Repayment of notes payable to general partner (3,000,000) -- (3,000,000)
------------ ------------ ------------
Net cash provided by financing
activities 10,776,711 3,284,021 14,060,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (302,722) 751 (301,971)
Cash and cash equivalents, beginning of period 646,769 1,682 648,451
------------ ------------ ------------
Cash and cash equivalents, end of period $ 344,047 $ 2,433 $ 346,480
============ ============ ============
</TABLE>
58
<PAGE>
EXHIBIT 99.2
ICC TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31,1997
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
ICC Fresh Air Adjustments Pro Forma
Technologies Solutions LP. (1) Dr. (Cr.) As Adjusted
------------ ----------------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,257,483 $ 235,432 $18,628,571 (2) $ 22,621,486
2,500,000 (3)
Accounts receivable, net -- 1,043,734 -- 1,043,734
Inventories, net -- 2,101,894 -- 2,101,894
Prepaid expenses and other 406,558 62,965 (300,000)(2) 169,523
------------ ------------ ----------- ------------
Total current assets 1,664,041 3,444,025 20,828,571 25,936,637
Investment in Engelhard HexCore LP -- -- 797,958 (4) 231,352
(566,606)(2)
Property, equipment and software, net 7,615 2,634,389 -- 2,642,004
Other assets -- 539,827 -- 539,827
Note receivable 350,000 -- -- 350,000
Restricted cash 2,500,000 -- (2,500,000)(3) --
------------ ------------ ----------- ------------
Total assets $ 4,521,656 $ 6,618,241 $18,559,923 $ 29,699,820
============ ============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities 281,504 4,306,795 -- 4,588,299
Short-term loan -- 2,750,000 -- 2,750,000
Losses of Engelhard/ICC in excess of investments 7,302,358 -- 7,279,765 (2) --
(797,958)(4)
820,551 (1)
Long-term debt -- 198,685 -- 198,685
Commitments and contingencies -- -- -- --
Minority interest -- -- -- --
Stockholders' equity (deficit):
Partners' capital (deficit) -- (637,239) (637,239)(1) --
Common Stock, $.01 par value, authorized 50,000,000 shares,
issued 21,519,998 shares at December 31, 1997 215,200 -- -- 215,200
Additional paid-in capital 51,308,904 -- -- 51,308,904
Note receivable from officer (230,467) -- -- (230,467)
Accumulated deficit (54,184,413) -- (25,225,042)(2) (28,959,371)
Less: Treasury common stock, at cost, 66,227 shares (171,430) -- -- (171,430)
------------ ------------ ----------- ------------
Total stockholders' equity (deficit) (3,062,206) (637,239) (25,862,281) 22,162,836
------------ ------------ ----------- ------------
Total liabilities and stockholders' equity (deficit) $ 4,521,656 $ 6,618,241 $(18,559,923) $ 29,699,820
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
<PAGE>
ICC TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,1997
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
Icc Fresh Air Adjustments Pro Forma
Technologies Solutions LP.(1) Dr. (Cr.) As Adjusted
------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues -- $ 6,415,474 -- $ 6,415,474
Cost of goods sold -- 11,661,030 -- 11,661,030
------------ -----------
Gross loss -- (5,245,556) -- (5,245,556)
Operating expenses:
Marketing -- 4,105,228 -- 4,105,228
Engineering -- 2,074,295 -- 2,074,295
Research and development -- 901,523 -- 901,523
General and administrative $ 1,991,594 3,799,838 -- 5,791,432
------------ ------------ ------------ ------------
Total operating expenses 1,991,594 10,880,884 -- 12,872,478
Loss from operations (1,991,594) (16,126,440) -- (18,118,034)
Other income (expense):
Equity interest in net loss of investee (11,985,361) -- $ (11,985,361)(5) --
92,328 (5) (92,328)
Interest income (expense), net 492,870 (136,283) -- 356,587
Minority interest -- -- -- --
------------ ------------ ------------ ------------
Net loss $(13,484,085) $(16,262,723) $(11,893,033) $(17,853,775)
============ ============ ============ ============
Net loss applicable to common stockholders $(13,484,085) $(17,853,775)
============ ============
Net (loss) per common share $ (0.63) $ (0.84)
============ ============
Weighted average common shares 21,339,635 21,339,635
============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited
consolidated pro forma financial statements.
<PAGE>
ICC TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation:
The unaudited pro forma consolidated financial statements are presented to
illustrate the effect of the restructuring of the Partnership, which occurred on
February 27, 1998, on the Company's financial position as if it occurred on
December 31, 1997, and to demonstrate the effects upon the Company's historical
results of operations for the year ended December 31, 1997, as if the
restructuring occurred on January 1, 1997.
Pursuant to the restructuring, the Partnership was terminated and its net assets
were divided into two separate operating limited partnerships, Fresh Air
Solutions LP and Engelhard HexCore LP (see Note 3). The Company will have an
ownership interest of 90% in Fresh Air Solutions LP and 20% in Engelhard HexCore
LP. The assets, liabilities and results of operations of Fresh Air Solutions LP
will be consolidated in the Company's financial statements. The Company will
account for its 20% investment in Engelhard HexCore LP under the equity method
of accounting. Under the equity method of accounting, the Company will recognize
its proportionate share of the net income or loss of Engelhard HexCore LP on a
current basis.
The unaudited pro forma consolidated financial statements are not necessarily
indicative of the financial position or results of operation had the
aforementioned restructuring occurred on those dates, nor are they necessarily
indicative of the future results of the Company's operations.
The unaudited pro forma consolidated financial statements have been prepared
from the historical financial statements of the Company and contain certain
adjustments with respect to the restructuring as explained hereafter. The
unaudited pro forma consolidated statements of operations for the year ended
December 31, 1997 do not include any nonrecurring adjustments that may result
from the restructuring.
2. Pro Forma Adjustments:
(1) The adjustment column (Fresh Air Solutions LP) reflects the consolidation
of 100% of the assets and liabilities of Fresh Air Solutions LP and the pro
forma adjustments reflect the elimination of Fresh Air Solutions LP equity
in consolidation.
(2) The pro forma adjustment reflects the Company's sale of 60% of its interest
in Engelhard HexCore LP amounting to $566 thousand for consideration of
approximately $18.6 million in cash and 80% of Engelhard's interest in
Fresh Air Solutions LP amounting to $7.3 million. The restructuring would
result in a gain of $25.2 million, net of estimated transaction costs of
$450 thousand.
(3) The pro forma adjustment reflects the reclassification of $2.5 million from
restricted cash to cash available for operations due to the release of the
Company's portion of a guarantee on Engelhard HexCore LP's bond obligation.
(4) The pro forma adjustment reflects the reclassification of the Company's
50% equity investment in Engelhard HexCore LP in connection with the
restructuring.
(5) The pro forma adjustment reflects the elimination of the equity interest in
net loss of investee recorded in ICC's historical financial statements
because Fresh Air Solutions LP will now be consolidated and the recording
of the equity in net loss of Engelhard HexCore LP based on the Company's
20% ownership interest.
<PAGE>
3. Summarized Financial Data of the Partnership:
The restructuring resulted in the Partnership being terminated and the net
assets divided into two separate companies, one to manufacture and market
complete, active Climate Control Systems (Fresh Air Solutions LP) and the other
to manufacture and market the desiccant and heat-exchange rotors that are a
component of Climate Control Systems (Engelhard HexCore LP).
The following summarizes carved out financial information of Fresh Air Solutions
LP and Engelhard HexCore LP as of December 31, 1997 and for the year ended
December 31, 1997, as if the restructuring had occurred on January 1, 1997.
<TABLE>
<CAPTION>
Historical Fresh Air Engelhard
Balance Sheet Data Partnership Solutions LP HexCore LP
----------- ------------ ----------
<S> <C> <C> <C>
Total Assets $16,761,610 $6,618,241 $10,143,369
Total Liabilities 16,217,279 7,255,480 8,961,799
Partners' Capital (Deficit) 544,331 (637,239) 1,181,570
<CAPTION>
Historical Fresh Air Engelhard
Income Statement Data Partnershp Eliminations Solutions LP HexCore LP
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenue $12,239,012 $1,103,000 $ 6,415,474 $6,926,538
Expenses 28,963,373 1,103,000 22,678,197 7,388,176
Net (Loss) (16,724,361) -- (16,262,723) (461,638)
</TABLE>
4. Purchase Price:
In connection with the acquisition of Fresh Air Solutions LP, the Company and an
investment banker were unable to determine the fair market values of either
Fresh Air Solutions LP or Engelhard HexCore LP within reasonable limits. As a
result, the non-monetary considerations paid and received by the Company were
based upon their recorded amounts in the accompanying unaudited pro forma
consolidated financial statements.
