CONFORMED WITHOUT EXHIBITS
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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, 1997, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2368845
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
330 S. Warminster Road
Hatboro, Pennsylvania 19040
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-6600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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
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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 25, 1998 was $43,366,986.
As of March 25, 1998, 21,520,000 shares of common stock were outstanding.
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PART I
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ITEM 1. BUSINESS
INTRODUCTION
ICC Technologies, Inc., a Delaware corporation (the "Company" or "ICC"), is
engaged in the design, manufacture and marketing of innovative climate control
systems to address indoor air quality, energy and environmental concerns and
regulations currently affecting the air conditioning market. Prior to February
27, 1998, the Company had been engaged in such business through Engelhard/ICC
("E/ICC" or "the Partnership"), a general partnership formed in February 1994,
in which the Company, along with Engelhard Corporation ("Engelhard"), each
owned, indirectly, a 50% general partnership interest.
On February 27, 1998, pursuant to a Master Agreement dated as of November 17,
1997 by and among the Company, Engelhard and 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
the complete climate control systems ("Fresh Air Solutions, "L.P. or "Fresh Air
Solutions"), and the other to manufacture and market products manufactured from
honeycomb substrate and the desiccant-coated and heat-exchange wheel-shaped
rotors that are components of the climate control systems ("Engelhard HexCore,
L.P." or "Engelhard HexCore"); 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 $18.6 million, 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"). 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.
Fresh Air Solutions' climate control systems are designed to address indoor air
quality, energy and environmental concerns and regulations currently affecting
the air conditioning market. Fresh Air Solutions currently markets its systems
to certain targeted applications within the commercial air conditioning market
primarily in North America and Asia-Pacific. Fresh Air Solutions' climate
control systems incorporate desiccant technology initially developed by the
Company, Engelhard HexCore's licensed honeycomb rotor technology and Engelhard's
patented titanium silicate desiccant, ETS(TM).
The Company believes that the Fresh Air Solutions' climate control systems
create a more comfortable environment, more effectively control humidity,
improve indoor air quality, address certain environmental concerns and provide
customers a choice from a variety of energy sources such as natural gas, steam,
waste heat or electricity.
MARKET OVERVIEW
The Company estimates that the worldwide annual market for residential and
commercial air conditioning systems was approximately $32 billion in 1997. Fresh
Air Solutions 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 was $10
billion in 1997. The Company expects Fresh Air Solutions desiccant-based systems
to compete in a broader segment of this market as awareness and acceptance of
Fresh Air Solutions' systems grow and their initial cost declines.
The Company estimates that the Asian-Pacific commercial air conditioning market
was approximately $4 billion in 1997. Many of the Asian-Pacific countries are
located in humid climates where Fresh Air Solutions 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
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energy sources. Many of the Asian-Pacific economies have been experiencing lower
economic growth than had been previously enjoyed resulting in declines in many
of the Asian-Pacific currencies in comparison to the US dollar. Continued
weakness in Asian-Pacific currencies could adversely impact Asian-Pacific market
growth and Fresh Air Solutions' sales and marketing activities.
The Company estimates that the North American commercial air conditioning market
was approximately $3 billion in 1997. Air conditioning systems in North America
predominately utilize electric powered systems. The Fresh Air Solutions'
strategy is to target commercial applications in which humidity control, indoor
air quality and energy consumption 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 ductwork 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."
The Company's estimates of market size was derived from a market study completed
for the Company in December 1995.
International accords which address various energy and environmental concerns
are also having an impact on air conditioning markets throughout the world. 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 Fresh Air Solution'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 Engelhard HexCore's
desiccant and heat exchange rotors, has principally overcome these problems and
in many applications is an effective and environmentally safer supplement or
alternative to conventional air conditioning systems. There can be no assurance
that Fresh Air Solutions will be able to create sufficient market acceptance of
its climate control 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, Fresh Air Solutions' systems
can use a wider variety of heat sources, including waste heat, than other
desiccant-based systems.
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Fresh Air Solutions' systems utilize two wheel-shaped rotors with honeycomb
passages. The honeycomb substrate material used to make the rotors is
manufactured by Engelhard HexCore 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 Engelhard HexCore's competitors. The
Company believes that the Engelhard HexCore's honeycomb rotors are unique and
would be difficult and costly for competitors to duplicate.
The first rotor in the Fresh Air Solution's desiccant 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 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 Fresh Air Solution's systems provide the following
features and benefits:
o More Effective Control of Humidity -- Fresh Air Solution'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.
o 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 in
certain circumstances compared to prior ventilation standards to reduce
indoor air pollutants associated with "Sick Building Syndrome." Fresh
Air Solution's 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.
o Cost Effective -- Less humid air requires less energy to cool than more
humid air. As a supplement to conventional air conditioning, by first
dehumidifying the air, Fresh Air Solutions systems are designed to
improve the effectiveness of existing conventional air conditioning and
thereby result in downsizing of total air conditioning requirements.
o Versatile and Reliable - Fresh Air Solution'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.
o 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 desiccant cooling
systems dehumidify the air before it is cooled by a post-cooling option
in the system
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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.
o Year-round Performance -- Fresh Air Solution'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.
In 1998, Fresh Air Solutions expanded its product line in response to customer
demands to include an enthalpy wheel energy recovery systems. The enthalpy wheel
energy recovery system is a single wheel lightly coated with desiccant material
which provides for limited cooling and passive dehumidification. The enthalpy
wheel energy recovery system operates as a supplement to conventional air
conditioning systems. The enthalpy wheel energy recovery system provides for
limited cooling and dehumidification at a relatively low cost. The enthalpy
wheel will in certain circumstances improve the effectiveness of existing
conventional air conditioning and thereby allow for the downsizing of the total
air conditioning requirements. The performance of the enthalpy wheel energy
recovery system is less than that of the two wheel active humidity control
system. In addition, Fresh Air Solutions also introduced a single wheel
desiccant system which provides for dehumidification control only.
BUSINESS STRATEGY
The Fresh Air Solutions 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. Fresh Air Solutions markets its systems primarily as a supplement
to conventional air conditioning systems. Fresh Air Solutions is pursuing the
following strategies:
o Reduction of Operating and Manufacturing Costs - Fresh Air Solutions
reduced the cost of its systems in 1997 and expects to further reduce
manufacturing and material costs through production innovations and
efficiencies and materials improvement and substitutes. Further
operating cost savings are expected through reduction in operating
department work force and increased constraints on expenditures. In
addition, the Company believes enhanced product performance and reduced
system costs can be obtained through the development or acquisition of
certain new low cost components.
o Acquisition of an Air Conditioning Manufacturer -- The Company is
continuing to seek and evaluate acquisition opportunities to acquire an
air conditioning manufacturer which the Company believes would enhance
Fresh Air Solutions' 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 binding 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.
o Target Specific Commercial Applications - Fresh Air Solutions strategy
is to market its climate control systems to users in which humidity
control, indoor air quality and energy consumption are important
considerations. The primary applications targeted by Fresh Air
Solutions and the benefits that its systems can provide include:
<TABLE>
<CAPTION>
Segment Benefits
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<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.
</TABLE>
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<TABLE>
<CAPTION>
Segment Benefits
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<S> <C>
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>
o Establish Strategic Relationships with Domestic and International
Manufacturers and Distributors of Air Conditioning Equipment - Fresh
Air Solutions plans to enter into additional licenses, marketing
relationships or joint venture arrangements. Fresh Air Solutions
believes that the reputation and resources of its licensees and joint
venture partners can help gain market acceptance and awareness for its
products.
The Company is continuing to seek and evaluate acquisition opportunities related
or unrelated to desiccant technology, that would help broaden its product
offerings or permit ICC to enter new areas of business and that demonstrate
capabilities of enhancing shareholder value. Presently, although the Company is
exploring the possibility of pursuing other ventures, to date it has not entered
into any binding agreement to do so. ICC may enter any other business it deems
appropriate, whether or not related to Fresh Air Solutions' business, except
that in connection with the terms of the Restructuring it may not be a reseller
of wheel-shaped rotors acquired from Engelhard HexCore other than as a component
in the production and sale of climate control systems.
PRODUCTS
Fresh Air Solutions currently manufactures and sells several types of
desiccant-based climate control systems. The two wheel systems, "Desert
Cool(TM)" and "Desert Breeze(TM)" differ based upon function and energy source;
in addition, in 1998 Fresh Air Solutions introduced single wheel systems. Fresh
Air Solutions' systems are being marketed currently as energy efficient
supplements to enhance the performance of, or partially replace, existing
conventional air conditioning systems. Consistent with general industry
practices, Fresh Air Solutions warrants its systems for one year from the date
of installation and Engelhard HexCore warrants its desiccant and heat exchange
rotors for an additional four years.
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) systems typically operate on natural gas, but are also available in
steam or waste heat operated models, and also have gas heating capabilities. All
of the systems incorporate the Engelhard HexCore's proprietary honeycomb rotors
and Engelhard's ETS(TM).
The Desert Breeze(TM) system, the first all-electric desiccant-based climate
control system, 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. Desert Breeze(TM) system
sales have not been significant. Desert Breeze(TM) is designed to cool
commercial applications with the flexibility of utilizing either circulated or
fresh air. Unlike Fresh Air Solutions' 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.
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In 1998, Fresh Air Solutions expanded its product line in response to customer
demands to include enthalpy wheel energy recovery systems. The enthalpy wheel
energy recovery system is a single wheel lightly coated with desiccant material
which provides for limited cooling and passive dehumidification. The enthalpy
wheel energy recovery system operates as a supplement to conventional air
conditioning systems. The enthalpy wheel energy recovery system provides for
limited cooling and dehumidification at a relatively low cost. The enthalpy
wheel will in certain circumstances improve the effectiveness of existing
conventional air conditioning and thereby allow for the downsizing of the total
air conditioning requirements. The performance of the enthalpy wheel energy
recovery system is less than that of the two-wheel active humidity control
system. In addition, Fresh Air Solutions also introduced a single wheel
desiccant system which provides for dehumidification control only.
SALES AND MARKETING
Currently, Fresh Air Solutions 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, Fresh Air
Solutions has marketed its systems primarily as a supplement to, or partial
replacement of, conventional air conditioning systems. Since Fresh Air
Solutions' products utilize an emerging technology, potential customers
carefully evaluate and, in most cases, purchase the systems for testing before
committing to further purchases. Fresh Air Solutions sells its systems
principally to end users either directly or through independent manufacturers'
representatives who purchase units at a discount or receive a commission. Fresh
Air Solutions has developed separate plans and departments for domestic and
international sales and marketing. Fresh Air Solutions primarily sells its
products domestically through its independent manufacturers' representatives and
direct sales staff.
United States. Fresh Air Solutions employs a direct sales staff of five 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. Fresh Air Solutions' 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. Fresh Air Solutions
plans to increase its sales staff and upgrade its manufacturers' representative
network.
Gas and electric utilities have supported Fresh Air Solutions' efforts to create
market awareness and acceptance of its systems. The Gas Research Institute has
funded the independent testing of the performance of ETS(TM) and 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 desiccant
climate control systems 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 desiccant natural gas systems. The consortium, with various
utilities currently participating, provides financial incentives and sponsors
training programs for engineers and 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.
International. Fresh Air Solutions employs one direct sales person for
international sales. International sales and marketing efforts have focused on
the high humidity, developing regions of the Asian-Pacific market. In this
region, manufacturing and industrial companies are generally interested in the
desiccant systems to improve workers' comfort by lowering humidity.
International sales have been made to customers primarily in Japan, South Korea,
Mexico and Israel. International sales have been primarily made through various
licensing and distribution agreements or relationships. Fresh Air Solutions
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.
Fresh Air Solutions has marketing relationships and distribution agreements with
various international companies. There are no assurances that the various
international companies will continue to purchase systems from Fresh Air
Solutions.
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Nichimen, a Japanese trading company with approximately $60 billion in annual
sales, has been appointed a non-exclusive distributor of Fresh Air Solutions'
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 Fresh Air Solutions' systems. No assurance can
be given as to whether Nichimen will purchase any significant number of natural
gas systems. 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.
The Partnership's joint market development agreement with Carrier's Asia-Pacific
Operations ("Carrier APO") which covers a significant portion of the
Asia-Pacific market expires in March 1998. The agreement did not result in any
significant sales of systems and is expected to be terminated by Fresh Air
Solutions due to lack of sales activity. Fresh Air Solutions anticipates it will
seek new market distribution agreements with other entities in the Asia-Pacific
market.
Export sales of equipment, primarily to the Asia Pacific market were
approximately $1,283,000, $1,457,000 and $643,000 in 1997, 1996 and 1995,
respectively.
As of March 25, 1998 and 1997, backlog of purchase orders for climate control
equipment was approximately $2 million and $3 million, respectively.
MANUFACTURING
Fresh Air Solutions assembles and manufactures its systems at its new,
approximately 140,000 square foot, leased facility located in Hatboro,
Pennsylvania. The new Hatboro facility provides for future capacity and
consolidated the previous Philadelphia office and manufacturing operations into
one location. The lease began in April 1997 with a ten-year term. The lease can
be terminated after the fifth year. In connection with the Restructuring of the
Partnership the lease was assigned to Fresh Air Solutions. The obligations under
the lease agreement continue to be guaranteed by Engelhard and ICC.
All of Fresh Air Solutions' honeycomb desiccant and heat-exchange rotors are
purchased from Engelhard HexCore which produces them at its Miami facility under
a supply agreement. See "Supplies and Materials".
As described below, Fresh Air Solutions and Engelhard HexCore have entered into
several licensing arrangements with respect to technology relating to their
respective businesses. Fresh Air Solutions and Engelhard HexCore may also
license, or otherwise permit, other companies in the United States or
internationally to manufacture their respective systems or components.
SUPPLIES AND MATERIALS
Except as described below, Fresh Air Solutions 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 Fresh Air
Solutions is not highly dependent on any specific supplier and could obtain
similar components from other suppliers, except for the rotors which are now
supplied by Engelhard HexCore.
In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions
entered into a rotor supply agreement ("Rotor Supply Agreement"). Pursuant to
the Rotor Supply Agreement, Engelhard HexCore has agreed to provide Fresh Air
Solutions with all its desiccant and heat-exchange rotors requirements. Fresh
Air Solutions has agreed to purchase all its rotor requirements at prices which
are lower than the best prices Engelhard HexCore will offer its other customers.
The term of the rotor supply agreement is fifteen years. Rotors supplied may be
used only as a component in the production of complete climate control systems
or as a part of a systems kit for assembly or as part of a cassette to
affiliates or strategic partners for inclusion in a climate control system. If
Fresh Air Solutions requires rotors with performance characteristics'
substantially different from those previously provided by Engelhard HexCore,
Fresh Air Solutions is required to first request such rotors from Engelhard
HexCore under the terms of the Rotor Supply Agreement. If Engelhard HexCore
elects not to provide such rotors, Fresh Air Solutions may obtain them from a
third party subject to certain limitations.
Engelhard HexCore purchases a proprietary strong, lightweight material from a
single supplier which is used as the base material in manufacturing the
honeycomb substrate for the Fresh Air Solutions' desiccant and heat-exchange
rotors. While this material is critical in the manufacture of the rotors and
Engelhard HexCore does not have a contractual agreement with such supplier, the
Company believes that Engelhard HexCore can obtain all of
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its requirements for such material from such supplier for the foreseeable
future. In addition, the Company believes Engelhard HexCore could obtain
comparable alternatives to the current substrate used in the rotors.
ETS(TM) is a patented desiccant material manufactured exclusively by Engelhard.
Pursuant to the Engelhard Supply Agreement, Engelhard HexCore has agreed to
purchase exclusively from Engelhard all of the ETS(TM) or any improved desiccant
material developed by Engelhard that Engelhard HexCore may require in its
manufacture of rotors. In turn, Engelhard has agreed to sell to Engelhard
HexCore its total requirements for ETS(TM) or any improved desiccant material
developed by Engelhard. The price for ETS is adjusted as of January 1 of each
year during the term of the Engelhard Supply Agreement, which expires in the
year 2013. The Engelhard Supply Agreement does not include specific purchase
prices but does contain a 'competitive offer' provision, whereby Engelhard
HexCore 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 Engelhard HexCore's requirements for such desiccants in
all material respects in order to be considered a 'competitive offer.'
THE PARTNERSHIP AND THE RESTRUCTURING
The Company and Engelhard formed Engelhard/ICC 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 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.
On February 27, 1998, the Company and Engelhard restructured the Partnership
("the Restructuring"). The Partnership was terminated and its net assets 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 products fabricated from honeycomb
substrate and the heat-exchange and desiccant coated wheel-shaped rotors that
are components of the climate control systems under the name Engelhard HexCore,
LP. All assets and liabilities of the Partnership related to or used in the
Partnership's climate control systems business (including all assets and
liabilities directly related to, located at or arising out of the Partnership's
Hatboro facility) were transferred or assigned to Fresh Air Solutions. Pursuant
to the Restructuring, ICC received approximately $18,600,000 in cash, a 90%
ownership interest in and full control of Fresh Air Solutions, L.P. ICC
Desiccant Technologies, Inc., a wholly owned subsidiary of ICC, is the sole
general partner of Fresh Air Solutions, L.P. All assets and liabilities of the
Partnership related to or used in the Partnership's honeycomb substrate and
rotor business (including all assets and liabilities directly related to,
located at or arising out of the Partnership's Miami facility) were retained by
Engelhard HexCore. ICC retained a 20% ownership interest in Engelhard HexCore,
L.P. Engelhard received an 80% ownership interest and full control of Engelhard
HexCore, L.P. Engelhard DT, Inc., a wholly owned subsidiary of Engelhard is the
sole general partner of Engelhard HexCore. Fresh Air Solutions will purchase
rotors exclusively from Engelhard HexCore, LP and will receive preferential
pricing for such purchases. Engelhard will continue its guarantee on Fresh Air
Solutions, LP's facility lease until April 2002 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. In
connection with the Restructuring, the Company's guarantee of 50% of the
Partnership's indebtedness associated with the industrial development bonds and
the related irrevocable letter of credit for $2,500,000 was terminated; as a
result, $2,500,000 in cash equivalents previously held as collateral became
unrestricted.
In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions
entered into the Rotor Supply Agreement whereby Engelhard HexCore will supply
Fresh Air Solutions with its heat-exchange and desiccant rotor requirements.
Furthermore, Engelhard HexCore and Fresh Air Solutions entered into reciprocal
technology
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license agreements whereby nonexclusive, royalty free, perpetual licenses with
the further right to sublicense, certain technology related to Engelhard
HexCore's and Fresh Air Solutions' respective businesses related 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 the name
"Engelhard" as part of the "Engelhard/ICC" trademark for a thirty month period
following the Restructuring. See "Patents and Proprietary Information".
In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions
entered into a cassette supply agreement whereby Fresh Air Solutions will supply
Engelhard HexCore with cassettes, which consist of a structure that holds a
rotor, coated or uncoated with ETS(TM), supported by castors or a hub, which
itself consists of seals, drive motor, belt and other components required to
conduct heat or mass transfer. Cassettes will be sold to Engelhard HexCore at
favorable prices relative to other customers of Fresh Air Solutions. The term of
the agreement is five years. Also, in connection with the Restructuring, a
sensor supply agreement was entered into related to the sale of humidity and dew
point infrared sensors to Fresh Air Solutions at more favorable prices related
to other customers of Engelhard for a period of five years. Also, pursuant to a
Referral Agreement, Fresh Air Solutions agreed to sell climate control systems
to customers referred to it by Engelhard HexCore in order to assist Engelhard
HexCore in generating interest in the purchase of rotors. Such sales will be on
the same pricing terms as wholesale customers of Fresh Air Solutions and will be
limited in nature. The lawsuit brought against Engelhard by the Company in
connection with Engelhard's acquisition of the sensor company Telaire Systems,
Inc. was dismissed in connection with the Restructuring.
In accordance with the Restructuring, the Company has the option to acquire
Engelhard's interest in Fresh Air Solution at a price equal to 95% of the fair
market value as determined by mutually agreed to investment banker.
Correspondingly Engelhard has the option to acquire ICC's interest in Engelhard
HexCore at a price equal to 95% of the fair market value as determined by
mutually agreed to investment banker.
PATENTS AND PROPRIETARY INFORMATION
Fresh Air Solutions' ability to compete effectively with other manufacturers of
climate control equipment has been dependent upon, among other things, a
combination of (i) Fresh Air Solutions' proprietary desiccant system design,
(ii) Engelhard's patented ETS(TM) and (iii) Hexcel's proprietary process
licensed to Engelhard HexCore and utilized in manufacturing the small cell,
honeycomb substrate material used to make the systems' rotors. The Partnership
had been issued nine United States patents covering certain of its desiccant
technology which have been assigned to Fresh Air Solutions or Engelhard HexCore.
Several U.S. patent applications are pending which are directed to the products
manufactured and sold by Fresh Air Solutions and additional patent filings are
expected to be made in the future.
Fresh Air Solutions holds one U.S. patent expiring in 2010 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. Fresh Air
Solutions was also assigned nine other U.S. patents expiring between 2013 and
2015,
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protecting its' intellectual property. Engelhard HexCore was assigned one U.S.
patent expiring in 2015. Similar patents have also been applied for by Fresh Air
Solutions in selected Asia-Pacific rim countries.
As part of the Restructuring of E/ICC, on February 27, 1998, Fresh Air Solutions
entered into the Box Technology License Agreement (the "Box Technology License")
with Engelhard Hexcore pursuant to which Fresh Air Solutions granted to
Engelhard Hexcore a nonexclusive, royalty free, world-wide, perpetual license,
with the further right to sublicense, to all technology related to the climate
control system business of Fresh Air Solutions and all improvements to such
technology that are conceived by employees of Fresh Air Solutions and are
subject to patents or patent applications filed within twelve months after
execution of the Box Technology License, other than improvements used solely on
gas platform systems. Engelhard Hexcore may, however, only use such technology
in the climate control systems business and businesses ancillary or reasonably
related thereto.
Also, as part of the Restructuring of E/ICC, on February 27, 1998, Fresh Air
Solutions and Engelhard Hexcore entered into the Wheel Technology License
Agreement (the "Wheel Technology License"), pursuant to which Engelhard Hexcore
granted Fresh Air Solutions a nonexclusive, royalty free, world-wide, perpetual
license with the further right to sublicense, for technology specifically
covered by certain patents relating to the rotor business and owned by Engelhard
Hexcore (which will not include Hexcore's proprietary process utilized in
manufacturing the small cell, honeycomb substrate material used to make
Engelhard Hexcore's rotors which is licensed to Engelhard Hexcore) and any
improvements to such technology conceived by employees or representatives of
Engelhard Hexcore that are subject to patents or patent applications within the
twelve month period after the signing of the agreement. Fresh Air Solutions
may, however, utilize such technology only in connection with the climate
control system business and businesses ancillary or reasonably related to
thereto.
Also, as part of the Restructuring of E/ICC, on February 27, 1998, Fresh Air
Solutions entered into the E/ICC License Agreement (the "E/ICC License") with
Engelhard, pursuant to which Engelhard granted Fresh Air Solutions 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.
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. ICC, through Fresh Air Solutions continues to have the right
to use the technology covered by the patents and the proprietary desiccant
system design in conducting the business of Fresh Air Solutions and expects to
derive benefit from the ETS(TM) and small-cell, honeycomb substrate material
used to make the Engelhard HexCore rotors through the purchase of rotors under
the Rotor Supply Agreement; however, Fresh Air Solutions will no longer have or
share in the exclusive right to any such technology. Moreover, Engelhard,
through Engelhard HexCore will have the right to use and, except with
respect to Hexcel, sublicense others to use, such technology through its rights
under the Box Technology License and ownership of the patented ETS(TM) and the
Hexcel license. Fresh Air Solutions will retain exclusive rights to sell its
systems to standalone supermarkets, ice rinks, and pachinko halls in North
America, Japan and Korea for a seven year period provided that Fresh Air
Solutions meets certain agreed to performance targets for sales to these
markets.
Fresh Air Solutions has trademark applications for "Desert Cool(TM)" and "Desert
Breeze(TM)" in the United States and overseas for heating, ventilation and air
conditioning systems.
COMPETITION
Fresh Air Solutions currently competes against other manufacturers of
conventional and desiccant-based air conditioning systems primarily on the basis
of capabilities, performance, reliability, price and operating efficiencies.
Fresh Air Solutions competes with 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 Fresh Air Solutions. The Company believes Fresh
Air Solutions systems provide the following advantages over conventional air
conditioning systems: more effectively control humidity; improve
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indoor air quality; offer energy versatility; and reduce the amount of
refrigerants required. Fresh Air Solutions 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
their honeycomb rotors coated with Engelhard's ETS(TM).
EMPLOYEES
In connection with the Restructuring of the Partnership on February 27, 1998,
substantially all of the employees of the Hatboro operations became employees of
Fresh Air Solutions and substantially all of the employees of the Miami
operations became employees of Engelhard HexCore. The Company employed 4
full-time persons and the Partnership employed 137 full-time persons as of
December 31, 1997, none of whom are represented by unions. Fresh Air Solutions
currently has 80 full time employees.
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'), many 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. Reduction of the use of HFCs is also being considered by many
countries 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 Fresh Air Solutions' 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.
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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 in certain
circumstances 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 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 Fresh Air
Solutions' business prospects are enhanced because Fresh Air Solutions' climate
control systems currently enable buildings to meet or exceed such standards.
A new revised standard under consideration, ASHRAE 62-1989R, would limit
relative humidity to 60% or less, the Company believes that Fresh Air Solutions'
climate control systems currently enable buildings to meet or exceed such
standards.
ITEM 2. PROPERTIES
The manufacturing facility and executive offices of both the Company and Fresh
Air Solutions are currently located at 330 South Warminster Road Hatboro,
Pennsylvania 19040. Fresh Air Solutions currently has approximately 140,000
square feet under a lease at this location.
ITEM 3. LEGAL PROCEEDINGS
Currently, the Company is not engaged in any material lawsuits.
In February 1997, the Company , together with its wholly-owned subsidiary, ICC
Desiccant Technologies, Inc. and Engelhard/ICC (the "Plaintiffs"), filed a
Complaint in the Court of Common Pleas, Philadelphia County (February Term,
1997, No. 496) against Engelhard and its wholly-owned subsidiary, Engelhard
Sensor Technologies, Inc., in which the company asserted that, in September,
1996, the Company made Engelhard aware of certain technology owned by Telaire
Systems, Inc. ("Telaire") which could be utilized by Engelhard/ICC and that
Engelhard subsequently breached several legal duties it owed the Plaintiffs by
acquiring the assets of Telaire. The Plaintiffs requested that the court: (i)
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, (ii) require Engelhard and its subsidiaries
to disclose all information concerning its acquisition of the assets of Telaire,
(iii) require Engelhard and its subsidiaries to make an accounting of all
profits derived from Engelhard's use of Telaire's technology, and (iv)
compensatory and punitive damages. This lawsuit was dismissed with prejudice by
ICC and the Partnership and mutual general releases were executed by all of the
parties in connection with the E/ICC Restructuring.
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, 1997.
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A special meeting of Stockholders of ICC was held on February 23, 1998, at 10:00
AM EST, at 330 South Warminster Road, Hatboro, Pennsylvania 19040 to approve a
Master Agreement by and among ICC, Engelhard Corporation and Engelhard/ICC which
provided in substance for the Restructuring of the Partnership.
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 February 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:
1997
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
High Bid: $4.81 $5.25 $6.88 $7.06
Low Bid: $1.56 $4.25 $4.38 $4.88
1996
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
High Bid: $7.75 $9.25 $10.00 $12.38
Low Bid: $4.88 $5.25 $ 5.38 $ 6.38
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 25, 1998, the last reported sale
price for the Common Stock was $2.562 per share.
As of March 25, 1998, ICC had approximately 1,200 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 it has approximately 11,000 beneficial owners
of its Common Stock. 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 Fresh Air Solutions, 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following historical selected financial data of the Company for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993 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>
Unaudited
Pro Forma Historical
------------ ----------------------------------------------------------------------------
Year Ended December 31:
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: 1997(1) 1997 1996 1995 1994(3) 1993
------------ ------------ ------------ ------------ ------------ ------------
Revenues(4) $ 6,772,061 $ 492,870 $ 688,411 $ 362,153 $ 162,285 $ 1,216,032
Expenses(5) 24,625,836 13,976,955 7,843,020 6,685,526 4,553,367 5,273,884
------------ ------------ ------------ ------------ ------------ ------------
Net Loss (17,853,775) (13,484,085) (7,154,609) (6,323,373) (4,391,082) (4,057,852)
Cumulative preferred stock
dividend requirements 0 0 (49,655) (301,413) (227,750) (261,500)
------------ ------------ ------------ ------------ ------------ ------------
Net loss applicable to
common stockholders $(17,853,775) $(13,484,085) $ (7,204,264) $ (6,624,786) $ (4,618,832) $ (4,319,352)
============ ============ ============ ============ ============ ============
Loss per common share $ (.84) $ (.63) $ (.35) $ (.47) $ (.41) $ (.51)
Weighted average
shares outstanding 21,339,635 21,339,635 20,322,952 14,072,867 11,390,981 8,550,852
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Pro Forma Historical
----------- -----------------------------------------------------------------------
As of December 31:
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: 1997(2) 1997 1996 1995 1994(3) 1993
----------- ----------- ----------- ----------- ----------- -----------
Total assets $29,699,820 $ 4,521,656 $12,250,865 $ 4,796,426 $ 2,397,522 $ 2,564,302
Working capital 18,598,338 1,382,537 9,661,805 1,827,797 1,072,485 1,206,700
Long-term obligations 198,685 0 0 0 150,000 650,000
Total liabilities 7,536,984 7,583,862 2,179,467 3,262,614 426,782 1,520,631
Stockholders' equity (deficit) 22,162,836 (3,062,206) 10,071,398 1,533,812 1,970,740 1,043,671
</TABLE>
(1) The unaudited pro forma consolidated financial information is presented to
illustrate the effect of the Restructuring of the Partnership, pursuant to
the Master Agreement, on the Company's results of operations as if it
occurred on January 1, 1997. Refer to the unaudited pro forma consolidated
financial statements appearing in Exhibit 99.
(2) The unaudited pro forma consolidated financial information is presented to
illustrate the effect of the Restructuring of the Partnership, pursuant to
the Master Agreement on the Company's financial position as if it occurred
December 31, 1997. Refer to the unaudited pro forma consolidated financial
statements appearing in Exhibit 99.
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<PAGE>
(3) On February 7, 1994, the Company transferred its desiccant climate control
business in exchange for a 50% interest in the Partnership.
(4) Revenues consist of interest income and other income for 1994, 1995, 1996
and 1997. For 1993 and for the pro forma period presented, revenues also
include sale of equipment.
(5) Expenses consists of equity interest in net loss of Engelhard/ICC, general
and administrative expense and interest expense for 1994, 1995, 1996 and
1997. For 1993 and for the pro forma period presented, expenses include
cost of goods sold, other operating expenses and minority interest.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, through Fresh Air Solutions, designs, manufactures and markets
innovative climate control systems to supplement or replace conventional air
conditioning systems.
The Company and Engelhard formed Engelhard/ICC (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 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.
On February 27, 1998, the Company and Engelhard restructured the Partnership.
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 products fabricated from honeycomb substrate material and
the heat-exchange and desiccant coated wheel-shaped rotors that are components
of the climate control systems under the name Engelhard HexCore, LP. All assets
and liabilities of the Partnership related to or used in the Partnership's
climate control systems business (including all assets and liabilities directly
related to, located at or arising out of the Partnership's Hatboro facility)
were transferred or assigned to Fresh Air Solutions. Under the Restructuring ICC
received approximately $18,600,000 in cash, a 90% ownership interest in and full
management control of Fresh Air Solutions, LP. All assets and liabilities of the
Partnership related to or used in the Partnership's honeycomb substrate and
rotor business (including all assets and liabilities directly related to,
located at or arising out of the Partnership's Miami facility) were retained by
Engelhard HexCore. ICC retained a 20% ownership interest in Engelhard HexCore,
LP. Engelhard received an 80% ownership interest in and full management control
of Engelhard HexCore.
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<PAGE>
RESULTS OF OPERATIONS
Year Ended December 31, 1997 compared with Year Ended December 31, 1996
The Partnership's revenue for the year ended December 31, 1997 increased
$1,734,403 to $12,239,012 from $10,504,609 for the year ended December 31, 1996.
This increase in revenues is due primarily to increased substrate sales and
equipment sales. Sales of substrate from the Miami plant to Hexcel pursuant to a
supply agreement increased 35% to approximately $5.8 million in 1997 from $4.3
million in 1996. Equipment sales increased 4% to approximately $6.3 million in
1997 compared to approximately $6.1 million in 1996. The Partnership's gross
loss for the year ended December 31, 1997 increased $1,949,920 to $5,221,770
from $3,271,850 for the year ended December 31,1996. The increase in gross loss
is due primarily to increased provisions for inventory obsolescence and warranty
costs. The provision for inventory obsolescence increased by approximately
$1,300,000 to cover primarily slow moving components related to older desiccant
unit versions. The Partnership incurred warranty costs of $2.2 million in 1997
related primarily to premature component failures and odor issues which the
Company believes it has rectified through design changes, system operation
modifications and quality control improvements. Premature component failures
related primarily to failures of certain castor wheels upon which the desiccant
or heat exchange wheels rotate. In certain installations the desiccant wheel
adsorbed not only moisture but compounds in the air that produced odors. Through
modifications to the operation of the system cycles, addition of dampers and
replacement of contaminated wheels, Fresh Air Solutions believes it can control
the odors that are created under certain circumstances. The Company believes
that Fresh Air Solutions has adequately provided for existing and potential
future warranty claims.
The Partnership's active humidity climate control systems are an emerging
technology and have been subject to numerous improvements and modifications.
Sales volumes have been lower than the capacity to produce and revenues have not
been sufficient to cover fixed and variable costs of production.
As a result of the Partnership Restructuring, Fresh Air Solutions' will not
receive any revenues from ongoing substrate sales, as that business was retained
by Engelhard HexCore.
The Partnership's operating expenses increased $2,141,015 to $11,021,859 for the
year ended December 31, 1997 compared to $8,880,844 for the year ended December
31, 1996, due to higher marketing, engineering and general and administrative
costs which more than offset reduced research and development costs. General and
administrative costs increased approximately $733,000 due to increased
depreciation and amortization of approximately $275,000 and an increase in the
bad debt provision of approximately $403,000. Marketing expenses increased
approximately $541,000 as a result of increased marketing efforts and increased
sales and marketing personnel. Engineering costs increased approximately
$1,020,000 due to increased engineering staff costs of approximately $461,000
and increased engineering consulting services of approximately $465,000. The
loss from operations for the year ended December 31,1997 increased $4,090,935 to
$16,243,629 compared to $12,152,694 for the year ended December 31, 1996.
The Partnership's net loss increased $4,134,697 to $16,724,361 for the year
ended December 31, 1997 from $12,589,664 for the year ended December 31, 1996
due to the increase in the loss from operations of $4,090,935 discussed above
and reduced interest income.
The Company realized a decrease in interest and other income of $195,541 to
$492,870 for the year ended December 31, 1997 as compared to $688,411 for the
year ended December 31,1996, which was primarily attributable to a decrease in
the average balance of cash and cash equivalents. The Company's increase in its
equity interest in the net loss of the Partnership increased $5,690,529 to $
11,985,361 for the year ended December 31, 1997 as compared to $6,294,832 for
the year ended December 31, 1996 which was due to the increased Partnership loss
and the increased share of the loss recognized by the Company as a result of a
limit placed on the loss recognized by Engelhard of approximately $4,700,000 in
connection with Master Agreement governing
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<PAGE>
the Restructuring. The Company's general and administrative expenses increased
$446,000 to $1,991,594 for the year ended December 31, 1997 compared to
$1,545,594 for the same period in 1996 primarily the result of an increase in
professional and consulting fees.
The Company's net loss for the year ended December 31, 1997 increased $6,329,476
to $13,484,085 from $7,154,609 for the same period in 1996. Net loss per share
of Common Stock increased $.28 to $.63 for the year ended December 31, 1997 from
$.35 for the same period in 1996 primarily the result of the increased loss of
the Partnership and the increased share of the Partnership loss recognized by
the Company in connection with the Master Agreement governing the Restructuring.
The backlog of purchase orders as of March 25, 1998 is approximately $2 million
which is approximately $1 million less than the comparable period in 1997. The
decrease in backlog is primarily attributable to a significant declined in
orders from the Asia-Pacific market and to customer concerns over component
failures and odor issues. The decline in the Asia-Pacific market activity is
largely attributable to the Asian-Pacific economies experiencing lower economic
growth than had been previously enjoyed resulting in declines in many of the
Asia-Pacific currencies in comparison to the US dollar. Continued weakness in
Asian-Pacific currencies could adversely impact Asian-Pacific market activities.
In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions
entered into the Rotor Supply Agreement whereby Engelhard HexCore will supply
Fresh Air Solutions with its heat-exchange and desiccant rotor requirements.
Fresh Air Solutions is obligated to purchase its rotor requirements from
Engelhard HexCore. All rotors will be purchased at prices which are lower than
the best price Engelhard HexCore offers to other customers. The term of the
rotor supply agreement is fifteen years. Under the Rotor Supply Agreement,
Engelhard HexCore will sell all desiccant and heat-exchange rotors to Fresh Air
Solutions atf prices which are lower than it will sell rotors to others
("Favorable Wheel Prices"). Moreover, during the first two years under the Rotor
Supply Agreement, Engelhard HexCore has agreed to sell such rotors at prices
which are lower than the Favorable Wheel Prices. Although Fresh Air Solutions
will receive preferential pricing for such purchases, it is required to purchase
rotors that will cover approximately $600,000 in costs annually. Initially the
Company believes that rotor costs will be obtained at prices higher than had
been obtained when rotors were transferred intra-partnership at cost prior to
the Restructuring of the Partnership; however, the Company believes as the
demand for rotors increase and as Engelhard HexCore begins to sell to other end
users, the price of rotors will decline.
ICC, through Fresh Air Solutions continues to have the right to use the
technology covered by the patents and the proprietary desiccant system design in
conducting the business of Fresh Air Solutions and expects to derive benefit
from the ETS(TM) and small-cell, honeycomb substrate material used to make the
Engelhard HexCore rotors through the purchase of rotors under the Rotor Supply
Agreement; however, Fresh Air Solutions will no longer have or share in the
exclusive right to any such technology. Moreover, Engelhard, through Engelhard
HexCore will have the right to use and, except with respect to Hexcel, the
successor corporation to the former owner of the Partnership's Miami Plant,
sublicense others to use, such technology through its rights under the Box
Technology License and ownership of the patented ETS(TM) and the Hexcel license.
Fresh Air Solutions will retain exclusive rights to sell its systems to
standalone supermarkets, ice rinks, and pachinko halls in North America, Japan
and Korea for a seven year period provided that Fresh Air Solutions meets
certain agreed to performance targets for sales to these markets.
Year Ended December 31, 1996 compared with Year Ended December 31, 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 sales 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.
Continued negative margins have occurred due to the sales volume 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 have 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.
19
<PAGE>
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.
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 decreased to $275,717 at December
31, 1997 from $1,192,997 at December 31, 1996. The decreases were due to cash
consumed in operations and investing activities exceeding the capital
contributions from the partners. Fresh Air Solutions is expected to require
additional financing to support anticipated growth and will be dependent on the
Company to provide additional financing to support its current operations and
future expansion.
Net cash used in operating activities by the Partnership was $9,939,756 for the
year ended December 31,1997 due to the net loss of $16,724,361 which offset
noncash charges of $5,968,747 and reduced working capital needs of $3,134,704.
Net working capital reductions were primarily the result of increases in accrued
expenses and other liabilities which offset the decreases in receivables,
inventories, prepaid expenses and payables. Net cash used in investing
activities by the Partnership was $2,919,349 for the year ended December 31,
1997. 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 $6,775,000 in capital
contributions by the Company and $5,175,000 in capital contributions by
Engelhard.
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.
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 and 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.
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 and net working
capital needs of $3,265,030 which offset noncash charges of
20
<PAGE>
$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 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 was
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. In connection with the Restructuring, the Company's
guarantee of 50% of the Partnership's indebtedness associated with the
industrial development bonds and the related irrevocable letter of credit for
$2,500,000 was terminated; as a result, $2,500,000 in cash equivalents
previously held as collateral became unrestricted.
The Company's cash and cash equivalents amounted to $1,257,483, $9,641,114 and
$1,573,475 at December 31, 1997, 1996 and 1995, respectively. The cash utilized
in the Company's operating and investing activities was financed primarily
through proceeds from the issuance of stock and exercise of stock options and
warrants. Management believes that Fresh Air Solutions will require additional
capital contributions during 1998, and the Company plans to satisfy such capital
contribution requirements from its available cash and cash equivalents that it
received in connection with the Restructuring. To the extent Fresh Air Solutions
capital contributions in excess of the available proceeds from the Restructuring
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
Fresh Air Solutions. There can be no assurance that the Company will be able to
obtain equity financing in the future.
The Company's ability to attain profitable operations and positive cash flows
from operations is primarily dependent on increasing sales of Fresh Air
Solutions. Fresh Air Solutions expects to achieve increased sales through
targeted marketing of its products to end users, upgrade and increase its
manufacturers' representative network, introduce new commission sales incentive
programs, expansion of product line with introduction of single wheel systems,
establish new strategic relationships with domestic and international
manufacturers/distributors of air conditioning equipment and improved
dissemination of product information through web site, trade shows and
newsletters to improve market awareness. The Company expects to improve cash
flow by increasing sales, reduction of manufacturing costs through process
improvements, product design changes and increased unit production and through
reduction in operating expenses through reduction in support staff and
constraints on discretionary spending. In connection with the Restructuring, the
Company received approximately $18,600,000 in cash from Engelhard and obtained a
release from restrictions of $2,500,000 in cash, which had been pledged as
collateral for long-term debt of Engelhard/ICC. The Company expects to use this
cash to support the operations of Fresh Air Solutions and to seek other
investment opportunities. The Company believes that the cash obtained from the
Restructuring combined with its plans to increase sales and reduce costs will
permit it to continue operations for at least the next fiscal year.
Engelhard will continue its guarantee on Fresh Air Solutions, LP's facility
lease until April 2002 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.
On December 24, 1997 the Company loaned $350,000 to a potential acquisition
candidate which is engaged in a business that is unrelated to the desiccant
based climate control system business. In connection with such loan, such
potential acquisition candidate agreed not to enter into discussions with
respect to an acquisition agreement with any other entity (the "Standstill
Agreement"). The loan is unsecured and matures on the earlier of (i) five years,
(ii) the consummation of an acquisition agreement by such candidate with another
entity, or (iii) the receipt by such candidate of significant financing from
other sources. The loan bears interest at the prime rate of 8.5% payable at
maturity and is adjusted to the current prime rate at each annual anniversary
date. Subsequent to December 31, 1997 the Company loaned an additional
$1,150,000 to
21
<PAGE>
such acquisition candidate and such candidate's Standstill Agreement was
extended through April 30, 1998. While the Company has had ongoing discussions
and negotiations regarding the potential acquisition of such candidate, the
Company has not as of the date of this report entered into a definitive binding
agreement for such acquisition and there can be no assurance that the Company
will acquire such acquisition candidate.
The Company is continuing to seek and evaluate acquisition opportunities related
or unrelated to desiccant technology, that would help broaden its product
offerings or permit ICC to enter new areas of business and that demonstrate
capabilities of enhancing shareholder value. Presently, although the Company is
exploring the possibility of pursuing other ventures, to date it has not entered
into any binding agreements to do so. ICC may enter any other business it deems
appropriate, whether or not related to Fresh Air Solutions business, except that
it may not be a reseller of wheel-shaped rotors acquired from Engelhard HexCore
other than as a component in the production and sale of climate control systems.
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 located in Miami 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.
The independent accountants' report on the audit of the Company's 1997 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 $54 million through December 31, 1997. 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 Fresh Air Solutions.
22
<PAGE>
YEAR 2000
The Company has determined that its systems are Year 2000 compliant and there
are no material costs or consequences to the Company which will arise from the
incomplete or untimely resolution of the Year 2000 issue by vendors or
suppliers. The products sold by the Partnership and Fresh Air Solutions do not
contain date sensitive control systems.
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 and Fresh Air
Solutions' 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 Fresh Air Solutions', market acceptance of Fresh
Air Solutions' 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.
23
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information concerning
the directors and executive officers of the Company(1).
<TABLE>
<CAPTION>
Director/Officer
Name Age Position With the Company Since
- ---- --- ------------------------- ----------------
<S> <C> <C>
Irwin L. Gross 54 Chairman of the Board 1984
Glenn S. Meyers 37 Director, President and CEO 1998
Charles T. Condy 60 Director 1996
Robert O. Aders (5) 71 Director 1996
Manfred Hanuschek 37 Treasurer and Chief Financial Officer 1994
</TABLE>
- -------------------------------
(1) The directors listed reflect the Board of Directors of the Company as
of April 30, 1998 following the consummation of the acquisition of Rare Medium,
Inc.("Rare Medium"), a New York corporation and Internet professional services
company engaged in the design, delivery and implementation of Internet web site
applications and strategies, on April 15, 1998 pursuant to the terms of that
certain Merger Agreement and Plan of Reorganization dated as of April 8, 1998,
by and among the Company, Rare Medium Acquisition Corp., Rare Medium, Inc., and
the Founding Stockholders named therein (the "Rare Medium Merger Agreement"). As
of April 15, 1998, the effective time of the merger contemplated by the Rare
Medium Merger Agreement, Messrs. William A. Wilson, Albert Resnick, Stephen
Schachman, Andrew L. Shapiro and Mark S. Hauser, Directors of the Company,
resigned from the Board of Directors of the Company. In addition to being
nominated to the Board at that time, Glenn S. Meyers, the President and Chief
Executive Officer of Rare Medium, Inc. prior to the Merger, was elected to serve
as President and Chief Executive Officer of the Company to replace Mr. Wilson.
Pursuant to the terms of the Rare Medium Merger Agreement, the Board of
Directors of the Company shall consist of three additional independent members
to be nominated by Mr. Meyers and approved by Mr. Gross. As of the date of this
report, such nominations have not been made. Upon effectiveness of the Merger,
William A. Wilson, Robert O. Aders, Albert Resnick and Andrew Shapiro were
elected to the Board of Directors of ICC Desiccant Technologies, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company. Mr. Wilson also
serves as the President and Chief Executive Officer of ICC Desiccant
Technologies, Inc. ICC Desiccant Technologies, Inc. is the sole general partner
of, and holds a 90% interest in, Fresh Air Solutions, L.P., a Pennsylvania
limited partnership ("Fresh Air Solutions LP"), which is engaged in the business
of designing, manufacturing and marketing, desiccant-based climate control
systems. ICC Desiccant Technologies, Inc. also holds a 20% passive limited
partnership interest in Engelhard HexCore, L.P. ("Engelhard HexCore LP"), a
desiccant and heat exchange rotor manufacturer which is controlled by a wholly
owned subsidiary of Engelhard Corporation.
The following information with respect to the directors and executive
officers of the Company has been furnished by such persons.
Irwin L. Gross is a founder of the Company and has been the Chairman of the
Company and a director since the Company's inception in May 1984. Mr. Gross had
served as the President and Chief Executive Officer of the Company until
November 1997. In addition, Mr. Gross had served as the Chief Executive Officer
of Engelhard/ICC (the "Partnership"), the Company's 50% owned joint venture with
Engelhard Corporation, since its formation in February 1994 until the
Restructuring in February 1998 and was one of the two members of the Management
Committee of the Partnership. Mr. Gross also served until May 1997 as the
Chairman of the Board of Directors of EA Industries, Inc. (formerly called
Electronic Associates, Inc.), a publicly-held company listed on the New York
Stock Exchange that is engaged in the contract manufacturing of electronic
products and development of new technologies. Mr. Gross also serves as director
on the Board of Directors for Aydin Corporation, a publicly-held electronic
products manufacturer. Mr. Gross has a Bachelor of Science degree in Accounting
from Temple University and a Juris Doctor degree from Villanova University.
Glenn S. Meyers has been Chairman, President & Chief Executive Officer of
Rare Medium, Inc. since August 1996. Prior to that Mr. Meyers was President of
Brookridge Capital, a
24
<PAGE>
technology investment advisory firm from January 1995 to July 1996. Prior
thereto, Mr. Meyers acted as a private investor and served on the Board of
Directors of various portfolio companies from 1988 through December, 1994. He
founded American Cable Products, Inc. (ACP) a network integration firm in which
he served as President & CEO from 1983 through 1988. Mr. Meyers received a B.S.
from the Business School of the University of Florida in 1983.
Charles T. Condy has been a director of the Company since June 1996. He is
founder and has been Chairman and Chief Executive Officer of Proven
Alternatives, Inc., an international energy management company, since 1991. Mr.
Condy was Chairman and Chief Executive Officer of California Energy Company,
Inc., a geothermal energy company which he founded in 1971. Prior to founding
California Energy Company, Mr. Condy was Executive Vice President-Western Region
of John Nuveen and Company, members of the New York Stock Exchange. In the
public policy area, Mr. Condy helped found and has served as board member of the
Business Council for a Sustainable Energy Future and the Coalition for Energy
Efficiency and Renewable Technologies. Mr. Condy currently advises the U.S.
Department of Energy, the U.S. Agency for International Development, and the
U.S. Asian Environmental Partnership on energy efficiency technology transfer
and related funding to developing economies.
Robert O. Aders has been a director of the Company since October 1996. He
has been Chairman of The Advisory Board, Inc., an international consulting
organization, since 1992. Mr. Aders is Of Counsel to the law firm of Collier,
Shannon, Rill & Scott. He is also President Emeritus and a member of the Board
of Directors of Food Marketing Institute ("FMI"), where he served as Chief
Executive Officer from the founding of FMI in 1976 until his retirement in 1993.
Mr. Aders served as Under Secretary of Labor and Acting Secretary during 1975
and 1976 prior to which time he was Chairman of the Board of the Kroger Co. Mr.
Aders is a director of Telepanel Systems, Inc., a Canadian manufacturer of
electronic shelf labels. Mr. Aders is also a member of the Board of Directors of
Checkpoint Systems, Inc., a manufacturer of integrated electronic security
systems.
Manfred Hanuschek has been the Chief Financial Officer of the Company since
October 1994 and Treasurer since December 1994. From 1983 to October 1994, he
was employed by Coopers & Lybrand, L.L.P., certified public accountants. Mr.
Hanuschek is a Certificated Public Accountant, licensed in the Commonwealth of
Pennsylvania. Mr. Hanuschek has a Bachelor of Science degree in Accounting from
Pennsylvania State University and is a member of the American and Pennsylvania
Institutes of Certified Public Accountants.
The executive officers of the Company are elected by, and serve at the
discretion of, the Board of Directors.
Compliance with Section 16(a) of the Exchange Act. Based solely on a review
of copies of reports filed with it under Section 16(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") the Company believes that the
following officers and directors failed to file on a timely basis the indicated
number of reports required by Section 16(a) of the Exchange Act for the fiscal
year ended December 31, 1997: Albert Resnick filed one late report (relating to
a single transaction); and Robert O. Aders filed one late report (relating to a
single transaction).
25
<PAGE>
Item 11. Executive Compensation.
The following Summary Compensation Table sets forth, for the three fiscal
years ended December 31, 1997, the compensation for services in all capacities
earned by the Company's Chief
Executive Officer and each other named executive officer whose total annual
salary and bonus exceeded $100,000 in 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------------------------- -------------------------------
Awards Payouts
------ -------
Name and Principal Year Salary Bonus($) Other Annual Restricted Securities LTIP All other
Position (1) ($)(1) Compensation Stock Underlying Payouts Compen-
($) Award(s)($) Options/ ($) sation ($)
SARs (#)
- ------------------------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Irwin L. Gross, 1997 $305,000(3) - $7,200(6) - - - $45,353(5)
Chairman of the Board, 1996 305,000(3) - - - - - 3,100(5)
and Former President 1995 284,167(3) - - - 675,000(2) - 3,100(5)
and CEO
William A. Wilson, 1997 $165,972(4) - - - 300,000(2) - $1,028(7)
former President and CEO 1996 70,833(4) - - - 100,000(2) - -
1995 50,000 - - - - - -
Manfred Hanuschek 1997 $100,000 $17,500 - - 20,000(2) - $2,350(7)
Chief Financial Officer 1996 90,000 17,500 - - - - 2,150(7)
1995 80,000 17,500 - - 10,000(2) - 1,950(7)
</TABLE>
- ---------------
(1) There were no other executive officers whose total annual salary and bonus
exceeded $100,000 in 1997.
(2) Stock options granted under the Nonqualified or Incentive Stock Option
Plan.
(3) Includes Mr. Gross' annual salary of $155,000 received from Engelhard/ICC
in his capacity as Chief Executive Officer covered under an employment
agreement, which was terminated February 27, 1998 in connection with the
Restructuring of Engelhard/ICC.
(4) Includes Mr. Wilson's compensation for consulting services provided to
Engelhard/ICC of $100,000 in 1997 and $20,833 in 1996. Mr. Wilson's
consulting services were covered under a consulting agreement which was
terminated December 31, 1997.
(5) Represents loan forgiveness which includes principal and accrued interest
in 1997 and a Engelhard/ICC 401(k) Profit Sharing Plan annual employer
match of $3,100.
(6) Represents automobile allowance.
(7) Represents an ICC Technologies, Inc. 401(k) Profit Sharing Plan employer
match.
26
<PAGE>
The following table sets forth information concerning grants of stock
options to purchase common stock during the fiscal year ended December 31, 1997
to the named executive officer.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
------------------------------------------------------------------- ----------------------------------
Number of Percent of
Securities Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted ($)(4) Employees in Base Price Expiration Date 5% 10%
Fiscal Year ($/Sh)(3) ($) ($)
- --------------------------- ---------------- ---------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
William A. Wilson(1) 300,000 43.7% $2.16 12/18/99 66,290 135,829
Manfred Hanuschek(2) 20,000 2.9% $2.16 12/18/99 4,419 9,055
</TABLE>
(1) Nonqualified stock options granted December 18, 1998, the exercisability of
which is dependent upon the achievement of certain profitability
performance criteria.
(2) Incentive stock options granted December 18, 1998, the exercisability of
which is dependent upon the achievement of certain profitability
performance criteria.
(3) The exercise prices equal the closing prices of the stock as reported by
NASDAQ on the respective dates of grant of the options.
(4) The number of shares covered by the options are subject to anti-dilution
adjustments in the event of any stock dividend, stock split or combination
of shares, recapitalization or other change in the Company's capital stock.
The vesting of the options is subject to acceleration in the event of a
change in control of the Company, which means the consummation of any
merger or consolidation involving the Company, any sale of substantially
all of the Company's assets or other transaction or related transactions as
a result of which a single person or several persons acting in concert own
a majority of the Company's Common Stock (except for certain transactions
that do not involve a change in the holders of a majority of the
outstanding Common Stock and the ownership of a majority of the outstanding
shares of Common Stock by a single person).
The following table sets forth information concerning the exercise of
options to purchase the Company's Common Stock by the named executive officers
during the fiscal year ended December 31, 1997 as well as the number and
potential value of unexercised options (both options which are presently
exercisable and options which are not presently exercisable) as of December 31,
1997.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Name Shares Acquired Value Number of Securities Value of Unexercised
on Exercise (#) Realized Underlying Unexercised In-the-Money
($) Options/SARs at Fiscal Year Options/SARs at Fiscal Year
End (#) End ($)
Exercisable/Unexercisable (1) Exercisable/Unexercisable (2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Irwin L. Gross 82,753 219,502(3) 753,000/420,000(4) $0/$0
William A. Wilson - - 168,334/436,666(5) $0/$0
Manfred Hanuschek - - 34,000/ 46,000(5) $0/$0
</TABLE>
- ---------------
(1) Includes both options and warrants to purchase common stock.
(2) The value reported represents the difference between the closing price as
reported by NASDAQ on December 31, 1997 of $1.75, minus the exercise price,
multiplied by the number of shares underlying the options and warrants.
(3) Mr. Gross exercised options to purchase common stock but did not sell
shares into market.
(4) Includes warrants to purchase 698,000 shares of common stock of which
548,000 were exercisable as of December 31, 1997.
(5) In connection with the acquisition of Rare Medium on April 15, 1998,
305,000 of Mr. Wilson's outstanding options became immediately exercisable
and 60,000 of Mr. Hanuschek's outstanding options became immediately
exercisable.
27
<PAGE>
Compensation of Directors. Commencing June 1, 1996, each non-employee
director receives an annual retainer of $10,000 plus a per meeting fee of $1,000
for each Board or Committee meeting attended, not to exceed $1,500 per day.
The Company's Equity Plan for Directors provides that on the date on which
a person first becomes an Eligible Director (each, a "First Grant Date"), and on
each fifth anniversary of his First Grant Date, each Eligible Director will be
automatically granted an option to purchase 50,000 shares of Company Common
Stock, subject to antidilution adjustments in the event of any stock dividend,
stock split or combination of shares, recapitalization or other change in the
Company's capital stock, provided that sufficient shares are available under the
Equity Plan for such grant. An "Eligible Director" is a director who is not, and
has not been during the preceding 12 months, an officer or employee of the
Company. The exercise price for options granted under the Equity Plan is the
fair market value of the Company Common Stock on the date of the grant. Options
will vest and be exercisable in five annual installments of 10,000 shares
commencing on the first anniversary of the First Grant Date, provided that
certain performance criteria, relating to future market prices of the Company's
Common Stock, have been satisfied. All options under the Equity Plan will expire
not later than ten years after the First Grant Date. If a director's service
with the Company terminates for any reason other than death, all his options
under the Equity Plan which are not then exercisable will terminate and the
exercisable options will remain exercisable for a period of three months but not
later than ten years after the First Grant Date. In the case of a director's
death, all his options under the Equity Plan shall become immediately
exercisable and may be exercised by such director's estate or assignee for a
period of three years thereafter but not later than ten years after the First
Grant Date. Immediately prior to a "change in control" of the Company, as
defined under the plan, all outstanding options under the Equity Plan will
immediately vest and become exercisable, subject to satisfaction of the
performance criteria for the year in which such event occurs as if all of the
outstanding options constitute an option installment for such year. The Equity
Plan is administered by a committee of the Board which during 1997 was comprised
of Irwin L. Gross and Albert Resnick.
In connection with the acquisition of Rare Medium on April 15, 1998
pursuant to the Rare Medium Merger Agreement, the Board of Directors of the
Company concluded that with respect to stock options to purchase shares of
common stock of the Company held by those directors who resigned from the Board
of Directors effective upon such acquisition as well as certain employees of the
Company, the acquisition constituted a "change of control" of the Company solely
for purposes of such stock options, and the Board determined to accelerate the
vesting of all unvested stock options held by such individuals and to reset the
per share exercise prices of all unexercised options held by such individuals to
the lower of the market price of the Company's stock on April 18, 1998, plus
$.25, or the then current exercise price of such options.
Additional Information with Respect to the Compensation Committee
Interlocks and Insider Participation in Compensation Decisions. The members of
the Compensation Committee for the Company in 1997 were Charles Condy, Andrew
Shapiro and Mark S. Hauser, outside directors. Messrs. Robert Aders, Andrew
Shapiro and Mark Hauser also served as the members of the Stock Option
Committee.
28
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of April 22, 1998,
regarding beneficial ownership of the Company's Common Stock by (i) each person
who is known to the Company to be the beneficial owner of more than 5% of the
Company's Common Stock, (ii) each of the Company's names executive officers,
(iii) each director of the Company, and (iv) all executive officers and
directors as a group. Unless otherwise indicated, the stockholders listed
possess sole voting and investment power with respect to the shares indicated as
owned by them.
<TABLE>
<CAPTION>
Name and Address(1) Position Number of Shares Owned Percentage of Class
- ------------------------------ ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Irwin L. Gross Chairman of the Board; 3,088,040(2) 13.3%
330 South Warminster Road Former President and CEO
Hatboro PA 19040
Glenn S. Meyers Director, President and CEO 619,225(3) 2.9%
William A. Wilson Former President and CEO; 305,000(4) 1.4%
President of ICC Desiccant
Technologies, Inc.
Charles T. Condy Director -0- 0%
Robert Aders Director 20,000(5) 0.1%
Manfred Hanuschek Chief Financial Officer 60,000(4) 0.3%
Laura Huberfeld/Naomi Bodner N/A 1,464,833 5.7%
Partnership
152 W. 57th Street
New York NY 10019
All Executive Officers and N/A 4,092,271 18.1%
Directors as a group
(6 persons)
</TABLE>
(1) Addresses are included for beneficial owners of more than 5%. Beneficial
ownership has been determined pursuant to Rule 13d-3 of the Securities and
Exchange Act.
(2) Includes 1,413,354 shares of Common Stock and currently exercisable options
to purchase 205,000 shares of Common Stock, and warrants to purchase
698,000 shares of Common Stock. Also includes 771,692 shares of Common
Stock held of record by trust for the benefit of the children of Mr. Gross,
with respect to which he exercises voting and investment power.
(3) Does not include stock options to purchase 2,000,000 shares at $2.375 per
share granted to Mr. Meyers as of April 15, 1998, which vest ratably on a
monthly basis over a five year period.
(4) Consists of shares of Common Stock which may be acquired pursuant to
currently exercisable options.
(5) Includes 10,000 shares of common stock and currently exercisable options
to purchase 10,000 shares of common stock.
Item 13. Certain Relationships and Related Transactions.
On June 25, 1997 the Company loaned Irwin L. Gross $230,467 to enable him
to exercise his option to acquire 82,573 shares of Common Stock of the Company
at $2.875 per share. The loan was a full recourse loan which bears interest
equal to prime (8.75%) with such rate to be adjusted at the respective rate as
of each anniversary date. The loan matures June 2002.
In February, 1997 the Company forgave indebtedness of $42,253 owed by Irwin
L. Gross to the Company, representing principal and accrued interest due under a
promissory note evidencing a loan of $70,000 made in April 1993.
As a condition to the formation of E/ICC pursuant to the joint venture
asset transfer agreement with Engelhard in February, 1994, Mr. Gross entered
into a five year employment agreement with E/ICC, dated
29
<PAGE>
February 7, 1994, pursuant to which Mr. Gross was employed as the Chief
Executive Officer of E/ICC and was required to devote a majority of his business
time to the business of the Partnership, at an annual salary of $155,000,
subject to certain adjustments. Mr. Gross also received an annual salary in 1997
of $150,000 from the Company for his services as its Chairman of the Board and
President, although he does not have a written employment agreement with the
Company. Mr. Gross' employment agreement with E/ICC was terminated effective
February 27, 1998 as part of the E/ICC Restructuring.
Effective October 1997 Mr. Wilson was named Chief Executive Officer and
President of the Company and commencing thereon was to receive an annual
aggregate salary of $200,000. Prior thereto Mr. Wilson was being paid a $50,000
annual salary by the Company. Effective October 15, 1996, Mr. Wilson entered
into a consulting agreement for consulting services to E/ICC whereby Mr. Wilson
received $8,333 per month in compensation. Such consulting agreement was
cancelled December 31, 1997. Effective April 15, 1998 Mr. Wilson resigned as
President and CEO of the Company and Glenn S. Meyers became the President and
CEO of the Company. Mr. Wilson continues as the President and CEO of ICC
Desiccant Technologies, Inc., a wholly-owned subsidiary of the Company. Mr.
Wilson does not have a written employment agreement with the Company or ICC
Desiccant Technologies, Inc.
In connection with the transactions consummated pursuant to the Rare Medium
Merger Agreement, ICC entered into an Employment Agreement effective April 15,
1998 with Glenn S. Meyers. Pursuant to the Employment Agreement, Mr. Meyers has
been engaged as the President and Chief Executive Officer of ICC and Rare Medium
to serve for a term of 5 years at an annual base salary of $250,000, with a
minimum annual increase during the term of not less than 4% per annum. In
addition to Base Compensation, Mr. Meyers shall be entitled to receive for each
calendar year during the term, incentive compensation equal to 2% of revenues
derived from activities of Rare Medium for such calendar year in excess of the
revenues of Rare Medium for the preceding year. The Employment Agreement
provides Mr. Meyers with a right to terminate the agreement upon a breach of the
Agreement or certain events constituting a "change in control" of ICC as defined
therein, upon which Mr. Meyers would be entitled to receive all salary and
incentive compensation for the remaining term, the cash value of all benefits
which would have been received by him for the remaining term and the cash value
off all unexercised stock options (whether or not vested) or the cashless
exercise value thereof. The Employment Agreement also contains a covenant not to
compete with ICC or any of its affiliates for the term of the Employment
Agreement, plus one additional year. Concurrently with the execution of the
Employment Agreement with Mr. Meyers, ICC granted to Mr. Meyers incentive and
non-incentive stock options to acquire an aggregate of 2,000,000 shares of
common stock of ICC at exercise prices equal to $2.375 per share, which options
will become exercisable ratably on a monthly basis over a period of 60 months
from the date of grant and expire ten years from the date of grant.
See "Item 11 Executive Compensation" above.
30
<PAGE>
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 as of December 31, 1997
and 1996.
(iii) Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995
.
(iv) Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended December 31, 1997,
1996 and 1995.
(v) Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
.
(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
Restructuring of Engelhard/ICC on February 27, 1998 pursuant to
the Master Agreement dated November 17, 1997
(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
------- -----------
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.
10.1 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,
31
<PAGE>
No. 33-85636 filed on October 26, 1994 and
is hereby incorporated by reference.
10.2 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.
10.3 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.
10.4 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 the
period ended September 30, 1991.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
32
<PAGE>
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 Form of Amendment assignment and transfer to
Hexcel all contracts between Engelhard/ICC
and Ciba-Geigy, dated October 19, 1995
was filed as an exhibit to ICC's Form 10-K
for the year ended December 31, 1996 and is
incorporated herein by reference.
10.20 Asia Pacific Market Development Agreement
between Carrier APO and the Partnership
dated September 12, 1996 was filed as an
exhibit to ICC's Form 10-K for the year
ended December 31, 1996 and is incorporated
herein by reference.
10.21 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 an exhibit to ICC's Form 10-K for the
year ended December 31, 1996 and is
incorporated herein by reference.
10.22 Master Agreement dated November 17, 1997,
by and among ICC Technologies, Inc., ICC
Investment, L.P., ICC Desiccant
Technologies,
33
<PAGE>
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 by reference.
10.23 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 the Stockholders held on
February 23, 1998 and is hereby incorporated
by reference.
*10.24 E/ICC Purchase and Sale Agreement dated as
of November 17, 1997 by an among ICC
Investment, L.P., ICC Desiccant
Technologies, Inc. and Engelhard DT, Inc.
*10.25 Rotor Supply Agreement dated as of February
27, 1998 by and between Engelhard HexCore,
L.P. and Fresh Air Solutions, L.P.
*10.26 Cassette Supply Agreement dated as of
February 27, 1998 by and between Fresh Air
Solutions, L.P. and Engelhard HexCore, L.P.
*10.27 Referral Agreement dated as of February 27,
1998 by and between Engelhard HexCore, L.P.
and Fresh Air Solutions, L.P.
*10.28 Box Technology License Agreement dated as
of February 27, 1998 by and between Fresh
Air Solutions, L.P. and Engelhard HexCore,
L.P.
*10.29 Wheel Technology License Agreement dated as
of February 27, 1998 by and between Fresh
Air Solutions, L.P. and Engelhard HexCore,
L.P.
*10.30 E/ICC License Agreement dated as of February
27, 1998 by and between Fresh Air Solutions,
L.P. and Engelhard Corporation.
*10.31 Sensor Supply Agreement dated as of February
27, 1998 by and between Fresh Air Solutions,
L.P. and Engelhard Sensor Technologies, Inc.
10.32 Fresh Air Solutions, L.P. Limited
Partnership Agreement dated February, 1998,
between ICC Desiccant Technologies, Inc., as
sole general partner and a limited partner,
and Engelhard DT, Inc., a limited partner.
*10.33 Engelhard HexCore, L.P. Limited Partnership
Agreement dated February, 1998, between
Engelhard DT, Inc., as a sole general
partner and a limited partner, and ICC
Desiccant Technologies, Inc., a limited
partner
21 Subsidiaries of ICC Technologies, Inc.
ICC Desiccant Technologies, Inc., a Delaware
Corporation
Fresh Air Solutions L.P., a
Delaware limited partnership
ICC Investment L.P., a Delaware limited
partnership
23 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants
27 Financial Data Schedule
99 Unaudited pro forma consolidated financial
statements of ICC
34
<PAGE>
Technologies, Inc as of December 31, 1997
illustrating the effect of the Restructuring
of the Partnership pursuant to the Master
Agreement dated November 17, 1997.
- -----------------
* Previously filed as Exhibit to Form 10-K for the year ended December 31, 1997.
(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 Sheets as of December 31, 1997 and
1996.
(iii) Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
(iv) Statements of Changes in Partners' Capital
for the years ended December 31, 1997, 1996
and 1995.
(v) Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
(vii) Notes to Financial Statements.
35
<PAGE>
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 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 $54,184,410 through December 31, 1997. 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 20, 1998
36
<PAGE>
ICC TECHNOLOGIES, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,257,483 $ 9,641,114
Prepaid expenses and other 406,558 108,161
----------- ------------
Total current assets 1,664,041 9,749,275
Restricted cash equivalents 2,500,000 2,500,000
Note receivable 350,000 0
Property, equipment and software, net 7,615 1,590
----------- ------------
Total assets $ 4,521,656 $ 12,250,865
=========== ============
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIT)
Current liabilities:
Accounts payable 80,266 $ 22,210
Payable to Engelhard/ICC 17,720 17,035
Accrued liabilities 183,518 48,227
----------- ------------
Total current liabilities 281,504 87,472
----------- ------------
Losses of Engelhard/ICC in excess of investments 7,302,358 2,091,997
----------- ------------
Stockholders' equity (deficit):
Common stock, $.01 par value, authorized 50,000,000 shares,
issued 21,519,998 shares at December 31, 1997 and 21,282,354
shares at December 31, 1996 215,200 212,824
Additional paid-in capital 51,308,904 50,730,330
Note receivable from officer (230,467) 0
Accumulated deficit (54,184,413) (40,700,328)
Less: Treasury common stock, at cost, 66,227 shares (171,430) (171,430)
----------- ------------
Total stockholders' equity (deficit) (3,062,206) 10,071,396
----------- ------------
Total liabilities and stockholders' equity (deficit) $ 4,521,656 $ 12,250,865
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
37
<PAGE>
ICC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Interest and other income $ 492,870 $ 688,411 $ 362,153
Expenses:
Equity interest in net loss of Engelhard/ICC 11,985,361 6,294,832 5,286,112
General and administrative 1,991,594 1,545,594 1,383,164
Interest 0 2,594 16,250
------------ ------------ ------------
Total expenses 13,976,955 7,843,020 6,685,526
------------ ------------ ------------
Net loss (13,484,085) (7,154,609) (6,323,373)
Cumulative preferred stock
dividend requirements 0 (49,655) (301,413)
------------ ------------ ------------
Net loss applicable to common stockholders $(13,484,085) $ 7,204,264 (6,624,786)
============ ============ ============
Net loss per common share $ (0.63) $ (0.35) $ (0.47)
============ ============ ============
Weighted average common shares 21,339,635 20,322,952 14,072,867
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
38
<PAGE>
ICC TECHNOLOGIES, INC.
CONSOLIDATED 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 $(13,484,085) $ (7,154,609) $ (6,323,373)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,927 1,590 1,591
Equity interest in net loss of Engelhard/ICC 11,985,361 6,294,832 5,286,112
Common stock, stock options and warrants issued for services rendered 52,381 12,500 112,500
Increase in inventory reserve 0 0 9,000
(Increase) decrease in:
Receivables 0 189,640 (36,878)
Inventories 0 0 7,960
Prepaid expenses and other (298,397) 172,349 (464,921)
Increase (decrease) in:
Accounts payable and accrued expenses 194,030 (227,977) 110,475
------------ ------------ ------------
Net cash used in operating activities (1,546,783) (711,675) (1,297,534)
------------ ------------ ------------
Cash flows from investing activities:
Capital contributions to Engelhard/ICC (6,775,000) (7,000,000) (3,000,000)
Issuance of note receivable (350,000) 0 0
Repayment of loan to Engelhard/ICC 0 1,500,000
Purchase of restricted certificate of deposit 0 (2,500,000)
Purchases of property and equipment, net (9,950) 0 (4,771)
------------ ------------ ------------
Net cash used in investing activities (7,134,950) (7,000,000) (4,004,771)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 298,102 17,305,194 5,761,445
Cash redemption of preferred stock 0 (981,270) 0
Cash dividend on preferred stock 0 (394,610) 0
Repayments of borrowings from stockholders 0 (150,000) 0
------------ ------------ ------------
Net cash provided by financing activities 298,102 15,779,314 5,761,445
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (8,383,631) 8,067,639 459,140
Cash and cash equivalents, beginning of period 9,641,114 1,573,475 1,114,335
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,257,483 $ 9,641,114 $ 1,573,475
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
39
<PAGE>
ICC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Additional Note receivable
Preferred Stock paid-in from
stock ($0.1 par value) capital officer
----------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 95 $ 122,887 $29,241,534 0
Issuance of 925,000 shares of common stock to redeem
6750 shares of Series F preferred stock (68) 9,250 (9,182) 0
Issuance of 1,151,908 shares of common stock through
exercise of stock options and warrants 0 11,519 2,769,834 0
Issuance of 300,000 shares of common stock through
a private placement, net of offering expenses 0 3,000 3,027,092 0
Issuance of 26,653 shares of common stock for
services rendered 0 267 74,733 0
Net loss 0 0 0 0
----------- --------- ----------- ----------
Balance, December 31, 1995 27 146,923 35,104,011 0
Issuance of 2,686,813 shares of common stock through
a secondary offering, net of offering expenses 0 26,868 16,739,905 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
Issuance of 131,300 shares of common stock through
exercise of stock options and warrants 0 1,313 299,987 0
Net loss 0 0 0 0
----------- --------- ----------- ----------
Balance, December 31, 1996 0 212,824 50,730,330 0
Issuance of 237,644 shares of common stock through
exercise of stock options and warrants 0 2,376 578,574 (230,467)
Net loss 0 0 0 0
----------- --------- ----------- ----------
Balance, December 31, 1997 $ 0 $215,200 $51,308,904 $ (230,467)
=========== ======== =========== ==========
<CAPTION>
Treasury Total
Accumulated common stock stockholders'
deficit at Cost equity (deficit)
------------- ------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1994 $(27,222,346) $ (171,430) $ 1,970,740
Issuance of 925,000 shares of common stock to redeem
6750 shares of Series F preferred stock 0 0 0
Issuance of 1,151,908 shares of common stock through
exercise of stock options and warrants 0 0 2,781,353
Issuance of 300,000 shares of common stock through
a private placement, net of offering expenses 0 0 3,030,092
Issuance of 26,653 shares of common stock for
services rendered 0 0 75,000
Net loss (6,323,373) 0 (6,323,373)
------------ ------------ ------------
Balance, December 31, 1995 (33,545,719) (171,430) 1,533,812
Issuance of 2,686,813 shares of common stock through
a secondary offering, net of offering expenses 0 0 16,766,773
Issuance of 3,772,045 shares of common stock through
conversion and redemption of the outstanding
preferred stock 0 0 (1,375,880)
Issuance of 131,300 shares of common stock through
exercise of stock options and warrants 0 0 301,300
Net loss (7,154,609) 0 (7,154,609)
------------ ------------ ------------
Balance, December 31, 1996 (40,700,328) (171,430) 10,071,396
Issuance of 237,644 shares of common stock through
exercise of stock options and warrants 0 35O,483
Net loss (13,484,085) 0 (13,484,085)
------------ ------------ ------------
Balance, December 31, 1997 $(54,184,413) $ (171,430) $ (3,062,206)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
40
<PAGE>
ICC TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
Prior to February 27, 1998, ICC Technologies, Inc. (the "Company")
through its partnership with Engelhard Corporation ("Engelhard"),
designed, manufactured and marketed innovative climate control systems
to supplement or replace conventional air conditioning systems. The
Company and Engelhard formed the partnership Engelhard/ICC in February
1994; as a result, the Company had become principally a holding
company, owning a 50% interest in Engelhard/ICC. In February 1998,
Engelhard/ICC was divided into two separate operating partnerships:
Fresh Air Solutions LP ("Fresh Air Solutions") and Engelhard HexCore LP
("Engelhard HexCore"). Fresh Air Solutions designs, manufactures and
markets innovative climate control systems to supplement or replace
conventional air conditioning systems. Engelhard HexCore designs,
manufactures and markets desiccant coated and heat-exchange rotors and
products manufactured from honeycomb substrate. ICC owns 90% of Fresh
Air Solutions and 20% of Engelhard HexCore. Engelhard owns 10% of Fresh
Air Solutions and 80% of Engelhard HexCore. (See Note 12).
Fresh Air Solutions' climate control systems are designed to address
indoor air quality, energy and environmental concerns and regulations
currently affecting the air conditioning market. Fresh Air Solutions
currently markets its systems to certain targeted applications within
the commercial air conditioning market in North America and
Asia-Pacific. Fresh Air Solutions' climate control systems incorporate
proprietary desiccant technology initially developed by the Company,
Engelhard HexCore's licensed honeycomb rotor technology and Engelhard's
patented titanium silicate desiccant, ETS(TM). Fresh Air Solutions'
climate control systems are designed to address indoor air quality,
energy and environmental concerns and regulations currently affecting
the air conditioning market.
The Company believes that the Fresh Air Solutions' climate control
systems create a more comfortable environment, more effectively control
humidity, improve indoor air quality, address certain environmental
concerns and provide customers a choice from a variety of energy
sources such as natural gas, steam, waste heat or electricity.
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, 1997. The Company has incurred cumulative losses since
inception of $54,184,410 through December 31, 1997 and has a deficit in
stockholders equity of $3,062,203 at December 31, 1997. As described in
Notes 1 and 12, Engelhard/ICC was restructured ("the Restructuring") on
February 28, 1998 into two partnerships, Fresh Air Solutions which is
90% owned and controlled by the Company, and Engelhard HexCore, which
is owned 20% by the Company. Engelhard/ICC suffered losses totaling $
45,511,093 from its inception in February 1994 until its restructuring
in February 1998. The Company absorbed $26,378,726 of the losses of
Engelhard/ICC. Engelhard/ICC required the support of its partners for
operations to continue. Effective with the Restructuring, the Company
will absorb all of the losses of Fresh Air Solutions and will be
responsible for providing all of its financial support. As described in
Note 12, if the Company had acquired Fresh Air Solutions on January 1,
1997, the unaudited pro forma net loss would have been $17,853,755. The
Company's continuation as a going concern is dependent on its ability
to ultimately attain profitable operations and positive cash flows from
operations. The accompanying financial statements do not include any
adjustments that may result from the Company's inability to continue as
a going concern.
41
<PAGE>
The Company's ability to attain profitable operations and positive cash
flows from operations is primarily dependent on increasing sales of
Fresh Air Solutions. The Company and Fresh Air Solutions expect to
achieve increased sales through targeted marketing of its products to
end users, upgrade and increase its manufacturers' representative
network, introduce new commission sales incentive programs, expansion
of the product line with the introduction of single wheel systems,
establish new strategic relationships with domestic and international
manufacturers/distributors of air conditioning equipment and improved
dissemination of product information through web site, trade shows and
newsletters to improve market awareness. The Company and Fresh Air
Solutions expect to improve cash flow by increasing sales, reducing
manufacturing costs through process improvements and product design
changes, and increased unit production and through reducing operating
expenses through reductions in support staff and constraints on
discretionary spending. In connection with the Restructuring, the
Company received approximately $18,600,000 in cash from Engelhard and
obtained a release from restrictions of $2,500,000 in cash, which had
been pledged as collateral for long-term debt of Engelhard/ICC. The
Company expects to use this cash to support the operations of Fresh Air
Solutions and to seek other investment opportunities. The Company
believes that the cash obtained from the Restructuring combined with
its plans to increase sales and reduce costs will permit it to continue
operations for at least the next fiscal year.
The Company is continuing to seek and evaluate acquisition
opportunities related or unrelated to desiccant technology, that would
help broaden its product offerings or permit ICC to enter new areas of
business that demonstrate capabilities of enhancing shareholder value.
Presently, although the Company is exploring the possibility of
pursuing other ventures, to date it has not entered into any binding
agreements to do so ICC may enter any other business it deems
appropriate, whether or not related to Fresh Air Solutions, except that
it may not be a reseller of wheel-shaped rotors acquired from Engelhard
HexCore other than as a component in the production and sale of climate
control systems.
(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 Year ended
December 31, December 31, December 31,
1997 1996 1995
------------- -------------- --------------
RESULTS OF OPERATIONS:
<S> <C> <C> <C>
Revenues $ 12,239,012 $ 10,504,609 $ 8,944,279
Loss from operations (16,243,629) (12,152,694) (9,862,641)
Net loss $ (16,724,361) $ (12,589,664) $ (10,572,223)
BALANCE SHEET INFORMATION: December 31, December 31,
1997 1996
-------------- ------------
Cash $ 275,717 $ 1,192,997
Receivables 2,135,858 2,640,804
Inventory 3,061,684 4,570,952
Other current assets 79,859 278,762
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
Cash held in escrow 15,010 307,476
Property, plant and equipment 9,496,897 7,990,125
Purchased intangibles, net 866,116 991,883
Other assets, net 830,469 986,232
------------ ------------
Total assets $ 16,761,610 $ 18,959,231
============ ============
Accounts payable and accrued expenses $ 4,768,594 $ 1,885,596
Payable to general partners 0 298,084
Debt 11,448,685 11,456,859
Partners' capital 544,331 5,318,692
------------ ------------
Total liabilities and equity $ 16,761,610 $ 18,959,231
============ ============
</TABLE>
In December 1994, the Partnership acquired an existing manufacturing
facility located in 2,923,002, Florida ("Miami Plant"), which 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 Miami Plant produced primarily large
cell substrate which the Partnership is prohibited to produce or sell
other than to Hexcel Corporation. The Partnership also acquired, as
part of the transaction, an exclusive technology license to use
Hexcel's proprietary process which is necessary to manufacture such
small cell, honeycomb structures.
In May 1995, the Company guaranteed 50% of the Partnership's
indebtedness associated with the issuance of $8,500,000 industrial
development revenue bonds in connection with the acquisition of the
Miami Plant. The Company established an irrevocable letter of credit
for $2,500,000 to support its portion of the guarantee. As a result of
the Restructuring of the Partnership, this guarantee was released in
February 1998 and fully assumed by Engelhard.
During 1997, capital contributions of $6,775,000 were made by the
Company and $5,175,000 were made by Engelhard to the Partnership.
During 1996 and 1995, capital contributions of $7,000,000 and
$3,000,000 to the Partnership were made by each partner, respectively.
The Company's share of losses of the Partnership are $11,985,361,
$6,294,832, and $5,286,112 for the years ended December 31, 1997, 1996
and 1995, respectively. The Company's share of the Partnership losses
for 1997 exceeded its proportionate 50% share due to an amendment of
the Partnership Agreement as part of the Restructuring. The Partnership
has incurred cumulative losses of approximately $45,339,000 since
inception. The Company's share of the cumulative losses have resulted
in losses in excess of the Company's investment in the Partnership of
$7,302,358 and $2,091,977 for 1997 and 1996,which has been reflected as
a liability in the balance sheet.
Payables to the Partnership amounted to $17,720 and $17,035 at December
31, 1997 and 1996, respectively. 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. The Partnership provided approximately $78,000,
$95,000 and $83,000 in various administrative office support services
to the Company in 1997, 1996 and 1995, respectively.
In order to provide more capacity and combine the corporate 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. Annual lease
obligation of the Partnership for the new facility for the first
five-years are approximately $500,000 per year. The lease
43
<PAGE>
can be terminated after the fifth year. The general partners are
guarantors of the Partnership's lease obligations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiary, ICC Desiccant
Technologies, Inc. ICC Desiccant Technologies, Inc. owned the Company's
50% interest in the Partnership during 1997, 1996 and 1995. The
Partnership is included in the consolidated financial statements under
equity method of accounting. Following the Restructuring of the
Partnership on February 27, 1998, ICC Desiccant Technologies, Inc. owns
a 90% interest in Fresh Air Solutions which will be included in the
consolidated financial statements of the Company for periods ending on
or after February 27, 1998; in addition, ICC Desiccant Technologies,
Inc. owns a 20% interest in Engelhard HexCore, which will be included
in the consolidated financial statements on the equity method of
accounting for the periods ending on or after February 27, 1998.
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 has been computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share." Under SFAS No. 128, basic net loss per share is computed
based on the net loss plus preferred dividends divided by the weighted
average number of common shares outstanding for the period. Cumulative
dividends on preferred stock of $49,655 and $301,413 for 1996 and 1995
were added to the net loss to determine the net loss applicable
44
<PAGE>
to common stockholders. Diluted net loss per share is computed based on
earnings applicable to common stockholders divided by the weighted
average number of common shares outstanding for the period after giving
effect to securities considered to be dilutive potential common shares
such as: stock options, warrants and convertible preferred stock.
Because the Company incurred losses for all periods presented, the
effect of all dilutive potential common shares is antidilutive.
Consequently, the Company's basic and diluted earnings per share are
the same amounts for all periods presented.
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.
(4) SUPPLEMENTAL CASH FLOWS AND EQUITY DISCLOSURE:
Cash paid during the year for interest was $0, $67,985 and $0 in 1997,
1996 and 1995, respectively.
Included in the Statement of Cash Flows for 1997 were cash proceeds of
$298,102 from the issuance of 154,891 shares of Common Stock upon
exercise of stock options and warrants. Excluded from the Statement of
Cash Flows for 1997 was the effect of certain non-cash operating
transactions related to approximately $53,000 of compensation expense
related to the grant to consultants of stock options to purchase
approximately 100,000 shares of Common Stock. Also excluded was the
effect of a non-cash financing transaction related to a $230,467 loan
to the Company's Chairman in connection with the exercise of an option
to acquire 82,753 shares of Common Stock.
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
that 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
45
<PAGE>
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.
(5) NOTE RECEIVABLE:
The Company loaned $350,000 to a corporation on December 24, 1997 in
connection with an agreement by such corporation to not enter into an
acquisition or merger agreement with any entity other than the Company.
The loan matures on the earlier of five years or the date the
corporation enters into an acquisition agreement with another entity or
obtains significant financing from other sources. The loan bears
interest at the prime rate of 8.5% payable at maturity and is adjusted
to the current prime rate at each annual anniversary date. Subsequent
to December 31, 1997 the Company loaned an additional $1,150,000 to the
corporation on the same terms.
(6) PROPERTY, EQUIPMENT AND SOFTWARE:
Property, equipment and software, net are comprised of the following:
December 31,
--------------------------
1997 1996
----------- -----------
Office, computer equipment and
software $13,766 $3,815
Furniture and fixtures 956 956
----------- -----------
14,772 4,771
Less- Accumulated depreciation
And Amortization (7,107) (3,181)
----------- -----------
$ 7,615 $ 1,590
=========== ===========
(7) ACCRUED LIABILITIES:
Accrued liabilities are comprise of the following:
December 31,
----------------------
1997 1996
--------- ---------
Professional fees $114,500 $23,500
Other 69,015 24,727
--------- ---------
$183,515 $48,227
========= =========
(8) STOCK TRANSACTIONS:
The Company received proceeds of approximately $238,000 from the
exercise of stock options to purchase approximately 125,000 shares of
Common Stock granted under its option plans during 1997. The Company
received proceeds of approximately $60,000 from the exercise of
warrants to purchase approximately 30,000 shares of Common Stock during
1997.
46
<PAGE>
The Company loaned $230,467 to its Chairman in July 1997 in connection
with exercise of an option to acquire 82,753 shares of Common Stock.
The loan was in the form of a full recourse note which matures in five
years. Such note bears interest equal to the prime rate, with such rate
adjusted to the current prime rate at each anniversary date.
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 which 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 no shares of
Preferred Stock outstanding. 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.
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 $183,000 from the
exercise of stock options to purchase approximately 106,000 shares of
Common Stock granted under its option plans for 1996. The Company
received proceeds of approximately $119,000 from the exercise of
warrants to purchase approximately 25,000 shares of Common Stock for
1995.
(9) 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 Stock on the date of the grant.
Incentive stock options are exerciseable 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 exerciseable for three to
five years subsequent to the grant date. The Company had reserved
1,750,000 and 5,100,000 shares of authorized Common Stock for issuance
under 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.
47
<PAGE>
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>
BALANCE AT JANUARY 1, 1995 1,910,942 3,811,019 $ 3.39
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 2,923,626 $ 3.83
Exerciseable 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 3,010,326 $ 4.09
Exerciseable at December 31, 1996 1,498,173 $ 3.08
===========
Granted (686,998) 686,998 $ 3.04
Canceled 248,200 (248,200) $ 6.58
Exercised 0 (207,644) $ 2.26
--------- --------- ------
BALANCE AT DECEMBER 31, 1997 1,257,204 3,241,480 $ 3.79
========= =========
Exerciseable at December 31, 1997 1,669,851 $ 3.38
===========
</TABLE>
At December 31, 1997, options outstanding based on ranges of exercise
prices are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Range of Exercise Number Weighted Weighted-Average Number Weighted-Average
Price Outstanding Average Exercise Price Exercisable Exercise Price
Remaining Life
(Years)
------------- ----------------- ----------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.00-$2.16 949,658 2.92 $1.93 423,658 $1.65
$2.25-$3.25 857,550 4.08 $2.63 687,550 $2.65
$3.63-$5.60 1,123,333 6.89 $5.39 478,333 $5.38
$6.19-$10.75 310,938 8.26 $6.81 85,510 $6.63
--------- ---- ----- --------- -----
3,241,479 5.12 $3.79 1,675,051 $3.38
</TABLE>
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>
1997 1996
----------- ----------
<S> <C> <C> <C>
Net loss: As Reported, $13,484,085 $7,154.609
Pro Forma $13,613,974 $7,351,632
Net loss applicable to common stockholders: As Reported $13,484,085 $7,204,264
Pro Forma $13,613,974 $7,401,287
Net loss per share: As Reported $0.63 $ 0.35
Pro Forma $0.64 $ 0.36
</TABLE>
48
<PAGE>
The fair value of each option for 1997 and 1996 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 73.9% in 1997 and 69.7% in
1996; risk-free interest rates ranging from 5.4% to 6.5% in 1997 and
5.4% to 7.2% in 1996; and expected lives of approximately 6 years in
1997 and 1996. The weighted average fair value of options on the date
of grant during 1997 and 1996 was $ 1.38 and $3.64, respectively.
The Company had the following Common Stock warrants outstanding at
December 31, 1997, 1996, and 1995, respectively:
Warrants Outstanding
----------------------------
Weighted Average
Number Exercise Price
--------- ----------------
December 31, 1997
-----------------
Consultants 525,000 $9.44
Officers and directors 863,000 $2.70
---------
1,440,000 $5.06
=========
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
=========
The outstanding warrants are currently exercisable and expire in the
years 2003 and 2004.
(10) 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 aggregated to approximately
$8,000 and $6,000 for each of the years ended December 31, 1997 and
1996 respectively.
(11) 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:
49
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforward $ 17,928,000 $ 12,798,000 $ 10,180,000
Other 10,000 10,000 10,000
------------ ------------ ------------
$17,938,000 $ 12,808,000 $ 10,190,000
Less valuation allowance (17,938,000) (12,808,000) (10,190,000)
------------ ------------ ------------
Total $ 0 $ 0 $ 0
============ ============= ============
</TABLE>
The Company has incurred losses since inception. At December 31, 1997
the Company has federal net operating loss carryforwards of
approximately $47 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.
(12) SUBSEQUENT EVENT:
Restructuring of the Partnership
On February 27, 1998, the Company and Engelhard restructured the
Partnership. The Partnership was terminated and the 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 that are
components of the climate control systems under the name Engelhard
HexCore, LP. Pursuant to the Restructuring, ICC received approximately
$18,600,000 in cash from Engelhard and assumed 90% ownership and full
control of Fresh Air Solutions. ICC retained a 20% equity interest in
Engelhard HexCore. Fresh Air Solutions will purchase rotors exclusively
from Engelhard HexCore at prices that are lower than the best prices
Engelhard HexCore offers to other customers for such purchases.
Engelhard continues to guarantee the lease on Fresh Air Solutions'
manufacturing facility until 2002 and continues to guarantee up to
$2,000,000 of Fresh Air Solutions' short-term debt. Engelhard's
short-term debt guarantee is reduced to $1,000,000 after one year and
completely terminated after two years. The Company's guarantee of 50%
of the Partnership's $8.5 million indebtedness associated with the
industrial development bonds and the related irrevocable letter of
credit for $2,500,000 was terminated; as a result, $2,500,000 in cash
equivalents previously held as collateral became unrestricted.
Unaudited Pro Forma Condensed Consolidated Financial Statements
The following financial statements set forth the Company's and Fresh
Air Solutions: (i) unaudited pro forma condensed consolidated balance
sheet as of December 31, 1997 in order to demonstrate the effects upon
the Company's historical financial position, as if the Restructuring
occurred on that date; and (ii) unaudited pro forma condensed
consolidated statement of operations for the period ended December 31,
1997 in order to demonstrate the effects upon the Company's historical
results of operations, as if the Restructuring occurred at January 1,
1997.
The unaudited pro forma condensed consolidated financial statements
have been prepared from the historical financial statements of the
Company and the Partnership. The acquisition of Fresh Air Solutions is
accounted for under the purchase method of accounting. The sale of 60%
of the Company's interest in Engelhard HexCore for approximately
$18,600,000 would result in a nonrecurring gain of approximately
$24,900,000 and is not included in the unaudited pro forma condensed
consolidated statement of operations. The pro forma information is not
necessarily indicative of the results that would have occurred in 1997,
or that will occur in the future.
50
<PAGE>
The Company and an investment banker were unable to determine the fair
market values of either Fresh Air Solutions or Engelhard HexCore within
reasonable limits. As a result, the nonmonetary considerations paid and
received by the Company were recorded at the historical carrying
amounts reflected in the Partnership's financial statements. At
December 31, 1997, Fresh Air Solutions' liabilities exceeded assets by
$911,723.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 1997
ASSETS
Cash and cash equivalents $ 22,621,486
Accounts receivable 1,043,734
Inventories 2,101,894
Prepaid expenses and other 169,523
------------
Total current assets 25,936,637
Investment in Engelhard HexCore 231,352
Property, equipment and software 2,642,004
Other noncurrent assets 889,827
------------
$ 29,699,820
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term loan $ 2,750,000
Accounts payable and accrued liabilities 4,588,299
------------
Total current liabilities 7,338,299
Long-term debt 198,685
Stockholders' equity 22,162,836
------------
$ 29,699,820
============
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1997
Revenues $ 6,415,474
Cost of goods sold 11,661,030
-------------
Gross loss (5,245,556)
Total operating expenses 12,872,478
-------------
Loss from operations (18,118,034)
Equity in loss of Engelhard HexCore (92,328)
Interest income 356,587
=============
Net loss $(17,853,775)
=============
Net loss per common share $ (0.84)
=============
51
<PAGE>
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
52
<PAGE>
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.
53
<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.
54
<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.
55
<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.
56
<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.
57
<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.
58
<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.
59
<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
=========== ===========
60
<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
========== ========
61
<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,
62
<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
63
<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>
64
<PAGE>
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/ Manfred Hanuschek
---------------------------------
(Signature)
Name and Title: Manfred Hanuschek, Chief Financial
Officer
----------------------------------
Date: April 30, 1998
--------------------
65
FRESH AIR SOLUTIONS, L.P.
LIMITED PARTNERSHIP AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - INTERPRETIVE PROVISIONS........................................... 1
SECTION 1.1 Certain Definitions........................................... 1
SECTION 1.2 Rules of Construction......................................... 8
ARTICLE II - CONTINUATION..................................................... 9
SECTION 2.1 Continuation ................................................ 9
SECTION 2.2 Name ......................................................... 9
SECTION 2.3 Place of Business; Registered Agent........................... 9
ARTICLE III - BUSINESS PURPOSE................................................10
SECTION 3.1 Business .....................................................10
SECTION 3.2 Authorized Activities.........................................10
ARTICLE IV - CAPITAL CONTRIBUTIONS............................................10
SECTION 4.1 Capital Contributions.........................................10
SECTION 4.2 Additional Partnership Interests..............................11
SECTION 4.3 No Third Party Beneficiaries..................................11
SECTION 4.4 Capital Accounts..............................................11
SECTION 4.5 Return of Capital Account; Interest...........................13
SECTION 4.6 Preemptive Rights.............................................13
ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS....................................13
SECTION 5.1 Limited Liability.............................................13
SECTION 5.2 Profits, Losses and Distributive Shares.......................14
SECTION 5.3 Distributions.................................................19
SECTION 5.4 Distributions upon Liquidation................................19
ARTICLE VI - ARTNERSHIP MANAGEMENT...........................................19
SECTION 6.1 Management and Control of Partnership Business................19
SECTION 6.2 No Management by Limited Partners; Limitation of Liability....20
SECTION 6.3 Limitations on Partners.......................................20
SECTION 6.4 Compensation; Reimbursement of Expenses.......................21
SECTION 6.5 Liability for Acts and Omissions..............................21
SECTION 6.6 Indemnification...............................................22
-i-
<PAGE>
ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS.......................22
SECTION 7.1 Books and Records.............................................22
SECTION 7.2 Annual Audit and Accounting...................................22
SECTION 7.3 Partnership Funds.............................................22
SECTION 7.4 Reports and Notices...........................................23
SECTION 7.5 Tax Matters ..................................................23
ARTICLE VIII - TRANSFER OF PARTNERSHIP INTERESTS; ADMISSIONS OF PARTNERS......24
SECTION 8.1 Transfer by General Partner...................................24
SECTION 8.2 Obligations of a Prior General Partner........................24
SECTION 8.3 Successor General Partner.....................................24
SECTION 8.4 Restrictions on Transfer and Withdrawal by Limited Partner....25
SECTION 8.5 Substituted Limited Partner...................................26
SECTION 8.6 Timing and Effect of Transfers................................26
SECTION 8.7 Additional Limited Partners...................................26
SECTION 8.8 Amendment of Agreement and Certificate........................27
SECTION 8.9 Tax Allocation Adjustments; Distributions After Transfer......27
ARTICLE IX - PARTNERS' PURCHASE OPTIONS.......................................27
SECTION 9.1 I Partner's Purchase Option...................................27
SECTION 9.2 E Partner's Right of Offer....................................28
ARTICLE X - DISSOLUTION AND LIQUIDATION.......................................28
SECTION 10.1 Term and Dissolution.........................................28
SECTION 10.2 Winding-Up ..................................................29
SECTION 10.2 Liquidation of Partnership Assets............................29
SECTION 10.3 Effect of Treasury Regulations...............................31
SECTION 10.4 Time for Winding-Up..........................................31
ARTICLE XI - AMENDMENTS AND MEETINGS..........................................31
SECTION 11.1 Amendment Procedure..........................................31
SECTION 11.2 Meetings and Voting..........................................32
-ii-
<PAGE>
ARTICLE XII - MISCELLANEOUS PROVISIONS........................................33
SECTION 12.1 Title to Property............................................33
SECTION 12.2 Other Activities of Limited Partners.........................33
SECTION 12.3 Power of Attorney............................................33
SECTION 12.4 Notices .....................................................34
SECTION 12.5 Further Assurances...........................................34
SECTION 12.6 Titles and Captions..........................................35
SECTION 12.7 Applicable Law...............................................35
SECTION 12.8 Binding Agreement............................................35
SECTION 12.9 Waiver of Partition..........................................35
SECTION 12.10 Counterparts and Effectiveness...............................35
SECTION 12.11 Survival of Representations..................................35
SECTION 12.12 Entire Agreement.............................................35
SECTION 12.13 Property Rights..............................................35
Exhibit 1 - Schedule of Partners
-iii-
<PAGE>
FRESH AIR SOLUTIONS, L.P.
LIMITED PARTNERSHIP AGREEMENT
The undersigned, being the sole general partner and the initial Limited
Partner of Fresh Air Solutions, L.P. (the "Partnership"), a limited partnership
formed under the Pennsylvania Revised Uniform Limited Partnership Act, do hereby
enter into this Partnership Agreement this ______ day of February, 1998.
R E C I T A L S:
A. The Partnership was formed pursuant to a Certificate of Limited
Partnership filed on November 6, 1997 with the Secretary of State of the
Commonwealth of Pennsylvania under the name "Fresh Air Solutions, L.P.".
B. The General Partner and the initial Limited Partners desire to set forth
the understandings and agreements, including certain rights and obligations,
among the Partners (as hereinafter defined) with respect to the Partnership.
- --------------------------------------------------------------------------------
ARTICLE I - INTERPRETIVE PROVISIONS
- --------------------------------------------------------------------------------
SECTION 1.1 Certain Definitions. The following terms have the definitions
hereinafter indicated whenever used in this Agreement with initial capital
letters:
Act: The Pennsylvania Revised Uniform Limited Partnership Act, Pennsylvania
Consolidated Statutes, Title 15, Chapters 81 and 85, as amended from time to
time.
Additional Limited Partner: A Person admitted to the Partnership as a
Limited Partner in accordance with Section 8.7 hereof and who is shown as such
on the books and records of the Partnership.
Adjusted Capital Account: With respect to any Partner, such Partner's
Capital Account maintained in accordance with Section 4.4 hereof, as of the end
of the relevant Fiscal Year of the Partnership, after giving effect to the
following adjustment:
Debit to such Capital Account the items described in Treasury Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of "Adjusted Capital Account" is intended to
comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii) and
shall be interpreted consistently therewith.
<PAGE>
Adjusted Capital Account Deficit: With respect to any Partner, the deficit
balance, if any, in that Partner's Adjusted Capital Account as of the end of the
relevant Fiscal Year of the Partnership.
Affiliate: With respect to any referenced Person, (i) a member of such
Person's immediate family; (ii) any Person who directly or indirectly owns,
controls or holds the power to vote ten percent (10%) or more of the outstanding
voting securities of the Person in question; (iii) any Person ten percent (10%)
or more of whose outstanding securities are directly or indirectly owned,
controlled, or held with power to vote by the Person in question; (iv) any
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with the Person in question; (v) if the Person in
question is a corporation, any executive officer or director of such Person or
of any corporation directly or indirectly controlling such Person; and (vi) if
the Person in question is a partnership, any general partner of the partnership
or any limited partner owning or controlling ten percent (10%) or more of either
the capital or profits interest in such partnership. As used herein, "control"
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract, or otherwise.
Agreed Value: In the case of any (i) Contributed Property acquired pursuant
to the Contribution Agreement, the value (exclusive of any related indebtedness
assumed by the Partnership or to which such Contributed Property is taken
subject) of such Contributed Property as set forth in or determined pursuant to
the Contribution Agreement or, if no such value is set forth or determined for
such Contributed Property, the portion of the consideration provided for under
the Contribution Agreement allocable to such Contributed Property (exclusive of
any related indebtedness assumed by the Partnership or to which such Contributed
Property is taken subject), as determined by the General Partner in its
reasonable discretion, (ii) Contributed Property acquired other than pursuant to
the Contribution Agreement, the fair market value of such property at the time
of contribution, as determined by the General Partner using such method of
valuation as it may adopt in its reasonable discretion and (iii) property
distributed to a Partner by the Partnership, the Partnership's Book Value of
such property at the time such property is distributed, reduced by any
indebtedness either assumed by such Partner upon such distribution or to which
such property is subject at the time of distribution as determined under Code
Section 752 and the Treasury Regulations thereunder.
Agreement: This Limited Partnership Agreement and all Exhibits attached
hereto, as the same may be amended or restated and in effect from time to time.
Arm's-length basis: As to any transaction agreement, or other arrangement,
being on terms that would be reached by unrelated parties not under any
compulsion to contract.
Assignee: Any Person to whom one or more Partnership Units have been
Transferred as permitted under this Agreement but who has not become a
Substituted Limited Partner in accordance with the provisions hereof.
-2-
<PAGE>
Bankruptcy: The "Bankruptcy" of a Partner shall be deemed to have occurred
upon the happening of any of the following:
(a) The valid appointment of a receiver or trustee or other
representative to administer all or a substantial portion of a Partner's
assets or a Partner's Interest in the Partnership;
(b) The filing by a Partner of voluntary petition for relief under the
Bankruptcy Code or any similar statute of any jurisdiction or of a pleading
in any court or tribunal admitting in writing its inability to pay its
debts as they become due;
(c) The making by a Partner of a general assignment for the benefit of
creditors;
(d) The filing by a Partner of an answer admitting the material
allegations of, or its consenting to or defaulting in answering, a petition
for relief filed against it in any proceeding under the Bankruptcy Code or
any similar statute of any jurisdiction (including any foreign
jurisdiction); or
(e) The entry of an order, judgment or decree by any court of
competent jurisdiction, granting relief against a Partner in a proceeding
under the Bankruptcy Code or any similar statute of any jurisdiction, and
such order, judgment or decree continuing unstayed and in effect for a
period of thirty (30) days after such entry.
Book-Tax Disparity: With respect to any item of Contributed Property,
or property the Book Value of which has been adjusted in accordance with Section
4.4(D), as of the date of determination, the difference between the Book Value
of such property and the adjusted basis of such property for federal income tax
purposes.
Book Value: With respect to any Contributed Property, the Agreed Value
of such property reduced (but not below zero) by all depreciation with respect
to such property properly charged to the Partners' Capital Accounts and with
respect to any other asset, the asset's adjusted basis for federal income tax
purposes; provided, however, (a) the Book Value of all Partnership Assets shall
be adjusted in the event of a revaluation of Partnership Assets in accordance
with Section 4.4(D) hereof, (b) such Book Value shall be adjusted by the
depreciation taken into account with respect to such asset for purposes of
computing Profits and Losses and (c) the Book Value of any Partnership Asset
distributed to any Partner shall be the fair market value of such asset on the
date of distribution as determined by the General Partner.
Capital Account: The account maintained by the Partnership for each
Partner described in Section 4.4 hereof.
Capital Contribution: The total amount of cash or cash equivalents and
the Agreed Value of Contributed Property which a Partner contributes or is
deemed to contribute to the Partnership pursuant to the terms of this Agreement.
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Certificate: The Partnership's Certificate of Limited Partnership
filed in the office of the Secretary of State of the Commonwealth of
Pennsylvania, as amended from time to time.
Code: The Internal Revenue Code of 1986, as amended from time to time.
Consent: Either the written consent of a Person or the affirmative
vote of such Person at a meeting duly called and held pursuant to this
Agreement, as the case may be, to do the act or thing for which the consent or
vote is required or solicited, or the act of granting such consent or vote, as
the context may require.
Contributed Property: Each property or other asset (excluding cash and
cash equivalents) contributed or deemed contributed to the Partnership (whether
as a result of a Code Section 708 termination or otherwise). For the avoidance
of doubt, the properties and assets held by the partnership constituting the Box
Assets (as defined in the Contribution Agreement) shall constitute Contributed
Properties to the extent the Contributed Interests are acquired by the
Partnership.
Contribution Agreement: The Contribution Agreement dated the date
hereof pursuant to which, inter alia, property is being contributed to the
Partnership on the Effective Date in exchange for Partnership Units.
E Partner: means the initial holder of 10% of the Partnership Units.
Effective Date: February __, 1998.
ERISA: The Employee Retirement Income Security Act of 1974, as amended
from time to time.
Exercise Date: Shall have the meaning set forth in Section 9.1.
Fair Market Value: As to any property, the price at which a willing
seller would sell and a willing buyer would buy such property having full
knowledge of the facts that are relevant to the purchase and sale of such
property, and assuming each party acts on an Arm's-length basis with the
expectation of concluding the purchase or sale within a reasonable time.
Fiscal Year: The calendar year or such other twelve (12) month period
designated by the General Partner.
General Partner: The Person identified as a general partner on Exhibit
1 hereto and its respective successor(s) who or which become Successor General
Partner(s) in accordance with the terms of this Agreement.
General Partner Interest: A Partnership Interest held by the General
Partner that is a general partner interest. A General Partner Interest may be
expressed as a number of Partnership Units.
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I Partner: means the initial holder of 90% of the Partnership Units,
and its successors and assigns permitted hereunder.
Involuntary Withdrawal: As to any (i) individual shall mean such
individual's death, incapacity or adjudication of incompetence, (ii) corporation
shall mean its dissolution or revocation of its charter (unless such revocation
is promptly corrected upon notice thereof), (iii) partnership shall mean the
dissolution and commencement of winding up of its affairs, (iv) trust shall mean
the termination of the trust (but not the substitution of trustees), (v) estate
shall mean the distribution by the fiduciary of the estate's complete interest
in the Partnership and (vi) Partner shall mean the Bankruptcy of such Partner.
IRS: The Internal Revenue Service, which administers the internal
revenue laws of the United States.
Limited Partner: Those Persons listed as such on Exhibit 1 attached
hereto and made a part hereof, as such Exhibit may be amended from time to time,
including any Person who becomes a Substituted Limited Partner or an Additional
Limited Partner in accordance with the terms of this Agreement.
Limited Partner Interest: A Partnership Interest held by a Limited
Partner that is a limited partner interest. A Limited Partner Interest may be
expressed as a number of Partnership Units.
Nonrecourse Liability: A liability as defined in Treasury Regulations
Section 1.704-2(b)(3).
Notice: A writing containing the information required by this
Agreement to be communicated to a Person and delivered to such Person in
accordance with Section 12.4; provided, however, that any written communication
containing such information actually received by such Person shall constitute
Notice for all purposes of this Agreement.
Partner Minimum Gain: The gain (regardless of character) which would
be realized by the Partnership if property of the Partnership subject to a
partner nonrecourse debt (as such term is defined in Treasury Regulation's
Section 1.704-2(b)(4)) were disposed of in full satisfaction of such debt on the
relevant date. The adjusted basis of property subject to more than one partner
nonrecourse debt shall be allocated in a manner consistent with the allocation
of basis for purposes of determining Partnership Minimum Gain hereunder. Partner
Minimum Gain shall be computed hereunder using the Book Value, rather than the
adjusted tax basis, of the Partnership property in accordance with Treasury
Regulations Section 1.704-2(d)(3).
Partner Nonrecourse Deductions: With respect to any partner
nonrecourse debt (as such term is defined in Treasury Regulation Section
1.704-2(b)(4)), the increase in Partner Minimum Gain during the tax year plus
any increase in Partner Minimum Gain for a prior tax year which has not
previously generated a Partner Nonrecourse Deduction hereunder. The
determination
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of which Partnership items constitute Partner Nonrecourse Deductions shall be
made in a manner consistent with the manner in which Partnership Nonrecourse
Deductions are determined hereunder.
Partner Loans: Any loan made by the General Partner or an Affiliate of
the General Partner to the Partnership, which loan shall bear interest at a rate
equal to the three-month LIBOR (as published in the Wall Street Journal) plus
1.00% per annum, such rate to be set on the date of the making of the loan and
to be reset on the first day of each succeeding quarter.
Partners: The General Partner and the Limited Partners as a group. The
term "Partner" shall mean a General Partner or a Limited Partner. Such terms
shall be deemed to include such other Persons who become Partners pursuant to
the terms of this Agreement.
Partnership: The Pennsylvania limited partnership referred to herein
as Fresh Air Solutions, L.P., as such partnership may from time to time be
constituted.
Partnership Assets: At any particular time, any assets or property
(real or personal, tangible or intangible, choate or inchoate, fixed or
contingent) owned by the Partnership.
Partnership Interest or Interest: As to any Partner, such Partner's
ownership interest in the Partnership and including such Partner's right to
distributions under this Agreement and any other rights or benefits which such
Partner has in the Partnership, together with any and all obligations of such
Person to comply with the terms and provisions of this Agreement. A Partnership
Interest may be expressed as a number of Partnership Units.
Partnership Minimum Gain: The aggregate gain (regardless of character)
which would be realized by the Partnership if all of the property of the
Partnership subject to nonrecourse debt (other than partner nonrecourse debt as
such term is defined in Treasury Regulations Section 1.704-2(b)(4)) were
disposed of in full satisfaction of such debt and for no other consideration on
the relevant date. In the case of any Nonrecourse Liability of the Partnership
which is not secured by a mortgage with respect to any specific property of the
Partnership, any and all property of the Partnership to which the holder of said
liability has recourse shall be treated as subject to such Nonrecourse Liability
for purposes of the preceding sentence. Partnership Minimum Gain shall be
computed separately for each Nonrecourse Liability of the Partnership. For this
purpose, the adjusted basis of property subject to two or more liabilities of
equal priority shall be allocated among such liabilities in proportion to the
outstanding balance of such liabilities, and the adjusted basis of property
subject to two or more liabilities of unequal priority shall be allocated to the
liability of inferior priority only to the extent of the excess, if any, of the
adjusted basis of such property over the outstanding balance of the liability of
superior priority. Partnership Minimum Gain shall be computed hereunder using
the Book Value, rather than the adjusted tax basis, of the Partnership property
in accordance with Treasury Regulations Section 1.704-2(d)(3).
Partnership Nonrecourse Deductions: The amount of Partnership
deductions equal to the increase, if any, in the amount of the aggregate
Partnership Minimum Gain during the tax year (plus any increase in Partnership
Minimum Gain for a prior tax year which has not previously
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generated a Partnership Nonrecourse Deduction) reduced (but not below zero) by
the aggregate distributions made during the tax year of the proceeds of a
Nonrecourse Liability of the Partnership which are attributable to an increase
in Partnership Minimum Gain within the meaning of Treasury Regulations Section
1.704-2(d). The Partnership Nonrecourse Deductions for a Partnership tax year
shall consist first of depreciation or cost recovery deductions with respect to
each property of the Partnership giving rise to such increase in Partnership
Minimum Gain on a pro rata basis to the extent of each such increase, with any
excess made up pro rata of all items of deduction.
Partnership Unit: A fractional, undivided share of the Partnership
Interests of all Partners issued pursuant to Section 4.1 hereof.
Percentage Interest: As to any Partner, the percentage in the
Partnership, as determined by dividing the Partnership Units then owned by such
Partner by the total number of Partnership Units then outstanding, as the same
may be automatically adjusted from time to time to reflect the issuance and
redemption of Partnership Units in accordance with this Agreement, without
requiring the amendment of Exhibit 1 to reflect any such issuance or redemption.
Person: Any individual, partnership, corporation, limited liability
company, trust or other entity.
Profits and Losses: For each Fiscal Year or other period, an amount
equal to the Partnership's taxable income or loss (as the case may be) for such
year or period, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments:
a. Any income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be added to such taxable income or loss;
b. Any expenditures of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant
to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this
definition, shall be subtracted from such taxable income or loss;
c. Where property is reflected in the Capital Accounts at a book basis
different from the basis of such property for U.S. Federal income tax
purposes, all gain, loss, depreciation and amortization on such property
shall be determined for purposes of adjusting Capital Accounts based on the
book basis of such property in accordance with U.S. Department of Treasury
Regulations Section 1.704-1(b)(2)(iv)(g); and
d. Gain or loss resulting from any disposition of Partnership property
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by
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reference to the Book Value of the property disposed of notwithstanding that the
adjusted tax basis of such property differs from such Book Value.
Recourse Liabilities: The liabilities owed by the Partnership, other
than nonrecourse liabilities and liabilities to which Partner Nonrecourse
Deductions are attributable in accordance with Treasury Regulations Section
1.704-2(i).
SEC: The Securities and Exchange Commission.
Subsidiary: With respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
Substituted Limited Partner: That Person or those Persons admitted to
the Partnership as a substitute Limited Partner, in accordance with the
provisions of this Agreement. A Substituted Limited Partner, upon admission as
such, shall succeed to the rights, privileges and liabilities of the predecessor
in interest as a Limited Partner.
Successor General Partner: Any Person who is admitted to the
Partnership as substitute General Partner pursuant to this Agreement. A
Successor General Partner, upon its admission as such, shall succeed to the
rights, privileges and liabilities of its predecessor in interest as General
Partner, in accordance with the provisions of the Act.
Tax Matters Partner: The General Partner or such other Partner who
becomes Tax Matters Partner pursuant to the terms of this Agreement.
Terminating Capital Transaction: The sale or other disposition of all
or substantially all of the Partnership Assets or a related series of
transactions that, taken together, result in the sale or other disposition of
all or substantially all of the Partnership Assets.
Transfer: With respect to any Partnership Unit shall mean a
transaction in which a Partner assigns his Partnership Interest to another
Person and includes any sale, assignment, gift, pledge, mortgage, exchange,
hypothecation, encumbrance or other disposition by law or otherwise.
Treasury Regulations: The Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time.
SECTION 1.2 Rules of Construction. The following rules of construction
shall apply to this Agreement:
(A) All section headings in this Agreement are for convenience of
reference only and are not intended to qualify the meaning of any section.
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(B) All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all other genders, the
singular shall include the plural, and vice versa, as the context may require.
(C) Each provision of this Agreement shall be considered severable
from the rest, and if any provision of this Agreement or its application to any
Person or circumstances shall be held invalid and contrary to any existing or
future law or unenforceable to any extent, the remainder of this Agreement and
the application of any other provision to any Person or circumstances shall not
be affected thereby and shall be interpreted and enforced to the greatest extent
permitted by law so as to give effect to the original intent of the parties
hereto.
(D) Unless otherwise specifically and expressly limited in the
context, any reference herein to a decision, determination, act, action,
exercise of a right, power or privilege, or other procedure by the General
Partner shall mean and refer to the decision, determination, act, action,
exercise or other procedure by the General Partner in its sole and absolute
discretion.
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ARTICLE II - CONTINUATION
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SECTION 2.1 Continuation. The Partners hereby continue the Partnership
as a limited partnership under the Act. The General Partner shall take all
action required by law to perfect and maintain the Partnership as a limited
partnership under the Act and under the laws of all other jurisdictions in which
the Partnership may elect to conduct business, including but not limited to the
filing of amendments to the Certificate with the Commonwealth of Pennsylvania
Secretary of State, and qualification of the Partnership as a foreign limited
partnership in the jurisdictions in which such qualification shall be required,
as determined by the General Partner. The General Partner shall also promptly
register the Partnership under applicable assumed or fictitious name statutes or
similar laws.
SECTION 2.2 Name. The name of the Partnership is Fresh Air Solutions,
L.P. The General Partner may adopt such assumed or fictitious names as it deems
appropriate in connection with the qualifications and registrations referred to
in Section 2.1.
SECTION 2.3 Place of Business; Registered Agent. The principal office
of the Partnership is located at 330 South Warminster Road, Hatboro,
Pennsylvania 19040, which office may be changed to such other place as the
General Partner may from time to time designate. The Partnership may establish
offices for the Partnership within or without the Commonwealth of Pennsylvania
as may be determined by the General Partner. The initial registered agent for
the Partnership in the Commonwealth of Pennsylvania is The Corporation Trust
Company, whose address is c/o Corporation Trust Center, 1635 Market Street,
Philadelphia, Pennsylvania 19103.
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ARTICLE III - BUSINESS PURPOSE
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SECTION 3.1 Business. The business of the Partnership shall be (i)
conducting any business that may be lawfully conducted by a limited partnership
pursuant to the Act, (ii) entering into any partnership, joint venture or other
relationship to engage in any of the foregoing or the ownership of interests in
any entity engaged in any of the foregoing, (iii) making loans, guarantees,
indemnities or other financial accommodations and borrowing money and pledging
its assets to secure the repayment thereof, (iv) to do any of the foregoing with
respect to any Affiliate or Subsidiary and (v) doing anything necessary or
incidental to the foregoing.
SECTION 3.2 Authorized Activities. In carrying out the purposes of the
Partnership, but subject to all other provisions of this Agreement, the
Partnership is authorized to engage in any kind of lawful activity, and perform
and carry out contracts of any kind, necessary or advisable in connection with
the accomplishment of the purposes and business of the Partnership described
herein and for the protection and benefit of the Partnership; provided, however,
that the General Partner shall not be obligated to cause the Partnership to
take, or refrain from taking, any action which action or omission, in the
judgment of the General Partner, (i) could adversely affect the ability of the
General Partner to manage and control the Partnership, (ii) could subject the
General Partner to additional taxes under Code Section 857 or 4981 or (iii)
could violate any law or regulation of any governmental body or agency having
jurisdiction over the General Partner or its securities. The General Partner
may, or cause any of its Affiliates to, make a Partner Loan at any time and
interest and principal on such Partner Loan shall be paid at such times as may
be determined by the General Partner.
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ARTICLE IV - CAPITAL CONTRIBUTIONS
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SECTION 4.1 Capital Contributions. Upon the contribution to the
Partnership of property in accordance with the Contribution Agreement,
Partnership Units shall be issued in accordance with, and as contemplated by,
the Contribution Agreement, and the Persons receiving such Partnership Units
shall become Partners and shall be deemed to have made a Capital Contribution as
set forth on Exhibit 1. Exhibit 1 also sets forth the initial number of
Partnership Units owned by each Partner and the Percentage Interest of each
Partner, which Percentage Interest shall be adjusted from time to time by the
General Partner to reflect the issuance of additional Partnership Units, the
redemption of Partnership Units, additional Capital Contributions and similar
events having an effect on a Partner's Percentage Interest. Except as set forth
in Section 4.2 (regarding issuance of additional Partnership Units), no Partner
shall be required under any circumstances to contribute to the capital of the
Partnership any amount beyond that sum required pursuant to this Article IV.
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SECTION 4.2 Additional Partnership Interests.
(A) Subject to Section 4.2(B) below, the Partnership may issue
additional limited partnership interests in the form of Partnership Units for
any Partnership purpose at any time or from time to time, to any Partner or
other Person.
(B) Prior to any proposed issuance of additional partnership
interests, each Limited Partner shall have the option to either (i) purchase
such number of additional limited partnership interests (on the same terms as
such additional limited partnership interests are being purchased by all other
purchasers) as will result in such Limited Partner holding the same Percentage
Interest in the Partnership immediately after giving effect to such proposed
issuance as such Limited Partner held immediately prior to such proposed
issuance or (ii) notify the General Partner that no such additional partnership
interests shall be issued. In the event that a Limited Partner delivers a notice
pursuant to clause (ii) of the preceding sentence, the Partnership shall be
prohibited from issuing any additional partnership interests, and any such
issuance shall be null and void ab initio. At least 30 days prior to any
proposed issuance of any additional partnership interests, the General Partner
shall notify in writing the Limited Partners of such proposed issuance, and each
Limited Partner shall have 20 days from receipt of such notice to make its
forgoing election.
SECTION 4.3 No Third Party Beneficiaries. The foregoing provisions of
this Article IV are not intended to be for the benefit of any creditor of the
Partnership or other Person to whom any debts, liabilities or obligations are
owed by (or who otherwise has any claim against) the Partnership or any of the
Partners and no such creditor or other Person shall obtain any right under any
such foregoing provision against the Partnership or any of the Partners by
reason of any debt, liability or obligation (or otherwise).
SECTION 4.4 Capital Accounts.
(A) (1) The Partnership shall establish and maintain a separate
Capital Account for each Partner in accordance with Code Section 704 and
Treasury Regulations Section 1.704-1(b)(2)(iv). The Capital Account of each
Partner shall include the amount of all Capital Contributions made to the
Partnership by such Partner in accordance with this Agreement, and shall be (i)
increased by Profits allocated to such Partner pursuant to Article V and (ii)
decreased by (A) the amount of cash and the Agreed Value of any property
distributed to such Partner pursuant to the terms of this Agreement and (B)
Losses allocated to such Partner pursuant to Article V, and otherwise maintained
in accordance with U.S. Treasury Regulations (specifically Treas. Reg.
1.704-1(b)(2)(iv), as amended from time to time, or its successor provisions) in
order for the allocation of Profits and Losses pursuant to Article V hereof to
have substantial economic effect within the meaning of Section 704(b) of the
Code. The value of Partnership property shall be adjusted in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(f) to reflect a revaluation of
Partnership property in the event of either (i) a contribution of money or other
property to the Partnership by a new or existing Partner as consideration for an
interest in the Partnership; or (ii) a distribution of money or property by the
Partnership to a retiring or continuing Partner as consideration for an interest
in the Partnership. If a Partner contributes to the Partnership property to
which Section
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704(c) of the Code applies, or if a revaluation of Partnership property occurs
under one of the circumstances described in the preceding sentence, the Capital
Accounts shall be adjusted as provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(g).
(2) Immediately prior to the distribution of any property (other than
cash) to a Partner, the Capital Account of each Partner shall be increased or
decreased, as the case may be, to reflect the manner in which the unrealized
income, gain, loss and deduction inherent in such property (that has not
previously been reflected in the Capital Accounts) would be allocated among the
Partners if there were a taxable disposition of such property for its Agreed
Value on the date of the distribution.
(3) No Partner shall be entitled to interest on its capital
contributions or on the positive balance in its Capital Account and no such
interest shall be accrued.
Any reference in any section or subsection of this Agreement to the
Capital Account of a Partner shall be deemed to refer to such Capital Account as
the same may be credited or debited from time to time as set forth above.
(B) For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of each such item shall be the
same as its determination, recognition and classification for federal income tax
purposes, determined in accordance with Code Section 703(a), with the following
adjustments:
(1) any income, gain or loss attributable to the taxable disposition
of any Partnership Asset shall be determined by treating the adjusted basis of
such property as of the date of such disposition as equal to the Book Value of
such property as of such date;
(2) the computation of all items of income, gain, loss and deduction
shall be made without regard to any Code Section 754 election that may be made
by the Partnership, except to the extent required in accordance with the
provisions of Treasury Regulations Section 1.704-1(b)(2)(iv)(m);
(3) in lieu of depreciation, amortization and other cost recovery
deductions taken into account in computing Profit and Loss, there shall be taken
into account depreciation for such Fiscal Year;
(4) in the event the Book Value of any Partnership Asset is adjusted
pursuant to Section 4.4(D) below, the amount of such adjustment shall be treated
as gain or loss from the disposition of such asset.
(C) Any transferee of a Partnership Interest shall succeed to a pro
rata portion of the transferor's Capital Account transferred unless such
Transfer causes a Code Section 708 termination of the Partnership, in which case
the Book Value of all Partnership Assets shall be adjusted immediately prior to
the deemed distribution pursuant thereto as provided in Section 4.4(D).
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(D) Consistent with the provisions of Treasury Regulations Section
1.704-1(b)(2)(iv)(f), (i) immediately prior to the acquisition of an additional
Partnership Interest by any new or existing Partner in connection with the
contribution of money or other property (other than a de minimis amount) to the
Partnership, (ii) immediately prior to the distribution by the Partnership to a
Partner of Partnership property (other than a de minimis amount) as
consideration for a Partnership Interest and (iii) immediately prior to the
liquidation of the Partnership as defined in Treasury Regulations Section
1.704-1(b)(2)(ii)(g), the Book Value of all Partnership Assets shall be revalued
upward or downward to reflect the fair market value of each such Partnership
Asset as determined by the General Partner using such reasonable method of
valuation as it may adopt unless the General Partner shall determine that such
revaluation is not necessary to maintain Capital Accounts in accordance with
Treasury Regulations Section 1.704-1(b)(2)(iv).
(E) The foregoing provisions of this Section 4.4 are intended to
comply with Treasury Regulations Section 1.704-1(b) and shall be interpreted and
applied in a manner consistent with such Treasury Regulations. In the event the
General Partner shall determine that it is prudent to modify the manner in which
the Partners' Capital Accounts are computed hereunder in order to comply with
such Treasury Regulations, the General Partner may make such modification if
such modification is not likely to have a material effect on the amount or
timing of any distribution to any Partner under the terms of this Agreement and
the General Partner notifies the other Partners in writing of such modification
prior to making such modification.
SECTION 4.5 Return of Capital Account; Interest. Except as otherwise
specifically provided in this Agreement, (i) no Partner shall have any right to
withdraw or reduce its Capital Contributions or Capital Account, or to demand
and receive property other than cash from the Partnership in return for its
Capital Contributions or Capital Account; (ii) no Partner shall have any
priority over any other Partners as to the return of its Capital Contributions
or Capital Account; (iii) any return of Capital Contributions or Capital
Accounts to the Partners shall be solely from the Partnership Assets, and no
Partner shall be personally liable for any such return; and (iv) no interest
shall be paid by the Partnership on Capital Contributions or on balances in
Partners' Capital Accounts.
SECTION 4.6 Preemptive Rights. Other than as set forth in Section
4.2(B), no Person shall have any preemptive or similar rights with respect to
the issuance or sale of additional Partnership Units.
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ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS
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SECTION 5.1 Limited Liability. For bookkeeping purposes, the Profits
of the Partnership shall be shared, and the Losses of the Partnership shall be
borne, by the Partners as provided in Section 5.2 below; provided, however, that
except as expressly provided in this Agreement, no Limited Partner (in its
capacity as a Limited Partner) shall be personally liable for losses
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costs, expenses, liabilities or obligations of the Partnership in excess of its
Capital Contribution required under Article IV hereof.
SECTION 5.2 Profits, Losses and Distributive Shares.
(A) Profits. After giving effect to the special allocations, if any,
provided in Section 5.2(C) and (D), Profits in each Fiscal Year shall be
allocated in the following order:
(1) First, to the General Partner until the cumulative Profits
allocated to the General Partner under this Section 5.2(A)(1) equal the
cumulative Losses allocated to such Partner under Section 5.2(B)(3);
(2) Second, to each Partner in proportion to the cumulative Losses
allocated to such Partner under Section 5.2(B)(2), until the cumulative Profits
allocated to such Partner under this Section 5.2(A)(2) equal the cumulative
Losses allocated to such Partner under Section 5.2(B)(2);
(3) Third, to each Partner in proportion to the cumulative Losses
allocated to such Partner under Section 5.2(B)(1), until the cumulative Profits
allocated to such Partner under this Section 5.2(A)(3) equal the cumulative
Losses allocated to such Partner under Section 5.2(B)(1);
(4) Then, the balance, if any, to the Partners in accordance with
their respective Percentage Interests.
(B) Losses. After giving effect to the special allocations, if any,
provided in Section 5.2(C) and (D), Losses in each Fiscal Year shall be
allocated in the following order of priority:
(1) First, to the Partners, in accordance with their respective
Percentage Interests, but not in excess of the positive Capital Account balance
of any Partner prior to the allocation provided for in this Section 5.2(B)(1);
(2) Second, to the Partners with positive Capital Account balances
prior to the allocation provided for in this Section 5.2(B)(2), in proportion to
the amount of such balances until all such balances are reduced to zero;
(3) Thereafter, to the General Partner.
This Section 5.2(B) shall control, notwithstanding any reallocation or
adjustment of taxable income, loss or other items by the Internal Revenue
Service or any other taxing authority.
(C) Special Allocations. Except as otherwise provided in this
Agreement, the following special allocations will be made in the following order
and priority:
(1) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Article V, if there is a net decrease in Partnership Minimum
Gain during any tax year or other period for which allocations are made, each
Partner will be specially allocated items of
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Partnership income and gain for that tax year or other period (and, if
necessary, subsequent periods) in an amount equal to such Partner's share of the
net decrease in Partnership Minimum Gain during such tax year or other period
determined in accordance with Treasury Regulations Section 1.704-2(g).
Allocations pursuant to the preceding sentence shall be made in proportion to
the respective amounts required to be allocated to each Partner pursuant
thereto. The items to be so allocated shall be determined in accordance with
Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section
5.2(C)(1) is intended to comply with the minimum gain chargeback requirements
set forth in Treasury Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith, including the exceptions to the minimum gain chargeback
requirement set forth in Treasury Regulations Section 1.704-2(f) and (3). If the
General Partner concludes, after consultation with tax counsel, that the
Partnership meets the requirements for a waiver of the minimum gain chargeback
requirement as set forth in Treasury Regulations Section 1.704-2(f)(4), the
General Partner may take steps reasonably necessary or appropriate in order to
obtain such waiver.
(2) Partner Nonrecourse Debt Minimum Gain Chargeback. Notwithstanding
any other provision of this Section (other than Section 5.2(C)(1) which shall be
applied before this Section 5.2(C)(2)), if there is a net decrease in Partner
Minimum Gain during any tax year or other period for which allocations are made,
each Partner with a share of Partner Minimum Gain determined in accordance with
Treasury Regulations Section 1.704-2(i)(5) shall be specially allocated items of
Partnership income and gain for that period (and, if necessary, subsequent
periods) in an amount equal to such Partner's share of the net decrease in
Partner Minimum Gain determined in accordance with Treasury Regulations Section
1.704-2(i)(4). The items to be so allocated shall be determined in accordance
with Treasury Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii). This
Section 5.2(C)(2) is intended to comply with the minimum gain chargeback
requirements of Treasury Regulations Section 1.704-2(i)(4) and shall be
interpreted consistently therewith, including the exceptions set forth in
Treasury Regulations Section 1.704-2(f)(2) and (3) to the extent such exceptions
apply to Treasury Regulations Sections 1.704-2(i)(4). If the General Partner
concludes, after consultation with tax counsel, that the Partnership meets the
requirements for a waiver of the Partner Minimum Gain chargeback requirement set
forth in Treasury Regulation 1.704-2(f), but only to the extent such exception
applies to Treasury Regulations Section 1.704-2(i)(4), the General Partner may
take steps necessary or appropriate to obtain such waiver.
(3) Qualified Income Offset. A Partner who unexpectedly receives any
adjustment, allocation or distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) will be specially allocated items of
Partnership income and gain in an amount and manner sufficient to eliminate, to
the extent required by Treasury Regulations 1.704-1(b)(2)(ii)(d), the Adjusted
Capital Account Deficit of the Partner as quickly as possible, provided that an
allocation pursuant to this Section 5.2(C)(3) shall be made if and only to the
extent that such Partner would have an Adjusted Capital Account Deficit after
all other allocations provided for in this Article V have been tentatively made
as if this Section 5.2(C)(3) were not contained in this Agreement.
(4) Partnership Nonrecourse Deductions. Partnership Nonrecourse
Deductions for any taxable year or other period for which allocations are made
will be allocated among the Partners in proportion to their respective
Partnership Interests in the Partnership.
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(5) Partner Nonrecourse Deductions. Notwithstanding anything to the
contrary in this Agreement, any Partner Nonrecourse Deductions for any taxable
year or other period for which allocations are made will be allocated to the
Partner who bears the economic risk of loss with respect to the liability to
which the Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulations Section 1.704-2(i).
(6) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset under Code Section 734(b) or 743(b)
is required to be taken into account in determining Capital Accounts under
Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(2) or (4), the amount of the
adjustment to the Capital Accounts will be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases the basis of the asset), and the gain or loss will be specially
allocated to the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted under Treasury Regulations Section
1.704-1(b)(2)(iv)(m).
(7) Depreciation Recapture. The parties hereto recognize that part of
any gain recognized by the Partnership in any fiscal year on the sale, exchange
or other disposition of all or any part of the assets of the Partnership may be
treated for U.S. Federal income tax purposes (as a result of the application of
Section 1245 or 1250 of the Code) as ordinary income by reason of "Depreciation
Recapture." It is the understanding and agreement of the parties that, to the
extent possible, without increasing the total taxable gain to the Partnership or
the amount of taxable gain allocable to any Partner by reason of any such sale,
exchange or other disposition, to the extent not attributable, at the time of
contribution, to the excess of the basis of contributed property reflected in
the Capital Accounts over the tax basis of that property that portion of such
gain which shall constitute Depreciation Recapture shall be allocated among the
Partners in the proportion that the depreciation deductions (or basis reductions
treated as depreciation deductions) giving rise to such Depreciation Recapture
were taken by or allocated to the Partners after the date of this Agreement.
Depreciation Recapture with respect to depreciation deductions taken before an
asset is contributed to the Partnership will be allocable to the Partner who
contributed the asset to the Partnership.
(8) Interest in Partnership. Notwithstanding any other provision of
this Agreement, no allocation of Profit or Loss (or item of Profit or Loss) will
be made to a Partner if the allocation would not have "economic effect" under
Treasury Regulations Section 1.704-1(b)(2)(ii)(a) and would not be in accordance
with the Partner's interest in the Partnership within the meaning of Treasury
Regulations Section 1.704-1(b)(3).
(D) Curative Allocations. The allocations set forth in Section
5.2(C)(1) through (8) (the "Regulatory Allocations") are intended to comply with
certain requirements of Treasury Regulations Sections 1.704-1(b) and 1.704-2.
The Regulatory Allocations may not be consistent with the manner in which the
Partners intend to divide Partnership distributions. Accordingly, the General
Partner is authorized to further allocate Profits, Losses, and other items among
the Partners in a reasonable manner so as to prevent the Regulatory Allocations
from distorting the manner in which Partnership distributions would be divided
among the Partners under Section 5.3, but for application of the Regulatory
Allocations. In general, the reallocation will be accomplished by
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specially allocating other Profits, Losses and items of income, gain, loss and
deduction, to the extent they exist, among the Partners so that the net amount
of the Regulatory Allocations and such special allocations to each Partner is
zero. The General Partner may accomplish this result in any reasonable manner
that is consistent with Code Section 704 and the related Treasury Regulations.
(E) Tax Allocations.
(1) Except as otherwise provided in Section 5.2(E)(2), each item of
income, gain, loss and deduction shall be allocated for federal income tax
purposes in the same manner as each correlative item of income, gain, loss or
deduction, is allocated for book purposes pursuant to the provisions of Section
5.2 hereof.
(2) Notwithstanding anything to the contrary in this Article V (except
in this Section 5.2(E)), in an attempt to eliminate any Book-Tax Disparity with
respect to a Contributed Property, items of income, gain, loss or deduction with
respect to each such property shall be allocated for federal income tax purposes
among the Partners as follows:
(a) Depreciation, Amortization and Other Cost Recovery Items. In
the case of each Contributed Property with a Book-Tax Disparity, any
item of depreciation, amortization or other cost recovery allowance
attributable to such property shall be allocated as follows: (x)
first, to Partners (the "Non-Contributing Partners") other than the
Partners who contributed such property to the Partnership (or are
deemed to have contributed the property pursuant to Section 4.1(A)
(the "Contributing Partners") in an amount up to the book allocation
of such items made to the Non-Contributing Partners pursuant to
Section 5.2 hereof, pro rata in proportion to the respective amount of
book items so allocated to the Non-Contributing Partners pursuant to
Section 5.2 hereof; and (y) any remaining depreciation, amortization
or other cost recovery allowance to the Contributing Partners in
proportion to their Percentage Interests. In no event shall the total
depreciation, amortization or other cost recovery allowance allocated
hereunder exceed the amount of the Partnership's depreciation,
amortization or other cost recovery allowance with respect to such
property.
(b) Gain or Loss on Disposition. In the event the Partnership
sells or otherwise disposes of a Contributed Property with a Book-Tax
Disparity, any gain or loss recognized by the Partnership in
connection with such sale or other disposition shall be allocated
among the Partners as follows: (x) first, any gain or loss shall be
allocated to the Contributing Partners in proportion to their
Percentage Interests to the extent required to eliminate any Book-Tax
Disparity with respect to such property; and (y) any remaining gain or
loss shall be allocated among the Partners in the same manner that the
correlative items of book gain or loss are allocated among the
Partners pursuant to Section 5.2 hereof.
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(3) In the event the Book Value of a Partnership Asset (including a
Contributed Property) is adjusted pursuant to Section 4.4(D) hereof, and such
asset has not been deemed contributed to a new partnership, with the
contributing partnership then being liquidated pursuant to Code Section 708
subsequent thereto, all items of income, gain, loss or deduction in respect of
such property shall be allocated for federal income tax purposes among the
Partners in the same manner as provided in Section 5.2(E)(2) hereof to take into
account any variation between the fair market value of the property, as
determined by the General Partner using such reasonable method of valuation as
it may adopt, and the Book Value of such property, both determined as of the
date of such adjustment.
(4) The General Partner shall have the authority to elect alternative
methods to eliminate the Book-Tax Disparity with respect to one or more
Contributed Properties, as permitted by Treasury Regulations Section 1.704-3,
and such election shall be binding on all of the Partners.
(5) The Partners hereby intend that the allocation of tax items
pursuant to this Section 5.2(E) comply with the requirements of Code Section
704(c) and Treasury Regulations Section 1.704-3.
(6) The allocation of items of income, gain, loss or deduction
pursuant to this Section 5.2(E) are solely for federal, state and local income
tax purposes, and the Capital Account balances of the Partners shall be adjusted
solely for allocations of "book" items in respect of Partnership Assets pursuant
to Section 5.2(A), (B), (C), (D) and (F) hereof.
(F) Other Allocation Rules. The following rules will apply to the
calculation and allocation of Profits, Losses and other items:
(1) Except as otherwise provided in the Agreement, all Profits, Losses
and other items allocated to the Partners will be allocated among them in
proportion to their Percentage Interests.
(2) For purposes of determining the Profits, Losses or any other item
allocable to any period, Profits, Losses and other items will be determined on a
daily, monthly or other basis, as determined by the General Partner using any
permissible method under Code Section 706 and the related Treasury Regulations.
(3) Except as otherwise provided in this Agreement, all items of
Partnership income, gain, loss and deduction, and other allocations not provided
for in this Agreement will be divided among the Partners in the same proportions
as they share Profits and Losses, provided, however, that any credits shall be
allocated in accordance with Treasury Regulations Section 1.704-1(b)(4)(ii).
(4) For purposes of Treasury Regulations Section 1.752-3(a), the
Partners hereby agree that any nonrecourse liabilities of the Partnership in
excess of the sum of (i) the Partnership Minimum Gain and (ii) the aggregate
amount of taxable gain that would be allocated to the Partners under Section
704(c) (or in the same manner as Section 704(c) in connection with a revaluation
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of Partnership property) if the Partnership disposed of (in a taxable
transaction) all Partnership property subject to one or more nonrecourse
liabilities of the Partnership in full satisfaction of such liabilities and for
no other consideration, shall be allocated among the Partners in accordance with
their respective shares of Profits. The General Partner shall have discretion in
any Fiscal Year to allocate such excess nonrecourse liabilities among the
Partners (a) in a manner reasonably consistent with allocations (that have
substantial economic effect) of some other significant item of Partnership
income or gain or (b) in accordance with the manner in which it is reasonably
expected that the deductions attributable to the excess nonrecourse liabilities
will be allocated.
(G) Partner Acknowledgment. The Partners agree to be bound by the
provisions of this Section 5.2 in reporting their shares of Partnership income,
gain, loss, deduction and credit for income tax purposes.
(H) Regulatory Compliance. The foregoing provisions of this Section
5.2 relating to the allocation of Profits, Losses and other items for federal
income tax purposes are intended to comply with Treasury Regulations Sections
1.704-1(b), 1.704-2 and 1.704-3 and shall be interpreted and applied in a manner
consistent with such Treasury Regulations.
SECTION 5.3 Distributions. No Limited Partner shall have the right to
demand a distribution from the Partnership. At the General Partner's election,
the Partnership shall make periodic distributions (in each case in accordance
with the Partners' Percentage Interests) to each Partner in amounts such that,
after giving effect to such distribution, the Partners shall have received an
amount sufficient to satisfy all federal, state and local income taxes actually
payable by the Partners as a result of their interests in the Profits of the
Partnership for such period. In addition, the Partnership shall, at such times
as the General Partner shall determine, distribute cash to the Partners in
amounts that the General Partner determines. All distributions shall be made in
accordance with the Partners' Percentage Interests.
SECTION 5.4 Distributions upon Liquidation. Notwithstanding any other
provision hereof, proceeds of a Terminating Capital Transaction shall be
distributed to the Partners in accordance with Section 10.3.
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ARTICLE VI - PARTNERSHIP MANAGEMENT
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SECTION 6.1 Management and Control of Partnership Business.
(A) Except as otherwise expressly provided or limited by the
provisions of this Agreement, the General Partner shall have full, exclusive and
complete discretion to manage the business and affairs of the Partnership, to
make all decisions affecting the business and affairs of the Partnership and to
take all such action as it deems necessary or appropriate in connection with the
business of the Partnership. Except as expressly set forth in this Agreement,
the Limited Partners shall not have any authority, right, or power to bind the
Partnership, or to manage, or to participate in any way whatsoever in the
management of the business and affairs of the Partnership in any manner
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whatsoever. Such management shall in every respect be the full and complete
responsibility of the General Partner alone as herein provided.
(B) In carrying out the purposes of the Partnership, the General
Partner and/or any management committee, officer of the Partnership or other
persons appointed by the General Partner in its sole discretion shall be
authorized to take all actions it deems necessary and appropriate to carry on
the business of the Partnership. The General Partner shall be authorized to
delegate to one or more persons (including, without limitation, appointment of a
Management Committee and/or officers of the Partnership) the General Partner's
rights and powers to manage and control the business and affairs of the
Partnership, including to delegate to agents, officers and employees of the
General Partners or the Partnership. The Limited Partners, by execution hereof,
agree that the General Partner and/or any management committee, officers of the
Partnership or other persons appointed by the General Partner in its sole
discretion is authorized to execute, deliver and perform any agreement and/or
transaction on behalf of the Partnership.
(C) The General Partner and its Affiliates may acquire Limited Partner
Interests from Limited Partners who agree so to transfer Limited Partner
Interests from the Partnership in accordance with Section 4.2(A). Any Limited
Partner Interest acquired by the General Partner shall be converted into a
General Partner Interest. Upon acquisition of any Limited Partner Interest or by
an Affiliate of the General Partner, such Affiliate shall have all the rights of
a Limited Partner or.
SECTION 6.2 No Management by Limited Partners; Limitation of
Liability.
(A) The Limited Partners, in their capacity as Limited Partners shall
not take part in the day-to-day management, operation or control of the business
and affairs of the Partnership or have any right, power, or authority to act for
or on behalf of or to bind the Partnership or transact any business in the name
of the Partnership. The Limited Partners shall not have any rights other than
those specifically provided herein or granted by law where consistent with a
valid provision hereof. Any approvals rendered or withheld by the Limited
Partners pursuant to this Agreement shall be deemed as consultation with or
advice to the General Partner in connection with the business of the Partnership
and, in accordance with the Act, shall not be deemed as participation by the
Limited Partners in the business of the Partnership and are not intended to
create any inference that the Limited Partners should be classified as general
partners under the Act.
(B) No Limited Partner shall have any liability under this Agreement
except with respect to withholding under Section 7.6, in connection with a
violation of any provision of this Agreement by such Limited Partner or as
provided in the Act.
(C) The General Partner shall not take any action which would subject
a Limited Partner (in its capacity as Limited Partner) to liability as a general
partner.
SECTION 6.3 Limitations on Partners.
(A) No Partner or Affiliate of a Partner shall have any authority to
perform (i) any act in violation of any applicable law or regulation thereunder,
(ii) any act prohibited by
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Section 6.2(C), or (iii) any act which is required to be Consented to or
ratified pursuant to this Agreement without such Consent or ratification.
(B) No action shall be taken by a Partner if it would cause the
Partnership to be treated as an association taxable as a corporation for federal
income tax purposes or, without the consent of the General Partner, as a
publicly-traded partnership within the meaning of Section 7704 of the Code. A
determination of whether such action will have the above described effect shall
be based upon a declaratory judgment or similar relief obtained from a court of
competent jurisdiction, a favorable ruling from the IRS or the receipt of a
written opinion of counsel.
SECTION 6.4 Compensation; Reimbursement of Expenses. In consideration
for the General Partner's services to the Partnership in its capacity as General
Partner, the Partnership shall pay on behalf of or reimburse to the General
Partner all expenses of the General Partner incurred in connection with the
management of the business and affairs of the Partnership, including all
employee compensation of employees of the General Partner and indemnity or other
payments made pursuant to agreements entered into in furtherance of the
Partnership's business. Except as otherwise set forth in this Agreement, the
General Partner shall be fully and entirely reimbursed by the Partnership for
any and all direct and indirect costs and expenses incurred in connection with
the organization and continuation of the Partnership pursuant to this Agreement.
In addition, the General Partner shall be reimbursed for all expenses incurred
by the General Partner in connection with issuance of additional Partnership
Interests.
SECTION 6.5 Liability for Acts and Omissions.
(A) The General Partner shall not be liable, responsible or
accountable in damages or otherwise to the Partnership or any of the other
Partners for any act or omission (i) performed or omitted in good faith on
behalf of the Partnership and in a manner reasonably believed to be within the
scope of the authority granted by this Agreement and in the best interests of
the Partnership or the stockholders of the General Partner or (ii) except to the
extent required by applicable law, arising out of or related to the management
and control of the business and affairs of the Partnership pursuant to Section
6.1. In exercising its authority hereunder, the General Partner may, but shall
not be under any obligation to, take into account the tax consequences to any
Partner of any action it undertakes on behalf of the Partnership. Neither the
General Partner nor the Partnership shall have any liability as a result of any
income tax liability incurred by a Partner as a result of any action or inaction
of the General Partner hereunder and, by their execution of this Agreement, the
Limited Partners acknowledge the foregoing.
(B) Unless otherwise prohibited hereunder, the General Partner shall
be entitled to exercise any of the powers granted to it and perform any of the
duties required of it under this Agreement directly or through any agent. The
General Partner shall not be responsible for any misconduct or negligence on the
part of any agent; provided, however, that the General Partner selected or
appointed such agent in good faith.
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SECTION 6.6 Indemnification.
(A) The Partnership shall indemnify the General Partner and each
director, officer and stockholder of the General Partner and each Person
(including any Affiliate) designated as an agent by the General Partner in its
reasonable discretion (each, an "Indemnified Party") to the fullest extent
permitted under the Act (including any procedures set forth therein regarding
advancement of expenses to such Indemnified Party) from and against any and all
losses, claims, damages, liabilities, expenses (including reasonable attorneys'
fees), judgments, fines, settlements and any other amounts arising out of or in
connection with any claims, demands, actions, suits or proceedings (civil,
criminal or administrative) relating to or resulting (directly or indirectly)
from the operations of the Partnership, in which such Indemnified Party becomes
involved, or reasonably believes it may become involved, as a result of the
capacity referred to above.
(B) The Partnership shall have the authority to purchase and maintain
such insurance policies on behalf of the Indemnified Parties as the General
Partner shall determine, which policies may cover those liabilities the General
Partner reasonably believes may be incurred by an Indemnified Party in
connection with the operation of the business of the Partnership. The right to
procure such insurance on behalf of the Indemnified Parties shall in no way
mitigate or otherwise affect the right of any such Indemnified Party to
indemnification pursuant to Section 6.6(A) hereof.
(C) The provisions of this Section 6.6 are for the benefit of the
Indemnified Parties, their heirs, successors, assigns and administrators and
shall not be deemed to create any rights in or benefit to any other Person.
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ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS
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SECTION 7.1 Books and Records. The General Partner shall maintain at
the office of the Partnership full and accurate books of the Partnership showing
all receipts and expenditures, assets and liabilities, profits and losses, names
and current addresses of Partners, and all other records necessary for recording
the Partnership's business and affairs. Each Limited Partner shall have, upon
written demand and at such Limited Partner's expense, as the case may be, the
right to receive true and complete information regarding Partnership matters to
the extent required (and subject to the limitations) under Delaware law.
SECTION 7.2 Annual Audit and Accounting. The books and records of the
Partnership shall be kept for financial and tax reporting purposes on the
accrual basis of accounting in accordance with generally accepted accounting
principles ("GAAP"). The accounts of the Partnership shall be audited annually
by a nationally recognized accounting firm of independent public accountants
selected by the General Partner (the "Independent Accountants").
SECTION 7.3 Partnership Funds. The General Partner shall have
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in its direct or
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indirect possession or control. All funds of the Partnership not otherwise
invested shall be deposited in one or more accounts maintained in such banking
institutions as the General Partner shall determine, and withdrawals shall be
made only in the regular course of Partnership business on such signatures as
the General Partner may from time to time determine.
SECTION 7.4 Reports and Notices. The General Partner shall provide all
Partners with the following reports no later than the dates indicated or as soon
thereafter as circumstances permit:
(A) By March 31 of each year, Schedule K-1, or such similar form(s) as
may be required by the IRS, stating each Partner's allocable share of income,
gain, loss, deduction or credit for the prior Fiscal Year;
(B) Until the earlier of February , 2096 or when E Partner is no
longer a Limited Partner, within thirty (30) days after the end of each fiscal
quarter, as of the last day of the fiscal quarter, a report containing unaudited
financial statements of the Partnership, or of the General Partner if such
statements are prepared on a consolidated basis with the General Partner, and
such other information as may be legally required or determined to be
appropriate by the General Partner; and
(C) Until the earlier of February , 2096 or when E Partner is no
longer a Limited Partner, within seventy five (75) days after the end of each
Fiscal Year, as of the close of the Fiscal Year, an annual report containing
audited financial statements of the Partnership, or of the General Partner if
such statements are prepared on a consolidated basis with the General Partner,
presented in accordance with GAAP and certified by the Independent Accountants.
SECTION 7.5 Tax Matters.
(A) The General Partner shall be the Tax Matters Partner of the
Partnership for federal income tax matters pursuant to Code Section
6231(a)(7)(A). The Tax Matters Partner is authorized and required to represent
the Partnership (at the expense of the Partnership) in connection with all
examinations of the affairs of the Partnership by any federal, state, or local
tax authorities, including any resulting administrative and judicial
proceedings, and to expend funds of the Partnership for professional services
and costs associated therewith. The Tax Matters Partner shall deliver to the
Limited Partners within fifteen (15) business days of the receipt thereof a copy
of any notice or other communication with respect to the Partnership received
from the IRS (or other governmental tax authority), or any court, in each case
with respect to any administrative or judicial proceeding involving the
Partnership. The Partners agree to cooperate with each other in connection with
the conduct of all proceedings pursuant to this Section 7.5(A).
(B) The Tax Matters Partner shall receive no compensation for its
services in such capacity. If the Tax Matters Partner incurs any costs related
to any tax audit, declaration of any tax deficiency or any administrative
proceeding or litigation involving any Partnership tax matter, such amount shall
be an expense of the Partnership and the Tax Matters Partner shall be entitled
to full reimbursement therefor.
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(C) The General Partner shall cause to be prepared all federal, state
and local income tax returns required of the Partnership at the Partnership's
expense.
(D) Except as set forth herein, the General Partner shall determine
whether to make (and, if necessary, revoke) any tax election available to the
Partnership under the Code or any state tax law; provided, however, upon the
request of any Partner, the General Partner shall make the election under Code
Section 754 and the Treasury Regulations promulgated thereunder. The Partnership
shall elect to deduct expenses, if any, incurred by it in organizing the
Partnership in accordance with the provisions of Code Section 709.
(E) Each Partner and the Partnership will cooperate with and assist,
at its own expense, the Tax Matters Partner in connection with any U.S. Federal,
state, local or foreign tax matter affecting the Partnership or any entity in
which the Partnership has an interest, including, but not limited to, providing
any records or supporting data with respect to assets or liabilities transferred
to the Partnership, preparing any tax return or assisting as requested on any
audit.
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ARTICLE VIII - TRANSFER OF PARTNERSHIP INTERESTS; ADMISSIONS OF PARTNERS
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SECTION 8.1 Transfer by General Partner. The General Partner may not
voluntarily withdraw or Transfer all or any portion of its General Partner
Interest. Notwithstanding the foregoing, the General Partner may pledge its
General Partner Interest in furtherance of the Partnership's business (including
without limitation, in connection with a loan agreement under which the
Partnership is a borrower) without the consent of any Partner.
SECTION 8.2 Obligations of a Prior General Partner. Except as
contemplated by the Distribution (as defined in the Master Agreement), upon an
Involuntary Withdrawal of the General Partner and the subsequent Transfer of the
General Partner's Interest, such General Partner shall (i) remain liable for all
obligations and liabilities (other than Partnership liabilities payable solely
from Partnership Assets) incurred by it as General Partner before the effective
date of such event and (ii) pay all costs associated with the admission of its
Successor General Partner. However, such General Partner shall be free of and
held harmless by the Partnership against any obligation or liability incurred on
account of the activities of the Partnership from and after the effective date
of such event, except as provided in this Agreement.
SECTION 8.3 Successor General Partner. A successor to all of a General
Partner's General Partner Interest who is proposed to be admitted to the
Partnership as a Successor General Partner shall be admitted as the General
Partner, effective upon the Transfer. Any such transferee shall carry on the
business of the Partnership without dissolution. In addition, the following
conditions must be satisfied:
(A) The Person shall have accepted and agreed to be bound by all the
terms and provisions of this Agreement by executing a counterpart thereof and
such other documents or
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instruments as may be required or appropriate in order to effect the admission
of such Person as a General Partner;
(B) An amendment to this Agreement evidencing the admission of such
Person as a General Partner shall have been executed by all General Partners and
an amendment to the Certificate shall have been filed for recordation as
required by the Act, and
(C) Any consent required under Section 10.1(A) shall have been
obtained.
SECTION 8.4 Restrictions on Transfer and Withdrawal by Limited
Partner.
(A) No Limited Partner may Transfer all or any portion of its
Partnership Interest without first obtaining the Consent of the General Partner,
which Consent may be granted or withheld in the sole and absolute discretion of
the General Partner. Any such purported transfer undertaken without such Consent
shall be considered to be null and void ab initio and shall not be given effect.
E Partner may in no event Transfer any portion of its Partnership Interest prior
to the irrevocable decision by I Partner not to exercise the option set forth in
Section 9.1.
(B) No Limited Partner may withdraw from the Partnership other than as
a result of a permitted Transfer (i.e., a Transfer consented to as contemplated
by clause (A) above or a Transfer pursuant to clause (C) below) of all of his
Partnership Units pursuant to this Article VIII or pursuant to a redemption or
exchange of all of his Partnership Units pursuant to Article IX. Upon the
permitted Transfer or redemption of all of a Limited Partner's Units, such
Limited Partner shall cease to be a Limited Partner.
(C) Upon the Involuntary Withdrawal of any Limited Partner (which
shall under no circumstance cause the dissolution of the Partnership), the
executor, administrator, trustee, guardian, receiver or conservator of such
Limited Partner's estate shall become a Substituted Limited Partner upon
compliance with the provisions of Section 8.5(A)(1)-(3).
(D) No Transfer of Limited Partnership Units shall be made if such
Transfer would (i) in the opinion of Partnership counsel, cause the Partnership
to be terminated for federal income tax purposes or to be treated as an
association taxable as a corporation (rather than a partnership) for federal
income tax purposes; (ii) be effected through an "established securities market"
or a "secondary market (or the substantial equivalent thereof)" within the
meaning of Code Section 7704 and the Treasury Regulations thereunder, (iii) in
the opinion of Partnership counsel, violate the provisions of applicable
securities laws; (iv) violate the terms of (or result in a default or
acceleration under) any law, rule, regulation, agreement or commitment binding
on the Partnership; (v) cause the Partnership to become, with respect to any
employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as
defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in
Section 4975(e) of the Code); (vi) in the opinion of counsel to the Partnership,
cause any portion of the underlying assets of the Partnership to constitute
assets of any employee benefit plan pursuant to Department of Labor Regulations
Section 2510.3-101; or (vii) result in a deemed
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distribution to any Partner attributable to a failure to meet the requirements
of Treasury Regulations Section 1.752-2(d)(1), unless such Partner consents
thereto.
(E) Prior to the consummation of any Transfer under this Section 8.4,
the transferor and/or the transferee shall deliver to the General Partner such
opinions, certificates and other documents as the General Partner shall request
in connection with such Transfer.
SECTION 8.5 Substituted Limited Partner.
(A) No transferee shall become a Substituted Limited Partner in place
of its assignor unless and until the following conditions have been satisfied:
(1) The assignor and transferee files a Notice or other evidence of
Transfer and such other information reasonably required by the General Partner,
including, without limitation, names, addresses and telephone numbers of the
assignor and transferee;
(2) The transferee executes, adopts and acknowledges this Agreement,
or a counterpart hereto, and such other documents as may be reasonably requested
by the General Partner, including without limitation, all documents necessary to
comply with applicable tax and/or securities rules and regulations; and
(3) The assignor or transferee pays all costs and fees incurred or
charged by the Partnership to effect the Transfer and substitution.
(B) If a transferee of a Limited Partner does not become a Substituted
Limited Partner pursuant to Section 8.5(A), such transferee shall be an Assignee
and shall not have any rights to require any information on account of the
Partnership's business, to inspect the Partnership's books or to vote or
otherwise take part in the affairs of the Partnership (such Partnership Units
being deemed to have been voted in the same proportion as all other Partnership
Units held by Limited Partners have been voted). Such Assignee shall be
entitled, however, to all the rights of an assignee of a limited partnership
interest under the Act. Any Assignee wishing to Transfer the Partnership Units
acquired shall be subject to the restrictions set forth in this Article VIII.
SECTION 8.6 Timing and Effect of Transfers. Unless the General Partner
agrees otherwise, Transfers under this Article VIII may only be made as of the
first day of a fiscal quarter of the Partnership. Upon any Transfer of a
Partnership Interest in accordance with this Article VIII or acquisition of a
Partnership Interest in accordance with Article IX, the Partnership shall
allocate all items of Profit and Loss between the assignor Partner and the
transferee Partner in accordance with Article V hereof. The assignor Partner
shall have the right to receive all distributions as to which the Record Date
precedes the date of Transfer and the transferee Partner shall have the right to
receive all distributions thereafter.
SECTION 8.7 Additional Limited Partners. Other than in accordance with
the transactions specified in the Contribution Agreements, after the initial
execution of this Agreement and the admission to the Partnership of the Initial
Limited Partners, any Person making a Capital
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Contribution to the Partnership in accordance herewith shall be admitted as an
Additional Limited Partner of the Partnership only (i) with the Consent of the
General Partner and (ii) upon execution, adoption and acknowledgment of this
Agreement, or a counterpart hereto, and such other documents as may be
reasonably requested by the General Partner, including without limitation, the
power of attorney required under Section 12.3. Upon satisfaction of the
foregoing requirements, such Person shall be admitted as an Additional Limited
Partner effective on the date upon which the name of such Person is recorded on
the books of the Partnership.
SECTION 8.8 Amendment of Agreement and Certificate. Upon any admission
of a Person as a Partner to the Partnership, the General Partner shall make any
necessary amendment to this Agreement to reflect such admission and, if required
by the Act, to cause to be filed an amendment to the Certificate.
SECTION 8.9 Tax Allocation Adjustments; Distributions After Transfer.
In the event of a transfer of any Interest, regardless of whether the transferee
becomes a substitute Partner, all items of income, gain, loss, deduction and
credit for the fiscal period in which the transfer occurs shall be allocated for
U.S. Federal income tax purposes between the transferor and the transferee on
the basis of the ownership of the Interest at the time the particular item is
taken into account by the Partnership for U.S. Federal income tax purposes and
assuming that the taxable income, such as "subpart F income" under the Code,
resulting from ownership of any foreign corporation is taken into account by the
Partnership, when the events occur giving rise to such income, except to the
extent otherwise required by Section 706(d) of the Code. Distributions made on
or after the effective date of transfer shall be made to the transferee,
regardless of when such distributions accrued on the books of the Partnership.
- --------------------------------------------------------------------------------
ARTICLE IX - PARTNERS' PURCHASE OPTIONS.
- --------------------------------------------------------------------------------
SECTION 9.1 I Partner's Purchase Option.
(A) Upon the terms and subject to the conditions set forth in this
Article IX, E Partner hereby grants to I Partner an option (the "Option") to
purchase E Partner's entire Interest in the Partnership, such Option to be
exercisable on January 1, 2004 (the "Exercise Date"). The exercise price for the
Option (the "Option Price") shall be equal to 95% of the Fair Market Value (as
determined below) of the Partnership (taking into account any indebtedness of
the Partnership, including, without limitation, Partner Loans), determined as of
the Exercise Date, multiplied by a percentage equal to the Partner's Interest
being purchased pursuant to the Option.
(B) The Partnership shall engage an investment banking firm to be
selected by the Partners as provided below (the "Firm") to render an opinion
(the "Value Opinion") as to its estimate of the Fair Market Value of the
Partnership as of the Exercise Date. In selecting the Firm, the Partners shall
first try to mutually agree on one of the four following investment banking
firms (the "Eligible Firms"): SBC Warburg Dillon Read Inc., Goldman, Sachs &
Co., J.P. Morgan & Co.
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and Merrill Lynch & Co. If within 10 days the Partners cannot so mutually agree,
then the Partners shall promptly meet in person and on a random basis select one
name from among the Eligible Firms. If either Partner objects to the Eligible
Firm so selected, another name shall be randomly selected and such process shall
continue until such time as the Partners agree on the Eligible Firm selected or
there is only one Eligible Firm left, in which case that Eligible Firm shall
serve as the Firm, unless it cannot be so engaged, in which case the next to
last Eligible Firm selected shall render the Value Opinion in writing to the
Partners and the Partnership on or before the 30th day after the Exercise Date
and the cost of such opinion shall be borne entirely by the Partnership.
(C) The Option may be exercised by I Partner by the giving of written
notice to E Partner of such exercise at any time within 60 days of the Partners'
receipt of the Value Opinion and such Option shall be deemed to be exercised as
of such Exercise Date.
(D) In consideration for the grant by E Partner of the Option, I
Partner agrees to pay, or cause to be paid, to E Partner an amount equal to the
Option Price plus interest on such amount at a rate per annum equal to the
three-month London Interbank Offered Rate (LIBOR) as published in The Wall
Street Journal from the Exercise Date to the date of payment. Payment of the
Option Price for the Option exercised and such interest shall be made in
immediately available funds on or before the tenth day following the giving of
notice pursuant to Section 9.1(C) for which the Option was exercised. Upon
payment of the Option Price and such interest, the Percentage Interest of E
Partner shall automatically be decreased to zero and the Percentage Interest of
I Partner shall be increased by a similar percentage.
SECTION 9.2 E Partner's Right of Offer. If I Partner decides to sell
all or a part of its Percentage Interest in the Partnership, I Partner, at least
60 days before the closing date of such sale, shall inform E Partner of its
intention to make such a sale. E Partner shall have the right to offer to
acquire all or a portion of I Partner's Percentage Interest in the Partnership,
but I Partner shall not in any way be required to sell all or any of its
Percentage Interest to E Partner pursuant to any offer submitted by E Partner.
- --------------------------------------------------------------------------------
ARTICLE X - DISSOLUTION AND LIQUIDATION
- --------------------------------------------------------------------------------
SECTION 10.1 Term and Dissolution. The Partnership commenced as of
February , 1998, and shall continue until February , 2096, at which time the
Partnership shall dissolve or until dissolution occurs prior to that date for
any one of the following reasons (each, an "Event of Termination"):
(A) An Involuntary Withdrawal or a voluntary withdrawal, even though
in violation of this Agreement, of the General Partner unless, within ninety
(90) days after such event of withdrawal, a majority of the Limited Partners
remaining agree in writing to the continuation of the Partnership and to the
appointment of a Successor General Partner;
(B) Entry of a decree of judicial dissolution of the Partnership under
the Act;
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(C) The sale, exchange or other disposition of all or substantially
all of the Partnership Assets;
(D) The dissolution, winding-up, cessation of business, withdrawal or
removal of all of the Partners; or
(E) The affirmative vote of the holders of not less than two-thirds of
the Limited Partner Interests.
SECTION 10.2 Winding-Up. Upon the occurrence of an Event of
Termination, if the Partnership is not continued as provided herein, the
Partnership affairs shall be wound up as follows:
(a) The General Partner shall cause to be made a proper
accounting of the Capital Account of each Partner and of the Profits
and Losses of the Partnership from the date of the last previous
accounting to the date of dissolution. Financial statements presenting
such accounting shall include a report of a certified public
accountant. The General Partner shall also cause to be prepared a
statement of the assets and liabilities of the Partnership as of the
date of dissolution.
(b) The assets and properties of the Partnership shall be
liquidated as promptly as possible, and receivables collected, subject
to Section 10.5, all in an orderly and businesslike manner so as not
to involve undue sacrifice. Notwithstanding the foregoing, the
Partners may determine not to sell, or authorize the sale of, all or
any portion of the assets and properties of the Partnership, in which
event such assets and properties shall be distributed in kind pursuant
to Section 10.3(A).
SECTION 10.3 Liquidation of Partnership Assets.
(A) Subject to Section 10.3(E), in the event of dissolution pursuant
to Section 10.1, the Partnership shall continue solely for purposes of winding
up the affairs of, achieving a final termination of, and satisfaction of the
creditors of, the Partnership. The General Partner (or, if there is no General
Partner remaining, any Person elected by a majority in interest of the Limited
Partners (the "Liquidator")) shall be responsible for oversight of the winding
up and dissolution of the Partnership. The Liquidator shall obtain a full
accounting of the assets and liabilities of the Partnership and shall obtain a
report of a certified public accountant and such Partnership Assets shall be
liquidated as promptly as the Liquidator is able to do so without any undue loss
in value, with the proceeds therefrom applied and distributed in the following
order:
(1) First, to the discharge of Partnership debts and liabilities to
creditors other than Partners;
(2) Second, to the discharge of Partnership debts and liabilities to
the Partners (including Partner Loans); and
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(3) The balance, if any, to the Partners in accordance with their
positive Capital Accounts after giving effect to all contributions,
distributions and allocations for all periods.
(B) In accordance with Section 10.3(A), the Liquidator shall proceed
without any unnecessary delay to sell and otherwise liquidate the Partnership
Assets; provided, however, that if the Liquidator shall determine that an
immediate sale of part or all of the Partnership Assets would cause undue loss
to the Partners, the Liquidator may defer the liquidation except (i) to the
extent provided by the Act or (ii) as may be necessary to satisfy the debts and
liabilities of the Partnership to Persons other than the Partners.
(C) If, in the sole and absolute discretion of the Liquidator, there
are Partnership Assets that the Liquidator will not be able to liquidate, or if
the liquidation of such assets would result in undue loss to the Partners, the
Liquidator may distribute such Partnership Assets to the Partners in-kind, in
lieu of cash, as tenants-in-common in accordance with the provisions of Section
10.3(A). The foregoing notwithstanding, such in-kind distributions shall only be
made if in the Liquidator's good faith judgment that is in the best interest of
the Partners.
(D) Upon the complete liquidation and distribution of the Partnership
Assets, the Partners shall cease to be Partners of the Partnership, and the
Liquidator shall execute, acknowledge and cause to be filed all certificates and
notices required by law to terminate the Partnership. Upon the dissolution of
the Partnership pursuant to Section 10.1, the Liquidator shall cause to be
prepared, and shall furnish to each Partner, a statement setting forth the
assets and liabilities of the Partnership. Promptly following the complete
liquidation and distribution of the Partnership Assets, the Liquidator shall
furnish to each Partner a statement showing the manner in which the Partnership
Assets were liquidated and distributed.
(E) Notwithstanding the foregoing provisions of this Section 10.3, in
the event that the Partnership shall dissolve as a result of the expiration of
the term provided for herein or as a result of the occurrence of an event of the
type described in Section 10.1(B) or (C), then each Limited Partner shall be
deemed to have delivered a Redemption Notice on the date of such dissolution. In
connection with each such Redemption Notice, the General Partner shall have the
option of either (i) complying with the redemption procedures contained in
Article IX or (ii) at the request of any Limited Partner, delivering to such
Limited Partner, Partnership property approximately equal in value (after taking
into account the liabilities hereto referred to) the amount otherwise
distributable to such Partner under Section 10.3(A)(3) hereof upon the
assumption by such Limited Partner of such Limited Partner's proportionate share
of the Partnership's liabilities and payment by such Limited Partner (or the
Partnership) of any excess (or deficiency) of the value of the property so
delivered over the amount otherwise distributable to such Partner under Section
10.3(A)(3). In lieu of requiring such Limited Partner to assume its
proportionate share of Partnership liabilities, the General Partner may deliver
to such Limited Partner unencumbered Partnership property approximately equal in
value to the amount otherwise distributable to such Partner under Section
10.3(A)(3).
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<PAGE>
SECTION 10.4 Effect of Treasury Regulations.
(A) In the event the Partnership is "liquidated" within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made
pursuant to this Article X to the General Partner and the Limited Partners, who
have positive Capital Accounts in compliance with Treasury Regulations Section
1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in its Capital
Account (after giving effect to all contributions (without regard to this
Section 10.3(A)), distributions and allocations), such Partner shall have no
obligation to make any contribution to the capital of the Partnership. Any
deficit restoration obligation pursuant to the provisions hereof shall be for
the benefit of creditors of the Partnership or any other Person to whom any
debts, liabilities, or obligations are owed by (or who otherwise has any claim
against) the Partnership or the general partner, in its capacity as General
Partner of the Partnership.
(B) In the event the Partnership is "liquidated" within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(ii)(g) but there has been no
dissolution of the Partnership under Section 10.1 hereof, then the Partnership
Assets shall not be liquidated, the Partnership's liabilities shall not be paid
or discharged and the Partnership's affairs shall not be wound up. In the event
of such a liquidation there shall be deemed to have been a distribution of
Partnership Assets in kind to the Partners in accordance with their respective
Capital Accounts followed by a recontribution of the Partnership Assets by the
Partners also in accordance with their respective Capital Accounts.
SECTION 10.5 Time for Winding-Up. Anything in this Article X
notwithstanding, a reasonable time shall be allowed for the orderly winding-up
of the business and affairs of the Partnership and the liquidation of the
Partnership Assets in order to minimize any potential for losses as a result of
such process. During the period of winding-up, this Agreement shall remain in
full force and effect and shall govern the rights and relationships of the
Partners inter se.
- --------------------------------------------------------------------------------
ARTICLE XI - AMENDMENTS AND MEETINGS
- --------------------------------------------------------------------------------
SECTION 11.1 Amendment Procedure.
(A) Amendments to this Agreement may be proposed by the General
Partner. An amendment may be made by the General Partner without the Consent of
any Limited Partner; provided, however, that no amendment shall be adopted if it
would (i) convert a Limited Partner's Partnership Interest into a general
partner interest, (ii) increase the liability of a Limited Partner under this
Agreement, (iii) except as otherwise permitted in this Agreement, alter the
amount of or a Partner's rights to distributions set forth in Article V or X, or
the allocations set forth in Article IV, (iv) cause the early termination of the
Partnership (other than pursuant to the terms hereof) or (v) amend this Section
11.1(A) or any provision contained in Article IX, in each case without the
Consent of each Partner adversely affected thereby. In connection with any
proposed amendment of this Agreement requiring Consent, the General Partner
shall either call a meeting to solicit the vote of the Partners or seek the
written vote of the Partners to such amendment. In the case of a request for
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a written vote, the General Partner shall be authorized to impose such
reasonable time limitations for response, but in no event less than ten (10)
days, with the failure to respond being deemed a vote consistent with the vote
of the General Partner.
(B) Notwithstanding the foregoing, amendments may be made to this
Agreement by the General Partner, without the Consent of any Limited Partner, to
(i) add to the representations, duties or obligations of the General Partner or
surrender any right or power granted to the General Partner herein; (ii) cure
any ambiguity, correct or supplement any provision herein which may be
inconsistent with any other provision herein or make any other provisions with
respect to matters or questions arising hereunder which will not be inconsistent
with any other provision hereof; (iii) reflect the admission, substitution,
termination or withdrawal of Partners in accordance with this Agreement; or (iv)
satisfy any requirements, conditions or guidelines contained in any order,
directive, opinion, ruling or regulation of a federal or state agency or
contained in federal or state law. The General Partner shall reasonably promptly
notify the Limited Partners whenever it exercises its authority pursuant to this
Section 11.1(B).
(C) Within ten (10) days of the making of any proposal to amend this
Agreement, the General Partner shall give all Partners Notice of such proposal
(along with the text of the proposed amendment and a statement of its purposes).
SECTION 11.2 Meetings and Voting.
(A) Meetings of Partners may be called by the General Partner. The
General Partner shall give all Partners Notice of the purpose of such proposed
meeting not less than seven (7) days nor more than thirty (30) days prior to the
date of the meeting. Meetings shall be held at a reasonable time and place
selected by the General Partner. Whenever the vote or Consent of Partners is
permitted or required hereunder, such vote or Consent shall be requested by the
General Partner and may be given by the Partners in the same manner as set forth
for a vote with respect to an amendment to this Agreement in Section 11.1(A).
(B) Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth the
action to be taken is signed by the Partners owning Percentage Interests
required to vote in favor of such action, which consent may be evidenced in one
or more instruments. Consents need not be solicited from any other Partner if
the written consent of a sufficient number of Partners has been obtained to take
the action for which such solicitation was required.
(C) Each Limited Partner may authorize any Person or Persons,
including without limitation the General Partner, to act for him by proxy on all
matters on which a Limited Partner may participate. Every proxy (i) must be
signed by the Limited Partner or his attorney-in-fact, (ii) shall expire eleven
(11) months from the date thereof unless the proxy provides otherwise and (iii)
shall be revocable at the discretion of the Limited Partner granting such proxy.
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- --------------------------------------------------------------------------------
ARTICLE XII - MISCELLANEOUS PROVISIONS
- --------------------------------------------------------------------------------
SECTION 12.1 Title to Property. All property owned by the Partnership,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the Partnership as an entity, and no Partner, individually, shall have any
ownership of such property. The Partnership may hold any of its assets in its
own name or, in the name of its nominee, which nominee may be one or more
individuals, corporations, partnerships, trusts or other entities.
SECTION 12.2 Other Activities of Limited Partners. Except as expressly
provided otherwise in this Agreement or in any other agreement entered into by a
Limited Partner or any Affiliate of a Limited Partner and the Partnership, the
General Partner or any Subsidiary of the Partnership or the General Partner, any
Limited Partner or any Affiliate of any Limited Partner may engage in, or
possess an interest in, other business ventures of every nature and description,
independently or with others, whether or not such other enterprises shall be in
competition with any activities of the Partnership, the General Partner or any
Subsidiary of the Partnership or the General Partner; and neither the
Partnership, the General Partner, any such Subsidiary nor the other Partners
shall have any right by virtue of this Agreement in and to such independent
ventures or to the income or profits derived therefrom.
SECTION 12.3 Power of Attorney.
(A) Each Partner hereby irrevocably appoints and empowers the General
Partner (which term shall include the Liquidator, in the event of a liquidation,
for purposes of this Section 12.3) and each of their authorized officers and
attorneys-in-fact with full power of substitution as his true and lawful agent
and attorney-in-fact, with full power and authority in his name, place and stead
to:
(1) make, execute, acknowledge, publish and file in the appropriate
public offices (a) any duly approved amendments to the Certificate pursuant to
the Act and to the laws of any state in which such documents are required to be
filed; (b) any certificates, instruments or documents as may be required by, or
may be appropriate under, the laws of any state or other jurisdiction in which
the Partnership is doing or intends to do business; (c) any other instrument
which may be required to be filed by the Partnership under the laws of any state
or by any governmental agency, or which the General Partner deems advisable to
file; (d) any documents which may be required to effect the continuation of the
Partnership, the admission, withdrawal or substitution of any Partner pursuant
to Article VIII, dissolution and termination of the Partnership pursuant to
Article X, or the surrender of any rights or the assumption of any additional
responsibilities by the General Partner; (e) any document which may be required
to effect an amendment to this Agreement to correct any mistake, omission or
inconsistency, or to cure any ambiguity herein, to the extent such amendment is
permitted by Section 11.1(B); and (f) all instruments (including this Agreement
and amendments and restatements hereof) relating to the determination of the
rights, preferences and privileges of any class or series of Partnership Units
issued pursuant to Section 4.2(B) of this Agreement; and
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(2) sign, execute, swear to and acknowledge all voting ballots,
consents, approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole discretion of the General Partner, to make, evidence,
give, confirm or ratify any vote, consent, approval, agreement or other action
which is made or given by the Partners hereunder or is consistent with the terms
of this Agreement and appropriate or necessary, in the sole discretion of the
General Partner, to effectuate the terms or intent of this Agreement.
(B) Nothing herein contained shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XI or
as may be otherwise expressly provided for in this Agreement.
(C) The foregoing grant of authority (i) is a special power of
attorney, coupled with an interest, and it shall survive the Involuntary
Withdrawal of any Partner and shall extend to such Partner's heirs, successors,
assigns and personal representatives; (ii) may be exercised by the General
Partner for each and every Partner acting as attorney-in-fact for each and every
Partner; and (iii) shall survive the Transfer by a Limited Partner of all or any
portion of its Interest and shall be fully binding upon such transferee; except
that the power of attorney shall survive such assignment with respect to the
assignor Limited Partner for the sole purpose of enabling the General Partner to
execute, acknowledge and file any instrument necessary to effect the admission
of the transferee as a Substitute Limited Partner. Each Partner hereby agrees to
be bound by any representations made by the General Partner, acting in good
faith pursuant to such power of attorney. Each Partner shall execute and deliver
to the General Partner, within fifteen (15) days after receipt of the General
Partner's request therefor, such further designations, powers of attorney and
other instruments as the General Partner deems necessary to effectuate this
Agreement and the purposes of the Partnership.
SECTION 12.4 Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery, (i) if to a Limited Partner, at the most current address given by such
Limited Partner to the General Partner by means of a notice given in accordance
with the provisions of this Section 12.4, which address initially is the address
contained in the records of the General Partner, or (ii) if to the General
Partner, 330 South Warminster Road, Hatboro, Pennsylvania 19040, Attn:
President.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if hand delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back, if telexed; or when receipt is acknowledged, if telecopied.
SECTION 12.5 Further Assurances. The parties agree to execute and
deliver all such documents, provide all such information and take or refrain
from taking any action as may be necessary or desirable to achieve the purposes
of this Agreement and the Partnership.
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SECTION 12.6 Titles and Captions. All article or section titles or
captions in this Agreement are solely for convenience and shall not be deemed to
be part of this Agreement or otherwise define, limit or extend the scope or
intent of any provision hereof.
SECTION 12.7 Applicable Law. This Agreement, and the application or
interpretation thereof, shall be governed exclusively by its terms and by the
law of the Commonwealth of Pennsylvania, without regard to its principles of
conflicts of laws.
SECTION 12.8 Binding Agreement. This Agreement shall be binding upon
the parties hereto, their heirs, executors, personal representatives, successors
and permitted assigns.
SECTION 12.9 Waiver of Partition. Except as may be otherwise provided
by law in connection with the winding-up, liquidation and dissolution of the
Partnership, each of the parties hereto irrevocably waives during the term of
the Partnership any right that it may have to maintain any action for partition
with respect to any property of the Partnership.
SECTION 12.10 Counterparts and Effectiveness. This Agreement may be
executed in several counterparts, which shall be treated as originals for all
purposes, and all so executed shall constitute one agreement, binding on all of
the parties hereto, notwithstanding that all the parties are not signatory to
the original or the same counterpart. Any such counterpart shall be admissible
into evidence as an original hereof against each Person who executed it. The
execution of this Agreement and delivery thereof by facsimile shall be
sufficient for all purposes, and shall be binding upon any party who so
executes.
SECTION 12.11 Survival of Representations. All representations and
warranties herein shall survive the dissolution and final liquidation of the
Partnership.
SECTION 12.12 Entire Agreement. This Agreement (and all Exhibits
hereto) contains the entire understanding among the parties hereto and
supersedes all prior written or oral agreements among them respecting the within
subject matter, unless otherwise provided herein.
SECTION 12.13 Property Rights . All books, records and accounts
maintained exclusively for the Partnership (including, without limitation,
marketing reports and all other data whether stored on paper or in electronic or
other form), and any contracts or agreements entered into by or exclusively on
behalf of the Partnership, and all technology developed by the Partnership shall
at all times be the exclusive property of the Partnership. All property (real or
personal or mixed) purchased with Partnership funds, and all moneys held or
collected for or on behalf of the Partnership shall at all times be the
exclusive property of the Partnership.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties hereto as of the day and year first above written.
General Partner: ICC DESICCANT TECHNOLOGIES, INC.
By:
-------------------------------
Name:
Title:
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<PAGE>
Exhibit 1
Schedule of Partners
General Partner Number of Units
- --------------- ---------------
ICC Desiccant Technologies, Inc..................................... 1.0
Limited Partners
- ----------------
ICC Desiccant Technologies, Inc..................................... 89.0
Engelhard DT, Inc................................................... 10.0
Total .............................................................. 100.0
- -----
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 20, 1998, on our audits of the consolidated financial statements of
ICC Technologies, Inc. as of December 31, 1997 and 1996 and for the years ended
December 31, 1997, 1996, and 1995, which report is included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1997. We also
consent to the incorporation by reference in the Registration Statements (set
forth above) of the Company of our report, dated March 20, 1998, on our audits
of the financial statements of Engelhard/ICC as of December 31, 1997 and 1996
and for the years ended Decmeber 31, 1997, 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, 1997.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
April 30, 1998
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<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,664,041
<PP&E> 14,772
<DEPRECIATION> 7,107
<TOTAL-ASSETS> 4,521,656
<CURRENT-LIABILITIES> 281,502
<BONDS> 0
0
0
<COMMON> 215,200
<OTHER-SE> (2,847,006)
<TOTAL-LIABILITY-AND-EQUITY> 4,521,656
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,991,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,498,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,985,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,484,085)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
EXHIBIT 99
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.
