SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 33-19584
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2582701
(State of Incorporation) (IRS Employer
Identification No.)
6626 Topper Parkway
San Antonio, Texas 78233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 210 659-8450
Securities registered pursuant to Sections 12(b) of the Act: NONE
Securities registered pursuant to Sections 12(g) of the Act: NONE
Common Stock, $0.001 Par Value Electronic Bulletin Board
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ NO ___ .
As of March 24, 1996, 5,838,269 shares of Common Stock were
outstanding, and the aggregate market value of such shares held by
unaffiliated stockholders was approximately $3,741,970.
Documents incorporated herein by reference: NONE
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PART I
ITEM 1. BUSINESS
General Company Business
International Cryogenic Systems Corporation (ICSC) and its related companies
design, engineer, manufacture, market and support industrial refrigeration and
freezing systems for use world-wide. Innovative and unique industrial
refrigeration products and packages include evaporative heat exchange systems,
ammonia recovery and recycling systems, non-chemical water treating systems,
liquid recirculating packages, and merchant carbon dioxide plants. The most
advanced, cost-effective and environmentally safe "quick freeze" system has
been developed for the food freezing industry.
The current structure of ICSC is organized like a holding company with
independent and self sufficient subsidiaries related to the same industry. As
of year end there are three subsidiaries: RealCold Products, Inc., formally
RealCold Maintenance Systems, packaged refrigeration and freezer systems;
Nauticon Inc., refrigeration and evaporative heat exchange systems; Technicold
Services Inc., provides industry consulting and educational services. Included
is the sale of RealCold Systems, Inc. an ICSC subsidiary, whereas the Company
receives a long term royalty payment from Wittcold Systems. The two combined
companies provide world wide market support for refrigeration systems and
merchant CO2 plants. Details of the subsidiary sale follows.
In December 1996, the Company reached an agreement with Rotary Power
International, Inc. ("RPI") whereby the Company invested the sum of one million
dollars ($1,000,000) in exchange for two million shares (2,000,000) of RPI
common stock. Concurrent with the investment, ICSC and RPI have agreed in
principal to merge the two companies in a stock for stock acquisition, whereby
RPI would become a wholly owned subsidiary of ICSC. Each shareholder of RPI
will receive (.363) shares of ICSC common stock. The stock for stock
transaction will result in ICSC issuing a fixed total number (1,516,196) of
shares of common stock for all the issued and outstanding shares of RPI common
stock at the time of closing and execution of the stock purchase and merger
agreement. Subsequently, on March 21, 1997 the Company and RPI signed a Plan
and Agreement of Merger subject to stockholders approval. This transaction will
be accounted for as a purchase for Financial Accounting purposes.
The Company is forming alliances and distribution centers with agents,
distributors and synergistic companies world wide, building a comprehensive
industrial refrigeration and freezer business. ICSC is continually seeking
related acquisitions and joint venture partners that will compliment its
business and support its growth and goals. The Company has established a
relationship for a leasing program, leasing total turn key systems including
products, services, maintenance and supplies.
Subsidiaries - Three major operating subsidiaries, Technicold Services, Inc.,
RealCold Products, Inc. and Nauticon Ltd., supported by the parent public
entity, ICSC, supports all operating activities for the freezing systems, the
refrigeration systems and the evaporative heat exchange systems respectively.
Technicold provides consulting services to the refrigeration industry, and
RealCold Products, Inc. supports all refrigeration and freezer systems and
operations from their corporate facility in Cibolo, Texas. Nauticon Ltd.
supports all evaporative heat exchange and refrigeration systems and operations
from their corporate facility in Austin, Texas. The respective corporate
facilities support all technical and service product operations including;
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design and engineering; assemble and fabrication; administration; marketing,
sales support and consulting services. Sales and marketing activities are
supported by represented agents, dealers and distributors.
Synergy of operations; people and product activity all related with respective
freezing and refrigeration product knowledge. People are cross trained and
knowledgeable about all products. Sales agents and distributors may market
related industry products to the same customer. Products produced for the
refrigeration business (compressors, condensers, vessels, parts etc.) are also
needed to compliment the freezing system. Packaged freezing and refrigeration
systems are a longer sales cycle, bigger sale price; refrigeration products and
components have a shorter sales cycle, smaller sale price providing constant
cash flow.
Management - The Company's business operations are supported by an executive
management team with over (130) years experience, which includes the directors
of the Company, having extensive experience and background adequately related
to the business. CEO - over (30) years experience in marketing, management and
finance; Financial Executive - over (25) years experience in accounting and
finance, a CPA with a concentration on SEC audit and public accounting;
General Counsel - over (30) years legal experience including counsel to two
Fortune 100 companies; Technical Executive - over (45) years experience in
engineering and design, and a well-known expert consultant in the refrigeration
industry.
ICSC's management philosophy and structure supports decentralized authority and
operations, profit and loss accountability, incentive driven performance and
compensation, and total customer satisfaction. The Company's management
objective is to become a major force with niche products in the multi-billion
dollar freezer and refrigeration industry. The Company's goal is to achieve
profitable growth and increase shareholder value by increasing its line of
superior products and services, through acquisitions and joint ventures of
related products and companies.
Products:
Freezer Systems - ICSC's basic system (patented in May l990) quick-freezes
food products by immersing them in a bath of refrigerant, with special
advantages for fragile foods such as fruits and seafood. Quick freezing forms
a protective, ice-glazed shell around foods with little cellular damage. This
method retains freshness and flavor, and prevents clumping for processing and
packaging. Quick freezing also reduces shrinkage, promotes faster thawing,
extends product quality and shelf life up to four times longer than other
processes. This unique process provides the least cost to freeze per product
pound versus competition.
The Company has designed a unique refrigeration recovery system, the only
close-looped system in the industry. This system recovers CO2 refrigerants. It
contains and recycles these gasses, providing less costly use of refrigerants.
It has environmental advantages over competitive systems. ICSC's cost-effective
systems use less energy, less refrigerant, save space, and require no periodic
defrosting.
The Company's newly designed Star Wheel freezing system was completed in March
l994; its second generation compact Rotary Drum freezing system was introduced
in 1995. The Star Wheel freezing system employs inlet and outlet star wheels,
which seal the refrigerant and food product in a freezer chamber. The total
system process is automated. The star wheels are synchronized with a conveyor
belt immersed in the refrigerant. ICSC's newly designed Rotary Drum System
(patent pending) receives food product into rotating drum pockets. Refrigerant
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enters each individual pocket from the top of the rotating drum. While
rotating, the sealed food product and refrigerant in the drum pockets are
computer controlled, cycled and timed for freezing specifications desired.
RealCold Systems and related divisions, manufacture packaged refrigeration
systems for ICSC's cryogenic freezing systems and other industrial users.
Custom innovative industrial refrigeration products include the following:
ammonia recovery and recycling system, non-chemical water treating systems,
liquid recirculating packages, and refrigeration system vessels. RealCold
Systems will also offer unique automated ice systems which produce low cost
block and sized ice.
The ISCS Quick Freeze System, employing a recoverable liquid refrigerant,
provides a cost effective method for freezing specialty products that are
difficult to freeze employing conventional systems. The ICSC Quick Freeze
System has advantages over all existing systems. The ICSC Quick Freeze System
is designed to freeze "specialty" foods, which are typically difficult to
freeze, includes the following: peeled and deveined shrimp (prawns), fish
fillets, sauces (gravies) or other fragile food products. This system may also
be employed in "peeling" systems, sterilization of surgical instruments, blood
freezing and possibly others. ICSC will employ three major Quick Freeze System
products meeting most freezing requirements world-wide.
Star Wheel System - The product to be frozen is conveyed to the freezer inlet
synchronized star wheel, which seals the freezant in the freezing chamber. The
product is transferred to the perforated conveyor belt which is immersed in the
freezant. The heavily insulated freezer chamber is maintained at a slight
positive pressure to prevent air infiltration. Excess subcooled freezant is
then sprayed over the product as it is carried through a portion of the freezer
chamber on the conveyor belt.
To assure that the frozen product does not retain any freezant, the conveyor
moves the product through an equilibration zone in the freezer chamber. The
time in this zone is approximately three times that required to freeze the
product. The frozen product is then discharged from the conveyor belt through
the outlet synchronized start wheel, which also seals the freezant in the
freezing chamber, to an outlet conveyor into a container. The perforated
conveyor belt is synchronized with the inlet and outlet star wheels. The liquid
refrigerant and vapor gas is recaptured and recycled.
Belt Feed Freezer System - This product is similar to the Star Wheel System. In
lieu of the star wheel mechanized operation, a wide flat horizontal belt feed
system is incorporated and synchronized with the inlet and outlet feeder
systems.
Rotary Drum System - A small compact, low cost (42" in diameter) rotating drum,
constructed of high density (HMW polymer) plastic and stainless steel, which is
insulated and sealed maintaining a slight positive pressure to prevent air
infiltration. Food product, assembled on a conveyor system, enters sealed
rotating drum "pockets". Liquid refrigerant enters the top sealed rotating drum
"pockets" and merges with the food product. While rotating, the liquid
refrigerant is drained off and the food product remains in the "pockets" for
"drying" (evaporation of refrigerant). Rotation cycle is timed and synchronized
to produce the level of product freezing desired. Food product is discharged
from the rotating drum onto a conveyor system and container. The liquid
freezant and vapor gas is recaptured and recycled.
CO2 Freezer System - Designed to operate very similar to the Star Wheel and
Rotary Drum Systems, utilizes CO2 in place of a liquid freezant. Also can be
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designed as a very economical recovery freezing system for existing CO2
installations.
ICSC Quick Freeze Process - The ICSC Quick Freeze process is based upon the
principles of the low boiling point of low temperature halocarbon refrigerants,
and the subsequent surface heat removal of processed product in an environment
of less than -20. F. This is, in this case, accomplished with liquid
halocarbon refrigerants, which provides for virtually instant surface freezing.
The mechanics of the system, in general, insures an adequate pathway and
retention time which is adjusted to accommodate the mass weight and surface
heat or total heat of respiration of the product intended to be quick frozen,
and to what degree the freezing process is to be accomplished. This patented
process enclosed in a semi-hermetic chamber in which the refrigerant agent's
temperature is carefully controlled and monitored, and in which the product is
retained as long as is required to obtain the exact freeze criteria.
Upon introducing the product into the ICSC process chamber or "pockets", it is
immediately immersed in a liquid bath of refrigerant agent and crust-frozen.
This causes the crystal structure of the liquid in the crust to form a matrix
which interlocks to the firmness similar to that of an egg shell which protects
the delicate inner section which contains the meat, flavoring juices and
aromas.
The shape of a delicate form is thus preserved during the quick freezing
process, thus preventing damage during deep frozen storage. This also produces
a surface or "ice-glazed" which also prevents sticking or ice-packing or the
formation of solid clumps of frozen products. The fast freeze preserves the
delicate taste and ascetic value of the product, which is important to the
ultimate consumer and which preserves the price levels of quality products.
Competition - Food Freezing:
Mechanical Systems - There are two types of in-line continuous freezing
systems. Each employs a mechanical refrigeration system, usually two staged or
economized. Most of the refrigeration systems employ ammonia as the
refrigerant. IQF fluidized freezers are employed to freeze loose (unpackaged)
vegetables and fruit on a continuous basis. The other mechanical freezing
system employs a spiral conveyor to transport product through the enclosure.
This type freezer is used to freeze both "open" and boxed products.
Liquid Nitrogen Freezers - Cryogenic freezing has been a factor in the food
freezing industry for many years. Its main selling point has been rapid
freezing that provides excellent quality. Its main disadvantage is cost to
freeze. Two types of nitrogen freezers are available. One is a spiral, the
other is an air in-line belt (conveyor) freezer.
Carbon Dioxide Freezers - Another cryogen, carbon dioxide (CO2), is also used
for freezing many kinds of food products. The freezer configurations are
similar to liquid nitrogen freezers. CO2 freezers in general have an advantage
over liquid nitrogen that is difficult to overcome and that is cost to freeze.
Industrial Refrigeration Packages - RealCold Products, Inc. and related
companies, manufacture custom packaged refrigeration systems for ICSC's
cryogenic freezing systems and other industrial users. Custom innovative
industrial refrigeration products include the following: ammonia recovery and
recycling system, non-chemical water treating system, liquid recirculating
packages, and refrigeration system vessels. RealCold Systems also offers unique
automated ice systems which produce low cost block and sized ice.
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Packaged systems and custom products produced by RealCold are an integral part
of the Company's freezing system, which enhances the freezer system profit
margins. Their expertise and support has refined progress on the Company's new
drum freezer system, ReelFrez, which is now designed for use with either CO2 or
liquid refrigerants for domestic and international markets.
RealCold Systems Inc. and The Wittemann Company had a Joint Cooperative
Agreement for the manufacture and marketing of merchant carbon dioxide plants
and refrigeration products prior to the sale of RealCold Systems to Wittemann.
Wittemann is the world's leading manufacturer of carbon dioxide systems and
refrigeration accessories employed by brewers and other fermentation
processors. Wittemann has carbon dioxide systems operating in almost every
country in the world. The cooperative agreement combines the technical
expertise and experience of RealCold with the worldwide marketing of Wittemann.
George Briley, President of RealCold with 46 years experience, is a renown
expert in the innovative design and building of merchant carbon dioxide
systems. The RealCold technical and engineering staff provides the engineering
design and manufacturing for innovative refrigeration products and the merchant
carbon dioxide plants. This industry combination of technology, sales and
manufacturing experience is unsurpassed and should provide an effective and
cost efficient entry for this worldwide market. This venture has proven very
successful for all related companies and their respective products.
Complimenting the various product lines, the Company intends to market other
various related industry products including automated ice systems which produce
low cost block and sized ice.
Competition - varies from small industrial refrigeration manufactures to the
very large companies in the industry, all competing for this multi billion
dollar industry. The Company envisions an enormous market demand for
refrigeration systems in third world countries. America is well entrenched with
refrigeration systems, but there is a great niche market for the Company's
unique and innovative refrigeration and freezer products. ICSC and its related
entities have the refrigeration engineering expertise and new innovative
products that are needed and in demand today for an industry that hasn't seen
many changes in the last 30 - 40 years.
Evaporative Heat Exchange Systems - Nauticon Ltd., a wholly owned subsidiary of
ICSC manufactures and markets a product line of evaporative heat exchange
systems for the HVAC and refrigeration industry. The new patented products are
innovative and unique in design, use new material technology, are simple to
manufacture, and have low operating costs. They are used for condensers, fluid
coolers, booster coolers, and cooling towers.
Condensers for both Refrigeration and HVAC - Capacities range from 60,000 to
525,000 BTU for refrigeration condensing. Refrigerants may be at different
incoming temperatures as would be normal for multi-circuit applications.
Copper coils are compatible with all refrigerants except ammonia.
Fluid Coolers - Water. oil, glycol - anything compatible with the copper
coils can be cooled according to each thermal characteristics. The separate
coils can handle different liquids at the same time, according to needs.
Booster Coolers - Applies to new or existing applications. Especially
advantageous in systems now short of capacity, as it can be inserted in the
existing cooling loop to circumvent the need for an entirely new system.
Gives low cost additional cooling to refrigerants or liquids plus the multi-
circuit ability.
Cooler Tower - Several important differences set this cooling tower apart
from others. Hot water is dispersed through Nauticon's unique "cyclone" water
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heads - there are no sprinkler moving arms to break, stall or clog. No
bottom openings to attract debris, thus polluting the system.
Unique low cost manufacturing procedures are essentially for the same product,
which is offered in four varieties. This is attributed to communality of parts
and manufacturing. Manufacturing processes and techniques are both simple and
well worked out utilizing low cost labor.
Initially Nauticon's market was primarily mid-range systems (20- 50 ton units)
for mid size industrial and commercial applications. There has been a major
interest from refrigeration manufactures at the trade shows that the larger (80
- - 120 ton units) are more desired for their larger applications. The Company
also envisions an enormous opportunity for the small market - a low end HVAC
system for the home and commercial uses. A related, but completely separate
opportunity exists in the small unit market for a self contained evaporative
condenser (2.5 to 10 ton units).
Its primary advantage is energy savings, yielding extremely high EER ratings to
not only better, but to offset the regulated change to low efficiency
refrigerants. To be sold as a replacement or new applications and to also be
offered packaged with compressors.
Competition - Nauticon products could revolutionize the refrigeration industry;
an industry that faces serious changes for the first time in years due to
energy and environmental concerns world wide. The Nauticon application should
reduce these traditional concerns and enhance the industry's growth. The
Company believes that it has a truly unique product concept that serves a very
wide arena of commercial applications for the national market as well as the
international market. Initial marketing of the Nauticon systems will be
primarily the mid-range systems because there is much less competition, a great
advantage to Nauticon and its unique patented product. The larger and smaller
size systems are marketed by some of the major competitors in the industry;
larger systems by Evapco and BAC, smaller systems by York and Carrier. These
competitors are well established and have substantially greater financial and
other resources than Nauticon.
Company History
The Company was originally established in 1988 as a private company, Immersion
Cryogenic Systems Corporation, to fabricate and market its original freezer
systems.
In January l993 the Company's assets were merged into a public entity formerly
known as Marco Ventures, and is currently trading on the Nasdaq Electronic
Bulletin Board with the symbol ICRY. The public Nevada corporation, Marco
Ventures, was originally organized on October 7, 1987 for the purpose of
engaging in the acquisition of any and all types of assets, properties and
businesses. Two of the Company's executives/directors, President and Treasurer,
have been affiliated with the public company since 1988 and were also
affiliated with the private company as directors prior to the merger.
At the Annual Meeting of Shareholders on July 30, 1992, the shareholders of the
Company approved the recapitalization of the Company Common Stock consisting of
a 100 to 1 reverse split.
On December 28, 1992, the Board of Directors unanimously voted to change the
name of the Company to INTERNATIONAL CRYOGENIC SYSTEMS CORP. (ICSC)
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Asset Acquisition - On December 28, 1992, the Board of Directors of the Company
agreed to issue 2,414,083 shares of common stock to six individuals for the
exclusive rights to U. S. Patent No. 4,928,492 (May 29, 1990); which provides a
method and apparatus for production treatment of a product through the usage of
a cryogenic liquid and in a manner such that minimum loss of the cryogenic
liquid is encountered. The products that will be processed by this method
includes, but not limited to, food products, computer chips, tires for
recycling, blood and plasma products, and medical utensils that require a high
degree of sterilization.
The total value of the transaction was $724,224.90. Two of the six individuals,
(Terrence J. Dunne and Francis L. Simola) receiving stock in this transaction
are Directors of the Company. Terrence J. Dunne received 850,000 and Francis
L. Simola received 340,041 shares of stock respectively. This represents 49.3%
of all the common stock issued for the transaction.
The structure and organization of ICSC as a public entity through 1993 and 1994
was considered as a development stage company. The design, manufacture and
testing of two major freeze machine products, and the restructure from a
private company to a public company expended company time and capital. The
newly designed and manufactured Star Wheel freezer machine was completed and
operating consistently as of March 1994. This was a major undertaking and
technology breakthrough proving that the new immersion freezer design concept
worked. In June 1994 a marketing program was initiated for the freezer machine,
and the progress in business activity projected the company into a true
operating entity. The Company started generating revenue after establishing
RealCold Systems, Inc. and its first acquisition in January 1995.
During 1994 the company was active in testing various food products and
demonstrating the freezing process to prospective customers. During this time
the Company acquired additional knowledge and experience; in the use of food
freezant, visiting with major chemical manufactures of refrigerants; in the use
of frozen food processing equipment, visiting major food processing customers
and food processing conventions.
The Company implemented a growth plan in 1994 which it has followed todate,
that has successfully structured and supported the bases for the current ICSC
organization.
(1) Hire knowledgeable people into the business.
(2) Joint Venture or Acquire other related refrigeration and freezing
equipment companies, and other related products.
(3) Partner and secure alliances with related businesses, and partner
with a major chemical manufacturer to supply food grade refrigerant.
(4) Fund the growth plan with sufficient capital.
During 1995, ICSC acquired four companies in the refrigeration business in a
stock exchange transaction. These entities, which compliment and secure ICSC's
position in the industry, operated as wholly owned subsidiaries. RealCold
Systems, Inc., prior to its sale to Wittcold Systems, a Wittmann Company,
offered custom industrial refrigeration packages and merchant carbon dioxide
plants in a joint venture with The Wittemann Company. Nauticon, Ltd. offers a
product line of evaporative heat exchange systems for the HVAC and
refrigeration industry. Technicold Services, Inc. offers consulting
engineering services, including process safety management compliance and
ammonia refrigeration and carbon dioxide system design. Technicold also
provides operation, maintenance and safety seminars for ammonia refrigeration
technicians and supervisors. Jordan Vessel Corporation, merged into RealCold
Systems, offered industrial refrigeration system components such as liquid
recirculating packages and refrigeration system vessels of all types. RealCold
Maintenance Systems, Inc. designs and produces unique products for the
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refrigeration industry. RealCold Systems also publishes a quarterly newsletter,
COLD TALK, which reaches over (1800) refrigeration technicians in the industry.
The new companies have been a proven success, because they not only increased
the Company's sales and assets but also support ICSC's freezer systems with
their in-house engineering and manufacturing experience. Packaged systems and
custom products produced by RealCold are an integral part and compliment the
Company's freezer systems. RealCold's expertise and support has refined
progress on the Company's new drum freezer system, ReelFrez, which is designed
to use either CO2 or liquid refrigerants for domestic and international
markets. The new drum system is currently in the process of freeze testing
various food products and is being marketed using either refrigerant.
RealCold Systems Inc. signed a Joint Cooperative Agreement in July 1995 with
The Wittemann Company, a wholly owned subsidiary of Dover Resources and Dover
Corp. (NYSE - DOV), for the manufacture and marketing of merchant carbon
dioxide plants and refrigeration products. The cooperation agreement combines
the technical expertise and experience of RealCold with the marketing of
Wittemann. Wittemann is the world's leading manufacturer of carbon dioxide
systems and refrigeration accessories employed by brewers and other
fermentation processors. Wittemann has carbon dioxide systems operating in
almost every country in the world. George Briley, President of RealCold Systems
with over 45 years experience, is a renown expert in the innovative design and
building of merchant carbon dioxide systems. This industry combination of
technology, sales and manufacturing experience is unsurpassed and provides an
effective and cost efficient entry for this worldwide market. Subsequently,
Wittcold Systems, Inc., a division of Wittmann Company, acquired RealCold
Systems in July 1996.
In August 1995, ICSC acquired Nauticon Ltd., a company that manufactures and
markets a product line of innovative evaporative heat exchange systems for the
HVAC and refrigeration industry, representing over five years of development.
The new patented products are innovative and unique in design and simple to
manufacture. They use new material technology with high efficiency copper
tubing to give very high efficiency, low operating costs and minimal
maintenance. The evaporative heat exchangers are self cleaning in most
applications thus eliminating chemical cleaning. The outstanding Nauticon
product features cannot be found in competitive products. Nauticon evaporative
heat exchangers serve the residential, commercial HVAC sector and the
commercial refrigeration industry. They have many applications, varying from
traditional commercial refrigeration to HVAC to industrial cooling. Customers
vary from supermarkets to ice rinks to walk-in coolers for refrigeration
systems. HVAC applications are in smaller commercial buildings, for traditional
air conditioning systems to highly efficient heat pumps. Industrial uses span
plastic molding and extrusion to conventional cooling of process water to
cooling of cutting oils. They are used for condensers, fluid coolers, booster
coolers, and cooling towers. The Company believes that the Nauticon products
may revolutionize the refrigeration industry; an industry that faces serious
changes for the first time in years due to energy and environmental concerns
world wide. The Nauticon application should reduce these traditional concerns
and enhance the industry's growth.
ITEM 2. PROPERTIES
The Company maintains its corporate office in Cibolo, Texas, and an executive
office in Philadelphia, Pennsylvania. The Cibolo facility is 32,000 sq. ft. and
houses administrative, engineering and manufacturing operations. WittCold
Systems, Inc. subleases 50% of the facility from the Company for their
engineering and manufacturing operations. A 4,300 sq. ft. administrative,
engineering and manufacturing facility is located in Austin, Texas for
Nauticon.
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All properties are leased on a short term basis. The Company owns and maintains
no properties. Management believes that the Company's facilities are adequate
for its operations and are maintained in good condition. The Company is aware
of the growth potential of its operating facilities and is currently reviewing
another plant facilities near their respective locations.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings are pending by or against the Company, and nor are the
Directors or the Company aware of any claims which could give rise to any
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during 1996.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the Nasdaq Electronic Bulletin Board
under the trading symbol ICRY. As of December 31, 1996, there were
approximately 300 record holders of the Company's Common Stock.
The following table sets forth the high and low sale prices of the Company's
Common Stock
as reported by one of the market makers for the periods indicated.
1995 High Low 1996 High Low
-------------------------------------------------------
First Quarter 2 3/4 2 1/4 2 1/8 1 1/2
Second Quarter 2 3/4 2 1 3/4 1 1/4
Third Quarter 2 3/4 1 7/8 1 1/4 7/8
Fourth Quarter 2 5/8 1 1/2 1 1/2 7/8
The Company has paid no cash dividends to date, and it does not intend to pay
any cash dividends in the foreseeable future. The present policy of the Board
of Directors is to retain any future earnings to provide for the Company's
growth.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for ICSC and its
subsidiaries. The financial data for fiscal years ending December 31, 1994
through December 31, 1996 have been derived from the Company's audited
Consolidated Financial Statements included elsewhere in this Report, and should
be read in conjunction with those Consolidated Financial Statements and related
notes.
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SUMMARY STATEMENT OF OPERATIONS (In thousands, except per share data)
Year Ended December 31, 1996 1995 1994 1993 1992
--------------------------------------------
Revenues $ 1,451 $ 2,243 $ 0 $ 0 $ 4
Operating loss $ (573) $(1,060) $ (245) $ (268) $ (38)
Net Income (loss) $ 2,208 $ 1,088) $ (245) $ (268) $ 38)
Net Income (loss) per share $ 0.39 $ (0.23) $ (0.07) $ (0.08) $ (0.01)
Weighted average number of shares 5,662 4,776 3,504 3,449 3,059
SUMMARY BALANCE SHEET (In thousands, except per share data)
Year Ended December 31, 1996 1995 1994 1993 1992
--------------------------------------------
Total assets $ 5,145 $ 2,298 $ 866 $ 764 $ 724
Total liabilities $ 1,076 $ 759 $ 99 $ 11 $ 0
Long term debt $ 0 $ 0 $ 0 $ 0 $ 0
Shareholders' equity 4,069 $1,539 $ 767 $ 753 $ 724
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL FINANCIAL ACTIVITY
Forward looking statements made herein are based on current expectations of the
Company that involves a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include;
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.
RealCold Systems, Inc Sale - WittCold Systems, Inc., Palm Coast, Florida, a
Wittemann Company and wholly owned subsidiary of Dover Resources/Dover
Corporation purchased all of the issued and outstanding capital stock of
RealCold Systems, a wholly owned subsidiary of the Company. RealCold Systems
Inc. and The Wittemann Company previously signed a Joint Cooperative Agreement
in June 1995 for the manufacture and marketing of merchant carbon dioxide
plants and refrigeration products.
RealCold System engineers, manufactures and markets custom industrial
refrigeration systems. Wittemann is the world's leading manufacturer of carbon
dioxide systems and refrigeration accessories employed by brewers and other
fermentation processors. Wittemann has carbon dioxide systems operating in
almost every country in the world. The acquisition culminated after a
successful (50/50) cooperative joint venture between the two companies for the
manufacture and marketing of Merchant Carbon Dioxide Plants and Refrigeration
System Packages.
The effective closing date of all financial accounting transactions, between
the two companies, was as of June 30, 1996, the end of the Registrant's second
quarter reporting period. Closing date of the Acquisition Agreement was on July
23, 1996. Terms and conditions of the acquisition agreement between WittCold
Systems, Inc. and the Registrant, are as follows:
Sequential Page 11 of 24<PAGE>
The purchase price for the common shares was the aggregate sum of Three Million
Dollars ($3,000,000) plus five percent (5 %) of the Net Sales of Refrigeration
Systems for the ten (10) full calendar years 1996 through 2005 and two and one
half (2 1/2%) of Net Sales of Merchant C02 Systems for the nine (9) full
calendar years 1997 through 2005 (the "Percentage Amount").
If the aggregate Percentage Amount paid to Registrant, as set forth above,
through the year 2005 is not at least Two Million Dollars ($2,000,000), the
Purchaser agrees to pay to Registrant no later than April 30, 2006, the
difference between the aggregate Percentage Amount paid to Registrant and Two
Million Dollars ($2,000,000). Notwithstanding the foregoing, in the event that
George Briley, a Director and major shareholder of the Registrant, is not
employed by and actively engaged in the Company's business for a period of
three full years after the date of Closing, then the foregoing obligation to
pay a minimum Percentage Amount of Two Million Dollars ($2,000,000) is null and
void and Registrant shall be entitled only to the Percentage Amount based on
Actual Net Sales as set forth above.
"Net Sales", as used herein, means payments received from customers less
commissions to non-employee agents, export preparation, inland freight and
forwarding fees, ocean freight, insurance, discounts and all warranty work
performed during the relevant period. The Percentage Amount will be determined
each calendar quarter and any amount due Registrant shall be paid to the
Registrant within thirty days after the end of each calendar quarter starting
January 1, 1997.
Rotary Power International, Inc. Stock Purchase - Per an "Agreement" dated
December 24, 1996 International Cryogenic Systems Corporation (ICSC") agreed to
invest in Rotary Power International, Inc. ("RPI") the sum of one million
dollars ($1,000,000) in exchange for two million shares (2,000,000) of RPI
common stock. The $1,000,000 investment by ICSC is secured and subject to the
following conditions per the "Agreement".
ICSC has been invoiced (No. 122396) for $1,000,000 by RPI for certain good
inventory, serviceable by ICSC, and other tangible assets valued in excess
of $1,000,000, all to be delivered by February 1, 1997. And, all supported
by UCC Forms filed with the State. The invoice is to be canceled upon
fulfillment of the following two conditions:
If there is no equal matching funds of $1,000,000 and/or RPI Board of
Directors do not approve the stock purchase and merger agreement with ICSC
by January 30, 1997.
ICSC will have the first right to purchase (per invoice) RPI's interest in
Mars-Trans Affiliates LLC and all RPI engines (Masda, RPI and RMI) and
related engine parts and supplies for the aforesaid sum of $1,000,000.
Concurrent with the investment, ICSC and RPI have agreed in principal to merge
the two companies in a stock for stock acquisition, whereby RPI would become a
wholly owned subsidiary of ICSC. Upon completion of a definitive transaction
agreement and approval by the companies Board of Directors and stockholders,
each shareholder of RPI will receive (.363) shares of ICSC common stock. The
stock for stock transaction will result in ICSC issuing a fixed total number of
(1,516,196) shares of common stock for all the issued and outstanding shares of
RPI common stock at the time of closing and execution of the stock purchase and
merger agreement. January 1, 1997 is the proposed effective closing date of
the stock purchase and merger agreement for consolidated accounting and
financial reporting purposes.
Sequential Page 12 of 24<PAGE>
Subsequently, on March 21, 1997 the Company and RPI signed a Plan and Agreement
of Merger subject to stockholders approval. In March 1997 $1,000,000 in
matching funds was received from RPI bondholders.
New Facilities - The Registrant and subsidiaries recently moved to another
location near San Antonio, Texas, and leased a 32,000 square foot facility for
administration, engineering and manufacturing operations. WittCold Systems,
Inc. has subleased 50% of the facility from the Registrant for their
engineering and manufacturing operations.
New Corporate Address and Phone Number of the Company: PO Box 1027, 103
Guadalupe Drive, Cibolo, Texas 78108, Phone 210-659-8450, Fax 210-659-8250.
RESULTS OF OPERATIONS - 1996
The following tables sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:
Year Ended December 31,
1996 1995 1994
------------------------------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 62.8 91.3 0.0
Gross margin 37.2 8.7 0.0
Operating expenses 76.7 55.9 0.0
Operating income (loss) (39.5) (47.2) 0.0
Other income (expense) 200.2 (48.5) 0.0
Net income (loss) 152.2 (48.5) 0.0
Fiscal 1996 - The Company's Consolidated Statements of Operations for the
fiscal year ended December 31, 1996 compared to fiscal year ended December 31,
1995: Total revenue for 1996 was $1,451,521 compared to $2,243,752 for 1995;
operating loss of ($573,012) for 1996 compared to ($1.060,002) for 1995; and
net income of $2,208,749 or $0.39 per share for 1996 compared to a net loss of
($1,088,949) or ($0.23) per share for 1995. Net income (loss) per share was
based on weighted average number of shares of 5,662,000 for 1996 compared to
4,776,000 for 1995.
The Company's Consolidated Balance Sheets as of December 31, 1996 and December
31, 1995 respectively: Total current assets were $1,502,208 for 1996 and
$293,075 for 1995; total assets were $5,145,845 for 1996 and $2,298,761 for
1995; total liabilities for 1996 were $1,076,319 and $759,021 for 1995;
total stockholders' equity was $4,069,526 for 1996 and $1,539,740 for 1995;
and there is no long term debt in the Company.
The Company's substantial gain in 1996 over 1995 in net income, total assets
and shareholders equity was due to the sale of RealCold Systems, Inc.
RealCold Systems Inc. and The Wittemann Company previously signed a Joint
Cooperative Agreement in June 1995 for the manufacture and marketing of
merchant carbon dioxide plants and refrigeration products. The acquisition of
RealCold Systems, Inc. by Wittcold Systems, Inc., a Wittemann Company,
culminated after a successful (50/50) cooperative joint venture between the two
companies for the manufacture and marketing of Merchant Carbon Dioxide Plants
and Refrigeration System Packages. The effective closing date of all financial
accounting transactions, between the two companies, was as of June 30, 1996,
the end of the Company's second quarter reporting period. Effective July 1,
1996 all shipped and billed revenue and all other recorder accounting for
Sequential Page 13 of 24<PAGE>
RealCold Systems, Inc. was recorded by Wittcold Systems, Inc. Sales revenue
booked and shipped by Wittcold Systems, Inc. for 1996, the first year of the
joint operation, was $6,560,013 and order backlog was over $1,000,000, which is
scheduled for delivery throughout the first and second quarter 1996. Effective
January 1, 1997, the Company will receive from Wittcold Systems, Inc., under
the sale agreement, a "percentage amount" payment on product sales for the next
ten years, as previously stated.
The Company issued a total of 467,035 shares of common stock in 1996: 173,035
restricted shares at $1.00 per share were issued in satisfaction of recorded
liabilities, for expenses and services rendered in 1995 and prior years;
169,000 restricted shares at $0.50 per share for expenses and services rendered
in 1996; 125,000 restricted shares at $0.50 per share for financial
services/working capital for the Company (replaced a Company Director shares).
Management believes that its working capital is sufficient to support its
operations and growth plans for the near future, and the revenue "percentage
amount" payments that will be generated from WittCold Systems sales revenue
should provide a positive cash flow. To support the Company's growth and goals,
ICSC is continually seeking other related acquisitions and joint venture
partners. The Company has established a relationship with a finance company for
a leasing program; leasing total turn key systems including products, services,
maintenance and supplies as one monthly fixed cost to the customer.
During 1996, the Company made two significant events happen, that should
provide financial support for the Company's near term projected growth plans.
The sale of RealCold Systems and the acquired stock interest and proposed
merger of Rotary Power International continues to support and fulfill the
Company's growth goals of its internal Business Plan.
The cooperative partnership with Wittcold Systems/Wittemann Company over the
past year has generated proven revenue including ten shipments of CO2 plants
for installation in mainland China. Over forty proposals have been submitted
for carbon dioxide plants and refrigeration systems world wide.
The Company's purchase of 2,000,000 shares of Rotary Power for $1,000,000 and
simultaneously agreeing to merge the companies should provide both companies
reciprocal outlets for their respective products. The Company's packaged
refrigeration systems compliment the Rotary Power engines, which together
provide energy savings and a cleaner environment. Rotary Power International
has primarily marketed their engines to the military. With the near shut down
of the defense business, the opportunity for targeting the industrial and
commercial market rises.
In March 1997 RealCold Maintenance Systems changed its name to RealCold
Products. RealCold Products will be responsible for the manufacturing and sale
of commercial refrigeration systems which will include Nauticon condensers and
the Rotary Power engines. Management believes the Company should improve income
and profits as this entity improves its operations and sales increase during
the next year.
Nauticon, as a relatively new ICSC operating subsidiary continues to see
favorable results from its operations. Some twenty-five systems have been
shipped and installed todate. Nauticon, after initiating their sales and
marketing program, has been successful promoting their evaporative condenser
system at various trade shows. They have hosted a number of interested
visitors, (both from the United States and foreign countries), who represent
very significant markets for their products. Primary sales targets are the
large refrigeration manufactures that could produce and distribute product
Sequential Page 14 of 24<PAGE>
under their own private label. Besides marketing direct through agents in the
US, other market outlets will be through major distributors world wide. Besides
the US, Nauticon has shipped systems to Israel and Mexico, and to a prospective
distributor in Costra Rica, where the company anticipates additional orders for
Central and South America. In March 1997, Nauticon hired a Sales Manager to
oversee all sales and marketing activity.
Company executives representing Nauticon and executives from two major
manufacturers of refrigeration equipment have exchanged facility visits, the
result being that one major Company has successfully tested a Nauticon system
at their testing facility. A joint manufacturing and market program is being
proposed by both parties for implementation this year. Other major
refrigeration companies have expressed great interest in pursuing a joint
cooperative manufacturing and marketing venture with Nauticon. Management also
believes that there are many opportunities for licensing the Nauticon
technology to major manufactures in the US and foreign countries.
The Company is currently live on the INTERNET, a world wide information
network. The real time system will provide anyone, investor or customer,
Company news releases, financial data and product information. A new on-line
proposal writing system and sales tool, which will produce text, drawings,
color pictures and video, is currently being developed for the Company on the
INTERNET, that should enhance sales world wide for all Company products. A
remote sales rep will be able to prepare a sales proposal with the customer in
a real time environment producing text, drawings, color pictures and video.
Anyone can access the ICSC home page on the INTERNET by addressing
http://www.ucsc.com/icsc.
PREVIOUS FINANCIAL ACTIVITY - 1995
The following tables sets forth the company's results of operation as a
percentage of net sales for the periods indicated below:
Year Ended December 31,
1995 1994 1993
-----------------------------
Revenue 100.0% 100.0% 100.0%
Cost of revenue 91.3 0.0 0.0
Gross margin 8.7 0.0 0.0
Operating expenses 55.9 0.0 0.0
Operating income (loss) (47.2) 0.0 0.0
Other income (expense) (48.5) 0.0 0.0
Net income (loss) (48.5) 0.0 0.0
RealCold Acquisitions - On January 30, l995, the Board of Directors approved
(retroactive to January l, l995) the acquisitions of Technicold Services, Inc.,
RealCold Maintenance Systems, Inc. and Jordan Vessel Corporation. The company
acquired l00% of the stock of these three companies in exchange for 487,500
shares of its common stock.
The three companies, with over $1.7M in orders booked in 1994, will support and
operate under RealCold Systems, Inc., a new wholly owned subsidiary of ICSC.
RealCold Systems, Inc. will manufacture and support all related products,
including packaged refrigeration systems for ICSC's cryogenic freezing systems
and custom commercial sales, ammonia recovery and recycling systems, and non-
chemical water treating systems. RealCold Systems will also offer automated
block ice systems.
Technicold Services, Inc. offers consulting engineering services including
process safety management compliance and ammonia refrigeration system design.
Sequential Page 15 of 24<PAGE>
Technicold Services also provides operation, maintenance and safety seminars
for ammonia refrigeration technicians and supervisors. Jordan Vessel
Corporation offers industrial refrigeration system components such as liquid
recirculating packages and refrigeration system vessels of all types. RealCold
Maintenance Systems, Inc. offers unique innovative refrigeration products such
as an Ammonia Recovery and Recycle System and an Evaporative Condenser Water
Conditioning System.
Nauticon Acquisition - On August 4, 1995, the Board of Directors approved the
acquisition of 100% of Nauticon, Ltd. in a stock exchange for 900,000 shares of
common stock and 300,000 options of ICSC common stock. Nauticon will operate as
a wholly owned subsidiary in concert with ICSC's other subsidiaries, each
concentrating in unique, proprietary products for the food freezing,
refrigeration and cooling fields.
Nauticon, is an Austin, Texas based manufacturer of innovative evaporative heat
exchangers. Nauticon line of products represent five years of development. An
unique patented concept couples modern plastics with high efficiency copper
tubing to give very high efficiency, low operating costs and minimal
maintenance. These evaporative heat exchangers are self cleaning in most
applications thus eliminating chemical cleaning. These outstanding features
cannot be found in competitive products. Nauticon evaporative heat exchangers
serve the residential, commercial HVAC sector and the commercial refrigeration
industry. They have many applications, varying from traditional commercial
refrigeration to HVAC to industrial cooling. Customers vary from supermarkets
to ice rinks to walk-in coolers for refrigeration systems. HVAC applications
are in smaller commercial buildings, for traditional air conditioning systems
to highly efficient heat pumps. Industrial uses span plastic molding and
extrusion to conventional cooling of process water to cooling of cutting oils.
RealCold & Wittemann - RealCold Systems Inc. and The Wittemann Company signed a
Joint Cooperative Agreement for the manufacture and marketing of merchant
carbon dioxide plants and refrigeration products. Wittemann is the world's
leading manufacturer of carbon dioxide systems and refrigeration accessories
employed by brewers and other fermentation processors. Wittemann has carbon
dioxide systems operating in almost every country in the world. The cooperative
agreement combines the technical expertise and experience of RealCold with the
worldwide marketing of Wittemann. George Briley, President of RealCold Systems
with 46 years experience, is a renown expert in the innovative design and
building of merchant carbon dioxide systems. The RealCold technical and
engineering staff will provide the engineering design and manufacturing for
innovative refrigeration products and the merchant carbon dioxide plants. This
industry combination of technology, sales and manufacturing experience is
unsurpassed and should provide an effective and cost efficient entry for this
worldwide market. This venture has proved to be very successful for all related
companies and their respective products. Since the cooperative agreement was
initiated there are ten orders booked for CO2 plants and refrigeration systems
through the first quarter of 1996.
RESULTS OF OPERATIONS - 1995
Fiscal 1995 - For the fiscal year ended December 31, 1995, the Company incurred
a loss of ($1,088,949) or ($0.23) per share on sales revenue of $2,243,752.
This compares with a net loss of ($245,280) or ($0.07) per share on sales
revenue of $0 as a development stage company in 1994. Company total assets are
$2,298,761, stockholders equity is $1,539,740, and there was no long term debt.
For additional detailed financial information on the Company, reference the
Financial Statements on pages F-1 through F-14 included in this Annual Report
on Form 10K.
Sequential Page 16 of 24<PAGE>
Sales Backlog - Backlog as of December 31, 1995 was approximately $500K which
is scheduled for delivery throughout the first and second quarter 1996.
Subsequent backlog as of March 31, 1996 was approximately $3.4 million which is
scheduled for delivery throughout 1996.
The Company issued a total of 1,689,000 share of common stock in 1995: 101,500
restricted shares at $1.00 per share for expenses and services rendered;
1,387,500 restricted shares at $1.00 per share for company acquisitions;
200,000 shares at $1.40 per share for a private placement.
Management's comments on the primary reasons for the loss in 1995: Research and
development of the new rotary drum freezer system ReelFrez. The affect on daily
operations and expenses associated with the acquisition of the four companies.
The cost of sales were higher than expected through most of 1995 due to the
related startup costs of the new subsidiaries for the administrative offices,
coordinating sales and marketing activities and setting up new manufacturing
production procedures. The ammonia industrial refrigeration contractor demand
for system components was in an industry cycle "lull" for the latter part of
1995. New vessel product orders under Jordan Vessel Corp. were manufactured
through third party subcontractors which resulted in lower profit margins.
During 1995 the Company made significant advances fulfilling most of its
internal Business Plan. The three new companies, acquired in January 1995 and
related with RealCold Systems, have been a proven success, because they not
only increased the Company's sales and assets but also support ICSC's freezer
systems with their in-house engineering and manufacturing experience. Packaged
systems and custom products produced by RealCold are also an integral part of
the Company's freezing system, which enhances the freezer system profit
margins. Proposals for ammonia refrigeration packages have greatly increased
and sales activity in the industry has shown signs of improving during the
fourth quarter 1995 and into 1996. Since the cooperative partnership with The
Wittemann Company, over forty proposals have been submitted for carbon dioxide
plants and refrigeration systems generating twelve orders through the first
quarter 1996.
As the RealCold manufacturing facility improves its operations and additional
product is manufactured in house, profit margins should improve. Administration
office procedures have been implemented for new work flow accounting functions.
These new functions should greatly improve order processing, receivables and
payables, and customer relations resulting in reduced administration costs.
Management believes the Company will continue to improve profit margins and
income as these operating functions improve and as sales increase during the
next year.
Nauticon, as a new ICSC operating subsidiary, recorded financials for the
fourth quarter 1995. Nauticon is beginning to see favorable results from
having shown their evaporative condenser system at the Food Marketing
Exhibition and the ARI - ASHRAE Exhibition in Chicago. They have hosted a
number of interested visitors, (both from the United States and foreign
countries), who represent very significant markets for their products.
Nauticon has initiated their sales and marketing program during the fourth
quarter 1995. Primary sales targets will be the large refrigeration
manufactures that could produce and distribute product under their own private
label. Besides marketing direct through agents in the U S, other market outlets
will be through distributors world wide. Company executives representing
Nauticon and executives from a major manufacturer of refrigeration equipment
have recently exchanged facility visits. The major manufacturer expressed a
very strong interest in pursuing a joint manufacturing and marketing program
with Nauticon. Management also believes that there are many opportunities for
Sequential Page 17 of 24<PAGE>
licensing the Nauticon technology to major manufactures in the U S and foreign
countries.
Single unit sales of Nauticon products were shipped in the fourth quarter. A
Nauticon Evaporative Condenser was purchased by an Israel customer that
exhibited the system at the heating-air conditioning-refrigeration show in Tel
Aviv before installing it in its permanent location. The customer desires to
represent Nauticon products in Israel. Recently Nauticon shipped its first
system to a prospective distributor in Costra Rica, where the company
anticipates additional orders for Central and South America.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements appear on sequential pages F-1 to F-18 Index to Financial
Statements of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the registrant's fiscal year ending December 31, 1996 and the subsequent
period up to the date of the former accountants release, there were no
disagreements with the former accountant nor with the current account on any
matter of accounting principles or practices, financial statement disclosures
or auditing scope of procedure.
Sequential Page 18 of 24<PAGE>
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
Name Age Position Period Served
------------------ --- --------------------- --------------
Francis L. Simola. 58 Chairman of the Board January 1, 1993
President and CEO to Present
Terrence J. Dunne 48 Director January 1, 1993
Treasurer and CFO to Present
Robert D. Klages 65 Director January 1, 1993
Secretary and General to Present
Counsel
George C. Briley 73 Director September 1, 1994
President to Present
Technicold Services, Inc.
and RealCold Products, Inc.
Robert E. Jenkins 61 Director September 1, 1995
President to Present
Nauticon, Inc.
A summary of the business experience and background of the Company's officers
and directors is set forth below.
Francis L. Simola Mr. Simola has been Chairman, CEO and President of ICSC
since the Company's inception in January 1993. Mr. Simola's background and
experience includes; over 28 years in the computer industry with positions in
various marketing and management operations with Unisys Corporation, formerly
Burroughs Corporation; over 15 years as a consultant and principal in various
high-tech companies. Mr. Simola is the founder and president of Simco Group
Inc., a private investment company, that controls a major interest in ICSC.
Simco provides services consisting of financing, marketing and management
consulting for small technical start-up companies that have proven specialized
niche products. Mr. Simola is a graduate of Peirce Business College with a
degree in Marketing and Management, and attended Villanova University and
Drexel University Evening College for additional course studies in Finance and
Business Administration.
Terrence J. Dunne Mr. Dunne has been CFO and Treasurer of ICSC since the
Company's inception in January 1993. Mr. Dunne is a Certified Public
Accountant, and a member of the SEC Practice Section of the American Institute
of CPA's. Mr. Dunne has over 25 years of experience in public accounting, with
a concentration of work in the SEC area of auditing and public accounting. Mr.
Dunne has extensive experience providing financial consulting to a variety of
businesses. Mr. Dunne is a graduate of Gonzaga University in Accounting, and
has a MBA from Gonzaga University with a Masters in Taxation.
Robert D. Klages Mr. Klages has been Secretary and General Counsel of ICSC
since the Company's inception in January 1993. Mr. Klages served as a trial
Sequential Page 19 of 24<PAGE>
attorney in the Civil and Antitrust Divisions of the U. S. Department of
Justice for five years. Mr. Klages served as Licensing and Litigation Counsel
to Xerox Corporation, and later held the positions of Counsel to the Univac
Division and thereafter Vice President and General Counsel to Sperry Computer
Systems. Mr. Klages has since been in private practice which has included
practicing before the Iran United States Tribunal at The Hague. Mr. Klages is a
member of the Bar's of the District of Columbia, Maryland and Pennsylvania. He
has served on a number of government and private committees which include:
Member of the Technical Advisory Committee to the Secretary of Commerce and
Ambassador to GATT on international trade matters; Chairman of the Computer
Technical Advisory Committee to the Secretary of Commerce on East-West trade;
National Export Expansion Council Committee on Office Machines and Computers;
Chairman of the Computer and Business Equipment Manufactures Association
Foreign Trade Committee; and member of U. S. Delegation to the United Nations
Economic Commission for Europe Seminar on the Transfer of Technology. Mr.
Klages graduated from the U. S. Merchant Marine Academy and Georgetown
University Law School.
George C. Briley Mr. Briley has been a director of the ICSC since September
1994, and is President of RealCold Products, Inc., and President of Technicold
Services, Inc., ICSC subsidiary companies. Mr. Briley has over forty-seven
years experience in engineering and marketing in the refrigeration industry.
After receiving his BSEE at Louisiana Polytechnic University, Summa Cum Laude,
Mr. Briley was employed by York Corp. for twelve years, where he attended the
York Engineering Training Program. At York he served as a Project Engineer and
Sales Manager prior to management positions as a Branch Manager and Regional
Manager. He then served with Frick Company for two years as Field Sales
Manager. Mr. Briley was employed for thirteen years with Lewis Refrigeration
Company, as Vice President and Board Member; and fifteen years with
Refrigeration Engineering Corp. (RECO), as Vice President, Marketing and
Research and Board Member. While serving Lewis and RECO, he helped build the
companies into multi million dollar organizations, where they designed,
engineered, manufactured, installed and serviced industrial refrigeration
systems. Mr. Briley holds four US patents, and is a Registered Professional
Engineer in five states. He is the author of many articles and papers regarding
all aspects of industrial refrigeration. His services on professional
organizations include; Founding President of the International Institute of
Ammonia Refrigeration (IIAR); Fellow in American Society of Heating
Refrigeration and Air Conditioning Engineers (ASHRAE), fellow and life member;
Chairman and member of many committees, and a member at present of the ANSI-
ASHRAE 15-1993 "Safety Code for Air Conditioning and Refrigeration".
Robert E. Jenkins Dr. Jenkins has been a director of ICSC since September
1995, and is President of Nauticon Inc., an ICSC subsidiary. Dr. Jenkins has
been associated with Nauticon since its inception in the mid 1980's, and is one
of its founding principals. As a real estate developer of mixed used
properties, it was Dr. Jenkins' experience with the corrosion problems
associated with air cooled air conditioning condensers that led to the
development of the various concepts which are now utilized in the unique
Nauticon Heat Exchanger. Dr. Jenkins left real estate development in 1990 to
devote full time to product development for Nauticon. Dr. Jenkins'
undergraduate training was in mechanical engineering at the University of
Texas, followed Baylor University College of Dentistry, the post doctoral work
at both the University of Southern California and the University of Miami. He
has served as visiting instructor for the Pankey Institute of Advanced
Dentistry in Miami, and as a member of that institution's Cadre. Dr. Jenkins
retired from dentistry in 1981. Dr. Jenkins served as director of Allied Bank-
Austin, and has served both his profession and numerous charity organizations
as an office and/or board member.
Sequential Page 20 of 24<PAGE>
Directors of the Company are elected every three years. Officers of the
Company, elected by the Board of Directors, serve annually. There are no family
relationships among the Directors and Officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
No Officer or Director of the parent company, ICSC, received any cash
compensation during the year ended 1996, and no officer of any related
subsidiary received more than $60,000 from their respective Company. Five
directors received 2,500 shares each of restricted common stock for director's
fees in 1996.
Through Simco Group, Inc., Mr. Simola was paid cash for operating expenses, and
120,000 shares of common restricted stock for consulting services for 1996.
Mr. Simola worked 100% of his time for ICSC.
Mr. Dunne received 10,000 shares of common restrictive stock for accounting
services for 1996. Mr. Dunne's accounting services include the Form 10Q
quarterly filings and the Form 10K Annual Report, and consulting services on
related accounting matters during the year.
Mr. Klages received 10,000 shares of common restrictive stock for legal and
consultative services rendered in 1996.
Mr. Briley received cash personal compensation from consulting services through
Technicold Services, Inc. in 1996. Mr. Briley worked 50% of his time for
RealCold Products and Technicold Services and 50% of his time for WittCold
Systems. Wittcold Systems pays Mr. Briley $8,000 per month for consulting
services.
Mr. Jenkins received $5,000 per month cash compensation as president of
Nauticon, Inc. in 1996. Mr. Jenkins worked 100% of his time for Nauticon
Sequential Page 21 of 24<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of December 31, 1996, regarding
the number of shares of the Company's common stock beneficially owned by (i)
all beneficial owners of five percent (5%) or more of common stock, (ii) each
director and (iii) directors and officers as a group.
SECURITY OWNERSHIP:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership (1) of Class (2)
------------------------------------------------------------------
George C. Briley 547,602 9.38%
17 Pembroke Lane
San Antonio, TX. 78240
Terrence J. Dunne 359,135 6.15%
West 717 Sprague Ave. No. 1100
Spokane, Washington 99204
Robert E. Jenkins 403,728 6.92%
2903 Hillview Road
Austin, Texas 78703
Robert D. Klages 139,500 2.39%
Country Club Road
Phoenixville, Pa. 19460
Francis L. Simola and (3) 842,032 14.43%
Veronica M. Simola
9408 Meadowbrook Ave.
Philadelphia, Pa. 19118
Simco Group, Inc. (4) 1,184,000 20.28%
611 Bethlehem Pike, Ste. B
Montgomeryville, PA. 18936
All Directors and
Executive Officers 3,475,997 59.55%
(1) The nature of beneficial ownership for all shares is sole voting and
investment power.
(2) The per cent of class is all common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(3) 202,500 shares are owned by Simola minor children
(4) Simco Group Inc., a privately held Nevada Corporation, is (100%) owned by
Francis L. Simola and Veronica M. Simola, his wife.
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Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
1.Financial Statements: The financial statements and other information
appear on pages F-1 to F-18 of the Annual Report on Form 10-K and are
filed as a part hereof.
2.Schedules: The schedules are not filed with this Annual Report on Form
10-K because the schedules are either inapplicable or the required
information is presented in the Financial Statements or Notes hereto.
3.Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
8-K April 5, 1996 - Changes in Registrant's Certifying Accounting
8-K August 2, 1996 - Acquisition or Disposition of Assets - RealCold
Systems, Inc
8-K January 6, 1997 - Acquisition or Disposition of Assets - Rotary Power
International, Inc.
Sequential Page 23 of 24<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
F-1<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
International Cryogenic Systems Corporation
We have audited the accompanying consolidated balance sheets of International
Cryogenic Systems Corporation and Subsidiaries (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The financial statements of the Company for
1994 were audited by other auditors, whose report, dated April 4, 1995,
included an explanatory paragraph describing the uncertainty of the recovery of
the Company's primary asset, comprising patent rights and related technology
aggregating $726,572.
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 the
Company as of December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Intangible assets, which comprise a material portion of the Company's assets,
include patent rights and related technology of $1,155,986 and goodwill of
$491,892, as of December 31, 1996. The recovery of these intangible assets is
dependent upon achieving profitable operations. The ultimate outcome of this
uncertainty cannot presently be determined. Accordingly, the financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 7, 1997
F-2<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 457,552 $ 158,616
Cash, invested through related party 607,960
Restricted cash (Note 6) 300,000
Trade accounts receivable, net of allowance for
doubtful accounts of $2,080 and
$31,060, respectively 48,588 31,514
Inventories 69,096 58,994
Prepaid expenses and other current assets 19,012 43,951
------------ -------------
Total current assets 1,502,208 293,075
Investment in securities available for sale 724,312 -
Investment in affiliate 1,000,000 -
Restricted cash (Note 6) 200,000 -
Property and equipment, net 71,447 104,628
Patent rights and related technology, net 1,155,986 1,295,718
Goodwill, net 491,892 605,340
------------ -------------
Total assets $ 5,145,845 $ 2,298,761
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, related parties $ 15,000 $ 69,105
Short-term borrowings 799,502 100,000
Accounts payable and accrued expenses 137,661 518,234
Income taxes payable 124,156 -
Deferred revenue - 61,148
Capital lease obligations - 10,534
------------ -------------
Total current liabilities 1,076,319 759,021
Commitments (Note 11)
Stockholders' equity:
Common stock, $0.001 par value, 200,000,000
shares authorized,
5,838,269 and 5,371,234 shares issued and
outstanding
at December 31, 1996 and 1995, respectively 5,838 5,371
Additional paid-in capital 4,036,633 3,717,063
Amounts due from stockholders (7,500) (7,500)
Unrealized gain on securities available for sale 1,000 -
Retained earnings (accumulated deficit) 33,555 (2,175,194)
------------ -------------
Total stockholders' equity 4,069,526 1,539,740
------------ -------------
Total liabilities and stockholders' equity $ 5,145,845 $ 2,298,761
------------ -------------
<CAPTION>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-3<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Revenue:
Product sales $ 1,299,735 $ 2,069,588 $ -
Services 151,786 174,164 -
------------ ------------- ------------
Total revenue 1,451,521 2,243,752 -
Cost of revenue:
Product sales 731,042 1,879,639 -
Services 180,340 167,739 -
------------ ------------- ------------
Total cost of revenue 911,382 2,047,378 -
------------ ------------- ------------
Gross margin 540,139 196,374 -
Operating expenses:
Sales and marketing 456,911 559,027 211,089
General and administrative 556,671 486,228 11,010
Research and development 99,569 211,121 23,181
------------ ------------- ------------
Total operating expenses 1,113,151 1,256,376 245,280
------------ ------------- ------------
Operating loss (573,012) (1,060,002) (245,280)
Other income (expense):
Interest and other income 80,759 5,498 -
Interest and other expense (63,355) (34,445) -
Gain on sale of subsidiary (Note 4) 2,888,513 - -
------------ ------------- ------------
Total other income (expense) 2,905,917 (28,947) -
------------ ------------- ------------
Income (loss) before provision for 2,332,905 (1,088,949) (245,280)
income taxes ------------ ------------- ------------
Provision (benefit) for income taxes:
Federal current provision 793,188 - -
Federal deferred benefit (669,032) - -
------------ ------------- ------------
124,156 - -
------------ ------------- ------------
Net income (loss) $ 2,208,749 $ (1,088,949) $ (245,280)
------------ ------------- ------------
Net income (loss) per share $ 0.39 $ (0.23) $ (0.07)
------------ ------------- ------------
Weighted average number of shares 5,662,000 4,776,000 3,504,000
------------ ------------- ------------
<CAPTION>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-4<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
Unrealized
Gain On Retained
Additional Amounts Securities Earnings
Common Stock Paid-In Due From Available Accumulated
Shares Amount Capital Stockholders For Sale (Deficit) Total
---------- -------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 3,449,034 $ 3,449 $ 1,590,785 $ - $ - $ (840,965) $ 753,269
Issuance of common stock 81,200 81 81,119 - - - 81,200
for services
Issuance of common stock 40,000 40 37,960 - - - 38,000
for cash
Issuance of common stock
for amounts
due from stockholders 112,000 112 139,888 (140,000) - - -
Net loss - - - - - (245,280) (245,280)
---------- -------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1994 3,682,234 3,682 1,849,752 (140,000) - (1,086,245) 627,189
Issuance of common stock 101,500 102 101,398 - - - 101,500
for services
Issuance for common
stock and options for 1,387,500 1,387 1,486,113 - - - 1,487,500
acquisitions
Payments of amounts due - - - 140,000 - - 140,000
from stockholders
Issuance of common stock
for amounts
due from stockholders - - - (7,500) - - (7,500)
Issuance of common stock 200,000 200 279,800 - - - 280,000
for cash
Net loss - - - - - (1,088,949) (1,088,949)
---------- -------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1995 5,371,234 5,371 3,717,063 (7,500) - (2,175,194) 1,539,740
Issuance of common stock 467,035 467 319,570 - - - 320,037
for services
Unrealized gain on
securities available for - - - - 1,000 - 1,000
sale
Net income - - - - - 2,208,749 2,208,749
---------- -------- ------------ ------------ ---------- ------------ ------------
Balance at December 31, 1996 5,838,269 $ 5,838 $ 4,036,633 $ (7,500) $ 1,000 $ 33,555 $ 4,069,526
---------- -------- ------------ ------------ ---------- ------------ ------------
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5 <PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,208,749 $ (1,088,949) $ (245,280)
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Depreciation and amortization 216,356 152,744 -
Net gain realized on available for sale
securities (7,892) - -
Gain on sale of subsidiary (2,888,513) - -
Loss on disposition of subsidiary 53,529 - -
Provision for doubtful accounts (28,980) 31,060 -
Common stock issued for services 320,037 101,500 81,200
Changes in assets and liabilities, net
of effects from acquisitions and
disposition:
Trade accounts receivable (253,052) 170,602 -
Inventories (905,400) (17,532) -
Prepaid expenses and other current
assets 2,376 (20,130) -
Accounts payable and accrued expenses (281,936) 283,317 103,235
Income taxes payable 124,156 - -
Deferred revenue 917,438 61,148 -
------------- ------------- ------------
Net cash used in operating
activities (523,132) (326,240) (60,845)
------------- ------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (22,456) (40,985) -
Cash purchased in acquisition - 13,869 -
Equity investment in subsidiary (1,000,000) - -
Purchase of certificate of deposit (300,000) - -
Proceeds from sale of subsidiary, net of
cash disposed 2,783,226 - -
Proceeds from sale of securities
available for sale 581,093 - -
Purchase of securities available for
sale (1,296,513) - -
------------- ------------- ------------
Net cash provided by (used in)
investing activities 745,350 (27,116)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from short-term borrowings,
related parties 142,997 345,000 -
Proceeds from short-term borrowings 799,502 100,000 -
Proceeds from issuance of common stock 420,000 38,000
Repayment of short-term borrowings,
related parties, net of effects from (153,102) (345,000) -
disposition
Repayment of short-term borrowings (100,000) - -
Principal payment on capital lease
obligations, net of effects from
disposition (4,719) (8,054) -
------------- ------------- ------------
Net cash provided by financing 684,678 511,946 38,000
activities ------------- ------------- ------------
Net increase (decrease) in cash and cash 906,896 158,590 (22,845)
equivalents and cash - related party
Cash and cash equivalents and cash - 158,616 26 22,871
related party at beginning of period ------------- ------------- ------------
Cash and cash equivalents and cash - $ 1,065,512 $ 158,616 $ 26
related party at end of period ------------- ------------- ------------
Interest paid $ 15,732 $ 12,176 $ -
Noncash investing activities:
Restricted cash held in escrow related $ 200,000 $ - $ -
to sale of subsidiary
Unrealized gain on securities available $ 1,000 $ - $ -
for sale
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background and Basis of Presentation:
Background
International Cryogenic Systems Corporation (the "Company" or "ICSC") was
incorporated on October 7, 1987 in the State of Nevada, and operates in one
business segment, the development, design, manufacture, distribution and
servicing of cryogenic refrigeration systems.
On December 28, 1992, the Company acquired the patent rights (U.S. Patent
No. 4,928,492) and related engineering and technology to a process of quick
freezing food products, and cleaning and treating various non-food products
by using a circulating cryogenic liquid in a closed pressurized vessel
system, in exchange for 2,414,083 shares of common stock. The common stock
was valued at $.30 per share, which was determined by management to be the
fair market value. Two directors of the Company were also directors of the
company selling such patent rights.
For the years ending December 31, 1994 and prior, International Cryogenic
Systems Corporation was considered a development stage enterprise, devoting
substantially all of its efforts to establishing its business, with no
significant revenue from its planned principal operations.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, and that
recovery of its intangible assets, primarily patent rights and related
technology and goodwill, will occur. The Company's ability to continue as a
going concern, and recover the value of its intangible assets is dependent
upon achieving profitable operations. The ultimate outcome of this
uncertainty cannot be presently determined. Accordingly, the financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, after elimination of intercompany
accounts and transactions. Wholly-owned subsidiaries of the Company in
1996, after dispositions (Note 4), include Technicold Services, Inc.,
RealCold Products, Inc. and Nauticon, Ltd. Wholly-owned subsidiaries of the
Company in 1995 include Technicold Services, Inc., RealCold Products, Inc.,
Jordan Vessel Corporation, RealCold Systems, Inc. and Nauticon, Ltd.
Investments in affiliates, representing 20% to 50% of the ownership of such
companies, are accounted for using the equity method.
Cash and Cash Equivalents
All highly liquid investments with original maturities at purchase date of
three months or less are considered cash equivalents.
F-7<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Investment in Securities
Investments in debt and marketable equity securities are designated as
trading, held-to-maturity, or available-for-sale in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Trading securities are
reported at fair value, with changes in fair value included in earnings.
Available-for-sale securities are reported at fair value, with net
unrealized gains and losses included as a component of equity.
Held-to-maturity securities are reported at amortized cost. Gains and
losses on the sale of securities are determined using the specific
identification method. For all investment securities, unrealized losses
that are other than temporary are recognized as a charge against earnings in
the period incurred. Market value is determined based on quoted market
prices. At December 31, 1996, all of the Company's investment securities
were classified as available-for-sale.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight line method over the estimated useful lives of the assets,
generally three to seven years. Expenditures that increase the value or
extend the life of an asset are capitalized, while cost of maintenance and
repairs are expensed as incurred. Gains or losses upon disposal of assets
are recognized in income.
Research and Development
Research and development expenses are charged to operations as incurred.
The cost of intellectual property purchased from others that are immediately
marketable or that have an alternative future use are capitalized and
amortized as intangible assets. Capitalized costs are amortized using the
straight line method over the estimated economic life of the related asset,
typically 10 years. At December 31, 1996 and 1995, capitalized patent
development costs, net of amortization, were $1,155,986 and $1,295,718.
Amounts capitalized and expensed during the years ended December 31, 1996
and 1995 were as follows:
1996 1995
-------- ---------
Capitalized patent costs $ - $ 673,250
Amortization expense 139,732 104,104
The Company periodically reviews its capitalized patent costs to assess
recoverability based on projected undiscounted cash flows from operations.
Impairments are recognized in operating results when a permanent diminution
in value occurs.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the
customer. Service revenue is recognized when services are performed and
billable.
F-8<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Goodwill
Goodwill represents the excess of the purchase price and related direct
costs over the fair value of net assets acquired as of the date of the
acquisition. Goodwill is amortized on a straight-line basis over 10 years.
Amortization of goodwill amounted to $56,971 and $40,687 for the years ended
December 31, 1996 and 1995.
The Company periodically reviews its goodwill to assess recoverability based
on projected undiscounted cash flows from operations. Impairments are
recognized in operating results when a permanent diminution in value occurs.
Net Income (Loss) Per Common Share
The computation of net income (loss) per common share is based upon the
weighted average number of common shares and common equivalent shares
outstanding during the period.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. (See Note 8).
Reclassifications
Certain amounts within the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the current year presentation.
Advertising Expenses
Advertising expenses consist primarily of costs incurred in the design,
development and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were approximately $16,908 and $2,062 for the years
ended December 31, 1996 and 1995.
Inventories
Inventories are stated at the lower of cost or market on a first-in,
first-out basis.
F-9<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
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 periods. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined in Statement of Financial Accounting Standards
No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," consist primarily of cash and cash equivalents, cash invested
through related party, trade accounts receivable, investments in securities
available for sale and restricted cash. Cash and cash equivalents exceeded
FDIC insurance coverage limits by $348,215 at December 31, 1996. The
Company maintains its cash and cash equivalents in major, credit-worthy
financial institutions and has not experienced any losses on its deposits.
The Company's receivables do not represent a significant concentration of
credit risk at December 31, 1996.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash and cash equivalents, cash invested through
related party, trade accounts receivable, investment in securities available
for sale, restricted cash, accounts payable and accrued expenses and
short-term borrowings. All instruments other than the investment in
securities available for sale are accounted for on a historical cost basis,
which, due to the short maturity of these financial instruments,
approximates fair value at December 31, 1996 and 1995. Investments in
securities available for sale are recorded at fair value at December 31,
1996.
Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement simplifies the computation of earnings per share amounts and
specifies the presentation and disclosure requirements. The Company will be
required to adopt FAS No. 128 for its fiscal year ended January 31, 1998.
Adoption of SFAS No. 128 is not expected to have a significant effect on the
financial statements.
F-10<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisitions and Investment in Affiliate:
Acquisition of RealCold Systems Group
On January 30, 1995, the Board of Directors approved the acquisitions of
Technicold Services, Inc., RealCold Maintenance Systems, Inc. and Jordan
Vessel Corporation (RealCold Systems Group).
Pursuant to the terms of the RealCold Systems Group acquisition agreement on
January 30, 1995, effective January 1, 1995, the Company issued 487,500
shares of its common stock to RealCold Systems Group in exchange for 100% of
the outstanding common shares of Technicold Services, Inc. RealCold
Maintenance Systems, Inc. and Jordan Vessel Corporation.
The RealCold Systems Group acquisition has been accounted for under the
purchase method and accordingly, the operating results of the Company
include the operations since the date of acquisition. The acquisition
resulted in goodwill of $305,701 which is being amortized over 10 years:
Purchase price $ 487,500
Fair value of assets acquired and
liabilities assumed:
Accounts receivable 233,133
Inventories 17,774
Prepaid expenses 1,470
Property and equipment 5,000
Liabilities assumed (75,578)
--------
181,799
--------
Excess of purchase price over fair
value of net assets acquired $ 305,701
--------
Acquisition of Nauticon Ltd.
On August 4, 1995, the Board of Directors approved the acquisition of the
assets and liabilities of Nauticon, Ltd.
Pursuant to the terms of the Nauticon Acquisition agreement, on August 29,
1995, effective July 25, 1995, the Company issued 900,000 of the Company's
common stock and options to purchase 300,000 shares of the Company's common
stock at a price from $1.00 to $2.00, expiring in the year 2000 to
Nauticon's owners in exchange for all of Nauticon's assets and liabilities.
F-11<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisitions and Investment in Affiliate, continued:
Acquisition of Nauticon Ltd., continued
The Nauticon acquisition has been accounted for as a purchase and,
accordingly, the operating results of the Company include the results of
operations of Nauticon, Ltd. since the date of acquisition. The acquisition
resulted in goodwill of $342,818 which is being amortized over 10 years:
Purchase price $ 1,000,000
Fair value of assets acquired and
liabilities assumed:
Cash and cash equivalents 13,869
Accounts receivable 7,543
Inventories 23,688
Prepaid expenses 22,351
Property and equipment 48,000
Patent costs 670,726
Liabilities assumed (128,995)
----------
657,182
----------
Excess of purchase price over fair
value of net
assets acquired $ 342,818
----------
The following unaudited pro forma summary presents the unaudited
consolidated results of operations as if the acquisition RealCold Systems
Group and Nauticon, Ltd. had occurred at the beginning of 1995 and 1994,
respectively. The pro forma presentation reflects the impact of adjustment
relating to the amortization of goodwill. It does not purport to be
indicative of the financial results which actually would have occurred had
the acquisition been made at the beginning of 1995 and 1994, respectively,
or of the results which may occur in the future.
Unaudited Pro Forma Consolidated Results of Operations
1995 1994
------------- ------------
Total revenue $ 2,243,752 $ -
Net loss $ (1,235,949) $ (306,019)
Net loss per share $ (0.23) $ (0.07)
F-12<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisitions and Investment in Affiliate, continued:
Investment in Affiliate
On December 24, 1996, the Company agreed to invest in Rotary Power
International, Inc. ("RPI") the sum of $1,000,000 in exchange for two
million shares of RPI common stock. As the Company's investment in RPI
represents less than a 50% interest in RPI, the equity method is used to
account for the Company's interest in RPI.
Concurrent with the investment in RPI, ICSC and RPI (the "Companies") have
agreed to merge the two companies in a stock for stock acquisition, whereby
RPI would become a wholly-owned subsidiary of ICSC. Upon completion of a
definitive transaction agreement and approval by the companies Board of
Directors and stockholders, each shareholder of RPI will receive 0.363
shares of ICSC common stock. The stock for stock transaction will result in
ICSC issuing a fixed total number of 1,516,196 shares of common stock for
all the issued and outstanding shares of RPI common stock at the time of
closing and execution of the stock purchase and merger agreement. The
transaction will be accounted for as a purchase.
The following table presents unaudited summarized financial information of
the affiliate, RPI. The Company owns approximately 33% of RPI common stock.
Unaudited Summarized Financial Information
September 30, December 31,
1996 1995
----------- -----------
Current assets $ 3,267,000 $ 3,763,000
Noncurrent assets 8,403,000 8,154,000
Current liabilities 1,813,000 1,190,000
Noncurrent liabilities 9,471,000 9,571,000
Nine Months Nine Months
Ended Ended
September 30, December 31,
1996 1995
--------------- --------------
Gross revenues $ 5,257,000 $ 7,307,000
Loss from operations (1,780,000) (1,119,000)
Net loss (2,233,000) (1,581,000)
F-13<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Dispositions:
RealCold Systems, Inc.
On May 1, 1996, the Company sold the common stock of RealCold Systems, Inc.
to Wittcold Systems, Inc. ("Wittcold"), formerly Wittemann Company, Inc., a
party to the Joint Cooperation Agreement entered into by the Company in June
1995. In consideration for the common stock of RealCold Systems, Inc., the
Company received from Wittcold the sum of $2,800,000 in cash, $200,000 in
cash held in escrow, which is to be released to the Company on the second
anniversary of the sale's closing, pursuant to the terms of the Escrow
Agreement, and the ability to earn additional consideration ("earnout") as
determined by a percentage of future net sales. The earnout is structured
to provide additional consideration in the amount of five (5%) percent of
the net sales of refrigeration systems for ten full calendar years beginning
in 1996 and ending in 2005, and two and one-half (2 1/2%) of net sales of
merchant CO2 systems for nine full calendar years beginning in 1997 and
ending in 2005. For purposes of calculating the earnout, net sales is
defined as payments received from customers less commissions to non-employee
agents, export preparation, inland freight and forwarding fees, ocean
freight, insurance, discounts and all warranty work performed during the
relevant period. The sales agreement further provides a minimum guaranteed
royalty from Wittcold, contingent upon the continued employment by the
Company of a certain employee for three full years after the date of
closing, whereupon the Company will receive $2,000,000 ("minimum earnout")
no later than April 30, 2006 in the event the earnout consideration, as
calculated on a percentage of net sales, does not exceed the minimum
earnout. The Company anticipates recording revenues on the earnout
beginning in 1997.
As a result of the sale of RealCold Systems, Inc., the Company has recorded
a gain in the amount of $2,888,513:
Sales proceeds $ 3,000,000
Carrying value of assets and
liabilities sold:
Cash 16,774
Accounts receivable 264,958
Inventories 895,298
Prepaid expenses and other current
assets 22,563
Property and equipment, net 38,932
Accounts payable and accrued
liabilities (98,637)
Deferred revenue (978,586)
Capital lease obligation (5,815)
Short-term borrowings, related
parties (44,000)
-------------
Gain on sale $ 2,888,513
-------------
F-14<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Dispositions, continued
RealCold Systems, Inc., continued
The operating results for the disposed subsidiary, RealCold Systems, Inc.,
are included in net income/loss through the date of sale. The following pro
forma summary presents the 1996 unaudited consolidated results of operations
as if the sale had occurred at the beginning of 1996. There would not have
been a material effect on the 1995 consolidated results of operations if the
sale had occurred at the beginning of 1995. The pro forma results give
effect to normal adjustments and the exclusion of gain resulting from the
sale of RealCold Systems, Inc., including related tax effects.
It does not purport to be indicative of the financial results which actually
would have occurred had the sale been made at the beginning of 1996 or of
the results which may occur in the future.
Unaudited Pro Forma Consolidated Results of Operations
1996
-----------
Total revenue $ 383,557
Net loss $ (729,784)
Net loss per share $ (0.13)
Jordan Vessel Corporation
During 1996, operations of Jordan Vessel Corporation, a subsidiary of the
Company, ceased operations. The assets were disposed of resulting in a loss
on disposition of $53,529 related primarily to goodwill.
5. Inventories:
The major components of inventories are as follows:
1996 1995
-------- ---------
Parts inventory $ 56,996 $ 22,432
Product inventory 12,100 36,562
-------- ---------
$ 69,096 $ 58,994
-------- ---------
F-15<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Restricted Cash:
Current restricted cash at December 31, 1996 consists of a $300,000
certificate of deposit which collateralizes the short-term borrowings (see
Note 9). Non-current restricted cash consists of $200,000 of cash held in
escrow relating to the sale of the common stock of RealCold Systems, Inc.
(see Note 4).
7. Property and Equipment:
Property and equipment consists of the following:
1996 1995
---------- ---------
Machinery and equipment $ 21,277 $ 60,681
Prototypes and molds 63,767 44,080
Furniture and fixtures 4,015 7,820
---------- ---------
89,059 112,581
Less accumulated depreciation (17,612) (7,953)
---------- ---------
$ 71,447 $104,628
---------- ---------
Depreciation expense was $19,653 and $7,953 in 1996 and 1995, respectively.
8. Income Taxes:
The components of net deferred tax asset were as follows:
1996 1995
-------- -----------
Net operating loss carryforwards $ - $ 669,032
Valuation allowance - (669,032)
-------- -----------
Net deferred tax asset $ - $ -
-------- -----------
The Company's net operating loss ("NOL") carryforwards for income tax
purposes approximated $0 and $1,967,000 at December 31, 1996 and 1995,
respectively. During the year ended December 31, 1996, the Company utilized
all of its NOL carryforwards.
F-16<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Short-Term Borrowings:
Short-term borrowings at December 31, 1996 consisted of $275,000 in
borrowings under a $300,000 line of credit agreement entered into with a
commercial bank in July 1996 to provide temporary working capital to the
Company. The interest rate is fixed at 7% per annum. The note is
collateralized by a certificate of deposit in the amount of $300,000, dated
July 26, 1996, bearing interest at a rate of 5%.
The remaining $524,502 in short-term borrowings consisted of a liability to
a broker for repayment of funds borrowed for the purpose of investment in
available-for-sale securities.
10. Related Party Transactions:
The Company has received funding on several occasions from Simco Group, Inc.
("Simco"), a separate legal entity wholly owned by the Company's Chairman
and Chief Executive Officer.
At December 31, 1996, the Company had $607,960 held in an account in the
name of Simco. These funds are invested in short and long-term liquid
marketable securities; however, cash is readily available for the Company
from various Simco sources and thus these funds have been classified as cash
invested through related party. Simco has guaranteed the Company a minimum
8% return on these funds. During 1996, Simco paid the Company approximately
$12,000 in interest.
During 1996, the Company issued 150,000 restricted shares of common stock to
Simco in satisfaction of prior years' liabilities related to expenses and
consulting services provided. During 1996, the Company recorded expense of
$273,750 related to the issuance of 122,500 restricted shares as payment for
expenses and consulting services provided, and 125,000 restricted shares as
payment for promotional services provided by Simco. The 1996 and 1995
shares were issued at $.50 and $1.00 per share, respectively.
Amounts due from stockholders at December 31, 1996 represent services
receivable under a consulting agreement.
11. Commitments:
Capital Leases
At December 31, 1995, the Company was obligated under a capital lease
agreement covering the purchase of equipment. The agreement was recorded at
the present value of the required rentals using the lower of the interest
rate implicit in the lease or the Company's incremental borrowing rate. As
of December 31, 1996, there were no remaining commitments under the capital
lease agreement.
F-17<PAGE>
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Commitments, continued:
Operating Leases
The Company leases certain sales offices, plant space and equipment under
operating lease agreements which expire at various times through 1999.
Total rent expense was $82,219 and $36,708 in 1996 and 1995, respectively.
Future minimum rental commitments as of December 31, 1996 were as follows:
1997 $ 132,000
1998 90,000
1999 48,000
Thereafter -
The Company subleases a sales office and plant space under a lease agreement
which expires in 1999. Total rental income from the sublease agreement was
$23,402 in 1996.
12. Available For Sale Investments:
Investments include the following available for sale securities at December
31, 1996:
Years Gross Gross
To Fair Unrealized Unrealized
Maturity Value Cost Gains Losses
-------- --------- ----------- ---------- ----------
Corporate
equity
securities -
common stock $ 145,501 $ 138,538 $ 6,963 $ -
U.S. government 1-5 69,868 70,296 - (428)
securities
5-10 49,735 50,000 - (265)
>10 459,208 464,478 4,310 (9,580)
--------- ----------- ---------- ----------
$ 724,312 $ 723,312 $ 11,273 $(10,273)
Proceeds, gross realized gains and gross realized losses from the sale of
securities classified as available for sale for the year ended December 31,
1996, were approximately $581,093, $15,736 and $7,844, respectively.
F-18<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL CRYOGENICS SYSTEMS CORPORATION
Dated: March 24, 1996
By: /s/Francis L. Simola
---------------------------------------
Francis L. Simola
President and (Chief Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Dated: March 24, 1996
By: /s/Francis L. Simola
---------------------------
Francis L. Simola
Director
By: /s/Terrence J. Dunne
---------------------------
Terrence J. Dunne
Director
By: /s/Robert D. Klages
---------------------------
Robert D. Klages
Director
By: /s/George C. Briley
---------------------------
George C. Briley
Director
By: /s/Robert E. Jenkins
---------------------------
Robert E. Jenkins
Director<PAGE>
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<PERIOD-END> DEC-31-1996
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<RECEIVABLES> 48588
<ALLOWANCES> 2080
<INVENTORY> 69069
<CURRENT-ASSETS> 1202208
<PP&E> 71447
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