SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 15, 1998
--------------
ICC Technologies, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
0-13865 23-368845
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
330 South Warminster Road, Hatboro PA 19040
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 682-6600
-------------------------------
(Registrant's telephone number)
-----------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
The purpose of this Report is to amend the Registrant's Current Report
on Form 8-K dated April 15, 1998 relative to the acquisition of Rare Medium,
Inc. This Report supplements the information provided under Item 2 and amends
the information provided under Item 7(a) and 7(b) to include the historical
financial statements of Rare Medium, Inc. and pro forma financial statements of
ICC Technologies, Inc.
Item 2. Acquisition or Disposition of Assets
General
On April 15, 1998 (the "Effective Time"), pursuant to the terms of a
Merger Agreement and Plan of Reorganization dated as of April 8, 1998 (the "Rare
Medium Merger Agreement"), ICC Technologies, Inc. ("ICC") acquired by merger
Rare Medium, Inc., a privately held New York corporation ("Rare Medium") (the
"Merger"). Rare Medium is an Internet professional services company engaged in
the design, delivery and implementation of Internet web site applications and
strategies, primarily for Global 2000 companies with its principal offices
located in New York City. See "Business of Rare Medium"; "Risk Factors Relating
to Rare Medium" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Rare Medium" below. The assets of Rare Medium are
comprised generally of cash, accounts receivable, prepaid expenses, work in
process, equipment and leasehold improvements. ICC intends to reflect the
transaction as a purchase for accounting purposes. At the Effective Time, Rare
Medium was merged with RareMedium Acquisition Corp. ("Acquisition Corp."), a
newly-formed wholly-owned subsidiary of ICC, with Rare Medium surviving the
merger and becoming a wholly-owned subsidiary of ICC. In consideration for
merging with ICC's subsidiary, the stockholders of Rare Medium (the "Rare Medium
Stockholders") received at the Effective Time in exchange for all of the
outstanding shares of common stock of Rare Medium total consideration of
approximately $46.2 million, consisting of $10 million in cash, 4,269,300 shares
of common stock of ICC, and a promissory note in the principal amount of $22.2
million.
The Rare Medium Stockholders constitute a group of 15 individuals and
two partnerships, six of whom, including Glenn S. Meyers, are employees of Rare
Medium and held approximately 59.4% of the outstanding stock of Rare Medium
prior to the Merger. The others were outside investors. None of the Rare Medium
Stockholders was affiliated with ICC, its officers or directors, prior to the
Merger. The shares of common stock of ICC were issued to the Rare Medium
Stockholders in a private placement exempt from the registration requirements
under the Securities Act of 1933, as amended (the "Securities Act") and
constitute "restricted securities," as such term is defined in Rule 144(a)(3) of
the Securities Act. ICC intends to continue the use of the assets of Rare Medium
in the same business conducted prior to the Merger. See "Business of Rare
Medium" below.
Basic Terms of the Merger Agreement and Related Transactions
The Merger. On the Effective Time, Acquisition Corp. was merged with
and into Rare Medium, and Rare Medium was the surviving corporation in the
merger. Each share of voting common stock of Rare Medium issued and outstanding
immediately prior to the Effective Time was converted into the right to receive
a pro rata portion of $10 million in cash, 4,269,300 shares of common stock of
ICC (the "ICC Stock") and a secured promissory note by Rare Medium, the
surviving corporation, in the principal amount of $22,200,000, which principal
amount is subject to adjustment upward as described below (the "Rare Medium
Note") (collectively, the "Merger Consideration"). See "Rare Medium Note" below.
Rare Medium Note. On the Effective Time, the Rare Medium Note was
delivered to Glenn S. Meyers, in his capacity as stockholder representative for
the Rare Medium Stockholders. Interest on the principal amount of the Rare
Medium Note is payable semi-annually at the prime rate charged by PNC Bank, N.A.
in the form of cash or common stock of ICC, at ICC's election, provided,
however, that the amount of common stock used to satisfy interest payment
obligations cannot exceed 60% of the amount of each such interest payment due
unless the amount that exceeds 60% have been registered for re-sale under the
Securities Act. The principal amount of the Rare Medium Note is payable one-half
on April 15, 2000 and the balance is payable on April 15, 2001. Notwithstanding
the foregoing, in the event that (i) ICC or Rare Medium closes a secondary
offering or other financing which results in net proceeds to ICC or Rare
2
<PAGE>
Medium, as the case may be, of $50,000,000 or more, Rare Medium shall within
five (5) business days following receipt of such proceeds prepay all amounts due
under the Rare Medium Note or (ii) ICC or Rare Medium closes a secondary
offering or other financing which results in net proceeds to ICC or Rare Medium,
as the case may be, of at least $20,000,000 but less than $50,000,000, Rare
Medium shall within five (5) business days following receipt of such proceeds
prepay that portion of the amount due under the Rare Medium Note which is equal
to forty percent (40%) of the amount of net proceeds of such offering or
financing which exceeds $20,000,000. Rare Medium also reserves the right to make
non-mandatory payments of principal or interest before they are due without
penalty or premium. All prepayments shall first be applied to accrued and unpaid
interest, then on the principal amount due on the first installment until fully
paid, then applied to the principal amount due on the final installment. The
Rare Medium Note is guaranteed by ICC and secured with a pledge of all of the
outstanding shares of stock in Rare Medium held by ICC as well as a security
interest in all of the assets of Rare Medium.
ICC Stock Price Guarantee. In the event the average closing price per
share as reported by the Wall Street Journal for the common stock of ICC
computed for the 60-day calendar period ending on the 12-month anniversary of
the Effective Time is less than $3.00, there will be added to the principal
amount of the Rare Medium Note the amount determined by multiplying the number
of shares of ICC Stock issued as part of the Merger Consideration by the
difference between $3.00 and the lesser amount. One-half of the amount of such
upward adjustment in the principal amount due under the Rare Medium Note, if
any, shall be added to the principal amount maturing on April 15, 2000 and
one-half of such adjustment, if any, shall be added to the principal amount
maturing on April 15, 2001.
Officers and Directors of ICC. Effective as of the Effective Time,
Messrs. Mark S. Hauser, Albert Resnick, Stephen Schachman, Andrew L. Shapiro,
and William A. Wilson, directors of ICC, each resigned from the Board of
Directors of ICC. Pursuant to the terms of the Rare Medium Merger Agreement, the
Board of Directors of ICC shall be comprised of seven members, consisting of
Irwin L. Gross, as Chairman, Robert Aders, Charles Condy (each of whom was a
director of ICC prior to the Merger), Glenn S. Meyers, former and current
President and Chief Executive Officer of Rare Medium, and three independent
members to be nominated by Mr. Meyers and approved by Mr. Gross, each to serve
until their successors are duly elected or appointed and qualified in accordance
with the bylaws of ICC. Throughout the term of ICC's Employment Agreement with
Glenn S. Meyers, ICC has agreed to use its best efforts to cause the officers
and directors of ICC to vote their shares of ICC Stock in favor of such
individuals as nominees to the ICC Board and to recommend such individuals as
nominees for shareholder approval at shareholders meetings from time to time. As
of the date of this report, the three independent members have not been
nominated to the Board of ICC. On the Effective Time, Glenn S. Meyers was
elected President and Chief Executive Officer of ICC to replace William Wilson.
See "Board of Directors-ICC Desiccant Technologies, Inc." below.
Effective May, 1998, John S. Gross was elected the Chief Financial
Officer and Senior Vice President of ICC, replacing Manfred Hanuschek, and was
also elected the Chief Financial Officer and Senior Vice President of Rare
Medium. Mr. Gross previously served as Vice President, Controller of Reader's
Digest Association, a $3 billion direct mail publisher, from February 1996
through October 1997. For the previous four years he was Chief Financial Officer
for FactSet Research Systems, a leading provider of online integrated database
services to the financial community, where he served as their first CFO leading
up to their IPO in 1996. Mr. Gross' experience also includes positions as
Controller and Manager of Strategic Planning at Pepsi USA, a division of PepsiCo
Inc. He started his career at Coopers & Lybrand. He is a Certified Public
Accountant, has a NASD Series 27 (Financial Operations Principal) and received
an MBA from New York University.
Officers and Directors of Rare Medium. Effective as of the Effective
Time, the Board of Directors of Rare Medium, the surviving corporation, is
comprised of the same individuals who are members of the Board of Directors of
ICC. Glenn S. Meyers, the President and Chief Executive Officer of Rare Medium
prior to the Merger, continues in such office following the Merger.
Registration of ICC Stock. Pursuant to the Rare Medium Merger
Agreement, ICC has agreed to use its best efforts to register for re-sale under
the Securities Act any ICC Stock which is delivered in payment of interest due
under the terms of the Rare Medium Note (the "Interest Shares"), as soon as
practicable following the issuance of the Interest
3
<PAGE>
Shares, but in any event no later than 180 days following the issuance of the
Interest Shares. In addition, within 180 days following the Effective Time, ICC
will use its best efforts to engage an underwriter to conduct a secondary public
offering of common stock of ICC on terms reasonably acceptable to the Board of
Directors of ICC, and in the event of such engagement, ICC is required to give
each of the Rare Medium Stockholders prompt written notice of its intent to do
so. Upon the written request of any of the Rare Medium Stockholders given within
30 days after receipt of such notice, ICC is required to cause to be included in
such registration that stockholder's pro rata share of ICC Stock, up to an
aggregate of 1,000,000 shares of ICC Stock issued to all of the Rare Medium
Stockholders upon the Merger. In addition, if ICC is advised in writing in good
faith by any managing underwriter of an underwritten offering of the securities
being offered pursuant to any such registration statement that the number of
shares to be sold by persons other than ICC is greater than the number of such
shares which can be offered without adversely affecting the offering, ICC may
reduce pro rata the number of shares offered for the accounts of such persons
(based upon the number of shares proposed to be sold by each such person) to a
number deemed satisfactory by such managing underwriter. In the event that ICC
is unable to engage the underwriter and commence a secondary offering as
described above within 180 days following the Closing Date, then thereafter ICC
shall use its best efforts to register the Registerable Shares of each Rare
Medium Stockholder for resale under the Securities Act on Form S-3 or other
appropriate form determined by ICC and to keep such registration statement
effective as long as possible thereafter but at least through the one-year
anniversary of the Effective Time. ICC will pay all expenses in connection with
the preparation and filing of the registration statement, provided that such
expenses will not include any legal fees or brokerage commissions paid by the
Rare Medium Stockholders in connection with the sale of ICC Stock under such
registration statement.
Compensation, Incentive and Benefits.
(a) Meyers Employment Agreement. In connection with the
transactions consummated pursuant to the Rare Medium Merger Agreement, ICC
entered into an Employment Agreement effective April 15, 1998 with Glenn S.
Meyers. Pursuant to the Employment Agreement, Mr. Meyers has been engaged as the
President and Chief Executive Officer of ICC and Rare Medium to serve for a term
of 5 years at an annual base salary of $250,000, with a minimum annual increase
during the term of not less than 4% per annum. In addition to Base Compensation,
Mr. Meyers shall be entitled to receive for each calendar year during the term,
incentive compensation equal to 2% of revenues derived from activities of Rare
Medium for such calendar year in excess of the revenues of Rare Medium for the
preceding year. The Employment Agreement provides Mr. Meyers with a right to
terminate the agreement upon a breach of the Agreement or certain events
constituting a "change in control" of ICC as defined therein, upon which Mr.
Meyers would be entitled to receive all salary and incentive compensation for
the remaining term, the cash value of all benefits which would have been
received by him for the remaining term and the cash value of all unexercised
stock options (whether or not vested) or the cashless exercise value thereof.
The Employment Agreement also contains a covenant not to compete with ICC or any
of its affiliates for the term of the Employment Agreement, plus one additional
year.
(b) Grant of Stock Options to Meyers. Concurrently with the
execution of the Employment Agreement with Mr. Meyers, ICC granted to Mr. Meyers
incentive and non-incentive stock options to acquire an aggregate of 2,000,000
shares of common stock of ICC at exercise prices equal to $2.375 per share,
which options will become exercisable ratably on a monthly basis over a period
of 60 months from the date of grant and expire ten years from the date of grant.
(c) Other Rare Medium Management Employment Agreements. Five
other Rare Medium Stockholders who were employees and stockholders of Rare
Medium prior to the Merger also entered into Employment Agreements with Rare
Medium upon consummation of the Merger. All of such Employment Agreements
provide for base compensation and include a covenant not to compete for the term
of the agreement plus one additional year.
(d) Other Option Grants. In addition to the options to purchase
common stock of ICC granted to Mr. Meyers described above, ICC also granted
stock options to purchase an aggregate of approximately one million shares of
common stock of ICC to certain other employees, consultants and contractors of
Rare Medium, which options are priced
4
<PAGE>
at $2.375 per share and become exercisable ratably on an annual basis over a
three year period commencing on the one year anniversary of the date of grant.
Accounting Treatment. The acquisition of Rare Medium by ICC will be
accounted for under the purchase method of accounting.
Federal Income Tax Consequences. ICC and the Rare Medium Stockholders
intend that the Rare Medium Merger Agreement shall constitute a tax-free plan of
reorganization pursuant to Section 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended.
ICC Restructuring. Pursuant to the terms of the Rare Medium Merger
Agreement, ICC agreed that as soon as practicable following the Effective Time,
but in no event later than 180 days following the Effective Time, to use its
best efforts to cause a "spin-off", through a dividend distribution to ICC's
stockholders, (the "Proposed Spin-Off") of ICC's entire interest in ICC
Desiccant Technologies, Inc., a Delaware corporation and wholly-owned subsidiary
of ICC ("ICC Desiccant Technologies"), such that immediately after the
completion of the Proposed Spin-Off, the sole assets and liabilities of ICC and
its subsidiaries shall be those assets and liabilities relating to Rare Medium
and its business. ICC Desiccant Technologies is the sole general partner of, and
holds a 90% interest in, Fresh Air Solutions, L.P., a Pennsylvania limited
partnership ("Fresh Air Solutions LP"), which is engaged in the business of
designing, manufacturing and marketing, desiccant-based climate control systems.
ICC Desiccant Technologies also holds a 20% passive limited partnership interest
in Engelhard HexCore, L.P. ("Engelhard HexCore LP"), a desiccant and heat
exchange rotor manufacturer which is controlled by a wholly owned subsidiary of
Engelhard Corporation. Further, ICC agreed not to enter into or engage in any
other business, except as determined from time to time by the Board of
Directors. Notwithstanding the foregoing, the Rare Medium Merger Agreement
provides that in the event ICC is unable to effectuate the Proposed Spin-Off
within 180 days following the Effective Time due to issues relating to
compliance with federal or state securities laws or other legal or accounting
requirements, or for any other reason which is not within the reasonable control
of ICC or which would cause ICC to incur unreasonable expense, such failure
shall not constitute a breach of the Rare Medium Merger Agreement.
As soon as practicable following the Effective Time, but in any event
no sooner than ICC's next annual meeting of stockholders to be held within 180
days following the Effective Time, ICC has agreed to submit for stockholder
approval an amendment to its charter to change the name of ICC to "Rare Medium,
Inc." and will use its best efforts to cause its Board of Directors to approve
and recommend for approval such amendment to the stockholders of ICC. Further,
ICC has agreed, as soon as practicable following the Effective Time, to cause
its stock trading symbol to be changed.
Following the Effective Time, ICC has agreed to allocate up to $4
million of available cash of ICC for use as working capital for the Rare Medium
business.
Indemnification. The Rare Medium Stockholders and ICC have agreed to
indemnify each other for any losses resulting from a breach of, among other
things, their respective representations, warranties and covenants contained in
the Rare Medium Merger Agreement. To secure the indemnification obligations of
the Rare Medium Stockholders thereunder, 2,000,000 shares of ICC Stock delivered
to the Rare Medium Stockholders as part of the Merger Consideration have been
placed in escrow for a period of 12 months from the date of closing, and the
liability of the Rare Medium Stockholders under such indemnification obligations
is expressly limited to the value of such shares held in escrow.
5
<PAGE>
Finders Fee. ICC paid a finders fee of $200,000 to Seth Joseph Antine
upon consummation of the Merger.
Rare Medium Loans
ICC loaned $350,000 to Rare Medium on December 24, 1997 and an
additional $150,000 to Rare Medium in January 1998. In connection with such
loans, Rare Medium agreed not to enter into discussions with respect to an
acquisition agreement with any other entity (the "Standstill Agreement"). Such
loans were unsecured and matured on the earlier of (i) five years, (ii) the
consummation of an acquisition agreement by Rare Medium with another entity, or
(iii) the receipt by such candidate of significant financing from other sources,
and bore interest at the prime rate of 8.5% payable at maturity. Subsequent to
December 31, 1997, ICC loaned an additional $1,000,000 to Rare Medium and its
Standstill Agreement was extended through April 30, 1998. Upon the Effective
Time of the Merger, the principal amounts of such loans were converted into a
contribution to the capital of Rare Medium and the promissory notes evidencing
such loans were cancelled.
Officers and Directors of ICC Desiccant Technologies, Inc.
ICC Desiccant Technologies, Inc., is a wholly-owned subsidiary of ICC
which, through its interest in Fresh Air Solutions LP, is engaged in the
business of designing, manufacturing and marketing, desiccant-based climate
control systems. ICC Desiccant Technologies also holds a 20% passive limited
partnership interest in Engelhard HexCore, L.P., a desiccant and heat exchange
rotor manufacturer controlled by Engelhard Corporation. Upon the Effective Time
of the Merger, William A. Wilson, Robert O. Aders, Albert Resnick and Andrew
Shapiro were elected as the entire Board of Directors of ICC Desiccant
Technologies by ICC, to serve for the ensuing year and until election and
qualification of their successors. Mr. Wilson is also the President and Chief
Executive officer of ICC Desiccant Technologies. See "Basic Terms of the Merger
Agreement and Related Transactions - ICC Restructuring" above.
Business of Rare Medium
Rare Medium is an Internet solutions provider that provides Intranet,
Extranet and Web site solutions and services to businesses. Rare Medium provides
a package of services to businesses by combining advertising agency creative and
marketing skills with information technology services. Rare Medium offers a
comprehensive range of services to deliver Internet solutions designed to
improve clients' business processes. Rare Medium's services include strategy
consulting; needs analysis; creative, design and technology development; content
development, implementation and integration; audience development; application
development; maintenance and hosting. Rare Medium markets its services to medium
and large-sized companies.
Rare Medium combines talent and experience in the areas of client
services, marketing, technology, creative design, production management, and
business consulting designed to produce business solutions that satisfy clients'
needs. Rare Medium believes that its work has proven that with skilled planning
and a crafted approach, new media can enhance communication and streamline
business processes.
Business & Marketing Consulting: Rare Medium works with clients to
identify business objectives; Rare Medium's professionals assist with strategy
briefs and cost benefit analysis for projects. Rare Medium offers analysis of
clients' market positions, technical infrastructures, and specific business
requirements for solutions.
In the area of marketing and promotions, Rare Medium offers clients the
following online marketing solutions, as well as programs tailored to each
specific client, including search engine registration and positioning, and
targeted public relations strategy. Rare Medium can also provide support in:
o Media execution - working with its clients to develop advertising
strategies that accomplish online marketing goals and objectives.
6
<PAGE>
o Tracking and evaluation - tracking all visitor activity on clients'
sites, and providing detailed reports based on clients' needs.
o Audience development - recommending and implementing plans to
expand clients' consumer base.
Web Site Development: Rare Medium is known for its expertise at
creating branded environments, both for kids and for adults, that build on
product equity. Rare Medium can build e-commerce sites that optimize the
Internet as a distribution system. Rare Medium can also help clients meet
specific goals with the construction of intranets, extranets, and unique
software tailored to client needs. The design, strategy and development use
available and current technologies.
Custom Application Development: Rare Medium creates communications
solutions for clients in a variety of media, including Internet Web sites,
CD-ROMs, and kiosks, using top-notch creative talent and state-of-the-art
technology. Rare Medium designs and architects secure corporate intranets and
extranets that can reduce the costs of internal communication and refine work
flow. Specifically, Rare Medium can:
o build e-commerce solutions that help businesses take advantage of
the Internet as a new distribution system.
o create branded environments that build brand loyalty, promote
products, and generate new leads for our clients.
o build corporate training tools that are versatile, updateable, and
take advantage of new technology to improve work processes.
o create administration tools that allow Rare Medium or its clients
to easily update and add content to a Web-based interface.
o use powerful Active Server Page technology to give content updaters
control over adding, deleting, and editing database elements.
Internet Service & Hosting: By hosting its clients' sites Rare Medium
is able to develop and maintain the site with complete parity between the
development and live environments. Rare Medium locates its live servers in a
state-of-the-art 7x24 facility offering high-speed access to the Internet.
Risk Factors Relating to Rare Medium
As a result of the acquisition of Rare Medium on April 15, 1998, the
overall operations of ICC have substantially changed. The following risk factors
relating to Rare Medium and its business should be considered, along with those
risks discussed in ICC's filings previously made with the Securities and
Exchange Commission.
Extremely Limited Operating History. Rare Medium was founded in
September 1995 and has only a limited operating history on which to base an
evaluation of its business and prospects. There can be no assurance that Rare
Medium will be successful in meeting the challenges and addressing the risks it
faces as a company both in an early stage of development and in a new and
rapidly expanding market such as internet services, and the failure to do so
could have a material adverse effect on Rare Medium's, and in turn, ICC's,
business, results of operations and financial condition.
Future Capital Needs; Uncertainty of Additional Financing. Rare
Medium's future liquidity and capital requirements will depend upon numerous
factors, including the success of Rare Medium's existing and new service
offerings, competing technological and market developments and the success of
Rare Medium's growth and acquisition strategy. ICC may sell additional equity or
debt securities or seek additional credit facilities to fund Rare Medium's
7
<PAGE>
capital requirements and satisfy its debt obligations to the former stockholders
of Rare Medium. Sales of additional equity or convertible debt securities would
result in additional dilution to ICC's stockholders. Rare Medium may also need
to raise additional funds sooner in order to support more rapid expansion,
develop new or enhanced services and products, respond to competitive pressures,
acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. There is no guaranty that such funding will be
available, or available under terms acceptable to ICC or Rare Medium. If Rare
Medium requires and is unable to obtain such funding, there would be a material
adverse effect on Rare Medium's, and in turn, ICC's, business, results of
operations and financial condition. If adequate funds are not available on
acceptable terms, Rare Medium may be unable to develop or enhance its services
and products, take advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on Rare Medium's,
and in turn, ICC's, business, results of operations and financial condition.
Risks Related to Acquisitions. A key component of Rare Medium's growth
strategy is the acquisition of Internet professional services firms that meet
Rare Medium's criteria for revenues, profitability, growth potential and
operating strategy. There can be no assurance that Rare Medium or ICC will be
able to acquire such candidates on acceptable terms or that pursuing such
acquisitions, regardless of whether such acquisitions are completed, will not
have a material adverse impact, either directly or indirectly, on Rare Medium,
and in turn, ICC's, business, results of operations and financial condition.
Potential Fluctuations in Operating Results. As a result of Rare
Medium's limited operating history, growth and the nature of the markets
in which it competes, Rare Medium's historical financial data is of limited
value in planning future operating expenses. Rare Medium believes that
period-to-period comparisons of its operating results are not meaningful and
that the results for any period should not be relied upon as an indication of
future performance. It is difficult to forecast accurately Rare Medium's
revenues which are derived from the services it offers in providing Internet
solutions. A significant shortfall in demand for Rare Medium's services could
have an immediate and material adverse effect on Rare Medium's, and in turn,
ICC's, business, results of operations and financial condition. In addition,
Rare Medium's quarterly results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of Rare Medium's
control, including, but not limited to, demand for Internet solutions, the
availability of suitable acquisition candidates, Rare Medium's ability to
attract and retain skilled qualified personnel, government regulation and
general economic conditions. Furthermore, it is possible that in some future
quarters Rare Medium's results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading price of ICC's
common stock would likely be materially and adversely affected.
Dependence on Key Personnel; Recruitment and Retention of Internet
Solutions Professionals. Rare Medium's performance is substantially dependent on
the continued services and on the performance of its executive officers and
other key employees, many of whom have worked together only for a relatively
short period of time. The loss of the services of any of its executive officers
or other key employees could have a material adverse effect on Rare Medium's,
and in turn, ICC's, business, results of operations and financial condition.
Further, Rare Medium's success depends in large part on its ability to identify,
hire, train and retain Internet professionals who can provide the technical,
strategic, creative, marketing and audience development skills required by
clients. There is a shortage of qualified personnel and Rare Medium competes
with other companies for this limited pool. Accordingly, there can be no
assurance that Rare Medium will be able to attract or retain such qualified
personnel in the future which if it fails to do so would have a material adverse
effect on Rare Medium's, and in turn, ICC's, business, results of operations and
financial condition.
Competition; Low Barriers to Entry. The market for Internet
professional services is relatively new, intensely competitive, rapidly evolving
and subject to rapid technological change. Rare Medium expects competition to
persist and increase in the future. Increased competition may result in price
reductions, reduced margins and loss of market share, any of which could
materially adversely affect Rare Medium's, and in turn, ICC's, business, results
of operations and financial condition. Furthermore, most of Rare Medium's
current and potential competitors have longer operating histories, larger
installed customer bases, greater name recognition, longer relationships with
clients and significantly greater financial, technical, marketing and public
relations resources than Rare Medium and ICC, and could at any time increase
their resource commitments to Rare Medium's markets. Further, there are
relatively low barriers to entry into
8
<PAGE>
Rare Medium's business and Rare Medium expects that it will face additional
competition from new market entrants in the future. Accordingly, there can be no
assurance that existing or future competitors will not develop or offer services
that provide significant performance, price or other advantages over those
offered by Rare Medium, any of which could have a material adverse effect on
Rare Medium's, and in turn, ICC's, business, results of operations and financial
condition.
Management of Growth; Integration of Acquisitions. Rare Medium's growth
has placed, and its anticipated continued growth through acquisitions and
otherwise, is expected to continue to place, a significant strain on Rare
Medium's, and in turn, ICC's, managerial, operational, financial and other
resources. As of March 31, 1998, Rare Medium had grown to 57 employees since its
inception in September 1995, and it expects that continued hiring of new
personnel will be required to support its business. There can be no assurance
that Rare Medium's or ICC's existing or future systems, procedures or controls
will be adequate to support Rare Medium's operations or that Rare Medium's and
ICC's management will be able to manage the growth and successfully integrate
the organizations that Rare Medium acquires, if any. If Rare Medium is unable to
manage either internal growth or growth through acquisitions effectively, Rare
Medium's, and in turn, ICC's, business, results of operations and financial
condition will be materially adversely affected.
Uncertain Maintenance and Strengthening of the Rare Medium Brand. Rare
Medium believes that the maintenance and strengthening of the Rare Medium brand
is an important aspect of its efforts to attract and maintain clients and that
the importance of brand recognition will increase as competition in the market
for Internet professional services increases. A single engagement could tarnish
the perception of Rare Medium as a whole. Moreover, client dissatisfaction with
a single engagement could tarnish the perception of Rare Medium as a whole,
despite any efforts by Rare Medium to maintain and strengthen the Rare Medium
brand name. If Rare Medium fails to promote and maintain its brand, or incurs
excessive expenses in an attempt to promote and maintain its brand, Rare
Medium's, and in turn, ICC's, business, results of operations and financial
condition will be materially adversely affected.
Reliance Upon Key Strategic Relationships. Rare Medium has established
key strategic relationships with Microsoft and Marcomedia. The loss of either of
these relationships would deprive Rare Medium of the opportunity to gain early
access to leading-edge technology, cooperatively market products with the
vendor, cross-sell additional services and gain enhanced access to vendor
training and support. In the event that either of these strategic relationships
is terminated, Rare Medium's, and in turn, ICC's, business, results of
operations and financial condition may be materially adversely affected.
Dependence on Limited Number of Customers. In 1997, Rare Medium had 2
customers each of which accounted for more than 10% of Rare Medium's net sales
and all together accounted for approximately 30% of Rare Medium's net sales in
1997. None of the customers of Rare Medium have a long term contractual
obligation to make purchases from Rare Medium. Since customer contracts can be
canceled and purchase levels can be changed or purchases delayed at any time,
the timely replacement of canceled, delayed or reduced contracts with new orders
cannot be assured. While Rare Medium expects its clients to vary from year to
year and does not believe that it is dependent upon any single customer, the
loss of one or more of its customers could have a material adverse effect on
Rare Medium's, and in turn, ICC's, business, results of operations and financial
condition.
Uncertain Adoption of Internet Solutions; Dependence on Client
Outsourcing. The market for Rare Medium's services will depend upon the adoption
of Internet solutions by companies to improve their business processes. If
critical issues concerning the ability of Internet solutions to improve business
processes are not resolved or if the necessary infrastructure is not developed,
Rare Medium's, and in turn, ICC's, business, results of operations and financial
condition will be materially adversely affected.
Rapid Technological Change. There can be no assurance that Rare Medium
will be successful in responding quickly, cost-effectively and sufficiently to
the rapid technological change that characterizes the market for Internet
professional services. If Rare Medium is unable, for technical, financial or
other reasons, to adapt in a timely manner in
9
<PAGE>
response to changing market conditions or client requirements, Rare Medium's,
and in turn, ICC's, business, results of operations and financial condition
would be materially adversely affected.
Potential Liability to Clients. Rare Medium's failure or inability to
meet a client's expectations in the performance of its services could injure
Rare Medium's business reputation or result in a claim for substantial damages
against Rare Medium or ICC, regardless of its responsibility for such failure.
Such harm to Rare Medium's reputation or claim for damages, could adversely
affect Rare Medium's, and in turn, ICC's, business, results of operations and
financial condition.
Government Regulation and Legal Uncertainties. Rare Medium is not
currently subject to direct government regulation, other than pursuant to the
securities laws and the regulations thereunder applicable to all publicly owned
companies, and laws and regulations applicable to businesses generally, and
there are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. Due to the increasing popularity and use of the
Internet, it is likely that a number of laws and regulations may be adopted at
the local, state, national or international levels with respect to the Internet.
Such laws and regulations could have a material adverse effect on Rare Medium's,
and in turn, ICC's, business, results of operations and financial condition.
Year 2000 Compliance. Rare Medium utilizes a significant number of
computer software programs and operating systems across its entire organization,
including applications used in operating network access, content providers, and
various administrative and billing functions. To the extent Rare Medium's
software applications contain source codes that are unable to appropriately
interpret the upcoming calendar year 2000, some level of modification, or even
possibly replacement of such applications, may be necessary. Rare Medium is in
the early stages of conducting its Year 2000 audit and therefore is unable to
make a reasonable estimate of the costs associated with Year 2000 compliance.
Accordingly, no assurance can be given that any or all of Rare Medium's or third
party systems are or will be Year 2000 compliant or that the costs required to
address the Year 2000 issue or the impact of a failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on Rare Medium's,
and in turn, ICC's, business, results of operations and financial condition.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Rare Medium
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Rare Medium below relates to periods prior to ICC's acquisition
of Rare Medium on April 15, 1998. For Management's Discussion and Analysis of
Financial Condition and Results of Operations of ICC for such periods, reference
is made to ICC's Annual Report on Form 10-K, as amended on Form 10-K/A, for the
year ended December 31, 1997 and its Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
Safe Harbor for Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Rare Medium below contains certain forward-looking statements
that involve risks and uncertainties, including statements regarding Rare
Medium's strategy, financial performance, and revenue sources. Such
forward-looking statements include, among others, those statements including the
words, "expects", "anticipates", "intends", "believes" and similar language.
Rare Medium's actual results could differ materially from the results
anticipated in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, and the risks discussed under the caption, "Risk Factors Relating to Rare
Medium" above.
Overview
Rare Medium is a wholly-owned subsidiary of ICC, acquired by ICC on
April 15, 1998. Rare Medium is an Internet professional services firm that
provides Intranet, Extranet and Web site solutions and services to businesses.
Rare Medium offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. Rare Medium's
services include strategy consulting; needs analysis; creative, design and
technology
10
<PAGE>
development; content development, implementation and integration; audience
development; application development; maintenance and hosting. Rare Medium
markets its services to large and medium-sized companies.
Rare Medium was formed as a privately held company in September of 1995
and, accordingly, has only a limited operating history upon which to base an
evaluation of its business and prospects. Rare Medium and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Interactive media and
Internet professional services. Such risks for Rare Medium include, but are not
limited to, an evolving business model and the management of both internal and
acquisition-based growth. To address these risks, Rare Medium must, among other
things, continue to develop the strength and quality of its operations, maximize
the value delivered to clients, enhance the Rare Medium brand, respond to
competitive developments and continue to attract, retain and motivate qualified
employees. There can be no assurance that Rare Medium will be successful in
meeting these challenges and addressing such risks, and the failure to do so
could have a material adverse effect on Rare Medium's and, in turn, ICC's
business, results of operations and financial condition. Although Rare Medium
has experienced revenue growth in recent periods, such historical growth rates
may not be sustained or indicative of future operating results. To the extent
that revenues do not grow at anticipated rates, that increases in operating
expenses precede or are not subsequently followed by commensurate increases in
revenues or that Rare Medium is unable to adjust operating expense levels
accordingly, Rare Medium's, and in turn ICC's, business, results of operations
and financial condition will be materially and adversely affected. For
additional discussion, see "Risk Factors" above.
Results of Operations
Revenue:
For the quarter ended March 31, 1998, revenue was $1.0 million, an
increase of 101 % over the first quarter of 1997. Revenue for fiscal year 1997
was $ 3.9 million, an improvement of 279 % over the prior year. In 1996,
revenues increased to $ 1.0 million from less than $0.1 million for the three
month period in 1995, Rare Medium's initial year of operation. The revenue
increases generally are the result of growth in the number of projects, in
addition to an increase in the revenue per project.
Expenses:
Cost of Revenues:
Cost of revenues include principally salaries and some
additional expenses directly associated with projects. Cost of revenues
increased to $ 0.6 million for the quarter ended March 31, 1998, up from $ 0.2
million in same period in 1997. The gross margin declined from 56% in the first
quarter of 1997 to 40% for the comparable period in 1998. The decrease in
margin, as well as the increase in absolute dollars, were due primarily to
increased investment in personnel and higher revenues. Gross margin for the year
ended December 31, 1997 was 60%, up from 52% in the prior year. For the fiscal
year ended December 31, 1997, cost of revenue increased to $ 1.5 million from $
0.5 million in 1996. The increase is principally the result of higher revenues
and increased investment in personnel.
Operating Expenses:
Operating expenses in 1997 increased to $5.9 million from $0.3
million in 1996 primarily as the result of non-cash compensation charges
(stock-based) of $4.1 million and a non-cash finder's fee of $0.5 million.
Excluding these expenses, operating expenses increased $1.0 million.
Operating expenses for the three months ended March 31, 1998
increased to $0.6 million from $0.1 million for the three months ended March 31,
1997, primarily due to the hiring of additional personnel and related costs
discussed below.
11
<PAGE>
General and Administrative:
The increases in expenses are attributable to increases in
personnel and related costs to manage and support Rare Medium's current and
expected internal growth and the growth anticipated with its planned acquisition
program. Rare Medium expects general and administrative expenses to increase on
an absolute dollar basis as Rare Medium hires additional personnel, expands into
new markets and incurs additional costs related to the growth of its business,
promotion of the Rare Medium brand, and its operations as part of a public
company.
Non-operating Items and Income Taxes:
Interest income increases are the result of increases in cash
and cash equivalents available for investment. Interest income in future periods
may fluctuate as a result of fluctuations in average cash balances maintained by
Rare Medium and changes in the market rate of its investments. Increases in
depreciation and amortization are the result of significant additions in
technical equipment to support the increase in personnel and revenue growth. The
company elected "S" corporation status, effective January 1, 1996, under the
applicable provisions of the Internal Revenue Code and New York State income tax
law. The net income of the company flows through to the shareholders' income tax
return. Accordingly, no provision for Federal income taxes has been made. The
company remains liable for New York State Corporation Tax and New York City
General Corporation Tax.
Net Income:
Net income decreased from $0.2 million in 1996 to a loss of
$3.6 million in 1997 as a result of non-cash compensation charges of $4.1
million and a non-cash finder's fee of $0.5 million. Excluding these expenses,
net income before taxes increased approximately $0.8 million, which was in
excess of 300% above the prior year.
Rare Medium recorded a net loss of $0.2 million for the three
months March 31, 1998 as compared to net income of $0.2 million for the same
period in 1997. The net loss was primarily due to the hiring of additional
personnel and related costs in all areas of Rare Medium as it continued to build
its infrastructure to manage and support Rare Medium's current and anticipated
growth internally and growth anticipated through its planned acquisition
program, all aimed toward expanding its markets and increasing its brand
awareness.
Liquidity and Capital Resources
Rare Medium had $1.2 million in cash and equivalents at March
31, 1998. Rare Medium recorded a net loss of $0.2 million for the three months
March 31, 1998 as compared to net income of $0.2 million for the same period in
1997. In addition to the operating loss, Rare Medium's major use of cash for the
three months ending March 31, 1998 related to equipment purchases, costs related
to leasehold improvements and Rare Medium's move to its new location. During
this three month period, Rare Medium also received $1,150,000 as proceeds from
loans from ICC. See "Rare Medium Loans" above.
Management anticipates that Rare Medium will experience a
substantial increase in its capital expenditures and lease commitments
consistent with its anticipated growth in operations, infrastructure and
personnel. Rare Medium currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
its operating expenses will be a material use of Rare Medium's cash resources.
In addition, Rare Medium expects to have an active acquisition program as a
critical part of its growth strategy. These acquisitions will represent a
significant use of capital.
While Rare Medium believes it has the capital resources to meet
its short term needs covering at least the next twelve months, it may be
required to raise additional capital during such period to fund working capital
or debt service requirements. In addition, ICC anticipates it will need to
raise capital to retire the $22.2 million in debt incurred by ICC in connection
with the Rare Medium acquisition, which matures one-half in the year 2000 and
one-half in the year 2001.
12
<PAGE>
ICC may sell additional equity or debt securities or seek
credit facilities to fund Rare Medium's capital requirements and to satisfy its
debt obligations to the former stockholders of Rare Medium. As of the date
hereof, neither ICC nor Rare Medium has entered into any binding agreements or
commitments to sell additional equity or debt securities or to obtain a credit
facility for such purposes. Sales of additional equity or convertible debt
securities would result in additional dilution to ICC's stockholders. Rare
Medium may need to raise additional funds sooner in order to support more rapid
expansion, develop new or enhanced services and products, respond to competitive
pressures, acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. Rare Medium's future liquidity and capital
requirements will depend upon numerous factors, including the success of Rare
Medium's existing and new service offerings and competing technological and
market developments. There is no guaranty that such funding will be available,
or available under terms acceptable to ICC or Rare Medium. If ICC or Rare Medium
requires and is unable to obtain such funding, there would be a material adverse
effect on Rare Medium's, and in turn ICC's, business, results of operations and
financial condition. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing."
To the extent that revenues do not grow at anticipated rates,
that increases in operating expenses precede or are not subsequently followed by
commensurate increases in revenues or that Rare Medium is unable to adjust
operating expense levels accordingly, Rare Medium's and, in turn, ICC's
business, results of operations and financial condition will be materially and
adversely affected.
Recent Accounting Developments
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. ICC has not yet determined the
impact, if any, of adopting SOP 98-1, which will be effective for ICC's year
ending December 31, 1999
Rare Medium utilizes a significant number of computer software
programs and operating systems across its entire organization, including
applications used in operating network access, content providers, and various
administrative and billing functions. To the extent Rare Medium's software
applications contain source codes that are unable to appropriately interpret the
upcoming calendar year 2000, some level of modification, or even possibly
replacement of such applications, may be necessary.
Rare Medium has appointed a Year 2000 Task Force to perform an
audit to assess the scope of Rare Medium's risks and bring its applications into
compliance. This Task Force is currently in the process of completing its
identification of applications that are not Year 2000 compliant. In addition,
Rare Medium has begun to ask its vendors, joint venture partners and content
partners about their progress in identifying and addressing problems that their
computer systems may face in correctly processing date information related to
the Year 2000.
Rare Medium is in the early stages of conducting its Year 2000
audit and therefore is unable to make a reasonable estimate of the costs
associated with Year 2000 compliance. Accordingly, no assurance can be given
that any or all of Rare Medium's or third party systems are or will be Year 2000
compliant or that the costs required to address the Year 2000 issue or the
impact of a failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on Rare Medium's, and in turn, ICC's, business,
financial condition or results of operations.
13
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Index to Financial Statements
Rare Medium, Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial statements for the three month periods ended March 31, 1998 and 1997
(unaudited) and for the years ended December 31, 1997 and 1996 and for the
period September 25, 1995 (date of formation) to December 31, 1995:
Report of Independent Accountants 15
Balance sheets as of March 31, 1997 and 1998 (unaudited), December 31, 16
1997 and December 31, 1996
Statements of operations for the three month periods ended March 31, 17
1997 and 1998 (unaudited) and for the years ended December 31, 1997 and
1996 and for the period September 25, 1995 (date of formation) to
December 31, 1995
Statements of changes in stockholders' equity for the three month 18
period ended March 31, 1997 and 1998 (unaudited) and for the years
ended December 31, 1997 and 1996 and for the period September 25, 1995
(date of formation) to December 31, 1995
Statements of cash flows for the three month periods ended March 31, 19
1997 and 1998 (unaudited), and for the years ended December 31, 1997
and 1996 and for the period September 25, 1995 (date of formation) to
December 31, 1995
Notes to financial statements 20
</TABLE>
14
<PAGE>
Report of Independent Accountants
To The Stockholders of
Rare Medium, Inc.
44 West 18th Street, 6th Floor
New York, NY 10011
We have audited the accompanying balance sheets of Rare Medium, Inc. (an S
Corporation) as of December 31, 1997 and 1996, and the related statements of
operations and retained earnings (deficit), changes in stockholders' equity, and
cash flows for the years then ended and for the period September 25, 1995 (date
of formation) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rare Medium, Inc. as of
December 31, 1997 and 1996, and the results of its operations, and its cash
flows for the years then ended and for the period September 25, 1995 (date of
formation) to December 31, 1995 in conformity with generally accepted accounting
principles.
GOULD & COMPANY, P.C.
New York, NY
May 26, 1998
15
<PAGE>
RARE MEDIUM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, (Unaudited)
March 31,
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 376,501 $ 543,856 $ 471,787 $ 1,198,849
Accounts receivable - less allowance
for doubtful accounts 66,091 1,261,064 327,754 1,169,107
Work in process 93,242 114,263 90,636 54,750
Prepaid expenses 8,515 5,688 8,306 3,951
----------- ----------- ----------- -----------
Total current assets 544,349 1,924,871 898,483 2,426,657
PROPERTY AND EQUIPMENT, NET 123,797 347,226 174,069 768,448
OTHER ASSETS, NET
12,000 342,400 312,000 344,730
----------- ----------- ----------- -----------
Total assets $ 680,146 $ 2,614,497 $ 1,384,552 $ 3,539,835
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,744 $ 162,224 $ 37,016 $ 284,060
Accrued payroll expense 26,708 396 4,230 808
Deferred taxes payable -- 9,739 11,316 7,353
Income taxes payable 22,014 425 325 325
Deferred revenue 113,842 233,785 135,706 69,250
----------- ----------- ----------- -----------
Total current liabilities 169,308 406,569 188,593 361,796
NOTES PAYABLE TO ICC
TECHNOLOGIES, INC -- 350,000 -- 1,500,000
DEFERRED RENT PAYABLE -- 29,986 -- 74,665
COMMITMENTS
STOCKHOLDERS' EQUITY: -- -- -- --
Common stock - No par value (10,000,000
shares authorized; 3,000,000 shares issued at
December 31, 1995; 3,125,000 shares issued at
December 31, 1996; 3,350,000 shares issued at
March 31, 1997 (unaudited), December 31,
1997, and March 31, 1998 (unaudited)) 5,208 5,583 5,583 5,583
Additional paid-in capital 249,792 5,348,058 759,417 5,348,058
Retained Earnings (Deficit) 255,838 (3,525,699) 430,959 (3,750,267)
----------- ----------- ----------- -----------
Total stockholders' equity 510,838 1,827,942 1,195,959 1,603,374
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $ 680,146 $ 2,614,497 $ 1,384,552 $ 3,539,835
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
RARE MEDIUM, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Period from
September 25, 1995 (Unaudited)
(date of formation) Years Ended Three Months Ended
to December 31, December 31, March 31
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE $ 85,591 $ 1,017,787 $ 3,856,223 $ 519,184 $ 1,041,532
COST OF PROFESSIONAL
SERVICES -- 452,050 1,431,838 212,489 577,052
DEPRECIATION AND
AMORTIZATION 3,958 33,593 106,840 13,495 43,376
----------- ----------- ----------- ----------- -----------
Gross profit 81,633 532,144 2,317,545 293,200 421,104
OPERATING EXPENSE
(INCOME):
General and administrative 15,611 325,996 1,349,494 105,884 650,006
Interest and dividend income -- (2,810) (21,921) (5,830) (6,167)
Interest expense -- -- -- -- 1,208
Stock-based Compensation -- -- 4,088,641 -- --
Finders Fee -- -- 500,000 -- --
----------- ----------- ----------- ----------- -----------
Total net operating expenses 15,611 323,186 5,916,214 100,054 645,047
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES 66,022 208,958 (3,598,669) 193,146 (223,943)
PROVISION FOR INCOME TAXES -- 19,142 29,135 18,025 625
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 66,022 189,816 (3,627,804) 175,121 (224,568)
RETAINED EARNINGS
(DEFICIT)
Beginning of year/period -- 66,022 255,838 255,838 (3,525,699)
DISTRIBUTIONS -- -- 153,733 -- --
----------- ----------- ----------- ----------- -----------
RETAINED EARNINGS
DEFICIT - End of
year/period $ 66,022 $ 255,838 $(3,525,699) $ 430,959 $(3,750,267)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
RARE MEDIUM INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period September 25, 1995 to March 31, 1998
<TABLE>
<CAPTION>
Total
Shares Common Additional Retained Stockholders
Issued Stock Paid-in Capital Earnings Equity
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock 3,000,000 $ 5,000 -- -- $ 5,000
Net Income $ 66,022 66,022
----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1995 3,000,000 5,000 -- 66,022 71,022
Issuance of common stock for
Cash 125,000 208 $ 249,972 -- 250,000
Net income 189,816 189,816
----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1996 3,125,000 5,208 249,792 255,838 510,838
Issuance of common stock 110,000 183 209,817 -- 210,000
Common stock issued for
future services 115,000 192 299,808 -- 300,000
Net income (unaudited) -- -- -- 175,121 175,121
----------- ----------- ----------- ----------- -----------
BALANCE MARCH 31, 1997
(unaudited) 3,350,000 5,583 759,417 430,959 1,195,959
Distributions -- -- -- (153,733) (153,733)
Warrants issued under stock
option plans -- -- 4,588,641 -- 4,588,641
Net loss (4/1/97-12/31/97) -- -- -- (3,802,925) (3,802,925)
----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1997 3,350,000 5,583 5,348,058 (3,525,699) 1,827,942
Net loss (unaudited) -- -- -- (224,568) (224,568)
----------- ----------- ----------- ----------- -----------
BALANCE MARCH 31, 1998
(unaudited) 3,350,000 $ 5,583 $ 5,348,058 $(3,750,267) $ 1,603,374
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
RARE MEDIUM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period (Unaudited)
September 25, 1995 Three Months Ended
to Years Ended December 31, March 31
December 31, 1995 1996 1997 1997 1998
----------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ 66,022 $ 189,816 $(3,627,804) $ 175,121 $ (224,568)
Non-cash items included in
net income (loss):
Depreciation and amortization 3,958 33,593 106,840 13,495 43,376
Non Cash Compensation Expense -- -- 4,088,641 -- --
Non Cash Finders Fee Expense -- -- 500,000 -- --
Deferred income taxes -- (3,365) 13,104 14,681 (2,386)
Deferred rent payable -- -- 29,986 -- 44,679
Changes in assets and
liabilities:
Accounts receivable (76,660) 10,569 (1,194,973) (261,663) 91,957
Work in process -- (93,242) (21,021) 2,606 59,513
Prepaid expenses -- (5,150) 5,150 -- (131,088)
Prepaid taxes -- -- (5,688) (3,156) 1,737
Accounts payable 178 6,566 155,480 30,272 121,836
Income taxes payable -- 22,014 (21,589) (21,689) (100)
Accrued payroll expense -- 26,708 (26,312) (22,478) 131,500
Deferred revenue 10,000 103,842 119,943 21,864 (164,535)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES 3,498 291,351 121,757 (50,947) (28,079)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property and
equipment (39,258) (122,090) (330,269) (63,767) (464,598)
Change in security deposits -- (12,000) (30,400) -- (2,330)
----------- ----------- ----------- ----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (39,258) (134,090) (360,669) (63,767) (466,928)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Change in officers' loan 35,055 (35,055) -- -- --
Proceeds from issuance of
notes -- -- 350,000 -- 1,150,000
Proceeds from issuance of
common stock 5,000 250,000 210,000 210,000 --
Dividends to Stockholders -- -- (153,733) -- --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 40,055 214,945 406,267 210,000 1,150,000
----------- ----------- ----------- ----------- -----------
NET INCREASE IN CASH
AND CASH AND CASH
EQUIVALENTS: 4,295 372,206 167,355 95,286 654,993
Beginning -- 4,295 376,501 376,501 543,856
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS:
End $ 4,295 $ 376,501 $ 543,856 $ 471,787 $ 1,198,849
=========== =========== =========== =========== ===========
Supplemental disclosures of
cash flow information -
Cash paid during the year for:
Income taxes -- $ 493 $ 43,308 $ 28,189 $ 1,374
----------- ----------- ----------- ----------- -----------
Interest -- -- -- -- $ 1,208
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements
19
<PAGE>
RARE MEDIUM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Rare Medium, Inc. (the Company) is an internet solutions
company that provides for its clients various types of interactive computer
services, such as website development and intra/extranet and CD-ROM development.
The Company incorporated on September 25, 1995 under the laws of the State of
New York. The Company was primarily owned (approximately 90%) by six
stockholders as of December 31, 1997. There are other investors who share in the
ownership of the remaining 10% of the Company in unequal proportions. Subsequent
to the date of these financial statements, ownership of the Company has changed.
The Company's clients are located throughout the United States.
Revenue Recognition - The Company recognizes revenue over the period of time of
each engagement using primarily the percentage of completion method of
accounting using labor hours incurred as the measure of progress towards
completion. Deferred revenues represent the amounts invoiced in advance of
services being performed. Work in progress consists of the cost of services
performed which have not been billed.
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 as of 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.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using an accelerated method over the estimated useful lives of the
assets. Amortization on leasehold improvements is calculated over the life of
the related leases or assets, whichever is shorter.
Cash and Cash Equivalents - Cash and cash equivalents represent money markets
and other highly liquid investments maturing in 90 days or less. As of December
31, 1997 and March 31, 1998, the Company held cash in demand accounts at banks
in excess of the federally insured amounts.
Income Taxes - The company has elected "S" Corporation status, effective January
1, 1996, under the applicable provisions of the Internal Revenue Code and New
York State income tax law. The net income of the Company flows through to the
shareholders' income tax return. Accordingly, no provision for Federal income
taxes has been made. The Company remains liable for New York State Corporation
Tax and New York City General Corporation Tax.
Deferred taxes result from temporary differences in the recognition of revenues
and expenses for financial statement and tax purposes. The primary temporary
differences arise from the use of the cash receipts and disbursements method of
reporting income for tax purposes.
Allowance for Doubtful Accounts - The Company has established an allowance for
doubtful accounts based on collection experience and management's evaluation of
collectible outstanding accounts receivable. The allowance for doubtful accounts
was $50,000, $50,000 and $0 as of March 31, 1998 and December 31, 1997 and 1996,
respectively.
(continued)
20
<PAGE>
RARE MEDIUM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risks - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents and accounts receivable. The Company limits its
exposure to credit loss by depositing its cash and cash equivalents with high
credit quality financial institutions. The Company believes the risk with
respect to trade receivables is mitigated, to some extent, by the fact that the
Company's customer base is geographically dispersed and is highly diversified.
The Company has not experienced any significant credit losses to date. At times,
the Company may receive professional services revenues from individual clients,
or agencies, of up to 20% of total revenues (in one case in 1996 in excess of
20%). However, the Company expects these clients to vary from year to year. The
Company does not believe that it is dependent upon any single customer.
NOTE 2 - INTERIM FINANCIAL INFORMATION
The financial statements and related financial information as of March 31, 1997
and 1998 and for the three months ended March 31, 1997 and 1998 are unaudited.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results of operations have
been included. Results of operations for the three months ended March 31, 1998
may not be indicative of the results expected for the year ending December 31,
1998.
NOTE 3 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31, (Unaudited) (Unaudited)
1996 1997 March 31, 1997 March 31, 1998
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Equipment $102,021 $408,429 $154,552 $570,807
Furniture and fixtures 59,327 83,188 70,563 109,865
Leasehold improvements
-- -- -- 275,543
-------- -------- -------- --------
Total 161,348 491,617 225,115 956,215
Less: Accumulated depreciation 37,551 144,391 51,046 187,767
-------- -------- -------- --------
Total $123,797 $347,226 $174,069 $768,448
======== ======== ======== ========
</TABLE>
NOTE 4 - INCOME TAXES
The provisions for New York State and City income taxes are comprised of the
following components:
<TABLE>
<CAPTION>
December 31, December 31, (Unaudited) (Unaudited)
1996 1997 March 31, 1997 March 31, 1998
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Current 22,507 $16,031 $ 3,344 $ 3,011
Deferred (3,365) 13,104 14,681 (2,386)
-------- ------- ------- --------
Total $ 19,142 $29,135 $18,025 $ 625
======== ======= ======= ========
</TABLE>
(continued)
21
<PAGE>
RARE MEDIUM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS
The Company entered into an office lease dated 11/1/97 for a period of ten years
and two months. Future minimum lease payments are as follows:
1998 $ 100,000
1999 153,000
2000 157,590
2001 162,317
2002 172,290
Thereafter 1,076,761
-----------
Total $ 1,821,958
===========
The lease includes six month rent abatement. Rent has been calculated as a
straight-line cost over the life of the lease. This has given rise to a deferred
rent payable of $29,986 and $74,665 as of December 31, 1997 and March 31, 1998,
respectively. The Company has operating leases for equipment expiring within the
next three years. Future minimum lease payments at March 31, 1998 are as
follows:
1998 $ 4,716
1999 6,288
2000 1,778
-------
Total $12,782
=======
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company received straight trade credits of $300,000 in exchange for shares
of common stock in the year ended December 31, 1997. The straight trade credits
are to be used in the purchase of advertising time or space in the United
States. These trade credits had not been utilized as of March 31, 1998 and will
be amortized as the services are provided.
NOTE 7 - NOTE PAYABLE
The Company has notes payable to ICC Technologies in principal amounts totalling
$350,000 and $1,500,000 at December 31, 1997 and March 31, 1998. These notes
were cancelled in connection with the acquisition of the Company on April 15,
1998 (see Note 9).
(continued)
22
<PAGE>
RARE MEDIUM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - DEFERRED REVENUE
The Company has deferred revenue for services invoiced but not completed of
$135,706, $69,250, $233,785, and $113,842 as of March 31, 1997 and 1998 and
December 31, 1997 and 1996, respectively. Estimates have been used to determine
job completion percentages.
NOTE 9 - SUBSEQUENT EVENTS
On April 15, 1998, the Company was acquired by ICC Technologies, Inc., a
publicly held company. In consideration for the acquisition, the stockholders of
Rare Medium, Inc. received, in exchange for all of their outstanding shares of
common stock, a total of approximately $46.2 million, consisting of a
combination of $10 million in cash, $22.2 million in a promissory note and the
remainder in 4,269,300 shares of common stock of ICC Technologies, Inc.
NOTE 10 - STOCK OPTIONS AND WARRANTS
The Company issued a warrant under an employment agreement to Glenn Meyers on
November 17, 1997. The warrant enabled Mr. Meyers to purchase 850,000 shares of
Rare Medium stock at an exercise price of .67 cents per share. The stock was
fully vested and immediately exercisable on the issue date. The option was
exercised on April 10, 1998 in a cashless transaction, in which shares received
were reduced by 42,405 representing the value of the exercise price of the
option. In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation", the Company has recorded compensation
expense of $4,088,641 which represents the market value of the stock at both
December 31, 1997 and March 31, 1998.
The Company also issued a warrant under a separate agreement to a non-employee
for services rendered as finders fees' on November 17, 1997. The warrant is for
the purchase of 1,484,500 shares of Rare Medium stock at an exercise price of
.67 cents per share. The stock was fully vested and immediately exercisable on
the issue date. The option was exercised on April 14, 1998 in a cashless
transaction, in which shares received were reduced by 74,600, representing the
value of the exercise price of the option. In accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation", the Company has valued and recorded the finders fee at $500,000
at December 31, 1997 based on the value of the services received by the
Company.
23
<PAGE>
(b) Pro forma financial information.
Index to Pro Forma Consolidated Financial Statements (unaudited): Page
----
Introduction 25
Pro Forma Consolidated Balance Sheet as of March 31, 1998 26
(unaudited)
Pro Forma Consolidated Statement of Operations for the year 28
ended December 31, 1997 (unaudited)
Pro Forma Consolidated Statement of Operations for the three months 29
ended March 31, 1998 (unaudited)
Notes to Pro Forma Consolidated Financial Statements 30
24
<PAGE>
ICC UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The following financial statements set forth the Company's: (i)
unaudited pro forma consolidated balance sheet as of March 31, 1998 in order to
illustrate the effect upon the Company's historical financial position as if the
acquisition by merger of Rare Medium, Inc. (the "Acquisition") had occurred on
that date and (ii) unaudited pro forma consolidated statement of operations for
the year ended December 31, 1997 for the three month period ended March 31, 1998
in order to demonstrate the effects upon the Company's historical results of
operations as if the Acquisition had occurred at January 1, 1997.
The pro forma consolidated financial statements have been prepared from
the historical financial statements of the Company and Rare Medium, Inc. and
certain adjustments with respect to the Acquisition as explained hereafter.
<PAGE>
ICC TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
Historical Pro Forma
ICC Historical Adjustments Pro Forma
Technologies Rare Medium DR.(CR.) As Adjusted
------------ ------------ ------------- -------------
CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 17,289,611 $ 1,198,849 $(10,000,000)(1) $ 8,188,460
(300,000)(7)
Accounts receivable 1,612,188 1,169,107 -- 2,781,295
Inventories 2,269,174 54,750 -- 2,323,924
Prepaid expenses and other 306,532 3,951 -- 310,483
------------ ------------ ------------ ------------
Total current assets 21,477,505 2,426,657 (10,300,000) 13,604,162
PROPERTY, PLANT AND EQUIPMENT 2,495,488 768,448 -- 3,263,936
NOTES RECEIVABLE FROM RARE
MEDIUM 1,500,000 -- (1,500,000)(4)
RESTRICTED CASH 750,000 -- -- 750,000
INVESTMENT IN ENGLEHARD
HEXCORE 249,772 -- -- 249,772
OTHER ASSETS, net 31,186 344,730 -- 375,916
INTANGIBLE ASSETS -- -- 44,942,623(2) 44,942,623
------------ ------------ ------------ ------------
Total assets $ 26,503,951 $ 3,539,835 $ 33,142,623 $ 63,186,409
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited pro
forma consolidated financial statements.
Continued
26
<PAGE>
ICC TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET, Continued
AS OF MARCH 31, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Historical Pro Forma
ICC Historical Adjustments Pro Forma
Technologies Rare Medium DR.(CR.) As Adjusted
------------ ----------- ----------- ------------
CURRENT LIABILITIES:
<S> <C> <C> <C> <C>
Accounts payable $ 1,065,188 $ 284,060 -- $ 1,349,248
Short-term loan 2,750,000 -- -- 2,750,000
Accrued liabilities 3,391,713 83,151 -- 3,474,864
Deferred revenue -- 69,250 -- 69,250
------------ ------------ ------------ ------------
Total current
liabilities 7,206,901 436,461 -- 7,643,362
------------ ------------ ------------ ------------
NOTES PAYABLE 93,678 -- $(22,200,000)(1) 22,293,678
NOTES PAYABLE TO ICC TECHNOLOGIES -- 1,500,000 1,500,000(4) --
COMMITMENTS AND CONTINGENCIES -- -- -- --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
authorized 50,000,000 shares,
issued 21,519,998 shares as of
March 31, 1998 and 25,789,298
pro forma shares as of
March 31, 1998 215,200 5,583 5,583(5) 257,893
(42,693)(1)
Additional paid-in capital 51,346,744 5,348,058 5,348,058(5) 65,350,048
(14,003,304)(1)
Note receivable from officer (230,467) -- -- (230,467)
Accumulated deficit (31,956,675) (3,750,267) (3,750,267)(5) (31,956,675)
Less: Treasury common stock (171,430) -- -- (171,430)
------------ ------------ ------------ ------------
Total stockholders' equity 19,203,372 1,603,374 (12,442,623) 33,249,369
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 26,503,951 $ 3,539,835 $(33,142,623) $ 63,186,409
============ ============ ============ ============
The accompanying notes are an integral part of the unaudited pro
forma consolidated financial statements.
27
<PAGE>
ICC TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited)
Historical Pro Forma
ICC Historical Adjustments Pro Forma
Technologies Rare Medium DR.(CR.) As Adjusted
------------ ------------- ------------ -------------
<S> <C> <C>
REVENUES -- $ 3,856,223 $ -- 3,856,223
COST OF SALES -- (1,538,678) -- (1,538,678)
------------ ------------ ------------ ------------
Gross profit -- 2,317,545 -- 2,317,545
OPERATING EXPENSES:
General and administrative $ 1,991,594 1,349,494 -- 3,341,088
Equity interest in net loss of
Englehard/ICC 11,985,361 -- -- 11,985,361
Amortization of goodwill -- -- 22,471,312(3) 22,471,312
Stock-based compensation -- 4,088,641 -- 4,088,641
Finders fee -- 500,000 -- 500,000
------------ ------------ ------------ ------------
Total operating expenses 13,976,955 5,938,135 22,471,312 42,386,402
------------ ------------ ------------ ------------
(Loss) income from operations (13,976,955) (3,620,590) 22,471,312 (40,068,857)
OTHER INCOME (EXPENSE):
Interest income 492,870 21,921 -- 514,791
Interest expense -- -- (1,887,000)(6) (1,887,000)
------------ ------------ ------------ ------------
Other income (expense) 492,870 21,921 1,887,000 (1,372,209)
------------ ------------ ------------ ------------
NET (LOSS) INCOME BEFORE
INCOME TAXES (13,484,085) (3,598,669) 24,358,312 (41,441,066)
Provision for income taxes -- 29,135 -- 29,135
------------ ------------ ------------ ------------
NET INCOME (LOSS) $(13,484,085) $ (3,627,804) $ 24,358,312 $(41,470,201)
============ ============ ============ ============
BASIC AND DILUTED
EARNINGS PER SHARE $ (0.63) $ (1.62)
============ ============
Net loss per share
Weighted average common
shares outstanding 21,339,635 4,269,300 25,608,935
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited pro
forma consolidated financial statements.
28
<PAGE>
ICC TECHNOLOGIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
ICC Historical Adjustments Pro Forma
Technologies Rare Medium DR.(CR.) As Adjusted
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,530,561 $ 1,041,532 $ -- $ 2,572,093
COST OF SALES (1,860,935) (620,428) -- (2,481,363)
------------ ------------ ------------ ------------
Gross (loss) profit (330,374) 421,104 -- 90,730
OPERATING EXPENSES:
Marketing 480,810 -- -- 480,810
Engineering 254,125 -- -- 254,125
General and administrative 977,393 650,006 -- 1,627,399
Amortization of goodwill -- -- 5,617,828(3) 5,617,828
------------ ------------ ------------ ------------
Total operating expenses 1,712,328 650,006 5,617,828 7,980,162
------------ ------------ ------------ ------------
Loss from operations (2,042,702) (228,902) 5,617,828 (7,889,432)
OTHER INCOME (EXPENSE):
Interest income 102,837 6,167 -- 109,004
Interest expense (47,716) (1,208) 471,750(6) (520,674)
Gain on restructuring 24,256,769 -- -- 24,256,769
Equity interest in net loss of
Englehard Hexcore (41,450) -- -- (41,450)
------------ ------------ ------------ ------------
Other income 24,270,440 4,959 471,750 23,803,649
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 22,227,738 $ (223,943) $ 6,089,578 $ 15,914,217
============ ============ ============ ============
BASIC EARNINGS PER SHARE
Net income per share $ 1.04 $ 0.62
Weighted Average Common ============ ============
shares outstanding 21,453,771 4,269,300 25,723,071
============ ============ ============
DILUTED EARNINGS PER SHARE
Net income per share $ 1.03 $ 0.62
============ ============
Weighted average common and
common equivalent shares
outstanding 21,569,879 4,269,300 25,839,179
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited pro
forma consolidated financial statements.
29
<PAGE>
ICC TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation: The unaudited pro forma consolidated financial
statements are presented to illustrate the effect of the acquisition by merger
of Rare Medium, Inc. (the "Acquisition"), which occurred on April 15, 1998, on
the Company's financial position as if it occurred on March 31, 1998, and to
demonstrate the effects upon the Company's historical results of operations for
the fiscal year ended December 31, 1997 and for the three months ended March 31,
1998, as if the Acquisition occurred on January 1, 1997.
Rare Medium, Inc., formed in September, 1995 ("Rare Medium") is an internet
professional services company engaged in the design, delivery and implementation
of internet web site applications and strategies with its principal offices
located in New York City and an office in Los Angeles.
The unaudited pro forma consolidated financial statements are not necessarily
indicative of the financial position or results of operations had the
aforementioned Acquisition occurred on those dates, nor are they necessarily
indicative of future results of the Company's operations.
The unaudited pro forma consolidated financial statements have been prepared
from the historical financial statements of the Company and Rare Medium and
contain certain adjustments with respect to the Acquisition as explained
hereafter. The pro forma adjustments are based upon available information and
upon certain assumptions that the Company believes are reasonable. The unaudited
pro forma consolidated statements of operations for the three months ended March
31, 1998 and the year ended December 31, 1997 do not include any nonrecurring
adjustments that may have resulted from the transaction.
2. Purchase Price: The total consideration paid by the Company was approximately
$46.2 million and consisted of a combination of $10 million in cash, $22.2
million in a promissory note and the remainder in 4,269,300 shares of common
stock of ICC. The fair value of ICC's common stock issued as consideration for
the Acquisition was determined based on a value of $3.29 per share which
represented the average of the closing prices of ICC common stock for the period
April 13, 1998 to April 17, 1998.
The merger agreement required 2,000,000 shares of ICC common stock to be placed
in escrow for a period of 12 months. The common stock placed in escrow will
serve as collateral for any damages or losses for which the Company is entitled
to indemnification pursuant to the Merger Agreement. Management of the Company
has determined that it is probable that all shares will be issued and,
accordingly, have been recognized in the purchase price consideration.
3. Accounting Treatment: The acquisition of Rare Medium was accounted for using
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the net assets acquired and liabilities assumed on the basis of
their fair values on the acquisition date. Approximately $1.6 million of the
purchase price was allocated to net tangible assets consisting primarily of
cash, accounts receivable, work-in-process, property and equipment, accounts
payable and deferred revenue. The historical carrying amounts of such net assets
approximated their fair values. The purchase price and costs associated with the
acquisition, in excess of the identified net assets in the amount of $45 million
was allocated to goodwill and amortized over its estimated useful life of two
years.
4. Pro Forma Adjustments:
(1) The pro forma adjustments reflect the recording of the purchase price
consideration paid by the Company consisting of $10 million in cash, issuance of
a $22.2 million promissory note and issuance of 4,269,300 shares of common stock
valued at $3.29 per share.
30
<PAGE>
(2) The pro forma adjustment reflects the allocation to goodwill which
represents the purchase price and acquisition costs, (see note (7) below) in
excess of the identified net assets in the amount of $45 million.
(3) The pro forma adjustment reflects the amortization of goodwill. The
amortization period is two years.
(4) The pro forma adjustment reflects the elimination of the notes payable and
receivable between Rare Medium and ICC Technologies. The notes were cancelled on
the date of the Acquisition.
(5) The pro forma adjustment reflects the removal of the equity of Rare Medium
resulting from the acquisition.
(6) The pro forma adjustment reflects the recording of interest expense on the
$22.2 million promissory note, calculated with an interest rate of 8.5%.
(7) The pro forma adjustment reflects the costs related to the acquisition.
5. Income Taxes: The Company has incurred significant losses since inception and
had federal net operating loss carryforwards (NOL's) of approximately $47
million at December 31, 1997, which begin to expire in 1999. Management believes
that any federal tax liability resulting from operating income generated by Rare
Medium will be eliminated due to utilization of these NOL's. However, the
availability and use of these NOL's against future taxable income may be limited
by Internal Revenue Code Section 382 as a result of certain changes in ownership
that have occurred.
6. Promissory Note Payable: The $22.2 million promissory note ("Note") issued by
the Company as part of the purchase price consideration is payable in equal
installments of $11.1 million on April 15, 2000 and April 15, 2001. The Note
bears interest at the prime rate. Interest is payable on a semi-annual basis in
cash or ICC common stock at the election of ICC. Payment of interest in common
stock is subject to certain limitations.
In the event the Company closes on a secondary offering with proceeds in excess
of $50 million, all amounts outstanding under the Note are immediately due and
payable. If the proceeds of the offering are between $20 million and $50
million, then 40% of the proceeds in excess of $20 million shall be applied as
payment on the Note.
7. Operating Segments: It is management's view that the business of ICC which
existed prior to the Acquisition, i.e. that of designing, manufacturing and
marketing fully integrated climate control systems and the business of Rare
Medium, an internet professional services company will be separate and distinct
businesses and operating segments of the Company.
31
<PAGE>
(c) Exhibits
Exhibit No. Description
- ----------- -----------
2.1* Merger Agreement and Plan of Reorganization dated as of April
8, 1998, by and among ICC Technologies, Inc., RareMedium
Acquisition Corp., Rare Medium, Inc. and the Founding
Stockholders named therein (Previously filed).
23 Consent of Gould & Company, P.C., Independent Accountants to
Rare Medium, Inc.
* Certain of the Exhibits and Schedules to the Merger Agreement and Plan of
Reorganization have been omitted from Exhibit 2.1. ICC Technologies, Inc. hereby
agrees to furnish supplementally a copy of any of such omitted Exhibits or
Schedules to the Securities and Exchange Commission upon request.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereto duly authorized.
ICC TECHNOLOGIES, INC.
----------------------
Registrant
By: /s/ Glenn S. Meyers
----------------------------
Glenn S. Meyers, President
and Chief Executive Officer
Date: June 25, 1998
33
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
Registration Statements of ICC Technologies, Inc. (the "Company') on Form S-8
(File Nos. 33-37036, 33-37037, 33-85634, 33-85636, 33-89122 and 33-89124) of our
report on our audits of the financial statements of Rare Medium, Inc. as of
December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996
and the period from September 25, 1995 to December 31, 1995, which report is
included in the Company's current report on Form 8-K dated April 15, 1998, as
amended on current report on Form 8-K/A.
GOULD & COMPANY, P.C.
New York, New York
June 25, 1998
