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Conformed Copy
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ or ____
Commission file number 0-13865
ICC TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2368845
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
330 South Warminster Road
Hatboro, Pennsylvania 19040
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 682-6600
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(Registrant's telephone number, including area code)
not applicable
-----------------------------------------
(Former name, former address and former
fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common Stock, par value $.01 per share 26,185,685 shares
outstanding as of August 7, 1998.
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ICC TECHNOLOGIES, INC.
Index
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
- ------ ---------------------
<S> <C> <C>
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations - Three months
and six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
ICC TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,887,503 1,257,483
Accounts receivable, net 2,682,865 -
Inventories 3,074,333 -
Prepaid expenses and other current assets 564,371 406,558
Investment in Engelhard Hexcore L.P. 157,772 -
------------ -----------
Total current assets 11,366,844 1,664,041
Property, plant and equipment, net 3,329,652 7,615
Note receivable - 350,000
Restricted cash - 2,500,000
Goodwill, net 41,935,300 -
Other assets 47,460 -
------------ -----------
Total assets $ 56,679,256 4,521,656
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 5,518,607 281,504
Deferred revenue 317,688 -
------------ -----------
Total current liabilities 5,836,295 281,504
Deferred rent 70,082 -
Notes payable 24,293,678 -
Losses in excess of investment balance - 7,302,358
------------ -----------
Total liabilities 30,200,055 7,583,862
------------ -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 50,000,000 shares, issued
25,996,798 shares at June 30, 1998 and
21,519,998 shares at December 31, 1997 259,969 215,200
Additional paid-in-capital 65,909,609 51,308,904
Note receivable from director (230,467) (230,467)
Accumulated deficit (39,288,480) (54,184,413)
Treasury common stock, at cost, 66,227 shares (171,430) (171,430)
------------ -----------
Total stockholders' equity (deficiency) 26,479,201 (3,062,206)
------------ -----------
Total liabilities and stockholders' equity $ 56,679,256 4,521,656
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ICC TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the For the
three months ended six months ended
June 30 June 30
---------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 2,268,912 - 3,799,473 -
Operating expenses:
Cost of revenue 2,126,398 - 3,987,353 -
General and administrative 3,249,177 568,111 4,961,485 998,036
Amortization of intangible assets 3,807,755 - 3,807,755 -
----------- ----------- ---------- ---------
Total operating expenses 9,183,330 568,111 12,756,593 998,036
----------- ----------- ---------- ----------
Loss from operations (6,914,418) (568,111) (8,957,120) (998,036)
----------- ----------- ---------- ----------
Other income (expense):
Gain on restructuring of Engelhard - - 24,256,769 -
Interest income 120,588 163,928 226,832 299,072
Interest expense (445,975) - (493,691) -
Equity interest in net loss of investment (92,000) (1,419,576) (133,450) (2,813,576)
----------- ----------- ---------- -----------
Total other income (expense) (417,387) (1,255,648) 23,856,460 (2,514,504)
----------- ----------- ---------- ----------
Net income (loss) $(7,331,805) (1,823,759) 14,899,340 (3,512,540)
=========== =========== ========== ==========
Basic earnings per share
Net income (loss) per share $ (.29) (.09) .64 (.17)
=========== =========== ========== ==========
Weighted average common
shares outstanding 25,231,597 21,280,927 23,342,684 21,265,235
=========== =========== ========== ==========
Diluted earnings per share
Net income (loss) per share $ (.29) (.09) .60 (.17)
=========== =========== ========== ==========
Weighted average common and
common equivalent shares
outstanding 25,231,597 21,280,927 24,691,994 21,265,235
=========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ICC TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 14,899,340 (3,512,540)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on restructuring of Engelhard (24,256,769) -
Depreciation and amortization 4,248,781 1,963
Equity interest in net loss of investment 133,450 2,813,576
Compensation expense in connection with issuances
of common stock, stock options and warrants 589,914 -
Changes in assets and liabilities (2,951,549) 188,859
------------ -----------
Net cash used in operating
activities (7,336,833) (508,142)
------------ -----------
Cash flows from investing activities:
Acquisition of Rare Medium, net of cash (9,951,151) -
Capital contribution to Engelhard - (3,250,000)
Cash received in connection with restructuring of Engelhard 18,864,003 -
Purchases of property, plant and equipment, net (350,551) (7,010)
Redemption of restricted certificate of deposit 2,500,000 -
------------ -----------
Net cash provided by (used in) investing
activities 11,062,301 (3,257,010)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 9,559 121,613
Payments of borrowings (105,007) --
------------ -----------
Net cash provided by (used in) financing
activities (95,448) 121,613
------------ -----------
Net increase (decrease) in cash and cash equivalents 3,630,020 (3,643,539)
Cash and cash equivalents, beginning of period 1,257,483 9,641,114
------------ -----------
Cash and cash equivalents, end of period 4,887,503 5,997,575
------------ -----------
Cash paid for interest $ 74,959 261,563
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ICC TECHNOLOGIES, INC.
Notes to Condensed Consolidated
Financial Statements
June 30, 1998
(Unaudited)
(1) Basis of Presentation
Historically ICC Technologies, Inc. ("ICC" or the "Company") has been
engaged in the design, development and manufacture and marketing of
climate control systems. In 1998, through a series of transactions, the
Company restructured its operations to focus on the business of providing
Internet professional services to large and medium size businesses. This
was accomplished by restructuring its Engelhard/ICC joint venture,
purchasing Rare Medium, Inc. ("Rare Medium") and determining to dispose
of Fresh Air Solutions (defined below) which sale is expected to be
completed in the third quarter of 1998.
On February 27, 1998, pursuant to a Master Agreement dated November 17,
1997, by and among ICC and Engelhard Corporation ("Engelhard"), ICC and
Engelhard effectuated a restructuring of the Engelhard/ICC joint
venture. In this restructuring, ICC and Engelhard exchanged certain of
their respective interests and the Company received approximately $18.6
million of cash from Engelhard in exchange for certain assets of the
partnership which resulted in a nonrecurring gain of $24.3 million.
Subsequent to the restructuring, the Company has operated the remaining
assets of the joint venture as a new partnership, Fresh Air Solutions,
L.P. through its wholly-owned subsidiary ICC Desiccant Technologies,
Inc. Fresh Air Solutions L.P. is engaged in the business of designing,
manufacturing and marketing, desiccant-based climate control systems. ICC
Desiccant Technologies is the general partner of, and holds a 90%
interest in Fresh Air Solutions L.P. The acquisition of Fresh Air
Solutions L.P. was accounted for under the purchase method of accounting.
In addition, ICC retained a 20% interest in Engelhard Hexcore L.P. The
Company and an investment banker were unable to determine the fair
market values of the assets exchanged within reasonable limits. As a
result, the nonmonetary consideration paid and received by the Company
was recorded at the historical carrying amounts reflected in
Engelhard/ICC's financial records.
On April 15, 1998, the Company acquired by merger all of the stock of
Rare Medium, Inc., a privately held New York corporation for total
consideration of approximately $46.2 million, consisting of a combination
of $10 million in cash, 4,269,300 shares of common stock of the Company
and the balance in a secured promissory note in the principal amount of
$22.2 million bearing interest of 8% due in two equal installments in
2000 and 2001. 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. Its clients are located throughout the United States. The
Company has accounted for the transaction under the purchase method of
accounting. Any goodwill from the transaction will be amortized over a
three year priod.
Pursuant to the terms of the Rare Medium Merger Agreement, the Company
agreed to use its best efforts to divest, as soon as practicable, its
climate control systems business consisting principally of its interest
in Fresh Air Solutions, L.P. and Engelhard/Hexcore (hereinafter referred
to collectively as "Fresh Air Solutions") such that immediately after
the completion of the divestiture, the sole operations of the Company
would be those operations relating to Rare Medium and its business. On
July 7, 1998 the Company announced that it had agreed in principle to
terms to sell a majority of the business of Fresh Air Solutions to its
management, for cash and a note.
6
<PAGE>
ICC TECHNOLOGIES, INC.
Notes to Condensed Consolidated
Financially Statements
(1) Continued
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 1997 included in the
Company's Annual Report on Form 10-K/A for the year then ended and the
Current Report on Form 8-K/A with respect to the acquisition of Rare
Medium. The accompanying consolidated financial statements as of June 30,
1998 include the results of operations and financial position of Rare
Medium from its acquisition in April, 1998. Results of operations for the
three months and six months ended June 30, 1998 include the operations of
the Company's 90% owned partnership, Fresh Air Solutions, L.P. on a
consolidated basis. Results of operations for the three months and six
months ended June 30, 1998 are not necessarily indicative of results of
operations expected for the full year.
(2) Summary of Significant Accounting Policies
The following represent additional accounting policies as a result of the
acquisition of Rare Medium.
Revenue Recognition
Rare Medium 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, included in inventories, consists of
the cost of services performed that have not been billed.
Recently Issued Accounting Standards
In June, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997, and SFAS No. 131 is
effective for fiscal years beginning after December 31, 1997. SFAS No.
130, applicable in the first quarter of 1998, does not have a material
effect on the Company's consolidated financial statements. SFAS No. 131
will be adopted for the Company's annual reporting in 1998. SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," was
issued in June 1998. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring recognition of those instruments as assets and
liabilities and to measure them at fair value. SFAS 133 will be effective
for the Company in 2000. The Company's management is currently assessing
the impact, if any, of this pronouncement. In April 1998, the American
7
<PAGE>
ICC TECHNOLOGIES, INC.
Notes to Condensed Consolidated
Financially Statements
(2) Continued
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 qualifies as 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.
The Company has not yet determined the impact, if any, of adopting
SOP 98-1, which will be effective for the Company's year ending
December 31, 1999.
(3) Going Concern Considerations
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The
results of operations of ICC and its subsidiaries have been insufficient
to cover costs of operations for the six months ended June 30, 1998. ICC
and its subsidiaries have incurred cumulative losses since inception. The
Company's continuation as a going concern is dependent on its ability to:
(i) generate sufficient cash flows to meet its obligations on a
timely basis,
(ii) obtain additional financing as may be required, and
(iii) ultimately attain profitable operations and positive cash
flows from its operations.
The accompanying consolidated financial statements do not include any
adjustments that may result from the Company's inability to continue as
a going concern.
The cash utilized in the Company's operating activities during the six
months ended June 30, 1998, was financed primarily through the use of
cash on hand and proceeds received in connection with the restructuring
of the Engelhard/ICC partnership. Management believes the Company will
require additional capital during 1998. The Company would expect to
satisfy such requirements by seeking equity or debt financing and by
completing the sale of Fresh Air Solutions. The Company's ability
to successfully obtain equity or debt financing in the future is
dependent in part on market conditions and the performance of the
Company. There can be no assurance that the Company will be able to
obtain equity or debt financing in the future, or if it is, whether the
terms will be favorable to the Company.
8
<PAGE>
ICC TECHNOLOGIES, INC.
Notes to Condensed Consolidated
Financial Statements
(4) Pro Forma Results of Rare Medium
The following are the summarized unaudited pro forma financial results
assuming Rare Medium had been purchased on January 1, 1997. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had Rare Medium and the Company
constituted a single entity during such period.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
$(000) $(000)
----------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
($000's)
--------
<S> <C> <C> <C> <C>
Revenues $ 2,269 982 4,841 $ 1,501
Loss from
Operations (6,914) (3,951) (12,994) (8,002)
Net Income (loss) (7,332) (5,181) 10,866 (10,503)
Net Income (loss) per share
-basic (.29) (.20) .39 (.41)
-dilutive (.29) (.20) .38 (.41)
</TABLE>
(5) Capital Stock Transactions
The Company issued 4,269,300 shares of common stock as partial
consideration for the acquisition of Rare Medium, Inc. in April, 1998. In
accordance with the Rare Medium Merger Agreement, the fair value of the
common stock was determined based on a value of $3.29 per share, which
represented the average of the closing prices of the Company's common
stock for the period April 13, 1998 to April 17, 1998.
Pursuant to the terms of the merger of Rare Medium and the Company, and
as an inducement for him to enter into the agreement for his employment,
the President and CEO was granted incentive and nonincentive 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, the fair value at the
time of agreement, 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. In addition to the options
granted to this officer, the Company also granted stock options to
purchase an aggregate of approximately 1,000,000 shares of the Company's
common stock to certain other employees, consultants and contractors of
Rare Medium, which options are priced 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.
In addition the then Chairman of the Company was granted 500,000 options
and two directors were granted 25,000 options each at an exercise price
equal to $2.375 per share, and which become exercisable ratably on an
annual basis over a three year period.
The Company issued 200,000 shares for consulting services during the
three months ended June 30, 1998.
9
<PAGE>
ICC TECHNOLOGIES, INC.
Notes to Condensed Consolidated
Financial Statements
(6) Income Taxes
The Company 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. As a result of various recent equity transactions, management
believes the Company may have undergone an "ownership change" as defined
by section 382 of the Internal Revenue Code. Accordingly, the utilization
of a portion of the net operating loss carryforward may be limited.
(7) Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if stock options or
warrants were exercised or converted into common stock. The dilutive
effect of stock options and stock warrants in the six months ended June
30, 1998 increased weighted average shares outstanding by 1,349,310.
Basic and dilutive earnings per share were the same for the three months
ended June 30, 1998 and for the three and six months ended June 30, 1997
since the effect of all potential dilutive common shares was
antidilutive.
(8) Subsequent Events
On July 7, 1998, the Company announced that it had agreed in principle to
terms to sell a majority of the business of Fresh Air Solutions to its
management group, for cash and a note.
On August 14, 1998, the Company and Rare Medium announced the
consummation of the acquisition of DigitalFacades, Inc.
("DigitalFacades"). The purchase price for DigitalFacades was $3.0
million payable in shares of ICC's common stock. All of the shares
issued in the DigitalFacades transaction are restricted securities and a
portion will be held in escrow as security for DigitialFacades
obligations under the acquisition agreement. In addition, DigitalFacades
stockholders will be entitled to additional consideration in the form of
shares of ICC if DigitalFacades achieves certain financial targets in
1998.
On August 14, 1998, the Company and Rare Medium announced the completion
of the acquisition of I/O 360 Digital Design, Inc. ("I/O 360"). The
purchase price for I/O 360 was $3 million payable in shares of ICC's
common stock. All of the shares are restricted securities and a portion
will be held in escrow as security for I/O 360's obligations under the
Agreement.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As a result of the Company's decision to dispose of its non-Internet related
businesses, Management's Discussion and Analysis of Financial Condition and
Results of Operations will focus on the Rare Medium business, as this will be
the surviving business. For Management's Discussion and Analysis of Financial
Condition and Results of Operations of ICC for prior 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, its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, and other reports filed with the Securities and Exchange
Commission.
Safe Harbor for Forward-Looking Statements
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1993 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. THE COMPANY'S ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER
"RISK FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT.
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
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 be 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 Relating to Rare Medium" below.
11
<PAGE>
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.
o 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.
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.
o 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 workflow. 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.
12
<PAGE>
Results of Operations
Rare Medium's results of operations for the quarter ended June 30, 1998 were
adversely affected by several factors relating principally to the implementation
of its growth strategy and involved (a) building the infrastructure both in
terms of systems and personnel, and to a lesser extent, (b) devoting substantial
resources to the two acquisitions consummated in August 1998. While the Company
believes that such activities are important to the long-term success of the
Company, individually and in combination, they had an adverse impact on both
revenue and expense for the quarter ended June 30, 1998. While these activities
will continue to impact the Company in the future quarters, management currently
believes that the affect will not be as dramatic as in the quarter ended June
30, 1998. The specific activities the Company engaged in included the upgrading
of the Rare Medium web site and Intranet and the scaling of the network to
improve capacity and security also had a negative impact from a resource
standpoint on the quarter, but are believed to be important to the long-term
success of the Company. The hiring, integrating and training of key personnel
across several functions similarly is a key factor supporting Rare Medium's
growth and acquisition strategy. During the three months ended June 30, 1998
Company headcount increased by 26 or roughly 50%: including a new Chief
Financial Officer; a Vice President of Legal and Business Affairs; a Vice
President of Mergers and Acquisitions; a Managing Director of Rare Medium
Atlanta, a senior programmer and systems administration and other personnel. The
addition of these key personnel, along with the existing organization, form the
foundation of the organization structure of Rare Medium. Finally, the
integration and planning for Rare Medium's first two acquisitions, part of the
growth strategy, impacted the results for the quarter.
Revenue
Revenue for Rare Medium for the three months ended June 30, 1998 was $1 million,
with the balance of the revenue derived from the operations of Fresh Air
Solutions.
Operating Expenses
Operating expenses (excluding amortization of goodwill) for the three months
ended June 30, 1998 include $1.9 million related to Rare Medium. These
operating expenses include both direct costs related to revenues, in addition to
general administrative expenses. Included in those expenses are: professional
fees related to the merger; costs related to building the systems infrastructure
(web site and Intranet redesign and the scaling of the network) which in the
aggregate were approximately $0.4 million. Excluding these expenses, operating
expenses were $1.5 million.
Operating expenses for the six months ended June 30, 1998, excluding
amortization of goodwill, include the results of Rare Medium for only the
period subsequent to the merger in April which amounts were discussed above.
Operating expenses for Fresh Air Solutions for the six months ended June
30, 1998 approximated $6.5 million.
Other Income and Expense
Other Income and Expense for the three months ended June 30, 1998 includes $0.4
million of interest expense related to Rare Medium. This expense represents the
accrued interest on the Company's note payable to the original Rare Medium
stockholders, payable in a combination of cash or common stock of ICC, at ICC's
election, subject to some restrictions.
13
<PAGE>
Net Income/(Loss)
For the three months ended June 30, 1998, ICC recorded a net loss of $7.3
million, which included $3.8 million in amortization of goodwill attributable to
the acquisition of Rare Medium. The operating loss attributable to Rare Medium
for this period was approximately $0.9 million. Excluding the previously
mentioned operating expenses related to the redesign of the web site and
Intranet, and scaling of the system's infrastructure, the loss for the three
months ended June 30, 1998 would have been $0.5 million. The loss was primarily
due to the factors described in "Results of Operations" and the hiring of
additional employees as Rare Medium continued to build its infrastructure in
anticipation of rapid growth.
Liquidity and Capital Resources
The Rare Medium subsidiary had $2.9 million in cash and equivalents at June 30,
1998. In addition to the operating loss, Rare Medium's major use of cash for the
three months ending June 30, 1998 related to equipment purchases and costs
related to leasehold improvements.
For the six months ended June 30, 1998, Fresh Air Solutions had negative cash
flow from operations in excess of $4 million.
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 continue its active acquisition program as a critical
part of its growth strategy. These acquisitions will represent a significant use
of capital.
ICC has experienced net losses and negative cash flow from operations. While the
Company believes it has the capital resources to meet its short term needs, it
will be required to raise additional capital during the next 12 months to fund
working capital or debt service requirements and acquisitions. 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.
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 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.
Subsequent Events
On August 14, 1998, the Company and Rare Medium announced the completion of the
acquisitions of DigitalFacades and I/O 360. DigitalFacades, a privately-held
developer of web sites and other interactive multimedia tools for corporate and
marketing communications, was acquired in an all stock, tax-free transaction.
DigitalFacades' clients include Bugle Boy, Epson America, Inc. and Beckman
Coulter.
14
<PAGE>
DigitalFacades' unaudited revenues for the year ended December 31, 1997 were $1
million and for the six months ended June 30, 1998 were $1 million. Unaudited
results are not necessarily indicative of full years results and are subject to
adjustment upon audit. The purchase price for DigitalFacades was $3.0 payable in
shares of ICC's common stock. All of the shares issued in the DigitalFacades
transaction are restricted securities and a portion will be held in escrow as
security for DigitialFacades obligations under the acquisition agreement. In
addition, DigitalFacades stockholders will be entitled to additional
consideration, consisting of additional ICC stock, if DigitalFacades achieves
certain financial targets in 1998.
I/O 360 Digital Design, Inc., a New York-based, privately-held interactive
design studio specializing in visual and engineering solutions for all
technology-mediated business environments was acquired in an all stock, tax-free
transaction. I/0 360 has recently designed the web site identity for the New
York Times' New York Today site, Yahoo Internet Life, Microsoft Press, and other
complex projects for such clients as Microsoft, Mitsubishi, Citicorp, Sony,
Fujitsu, Barnes & Noble and Prodigy. I/O 360's revenues for 1997 were $1.5
million and its unaudited revenues for the first half of 1998 were $1 million.
The purchase price for I/O 360 was $3 million payable in shares of ICC's common
stock. All of the shares are restricted securities and a portion will be held in
escrow as security for I/O 360's obligations under the acquisition agreement.
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 changed substantially. 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 believes it will be required to sell additional
equity or debt securities or seek additional credit facilities to fund Rare
Medium's 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.
15
<PAGE>
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 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.
16
<PAGE>
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. 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.
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 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.
17
<PAGE>
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.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Refer to the information regarding the settlement of the lawsuit with
Engelhard under the caption Legal Proceedings in the Company's Form
10-K Report for the year ended December 31, 1997.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
See Forms 8-K and 8-K/A dated April 15, 1998 and June 25, 1998,
respectively for information concern the Company's acquisition of
Rare Medium.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Financial Data Schedule Exhibit 27
(b) The following reports have been filed with the Securities and
Exchange Commission.
Form 8-K dated April 15, 1998 related to the acquisition of
Rare Medium.
Form 8-K/A dated June 25, 1998 related to the acquisition of
Rare Medium.
19
<PAGE>
SIGNATURES
Pursuant to the requirenments of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 17, 1998 BY: /s/ Glenn S. Meyers
------------------- --------------------
Glenn S. Meyers
Chairman,
President and CEO
DATE: August 17, 1998 BY: /s/ John S. Gross
------------------- --------------------
John S. Gross
Senior Vice President
Chief Financial Officer
20
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