<PAGE>
Conformed Copy
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 September 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.
------------------------------------------------------
(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)
44 West 18th Street, 6th Floor
New York, New York 10011
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 634-6950
----------------------------------------------------
(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 27,521,119 shares
outstanding as of November 11, 1998.
<PAGE>
ICC TECHNOLOGIES, INC.
Index
PART I FINANCIAL INFORMATION Page
- - ------ ---------------------
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998
(Unaudited) and December 31, 1997 3
Unaudited Condensed Consolidated Statements of Operations - Three
months and nine months ended September 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II OTHER INFORMATION
- - ------- -----------------
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
ICC TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 974,367 1,257,483
Accounts receivable, net 1,753,423 -
Work in process 430,663 -
Prepaid expenses and other current assets 3,257 406,558
Assets held for sale 1,500,000 -
------------ ------------
Total current assets 4,661,710 1,664,041
Property, plant and equipment, net 1,866,399 7,615
Note receivable - 350,000
Restricted cash - 2,500,000
Goodwill, net 44,243,650 -
Other assets 401,940 -
------------ ------------
Total assets 51,173,699 4,521,656
============ ============
LIABILITIES AND STOCKLHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 3,060,384 281,504
Deferred revenue 545,710 -
------------ ------------
Total current liabilities 3,606,094 281,504
Deferred rent payable 68,238 -
Notes payable 22,454,966 -
Notes payable - affiliates 109,000
Loss in excess of investment balance - 7,302,358
------------ ------------
Total liabilities 26,238,298 7,583,862
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 50,000,000 shares,
issued 27,521,119 shares at September 30, 1998 and
21,519,998 shares at December 31, 1997 275,211 215,200
Additional paid-in capital 71,938,504 51,308,904
Note receivable from director (230,467) (230,467)
Accumulated deficit (46,876,417) (54,184,413)
Treasury common stock, at cost, 66,227 shares (171,430) (171,430)
------------ ------------
Total stockholders' equity (deficiency) 24,935,401 (3,062,206)
------------ ------------
Total liabilities and stockholders' equity 51,173,699 4,521,656
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ICC TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 3,184,169 $ - $ 6,983,642 $ -
Operating expenses:
Cost of revenue 3,154,299 - 7,141,652 -
General and administrative 2,835,070 516,085 7,796,555 1,514,123
Amortization of intangible assets 4,082,367 - 7,890,122 -
------------ ---------- ------------ -----------
Total operating expenses 10,071,736 516,085 22,828,329 1,514,123
------------ ---------- ------------ -----------
Loss from operations (6,887,567) (516,085) (15,844,687) (1,514,123)
------------ ---------- ------------ -----------
Other income / (expense):
Gain on restructuring of Engelhard - - 24,256,769 -
Interest income 58,439 112,825 285,271 411,897
Interest expense (520,379) - (1,014,070) -
Equity interest in net income (loss)
of investments 10,650 (1,724,916) (122,800) (4,538,491)
Loss on disposition of FAS (252,587) - (252,587) -
------------ ---------- ------------ -----------
Total other income / (expense) (703,877) (1,612,091) 23,152,583 (4,126,594)
------------ ---------- ------------ -----------
Net income / (loss) (7,591,444) (2,128,176) 7,307,896 (5,640,717)
============ ========== ============ ===========
Basic earnings per share
Net loss per share $ (0.28) $ (0.10) $ 0.30 $ (0.26)
============ ========== ============ ===========
Weighted average common shares outstanding 26,731,817 21,383,464 24,497,546 21,304,645
============ ========== ============ ===========
Diluted earnings per share
Net loss per share $ (0.28) $ (0.10) $ 0.28 $ (0.26)
============ ========== ============ ===========
Weighted average common and common
equivalent shares outstanding 26,731,817 21,383,464 26,128,504 21,304,645
============ ========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ICC TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,307,896 $ (5,640,717)
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 8,553,299 2,945
Equity interest in net loss of investment 122,800 4,538,491
Compensation expense in connection with issuances -
of common stock, stock options and warrants 589,914 -
Loss on disposition of FAS 252,587 -
Changes in assets and liabilities (2,838,441) 22,177
------------- --------------
Net cash used in operating activities (10,268,714) (1,077,104)
------------- --------------
Cash flows from investing activities:
Acquisitions, net of cash (10,041,986) -
Capital contribution to Engelhard - (4,375,000)
Cash received in connection with restructuring of Engelhard 18,864,003 -
Purchases of property, plant and equipment, net (682,069) (9,951)
Redemption of restricted certificate of deposit 2,500,000 -
Cash component of assets held for sale (526,827) -
------------- --------------
Net cash provided by (used in) investing
activities 10,113,121 (4,384,951)
------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 53,696 210,415
Payment of borrowings (181,219) -
------------- --------------
Net cash provided by (used in) financing activities (127,523) 210,415
------------- --------------
Net decrease in cash and cash equivalents (283,116) (5,251,640)
Cash and cash equivalents, beginning of period 1,257,483 9,641,114
------------- --------------
Cash and cash equivalents, end of period $ 974,367 $ 4,389,474
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ICC TECHNOLOGIES, INC.
Notes to Condensed Consolidated
Financial Statements
September 30, 1998
(Unaudited)
(1) Basis of Presentation
During 1998, through a series of transactions, the Company has 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 the Internet-related businesses of Rare
Medium, Inc. ("Rare Medium"), I/O 360, Inc. ("I/O 360") and DigitalFacades
Corporation ("DigitalFacades"); and disposing of Fresh Air Solutions (defined
below) in October, 1998 (see Note 8). Historically ICC Technologies, Inc. ("ICC"
or the "Company") had been engaged in the design, development, manufacture and
marketing of climate control systems.
On April 15, 1998, the Company acquired by merger all of the stock of Rare
Medium, Inc. ("Rare Medium"), a privately held New York corporation. 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. Total consideration for the purchase
was 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. The note has a principal amount of $22.2 million
bearing interest at the prime rate (currently 8.5%), due in two equal
installments in 2000 and 2001. For further information regarding this
transaction, see the Current Reports on Forms 8-K and 8-K/A filed by the Company
on April 15, 1998 and June 25, 1998, respectively.
On August 14, 1998 the Company acquired by merger all of the stock of I/O 360,
Inc., a privately held New York corporation, and DigitalFacades Corporation,
a privately held California corporation. I/O 360 and DigitalFacades are
Internet professional services companies engaged in the design, delivery and
implementation of Internet web site applications and strategies. In
consideration for the purchase of I/O 360, the Company issued 786,559 shares of
common stock of the Company valued at $3.0 million (based on the average closing
price per share of ICC Common Stock for the 15 trading days during the period
from August 3, 1998 through August 21, 1998, inclusive as reported in the Wall
Street Journal). In consideration for the purchase of DigitalFacades, the
Company issued 719,144 shares of common stock of the Company valued at $3.0
million (based on the average closing price per share of ICC Common Stock for
the 20 trading days prior to the August 13, 1998, as reported in the Wall Street
Journal). For further information regarding these transactions, see the Current
Report on Form 8-K filed by the Company on August 28, 1998.
The Company has accounted for the above transactions under the purchase method
of accounting. The respective recognized purchase prices was allocated to net
tangible assets, which consisted primarily of cash, accounts receivable,
property and equipment, accounts payable, and notes payable. Goodwill resulting
from the transactions, which was $45.7 million for Rare Medium, $3.2 million for
I/O 360, and $3.2 million for DigitalFacades, is being amortized over a three
year period.
The Company is integrating the operations of Rare Medium, I/O 360, and
DigitalFacades under the Rare Medium brand name while achieving economies of
marketing, purchasing, and operations, and while simultaneously leveraging
relationships with various clients that existed prior to the mergers. To that
end, the operations of Rare Medium and I/O 360 have largely been physically
integrated due to I/O 360's move to a location in New York City adjacent to Rare
Medium, and the Los Angeles operations of Rare Medium and DigitalFacades have
been consolidated into one location.
The accompanying unaudited condensed 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 condensed 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 unaudited condensed consolidated financial statements
as of September 30, 1998 include the results of operations and financial
position of Rare Medium from its acquisition in April, 1998, and include the
results of operations of I/O 360 and DigitalFacades from their
<PAGE>
respective acquisitions in August, 1998. Results of operations for the three
months and nine months ended September 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 nine months ended
September 30, 1998 are not necessarily indicative of results of operations
expected for the full year. On October 14, 1998 the Company, through its
wholly-owned subsidiary, completed the sale of a majority of its partnership
interests in Fresh Air Solutions. Consequently, the assets of Fresh Air
Solutions are shown on the accompanying Unaudited Condensed Consolidated Balance
Sheet as of September 30, 1998 as "Assets held for sale." For further
information regarding this transaction, refer to the Current Report on Form 8-K
filed by the Company on October 29, 1998 as amended on Form 8-K/A filed on
November 13, 1998.
(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 principal 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 value 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 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 condensed 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 nine months ended September 30, 1998. 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 cashflows
from its operations.
The accompanying condensed consolidated financial statements do not include any
adjustments that may result from the Company's inability to continue as a going
concern.
(4) Pro Forma Results of Internet-Related Businesses
Subsequent to the sale of a majority of its partnership interests in Fresh Air
Solutions, the Company's operations relate solely to the Internet professional
and technical services of Rare Medium, I/O 360, and DigitalFacades. If these
businesses had been combined on January 1, 1998, their unaudited revenue for the
nine months ended September 30, 1998, would have totaled $6.2 million, versus
$2.4 million for the nine months ended September 30, 1997, which includes only
the revenue of Rare Medium.
<PAGE>
(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. The Company issued 786,559 shares of common stock as consideration for the
purchase of I/O 360 in August, 1998. In accordance with the I/O 360 Merger
Agreement, the fair value of the common stock was determined based on a value of
$3.81 per share, which represented the average of the closing prices of the
Company's common stock for the 15 trading days during the period from August 3,
1998 through August 21, 1998, inclusive. The Company issued 719,144 shares of
common stock as consideration for the purchase of DigitalFacades in August,
1998. In accordance with the DigitalFacades Merger Agreement, the fair value of
the common stock was determined based on a value of $4.17 per share, which
represented the average of the closing prices of the Company's common stock for
the 20 trading days prior to the August 13, 1998.
(6) Income Taxes
The Company and the stockholders of Rare Medium, I/O 360, and DigitalFacades
intend that each of their respective merger agreements 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 reflect 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 nine months ended September 30, 1998 increased weighted average
shares outstanding by 3.0 million shares. Basic and dilutive earnings per share
were the same for the three months ended September 30, 1998 and for the three
and nine months ended September 30, 1997 since the effect of all potential
dilutive common shares was antidilutive.
(8) Subsequent Events
On October 14, 1998 the Company, through its wholly-owned subsidiary, ICC
Desiccant Technologies, Inc., completed the sale of a majority its partnership
interests in Fresh Air Solutions, L.P. ("FAS") for total consideration of
$1,500,000, of which $1,125,000 was paid in cash and $375,000 was paid by
delivery of an unsecured promissory note issued by FAS. As a result of the sale
of partnership interests, ICC Desiccant retained, as its sole asset, a 32.4%
passive investment limited partnership interest in Fresh Air Solutions. For
further information on this transaction, refer to the Current Report on Form 8K
dated October 14, 1998 as amended on form 8-K/A filed on November 13, 1998.
Subsequent to the sale of the partnership interests referred to above, FAS
redeemed the 10% limited partnership interest in FAS held by Engelhard
Corporation in exchange for the 20% limited partnership interest in Engelhard
Hexcore, L.P. held by FAS and $1 million in cash. As a result, ICC Desiccant's
interest in FAS has been increased to a 36% limited partnership interest. The
remaining 64% is owned by the investment entity that purchased the FAS
partnership interests from the Company.
Subsequent to this divestiture, the sole operations of the Company are the
Internet-related operations of Rare Medium, I/O 360, and DigitalFacades.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As a result of the Company's recent disposition of its non-Internet related
businesses, Management's Discussion and Analysis of Financial Condition and
Results of Operations will focus on its Internet-related businesses. Subsequent
to this disposition, which was completed October 14, 1998, the surviving
businesses are Rare Medium, I/O 360, and DigitalFacades. 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
Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998,
and September 30, 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, AMONG OTHER THINGS, THOSE FACTORS DESCRIBED ELSEWHERE IN THIS
QUARTERLY REPORT.
Overview
Rare Medium, I/O 360, and DigitalFacades, (the "Rare Medium Group" or the
"Internet Businesses") are wholly-owned subsidiaries of ICC. Rare Medium was
acquired on April 15, 1998, and is an Internet professional services firm that
provide intranet, extranet and Internet Website solutions and professional
services to businesses. Rare Medium offers a comprehensive range of services to
deliver Internet solutions designed to improve clients' business processes, and
as such 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.
Both I/O 360 and DigitalFacades were acquired on August 13, 1998. DigitalFacades
is a Los Angeles-based Internet professional services firm whose clients include
Bugle Boy, Epson America, Inc. and Beckman Coulter. I/O 360 Digital Design, Inc.
is a New York-based interactive design studio specializing in visual and
engineering solutions for all technology-mediated business environments. I/O 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.
The Company is integrating the operations of Rare Medium, I/O 360, and
DigitalFacades under the Rare Medium brand name while achieving economies of
marketing, purchasing, and operations, and while simultaneously leveraging
relationships with various clients that existed prior to the mergers. To that
end, the operations of Rare Medium and I/O 360 have largely been physically
integrated due to I/O 360's move to a location in New York City adjacent to Rare
Medium, and the Los Angeles operations of Rare Medium and DigitalFacades have
been consolidated into one location.
Revenue
Revenue for the Internet Businesses for the three months ended September 30,
1998 was $1.5 million, with the balance of the revenue derived from the
operations of Fresh Air Solutions. Revenue for I/O 360 and DigitalFacades is
included only from the date of acquisition, which was August 14, 1998 for both
companies. On a pro forma basis, if the acquisitions had been effective January
1, 1998, unaudited revenues for the nine months ended September 30, 1998 would
have totaled $6.2 million, versus $2.4 million for the nine months ended
September 30, 1997, which includes only the revenue of Rare Medium. During the
quarter, the Company made the decision to sacrifice some more immediate
opportunities in order to dedicate the appropriate resources to obtaining
specific high-potential, long-term engagements. There can be no assurance that
these future projects will be obtained.
Operating Expenses
Operating expenses (excluding amortization of goodwill) for the three months
ended September 30, 1998 include $2.8 million related to the Internet
Businesses. These operating expenses include both direct costs related to
revenues, and to general and administrative expenses. Included in those expenses
are costs related to management's significant investment of time and
<PAGE>
resources into (a) building the systems infrastructure both in terms of systems
(web site and Intranet redesign and the scaling of the network) and personnel;
(b) the organizational restructuring of the Company; (c) the reengineering and
documentation of standard operating processes; and (d) the integration of I/O
360 and DigitalFacades into the Rare Medium functional and organizational
structure. These expenses associated with these activities represent an
investment in the operating infrastructure of the Company. While the Company
believes these activities are crucial and beneficial to the long term growth of
the Company, they did represent a significant component of operating expenses
for the three months ended September 30, 1998.
Operating expenses for the nine months ended September 30, 1998, excluding
amortization of goodwill, include the results of Rare Medium for only the period
subsequent to the merger in April, and include I/O 360 and DigitalFacades for
only the period subsequent to their respective mergers in August, which amounts
were discussed above. Operating expenses for Fresh Air Solutions for the nine
months ended September 30, 1998 approximated $10.0 million.
Other Income and Expense
Other Income and Expense for the three months ended September 30, 1998 includes
$0.5 million of interest expense related to the Rare Medium acquisition. 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.
Net Loss
For the three months ended September 30, 1998, the Company recorded a loss of
$3.5 million excluding $4.1 million in amortization of goodwill. Including the
amortization, the net loss for the period was $7.6 million. The operating loss
attributable to the Internet Businesses for this period was approximately $1.2
million. The loss was primarily due to the factors described in "Operating
Expenses."
Liquidity and Capital Resources
The following discussion relates to the Internet Businesses.
The Internet Businesses had $1.0 million in cash and equivalents at September
30, 1998. In addition to the operating loss, the major use of cash for Internet
Businesses for the three months ending September 30, 1998 related to equipment
purchases and costs related to leasehold improvements.
In order to achieve the objective of its business plan, the Company 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.
In order to fund the Internet Businesses capital requirements and to satisfy
its debt obligations to the former stockholders of Rare Medium, the Company will
need to sell additional equity or debt securities or seek credit facilities
within six to twelve months. 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. The Company 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. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the success of Rare Medium Group'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 the
Company. If the Company requires and is unable to obtain such funding, there
would be a material adverse effect on the Company's business, results of
operations and financial condition. In addition, in accordance with the
conditions for continued listing on the NASDAQ / AMEX exchange, the Company has
been notified that it does not currently meet such requirements because the
price of its Common Stock is below $5.00 per share. The Company is currently
considering alternatives which would enable it to remain listed on the NASDAQ
National Market. In the event the Company is unable to maintain its listing on
the NASDAQ National Market, it currently qualifies for, and it would apply for,
listing on, the NASDAQ Small Cap Market.
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 the Internet Businesses are unable to adjust
operating expense levels accordingly, Rare Medium Group's and, in turn, ICC's
business, results of operations and financial condition will be materially and
adversely affected.
<PAGE>
For the nine months ended September 30, 1998, Fresh Air Solutions had negative
cash flow from operations in excess of $5.5 million.
Year 2000 Issue
The "Year 200 Issue" refers to the problem of many computer programs using the
last two digits to represent a year rather than four digits (i.e., "98" for
1998). Some of the computer programs used by the Company may have date-sensitive
software that may not operate properly when dealing with years past 1999, which
is when "00" will represent the year 2000. To the extent that this situation
exists, there is a potential for computer system failure or miscalculations,
which could cause a disruption of operation of that program. The problem is not
limited to computer software, since some equipment may have date-sensitive
processors that may not be able to properly use dates after the year 1999.
The Company 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, the Company has
begun to ask its vendors, customers 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.
Based on investigations to date, the Company believes most of its applications
are Year 2000 compliant, and that expenditures to correct any deficiencies not
yet identified would not be significant.
However, no assurance can be given that any or all of the Company'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 the Company's,
financial condition or results of operations.
<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
None
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 April 15, 1998 related to the acquisition of Rare
Medium
Form 8-K dated August 20, 1998 related to a change in registrant's
certifying accountant
Form 8-K dated August 28, 1998 related to a change in registrant's
certifying accountant
Form 8-K dated August 28, 1998 related to the acquisitions of I/O 360,
Inc. and DigitalFacades Corporation
Form 8-K dated October 14, 1998 related to the sale of partnership
interests in Fresh Air Solutions
Form 8-K/A dated October 14, 1998 related to the sale of partnership
interests in Fresh Air Solutions
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 16, 1998 BY: /s/ Glenn S. Meyers
-------------------------
Glenn S. Meyers
Chairman,
President and CEO
DATE: November 16, 1998 BY: /s/ John S. Gross
-------------------------
John S. Gross
Senior Vice President
Chief Financial Officer
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