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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended December 31, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the transition period from ____ to ____
Commission file number 0-13865
RARE MEDIUM GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2368845
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
44 West 18th Street
New York, New York 10011
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(Address of principal executive offices) (Zip Code)
Registrant's former name - ICC Technologies, Inc.
Registrant's telephone number, including area code: (212) 634-6950
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 29, 1999 was $111,686,000.
As of March 29, 1999, 31,462,828 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders will be filed on or before April 30, 1999 and is incorporated by
reference in Part III of this Form 10-K.
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THIS FORM 10-K/A IS BEING FILED TO MAKE CERTAIN TECHNICAL, NON-MATERIAL CHANGES
TO THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's capital
needs, business strategy, the listing of its common stock on the Nasdaq National
Market, Year 2000 compliance, expectations and intentions. The words "believe,"
"anticipate," "expect," "estimate," "intend," and similar expressions identify
forward-looking statements. Forward-looking statements necessarily involve risks
and uncertainties, and the Company's actual results could differ materially from
those anticipated in the forward-looking statements, including those set forth
below under "Item 1. Description of Business" below and elsewhere in this
report. The factors set forth below under "Item 1. Business" and other
cautionary statements made in this report should be read and understood as being
applicable to all related forward-looking statements wherever they appear in
this report.
ITEM 1 DESCRIPTION OF BUSINESS
BACKGROUND
Currently, Rare Medium Group, Inc., a Delaware corporation (the "Company"),
through its wholly-owed subsidiary, Rare Medium, Inc. ("Rare Medium") and that
company's subsidiaries, provides creative and innovative business solutions for
the emerging digital economy. The Company provides integrated, Internet-based
services that include: digital business and marketing strategy and consulting
services, creative design services, and technology and systems integration
services. These services are generally delivered in partnership with clients
using a methodology designed for rapid delivery. The Company provides
Internet-based solutions primarily for large and medium-sized companies
including companies in the Fortune 500.
The Company was incorporated in the State of Delaware in 1985, as ICC
Technologies, Inc. Prior to April 1998, the Company had been principally engaged
in the design, development, manufacture and marketing of desiccant-based climate
control systems. On April 15, 1998, the Company acquired Rare Medium, Inc, a New
York corporation engaged in providing Internet professional services which was
founded in September 1995 and has a limited operating history. Following the
acquisition of Rare Medium, the Company divested itself of its desiccant-based
air conditioning systems operations. On March 16, 1999, the Company's
stockholders formally approved the change of the Company's name to Rare Medium
Group, Inc. Providing Internet professional services and other Internet related
products and services are the Company's sole businesses.
INDUSTRY BACKGROUND
The Internet has created a new paradigm for conducting business in the digital
age, creating new forms of commerce, communicating with prospects, customers and
business partners and for distributing products and services to consumers.
Intranets, Extranets and Web sites (collectively, "Internet solutions") enhance
the ability of businesses to create, store, process and distribute information.
Intranets enable a company's employees to receive corporate information and
training efficiently, communicate through e-mail, use the internal network's
business applications, and access proprietary information. Similarly, an
Extranet can extend part or all of the functionality of an Intranet to selected
business partners outside of the company, for example, by providing a select
group of customers with access to certain parts of its internal network. As a
result of the availability of Internet solutions, companies fundamentally need
to re-think their go-to-market strategies, business operating models and value
chains.
By many industry analyst estimates, the Internet solutions marketplace is
forecasted to be very robust in the 21st century. Forrester Research, Inc.
estimates that the worldwide Internet professional services market will grow
from $2.4 billion in 1997 to $32.8 billion in 2002, a compound annual growth
rate of 68.7%. Other industry analysts estimate that the Internet and E-Commerce
services spending will be $43.6 billion by 2002.
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Businesses seeking to capitalize on the significant opportunities provided by
Internet solutions face a formidable series of challenges integrating
traditional and digital business models. Many of the traditional components of a
company's value chain must be evaluated to determine the relevance in the new
digital world. Many organizations are ill-equipped to think outside of their
current, and often successful, business models. In addition, recent trends are
changing the marketing communications requirements of businesses throughout the
world. Businesses must also be able to rapidly develop and execute marketing
strategies because shortening product life cycles reduce preparation time for
marketing campaigns. New media, including Internet-based services, as well as CD
ROMs, laptop PC presentations and interactive kiosks, have emerged as an
integral component of marketing and communication strategy. These new media and
the increasing complexity of sophisticated digital delivery, storage and
multimedia enhancement tools and technologies enable companies to improve the
effectiveness of communications, but pose additional challenges to businesses
striving to link business strategy with rapidly changing technologies.
To perform the multitude of Internet professional services in-house, a company
would have to make substantial commitments of time, money and technical
personnel to keep current with rapidly evolving technologies, content
presentation techniques and competitors' offerings. Professionals with the
requisite strategic, technical and creative skills are often difficult to find
and retain. In addition, many businesses are hesitant to expand their internal
information systems or marketing departments for particular engagements at a
time when they are attempting to minimize fixed costs to increase returns on
investment. At the same time, external economic factors encourage organizations
to focus on their core competencies and limit work forces in the information
technology management and marketing areas. Accordingly, many businesses have
chosen to outsource a significant portion of the design, development and
maintenance of their Intranets, Extranets and Web sites and the development and
implementation of their marketing strategies to independent professionals. These
independent professionals can leverage accumulated strategic, technical and
creative talent and track developments in a field characterized by extremely
short technology, process and content life cycles. Companies seeking to
establish Internet solutions may turn to their traditional marketing or
technology service providers for assistance. However, most of these providers
have neither a proven track record of successful Internet solution deployment
nor the full portfolio of strategy, technology, marketing and creative skills
required to serve client needs effectively. Most advertising and marketing
communications agencies lack the extensive technical skills, such as application
development and legacy system and database integration, required to produce the
increasingly complex and functional solutions demanded by clients. Most national
information technology consulting service providers have sizable corporate
infrastructures and have therefore chosen to focus on multi-million dollar
engagements such as Year 2000 projects and client/server enterprise resource
planning software deployments, not Internet solution consulting engagements.
Most large computer technology product and service vendors lack the creative and
marketing skills required to build audiences and deliver unique and compelling
content, and are further constrained by their need to recommend their
proprietary brands. Internet access service providers, whose core strength is in
providing Internet access and site hosting rather than solution development,
typically lack both the necessary creative and application development skills.
A number of small Internet professional services firms have emerged to address
the significant and rapidly growing market for Internet solutions. However, the
small size and capital constraints of most of these firms restrict their ability
to supply clients with the necessary depth and integration of strategic,
technical and creative skills. Furthermore, many of these providers tend to
develop expertise in a limited number of vertical markets because of the need to
leverage the information and experiences gained from the relatively small number
of Internet solution engagements they have completed. We believe that the
rapidly increasing demand for Internet solutions and integrated marketing
communications services, combined with the inability of most current providers
to supply the full range and integration of strategic, technical and creative
skills required by clients, has created a significant market opportunity for a
scaled Internet professional services and integrated marketing communications
services firm. In the currently fragmented and rapidly changing environment, an
organization that could deliver the creative strengths of advertising and
marketing firms, the strategic skills and technical capabilities of information
technology consulting service providers, and the national reputation, economies
of scale, multiple points of local presence and
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information sharing capabilities of a large organization could capitalize on
this opportunity to help companies significantly improve their business
processes.
STRATEGY
The Company's goal is to make Rare Medium a leading Internet professional
services firm. The Company's strategy to achieve this objective includes: i)
expanding operations by acquisition and internal growth; ii) leveraging best
practices, reuse and creating operational efficiencies; iii) enhancing the Rare
Medium brand; iv) continuously enhancing strategy, creative and technology
service delivery excellence; and v) developing additional strategic
relationships. In addition, the Company intends to continue to explore other
Internet businesses that management believes may compliment the core Rare Medium
business or can capitalize on the Rare Medium expertise.
Expanding Operations by Acquisitions and Internal Growth. Rare Medium is
continuing to expand through acquisitions and internal growth. In addition, the
Company has recently recruited senior executive talent from various management
consulting and systems integration services companies. The Company believes that
in the fragmented market for providing Internet professional services, rapidly
building a critical mass of strategic, creative, technical and managerial talent
through internal growth and acquisitions will provide Rare Medium with a
distinct competitive advantage. As of December 31, 1998, the Company had offices
in New York, Los Angeles, Atlanta and Phoenix with pending transactions that
would add offices in Toronto, Dallas and San Francisco. The Company intends to
continue to identify acquisition candidates that meet the Company's criteria for
revenues, profitability, growth potential and operating strategy and to acquire
and integrate additional companies, both in the United States and abroad, that
meet those criteria. We expect the competition for acquisition candidates to
continue to increase. There is no assurance that we will identify and compete
for attractive acquisition candidates or complete acquisitions at reasonable
purchase prices, in a timely manner or at all. To the extent our management must
devote significant time and attention to the integration of technology,
operations, businesses and personnel as a result of these acquisitions, our
ability to service current clients and win new clients may suffer. In addition,
our senior management faces the difficult and potentially time consuming
challenge of implementing uniform standards, controls, procedures and policies
throughout our current and future acquisitions. We could also experience
financial or other setbacks if any of the acquired businesses experienced
problems in the past of which our management is not presently aware. For
example, if an acquired business had dissatisfied customers or had any
performance problems, our reputation could suffer as a result of our association
with that business. In addition, the Company may experience disputes with the
sellers of acquired businesses and may fail to retain key acquired personnel.
Our success depends largely on the skills of certain key management and
technical personnel, as well as key management and technical personnel of
companies acquired by us. Several of our executive officers have recently joined
the Company and many of our key personnel have worked together for a relatively
short period. The loss of one or more of our key management and technical
personnel may materially and adversely affect our business, results of
operations and financial condition. We do not currently maintain key man
insurance for any of our employees. We cannot guarantee that we will be able to
replace any of such persons in the event their services become unavailable.
While we have applied for $3 million in Key Man Insurance on our Chairman and
Chief Executive Officer Glenn S. Meyers, there is no guarantee that we will
receive such insurance.
Leveraging Best Practices, Reuse and Creating Operational Efficiencies. The
Company has recently implemented an enterprise-wide knowledge Intranet to
facilitate corporate learning across the various Rare Medium offices. At the
conclusion of client engagements, Rare Medium employees will participate in
post-engagement review where "lessons learned" and new and innovative creative
and technology techniques will be harvested and catalogued on the Intranet. This
Intranet will serve as a vehicle for capturing engagement best practices and
"lessons learned" and leveraging these experiences across the enterprise to
achieve operational efficiencies.
Enhancing the Rare Medium Brand. In a fragmented industry like Internet
professional services, the Company believes that its brand is well-recognized.
Nonetheless, enhancing the Rare Medium brand will be important to the Company's
success. The Company markets itself through traditional brand promotion and
other marketing strategies such as creation and distribution of sales and
marketing collateral material, public relations campaigns and speaking
engagements. The Company's success in its branding will likely also depend on
establishing and maintaining close relationships with industry analysts,
industry publications and continuing to obtain speaking engagements.
Continuously Enhancing Strategy, Creative and Technology Service Delivery
Excellence. Rare Medium strives to provide creative and innovative
Internet-based business solutions across the various service lines. Our work has
received numerous honors and awards. In order to maintain high levels of
creativity and quality, we place great importance on recruiting and retaining
talented employees.
Developing and Maintaining Additional Strategic Relationships. The Company
intends to continue to develop strategic relationships. Such relationships
enable Rare Medium to enter new markets, gain early access to leading-edge
technology, cooperatively market products and services with leading technology
vendors and gain enhanced access to vendor training and support. Rare Medium has
developed a number of strategic relationships, including relationships with
Microsoft, Macromedia, IBM, Oracle, Vignette and Advanced Technology Group. The
loss or diminution of one or several of these or other strategic relationships
would deprive us of the opportunity to (i) gain early access to leading-edge
technology, (ii) cooperatively market products with the vendor, (iii) cross-sell
additional services, and (iv) gain enhanced access to vendor training and
support.
<PAGE>
THE RARE MEDIUM APPROACH
Rare Medium employs a service delivery methodology that ensures rapid speed to
market of business solutions, iterative refinement of the solution, and a
solution that is linked to business benefit. The delivery methodology enables
projects to be conducted in both a fixed price, fixed time and a time and
materials manner.
The Rare Medium delivery methodology is comprised of four discrete phases:
Exploration, Ideation, Creation and Evolution.
Exploration Phase. The objective of the exploration phase is to conduct a
strategic visioning session with the client's executive team to identify
potential opportunities where the client may use Internet solutions for business
benefit. The exploration also begins the requirements capture and scoping
effort. A business case is also developed to provide a tool for prioritizing the
scope of solution requirements as well as a benchmark to evaluate the
effectiveness and success of the Internet solution. The key deliverable of this
phase is a road map to implement and promote the Internet solution.
Ideation Phase. The objective of this phase is to rapidly construct a
proof-of-concept prototype of the proposed Internet solution. In addition to
initiating the design process, this phase is intended to build support
from the various corporate constituencies and stakeholders as well as build
momentum across the client organization.
Creation Phase. The object of this phase is to design, build, test and implement
the Internet solution. The project team uses an iterative refinement approach to
design and build the solution. The project team works very closely with the
client executive sponsor and solicits continuous feedback from the various
stakeholders.
Evolution Phase. The objective of this phase is to implement the Internet
solution and monitor the performance and effectiveness of the solution in the
context of the business case and specific target market metrics. The
information collected during the evolution phase provides valuable feedback for
the next iteration of the Internet solution and provides a mechanism to measure
the overall effectiveness of the solution. In addition, many of the assumptions
made during the exploration phase in terms of the new digital business model and
targeted market segments are either validated or calibrated.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. While
relatively new, the market is already highly competitive and characterized by an
increasing number of entrants that have introduced or developed products and
services similar to those offered by us. We expect competition not only to
persist, but to increase. Increased competition may result in price reductions,
reduced margins and loss of market share. Our competitors fall into several
categories, including Internet service firms, technology consulting firms,
technology integrators, strategic consulting firms, and in-house information
technology, marketing and design departments of our potential clients. Most of
our 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 we do. At any time our current and potential
competitors could increase their resource commitments to our markets. The
barriers to entry into our business are also relatively low. As a result, we
expect to face additional competition from new market entrants in the future.
The market for our services is rapidly evolving and is subject to continuous
technological change. As a result, our competitors may be better positioned to
address these developments or may react more favorably to these changes. We
compete on the basis of a number of factors, including the attractiveness of the
Internet services offered, the breadth and quality of these services, creative
design and systems engineering expertise, pricing, technological innovation, and
understanding clients' strategies and needs. Many of these factors are beyond
our control. Existing or future competitors may develop or offer strategic
Internet services that provide significant technological, creative, performance,
price or other advantages over the services offered by us.
CUSTOMERS
Rare Medium focuses primarily on large and medium sized businesses. The Company
believes that the needs of such businesses provide excellent market
opportunities. Rare Medium's customers are from a broad variety of industries
including financial services, technology, consumer goods, pharmaceuticals,
publishing and entertainment. The Company's two largest clients in 1998, Nestle
USA, Inc. and General Mills, each accounted for more than approximately 10% of
<PAGE>
Internet related revenues of the Company. As of December 31, 1998, Rare Medium
had a backlog of approximately $3 million.
Our failure or inability to meet a client's expectations in the performance of
services could injure our business reputation or result in a claim for
substantial damages against us regardless of our responsibility for such
failure. In addition, the services we provide for our clients may include
confidential or proprietary client information. Although we have implemented
policies to prevent such client information from being disclosed to unauthorized
parties or used inappropriately, any such unauthorized disclosure or use could
result in a claim against us for substantial damages. Our contractual provisions
attempting to limit such damages may not be enforceable in all instances or may
otherwise fail to protect us from liability for damages. Moreover, the Company
does not currently have errors and omissions insurance.
EMPLOYEES
As of December 31, 1998, the Company had approximately 120 employees. None of
the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and the Company generally believes that its
relationship with its employees is good. Competition for qualified personnel in
the industry is intense. The Company believes that its future success in the
industry will depend in part on its ability to attract, hire or acquire and
retain qualified employees.
GOVERNMENT REGULATION
Currently, we are not subject to any direct governmental regulation other than
the securities laws and regulations applicable to all publicly owned companies,
and laws and regulations applicable to businesses generally. Few laws or
regulations are 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. Any new legislation could
inhibit the growth in use of the Internet and decrease the acceptance of the
Internet as a communications and commercial medium, which could in turn decrease
the demand for our services or otherwise have a material adverse effect on our
future operating performance.
<PAGE>
RECENT DEVELOPMENTS
The Acquisition of Rare Medium, Inc.
On April 15, 1998, the Company acquired by merger all of the stock of Rare
Medium, Inc., a privately held New York corporation("Rare Medium"). 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 in a private placement of
securities, and the balance in a secured promissory note dated April 15, 1998
(the "issued Rare Medium Note").
<PAGE>
The Exchange with Rare Medium Noteholders.
In connection with certain Exchange Agreements between the Company and
certain of the holders of the Rare Medium Note, effective December 31, 1998 the
Company in a private placement of securities issued an aggregate of 2,951,814
shares of common stock of the Company to such Noteholders in exchange for their
beneficial interest in $11,773,881 of the original principal amount of the Rare
Medium Note and accrued and unpaid interest thereunder through December 31,
1998. As a result, there is a remaining principal balance of $10,426,119 payable
under the Note, which bears interest at the prime rate, payable semi-annually,
with principal due in two equal installments on April 15, 2000 and April 15,
2001.
The Acquisition of I/O 360, Inc. and DigitalFacades Corporation.
On August 14, 1998, the Company acquired by merger all of the stock of I/O
360, Inc., a privately held New York corporation ("I/O 360"), and DigitalFacades
Corporation, a privately held California corporation ("DigitalFacades"). 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 of the purchase of I/O 360, the Company issued
786,559 shares of common stock of the Company in a private placement of
securities valued at $3.0 million (based on the average closing price per shares
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 August 13, 1998, as reported in The Wall Street Journal).
Currently, 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 Sale of a Majority of its Partnership Interests in Fresh Air Solutions, L.P.
On October 14, 1998, the Company, through its wholly-owned subsidiary, ICC
Desiccant Technologies, Inc., completed the sale of a majority of 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. In addition,
the unaffiliated investment entity that purchased the partnership interests
assumed the liabilities of FAS as general partner, with certain exceptions. As a
result of the sale of partnership interests, ICC Desiccant Technologies, Inc.
retained, as its sole asset, a 32.4% passive investment limited partnership
interest in FAS.
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
Technologies, Inc.'s interest in FAS has been increased to a 36% limited
partnership interest.
The Private Placement of Convertible Debentures and Warrants to Capital Ventures
International.
Pursuant to the terms of a Securities Purchase Agreement, dated as of
January 28, 1999, Capital Ventures International agreed to purchase from the
Company in a private placement of securities, in two tranches, 8% Convertible
Term Debentures of the Company in the aggregate principal amount of $6,000,000
(the "Convertible Debentures") and five year warrants to purchase an aggregate
of 693,642 shares of common stock at an exercise price of $5.27 per share,
subject to reset (the "Warrants"). The first tranche of the transaction closed
effective January 28, 1999, at which time Capital Ventures International
purchased Convertible Debentures in the aggregate principal amount of $3,500,000
and Warrants to purchase 404,625 shares of common stock. Upon the timely
satisfaction of the conditions to the closing of the second tranche, Capital
Ventures International will purchase the remaining Convertible Debentures and
Warrants. The term of the Convertible Debentures is four years. The principal
amount of the Convertible Debentures
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plus accrued interest thereon at 8% per annum are convertible, at the option of
the Selling Securityholder, into shares of common stock at a conversion price
equal to $5.27 per share until July 27, 1999 (unless certain events occur
earlier) and, thereafter, at a per share price equal to the lowest of (i) $5.27,
(ii) 105% of the average closing bid price of the common stock for the lowest
two trading days during the 15 trading days ending on July 27, 1999, and (iii)
92% of the average closing bid price of the common stock for the lowest two
trading days during the 15 trading days ending on the trading day immediately
preceding the applicable conversion date, but in no event less than $2.49 per
share, subject to adjustment (the "Floor Price"). In the event that the common
stock trades below the Floor Price for a certain period of time, the Company has
the right to prepay the Convertible Debentures at an amount equal to 120% of
principal plus accrued interest. Except under certain limited circumstances,
Capital Ventures International is not entitled to convert the Convertible
Debentures or exercise the Warrants to the extent that the shares to be received
by Capital Ventures International upon such conversion or exercise would cause
Capital Ventures International to beneficially own more than 4.9% of the
outstanding common stock.
Other Developments
On February 25, 1999, the Company acquired the assets of Interface Alternatives,
Inc. through a newly-formed subsidiary, iface.com, which is in the business of
providing software and solutions for voice-over-internet protocol ("VOIP") for
voice, video and fax communications via the Internet. The Company owns 80% of
the stock of iface.com, and previous management of Interface Alternative, Inc.
owns the remaining 20%. As consideration for the assets of Interface
Alternatives, Inc., which are currently estimated at $350,000, iface.com assumed
the liabilities of Interface Alternatives, Inc., which are currently estimated
at $250,000. In addition, the Company provided cash at closing to iface.com in
the amount of $250,000 and a one-year line of credit in the amount of $250,000.
The acquisition will be accounted for under the purchase method of accounting.
On February 26, 1999, the Company signed a definitive agreement to acquire 100%
of the outstanding stock of FS3 Interactive, Inc. FS3 creates Internet-based
business solutions, including Web marketing, design, programming, and E-commerce
enabling. As consideration for the purchase, the Company will issue common stock
valued at two times FS3's annual revenue, which is currently estimated at $1.7
million. The number of shares to be issued will be determined based on the
lesser of $4.50 or the average closing bid price for the ten days prior to
closing.
On March 9, 1999, the Company signed a definitive agreement to acquire 100% of
the outstanding stock of Big Hand, Inc. and its subsidiary, Circumstance Design,
Inc. Big Hand creates Internet-based solutions, including Web marketing, design,
programming, and E-commerce enabling. As consideration for the purchase the
Company will issue common stock valued at two times the trailing twelve month
consolidated revenue of Big Hand and Circumstance, which is currently estimated
at $3.0 million. The number of shares to be issued will be determined based on
the lesser of $4.50 or the average closing bid price for the ten days prior to
closing.
On March 19, 1999, the Company signed a definitive agreement to acquire 100% of
the outstanding stock of Hype! Inc., a Canadian corporation. Hype! is an
Internet marketing and communications company. As consideration for the
purchase, Rare Medium Group, Inc. will issue 270,729 shares of common stock.
On March 16, 1999, the Company, formerly known as ICC Technologies, Inc.,
officially changed its name to Rare Medium Group, Inc. by a vote at a special
meeting of the stockholders, increased the number of authorized shares from
50,000,000 to 200,000,000, adopted staggered terms for directors and received
approval for the 1998 Long-Term Incentive Plan.
ITEM 2. PROPERTIES
The Company conducts its administrative and operations activities primarily
from two adjacent facilities in New York, New York totaling approximately 20,000
square feet, pursuant to leases expiring in 2007 and 2002, and a facility in Los
Angeles consisting of approximately 12,000 square feet pursuant to a lease
expiring in 2003. The Company is currently evaluating whether its New York
facilities are adequate to meet its needs for the foreseeable future, but has
determined that its Los Angeles facility has capacity for additional growth. The
Company routinely evaluates the facilities used by the businesses it acquires in
light of its plans for growth in various geographic markets, and is currently
evaluating space in Dallas. The Company does not anticipate purchasing property
in the foreseeable future
ITEM 3. LEGAL PROCEEDINGS
Currently, the Company is not engaged in any material lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
A Special Meeting of Stockholders of ICC was held on March 16, 1999, at
10:30 AM EST in the ballroom of the Masonic Hall located at 71 West 23rd Street,
New York, NY 10010 to consider for approval the following proposals:
1. To approve a proposal to amend the Company's Certificate of
Incorporation to change the name of the Company to Rare Medium Group,
Inc;
2. To approve a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common
Stock of the Company from 50,000,000 shares to 200,000,000 shares;
3. To approve a proposal to amend the Company's Certificate of
Incorporation to divide the Board of Directors into three classes; and
4. To approve a proposal to adopt the Company's 1998 Long-Term Incentive
Plan.
All of the proposals were approved. The result of the stockholders' votes
on the Proposals is as follows:
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Proposal 1:
Votes cast: 27,765,079 183,471 111,478 83,874
-------------- -------------- -------------- -----------------
For Against Abstention Broker Non-Votes
Proposal 2:
Votes cast: 24,283,774 3,645,045 131,209 83,874
-------------- -------------- -------------- -----------------
For Against Abstention Broker Non-Votes
Proposal 3:
Votes cast: 15,688,961 3,346,034 431,328 8,667,579
-------------- -------------- -------------- -----------------
For Against Abstention Broker Non-Votes
Proposal 4:
Votes cast: 15,427,939 3,616,806 421,578 8,677,579
-------------- -------------- -------------- -----------------
For Against Abstention Broker Non-Votes
</TABLE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ICC's Common Stock trades on the NASDAQ National Market under the
symbol RRRR. Prior to February 15, 1996 the Company's Stock was listed on the
NASDAQ Small Cap Market. Based on reports provided by NASDAQ, the range of high
and low bids for ICC's Common Stock for the two most recent fiscal years are as
follows:
1998
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
High Bid: $4.97 $6.50 $7.50 $3.25
Low Bid: $1.63 $1.63 $2.19 $1.81
1997
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
High Bid: $4.81 $5.25 $6.88 $7.06
Low Bid: $1.56 $4.25 $4.38 $4.88
The above quotations reported by NASDAQ represent prices between
dealers and do not include retail mark-ups, mark-downs or commissions. Such
quotations may not represent actual transactions. On March 29, 1999, the last
reported sale price for the Common Stock was $4.72 per share.
As of March 29, 1999, ICC had approximately 1,074 recordholders of
Common Stock. This number was derived from the Company's stockholder records,
and does not include beneficial owners of the Common Stock whose shares are held
in the names of various dealers, clearing agencies, banks, brokers, and other
fiduciaries. Holders of Common Stock are entitled to share ratably in dividends,
if and when declared by the Board of Directors.
<PAGE>
Other than an in-kind warrant dividend declared by the Board of Directors in
June 1990, the Company has never paid a dividend on its Common Stock and it is
unlikely that any dividends will be paid in the foreseeable future. The payment
of cash dividends on the Common Stock will depend on, among other things, the
earnings, capital requirements and financial condition of the Company, and
general business conditions. In addition, future borrowings or issuances of
Preferred Stock may prohibit or restrict the Company's ability to pay or declare
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following historical selected financial data of the Company for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994 have been derived from
financial statements that have been audited by the Company's Independent
Accountants, whose reports thereon include an explanatory paragraph regarding
substantial doubt about the Company's ability to continue as a going concern.
There were no cash dividends paid to holders of Common Stock in any of these
years. The data should be read in conjunction with the Company's financial
statements and the notes thereto included elsewhere in this Form 10-K. The
format of prior year data has been conformed to reflect the accounting
for Engelhard/ICC partnership as discontinued operations.
(ALL AMOUNTS EXPRESSED IN DOLLARS EXCEPT WEIGHTED AVERAGE SHARES OUTSTANDING)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended December 31
-----------------------------------------------------------------------------------------
INCOME STATEMENT DATA 1998 1997 1996 1995 1994 (1)
----------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,688,120 $ - $ - $ - $ -
Expenses (2) (3) 5,307,372 13,484,085 7,154,609 6,323,373 4,391,082
----------------- ---------------- ----------------- ----------------- -----------------
Net Loss (619,252) (13,484,085) (7,154,609) (6,323,373) (4,391,082)
Cumulative preferred stock
dividend requirements 0 0 (49,655) (301,413) (227,750)
----------------- ---------------- ----------------- ----------------- -----------------
Net loss applicable to
common stockholders $ (619,252) $ (13,484,085) $ (7,204,264) $ (6,624,786) $(4,618,832)
================= ================ ================= ================= =================
Loss per common share (.02) (.63) (.35) (.47) (.41)
Weighted average
shares outstanding 25,282,002 21,339,635 20,322,952 14,072,867 11,390,981
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended December 31
-----------------------------------------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994 (1)
----------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Total assets $ 44,743,122 $ 4,521,656 $ 12,250,865 $ 4,796,426 $ 2,397,522
Working capital (1,188,272) 1,382,537 9,661,805 1,827,797 1,072,485
Long-term obligations 10,935,736 0 0 0 150,000
Total Liabilities 14,921,412 7,583,862 2,179,467 3,262,614 426,782
Stockholders' equity (deficit) 29,821,710 (3,062,206) 10,071,398 1,533,812 1,970,740
</TABLE>
<PAGE>
(1) On February 7, 1994, the Company transferred its desiccant climate control
business in exchange for a 50% interest in the Partnership.
(2) Includes interest income and other income for 1994, 1995, 1996 and 1997.
(3) Expenses consists of discontinued operations, general and administrative
expense and interest expense for 1994, 1995, 1996 and 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As a result of the Company's disposition of its desiccant based air
conditioning operations, Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1998
compared with December 31, 1997 will focus on its sole business of providing
Internet professional services and other Internet related products and services.
The following financial information includes the results of Rare Medium as of
January 1, 1997 and the results of DigitalFacades and I/O 360 as of August
1998.
<TABLE>
<CAPTION>
Rare Medium Group, Inc.
Unaudited Pro Forma Statement of Operations
1997 1998
---------------- ----------------
<S> <C> <C>
Revenue $ 3,856,233 $ 5,829,819
Expenses:
Operating expenses 2,781,332 9,541,510
Corporate General and Administrative 1,991,594 2,053,639
Stock-Based Compensation 4,588,641 -
Depreciation and Amortization 106,840 12,627,553
---------------- ----------------
9,468,407 24,222,702
---------------- ----------------
Loss from operations (5,612,184) (18,392,883)
================ ================
================ ================
Net income (loss) (17,111,889) (844,517)
================ ================
</TABLE>
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 in this
annual report.
OVERVIEW
Rare Medium, I/O 360 and DigitalFacades (the "Internet Businesses") are
wholly-owned subsidiaries of the Company. Rare Medium was acquired on April 15,
1998, and is an Internet professional services firm that provides Internet
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;
<PAGE>
audience development; application development; maintenance and hosting. Rare
Medium markets its services primarily 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 included Bugle Boy, Epson America, Inc. and Beckman Coulter. I/O 360 is
a New York-based interactive design studio specializing in visual and
engineering solutions for all technology-mediated business environments. I/O
360's clients included the New York Times, Yahoo Internet Life, Microsoft Press,
and other complex projects for such clients as Microsoft, Mitsubishi, Citicorp,
Sony Fujitsu, Barnes & Noble and Prodigy.
The Company has integrated 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 in one location.
Our recent growth has strained our managerial and operational
resources. A key part of our strategy is to grow, both by hiring more personnel
and through acquisitions, which will continue to strain our resources. To manage
future growth, our management must continue to improve our operational and
financial systems and expand, train, retain and manage our employee base. There
can be no assurance that we will be able to manage our growth effectively. If
our systems, procedures and controls are inadequate to support our operations,
our expansion would be halted and we could lose our opportunity to improve
market share.
On October 14, 1998, the Company, through its wholly-owned subsidiary,
ICC Desiccant Technologies, Inc., completed the sale of a majority of 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. In addition,
the unaffiliated investment entity that purchased the partnership interests
assumed the liabilities of FAS as general partner, with certain exceptions. As a
result of the sale of partnership interests, ICC Desiccant Technologies, Inc.
retained, as its sole asset, a 32.4% passive investment limited partnership
interest in FAS.
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
Technologies, Inc.'s interest in FAS has been increased to a 36% limited
partnership interest.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 compared with Year Ended December 31, 1997
During 1998, through a series of transactions, the Company has
restructured its operations to focus on the business of providing Internet
professional services primarily to large and medium sized businesses. This was
accomplished by restructuring its Engelhard/ICC joint venture; purchasing the
Internet-related businesses of Rare Medium,, I/O 360, and DigitalFacades; and
disposing of a majority of its partnership interests in Fresh Air Solutions in
October, 1998. Historically the Company had been engaged in the design,
development, manufacture and marketing of desiccant based climate control
systems.
The results include the pro forma results of Rare Medium as if the
acquisition was completed on January 1, 1997. The 1998 results include the
results of DigitalFacades and I/O 360 since their dates of acquisition in August
of 1998.
Revenue
Revenues for the year ended December 31, 1998 increased to $ 5.8
million from $ 3.9 million for the year ended December 31, 1997. The increase
was primarily due to the acquisitions of DigitalFacades and I/O 360 late in the
third quarter of 1998, as well as increased business generated by the
professional services business. The increase
<PAGE>
in revenues resulted from both higher revenues for some of the Company's
existing clients as well as the addition of new clients. On a pro forma basis,
if the acquisitions of Digital Facades and I/O 360 had been effective January 1,
1998, unaudited revenues for the year ended December 31, 1998 would have been $
8.3 million. The Company anticipates that revenues in future periods will
continue to be positively impacted by both internal growth in addition to
acquisitions of additional Internet professional services businesses.
Although we have experienced revenue growth, this growth may not be sustainable
or indicative of future operating results. In addition, we have incurred
substantial costs to expand and integrate our operations and we intend to
continue to invest heavily in ongoing expansion. Our ongoing integration costs
will include the combination of the financial, information and communications
systems of the various companies that we have acquired and expect to acquire.
Our ongoing expansion costs will include the leasing of additional office space
and the purchase of new computer and communications equipment. As a result of
these and other costs, we may continue to incur operating losses through 1999 or
beyond, and there can be no assurance that we will achieve or sustain
profitability.
Most of our contracts are currently on a fixed-price basis, rather than a time
and materials basis. Further, the average size of our contracts is currently
increasing, which results in a corresponding increase in our exposure to the
financial risks of fixed price contracts. We assume greater financial risk on
fixed-price contracts than on time and materials engagements. We have only a
limited history in estimating our costs for our engagements, particularly for
larger projects. We have had to commit unanticipated resources to complete
certain projects, resulting in lower gross margins on certain contracts. We may
experience similar situations in the future. In addition, we typically assume
the fixed-price contracts of the companies we acquire. If we fail to estimate
accurately the resources and time required for an engagement, to manage client
expectations effectively or to complete fixed-price engagements within our
budget, on time and to our clients' satisfaction, we would be exposed to cost
overruns, potentially leading to losses on these engagements.
In addition, we recognize revenues from fixed-fee contracts based on our
estimate of the percentage of each project completed in a reporting period. To
the extent our estimates are inaccurate, the revenues and operating profits, if
any, we report for periods during which we are working on a project may not
accurately reflect the final results of the project and we would be required to
make adjustments to such estimates in a subsequent period.
Our clients generally retain us on a project by project basis, rather than under
long-term contracts. As a result, a client may or may not engage us for further
services once a project is completed. Establishment and development of
relationships with additional companies and other corporate users of information
technology is an important component of profitability. The absence of long-term
contracts and the need for new clients create an uncertain revenue stream. There
is no assurance that we will be able to add new major clients or to secure new
engagements with existing clients. In addition, certain of our existing clients
may unilaterally reduce the scope of, or terminate, existing projects. There is
no assurance that we will be able to maintain our business relationship or avoid
a material reduction in the use of our services by any of our significant
existing clients.
EXPENSES
Operating Expenses
Operating expenses increased to $ 9.5 million for the year ended
December 31, 1998 from $ 2.8 million in fiscal 1997. The majority of the
increase is related to the significant increase in personnel as a result of the
expansion and scaling of the business, as the number of personnel more than
tripled and the Company went from one location in 1997 to five in 1998. These
operating expenses include both direct costs related to revenues as well as
general and administrative expenses related to Internet professional services.
Included in these expenses are costs related to the Company's significant
investment of time and resources into: (i) the organizational restructuring and
reengineering of the Company; (ii) building the systems infrastructure both in
terms of systems (web site, Intranet redesign, scaling of network) and
personnel; and (iii) the integration of I/O 360 and Digital Facades into the
Rare Medium functional and organizational structure. The expenses associated
with these activities represent an investment in the operating infrastructure of
the Company, which are not only necessary to support the anticipated future
growth of the Company, but are also part of the Company's plan to build a
national presence in the Internet professional services' business and be
competitive in our service offerings to current and potential clients. The
Company anticipates that operating expenses will continue to increase in
absolute dollars as the Company continues to build its infrastructure to support
its expected growth from both internal sources and through acquisitions.
Corporate General and Administrative Expenses
Corporate general and administrative expenses for the year ended
December 31, 1997 of $ 2.0 million represent expenses not associated with the
web services business of Rare Medium and were related primarily to legal,
accounting, public relations and other administrative expenses including
salaries and corporate overhead of the Company in support of its then existing
businesses. For the year ended December 31, 1998, corporate general and
administrative expenses were $2.0 million and included professional fees for
legal and accounting services and salaries and corporate overhead for the
Company prior to the acquisition of Rare Medium in April, 1998 and for some of
the costs associated with transitioning the Company to its new business.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the fiscal year ended
December 31, 1998 increased to $ 12.6 million form $ 0.1 million for the year
ended December 31, 1997. The increase of $ 12.5 million is due to the
amortization of goodwill related to the acquisitions during 1998 of Rare Medium,
I/O 360 and DigitalFacades, with $ 11.4 million related to the Rare Medium
acquisition in April, 1998. The goodwill relating to the acquisitions is being
amortized over a three-year period.
Loss from Operations
The loss from operations was $ 18.4 million for the year ended December
31, 1998 as compared to a loss of $ 5.6 million for the previous fiscal year.
The most significant reason for the increased loss was the amortization expense
in 1998 in addition to the increased operating expenses. The loss for 1997
includes $ 4.6 million in non-cash charges for stock-based compensation of which
$ 4.1 million relates to warrants granted to an officer of Rare Medium.
Excluding these non-cash charges, the loss from operations for 1997 would have
been $ 1.0 million.
Net Income
The net loss for the year ended December 31,1998 was $ 0.8 million. The
major differences between the loss from operations and the net loss is a $ 24.8
million gain on the restructuring of the Company's joint venture partnership
with the Englehard Corporation, the Englehard/ICC partnership
<PAGE>
and it was partially offset by the loss related to discontinued operations of $
4.7 million. For the year ended December 31, 1997, the Company had a net loss of
$ 17.1 million, which included a loss of $ 12.0 million from the equity in the
loss of the Engelhard/ICC joint venture.
Liquidity and Capital Resources
The Company had $ 0.9 million in cash and cash equivalents at December
31, 1998, as compared with $1.3 million at December 31, 1997.
On December 31, 1998, in connection with certain Exchange Agreements
between the Company and certain of the holders of the Rare Medium Note, the
Company issued an aggregate of 2,951,814 shares of common stock of the Company
to such Note holders in exchange for their beneficial interest in approximately
$ 11.8 million of the original principal amount of the Rare Medium Note and
accrued and unpaid interest thereunder through December 31, 1998. As a result,
the original Note has a remaining principal balance of $ 10.4 million, payable
one half on April 15, 2000 and the balance on April 15, 2001, with interest
accruing at prime and payable semi-annually each April 1 and October 1.
In January 1999, the Company raised $ 3.5 million in a private
placement of 8% Convertible Debentures and Warrants with Capital Ventures
International. Upon timely satisfaction of the conditions to closing for a
second tranche on or before May 28, 1999, the Company would receive $2.5 million
for the placement of additional 8% Convertible Debentures and Warrants.
In order to fund the Company's capital requirements and to satisfy its
remaining debt obligations to the former stockholders of Rare Medium, Inc., 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, the Company has
not 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
the Company'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 the Company'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.
Since our common stock has continued to trade at or below $5.00 per share during
recent months and the Company does not have net tangible assets of at least $4
million, we received notice from Nasdaq that we must take steps to come into
compliance with the Nasdaq National Market listing standards or our common stock
will be delisted from the Nasdaq National Market. A hearing with Nasdaq was held
on February 4, 1999. We have proposed a plan to Nasdaq which we believe should
enable us to remain listed on the Nasdaq National Market if accepted by Nasdaq.
In the event we are unable to maintain our listing on the Nasdaq National
Market, we currently meet the listing standards for, and would seek to apply
for, listing on the Nasdaq SmallCap Market. There can be no assurance, however,
that such an application would be approved. In the event we were unable to list
the Company's common stock on the Nasdaq SmallCap Market or any other exchange
at such time, there would be no established trading market for the Company's
common stock except as may be established in the National Association of
Securities Dealers Inc.'s OTC Bulletin Board Service or in the "pink sheets,"
which would have a material adverse effect on the liquidity and market price of
the Company's common stock.
Market Risk Exposure
The financial position of the Company is subject to market risk
associated with interest rate movements on outstanding debt. The Company has
debt obligations with both fixed and variable terms. The carrying value of the
Company's variable rate debt obligations approximates fair value as the market
rate is based on prime. A 10 percent increase in the underlying interest rates
would result in an increase of interest expense of approximately $95,000.
<PAGE>
Year 2000
Our Systems May Not Be Year 2000 Compliant. The "Year 2000 Issue" refers to
the problem of many computer programs using the last two digits to represent a
year rather than four digits (i.e., "99" for 1999). Some of our computer
programs and those of our vendors, clients and content partners 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.
We have appointed a Year 2000 Task Force to perform an audit to assess the scope
of our risks and bring our computer and our 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, we have been
discussing with our vendors, clients and content partners their progress in
identifying and addressing problems that their computer systems may face in
correctly processing date information related to the Year 2000. Moreover,
clients increasingly require that we warrant that the applications we create are
year 2000 compliant. Should they prove not to be, it could have a material
adverse effect on our business.
Based on this task force work to date, we believe that most of our applications
are Year 2000 compliant, and that expenditures to correct any deficiencies not
yet identified will not be significant. In addition, the Company is in the
process of developing a contingency plan to address any significant deficiencies
in the event that they are identified. There can be no assurance, however, that
any or all of the Company's or third party systems, including those of our
clients, 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 our business.
Year Ended December 31, 1997 compared with Year Ended December 31, 1996
The following discussion relating to the results of operations of the
Company and its former joint venture partnership, Engelhand/ICC (the
"Partnership") for the year ended December 31, 1997 compared with the year ended
December 31, 1996 pertains to the operations of the desicant air conditioning
business which the Company disposed of in October 1998 and is identical to the
corresponding section appearing under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, as amended on
Form 10-K/A. The Company does not believe that this discussion is relevant to
an understanding of the Company's current business.
The Partnership's revenue for the year ended December 31, 1997
increased $1,734,403 to $12,239,012 from $10,504,609 for the year ended December
31, 1996. This increase in revenues is due primarily to increased substrate
sales and equipment sales. Sales of substrate from the Miami plant to Hexcel
pursuant to a supply agreement increased 35% to approximately $5.8 million in
1997 from $4.3 million in 1996. Equipment sales increased 4% to approximately
$6.3 million in 1997 compared to approximately $6.1 million in 1996. The
Partnership's gross loss for the year ended December 31, 1997 increased
$1,949,920 to $5,221,770 from $3,271,850 for the year ended December 31,1996.
The increase in gross loss is due primarily to increased provisions for
inventory obsolescence and warranty costs. The provision for inventory
obsolescence increased by approximately $1,300,000 to cover primarily slow
moving components related to older desiccant unit versions. The Partnership
incurred warranty costs of $2.2 million in 1997 related primarily to premature
component failures and odor issues which the Company believes it has rectified
through design changes, system operation modifications and quality control
improvements. Premature component failures related primarily to failures of
certain castor wheels upon which the desiccant or heat exchange wheels rotate.
In certain installations the desiccant wheel adsorbed not only moisture but
compounds in the air that produced odors. Through modifications to the operation
of the system cycles, addition of dampers and replacement of contaminated
wheels, Fresh Air Solutions believes it can control the odors that are created
under certain circumstances. The Company believes that Fresh Air Solutions has
adequately provided for existing and potential future warranty claims.
The Partnership's active humidity climate control systems are an
emerging technology and have been subject to numerous improvements and
modifications. Sales volumes have been lower than the capacity to produce and
revenues have not been sufficient to cover fixed and variable costs of
production.
<PAGE>
As a result of the Partnership Restructuring, Fresh Air Solutions' will
not receive any revenues from ongoing substrate sales, as that business was
retained by Engelhard HexCore.
The Partnership's operating expenses increased $2,141,015 to
$11,021,859 for the year ended December 31, 1997 compared to $8,880,844 for the
year ended December 31, 1996, due to higher marketing, engineering and general
and administrative costs which more than offset reduced research and development
costs. General and administrative costs increased approximately $733,000 due to
increased depreciation and amortization of approximately $275,000 and an
increase in the bad debt provision of approximately $403,000. Marketing expenses
increased approximately $541,000 as a result of increased marketing efforts and
increased sales and marketing personnel. Engineering costs increased
approximately $1,020,000 due to increased engineering staff costs of
approximately $461,000 and increased engineering consulting services of
approximately $465,000. The loss from operations for the year ended December
31,1997 increased $4,090,935 to $16,243,629 compared to $12,152,694 for the year
ended December 31, 1996.
The Partnership's net loss increased $4,134,697 to $16,724,361 for the
year ended December 31, 1997 from $12,589,664 for the year ended December 31,
1996 due to the increase in the loss from operations of $4,090,935 discussed
above and reduced interest income.
The Company realized a decrease in interest and other income of
$195,541 to $492,870 for the year ended December 31, 1997 as compared to
$688,411 for the year ended December 31,1996, which was primarily attributable
to a decrease in the average balance of cash and cash equivalents. The Company's
increase in its equity interest in the net loss of the Partnership increased
$5,690,529 to $ 11,985,361 for the year ended December 31, 1997 as compared to
$6,294,832 for the year ended December 31, 1996 which was due to the increased
Partnership loss and the increased share of the loss recognized by the Company
as a result of a limit placed on the loss recognized by Engelhard of
approximately $4,700,000 in connection with Master Agreement governing the
Restructuring. The Company's general and administrative expenses increased
$446,000 to $1,991,594 for the year ended December 31, 1997 compared to
$1,545,594 for the same period in 1996 primarily the result of an increase in
professional and consulting fees.
The Company's net loss for the year ended December 31, 1997 increased
$6,329,476 to $13,484,085 from $7,154,609 for the same period in 1996. Net loss
per share of Common Stock increased $.28 to $.63 for the year ended December 31,
1997 from $.35 for the same period in 1996 primarily the result of the increased
loss of the Partnership and the increased share of the Partnership loss
recognized by the Company in connection with the Master Agreement governing the
Restructuring.
The backlog of purchase orders as of March 25, 1998 is approximately $2
million which is approximately $1 million less than the comparable period in
1997. The decrease in backlog is primarily attributable to a significant
decline in orders from the Asia-Pacific market and to customer concerns over
component failures and odor issues. The decline in the Asia-Pacific market
activity is largely attributable to the Asian-Pacific economies experiencing
lower economic growth than had been previously enjoyed resulting in declines in
many of the Asia-Pacific currencies in comparison to the US dollar. Continued
weakness in Asian-Pacific currencies could adversely impact Asian-Pacific market
activities.
In connection with the Restructuring, Engelhard HexCore and Fresh Air
Solutions entered into the Rotor Supply Agreement whereby Engelhard HexCore will
supply Fresh Air Solutions with its heat-exchange and desiccant rotor
requirements. Fresh Air Solutions is obligated to purchase its rotor
requirements from Engelhard HexCore. All rotors will be purchased at prices
which are lower than the best price Engelhard HexCore offers to other customers.
The term of the rotor supply agreement is fifteen years. Under the Rotor Supply
Agreement, Engelhard HexCore will sell all desiccant and heat-exchange rotors to
Fresh Air Solutions at prices which are lower than it will sell rotors to others
("Favorable Wheel Prices"). Moreover, during the first two years under the Rotor
<PAGE>
Supply Agreement, Engelhard HexCore has agreed to sell such rotors at prices
which are lower than the Favorable Wheel Prices. Although Fresh Air Solutions
will receive preferential pricing for such purchases, it is required to purchase
rotors that will cover approximately $600,000 in costs annually. Initially the
Company believes that rotor costs will be obtained at prices higher than had
been obtained when rotors were transferred intra-partnership at cost prior to
the Restructuring of the Partnership; however, the Company believes as the
demand for rotors increase and as Engelhard HexCore begins to sell to other end
users, the price of rotors will decline.
ICC, through Fresh Air Solutions continued to have the right to use the
technology covered by the patents and the proprietary desiccant system design in
conducting the business of Fresh Air Solutions and expected to derive benefit
from the ETS(TM) and small-cell, honeycomb substrate material used to make the
Engelhard HexCore rotors through the purchase of rotors under the Rotor Supply
Agreement; however, Fresh Air Solutions no longer had or shared in the exclusive
right to any such technology. Moreover, Engelhard, through Engelhard HexCore
received the right to use and, except with respect to Hexcel, the successor
corporation to the former owner of the Partnership's Miami Plant, sublicense
others to use, such technology through its rights under the Box Technology
License and ownership of the patented ETS(TM) and the Hexcel license. Fresh Air
Solutions retained exclusive rights to sell its systems to standalone
supermarkets, ice rinks, and pachinko halls in North America, Japan and Korea
for a seven year period provided that Fresh Air Solutions meet certain agreed to
performance targets for sales to these markets.
The independent accountants' report on the audit of the Company's 1997
financial statements includes an explanatory paragraph regarding substantial
doubt about the Company's ability to continue as a going concern. The Company's
financial statements have been prepared on a going concern basis, which
contemplates the realization of
<PAGE>
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred cumulative losses since inception amounting to
approximately $54 million through December 31, 1997. In order to continue
operations, the Company has had to raise additional capital to offset cash
consumed in operations and support of the Partnership. The Company's
continuation as a going concern is dependent upon its ability to: (i) generate
sufficient cash flows to meet its obligations on a timely basis; (ii) obtain
additional financing or refinancing as may be required; and (iii) ultimately,
attain profitable operations and positive cash flow from its operations and its
investment in Fresh Air Solutions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by
this Item 8 are set forth in Item 14 of this Form 10-K Report. All information
which has been omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 15, 1998, pursuant to the terms of a Merger Agreement and Plan
of Reorganization, the Company acquired by merger Rare Medium, Inc., a privately
held New York corporation, which is an Internet professional services company
engaged in the design, delivery and implementation of Internet site applications
and strategies, primarily to large and medium sized businesses, including global
2000 companies, with its principal offices located in New York City. On August
13, 1998, PricewaterhouseCoopers LLP ("PWC"), the Company's principal
accountant, was replaced by the Board of Directors of the Company, based upon
the Company's moving into this new line of business and moving its operations to
New York City. On August 13, 1998, the Board of Directors of the Company
retained KPMG, LLP ("KPMG") to audit its financial statements for the year
ended December 31, 1998.
In compliance with Item 304 of Regulation S-K and as reported in the
Company's report on form 8-K dated August 13, 1998, the Company provides the
following information:
1. The Board of Directors of the Company on August 13, 1998 chose KPMG
to perform the auditing engagement for the Company.
2. In their report dated March 20, 1998, PWC expressed an opinion that
the December 31, 1997 financial statements were prepared assuming that the
Company will continue to exist as a going concern and that the Company incurred
losses accumulating to $54,184,410 through December 31, 1997. This factor, among
others, raised substantial doubt about the Company's ability to continue as a
going concern. Other than the above, the reports of PWC on the Company's
financial statements for the Company's last two fiscal years did not in either
case contain an adverse opinion or a disclaimer of opinion, nor were either of
the same qualified or modified as to uncertainty, audit scope or accounting
principles.
3. The decision to change accountants was approved by the Board of
Directors of the Company.
4. During the Company's two most recent fiscal years and any subsequent
interim period to date, there have been no disagreements with PWC on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
5. None of the events referred to in paragraphs (a)(1)(v)(A) through
(D) of Item 304 occurred within the Company's two most recent fiscal years or
any subsequent interim period.
6. KPMG was engaged by the Company on August 13, 1998. The Company did
not consult KPMG on any of the matters described in Items 304(a)(1)(iv) or 304
(a)(1)(v) of Regulation S-K.
<PAGE>
7. The Company is providing PWC with a copy of this report pursuant to
the requirements of Item 304(a)(3).
PART III
Item 10. Directors and Executive Officers of the Registrant.
The required information with respect to each director and executive
officer is to be contained in the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Stockholders ("1999 Annual Meeting")
to be filed with the Securities and Exchange Commission (the "Commission")
within 120 days of the Registrant's fiscal year ended December 31, 1998, which
information is hereby incorporated by reference in this Form 10-K Annual Report.
Item 11. Executive Compensation.
The required information with respect to executive compensation is to
be contained in the Company's definitive Proxy Statement in connection with its
1999 Annual Meeting to be filed with the Commission within 120 days of the
Registrant's fiscal year ended December 31, 1998, which information is hereby
incorporated by reference in this Form 10-K Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information with respect to security ownership of certain
beneficial owners and management is to be contained in the Company's definitive
Proxy Statement in connection with its 1999 Annual Meeting to be filed with the
Commission within 120 days of the Registrant's fiscal year ended December 31,
1998, which information is hereby incorporated by reference in the Form 10-K
Annual Report
Item 13. Certain Relationships and Related Transactions.
The required information with respect to certain relationships and
related transactions is to be contained in the Company's definitive Proxy
Statement in connection with its 1999 Annual Meeting to be filed with the
Commission within 120 days of the Registrant's fiscal year ended December 31,
1998, which information is hereby incorporated by reference in this Form 10-K
Annual Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of certain documents filed as a part of this Form
10-K Report:
(1) Financial Statements of the Registrant.
(i). Report of Independent Accountants
(ii). Consolidated Balance Sheet as of December 31, 1998 and
1997.
(iii). Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996.
<PAGE>
(iv). Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended December 31, 1998,
1997 and 1996.
(v). Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.
(vi). Notes to Consolidated Financial Statements.
All other schedules specified in Item 8 or Item 14(d) of Form 10-K are
omitted because they are not applicable or not required, or because the required
information is included in the Financial Statements or notes thereto.
(b) Reports on Form 8-K. The following sets forth the Current Reports on Form
8-K that were filed with the Securities and Exchange Commission during and
subsequent to the quarterly period ending December 31, 1998:
1. Form 8-K filed on October 29, 1998, as amended on November 13, 1998,
relating to the sale of partnership interests in Fresh Air Solutions,
L.P. by ICC Technologies, Inc., through its wholly-owned subsidiary,
ICC Desiccant Technologies, Inc., to Wilshap Investments, LLC, dated
October 14, 1998;
2. Form 8-K filed on February 4, 1999, relating to the sale of
Convertible Debentures by ICC to Capital Ventures International, dated
January 28, 1999;
3. Form 8-K filed on February 10, 1999, relating to the exchange of
Common Stock for the beneficial interest in approximately $11.8
million of the principal amount of the Rare Medium Secured Promissory
Note held by certain former stockholders of Rare Medium, Inc., dated
December 31, 1998.
(c) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-X.
Exhibit Description
------- -----------
2.1 Master Agreement, dated November 17, 1997, by and
among ICC Technologies, Inc., ICC Investment, L.P.,
ICC Desiccant Technologies, Inc., and Engelhard
Corporation, Engelhard DT Inc. and Engelhard/ICC was
filed as Exhibit "B" to ICC Technologies, Inc.'s
Definitive Proxy Statement dated February 3, 1998, for
the Special Meeting of Stockholders held on February
23, 1998, and is hereby incorporated herein by
reference.
2.2 Contribution Agreement, dated as of November 17, 1997,
between Engelhard/ICC and Fresh Air Solutions, L.P.
was filed as Exhibit "C" to ICC Technologies, Inc.'s
Definitive Proxy Statement dated February 3, 1998, for
the Special Meeting of the Stockholders held on
February 23, 1998, and is hereby incorporated herein
by reference.
2.3 E/ICC Purchase and Sale Agreement, dated as of
November 17, 1997, by and among ICC Investment, L.P.,
ICC Desiccant Technologies, Inc. and Engelhard DT,
Inc., was filed as Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1997, and is hereby incorporated herein by
reference.
<PAGE>
2.4 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 ("Rare Medium
Merger Agreement") was filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated April 15,
1998 and is hereby incorporated herein by reference.
2.5 Agreement and Plan of Merger, dated as of August 13,
1998, by and among ICC Technologies, Inc., Rare
Medium, Inc., I/O 360, Inc. and the I/O 360
Stockholders named therein was filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated August
13, 1998 and is hereby incorporated herein by
reference.
2.6 Agreement and Plan of Merger, dated as of August 13,
1998 by and among ICC Technologies, Inc., Rare Medium,
Inc., DigitalFacades Corporation and the
DigitalFacades Stockholders named therein was filed as
Exhibit 2.2 to the Company's Current Report on Form
8-K dated August 13, 1998 and is hereby incorporated
herein by reference.
2.7 Purchase and Sale Agreement Relating to Partnership
Interests in Fresh Air Solutions, L,.P. by and between
ICC Desiccant Technologies, Inc. and Wilshap
Investments, LLC dated as of October 14, 1998 was
filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K dated October 14, 1998 and is hereby
incorporated herein by reference.
3.1 Articles of Incorporation and By-laws of Rare Medium
Group, Inc., formerly known as ICC Technologies, Inc.,
are hereby incorporated herein by reference from the
Company's Form 10 filed on September 16, 1985.
3.2 Amendment to Articles of Incorporation, changing name
to ICC Technologies, Inc., is hereby incorporated
herein by reference from the Company's Form 8-K dated
June 12, 1990.
*3.3 Amendment to Articles of Incorporation, changing name
to Rare Medium Group, Inc., filed with the Secretary
of State of the State of Delaware on March 17, 1999.
10.1 Form of Secured Promissory Note of Rare Medium, Inc.
("Rare Medium Note") in the principal amount of $22
million issued in connection with the acquisition of
Rare Medium, Inc. was filed as Exhibit "C-1" to the
Rare Medium Merger Agreement, which was filed as
Exhibit "2.1" to the Company's Form 8-K dated April
15, 1998, and is hereby incorporated herein by
reference.
10.2 Form of Security Agreement between Rare Medium, Inc.
and former stockholders of Rare Medium, Inc. in
connection with the acquisition of Rare Medium, Inc.
was filed as Exhibit "D" to the Rare Medium Merger
Agreement, which was filed as Exhibit "2.1" to the
Company's Form 8-K dated April 15, 1998, and is hereby
incorporated herein by reference.
10.3 Form of Stock Pledge Agreement between ICC
Technologies, Inc. and the former stockholders of Rare
Medium, Inc. in connection with the acquisition of
Rare Medium, Inc. was filed as Exhibit "E" to the Rare
Medium Merger Agreement, which was filed as Exhibit
"2.1" to the Company's Form 8-K dated April 15, 1998,
and is hereby incorporated herein by reference.
<PAGE>
10.4 Form of Non-Founder Agreement between the Company and
certain former stockholders of Rare Medium, Inc. in
connection with the acquisition of Rare Medium, Inc.
was filed as Exhibit "M" to the Rare Medium Merger
Agreement, which was filed as Exhibit "2.1" to the
Company's Form 8-K dated April 15, 1998, and is hereby
incorporated herein by reference.
10.5 Form of Guaranty by ICC Technologies, Inc. of the Rare
Medium Note was filed as Exhibit "N" to the Rare
Medium Merger Agreement, which was filed as Exhibit
"2.1" to the Company's Form 8-K dated April 15, 1998,
and is hereby incorporated herein by reference.
*10.6 Employment Agreement between the Company and Glenn S.
Meyers dated April 14, 1998.
*10.7 Employment Agreement between the Company and John S.
Gross dated May 13, 1998.
*10.8 Lease dated September 12, 1997 between Forty Four
Eighteen Joint Venture and Rare Medium, Inc. re:
entire sixth floor, 44-8 West 18th Street thru to
47-53 West 17th Street, Manhattan, New York, New.
York.
*10.9 Lease dated February 11, 1998 by and between B & G
Bailey Living Trust u/t/d March 25, 1975 and Steaven
Jones and DigitalFacades Corporation re: 4081 Redwood
Avenue, 1st Floor, Los Angeles, California.
10.10 The Company's Incentive of Stock Option Plan, as
amended was filed as Exhibit 4(g) to the Company's
Registration Statement on Form S-8, No. 33-85636 filed
on October 26, 1994, and is hereby incorporated herein
by reference.
10.11 The Company's Nonqualified Stock Option Plan as
amended and restated, was filed as Exhibit C to the
Company's Definitive Proxy Statement dated November
18, 1994 for Stockholders Meeting held December 15,
1994, and is hereby incorporated herein by reference.
10.12 The Company's Equity Plan for Directors is hereby
incorporated herein by reference from ICC's Definitive
Proxy Statement dated November 18, 1994, for
Stockholders Meeting held December 15, 1994.
10.13 The Company's 1998 Long-Term Incentive Plan was filed
as Appendix I to the Company's Definitive Proxy
Statement dated February 17, 1999 for the Stockholders
Meeting held March 16, 1998, and is hereby
incorporated herein by reference.
10.14 Fresh Air Solutions, L.P. Limited Partnership
Agreement, dated February, 1998, between ICC Desiccant
Technologies, Inc., as the sole general partner and a
limited partner, and Engelhard DT, Inc., a limited
partner, was filed as Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1997, and is hereby incorporated herein by
reference.
*10.15 Admission of Partner/Amendment of Partnership
Agreement dated October 14, 1998 between ICC Desiccant
Technologies, Inc., Wilshap Investments, L.L.C.,
Engelhard DT, Inc. and Fresh Air Solutions, L.P.
<PAGE>
10.16 Form of Exchange Agreement, dated as of December 31,
1998, by and between ICC Technologies, Inc. and each
of certain beneficial holders of the Rate Medium,
Inc., Secured Promissory Note, dated April 15, 1998
was filed as Exhibit 10.1 to the Company's Form 8-K
dated December 31, 1998 and is hereby incorporated
herein by reference.
10.17 Securities Purchase Agreement, dated as of January 28,
1999, by and among ICC Technologies, Inc. and Capital
Ventures International ("CVI Securities Purchase
Agreement") and Exhibits thereto were filed as Exhibit
10.1 to the Company's Form 8-K dated January 28, 1999
and is hereby incorporated herein by reference.
10.18 Form of Convertible Term Debenture dated as of January
28, 1999 was filed as Exhibit "A" to the CVI
Securities Purchase Agreement, which was filed as
Exhibit 10.1 to the Company's Form 8-K dated January
28, 1999, and is hereby incorporated herein by
reference.
10.19 Form of Stock Purchase Warrant of ICC Technologies,
Inc. dated as of January 28, 1999 was filed as Exhibit
"B" to the CVI Securities Purchase Agreement, which
was filed as Exhibit 10.1 to the Company's Form 8-K
dated January 28, 1999, and is hereby incorporated
herein by reference.
10.20 Form of Registration Rights Agreement dated as of
January 28, 1999 was filed as Exhibit "C" to the CVI
Securities Purchase Agreement, which was filed as
Exhibit 10.1 to the Company's Form 8-K dated January
28, 1999, and is hereby incorporated herein by
reference.
*10.21 Agreement and Plan of Merger, dated as of March 5,
1999, among Rare Medium, Inc., ICC Technologies, Inc.,
Rare Medium Texas I, Inc., Big Hand, Inc., and The
Stockholders of Big Hand, Inc.
16 Letter regarding change in certifying accountant from
PricewaterhouseCoopers LLP to the Securities and
Exchange Commission dated August 26, 1998 was filed as
Exhibit 16.1 to the Company's Current Report on Form
8-K dated August 13, 1998 and is hereby incorporated
herein by reference.
21 Subsidiaries of the Company are Rare Medium, Inc., a
New York corporation; I/O 360, Inc., a New York
corporation; DigitalFacades, Inc., a California
corporation; Investment Holding Co., f/k/a ICC
Desiccant Technologies, Inc., a Delaware corporation;
ICC Investment L.P., a Pennsylvania limited
partnership; Maintain Corp., a Delaware corporation;
and ICC Advanced Technologies, Inc., a Delaware
corporation.
23.1 Consent of KPMG LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
27 Financial Data Schedule.
99 Letter on behalf of ICC Technologies, Inc. to
PriceWaterhouseCoopers LLP pursuant to Item 304 of
Regulation S-K was filed as Exhibit 99.1 to the
Company's Current Report on Form 8-K dated August 13,
1998 and is hereby incorporated herein by reference.
- -----------
* Previously Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1998.
(d) The following is a list of certain documents required by Regulation S-X
consisting of financial statements of the fifty percent owned general
partnership Engelhard/ICC included in this Form 10-K Annual Report.
<PAGE>
(1) Financial Statements of Engelhard/ICC.
(i) Report of Independent Accountants.
(ii) Balance Sheets as of December 31, 1998 and 1997.
(iii) Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
(iv) Statements of Changes in Partner's Capital for the
years ended December 1998, 1997 and 1996.
(v) Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
(vi) Notes to Financial Statement.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Rare Medium Group, Inc.:
We have audited the accompanying consolidated balance sheet of Rare
Medium Group, Inc. as of December 31, 1998 and the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company as of December 31, 1997 and for
each of the years in the two-year period ended December 31, 1997 were audited by
other auditors whose report, dated March 20, 1998, on those statements included
an explanatory paragraph that states that the Company has incurred losses
accumulating to $54,184,410 through December 31, 1997, which raises substantial
doubt of their ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rare Medium
Group, Inc. as of December 31, 1998 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Rare Medium Group, Inc. will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
suffered net losses and losses from continuing operations, has a working
capital deficiency and has incurred accumulated losses through December 31,
1998. These factors, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
New York, New York
March 29, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors of
Rare Medium Group, Inc.
We have audited the accompanying consolidated balance sheets of Rare
Medium Group, Inc. (formerly ICC Technologies, Inc.) as of December 31,
1997 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1997. These consolidated financial statements
are the responsibility of Rare Medium Group's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Rare Medium Group as of December 31, 1997 and the
consolidated results of its operations and its cash flows for each of
the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Rare Medium Group will continue as a going concern. As
discussed in Note 1, Rare Medium Group incurred losses accumulating to a
$54,184,410 through December 31, 1997. This factor among others, raises
substantial doubt about Rare Medium Group's ability to continue as a
going concern. Management's plans in regard to these matters are
described in Note 1. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of
this uncertainty.
Coopers & Lybrand LLP
Philadelphia, Pennsylvania
March 20, 1998
<PAGE>
RARE MEDIUM GROUP, INC
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 917,978 $ 1,257,483
Accounts receivable, net 1,184,182 -
Unbilled receivables 251,718 -
Advertising credits 298,083 -
Prepaid expenses and other current assets 145,443 406,558
------------------ ------------------
Total current assets 2,797,404 1,664,041
Property and equipment, net 1,918,273 7,615
Goodwill, net of accumulated amortization of $12,234,602 39,899,170 -
Notes receivable, net - 350,000
Restricted cash equivalents - 2,500,000
Other assets 128,275 -
------------------ ------------------
Total assets $44,743,122 $ 4,521,656
================== ==================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable 1,634,889 $ 97,989
Accrued liabilities 1,557,364 183,515
Deferred revenue 308,898 -
Taxes payable 355,000 -
Notes payable - other 79,525 -
Note payable - affiliate 50,000 -
------------------ ------------------
Total current liabilities 3,985,676 281,504
Notes payable - related parties 10,591,526 -
Notes payable - other 235,145 -
Deferred rent 109,065 -
Loss in excess of investment balance - 7,302,358
------------------ ------------------
Total liabilities 14,921,412 7,583,862
------------------ ------------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, Authorized 9,510 shares;
no shares issued and outstanding - -
Common stock, $.01 par value. Authorized
50,000,000 shares; issued and outstanding 30,696,828
shares in 1998 and 21,519,998 shares in 1997 306,968 215,200
Additional paid-in capital 84,720,304 51,308,904
Note receivable from shareholder (230,467) (230,467)
Accumulated deficit (54,803,665) (54,184,413)
Less: Treasury stock, 66,227 shares in 1998 and
1997, at cost (171,430) (171,430)
------------------ ------------------
Total stockholders' equity (deficit) 29,821,710 (3,062,206)
------------------ ------------------
Total liabilities and stockholders' equity $ 44,743,122 $ 4,521,656
================== ==================
</TABLE>
See accompany notes to consolidated financial statements.
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 4,688,120 $ - $ -
----------------- ----------------- -----------------
Expenses:
Operating expenses 6,590,061 - -
General and administrative 3,590,194 1,991,594 1,545,594
Depreciation and amortization 12,584,177 - -
----------------- ----------------- -----------------
Total expenses 22,764,432 1,991,594 1,545,594
----------------- ----------------- -----------------
Loss from operations (18,076,312) (1,991,594) (1,545,594)
----------------- ----------------- -----------------
Interest (expense) income, net (1,278,507) 492,870 685,817
----------------- ----------------- -----------------
Loss before taxes and discontinued operation (19,354,819) (1,498,724) (859,777)
Income tax expense 355,487 - -
----------------- ----------------- -----------------
Loss before discontinued operation (19,710,306) (1,498,724) (859,777)
----------------- ----------------- -----------------
Discontinued operation:
Loss from discontinued operation (4,538,128) (11,985,361) (6,294,832)
Gain on restructuring of Engelhard 24,256,769 - -
Loss on sale of FAS (627,587) - -
----------------- ----------------- -----------------
Income (Loss) from discontinued operation 19,091,054 (11,985,361) (6,294,832)
----------------- ----------------- -----------------
Net loss (619,252) (13,484,085) (7,154,609)
Cumulative preferred stock dividend - - (49,655)
----------------- ----------------- -----------------
Net loss attributable to common stockholders $ (619,252) $ (13,484,085) $ (7,204,264)
================= ================= =================
Basic and diluted earnings (loss) per share
Continuing operations $(0.78) $(0.07) $(0.04)
Discontinued operation 0.76 (0.56) (0.31)
----------------- ----------------- -----------------
Net loss per share $(0.02) $(0.63) $(0.35)
================= ================= =================
Basic weighted average common shares outstanding 25,282,002 21,339,635 20,332,952
================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (619,252) $ (13,484,085) $ (7,154,609)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Gain of restructuring of Engelhard (24,256,769) - -
Depreciation and amortization 12,584,177 3,927 1,590
Equity interest in net loss of Engelhard/ICC 133,450 11,985,361 6,294,832
Common stock and stock options
issued for services rendered 589,914 52,381 12,500
Loss on disposition of FAS 627,587 - -
Interest expense paid in notes and stock 1,140,413 - -
(Increase) decrease in:
Receivables 422,567 - 189,640
Prepaid expenses and other 277,142 (298,397) 172,349
Increase (decrease) in:
Accounts payable and accrued liabilities 757,693 194,030 (227,977)
Taxes payable 362,745 - -
Other liabilities (702,629) - -
------------------ ------------------ -----------------
Net cash used in operating activities (8,682,962) (1,546,783) (711,675)
------------------ ------------------ -----------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (10,591,856) - -
Cash received in connection with restructuring
of Engelhard/ICC 18,864,003 - -
Capital contributions to Engelhard/ICC - (6,775,000) (7,000,000)
Issuance of note receivable - (350,000) -
Net cash received in connection with sale of
majority interest in FAS 973,173 - -
Purchases of property and equipment, net (912,239) (9,500) -
------------------ ------------------ -----------------
Net cash provided by (used in) investing
activities 8,333,081 (7,134,950) (7,000,000)
------------------ ------------------ -----------------
Cash flows from financing activities
Proceeds from issuance of common stock and
warrants, net 118,385 298,102 17,305,194
Cash redemption of preferred stock - - (981,270)
Repayment of borrowings (108,013) - -
Cash dividend on preferred stock - - (394,610)
Repayments of borrowings from stockholders - - (150,000)
------------------ ------------------ -----------------
Net cash (used in) provided by financing
activities 10,372 298,102 15,779,314
------------------ ------------------ -----------------
Net increase (decrease) in cash and cash equivalents (339,505) (8,383,631) 8,067,639
Cash and cash equivalents, beginning of period 1,257,483 9,641,114 1,573,475
------------------ ------------------ -----------------
Cash and cash equivalents, end of period $ 917,978 $ 1,257,483 $ 9,641,114
================== ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIT)
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common
stock Additional Note receivable
Preferred ($.01 par paid-in from
stock value) capital officer
----- ------ ------- -------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 27 $ 146,923 $35,104,011 $ -
Issuance of 2,686,813 shares of common stock through
a secondary offering, net of offering expenses - 26,868 16,739,905 -
Issuance of 3,772,045 shares of common stock through
conversion and redemption of the outstanding
preferred stock (27) 37,720 (1,413,573) -
Issuance of 131,300 shares of common stock through
exercise of stock options - 1,313 299,987 -
Net loss - - - -
------------- ---------------- -------------- ------------------
Balance, December 31, 1996 - 212,824 50,730,330 -
Issuance of 237,644 shares of common stock through
exercise of stock options and warrants - 2,376 578,574 (230,467)
Net loss - - - -
------------- ---------------- -------------- ------------------
Balance, December 31, 1997 - 215,200 51,308,904 (230,467)
Issuance of 5,775,003 shares of common stock for
acquired businesses - 57,753 19,988,244 -
Issuance of 193,895 shares of common stock for
payment of interest on Note - 1,939 526,423 -
Issuance of 2,951,814 shares of common stock for
conversion of debt and accrued interest - 29,518 12,190,988 -
Issuance of 55,800 shares of common stock through
exercise of stock options and warrants - 558 117,831 -
Issuance of 200,000 shares of common stock and
options for services rendered - 2,000 587,914 -
Net loss - - - -
------------- ---------------- -------------- ------------------
Balance, December 31, 1998 $ - $ 306,968 $84,720,304 $ (230,467)
============= ================ ============== ==================
</TABLE>
<TABLE>
<CAPTION>
Treasury Total
Accumulated stock stockholders'
deficit at cost Equity (deficit)
------- ------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1996 $(33,545,719) $ (171,430) $ 1,533,812
Issuance of 2,686,813 shares of common stock through
a secondary offering, net of offering expenses - - 16,766,773
Issuance of 3,772,045 shares of common stock through
conversion and redemption of the outstanding
preferred stock - - (1,375,880)
Issuance of 131,300 shares of common stock through
exercise of stock options - - 301,300
Net loss (7,154,609) - (7,154,609)
---------------- ----------------- -----------------
Balance, December 31, 1996 (40,700,328) (171,430) 10,071,396
Issuance of 237,644 shares of common stock through
exercise of stock options and warrants - - 350,483
Net loss (13,484,085) - (13,484,085)
---------------- ----------------- -----------------
Balance, December 31, 1997 (54,184,413) (171,430) (3,062,206)
Issuance of 5,775,003 shares of common stock for
acquired businesses - - 20,045,997
Issuance of 193,895 shares of common stock for
payment of interest on Note - - 528,362
Issuance of 2,951,814 shares of common stock for
conversion of debt and accrued interest - - 12,220,506
Issuance of 55,800 shares of common stock through
exercise of stock options and warrants - - 118,389
Issuance of 200,000 shares of common stock and
options for services rendered - - 589,914
Net loss (619,252) - (619,252)
---------------- ----------------- -----------------
Balance, December 31, 1998 $(54,803,665) $ (171,430) $ 29,821,710
================ ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
Rare Medium Group, Inc. (the "Company"), formerly known as ICC
Technologies, Inc. ("ICC"), through a series of transactions, 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 Partnership,
purchasing the Internet-related businesses of Rare Medium, Inc. ("Rare
Medium"), I/O 360, Inc. and DigitalFacades Corporation; and disposing
of Fresh Air Solutions (see Note 2). Historically the Company had been
engaged in the design, development, manufacture and marketing of
climate control systems.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Revenues
have been insufficient to cover costs of operations for the year ended
December 31, 1998 primarily as a result of the Company's increase in
headcount, investment in infrastructure and acquisitions. The Company
has a working capital deficiency and has incurred cumulative losses
since inception of $54,803,665 through December 31, 1998 and $54,184,410
through December 31, 1987 substantially all related to the air
conditioning business. The Company's continuation as a going concern is
dependent on its ability to ultimately attain profitable operations and
positive cash flows from operations. Company management believes that
the additional financing together with improved operating cash flows in
the future will enable the Company to continue to exist through the
next year. The accompanying financial statements do not include any
adjustments that may result from the Company's inability to continue as
a going concern.
During 1997 and 1996, the consolidated financial statements include the
financial statements of the Company and its wholly-owned subsidiary, ICC
Desiccant Technologies, Inc. ICC Desiccant Technologies, Inc. owned the
Company's 50% interest in Engelhard/ICC, a Partnership between the
Company and Engelhard Corporation. Engelhard/ICC, accounted for under
the equity method, is included in the consolidated financial statements
as discontinued operations. Equity in losses of Engelhard/ICC was
$11,985,361 in 1997 and $6,294,832 in 1996.
All intercompany accounts and transactions are eliminated in
consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining
maturities of three months or less at the time of purchase to be cash
equivalents.
(c) Property and Equipment
The Company uses the straight-line method of depreciation. The estimated
useful lives of property and equipment are as follows:
Years
-----
Equipment 3 to 5
Furniture and fixtures 5 to 7
Leasehold improvements are amortized on a straight-line basis over the
term of the lease or the estimated useful life of the improvement,
whichever is shorter.
(d) Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over three
years. The Company periodically assesses the recoverability of the cost
of its goodwill based upon estimated future profitability of the related
operating entities. The agreements pursuant to which the Company
acquired certain companies (see Note 2) include provisions that could
require the Company to issue additional shares if the acquired company
meets certain performance targets. The value of
<PAGE>
any such shares issued will be added to the goodwill related to such
acquisition and amortized over the remainder of that goodwill's useful
life.
Long-lived assets and certain identifiable intangibles, including
goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying value of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(e) Advertising Credits
The Company has advertising credits that are to be used in the purchase
of advertising time or space in the United States. These trade credits
will be expensed as utilized.
(f) Revenue Recognition
Revenues from the design and development of Internet web sites,
interactive and traditional marketing services are recognized using the
percentage-of-completion method. Unbilled receivables represent time and
costs incurred on projects in progress in excess of amounts billed, and
are recorded as assets. Deferred revenue represent amounts billed in
excess of costs incurred, and are recorded as liabilities. To the extent
costs incurred and anticipated costs to complete projects in progress
exceed anticipated billings, a loss is recognized in the period such
determination is made for the excess.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and for operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h) Stock Option Plans
The Company accounts for its stock option plan in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123 which
allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method,
as defined in SFAS No. 123, had been applied. The Company has elected to
apply the provisions of APB No. 25 and provide the pro forma disclosure
required by SFAS No. 123. See Note 7.
(i) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(j) Net Loss Per Share
Basic earnings per share ("EPS") is computed by dividing income or loss
plus preferred dividends by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise or conversion of securities into common stock.
Cumulative dividends on preferred stock of $49,655 in 1996 were added to
the net loss to determine the net loss attributable to common
stockholders.
<PAGE>
Net loss and weighted average shares outstanding used for computing
diluted loss per common share were the same as that used for computing
basic loss per common share for each of the years ended December 31,
1998, 1997 and 1996.
For the purposes of computing EPS from continuing operations, the
Company had potentially dilutive common stock equivalents of 909,321,
1,211,588 and 2,002,305, for the years ended December 31, 1998, 1997,
and 1996, respectively, made up of stock options and common stock
purchase warrants. These common stock equivalents were not included in
the computation of earnings per common share because they were
antidilutive on continuing operations for the periods presented.
(k) Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivables,
accounts and notes payable, and short-term debt approximate book value.
The fair value of long-term notes payable approximates market value
based on the recent exchange offering completed in December 1998 (see
Note 6).
(l) Concentration of Credit Risk, Major Customers and Geographic Information
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and
accounts receivables. Cash and cash equivalents consist of deposits and
money market funds placed with various high credit quality financial
institutions.
Concentrations of credit risk with respect to receivables is limited due
to the geographically diverse customer base. The Company routinely
assesses the financial strength of its customers and does not require
collateral or other security to support customer receivables. Credit
losses are provided for in the consolidated financial statements in the
form of an allowance for doubtful accounts.
The Company generates revenue principally from customers located in
North America, many of which are large multi-national organizations.
Two customers each separately accounted for approximately 10% of
Internet related revenues in 1998, one of which represents approximately
10% of the receivables as of December 31, 1998.
(m) Recently Issued Accounting Standards
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." 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 has not completed its analysis of the
impact, however, currently does not expect the impact to be material.
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.
(n) Segment Accounting
All of the of the Company's continuing operations are in one business
segment, which is that of providing Internet professional services to
large and medium size businesses, and are all located in the United
States.
(2) Business Transactions
<PAGE>
(a) Acquisition of Rare Medium
In April 1998, the Company acquired all of the issued and outstanding
shares of capital stock of Rare Medium, Inc., ("Rare Medium") which
provides Internet professional services. As consideration for the
purchase of Rare Medium, the Company issued 4,269,000 shares of Common
Stock valued at $14,045,997, paid $10,000,000 in cash and issued a
secured promissory note in the principal amount of $22,200,000 (see Note
5). In the event that on the first anniversary of the transaction the
shares issued have a value of less than $3.00 per share, the Company
shall issue additional Notes valued at the difference between $3.00 per
share and the actual value of the shares. The Company has accounted for
this transaction under the purchase method of accounting. The aggregate
purchase price, including acquisition costs, exceeded the fair value of
Rare Medium's net assets by $45,743,000. This amount has been allocated
to Goodwill and is being amortized using the straight line method over
three years. Included in the accompanying statement of operations are
the results of Rare Medium since the date of acquisition.
(b) Acquisition of I/O 360
In August 1998, the Company acquired all of the issued and outstanding
shares of capital stock of I/O 360, which provides Internet professional
services. As consideration for the purchase of I/O 360, the Company
issued 786,559 shares of Common Stock valued at $3,000,000. In the event
on the first anniversary of the transaction the shares issued have an
aggregate value of less than $3,000,000, the Company shall issue
additional shares valued at the difference between $3,000,000 and the
actual value of the shares. The Company has accounted for this
transaction under the purchase method of accounting. The aggregate
purchase price, including acquisition costs, exceeded the fair value of
I/O 360's net assets by $3,194,000. This amount has been allocated to
Goodwill and is being amortized using the straight line method over
three years. Included in the accompanying statement of operations are
the results of I/O 360 since the date of acquisition.
(c) Acquisition of DigitalFacades
In August 1998, the Company acquired all of the issued and outstanding
shares of capital stock of DigitalFacades, which provides Internet
professional services. As consideration for the purchase of
DigitalFacades, the Company issued 719,144 shares of Common Stock valued
at $3,000,000. In the event on the first anniversary of the transaction
the shares issued have an aggregate value of less than $3,000,000, the
Company shall issue additional shares valued at the difference between
$3,000,000 and the actual value of the shares. The Company has accounted
for this transaction under the purchase method of accounting. The
aggregate purchase price, including acquisition costs, exceeded the fair
value of DigitalFacades's net assets by $3,197,000. This amount has been
allocated to Goodwill and is being amortized using the straight line
method over three years. Included in the accompanying statement of
operations are the results of DigitalFacades since the date of
acquisition.
(d) Disposal of Engelhard/ICC Partnership and Fresh Air Solutions
Engelhard/ICC ("E/ICC"), a partnership between ICC and Engelhard
Corporation ("Engelhard"), was formed in February 1994 to design,
manufacture and sell desiccant climate control systems and desiccant and
heat-exchange wheel components. ICC and Engelhard each owned a 50%
interest in E/ICC. On February 27, 1998, ICC and Engelhard effected the
restructuring of E/ICC by dividing E/ICC into two separate operating
limited partnerships: Fresh Air Solutions L.P. ("FAS") to manufacture
and market active climate control systems; and Engelhard Hexcore, L.P.
to manufacture and market the heat exchange and desiccant coated wheel
components. This transaction included the exchange by ICC and Engelhard
of certain of their respective interests in each partnership and the
payment by Engelhard to ICC of approximately $18,600,000. After the
restructuring, the Company owned 90% of Fresh Air Solutions, L.P. and
20% of Engelhard Hexcore, L.P. and Engelhard owned 80% of Engelhard
Hexcore, L.P. and 10% of Fresh Air Solutions, L.P. The Company
recognized a gain of $24,256,769 on this transaction, including
approximately $7 million relating to the liabilities assumed by the
acquiror.
In October 1998, the Company sold its 1% general partnership and its
56% limited partnership interest in FAS for $1,500,000 of which
$1,125,000 was paid in cash and $375,000 by delivery of an unsecured
promissory note. The Company incurred a loss of $627,587 on this
transaction.
<PAGE>
As of December 31, 1998, the Company has written down its investment
including the related note to $0, as a result of the current financial
position and recurring losses of FAS. The Company has no future funding
responsibilities with respect to FAS and has a 36% passive limited
partnership interest with no voting rights, and therefore, is
accounting for the remaining investment in FAS under the cost method.
As a result of these transactions, the Company has recorded the
operating results, gain on restructuring, and loss on disposal of FAS
as discontinued operations.
(e) Escrow Shares
In connection with the purchases of I/O 360 and DigitalFacades, the
former shareholders of I/O 360 and DigitalFacades have agreed to
indemnify the Company for any losses resulting from a breach of, among
other things, their respective representations, warranties and
covenants. To secure the indemnification obligations of the I/O 360 and
DigitalFacades stockholders thereunder, 104,874 and 119,857 shares of
the Company's common stock delivered to the I/O 360 and DigitalFacades
shareholders, respectively, included as part of the Merger
Considerations, have been placed in escrow, and the liability of the I/O
360 and DigitalFacades shareholders under such indemnification
obligations is expressly limited to the value of such shares held in
escrow.
(f) Pro Formas (unaudited)
The following unaudited pro forma information is presented as if the
Company had completed the acquisitions as January 1, 1997. The pro
forma information is not necessarily indicative of what the results of
operations would have been had the acquisitions taken place at January
1, 1997, or of the future results of operations.
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
<S> <C> <C>
Revenue $ 8,292,394 $ 6,642,568
================== ==================
Net income (loss) before discontinued operations (25,774,639) (24,252,664)
Discontinued operations 19,091,054 (11,985,361)
------------------ ------------------
Net loss $ (6,683,585) $ (36,238,025)
================== ==================
Net loss per common share
basic and diluted $(0.24) $(1.34)
================== ==================
</TABLE>
(3) Property and Equipment
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Property and equipment
Equipment $1,469,759 $13,766
Furniture and fixtures 168,910 956
Leasehold improvements 629,179 -
------------------ -----------------
2,267,848 14,722
Less accumulated depreciation
and amortization 349,575 7,107
------------------ -----------------
Property and equipment, net $1,918,273 $7,615
================== =================
</TABLE>
(4) Accrued Liabilities
Accrued liabilities consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Accrued liabilities
Accrued compensation 474,805 -
Accrued professional fees 417,809 114,500
Accrued interest payable 273,309 -
Other liabilities 391,441 69,015
------------------ -----------------
Total accrued liabilities $1,557,364 183,515
================== =================
</TABLE>
<PAGE>
(5) Debt
(a) Notes Payable - related parties
In connection with the Company's acquisition of Rare Medium on April 15,
1998, a secured promissory note (the "Note") was issued to the former
shareholders of Rare Medium in the original aggregate principal amount of
$22,200,000. The principal amount of the Note is payable in two equal
annual installments on the second and third anniversary of the date of
issuance, interest accrued at the prime rate and is payable
semi-annually in the form of cash or shares of the Company's common stock
at the election of the Company subject to certain limitations. The first
interest payment due on October 1, 1998 has been satisfied by delivery of a
combination of common stock of the Company and an unsecured promissory note
of Rare Medium (the "Interest Note"). The Note and Interest Note are
secured by all of the assets of Rare Medium. In addition, the Company has
guaranteed the obligations of Rare Medium under the Note.
In December 1998, the Company and certain beneficial holders of the Note,
Interest Note and accrued interest amounting to $12,220,506 reached an
agreement to convert all of their Notes and accrued interest for common
stock of the Company for the price of $4.14 per share, the trading price of
the Company's common stock at that time.
Pursuant to certain agreements between the Company and its lenders, the
Company is subject to certain limitations on indebtedness. Such limitations
could adversely affect the Company's ability to secure debt financing in
the future. These limitations include the payment within 5 days of the Note
should the Company close a secondary offering or other financing which
results in net proceeds to the Company of $50,000,000 or more.
Additionally, should the Company close a secondary offering or financing
which results in net proceeds which exceeds $20,000,000 but is less that
$50,000,000, the Company must make a payment which is equal to 40% of the
Note within 5 days.
Accrued interest, included in accrued expenses, on the remaining notes
relating to the interest payment due April 1, 1999, amounted to $230,071 as
of December 31, 1998.
(b) Note payable - affiliate
As part of the acquisition of DigitalFacades, the Company assumed a
promissory note to the former President of DigitalFacades. The total
principal and interest due at December 31, 1998 on this note is $50,000.
The note was paid on the due date of March 25, 1999.
(c) Notes payable - other
As part of the acquisition of DigitalFacades, the Company assumed an
installment note payable to Wells Fargo Bank. The note calls for monthly
payments of principal and interest with a final due date of Mach 15, 2001
with interest payable at a rate of 12.1%. The total principal and interest
due at December 31, 1998 on this note is $26,885.
In August 1998, the Company issued a promissory note to First Insurance
Fund Group as a payment for a Directors and Officers insurance policy. The
note calls for monthly payments of principal and interest with a final due
date of May 10, 1999 with interest payable at a rate of 6.83%. The total
principal and interest due at December 31, 1998 on this note is $50,320.
Through its wholly owned subsidiaries I/O 360 and DigitalFacades, the
Company has bank lines of credit of $445,930. As of December 31, 1998, the
Company had drawn down $237,445 of this amount.
(6) Shareholders' Equity
Common Stock Transactions
<PAGE>
In December 1998, the Company issued 2,951,814 shares of common stock to
certain beneficial holders of the Note held by the former shareholders of
Rare Medium in exchange for the principal amount of the Note and accrued
interest. Additionally, 193,895 shares of common stock were issued with
respect to the interest payment made in October 1998. The fair value of the
common stock was determined based on a value of the average trading price
of the Company's common stock at that time.
In April 1998, the Company issued 4,269,300 shares of common stock as
partial consideration for the acquisition of Rare Medium, Inc.. 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 (the
average trading price of the Company's common stock at that time).
In August 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 (the average trading price
of the Company's common stock at that time).
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 (the average trading price
of the Company's common stock at that time).
The Company received proceeds of approximately $238,000 from the exercise
of stock options to purchase approximately 125,000 shares of common stock
granted under its option plans during 1997. The Company received proceeds
of approximately $60,000 from the exercise of warrants to purchase
approximately 30,000 shares of common stock during 1997.
In February 1996, the Company issued 2,500,000 shares in a secondary
offering at $7 per share less underwriting discounts and commissions of
$.49 per share. Proceeds of $16,275,000 were offset by costs of
approximately $750,000 incurred in connection with the offering. In
connection with the offering, all outstanding preferred stock was converted
into 3,609,696 shares of common stock or redeemed in cash for $981,270. In
addition, accrued dividends on the preferred stock amounting to
approximately $1,044,000 were declared and paid in cash, except for
$649,396 of dividends associated with the Series H preferred stock which
were paid in the form of 162,349 shares of common stock in accordance with
the original terms of such series. As a result of such conversion and
redemption of preferred stock, there are no shares of preferred stock
outstanding. In April 1996, the underwriters of the secondary offering
exercised their overallotment option and purchased 186,813 of common stock
for proceeds of approximately $1.2 million after underwriting discounts and
commissions.
The Company received proceeds of approximately $183,000 from the exercise
of stock options to purchase approximately 106,000 shares of common stock
granted under its option plans for 1996. The Company received proceeds of
approximately $119,000 from the exercise of warrants to purchase
approximately 25,000 shares of common stock for 1996.
(7) Employee Compensation Plans
The Company provides incentive and nonqualified stock option plans for
directors, officers, and key employees of the Company and others. The
Company had reserved a total of 13,600,000 shares of authorized common
stock for issuance under the following plans; the Long Term Incentive Plan,
Nonqualified Stock Option Plan and Equity Plan for Director. The number of
options to be granted and the option prices are determined by the
Compensation Committee of the Board of Directors in accordance with the
terms of the plans. Options generally expire five to ten years after the
date of grant.
<PAGE>
During 1998, the Board of Directors approved the 1998 Long-Term Incentive
Plan, ("Stock Incentive Plan") under which "non-qualified" stock options
("NQSOs") to acquire shares of common stock may be granted to non-employee
directors and consultants of the Company, and "incentive" stock options
("ISOs") to acquire shares of common stock may be granted to employees. The
Stock Incentive Plan also provides for the grant of stock appreciation
rights ("SARs"), shares of restricted stock, deferred stock awards,
dividend equivalents, and other stock-based awards to the Company's
employees, directors, and consultants.
The Stock Incentive Plan provides for the issuance of up to a maximum of
8,000,000 shares of common stock and is currently administered by the
Compensation Committee of the Board of Directors. Under the Stock Incentive
Plan, the option price of any ISO may not be less than the fair market
value of a share of common stock on the date on which the option is
granted. The option price of an NQSO may be less than the fair market value
on the date of the NQSO is granted if the Board of Directors so determines.
An ISO may not be granted to a "ten percent stockholder" (as such term is
defined in section 422A of the Internal Revenue Code) unless the exercise
price is at least 110% of the fair market value of the common stock and the
term of the option may not exceed five years from the date of grant. Common
stock subject to a restricted stock purchase or a bonus agreement is
transferable only as provided in such agreement. The maximum term of each
stock option granted to persons other than ten percent stockholders is ten
years from the date of grant.
Under the Nonqualified Stock Option Plan, which provides for the issuance
of up to 5,100,000 shares, the option price as determined by the Stock
Option Committee may be greater or less than the fair market value of the
common stock as of the date of the grant, and the options are generally
exerciseable for three to five years subsequent to the grant date.
The Company also authorized in 1994 the Equity Plan For Directors. The
Equity Plan For Directors is a fixed stock option plan whereby vesting is
dependent upon the performance of the market price of the Common Stock.
Under the Equity Plan For Directors, options may be granted for the
purchase of up to 500,000 shares of Common Stock to outside directors.
Under the terms of the Equity Plan For Directors, the option price cannot
be less than 100% of the fair market value of the Common Stock on the date
of the grant.
The per share weighted average fair value of stock options granted during
1998, 1997 and 1996 was $1.96, $1.38, and $3.64, respectively, on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: (1) a risk free interest rate ranging from 4.5% to 5.6% in
1998, 5.4% to 6.5% in 1997, and 5.4% to 7.2% in 1996, (2) an expected life
of six years for all years, (3) volatility of approximately 91.5% in 1998,
73.9% in 1997, and 69.7% in 1996 and (4) an annual dividend yield of 0% for
all years.
The Company applies the provisions of APB Opinion No. 25 in accounting for
its Stock Incentive Plan and, accordingly no cost has been recognized for
its stock options in the financial statements since the exercise price was
equal to or greater than the fair market value at the date of grant. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C> <C>
Net loss: As Reported $ 619,252 $13,484,085
Pro Forma $6,053,743 $13,613,974
Net loss per share: As Reported $0.02 $0.63
Pro Forma $0.24 $0.64
</TABLE>
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts because compensation cost is reflected over the various options'
vesting period and compensation cost for options granted prior to January
1, 1995 is not considered.
<PAGE>
Stock option activity under the Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
Weighted Number of
Average shares
Exercise Prices
<S> <C> <C>
Outstanding at January 1, 1996 3.83 2,923,626
Granted 6.23 356,000
Forfeited 5.65 (163,000)
Exercised 1.72 (106,300)
----------------
Outstanding at December 31, 1996 4.09 3,010,326
Granted 3.15 716,998
Forfeited 6.58 (248,200)
Exercised 2.26 (207,644)
----------------
Outstanding at December 31, 1997 3.81 3,271,480
Granted 2.63 6,255,785
Forfeited 5.02 (1,669,293)
Exercised 2.12 (55,800)
----------------
Outstanding at December 31, 1998 2.61 7,802,172
================
</TABLE>
The following table summarizes weighted-average option price information:
<TABLE>
<CAPTION>
Number Number
outstanding at exercisable at
December 31, Weighted Weighted December 31, Weighted average
Range of exercise 1998 average average 1998 exercise price
prices remaining life exercise price
<S> <C> <C> <C> <C> <C>
$1.00 - $2.16 1,054,996 3.82 $1.75 884,358 $1.71
$2.25 - $3.25 5,351,948 6.96 2.41 1,026,527 2.58
$3.63 - $5.32 1,351,290 6.32 3.91 1,279,672 3.86
$6.88 - $10.75 43,938 7.96 8.14 19,964 8.16
----------------- ----------------- ----------------- ------------------ ------------------
7,802,172 6.43 $2.61 3,210,521 $2.89
</TABLE>
Additionally, at December 31, 1998 there are approximately 1,065,000 warrants
outstanding with exercise prices ranging from $2.00-$13.42; 750,000 of these
warrants expired or were exercised in January 1999. The balance of these
warrants expire in May 1999.
(8) Income Taxes
The difference between the statutory federal income tax rate and the
company's effective tax rate for the years ended December 31, 1998, 1997
and 1996 is principally due to the Company incurring net operating losses
for which no tax benefit was recorded and in 1998 alternative minimum taxes
of $355,000.
For Federal income tax purposes, the Company has unused net operating loss
carryforwards of approximately $31.8 million expiring in 1999 through 2012.
The availability of the net operating loss carryforwards to offset income
in future years, if any, is limited by Internal Revenue Code Section 382 as
a result of certain changes in ownership that have occurred.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 12,099,000 $ 17,928,000
Alternative minimum tax carryforwards 355,000 -
Other assets 86,000 -
Other accrued expenses 281,000 10,000
------------------ ------------------
Total gross deferred tax assets 12,821,000 17,938,000
Less valuation allowance (12,821,000) (17,938,000)
------------------ ------------------
Net deferred tax assets $ - $ -
================== ==================
</TABLE>
<PAGE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning in making these assessments. During
1998 and 1997, the valuation allowance decreased by $5,117,000 and increased
by $5,130,000, respectively.
(9) Related Party Transactions
The Company received advertising credits of $300,000 in exchange for shares
of common stock in the year ended December 31, 1997. The trade credits are
to be used in the purchase of advertising time or space in the United
States. As of December 31, 1998, $1,917 of these trade credits had been
utilized. The remaining $299.083 will be expensed as utilized.
The Company loaned $230,467 to its then Chairman in July 1997 in connection
with exercise of an option to acquire 82,753 shares of Common Stock. The
loan was in the form of a full recourse note which matures in five years.
Such note bears interest equal to the prime rate, with such rate adjusted to
the current prime rate at each anniversary date.
(10) Commitments and Contingencies
Leases
The Company has non-cancelable leases, primarily related to its operations
in New York and Los Angeles. Future minimum payments, by year and in the
aggregate, under operating leases with initial or remaining terms of one
year or more consisted of the following at December 31, 1998:
Year ending
December 31 Amount
----------- ------
1999 $402,625
2000 404,635
2001 415,363
2002 348,232
2003 259,158
Thereafter 950,784
----------
Total minimum lease payments $2,780,797
==========
Total rent expense under operating leases amounted to $315,048
for 1998.
Employment Agreements
The Company is a party to employment agreement with the Chief Executive
Officer of the Company. The agreement term is from April 15, 1998 to April
15, 2003 and calls for a minimum base salary of $250,00 per year with
annual increases of his base salary of not less than 4% per year. The
minimum salary commitment for this agreement is $1,354,081. Additionally,
this officer is entitled to incentive compensation equal to 2% of the
Company's revenues for such year in excess of the revenues of the immediate
preceding year. In addition, this officer was granted options to acquire an
aggregate of 2,000,000 shares of the Company's common stock at the exercise
prices equal to $2.375 per share, the fair value at the time of the
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.
Litigation
From time to time, the Company is subject to litigation in the normal
course of business. The Company is of the opinion that, based on
information presently available, the resolution of any such legal matters
will not have a material adverse effect on the financial position or
results of operations of the Company.
(11) Subsequent Events - (unaudited)
<PAGE>
Pursuant to the terms of a Securities Purchase Agreement, dated as of
January 28, 1999, the Selling Securityholder agreed to purchase from the
Company, in two tranches, 8% Convertible Term Debentures of the Company in
the aggregate principal amount of $6,000,000 (the "Convertible Debentures")
and five year warrants to purchase an aggregate of 693,642 shares of common
stock at an exercise price of $5.27 per share, subject to reset (the
"Warrants"). The first tranche of the transaction closed effective January
28, 1999, at which time the Selling Securityholder purchased Convertible
Debentures in the aggregate principal amount of $3,500,000 and Warrants to
purchase 404,625 shares of common stock. Upon the timely satisfaction of
the conditions of the closing of the second tranche, the Selling
Securityholder will purchase the remaining Convertible Debentures and
Warrants. The term of the Convertible Debentures is four years. The
principal amount of the Convertible Debentures plus accrued interest
thereon at 8% per annum are convertible, at the option of the Selling
Securityholder, into shares of common stock at a conversion price equal to
$5.27 per share until July 27, 1999 (unless certain events occur earlier)
and, therefore, at a per share price equal to the lowest of (i) $5.27, (ii)
105% of the average closing bid price of the common stock for the lowest
two trading days during the 15 trading days ending on July 27, 1999, and
(iii) 92% of the average closing bid price of the common stock for the
lowest two trading days during the 15 trading days ending on the trading
day immediately preceding the applicable conversion date, but in no event
less than $2.49 per share, subject to adjustment (the "Floor Price"). In
the event that the common stock trades below the Floor Price for a certain
period of time, the Company has the right to prepay the Convertible
Debentures at an amount equal to 120% of principal plus accrued interest.
Except under certain limited circumstances, the Selling Securityholder is
not entitled to convert the Convertible Debentures or exercise the Warrants
to the extent that the shares to be received by the Selling Securityholder
upon such conversion or exercise would cause the Selling Securityholder to
beneficially own more than 4.9% of the outstanding common stock.
On February 25, 1999, the Company acquired the assets of Interface
Alternatives, Inc. through a newly-formed subsidiary, iface.com, which is
in the business of providing software and solutions for voice-over-internet
protocol ("VOIP") for voice, video and fax communications via the Internet.
The Company owns 80% of the stock of iface.com, and previous management of
Interface Alternative, Inc. owns the remaining 20%. As consideration for
the assets of Interface Alternatives, Inc., which are currently estimated
at $350,000, iface.com assumed the liabilities of Interface Alternatives,
Inc., which are currently estimated at $250,000. In addition, the Company
provided cash at closing to iface.com in the amount of $250,000 and a
one-year line of credit in the amount of $250,000. The acquisition will be
accounted for under the purchase method of accounting.
On February 26, 1999, the Company signed a definitive agreement to acquire
100% of the outstanding stock of FS3 Interactive, Inc. FS3 creates
Internet-based business solutions, including Web marketing, design,
programming, and E-commerce enabling. As consideration for the purchase,
the Company will issue common stock valued at two times FS3's annual
revenue, which is currently estimated at $1.7 million. The number of shares
to be issued will be determined based on the lesser of $4.50 or the average
closing bid price for the ten days prior to closing.
On March 9, 1999, the Company signed a definitive agreement to acquire 100%
of the outstanding stock of Big Hand, Inc. and its subsidiary, Circumstance
Design, Inc. Big Hand creates Internet-based solutions, including Web
marketing, design, programming, and E-commerce enabling. As consideration
for the purchase the Company will issue common stock valued at two times
the trailing twelve month consolidated revenue of Big Hand and
Circumstance, which is currently estimated at $3.0 million. The number of
shares to be issued will be determined based on the lesser of $4.50 or the
average closing bid price for the ten days prior to closing.
On March 19, 1999, the Company signed a definitive agreement to acquire
100% of the outstanding stock of Hype! Inc., a Canadian corporation. Hype!
is an Internet marketing and communications company. As consideration for
the purchase, Rare Medium Group, Inc. will issue 270,729 shares of common
stock.
On March 16, 1999, the Company, formerly known as ICC Technologies, Inc.,
officially changed its name to Rare Medium Group, Inc. by a vote at a
special meeting of the stockholders, increased the number of authorized
shares from 50,000,000 to 200,000,000, adopted staggered terms for
directors and received approval for the 1998 Long-Term Incentive Plan.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners of Engelhard/ICC
We have audited the accompanying balance sheets of Engelhard/ICC (Partnership)
as of December 31, 1997 and 1996, and the related statements of operations,
changes in partners' capital and cash flows for the years ended December 31,
1997, 1996 and 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Engelhard/ICC as of December
31, 1997 and 1996, the results of its operations and its cash flows for the
years ended December 31, 1997, 1996 and 1995 in conformity with generally
accepted accounting principles.
As more fully described in Notes 1 and 15, on February 27, 1998, the Partners
terminated the Partnership and divided its net assets into two separate limited
partnerships.
Coopers & Lybrand LLP
Philadelphia, Pennsylvania
March 20, 1998
<PAGE>
ENGELHARD/ICC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 275,717 $ 1,192,997
Accounts receivable, net of allowance for doubtful accounts
of $444,823 and $39,786, respectively 2,118,138 2,623,769
Accounts receivable - ICC Technologies, Inc. 17,720 17,035
Inventories 3,061,684 4,570,952
Prepaid expenses and other 79,859 278,762
----------- ------------
Total current assets 5,553,118 8,683,515
Property, plant and equipment, net 9,496,897 7,990,125
Cash held in escrow 15,010 307,476
Purchased intangibles, net 866,116 991,883
Other assets, net 830,469 986,232
----------- ------------
Total assets 16,761,610 $189,959,231
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term loan 2,750,000 2,750,000
Current portion of long term debt 69,557 64,529
Accounts Payable:
Trade 965,755 1,404,366
Engelhard Corporation 0 298,084
Accrued liabilities 3,802,839 481,230
----------- ------------
Total current liabilities 7,588,151 4,998,209
----------- ------------
Long-term debt 8,629,128 8,642,330
----------- ------------
Partners' capital 544,331 5,318,692
----------- ------------
Total liabilities and partners' capital $16,761,610 $ 18,959,231
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ENGELHARD/ICC
STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 12,239,012 $ 10,504,609 $ 8,944,279
Cost of goods sold 17,460,782 13,776,459 10,883,995
------------ ------------ ------------
Gross loss (5,221,770) (3,271,850 (1,939,716)
------------ ------------ ------------
Operating expenses:
Marketing 4,105,228 3,563,817 3,412,008
Engineering 2,074,295 1,053,809 936,415
Research and development 901,523 1,055,758 1,133,780
General and administrative 3,940,813 3,207,460 2,440,722
------------ ------------ ------------
Total operating expenses 11,021,859 8,880,844 7,922,925
------------ ------------ ------------
Loss from operations (16,243,629) (12,152,694) (9,862,641)
------------ ------------ ------------
Interest:
Interest income 54,472 94,766 50,679
Interest expense (535,204) (531,736 (760,261)
(480,732) (436,970) (709,582)
------------ ------------ ------------
Net loss $(16,724,361) $(12,589,664) $(10,572,223)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ENGELHARD/ICC
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
Partners' capital, December 31, 1994 $ 3,480,579
Conversion of general partners' loan to partners' capital 5,000,000
Capital contributions 6,000,000
Net loss (10,572,223)
- -------- ------------
Partners' capital, December 31, 1995 3,908,356
Capital contributions 14,000,000
Net loss (12,589,664)
-------------
Partners' capital, December 31, 1996 5,318,692
Capital contributions 11,950,000
Net loss (16,724,361)
-------------
Partners' capital, December 31, 1997 $ 544,331
============
The accompanying notes are an integral part of the financial statements.
<PAGE>
ENGELHARD/ICC
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,724,361) $(12,589,664) $(10,572,223)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,557,739 1,349,057 1,100,898
Provision for doubtful accounts 443,356 40,000 31,104
Provisions for inventory obsolescence and valuation 1,278,040 941,030 600,000
Write-off of equipment and other assets 446,838 23,471 0
Gain on sale of assets (18,000) 0 0
(Increase) decrease in:
Receivables 111,885 (606,349) (1,424,973)
231,228 (2,126,857) (1,545,616)
Prepaid expenses and other 198,903 (119,823) (83,103)
Increase (decrease) in:
Accounts payable (457,577) 604,077 (509,281)
Payables to ICC Technologies, Inc. (31,191) (178,008) 36,878
Payables to Engelhard Corporation (298,996) 93,548 141,697
Accrued expenses and other liabilities 3,322,380 127,634 119,368
------------ ------------ ------------
Net cash used in operating activities (9,939,756) (12,441,884) (12,105,25l)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,087,444) (928,644) (1,257,464)
Purchases of intangibles (142,371) (346,327) (134,244)
Proceeds from sale of assets 18,000 0 0
Cash held in escrow 292,466 558,268 (865,744)
------------ ------------ ------------
Net cash used in investing activities (2,919,349) (716,703 (2,257,452)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,458 57,072 69,956
Repayments of long-term debt (48,633) (51,968) (43,245)
Proceeds from issuance of bonds 0 0 8,500,000
Bond issuance costs 0 0 (215,979)
Capital contributions by general partners 11,950,000 14,000,000 6,000,000
Proceeds from short-term debt 0 0 2,750,000
Repayment of notes payable to general partners 0 0 (3,000,000)
------------ ------------ ------------
Net cash provided by financing activities 11,941,825 14,005,104 14,060,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (917,280) 846,517 (301,971)
Cash and cash equivalents, beginning of period 1,192,997 346,480 648,451
------------ ------------ ------------
Cash and cash equivalents, end of period $ 275,717 $ 1,192,997 $ 346,480
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ENGELHARD/ICC
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS:
Partnership Operations and Restructuring
Engelhard/ICC (the "Partnership") is a Pennsylvania general partnership. The
Partnership is engaged in the business of designing, manufacturing and marketing
climate control systems to supplement or replace conventional air conditioning
systems. The Partnership currently markets its systems to certain targeted
applications within the commercial air conditioning market primarily in North
America and Asia-Pacific. On February 7, 1994, ICC Technologies, Inc. ("ICC")
and Engelhard Corporation ("Engelhard"), through their respective subsidiaries
(the "general partners"), formed the Partnership.
On February 27, 1998, ICC and Engelhard restructured the Partnership (the
"Restructuring"). The Partnership was terminated and its net assets were divided
into two separate operating limited partnerships, one to manufacture and market
complete, Active Climate Control Systems under the name Fresh Air Solutions, LP
and the other to manufacture and market heat-exchange and desiccant coated
wheel-shaped rotors, which are components of the climate control systems, under
the name Engelhard HexCore, LP. ICC has a 90% ownership interest and control of
Fresh Air Solutions, LP. Engelhard retains a 10% interest in Fresh Air
Solutions. Engelhard has an 80% ownership interest and control of Engelhard
HexCore LP. ICC retains a 20% equity interest in Engelhard HexCore, LP. Fresh
Air Solutions will purchase rotors exclusively from Engelhard HexCore, LP.
Engelhard will continue its guarantee of the lease on Fresh Air Solutions, LP's
facility until April 2002 (Note 15) and will continue to guarantee $2,000,000 of
Fresh Air Solutions, LP's debt with the guarantee being reduced to $1,000,000
after February 1999 and completely terminated after February 2000. Going
forward, the financial statements of Fresh Air Solutions and Engelhard HexCore
will be consolidated into their majority owners' financial statements, ICC and
Engelhard respectively.
In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions
entered into a rotor supply agreement whereby Engelhard HexCore will supply
Fresh Air Solutions with its heat-exchange and desiccant rotor requirements.
Fresh Air Solutions will be obligated to purchase its rotor requirements from
Engelhard HexCore. All rotors will be sold at prices which are lower than the
best price Engelhard HexCore offers to other customers. The rotor supply
agreement is for a period of fifteen years. Furthermore, Engelhard HexCore and
Fresh Air Solutions entered into reciprocal technology license agreements
whereby nonexclusive, royalty free, perpetual license with the further right to
sublicense, technology related to Engelhard HexCore and Fresh Air Solutions
subject to patents or patent applications existing or filed within one year of
the Restructuring. Fresh Air Solutions was also granted a royalty free license
to use "Engelhard" as part of the "Engelhard/ICC" mark for a thirty month period
following the Restructuring. See note 15 for financial information related to
Fresh Air Solutions and Engelhard HexCore.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements have been prepared on the accrual basis of accounting
and include the accounts of the Partnership for the years ended December 31,
1997, 1996 and 1995. Subsequent to 1997, the Partnership was restructured (Note
1 and Note 15) into two separate limited partnerships.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents for the purpose of
determining cash flows. The carrying amount approximates fair value due to the
short-term maturity of these instruments.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Assets under capital lease are
recorded at the present value of the future lease payments. Costs of major
additions and improvements are capitalized and replacements, maintenance and
repairs, which do not improve or extend the life of the respective assets, are
charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the
property and equipment and the related accumulated depreciation are removed from
the respective accounts, and any resulting gains or losses are reflected in
operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leased assets under capital leases are amortized
over the period of the lease or the service lives of the improvements, whichever
is shorter, using the straight-line method.
Purchased Intangible Assets
Purchased intangible assets, consisting primarily of a license agreement
acquired in connection with the acquisition of certain assets (See note 6), are
amortized over ten years using the straight-line method.
Patents
Patents are amortized over their estimated useful lives, not exceeding seventeen
years, using the straight-line method.
Bond Issuance Costs
Bond issuance costs are deferred and amortized over the life of the bonds using
the straight-line method. Amortization of bond issuance costs is included in
interest expense.
Income Taxes
Partnership income, if any, is taxable to the general partners. Accordingly, no
provision for income taxes has been made by the Partnership.
Revenue Recognition
Revenues are recognized when equipment is shipped for equipment sales contracts,
and when equipment is installed and operating for installation contracts.
Maintenance service revenue is recognized when services provided are complete.
Processing fees for fabricating raw materials into substrate are recognized in
revenue in the period the substrate material is shipped.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs amounted to approximately $902,000, $1,056,000 and $1,134,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
Warranties
The Partnership`s warranty on its equipment is for eighteen months from date of
shipment or one year from date of original installation, except for desiccant or
thermal rotors which are warranted for five years from the date of shipment. The
Partnership records a reserve for the estimated cost of repairing or replacing
any faulty equipment covered under the Partnership's warranty. During 1997, the
Partnership identified odor creation problems and other quality control issues
related to certain units it manufactured. As a result, management recorded a
provision of $2.2 million related to expenses to be incurred to address these
problems.
Concentration of Credit Risk
The Partnership invests its cash primarily in deposits with major banks. At
times, these deposits may be in excess of federally insured limits. The
Partnership has sold its equipment and services to end-users in the retail
industry, primarily in the continental United States and Asia-Pacific rim.
Concentration of credit risk with respect to trade receivables is moderate due
to the relatively diverse customer base. At December 31, 1997, the Partnership
had trade receivables of approximately $1,000,124 from one customer. During
1997, revenues from this customer amounted to approximately $5.8 million, which
represents approximately 48% of the Partnership revenues. Trade receivables from
this customer were current at December
<PAGE>
31, 1997. Ongoing credit evaluations of customers' financial condition are
performed and generally no collateral is required. The Partnership maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations. The partnership does not anticipate non
performance by any of the counterparties that have been granted credit or hold
instruments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-lived Assets
In accordance with the Statement of Financial Accounting Standards SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Partnership reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Partnership is not aware of any events or change in
circumstances which indicate the existence of an impairment of assets which
would be material to the Partnership's financial position or results of
operatons.
(3) INVENTORIES:
Inventories comprise the following:
December 31, December 31,
1997 1996
---- ----
Raw materials and purchased parts $ 1,721,311 $ 2,013,913
Work-in-process 1,504,116 1,547,641
Finished goods 309,128 1,591,228
----------- -----------
3,534,555 5,152,782
Less: Allowance for inventory obsolescence (472,871) (581,830)
----------- -----------
$ 3,061,684 $ 4,570,952
=========== ===========
Inventory is net of an allowance for inventory obsolescence of $472,871, and
$581,830 as of December 31, 1997 and 1996, respectively. The Partnership
recorded provisions of $1,278,040 and $941,000 for inventory obsolescence and
valuation which have been included in cost of goods sold in the statements of
operations for 1997 and 1996, respectively. In 1997 and 1996, the Partnership
wrote-off approximately $1,387,000 and $449,000, respectively, of obsolete
inventory against the allowance for inventory obsolescence.
Raw materials purchased from Engelhard amounted to approximately $155,000,
$272,000 and $86,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Partnership designs, manufactures and markets desiccant based climate
control systems which have not yet achieved consistent sales levels and
consistent product mix. The Partnership's products are also subject to change
due to technological improvements. Consequently, the Partnership may from time
to time have inventory levels in excess of its short-term needs. Items in
inventory may become obsolete due to changes in technology or product design.
Management has developed a program to monitor inventory levels; however, it is
possible that a material loss could ultimately result in the disposal of excess
inventory or due to obsolescence.
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net, consist of the following at
December 31:
1997 1996
---- ----
Land $ 390,000 $ 390,000
Building 1,805,741 1,779,721
Machinery and equipment 9,740,532 7,607,702
Furniture, fixtures and
leasehold improvements 1,113,589 794,912
----------- -----------
13,049,862 10,572,335
Less - accumulated depreciation (3,552,965) (2,582,210)
----------- -----------
$ 9,496,897 $ 7,990,125
=========== ===========
(5) OTHER ASSETS:
Other assets consist of the following at December 31:
1997 1996
---- ----
Patents and Trademarks $ 767,478 $ 877,623
Bond Issue Costs 219,483 219,483
Deposits 410 33,854
Other 24,217 2,000
---------- ----------
1,011,588 1,132,960
Accumulated amortization (181,119) (146,728)
---------- -----------
$ 830,469 $ 986,232
========== ==========
(6) ASSET ACQUISITION:
On December 1, 1994, the Partnership acquired for approximately $8.2 million in
cash, real property and substantially all other manufacturing assets of an
existing manufacturing facility located in Miami, Florida from Ciba-Geigy
Corporation ("Ciba"), which currently produces the small cell, honeycomb
structures that are the base material of the desiccant and thermal rotors that
are an integral part of the Partnership's products. The former Ciba plant
produced primarily large cell substrate which the Partnership is prohibited to
produce or sell other than to Ciba. The Partnership also acquired, as part of
the transaction, an exclusive technology license to use Ciba's proprietary
process which is necessary to manufacture such small cell, honeycomb structures.
Assets acquired consisted of approximately: $6.9 million of Plant, Property and
Equipment and $1.3 million of intangibles.
To finance the acquisition, the general partners each lent to the Partnership
$4,000,000 ("General Partners' Loan") bearing interest payable monthly at the
Prime Rate plus 1%. In April 1995, the Partnership obtained financing from the
issuance of $8,500,000 of industrial development revenue bonds (see note 8). In
1995, the proceeds of these bonds were used to repay $3,000,000 of the General
Partners' Loan, $1,500,000 to each general partner, and provide for improvements
and capital equipment at the Miami facility.
<PAGE>
(7) ACCRUED LIABILITIES:
Accrued liabilities consist of the following at December 31:
1997 1996
---- ----
Accrued expenses $2,837,272 $168,987
Payroll and employee benefits 748,051 130,301
Commissions 141,251 168,891
Customer deposits 76,265 13,051
---------- --------
$3,802,839 $481,230
========== ========
(8) LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Industrial development revenue bonds; interest determined weekly and
payable weekly; bonds mature on April 2020, but are subject to
redemption at the option of the Partnership from April 2000 $ 8,500,000 $ 8,500,000
Notes payable due April 2000; interest at 2% per annum;
interest payable monthly; interest and principal payable in
equal monthly installments over 60-month period
commencing April 1995 99,418 138,649
Other 99,267 68,210
----------- -----------
8,698,685 8,706,859
Less- current portion (69,557) (64,529)
----------- -----------
$ 8,629,128 $ 8,642,330
=========== ===========
</TABLE>
In connection with the issuance of the industrial revenue bonds (see note 6),
cash of $15,015 is held in escrow pending the Partnership's incurrence of
certain qualified expenditures.
Maturities of long-term debt for each of the next five years are as
follows:
1998 $69,557
1999 64,093
2000 26,024
2001 19,506
2002 19,505
Thereafter 8,500,000
-----------
$ 8,698,685
===========
The general partners are guarantors on the long-term debt. Substantially all of
the assets are pledged as collateral under the various debt agreements. In
addition, Engelhard is the guarantor on the short-term loan which amounts to
$2,750,000 as of December 31, 1997. The short-term loan is payable on demand
with the interest rate adjusted on a weekly basis. The interest rate at December
31, 1997 was 6.0625%. The interest on the long-term debt is adjusted weekly to
current market rates. The fair value of the Partnership's debt was determined by
reference to quotations available in markets where similar issues are traded.
The estimated fair values of long-term debt at December 31, 1997 approximates
the carrying amount. In connection with the Restructuring of the Partnership,
Engelhard remained as guarantor of up to $2 million on the short-term debt that
was transferred to Fresh Air Solutions and became sole guarantor on the $8.5
million industrial revenue bond which was transferred to Engelhard HexCore.
<PAGE>
(9) REVENUES:
Revenues are comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Equipment sales $ 6,311,235 $ 6,097,736 $ 2,558,250
Substrate processing 5,823,538 4,302,233 5,801,666
Licensing fees 0 0 500,000
Maintenance and service 104,239 104,640 84,363
------------ ------------ -----------
$ 12,239,012 $ 10,504,609 $ 8,944,279
============ ============ ===========
</TABLE>
The Partnership fabricates large cell honeycomb substrate materials at its Miami
facility under a Manufacturing and Supply Agreement with Hexcel Corporation
("Hexcel"'). Hexcel provides the raw materials to be fabricated into large cell
honeycomb substrate and retains title to the raw materials, work-in-process and
finished goods. The Partnership receives processing fees for fabricating the raw
materials into large cell honeycomb substrate. Processing fees are recognized in
revenues in the period the fabricated substrate material is shipped. The
Manufacturing and Supply Agreement is for a period of five years. The
Partnership is in the fourth year of performing services under such Agreement.
Export sales of equipment were approximately $1,283.000, $1,457,000, and
$643,000 in 1997, 1996 and 1995, respectively.
(10) PARTNERS' CAPITAL:
During 1997, $6,775,000 was contributed by the Company and $5,175,000 by
Engelhard. During 1996 and 1995, $7,000,000 and $3,000,000 respectively was
contributed by each of the general partners to the Partnership. In conjunction
with the General Partners' Loan of $8,000,000 and issuance of $8,500,000 of
industrial development revenue bonds (see note 6), $3,000,000 was repaid to each
general partner and the remaining $5,000,000 outstanding balance on the loan was
converted into a capital contribution, $2,500,000 for each general partner in
1995.
(11) RELATED PARTY TRANSACTIONS:
The Partnership provided approximately $78,000, $95,000, and $83,000 in various
administrative office support services to ICC during the years ended December
31, 1997, 1996 and 1995, respectively. Engelhard provided approximately
$298,000, $504,000, and $351,000 in various administrative office support
services to the Partnership during the years ended December 31, 1997, 1996 and
1995, respectively. Engelhard provided approximately $8,000, $17,000, and
$162,000 in research and development to the Partnership during the years ended
December 31, 1997, 1996 and 1995, respectively. ICC provided approximately
$78,000, $47,000 and $72,000 in various administrative office support services
to the Partnership during the year ended December 31, 1997, 1996, and 1995,
respectively. The Partnership incurred approximately $328,000 during the year
ended December 31, 1995, respectively, of interest expense to the general
partners in connection with the $8,000,000 General Partners' Loan (see note 6).
In accordance with the Transfer Agreement entered into by the general partners,
a distribution of approximately $140,000 was paid to ICC in 1995.
(12) SUPPLEMENTAL CASH FLOW DISCLOSURES:
Excluded from the Statement of Cash Flows for the year ended December 31, 1997
was the write-off of $1,386,999 of inventory and $38,319 of bad debts.
Excluded from the Statement of Cash Flows for the year ended December 31, 1996
was the write-off of $449,200 of inventory and $40,214 of bad debts.
Excluded from the Statement of Cash Flows for the year ended December 31, 1995
was the conversion of $5,000,000 of General Partners' Loans to Partners' Capital
and the write-off of $14,283 of bad debts.
Cash paid for interest amounted to approximately $504,000, $516,000 and $823,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
(13) 401(K) PROFIT SHARING PLAN:
The Partnership provides a benefit for all employees through a 401(k) Profit
Sharing Plan ("the Plan"). Under the Plan, an employee may elect to contribute
on a pre-tax basis to a retirement account up to 15% of the employee's
compensation up to the maximum annual contributions permitted by the Internal
Revenue Code. The Partnership matches 50% of each participant's contributions up
to a maximum of 4% of the participant's compensation. Each employee is fully
vested at all times with respect to his or her contributions. The Partnership's
contribution and administration expense was approximately $104,380, $95,000 and
$80,000 for the years ended December 31, 1997 and 1996, and 1995, respectively.
(14) LEASE COMMITMENTS:
The Partnership has operating lease commitments for its facilities, vehicles and
certain equipment. In certain instances, these leases contain purchase and
renewal options, both of which are at fair market value. The Partnership's
offices are leased on a month-to-month basis.
The future minimum lease payments for these leases at December 31, 1997 are as
follows:
1998 $ 526,440
1999 523,843
2000 521,321
2001 513,918
2002 214,130
Rent expense under these operating leases was $655,551, $469,580, and $224,634
for the years ended December 31,
1997, 1996 and 1995, respectively.
In order to provide capacity and consolidate the Philadelphia office and
manufacturing operations, the Partnership entered into a ten-year lease
commitment which began April 1997, for approximately 140,000 square feet of
office, manufacturing and assembly space. The lease can be terminated after the
fifth year. The Partnership is responsible for paying its allocable portion of
all real estate taxes, water and sewer rates, and common expenses. The
obligations under the lease agreement are guaranteed by the general partners,
ICC and Engelhard.
(15) RESTRUCTURING OF PARTNERSHIP:
As indicated in Note 1, on February 27, 1998, ICC and Engelhard terminated the
Partnership into two limited partnerships, Fresh Air Solutions, LP and Engelhard
HexCore LP. The historical information related to Fresh Air Solutions and
Engelhard HexCore have been designated as "Box Business" and "Wheel Business",
respectively in the accompanying financial presentations. The following
financial statements of Box business and Wheel business have been prepared from
the historical financial statements of the Partnership and contain certain
adjustments to carve out assets, liabilities, net assets, revenues, expenses and
cash flows between the two businesses.
Balance Sheets
As of December 31, 1997
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash $ 235,432 $ 40,285 $ 275,717
Receivables 1,043,734 1,092,124 2,135,858
Inventory 2,101,894 959,790 3,061,684
Other current assets 62,965 16,894 79,859
Property, plant and equipment 2,634,389 6,862,508 9,496,897
Cash held in escrow -- 15,010 15,010
Other noncurrent assets 539,827 1,156,758 1,696,585
----------- ----------- -----------
Total assets $ 6,618,241 $10,143,369 $16,761,610
=========== =========== ===========
Current liabilities 4,306,795 461,799 4,768,594
Short-term loan 2,750,000 -- 2,750,000
Long-term loan 198,685 8,500,000 8,698,685
Partners' capital (deficit) (637,239) 1,181,570 544,331
----------- -----------
Total liabilities and capital $ 6,618,241 $10,143,369 $16,761,610
=========== =========== ===========
</TABLE>
<PAGE>
Statements of Operations
for the year ended
December 31, 1997
<TABLE>
<CAPTION>
Box Business Wheel Business Eliminations Partnership
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 6,415,474 $ 6,926,538 $ (1,103,000) $ 12,239,012
Cost of goods sold 11,661,030 6,902,752 (1,103,000) 17,460,782
------------ ------------ ------------ ------------
Gross profit (loss) (5,245,556) 23,786 - (5,221,770)
------------ ------------ ------------ ------------
Operating expenses:
Marketing 4,105,228 - 4,105,228
Engineering 2,074,295 - 2,074,295
Research and developmen 901,523 - 901,523
General and administrative 3,799,838 140,975 3,940,813
------------ ------------ ------------
Loss from operations (16,126,440) (117,189) 16,243,629)
------------ ------------ ------------
Interest expense 136,283 344,449 480,732
------------ ------------ ------------ ------------
Net loss $(16,262,723) $ (461,638) - $(16,724,361)
============ ============ ============ ============
</TABLE>
Condensed Statements of Cash Flows
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,262,723) $ (461,638) $(16,724,361)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 692,641 865,098 1,557,739
Provision for doubtful accounts 443,356 -- 443,356
Provisions for inventory obsolescence and
Valuation 1,278,040 -- 1,278,040
Write-off of equipment and other assets 364,201 82,637 446,838
Gain on sale of assets -- (18,000) (18,000)
(Increase) decrease in current assets 635,470 (93,454) 542,016
Current liabilities increase (decrease) 2,545,000 (10,384) 2,534,616
------------ ------------ ------------
Net cash (used in) provided by
operating activities (10,304,015) 364,259 (9,939,756)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,490,707) (596,737) (3,087,444)
Purchases of intangibles (103,203) (39,168) (142,371)
Proceeds from sale of assets -- 18,000 18,000
------------ ------------ ------------
Cash held in escrow -- 292,466 292,466
------------ ------------ ------------
Net cash used in investing activities (2,593,910) (325,439) (2,919,349)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,458 -- 40,458
Repayments of long-term debt (48,633) -- (48,633)
Capital contributions by general partners 11,950,000 -- 11,950,000
------------ ------------ ------------
Net cash provided by financing activities 11,941,825 -- 11,941,825
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (956,100) 38,820 (917,280)
Cash and cash equivalents, beginning of period 1,191,532 1,465 1,192,997
------------ ------------ ------------
Cash and cash equivalents, end of period $ 235,432 $ 40,285 $ 275,717
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance Sheets
As of December 31, 1996 Box Business Wheel Business Partnership
------------ ------------- -----------
<S> <C> <C> <C>
Cash $ 1,191,532 $ 1,465 $ 1,192,997
Receivables 2,091,908 548,896 2,640,804
Inventory 3,435,349 1,135,603 4,570,952
Other current assets 265,444 13,318 278,762
Property, plant and equipment 917,593 7,072,532 7,990,125
Cash held in escrow -- 307,476 307,476
Other noncurrent assets 719,550 1,258,565 1,978,115
----------- ----------- -----------
Total assets $ 8,621,376 10,337,855 18,959,231
=========== =========== ===========
Current liabilities 1,989,033 194,647 2,183,680
Short-term loan 2,750,000 -- 2,750,000
Long-term loan 206,859 8,500,000 8,706,859
Partners' capital 3,675,484 1,643,208 5,318,692
----------- ----------- -----------
Total liabilities and net assets $ 8,621,376 $10,337,855 `$18,959,231
=========== =========== ===========
</TABLE>
Statements of Operations
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Box Business Wheel Business Eliminations Partnership
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 6,202,609 $ 6,032,000 $ (1,730,000) $ 10,504,609
Cost of goods sold 9,190,145 6,316,314 (1,730,000) 13,776,459
------------ ------------ ------------ ------------
Gross profit (loss) (2,987,536) (284,314) -- (3,271,850)
------------ ------------ ------------ ------------
Operating expenses:
Marketing 3,563,817 -- 3,563,817
Engineering 1,053,809 -- 1,053,809
Research and development 1,055,758 -- 1,055,758
General and administrative 3,068,859 138,601 3,207,460
------------ ------------ ------------
Loss from operations (11,729,779) (422,915) (12,152,694)
------------ ------------ ------------
Interest expense 98,872 338,098 436,970
------------ ------------ ------------ ------------
Net loss $(11,828,651) $ (761,013) -- $(12,589,664)
============ ============ ============ ============
</TABLE>
<PAGE>
Condensed Statements of Cash Flows
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,828,651) $ (761,013) $(12,589,664)
Adjustments to reconcile net loss to net cash (used in)
Provided by
Operating activities:
Depreciation and amortization 581,092 767,965 1,349,057
Provision for doubtful accounts 40,000 -- 40,000
Provisions for inventory
obsolescence and valuation 941,030 -- 941,030
Write-off of equipment 23,471 -- 23,471
(Increase) decrease in current assets (3,038,921) 185,892 (2,853,029)
Increase (decrease) in current liabilities 641,348 5,903 647,251
------------ ------------ ------------
Net cash (used in) provided by operating activities (12,640,631) 198,747 (12,441,884)
Cash flows from investing activities: (211,189) (717,455) (928,644)
Purchases of property, plant and equipment (305,799) (40,528) (346,327)
Purchases of intangibles -- 558,268 558,268
------------ ------------ ------------
Cash held in escrow (516,988) (199,715) (716,703)
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt 57,072 -- 57,072
Repayments of long-term debt (51,968) -- (51,968)
Capital contributions by general partners 14,000,000 -- 14,000,000
---------- ------------ ------------
Net cash provided by financing activities 14,005,104 -- 14,005,104
Net increase (decrease) in cash and cash equivalents 847,485 (968) 846,517
Cash and cash equivalents, beginning of period 344,047 2,433 346,480
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,191,532 $ 1,465 $ 1,192,997
============ ============ ============
</TABLE>
<PAGE>
Statements of Operation
for the year December 31, 1995
<TABLE>
<CAPTION>
Box Business Wheel Business Elimination Partnership
------------ -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,142,613 $ 6,768,666 (967,000) $ 8,944,279
Cost of goods sold 5,190,059 6,660,936 (967,000) 10,883,995
------------ ------------ --------- ------------
Gross profit (loss) (2,047,446) 107,730 -- (1,939,716)
------------ ------------ --------- ------------
Operating expenses:
Marketing 3,412,008 3,412,008
Engineering 936,415 936,415
Research and development 1,133,780 1,133,780
General and administrative 2,305,888 134,834 2,440,722
------------ ------------ ------------
Loss from operations (9,835,537) (27,104) (9,862,641)
Interest expense 438,447 271,135 709,582
------------ ------------ --------- ------------
Net loss $(10,273,984) $ (298,239) $(10,572,223)
============ ============ ========= ==========
</TABLE>
Statements of Cash Flows
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Cash flows from operating activities Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Net loss $(10,273,984) $ (298,239) $(10,572,223)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 401,851 699,047 1,100,898
Provision for doubtful accounts 31,104 -- 31,104
Provisions for inventory obsolescence and valuation 600,000 -- 600,000
(Increase) decrease in current assets (758,389) (2,295,303) (3,053,692)
Current liabilities increase (decrease) (405,374) 194,036 (211,338)
------------ ------------ ------------
Net cash used in operating activities (10,404,792) (1,700,459) (12,105,251)
Cash flows from investing activities
Purchases of property, plant and equipment (572,097) (685,367) (1,257,464)
Purchases of intangibles (102,544) (31,700) (134,244)
Cash held in escrow -- (865,744) (865,744)
------------ ------------ ------------
Net cash used in investing activities (674,641) (1,582,811) (2,257,452)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 69,956 -- 69,956
Repayments of long-term debt (43,245) -- (43,245)
Proceeds from issuance of bonds -- 8,500,000 8,500,000
Transfer of bond proceeds between businesses 5,000,000 (5,000,000) --
Bond issuance costs (215,979) (215,979)
Capital contributions by general partners 6,000,000 -- 6,000,000
Proceeds from short-term debt 2,750,000 -- 2,750,000
Repayment of notes payable to general partner (3,000,000) -- (3,000,000)
------------ ------------ ------------
Net cash provided by financing activities 10,776,711 3,284,021 14,060,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (302,722) 751 (301,971)
Cash and cash equivalents, beginning of period 646,769 1,682 648,451
------------ ------------ ------------
Cash and cash equivalents, end of period $ 344,047 $ 2,433 $ 346,480
`============ ============ ============
</TABLE>
<PAGE>
Rare Medium Group
Schedule II - Valuations and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balance at
beginning costs and other end
Description of year expenses Accounts Deductions of year
- ---------------------------------------------------------- ------------- -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted asset accounts:
Allowances for uncollectible accounts receivable
Year ended December 31, 1996 - - - -
Year ended December 31, 1997 - - - -
Year ended December 31, 1998 - $ 82,445(1) - $ 82,445
Allowances for uncollectible notes receivable
Year ended December 31, 1996 - - - -
Year ended December 31, 1997 - - - -
Year ended December 31, 1998 - $ 375,000 - $ 375,000
</TABLE>
(1) Existing reserves for acquired companies.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant): Rare Medium Group, Inc.
----------------------
By: /s/ Glenn S. Meyers
(Signature)
Name and Title: Glenn S. Meyers, President and Chief Executive Officer
Date: April 9, 1999
By: /s/ John S. Gross
(Signature)
Name and Title: John S. Gross, Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Date: April 9, 1999
Exhibit 23.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors and Stockholders
Rare Medium Group, Inc.:
The audit referred to in our report dated March 29, 1999, included the related
financial statement schedule as of and for the year ended December 31, 1998,
included in the annual report on Form 10-K/A. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference in the registration statements Nos.
33-37036, 33-37037, 33-85634, 33-85636, 33-89122 and 33-89124 on Form S-8, of
our reports dated March 29, 1999, relating to the consolidated balance sheet as
of December 31, 1998 and the related consolidated statements of operations,
stockholders' equity (deficit), cash flows and financial statement schedule for
the year then ended which reports are included in the annual report on Form
10-K/A. Our report dated March 29, 1999, contains an explanatory paragraph that
states that the Company has suffered net losses and losses from continuing
operations, has a working capital deficiency, and has incurred accumulated
losses through December 31, 1998. These factors, raise substantial doubt about
its ability to continue as a going concern. The consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of that uncertainty.
KPMG LLP
New York, New York
April 9, 1999
Exhibit 23.2
Consent of PricewaterhouseCoopers LLP, Independent Accountants.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Rare Medium Group, Inc. (formerly ICC Technologies, Inc.) (the Company) on Form
S-8 (File Nos. 33-37036, 33-37037, 33-85634, 33-85636, 33-89122 and 33-89124) of
our report, which includes an explanatory paragraph which refers to conditions
that raise substantial doubt about the Company's ability to continue as a going
concern, dated March 20, 1998, on our audits of the consolidated financial
statements of the Company as of December 31, 1997 and for the years ended
December 31, 1997 and 1996, which report is included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998. We also consent
to the incorporation by reference in the Registration Statements (set forth
above) of the Company of our report, dated March 20, 1998, on our audits of the
financial statements of Engelhard/ICC as of December 31, 1997 and 1996 and for
the years ended December 31, 1997, 1996 and 1995, which report is also included
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
1998.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 9, 1999
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