SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13865
RARE MEDIUM GROUP, INC.
----------
(Exact name of registrant as specified in its
charter)
Delaware 23-2368845
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
565 Fifth Avenue, 29th Floor
New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 883-6940
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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __________
---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding of the issuer's common stock, as of July 31, 2000
Common Stock, par value $.01 per share 50,694,644
-------------------------------------- -----------
Class Number of shares outstanding
<PAGE>
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000
(Unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Operations
Three and six months ended June 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
2
<PAGE>
RARE MEDIUM GROUP, INC
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 208,345 $ 28,540
Accounts receivable, net 19,746 12,601
Work in process 8,573 3,171
Notes receivable 450 1,100
Prepaid expenses and other current assets 5,014 2,508
---------- -----------
Total current assets 242,128 47,920
Property, plant and equipment, net 24,438 12,100
Investments in affiliates 52,086 26,467
Goodwill and intangibles, net 71,184 72,552
Other assets 3,798 1,384
---------- -----------
Total assets $ 393,634 $ 160,423
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,405 7,097
Accrued liabilities 10,921 5,759
Deferred revenue 5,977 3,044
Current portion of note payable - related parties - 997
Current portion of notes payable 245 579
---------- -----------
Total current liabilities 25,548 17,476
Note payable 173 -
Note payable - related parties - 997
Other noncurrent liabilities 4,338 735
---------- -----------
Total liabilities 30,059 19,208
---------- -----------
Series A Convertible Preferred Stock, $.01 par
value, net of unamortized discount of $52,361 41,858 36,224
---------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized
10,000,000 shares, issued 942,184 shares as
Series A Convertible Preferred Stock at
June 30, 2000 and 907,820 shares at
December 31, 1999 - -
Common stock, $.01 par value, authorized
200,000,000 shares, issued and outstanding
50,614,077 shares at June 30, 2000
and 42,893,357 shares at December 31, 1999 506 429
Additional paid-in capital 528,316 252,075
Accumulated other comprehensive income 6,850 937
Note receivable from shareholder - (231)
Accumulated deficit (213,784) (148,048)
Treasury stock, at cost, 66,227 shares (171) (171)
---------- -----------
Total stockholders' equity 321,717 104,991
---------- -----------
Total liabilities and stockholders' equity $ 393,634 $ 160,423
========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 27,706 $ 5,155 $ 51,523 $ 7,744
Cost of revenues 16,663 3,008 29,725 4,388
--------- -------- --------- --------
Gross profit 11,043 2,147 21,798 3,356
Expenses:
Sales and marketing expense 5,626 900 9,173 1,111
General and administrative expense 23,428 5,652 41,251 8,271
Depreciation and amortization 11,605 5,671 22,014 10,164
--------- -------- --------- --------
Total expenses 40,659 12,223 72,438 19,546
--------- -------- --------- --------
Loss from operations (29,616) (10,076) (50,640) (16,190)
Interest income (expense), net 3,420 (1,466) 4,572 (2,203)
Equity interest in net loss of investments (1,193) - (2,563) -
Other expense (311) - (262) -
--------- -------- --------- --------
Net loss (27,700) (11,542) (48,893) (18,393)
Deemed dividend attributable to
issuance of convertible preferred stock - (29,879) - (29,879)
Cumulative dividends and accretion of
convertible preferred stock to
liquidation value (5,015) (1,192) (16,843) (1,192)
--------- --------- ---------- ---------
Net loss attributable to common
stockholders $ (32,715) $ (42,613) $ (65,736) $ (49,464)
========= ========= ========== =========
Basic and diluted loss per share $ (0.66) $ (1.19) $ (1.39) $ (1.48)
========= ========= ========== =========
Basic weighted average common shares
outstanding 49,288,828 35,929,161 47,436,995 33,520,807
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (48,893) $ (18,393)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 22,014 10,164
Equity interest in net loss of investments 2,563 -
Non-cash interest - 2,246
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable (8,753) (1,802)
Work in process (5,403) (555)
Prepaid expenses and other assets (4,770) (167)
Deferred revenue 2,933 70
Accounts payable and accrued liabilities 9,206 57
--------- ---------
Net cash used in operating activities (31,103) (8,380)
--------- ---------
Cash flows from investing activities:
Cash paid for investments in affiliates (19,659) -
Purchases of property, plant and equipment, net (15,474) (1,315)
Decrease in notes receivable 650 -
Cash acquired in acquisitions, net of
acquisition costs 46 948
--------- ---------
Net cash used in investing activities (34,437) (367)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible debenture - 6,000
Proceeds from issuance of convertible
preferred stock, net of costs - 82,998
Proceeds from issuance of common
stock, net of costs 241,355 -
Repayments of borrowings, net (737) (634)
Proceeds from issuance of stock in connection
with exercise of warrants and options 4,727 6,389
--------- ---------
Net cash provided by financing activities 245,345 94,753
--------- ---------
Net increase in cash and cash equivalents 179,805 86,006
Cash and cash equivalents, beginning of period 28,540 918
--------- ---------
Cash and cash equivalents, end of period $ 208,345 $ 86,924
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of the business
Rare Medium Group, Inc. (the "Company") conducts its operations primarily
through its subsidiaries, which are organized as two related lines of business:
the Internet services business and the investment business. The Company is
headquartered in New York with offices throughout the United States and in
England, Australia, Singapore and Canada.
The Company's Internet services business is a provider of Internet
solutions, offering Fortune 1000 companies and others its services to develop
e-commerce Internet strategies, improve business processes and develop marketing
communications, branding strategies and interactive content using Internet-based
technologies and solutions.
Through its incubator investment strategy the Company invests in and
develops, manages and operates companies in selected Internet-focused markets.
The Company also makes venture investments by making strategic equity
investments in companies with Internet-focused business models.
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. While the Company believes
that the disclosures presented are adequate to make the information not
misleading, these consolidated financial statements should be read in
conjunction with the audited financial statements and related notes for the year
ended December 31, 1999 which are contained in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission (the "SEC"). The
results for the three and six month periods ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year. Certain
prior year amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation.
(3) Acquisition
On June 6, 2000, the Company completed the acquisition of Friedland Jacobs
Communications, Inc. ("FJC"), a privately held marketing and branding company
based in Burbank, California that specializes in strategic marketing and
creative production for the entertainment industry. In connection with this
acquisition, the Company issued 800,745 shares of common stock valued at $14.8
million in exchange for all outstanding shares of capital stock of FJC. 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 the net assets acquired by approximately $14.5 million. This
amount has been allocated to goodwill and is being amortized using the
straight-line method over three years. Included in the accompanying statements
of operations are the results of operations of FJC since the date of
acquisition.
(4) Investments in Affiliates
The following is a summary of the carrying values of the investments held
by the Company:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(In thousands)
<S> <C> <C>
Cost investments 36,009 20,876
Equity investments 2,242 3,531
Marketable securities 13,835 2,060
------------- --------------
$ 52,086 $ 26,467
------------- --------------
</TABLE>
6
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(5) Segment Information
Presented below are the operating results and total assets of the Company's
two primary operating segments: the Internet services business and the
investment business.
<TABLE>
<CAPTION>
Three month period ending Six month period ending
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------------------- --------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Internet services 30,026 5,491 53,515 8,004
Investment 1,838 136 3,316 212
Internet services provided to
investments (4,158) (472) (5,308) (472)
----------- ----------- ----------- ------------
$ 27,706 $ 5,155 $ 51,523 $ 7,744
=========== =========== =========== ============
Loss before interest, taxes,
depreciation and amortization:
Internet services (2,470) (1,037) (5,734) (1,714)
Investment and corporate (15,541) (3,368) (22,892) (4,312)
----------- ----------- ----------- ------------
$ (18,011) $ (4,405) $ (28,626) $ (6,026)
=========== =========== =========== ============
Depreciation and amortization (11,605) (5,671) (22,014) (10,164)
Interest income (expense), net 3,420 (1,466) 4,572 (2,203)
Equity interest in net loss on
investments (1,193) - (2,563) -
Other expense (311) - (262) -
----------- ----------- ----------- ------------
Net loss $ (27,700) $ (11,542) $ (48,893) $ (18,393)
=========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
As of As of
June 30, 2000 December 31, 1999
<S> <C> <C>
Total assets:
Internet services 62,759 31,047
Investment and corporate 330,875 129,376
----------- ------------
$ 393,634 $ 160,423
=========== ============
</TABLE>
(6) Equity Transactions
On January 14, 2000, the Company sold 2,500,000 shares of its common stock
for gross proceeds of $70.1 million (net proceeds of $65.7 million) in a private
transaction to a group of mutual funds managed by Putnam Investments and
Franklin Resources, Inc. On April 18, 2000, the Company filed a registration
statement with the SEC to register the resale of such shares as required by the
purchase agreement executed in connection with such private transaction.
On March 29, 2000, the Company sold 3,000,000 shares of common stock for
gross proceeds of $186 million (net proceeds of $175.6 million) in a public
offering underwritten by Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens Inc.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") that involve risks and uncertainties, including statements regarding our
capital needs, business strategy, expectations and intentions. We urge you to
consider that statements which use the terms "believe," "do not believe",
anticipate," "expect," "plan", "estimate," "intend," and similar expressions are
intended to identify forward-looking statements. These statements reflect our
current views with respect to future events and because our business is subject
to numerous risks, uncertainties and risk factors, our actual results could
differ materially from those anticipated in the forward-looking statements,
including those set forth below under this "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of operations" and elsewhere in this
report. Actual results will most likely differ from those reflected in these
statements, and the differences could be substantial. We disclaim any obligation
to publicly update these statements, or disclose any difference between our
actual results and those reflected in these statements. The information
constitutes forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
OVERVIEW
We are an Internet-focused company that:
o provides Internet professional services to companies;
o invests in and develops, manages and operates companies in selected
Internet-focused market segments; and
o takes strategic equity positions in companies that we believe possess superior
Internet-focused business models.
Our end-to-end Internet professional services offering encompasses the
entire Internet services spectrum, ranging from strategic and creative
consulting to applications development, implementation and hosting. Our
strategic approach is to align these service offerings and expertise with our
customers industries. This vertical market approach allows us to provide more
sophisticated strategic solutions. Our customers include AT&T, Dr. Drew, Epson,
Forbes, Microsoft, Nestle, Ritz Carlton, Weider, Paine Webber, Sun
International, Furniture Brands, Wyndham Hotels, Corporate Express, Red Herring,
Providence Health Systems, Cablevision and Body Shop.
We also invest in and internally develop, manage and operate companies in
selected Internet-focused market segments. In addition, we make minority
investments in independently managed companies, in which we co-invest with
well-known financial and industry partners such as Brentwood Associates, Compaq
Computer Corp., Constellation Ventures, GE Capital Corp., Hicks, Muse, Tate &
Furst, Mayfield Partners and Omnicom. Our investment business is currently
focused on Internet companies engaged in the business-to-business e-commerce,
Internet enabling tools, broadband and next generation communications sectors.
Our investment in these businesses amounted to $88.8 million at June 30, 2000.
Our operating results are primarily driven by our Internet services
business. We evaluate the performance of this business as a separate segment.
Revenue and loss before interest, taxes, depreciation and amortization are used
to measure and evaluate our financial results and make relative comparisons to
other entities that operate within the Internet services industry. Our Internet
service business revenue, including revenue from services provided to our
consolidated subsidiaries, increased to $30.0 million for the three month period
ended June 30, 2000 from $23.5 million for the three month period ended March
31, 2000. This 28% increase in revenue from the second quarter of 2000 was
achieved through organic growth. Loss before interest, taxes, depreciation and
amortization decreased from $3.3 million for the three month period ended March
31, 2000 to $2.5 million for the three month period ended June 30, 2000.
Many of our Internet service contracts are currently on a fixed price
basis, rather than a time and materials basis. We recognize revenues from fixed
price 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 Internet services clients generally retain us on a project by project
basis, rather than entering into 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 and securing repeat engagements
with existing clients are important components of our success.
8
<PAGE>
Cost of revenues includes salaries, payroll taxes and related benefits and
other direct costs associated with the generation of revenues. Sales and
marketing expense represent the actual costs associated with our marketing and
advertising. General and administrative expenses include facilities costs,
recruiting, training, finance, legal, and other corporate costs as well as
salaries and related employee benefits for those employees that support such
functions.
Our board of directors has approved an equity participation plan that
allows our Compensation Committe to incentivize our employees by allocating to
them up to 20% of any profit we might recognize when and if our investments in
portfolio and incubator companies become liquid, subject to vesting and other
requirements. Upon liquidation event, we will recognize a compensation charge
for that portion of the profit on the investment that is allocated to the
employees. We will have the right to pay such amount to the employees either in
cash, in shares of common stock, or a combination thereof.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
REVENUES
Revenue for the three months ended June 30, 2000 increased to $27.7 million
from $5.2 million for the three months ended June 30, 1999, an increase of $22.5
million. This increase reflects increases in both the number and relative size
of client engagements which has been facilitated by increase in our billable
employees as a result of acquisitions and aggressive hiring strategy. All of the
acquired Internet services businesses' operations have been integrated into our
existing operations. Our incubator companies generated revenues totaling $1.8
million in the second quarter of 2000, compared to $0.1 million in the second
quarter ended June 30, 1999.
COST OF REVENUES
Cost of revenues for the three months ended June 30, 2000 increased to
$16.7 million from $3.0 million for the three months ended June 30, 1999, an
increase of $13.7 million. This increase is due primarily to a substantial
increase in additional personnel in our Internet services business. We expect
cost of revenues to increase on an absolute dollar basis as we hire additional
personnel and incur additional costs related to the anticipated growth of our
Internet services business. The increase in cost of revenues also reflects $1.7
million of costs related to our incubator businesses.
SALES AND MARKETING EXPENSE
Sales and marketing expense for the three months ended June 30, 2000
increased to $5.6 million from $.9 million for the three months ended June 30,
1999, an increase of $4.7 million. This increase is primarily the result of the
continued national marketing program to build the "Rare Medium" brand and the
marketing with respect to our incubator companies. We expect sales and marketing
expenses to increase as we continue to build brand awareness.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the three months ended June 30, 2000
increased to $23.4 million from $5.7 million for the three months ended June 30,
1999, an increase of $17.7 million. This increase is a result of the
infrastructure needed to support the significant growth in revenue and our
continued expansion into new markets. The increase in general and administrative
expenses also relates to the costs associated with required resources to
implement our venture/incubator strategy.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense substantially consists of the
amortization of intangible assets. Depreciation and amortization expense for the
three months ended June 30, 2000 increased to $11.6 million from $5.7 million
for the three months ended June 30, 1999, an increase of $5.9 million. This
increase resulted primarily from our acquisitions during 1999. We anticipate
that expenses related to the amortization of intangible assets will increase in
future periods as we continue to make acquisitions.
INTEREST INCOME, NET
Interest income, net for the three months ended June 30, 2000 is mainly
comprised of the interest earned on the proceeds received from the sale of our
common stock during the first quarter of 2000 as described below in "Liquidity
and Capital Resources".
9
<PAGE>
NET LOSS
For the three months ended June 30, 2000, we recorded a net loss of $27.7
million. Excluding $11.6 million in amortization and depreciation, the net loss
was $16.1 million. This loss was primarily due to the factors described above in
"Cost of Revenues," "General and Administrative Expense" and "Sales and
Marketing Expense."
Included in net loss attributable to common shareholders of $32.7 million
was $5.0 million of non-cash deemed dividends and accretion related to issuance
of our Series A convertible preferred stock. Dividends were accrued related to
the pay-in-kind dividends payable quarterly on the Series A convertible
preferred stock, and to the accretion of the $29.9 million carrying amount of
the Series A convertible preferred stock up to the $87.0 million face redemption
amount over 13 years.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
REVENUES
Revenue for the six months ended June 30, 2000 increased to $51.5 million
from $7.7 million for the six months ended June 30, 1999, an increase of $43.8
million. This increase reflects increases in both the number and relative size
of client engagements which has been facilitated by the increase in our billable
employees as a result of acquisitions and aggressive hiring strategy. All of the
acquired Internet services businesses' operations have been integrated into our
existing operations. Our incubator companies generated revenues totaling $3.3
million in the six months ended June 30, 2000, compared to $0.2 million in the
six months ended June 30, 1999.
COST OF REVENUES
Cost of revenues for the six months ended June 30, 2000 increased to $29.7
million from $4.4 million for the six months ended June 30, 1999, an increase of
$25.3 million. This increase is due primarily to a substantial increase in
additional personnel in our Internet services business. We expect cost of
revenues to increase on an absolute dollar basis as we hire additional personnel
and incur additional costs related to the anticipated growth of our Internet
services business. The increase in cost of revenues also reflects $3.1 million
of costs related to our incubator businesses.
SALES AND MARKETING EXPENSE
Sales and marketing expense for the six months ended June 30, 2000
increased to $9.2 million from $1.1 million for the six months ended June 30,
1999, an increase of $8.1 million. This increase is primarily the result of our
continued national marketing program to build the "Rare Medium" brand and the
marketing with respect to our incubator companies. We expect sales and marketing
expenses to increase as we continue to build our brand awareness.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the six months ended June 30, 2000
increased to $41.3 million from $8.3 million for the six months ended June 30,
1999, an increase of $33.0 million. This increase is a result of the
infrastructure needed to support our significant growth in revenue and our
continued expansion into new markets. The increase in general and administrative
expenses also relates to the costs associated with resources required to
implement our venture/incubator strategy.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense substantially consists of the
amortization of intangible assets. Depreciation and amortization expense for the
six months ended June 30, 2000 increased to $22.0 million from $10.2 million for
the six months ended June 30, 1999, an increase of $11.8 million. This increase
resulted primarily from our acquisitions during 1999. We anticipate that
expenses related to the amortization of intangible assets will increase in
future periods as we continue to make acquisitions.
INTEREST INCOME, NET
Interest income, net for the six months ended June 30, 2000 is mainly
comprised of the interest earned on the proceeds received from the sale of our
common stock during the period as described below in "Liquidity and Capital
Resources".
10
<PAGE>
NET LOSS
For the six months ended June 30, 2000, we recorded a net loss of $48.9
million. Excluding $22.0 million in amortization and depreciation, our net loss
was $26.9 million. This loss was primarily due to the factors described above in
"Cost of Revenues," "General and Administrative Expense" and "Sales and
Marketing Expense."
Included in net loss attributable to common shareholders of $65.7 million
was $16.8 million of non-cash deemed dividends and accretion related to issuance
of our Series A convertible preferred stock. Dividends were accrued related to
the pay-in-kind dividends payable quarterly on the Series A convertible
preferred stock, and to the accretion of the $29.9 million carrying amount of
the Series A convertible preferred stock up to the $87.0 million face redemption
amount over 13 years.
LIQUIDITY AND CAPITAL RESOURCES
We had $208.3 million in cash and cash equivalents at June 30, 2000. This
amount is substantially a result of the proceeds received from (1) the issuance
of 2,500,000 shares of our common stock on January 14, 2000, for gross proceeds
of $70.1 million (net proceeds of $65.7 million) in a private transaction to a
group of mutual funds managed by Putnam Investments and Franklin Resources,
Inc.; and (2) the issuance of 3,000,000 shares of our common stock on March 29,
2000 for gross proceeds of $186 million (net proceeds of $175.6 million) in an
underwritten public offering.
Cash used in operating activities was $31.1 million for the six months
ended June 30, 2000 and resulted primarily from the net loss of $48.9 million,
offset by non-cash charges of $24.6 million (which consists of depreciation,
amortization, and equity interest in net loss on investments) and changes in
working capital.
Cash used in investing activities was $34.4 million for the six months
ended June 30, 2000, which primarily consists of purchases of venture
investments of $19.7 million, and capital expenditures of $15.5 million. Capital
expenditures have generally been comprised of purchases of computer hardware and
software, as well as leasehold improvements related to leased facilities, and
are expected to increase in future periods.
YEAR 2000 ISSUE
We and our subsidiaries have not experienced any material problems with
network infrastructure, software, hardware and computer systems relating to the
inability to recognize appropriate dates related to the year 2000. We and our
subsidiaries are also not aware of any material Year 2000 problems with
customers, suppliers or vendors. Accordingly, we and our subsidiaries do not
anticipate incurring future material expenses or experiencing any material
operational disruptions as a result of any Year 2000 issues.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101") which summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We will be required
to adopt the accounting provisions of SAB No. 101, no later than the fourth
quarter of 2000. We do not believe that the implementation of SAB No. 101 will
have a significant effect on our results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and hedging
activities. In June 1999, SFAS N0. 137 was issued which delayed the effective
date of SFAS No. 133 to January 1, 2001. In June 2000, the Financial Accounting
Standards Board issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133" which intended to simplify the accounting for derivatives under SFAS 133
and is effective upon adoption of SFAS 133. Our management has not yet
determined the impact of adopting SFAS 133 as amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that our market risk exposures associated with our outstanding
debt is immaterial as our fixed rate and variable rate debt obligations are not
material.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Currently, we are not a party to any pending material legal proceedings.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on June 15, 2000. We solicited
proxies for the meeting were solicited by the Company pursuant to Regulation 14A
under the Exchange Act. All of management's nominees for the election of the
Board of Directors as listed in the Proxy Statement for the meeting were
elected. In addition, our stockholders also voted on the following proposals
with the following results:
1. The amendments to the Company's 1998 Long-Term Incentive Plan were
ratified.
<TABLE>
<CAPTION>
For: Against: Abstain: Broker Non-Votes:
<S> <C> <C> <C> <C>
Series A Preferred Stock: 924,837 0 0 0
Common Stock: 17,259,460 4,949,432 135,345 0
</TABLE>
2. The appointment of KPMG LLP as the independent auditors of the Company
for the year ending December 31, 2000 was ratified.
<TABLE>
<CAPTION>
For: Against: Abstain: Broker Non-Votes:
<S> <C> <C> <C> <C>
Series A Preferred Stock: 924,837 0 0 0
Common Stock: 40,591,119 112,438 80,733 0
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-X:
EXHIBIT
NUMBER DESCRIPTION
3.1 -- Restated Certificate of Incorporation of Rare Medium Group,
Inc., which was filed as Exhibit 3.1 to the Company's Form 10-K
for the year ended December 31, 1999, and is hereby incorporated
herein by reference.
3.2 -- Amended and Restated By-Laws of Rare Medium Group, Inc., which
was filed as Exhibit 3.2 to the Company's Form 10-K for the year
ended December 31, 1999, and is hereby incorporated herein by
reference.
10.1 -- Form of Purchase Agreement, dated January 14, 2000, between
the Company and each of the purchasers in the private placement
of the Company's Common Stock on January 14, 2000, which was
filed as Exhibit 4.1 to the Company's Form S-3 filed on February
11, 2000, and is hereby incorporated herein by reference.
10.2 -- Form of Underwriting Agreement by and among the Company and
Credit Suisse First Boston Corporation, Deutsche Bank Securities
Inc. and FleetBoston Robertson Stephens Inc. which was filed as
Exhibit 1.1 to the Company's Registration Statement on Form S-3
(Reg. No. 333-95829) and is hereby incorporated herein by
reference.
27 -- Financial Data Schedule.
12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
By: /s/ Glenn S. Meyers
-------------------------------------
Date: August 2, 2000 Glenn S. Myers
Chairman and Chief Executive Officer
By: /s/ Jeffrey J. Kaplan
-------------------------------------
Date: August 2, 2000 Jeffrey J. Kaplan
Executive Vice President and Chief Financial Officer
