<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RARE MEDIUM GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 23-2368845
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
------------------------
565 FIFTH AVENUE, 29TH FLOOR
NEW YORK, NEW YORK 10017
(212) 883-6940
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT C. LEWIS, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
RARE MEDIUM GROUP, INC.
565 FIFTH AVENUE, 29TH FLOOR
NEW YORK, NEW YORK 10017
(212) 883-6940
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
GREGORY A. FERNICOLA, ESQ. WILLIAM J. WHELAN, III, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP CRAVATH, SWAINE & MOORE
FOUR TIMES SQUARE 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10019
(212) 735-3000 (212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF SHARES TO AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common stock, $.01
par value
per share........... 2,875,000 shares $38.0625 $109,429,688 $28,890
</TABLE>
(1) Includes 375,000 shares of common stock which may be sold pursuant to an
option granted to the Underwriters to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 1, 2000
2,500,000 Shares
[LOGO]
Common Stock
------------------
Our common stock is traded on The Nasdaq National Market under the symbol
"RRRR". On January 28, 2000, the last reported sale price for our common stock
was $38.13 per share.
The underwriters have an option to purchase a maximum of 375,000 additional
shares of our common stock to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE 6.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS RARE MEDIUM GROUP
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
The date of this prospectus is , 2000.
<PAGE>
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE..................................... ii
PROSPECTUS SUMMARY.............................. 1
RISK FACTORS.................................... 6
THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS.................................... 16
USE OF PROCEEDS................................. 17
DIVIDEND POLICY................................. 17
CAPITALIZATION.................................. 18
DILUTION........................................ 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING
DATA.......................................... 20
UNAUDITED SUPPLEMENTAL FINANCIAL
INFORMATION................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 25
<CAPTION>
PAGE
----
<S> <C>
BUSINESS........................................ 32
MANAGEMENT...................................... 45
DESCRIPTION OF OUR CAPITAL STOCK................ 47
SHARES ELIGIBLE FOR FUTURE SALE................. 51
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK........... 53
UNDERWRITING.................................... 55
NOTICE TO CANADIAN RESIDENTS.................... 57
LEGAL COUNSEL................................... 58
EXPERTS......................................... 58
WHERE YOU CAN FIND ADDITIONAL
INFORMATION................................... 58
INDEX TO FINANCIAL
STATEMENTS.................................... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
i
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission (the "SEC") allows us to
"incorporate by reference" information that we file with them, which means that
we can disclose important information to you by referring you to those
documents. Specifically, we incorporate by reference the documents listed below
and any future filings we will make with the SEC under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934:
o Our Annual Report on Form 10-K for the year ended December 31, 1998, as
amended;
o Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
o Our Current Reports on Form 8-K filed with the SEC on February 4, 1999,
February 10, 1999, April 29, 1999, May 28, 1999, June 21, 1999, October
14, 1999 and November 24, 1999, as amended on December 23, 1999;
o Our Definitive Proxy Statement for a Special Meeting of Stockholders held
on March 16, 1999, filed with the SEC on February 17, 1999;
o Our Definitive Proxy Statement for an Annual Meeting of Stockholders held
on August 19, 1999, filed with the SEC on July 12, 1999; and
o Our Form 10 filed with the SEC on September 16, 1985.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Robert C. Lewis, Esq.
Vice President and
General Counsel
Rare Medium Group, Inc.
565 Fifth Avenue, 29th Floor
New York, NY 10017
Telephone: (212) 883-6940
This prospectus is part of a Registration Statement we filed with the SEC.
You should rely only on the information provided in this prospectus or
incorporated by reference. We have not authorized anyone else to provide you
with different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document. We are not making an offer of these securities in any state where the
offer is not permitted.
------------------
Any statement contained in this prospectus or in a document all or a
portion of which is incorporated or deemed to be incorporated by reference in
this prospectus shall be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this prospectus or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference in this prospectus modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information from this prospectus and
may not contain all the information that is important to you. You should read
the entire prospectus, including the section entitled "Risk Factors" and our
consolidated financial statements and related notes, before deciding to invest
in our common stock.
In this prospectus, unless the context otherwise requires a different
meaning, all references to "Rare Medium Group," "we," "our," "us" or "our
company" refer to Rare Medium Group, Inc. and its subsidiaries. All references
to "Rare Medium, Inc." refer to our wholly owned subsidiary, Rare Medium, Inc.
and its subsidiaries.
Unless otherwise indicated, the information in this prospectus assumes:
o no exercise of the underwriters' over-allotment option;
o no exercise of outstanding options to purchase our common stock; and
o no conversion or exercise of our outstanding Series A preferred stock,
Series 1-A warrants, Series 2-A warrants or any other outstanding
warrants or convertible or exchangeable securities.
OUR COMPANY
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
customers include AT&T, Dr. Drew, Epson, Forbes, Microsoft, Nestle, Ritz Carlton
and Weider.
We also invest in and internally develop, manage and operate companies in
selected Internet-focused market segments. We refer to the companies in which we
are the majority shareholder as our "incubator companies." 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.
The widespread acceptance of the Internet as a new global medium has
transformed the way people and businesses share information and conduct
commerce. International Data Corporation, an independent research firm,
forecasts that the number of worldwide Internet users will increase from
196 million in 1999 to 502 million in 2003. We believe this growth will drive
demand for Internet-related services to support this increased usage.
International Data Corporation projects that spending on Internet-related
services will rise from approximately $13 billion in 1999 to more than
$78 billion in 2003.
We believe the following elements of our Internet solutions distinguish us
as a leading Internet services provider:
o our vertically focused strategic industry expertise;
o our broad skill set;
o our focus on strategic consulting services for venture capital firms and
their portfolio companies;
o our efficient deployment of Internet solutions providing clients with
rapid time to value;
o our Application Service Provider or "ASP" initiative; and
o our rapidly developing broadband competency.
1
<PAGE>
Our goal is to enhance our position as a leading Internet services firm
providing complete e-business solutions. Our strategy to achieve this objective
is to:
o attract and retain a highly specialized work force;
o expand and develop industry-specific expertise;
o leverage our strategic consulting services;
o enhance the Rare Medium brand;
o increase repeat and recurring revenues;
o leverage best practices and create operational efficiencies;
o leverage our relationship with Apollo, our largest shareholder;
o develop and maintain additional strategic relationships; and
o continue to expand geographic coverage.
We believe the collaboration between our investment and Internet services
businesses allows us to achieve the following significant competitive advantages
in each business:
Investment Business
o we are better positioned to identify early promising Internet-focused
companies that we believe possess superior business models because of our
knowledge of and presence in the Internet services industry;
o we are able to deliver high quality Internet services, strategic
consulting services and business infrastructure services to these
companies during their most critical growth period, which we believe
increases the likelihood of their success and return on our investment.
Internet Services Business
o in many cases, the companies in which we invest enter into an Internet
services agreement with us;
o we believe many of the companies in which we invest are engaged in
innovative and cutting edge business models and technologies, and by
providing Internet services to these companies, we are able to increase
our knowledge and expertise; and
o our Internet services business is able to attract and retain superior
Internet professionals by giving them increased opportunities to share in
any financial success of and work for promising Internet-focused
companies.
ABOUT OUR COMPANY
Our executive offices are located at 565 Fifth Avenue, 29th Floor, New
York, New York 10017, and our telephone number is (212) 883-6940. Our website is
www.raremediumgroup.com. The website of Rare Medium, Inc. is www.raremedium.com.
The information contained on our website and Rare Medium, Inc.'s website is not
incorporated by reference into, and is not a part of, this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us......................... 2,500,000 shares
Common stock to be outstanding after this 47,946,165 shares
offering.........................................
Use of proceeds.................................... We estimate that the net proceeds from
this offering will be approximately
$ million based on an assumed
offering price of $ per share. We
intend to use the net proceeds to continue
to make venture and incubator investments
and develop our existing incubator
companies and to invest in and provide
working capital for our Internet services
business.
Nasdaq National Market symbol...................... RRRR
Risk factors....................................... See the section entitled "Risk Factors"
beginning on page 6 for a discussion of
factors you should carefully consider
before deciding to buy our common stock.
</TABLE>
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial and operating
data derived from our consolidated financial statements. You should read this
along with the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes.
Our historical financial statements for the nine months ended September 30,
1998 and September 30, 1999 are unaudited and in our opinion include all
adjustments necessary for a fair presentation of the results for the unaudited
period. You should not rely on interim results as being indicative of results we
may expect for the full year.
The pro forma balance sheet data give effect to (1) the acquisition of Evit
Caretni Interactive, Inc., Carlyle Media Group Limited and College Media, Inc.,
(2) the net proceeds of $65.7 million resulting from the private placement in
January 2000 of 2,500,000 shares of common stock and (3) the issuance in October
1999 of 398,703 shares of common stock to two noteholders for their beneficial
interest in $4 million of the original principal amount of the note arising from
our acquisition of Rare Medium, Inc. in April 1998, referred to in this
prospectus as the "Rare Medium Note," in each case as if they occurred on
September 30, 1999.
The pro forma, as adjusted, consolidated balance sheet data give effect to
the foregoing transactions and this offering of common stock, as if they had
occurred on September 30, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ -- $ 4,688 $ 2,538 $ 19,081
------------ ------------ ------------ ------------
Expenses:
Compensation expense.......................... -- 6,076 3,554 18,626
Sales and marketing expense................... -- 156 127 1,315
General and administrative expense............ 1,992 3,948 2,250 10,000
Depreciation and amortization................. -- 12,584 8,415 16,971
------------ ------------ ------------ ------------
Total expenses.............................. 1,992 22,764 14,346 46,912
------------ ------------ ------------ ------------
Loss from operations........................... (1,992) (18,076) (11,808) (27,831)
Interest income (expense), net................. 493 (1,279) (716) (1,407)
------------ ------------ ------------ ------------
Loss before taxes and discontinued
operation................................. (1,499) (19,355) (12,524) (29,238)
Income tax expense............................. -- 355 -- --
------------ ------------ ------------ ------------
Loss before discontinued operation............. (1,499) (19,710) (12,524) (29,238)
------------ ------------ ------------ ------------
Discontinued operation:
Loss from discontinued operation.............. (11,985) (5,166) (4,425) --
Gain on restructuring Engelhard/ICC........... -- 24,257 24,257 --
------------ ------------ ------------ ------------
(Loss) income from discontinued operation... (11,985) 19,091 19,832 --
------------ ------------ ------------ ------------
Net (loss) income.............................. (13,484) (619) 7,308 (29,238)
Deemed dividend attributable to issuance of
convertible preferred stock................. -- -- -- (29,879)
Cumulative dividends and accretion of
convertible preferred stock to liquidation
value....................................... -- -- -- (4,663)
------------ ------------ ------------ ------------
Net (loss) income attributable to common
stockholders.................................. $ (13,484) $ (619) $ 7,308 $ (63,780)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted (loss) earnings per share:
Continuing operations......................... $ (0.07) $ (0.78) $ (0.48) $ (1.81)
Discontinued operation........................ $ (0.56) $ 0.76 $ 0.76 $ --
------------ ------------ ------------ ------------
Net (loss) income per share.................... $ (0.63) $ (0.02) $ 0.28 $ (1.81)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common shares outstanding..... 21,339,635 25,282,002 26,128,504 35,320,850
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------- ------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 59,374 $124,092
Investments in affiliates....................................... 14,551 14,551
Total assets.................................................... 153,725 241,456
Notes payable, less current portion............................. 2,990 1,054
Total liabilities............................................... 16,826 20,463
Series A convertible preferred stock (a)........................ 34,553 34,553
Stockholders' equity............................................ 102,346 186,440
</TABLE>
- ------------------
(a) As a result of the issuance of the preferred stock and related warrants, the
net proceeds were allocated to the preferred stock and additional paid-in
capital based on the relative fair values of the preferred stock and
warrants. The amount at September 30, 1999 represents the initial
$29.9 million allocated to the preferred stock, plus the cumulative in-kind
dividends, and accretion of the $29.9 million carrying value up to the
$87.0 million face redemption amount over 13 years.
3
<PAGE>
SUMMARY SUPPLEMENTAL OPERATIONS DATA
The following unaudited supplemental operations data is based on our
unaudited historical operations data, and the unaudited historical operations
data of our wholly owned subsidiary, Rare Medium, Inc. Our Internet services
business is conducted through Rare Medium, Inc. No other business operations are
conducted by or through Rare Medium, Inc.
With respect to Rare Medium Group, Inc., the following unaudited
supplemental operations data for each of the periods presented give effect to
all 17 acquisitions made by us through September 30, 1999, and the acquisitions
of Evit Caretni Interactive, Inc., Carlyle Media Group Limited and College
Media, Inc., which were made in the three-month period ended December 31, 1999,
as if these acquisitions occurred on January 1, 1999. With respect to Rare
Medium, Inc., the following unaudited supplemental operations data for each of
the periods presented give effect to all of these acquisitions, except for the
acquisition of College Media, Inc., as if these acquisitions occurred on January
1, 1999. College Media, Inc. is one of our incubator companies and, therefore,
is not included in Rare Medium, Inc.'s Internet services operations.
The unaudited supplemental data is based upon currently available
information of the acquired companies, without audit, and those assumptions and
estimates which management believes are reasonable. These assumptions and
estimates, however, are subject to change, including adjustments for potential
cost savings or other synergies arising from the acquisitions we made during
1998 and 1999. These statements are presented for comparative purposes only and
do not purport to be indicative of the actual results of operations that might
have occurred or expected future results. You should read the unaudited
supplemental financial data in conjunction with our consolidated financial
statements and the related notes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
RARE MEDIUM, INC. RARE MEDIUM GROUP, INC.
----------------- -----------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Revenues......................................... $27,911 $ 31,818
Cost of revenues............................... 14,339 18,364
------- ---------
Gross profit................................. 13,572 13,454
------- ---------
Sales and marketing expense.................... 910 974
General and administrative expense............. 16,509 24,523
Depreciation and amortization.................. 1,115 21,280
------- ---------
18,534 46,777
------- ---------
Operating loss............................... $(4,962) $ (33,323)
------- ---------
------- ---------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
-------------------------------------- -------------
MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1999 1999
--------- -------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
RARE MEDIUM, INC.
Revenues................................... $ 6,158 $ 8,220 $13,533 $27,911
Cost of revenues......................... 3,199 4,334 6,806 14,339
------- -------- ------- -------
Gross profit.......................... 2,959 3,886 6,727 13,572
------- -------- ------- -------
Sales and marketing expense.............. 97 163 650 910
General and administrative expense....... 3,574 5,559 7,376 16,509
Depreciation and amortization............ 278 340 497 1,115
------- -------- ------- -------
3,949 6,062 8,523 18,534
------- -------- ------- -------
Operating loss........................ $ (990) $ (2,176) $(1,796) $(4,962)
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
Rare Medium, Inc.'s actual revenue was $2.5 million, $5.5 million and $11.9
million for the three-month periods ended March 31, 1999, June 30, 1999,
September 30, 1999, respectively, and $19.9 million for the nine-month period
ended September 30, 1999. Rare Medium, Inc.'s revenue includes revenues from our
consolidated subsidiaries of $0.5 million and $0.7 million for the three-month
periods ended June 30, 1999 and September 30, 1999, respectively, and $1.2
million for the nine-month period ended September 30, 1999. These revenues are
eliminated in the consolidated financial statements of Rare Medium Group, Inc.
4
<PAGE>
PRIVATE PLACEMENT
On January 14, 2000, we sold 2,500,000 shares of our common stock for gross
proceeds of $70.1 million (net proceeds of $65.7 million) in a private
transaction, which we refer to in this prospectus as the "private placement."
The private placement was made to a group of mutual funds managed by Putnam
Investments and Franklin Resources, Inc.
POTENTIAL ACQUISITIONS AND INVESTMENTS
We regularly consider possible investments, acquisition opportunities and
other forms of business combinations, particularly in our investment business.
Historically, we have been involved in numerous transactions of various
magnitudes for consideration which included cash or securities, including our
common stock or combinations thereof. We are continuing to evaluate and to
pursue appropriate investment, acquisition and combination opportunities as they
arise in the expansion of our operations and investment portfolio. We cannot
assure you as to the timing, likelihood or financial or business effect of any
possible transaction.
As part of our regular on-going evaluation of acquisition opportunities, we
are currently engaged in a number of separate and unrelated preliminary
discussions concerning possible investments and acquisitions. We are in the
early stages of such discussions and have not entered into any definitive
agreements with respect to any of these possible investments or acquisitions.
The consideration for the possible investments or acquisitions may be paid in
cash, through the issuance of common stock, which could significantly increase
the number of shares of common stock outstanding, or other securities, or a
combination thereof. Prior to consummating any such possible acquisition, we,
among other things, will have to initiate and satisfactorily complete our due
diligence investigation, negotiate the financial and other terms, including
price, and conditions of such investments or acquisitions, and obtain
appropriate board of directors, regulatory and other necessary consents and
approvals. We cannot predict if any such acquisition will be completed or, if
completed, will result in a financial or other benefit to us.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in shares of our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us may also impair our operations and
business.
If we do not successfully address any of the risks described below, there
could be a material adverse effect on our financial condition, operating results
and business, and the trading price of our common stock may decline and you may
lose all or part of your investment. We cannot assure you that we will
successfully address these risks.
WE HAVE REPORTED OPERATING LOSSES AND WE CANNOT ASSURE YOU THAT WE WILL ATTAIN
PROFITABILITY.
We had a $19.7 million loss before discontinued operations for the year
ended December 31, 1998 and a $29.2 million loss from operations for the nine
months ended September 30, 1999. Although we have experienced recent revenue
growth, and had revenues of $19.1 million for the nine months ended
September 30, 1999 compared to $4.7 million for the year ended December 31,
1998, 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. We intend to continue to invest heavily in acquisitions,
infrastructure and marketing. Our ongoing integration costs will include the
combination of the financial, information and communications systems of the
various companies that we have acquired and may acquire in the future. Our
ongoing expansion costs will include the leasing of additional office space, the
purchase and leasing of new computer and communications equipment and the hiring
of additional employees. As a result of these and other costs, we may continue
to incur operating losses in the future, and we cannot assure you that we will
attain profitability.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT MORE DIFFICULT TO PREDICT
WHETHER OR NOT WE WILL ULTIMATELY HAVE SUCCESSFUL BUSINESS OPERATIONS.
Our business has a limited operating history. Our prospects must be
considered in light of the risks and difficulties frequently encountered by
companies expanding into a new and rapidly evolving area such as Internet
services, including, but not limited to, an untested business model and the
management of growth. You should evaluate our business operations in view of the
risks, uncertainties, delays and difficulties associated with starting a new
business, many of which may be beyond our control. We cannot assure you that we
will be successful in meeting the challenges and addressing the risks that we
face in a new and rapidly expanding market such as Internet services and other
Internet related products and services and making venture investments and
developing incubator companies.
COMPETITION FOR INTERNET SERVICES IS INTENSE WITH LOW BARRIERS TO ENTRY WHICH
MAY AFFECT OUR FINANCIAL CONDITION, OPERATING RESULTS AND BUSINESS.
The market for Internet 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 who 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 can be divided into the following groups:
o Internet services providers;
o large systems integrators;
o specialty systems integrators;
o strategy consulting firms; and
o interactive marketing firms.
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Many 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.
We expect to face additional competition from new market entrants in the future
as the barriers to entry into our business are also relatively low. Our current
or future competitors may also be better positioned to address technological and
market developments or may react more favorably to technological 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. As a result, our
financial condition, operating results and business could be adversely affected
and the value of your investment could be reduced significantly.
COMPETITION FOR VENTURE INVESTMENTS IS INTENSE.
We face competition from numerous other capital providers seeking to
acquire interests in Internet-related businesses, including:
o other Internet companies;
o venture capital firms;
o large corporations; and
o other capital providers who also offer support services to companies.
Traditionally, venture capital and private equity firms have dominated
investments in emerging technology companies, and many of these types of
competitors may have greater experience and financial resources than we have. In
addition to competition from venture capital and private equity firms, several
public companies such as CMGI, Internet Capital Group and Safeguard Scientifics,
as well as private companies such as Idealab!, devote significant resources to
providing capital together with other resources to Internet companies.
Additionally, corporate strategic investors, including Fortune 500 and other
significant companies, are developing Internet strategies and capabilities. Many
of these competitors have greater financial resources and brand name recognition
than we do, and the barriers to entry for companies wishing to provide capital
and other resources to entrepreneurs and their emerging technology companies are
minimal. We expect that competition from both private and public companies with
business models similar to our own will intensify. Among other adverse
consequences, this competition may diminish the pool of potential investment
opportunities and raise the cost of making future investments. As a result, our
financial condition, operating results and business could be adversely affected
and the value of your investment could be reduced significantly.
WE GENERALLY DO NOT HAVE LONG-TERM SERVICE CONTRACTS AND OUR NEED TO ESTABLISH
RELATIONSHIPS WITH NEW CLIENTS CREATES AN UNCERTAIN REVENUE STREAM.
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 users of information
technology and securing repeat engagements with existing clients are important
components of our business operations. The absence of long-term contracts and
the need for new clients create an uncertain revenue stream. A client that
accounts for a significant portion of our revenues in a given period may not
generate a similar amount of revenues, if any, in subsequent periods. We cannot
assure you that we will be able to add new major clients or to secure new
engagements with existing clients. In addition, some of our existing clients may
unilaterally reduce the scope of, or terminate, existing projects. We cannot
assure you that we will be able to maintain our business relationship with or
avoid a material reduction in the use of our services by any of our significant
existing clients.
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WE MAY NEED ADDITIONAL CAPITAL WHICH MAY NOT BE AVAILABLE TO US. THE RAISING OF
ANY ADDITIONAL CAPITAL MAY DILUTE YOUR OWNERSHIP IN OUR COMPANY.
We may need to raise additional funds through public or private debt or
equity financings in order to:
o take advantage of opportunities, including more rapid expansion or
acquisitions of, or investments in, businesses or technologies;
o develop new services; or
o respond to competitive pressures.
Any additional capital raised through the sale of equity would dilute your
ownership percentage in our company. Furthermore, we cannot assure you that any
additional financing we may need will be available on terms favorable to us, or
at all. In such case, our financial condition, operating results and business
may be materially and adversely affected.
OUR RECENT ACQUISITIONS HAVE CREATED FINANCIAL AND OTHER CHALLENGES, WHICH, IF
NOT ADDRESSED OR RESOLVED, COULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL
CONDITION, OPERATING RESULTS AND BUSINESS.
We acquired or made controlling equity investments in three businesses
during 1998 and 22 businesses during 1999. To the extent our management must
devote significant time and attention to the integration of technology,
operations, businesses and personnel as a result of our services and incubator
acquisitions, our business 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, we may experience
disputes with the sellers of acquired businesses and may fail to retain key
acquired personnel. To the extent any customer or other third party asserts any
material legal claims against any of the acquired companies, our financial
condition, operating results and business could be materially and adversely
affected.
OUR ACQUISITION STRATEGY MAY RESULT IN INCREASED EXPENSES, DIFFICULTIES IN
INTEGRATING ACQUIRED COMPANIES AND DIVERSION OF MANAGEMENT'S ATTENTION.
A key component of our growth strategy is to acquire Internet related
businesses that complement or enhance our business, on acceptable terms. We
expect the competition for acquisition candidates to continue to increase. We
cannot assure you that we will be able to identify and successfully compete for
attractive acquisition candidates or complete acquisitions at reasonable
purchase prices, in a timely manner or at all. In addition, some of our
competitors have greater financial resources than we do and may be able to more
effectively complete acquisitions, which could result in increased prices for
acquisition targets and a diminished pool of companies available for
acquisition.
Some of the other risks that we may encounter in implementing our
acquisition growth strategy include:
o expenses and difficulties in identifying potential targets and the costs
associated with uncompleted acquisitions;
o expenses, delays and difficulties of integrating acquired companies into
our existing organization;
o diversion of management's attention;
o expenses of amortizing acquired companies' intangible assets;
o issuances of equity securities to pay for acquisitions may be dilutive to
existing stockholders;
o impact on our financial condition due to the timing of acquisitions; and
o expense of any undisclosed or potential legal liabilities of acquired
companies.
If realized, any of these risks could have a material adverse effect on our
financial condition, operating results and business.
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WE MAY SUFFER ADVERSE CONSEQUENCES IF DEEMED TO BE AN INVESTMENT COMPANY.
We may suffer adverse consequences if deemed to be an investment company
under the Investment Company Act of 1940. Some equity investments made by us may
constitute investment securities under the 1940 Act. A company may be deemed to
be an investment company if it owns investment securities with a value exceeding
40% of its total assets, subject to certain exclusions. Investment companies are
subject to registration under, and compliance with, the 1940 Act unless a
particular exclusion or SEC safe harbor applies. If we were to be deemed an
investment company, we would become subject to the requirements of the 1940 Act.
As a consequence, we would be prohibited from engaging in business or issuing
our securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, certain of our contracts might be
voidable, and a court-appointed receiver could take control of our company and
liquidate our business.
Although our investment securities currently comprise less than 40% of our
assets, fluctuations in the value of these securities or of our other assets may
cause this limit to be exceeded. Unless an exclusion or safe harbor were
available to us, we would have to attempt to reduce our investment securities as
a percentage of our total assets in order to avoid becoming subject to the
requirements of the 1940 Act. This reduction can be attempted in a number of
ways, including the disposition of investment securities and the acquisition of
non-investment security assets. If we were required to sell investment
securities, we may sell them sooner than we otherwise would. These sales may be
at depressed prices, and we may never realize anticipated benefits from, or may
incur losses on, these investments. Some investments may not be sold due to
contractual or legal restrictions or the inability to locate a suitable buyer.
Moreover, we may incur tax liabilities when we sell assets. We may also be
unable to purchase additional investment securities that may be important to our
operating strategy. If we decide to acquire non-investment security assets, we
may not be able to identify and acquire suitable assets and businesses.
WE MAY FACE DIFFICULTIES MANAGING OUR GROWTH.
Our recent growth has required a greater amount of 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 require a
substantial amount of 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. We cannot assure you 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 impaired. Any
inability to manage growth effectively could have a material adverse effect on
our financial condition, operating results and business.
WE MAY HAVE DIFFICULTY IN MANAGING OUR INTERNATIONAL OPERATIONS AND EXPANSION,
WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND BUSINESS.
A key element of our strategy is to expand our business into international
markets. In addition to our domestic operations, we have operations in
Australia, Canada and the United Kingdom. We intend to commence operations in
Singapore and Tokyo in the near future. Our management may have difficulty in
managing our international operations because of distance, as well as language
and cultural differences. We cannot assure you that we will be able to market
and operate our services successfully in foreign markets.
Other risks related to our international operations include:
o fluctuations in currency exchange rates;
o difficulties arising from staffing and managing foreign operations;
o state-imposed restrictions on the repatriation of funds;
o legal and regulatory requirements of different countries, such as
differing tax or labor laws; and
o potential political and economic instability.
If any of these risks materialize, we may not be able to successfully
promote our services or perform client engagements in international markets. As
a result, our growth and ability to compete effectively may be
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hindered and our financial condition, operating results and business could be
materially and adversely affected.
OUR VENTURE INVESTMENTS ARE RISKY.
A key element of our strategy is to make minority equity investments in
Internet start-up companies. As of September 30, 1999, we have made venture
investments in seven companies, with our equity stakes in these companies
ranging from 1% to 33%. As of September 30, 1999, the aggregate cost of our
venture investments totaled approximately $14.6 million. Decreases in the value
of these companies will have an adverse effect on our business. Because we own
less than a majority of the shares of these companies, we are not involved in
the day-to-day operations of any of these companies and may not be able to
control the policies or directions that these companies take.
All of the companies in which we have made venture investments are in the
early stages of development, and we cannot assure you that these companies will
be able to successfully achieve their business goals in a timely manner or at
all. Our strategy is to realize capital return on our investments in these
companies by liquidating these investments through sales of equity or otherwise.
We cannot assure you that we will realize any return on any of these
investments. Moreover, the trading price of our common stock may be adversely
affected if we do not realize any return on these investments, or if that return
is lower than the market expects. The failure of one or more of these companies
in which we have invested, and the timing of any dispositions of our investments
in these companies, could have a material adverse effect on our financial
condition, operating results and business and on the trading value of our common
stock.
OUR BUSINESS DEPENDS UPON THE PERFORMANCE OF OUR INCUBATOR COMPANIES, WHICH IS
UNCERTAIN.
A key element of our strategy is to internally develop and operate majority
owned subsidiaries. Of our approximately $153.7 million in total assets as of
September 30, 1999, approximately $9.8 million, or approximately 6%, consisted
of investments in and net assets of our incubator companies.
Many of our incubator companies are in the early stages of their
development, and we cannot assure you that these companies will be able to
successfully achieve their business goals in a timely manner or at all. Our
strategy is to realize capital return on our investment in these companies by
liquidating the investments through sales of equity or otherwise. We cannot
assure you that we will realize any return on any of these investments.
Moreover, the trading price of our common stock may be adversely affected if we
do not realize any return on these investments, or if that return is lower than
the market expects. The failure of one or more of our incubator companies could
have a material adverse effect on our financial condition, operating results and
business and on the trading value of our common stock.
THE LOSS OF EXECUTIVE MANAGEMENT OR OTHER KEY PERSONNEL MAY HARM OUR ABILITY TO
OBTAIN AND RETAIN CLIENT ENGAGEMENTS AND COMPETE EFFECTIVELY.
Our business operations depend largely on the skills of our key management
and technical personnel as well as key management and technical personnel of
companies we have acquired. Many of our executive officers have recently joined
us, and many of our key personnel have worked together for a relatively short
period. If one or more members of our executive management or other key
personnel were unable or unwilling to continue in their present positions, these
persons would be very difficult to replace. In addition, if any of these persons
joined a competitor or formed a competing company, some of our clients might
choose to use the services of that competitor or new company instead of ours.
Furthermore, our clients or other companies seeking management talent may hire
away some members of our executive management or other key personnel. This could
result in the loss of our client relationships or new business opportunities and
impede our ability to implement our business strategy. In addition, except for
Glenn S. Meyers, our Chairman, President and Chief Executive Officer, we do not
maintain key man insurance for any of our employees.
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WE ARE DEPENDENT ON OUR ABILITY TO RECRUIT, TRAIN AND RETAIN HIGHLY QUALIFIED
INTERNET
PROFESSIONALS WHO ARE IN SHORT SUPPLY.
We believe continued hiring of new personnel will be required to support
our business. Our business operations depend in large part on our ability to
identify, hire, train and retain highly qualified Internet professionals who can
provide the technical, strategic consulting, creative, marketing and audience
development skills required by clients. There is a shortage of these highly
qualified personnel and we compete with other companies for this limited pool of
persons. We cannot assure you that we will be able to attract, train, or retain
qualified personnel. Failure to do so could have a material adverse effect on
our financial condition, operating results and business.
FLUCTUATIONS IN OUR FINANCIAL PERFORMANCE COULD ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK.
Our operating results may fluctuate as a result of a variety of factors,
many of which are outside of our control, including:
o the number, size and scope of our client engagements;
o reductions, cancellations or completions of major projects;
o the loss of significant clients or a change of scope in a significant
client engagement;
o the opening or closing of an office;
o our relative mix of business;
o changes in pricing by us or our competitors;
o the efficiency with which we utilize our billable professionals, plan and
manage our existing and new client engagements and manage our future
growth;
o variability in market demand for Internet services;
o our ability to retain and attract qualified professionals;
o our ability to complete fixed-fee engagements within the assigned budget;
o costs related to expansion of our business;
o increased competition;
o marketing budget decisions by our clients; and
o general economic conditions.
As a result of these possible fluctuations, period-to-period comparisons of
our operating results may not be reliable indicators of future performance. A
high percentage of our expenses, including those related to employee
compensation and facilities, are fixed. If the number and size of our projects
decreases in any period, then our revenues and operating results may also
decrease. In some quarters, our operating results may fall below the
expectations of securities analysts and investors due to many factors, including
those described above. In such event, the trading price of the common stock
would likely decline and the decline could be significant.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE.
The market price of our common stock has been, and is likely to continue to
be, volatile, experiencing wide fluctuations. In recent years, the stock market
has experienced significant price and volume fluctuations which have
particularly affected the market prices of equity securities of many companies
providing Internet-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of such
companies. Future market movements may materially and adversely affect the
market price of our common stock.
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OUR FIXED PRICE CONTRACTS INVOLVE FINANCIAL RISK.
Many 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 because our
source of revenue remains fixed while our costs may be rising. 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 some
of our projects, resulting in lower gross margins on such 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.
OUR REVENUES COULD BE NEGATIVELY AFFECTED BY THE LOSS OF MAJOR CLIENTS.
We derive a significant portion of our revenues from a limited number of
clients. In 1999, we estimate that our five largest clients accounted for
approximately 14% of our revenues. The loss of major clients could significantly
reduce our revenues, which could have a material adverse effect on our financial
condition, operating results and business.
FAILURE TO DEVELOP AND STRENGTHEN OUR BRAND COULD ADVERSELY AFFECT OUR
OPERATIONS AND BUSINESS.
We believe that maintaining and strengthening the Rare Medium brand is an
important aspect of attracting and maintaining clients. The importance of brand
recognition will increase as competition in the market for Internet services
increases. Building a brand requires a successful marketing effort and
successful delivery of product to clients. A single event involving client
dissatisfaction could tarnish the perception of Rare Medium as a whole despite
any efforts to maintain and strengthen the Rare Medium brand name. We cannot
assure you that the strategy adopted and expenses incurred by us will result in
a stronger brand.
OUR SUCCESS DEPENDS UPON STRATEGIC RELATIONSHIPS.
We have established strategic relationships with AT&T, IBM, Macromedia,
Microsoft and Oracle which may be terminated at any time. The loss of any of
these or other strategic relationships would deprive us of the opportunity to:
o gain early access to leading-edge technology;
o cooperatively market products with these vendors;
o cross-sell additional services; or
o gain enhanced access to vendor training and support.
OUR BUSINESS DEPENDS ON THE GROWING DEMAND FOR INTERNET SOLUTIONS.
If the usage and volume of commercial transactions on the Internet does not
continue to increase, demand for our services may decrease and our financial
condition, operating results and business could be materially and adversely
affected. Our future success depends on the continued expansion of, and reliance
of consumers and businesses on, the Internet and related technical solutions.
The Internet may not be able to support an increased number of users or an
increase in the volume of data transmitted over it. As a result, the performance
or reliability of the Internet may be adversely affected as use increases. The
improvement of the Internet in response to increased demands will require timely
improvement of the high speed modems and other communications equipment that
form the Internet infrastructure. The Internet has already experienced outages
and delays as a result of damage to portions of its infrastructure. The
effectiveness of the Internet may also decline due to delays in the development
or adoption of new technical standards and protocols designed to support
increased levels of activity. We cannot assure you that the infrastructure,
products or
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services necessary to maintain and expand the Internet will be developed. Other
factors that may adversely affect Internet usage or e-commerce adoption include:
o actual or perceived lack of security of information;
o congestion of Internet traffic or other usage delays;
o inconsistent quality of service;
o increases in Internet access costs;
o increases in government regulation of the Internet;
o uncertainty regarding intellectual property ownership;
o reluctance to adopt new business methods;
o costs associated with the obsolescence of existing infrastructure; and
o economic viability of e-commerce models.
OUR BUSINESS OPERATIONS DEPEND ON OUR ABILITY TO ADAPT TO TECHNOLOGICAL
INNOVATIONS.
Our business operations depend, in part, on our ability to keep pace with
rapid technological change, new products and services embodying new processes
and technologies and industry standards and practices. Failure to respond to
these changes could render our existing service practices and methodologies
obsolete. We cannot assure you that we will be able to respond quickly,
cost-effectively or sufficiently to these developments.
MISAPPROPRIATION OF OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS COULD HARM OUR
REPUTATION, AFFECT OUR COMPETITIVE POSITION AND COST US MONEY.
We believe our trademarks and other proprietary rights are important to our
success and competitive position. If we are unable to protect our trademarks and
other proprietary rights against unauthorized use by others, our reputation
among existing and potential clients could be damaged and our competitive
position adversely affected. We have registered or are registering certain of
our trademarks in the United States and abroad. We attempt to limit access to
and distribution of our proprietary information as well as proprietary
information licensed from third-parties.
Our strategies to deter misappropriation could be inadequate in light of
the following risks:
o non-recognition or inadequate protection of our proprietary rights in
certain foreign countries;
o undetected misappropriation of our proprietary information or materials;
and
o development of similar software or applications by our competitors.
We cannot assure you that these strategies will be adequate to deter
misappropriation of our proprietary information and material. If any of these
risks materialize, we could be required to pay significant amounts to defend our
rights or pay damages, and our managerial resources could be diverted.
OTHER PARTIES MAY CLAIM THAT WE HAVE INFRINGED UPON THEIR INTELLECTUAL PROPERTY
RIGHTS, RESULTING IN SUBSTANTIAL COSTS TO US AND A DIVERSION OF OUR RESOURCES.
It is possible that third parties, including our clients, may claim we are
infringing upon their intellectual property rights. While we believe that
currently there is no basis for such a claim, we cannot assure you that an
infringement claim will not be brought against us in the future. The material
and adverse consequences of a successful infringement claim against us are as
follows:
o liability for litigation costs and damages;
o we may be enjoined from using specific intellectual property in the
future;
o we may incur costs for licensing specific intellectual property from
others;
o we may incur significant costs associated with the development of
non-infringing alternatives; and
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o we may have to indemnify clients with respect to losses as a result of
our infringement of the intellectual property.
Even if we are successful in defending against an infringement claim, we
may incur substantial costs defending ourselves. Additionally, these claims
could divert needed resources, management's attention and could harm our
reputation.
WE MAY BE SUBJECT TO LEGAL LIABILITY TO OUR CLIENTS.
Many of our engagements involve the development and implementation of
Internet services that are important to our clients' businesses. 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, we do not currently have
errors and omissions insurance.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 ISSUES.
Year 2000 risks exist because of the potential occurrence of computer
system or related processing failures caused by the inability of the computers
to recognize date-related data arising from the use of two digits rather than
four digits to define a particular year. Currently, our systems have functioned
properly with respect to dates starting in the Year 2000 and our clients have
not reported experiencing any Year 2000 problems. However, there may still be
Year 2000 problems that affect us or our clients, and any potential future Year
2000 problem may cause us to incur material financial losses, liability to our
clients or damage to our reputation.
OUR BUSINESS IS SUBJECT TO GENERAL ECONOMIC CONDITIONS.
Our revenues and results of operations will be subject to fluctuations
based upon the general economic conditions in the United States and, to a lesser
extent, abroad. If there is a general economic downturn or a recession in the
United States, we expect that business enterprises, including our customers and
potential customers, would substantially and immediately reduce their budgets or
delay implementation of Internet-focused business solutions. A deterioration in
existing economic conditions could therefore materially and adversely affect our
financial condition, operating results and business.
GOVERNMENTAL REGULATION OF THE INTERNET COULD IMPACT OUR OPERATIONS.
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, including the
possible levying of tax on e-commerce transactions. 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 and business.
APOLLO BENEFICIALLY OWNS A LARGE PERCENTAGE OF OUR VOTING STOCK.
After giving effect to this offering, assuming no exercise of the
underwriters' over-allotment option and assuming that all currently outstanding
shares of our Series A convertible preferred stock are converted and all Series
1-A and Series 2-A warrants are exercised, affiliates of Apollo would own
approximately 44% of our outstanding common stock. Apollo currently owns all of
the 907,820 outstanding shares of our Series A convertible preferred stock. As
long as Apollo owns at least 100,000 shares of these securities, we are
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precluded from taking various corporate actions and entering into various
transactions, without Apollo's consent. These corporate actions and transactions
are described in our proxy statement for the stockholders' meeting held on
August 19, 1999. In addition, as long as Apollo owns at least 100,000 shares of
our Series A convertible preferred stock, the holders of the Series A
convertible preferred stock, voting as a separate class, have the right to elect
two of the members of our board of directors and have certain approval rights
with respect to additional members of our board of directors in the event that
the size of our board of directors is increased.
Because of Apollo's large percentage of ownership and its rights as the
holder of Series A convertible preferred stock, Apollo may have significant
influence over our management and policies, such as the election of our
directors, the appointment of new management and the approval of any other
action requiring the approval of our stockholders, including any amendments to
our certificate of incorporation and mergers or sales of all or substantially
all of our assets. In addition, the level of Apollo's ownership of our shares of
common stock and these rights could have the effect of discouraging or impeding
an unsolicited acquisition proposal.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends in the foreseeable future.
YOU MAY DISAGREE WITH THE WAYS IN WHICH WE MAY ALLOCATE THE PROCEEDS FROM THIS
OFFERING.
Our management will have substantial discretion in the allocation of the
proceeds from this offering. Currently, there is no specific plan as to the use
of these proceeds, as they will be used for our investment business, the
development of our incubator companies and working capital for our Internet
services business. As a result, you will have to rely on the judgment and
discretion of our management to allocate the proceeds properly. We cannot assure
you that you will agree with their decisions as to the application of the
proceeds. See section entitled "Use of Proceeds."
THE ISSUANCE OF PREFERRED STOCK OR ADDITIONAL COMMON STOCK MAY ADVERSELY AFFECT
OUR STOCKHOLDERS.
Our board has the authority to issue up to 10,000,000 shares of our
preferred stock and to determine the terms, including voting rights, of those
shares without any further vote or action by our stockholders. The voting and
other rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. Similarly, our board may issue additional shares of
common stock without any further vote or action by stockholders, which would
have the effect of diluting common stockholders. An issuance could occur in the
context of another public or private offering of shares of common stock or
preferred stock or in a situation where the common stock or preferred stock is
used to acquire the assets or stock of another company. The issuance of common
stock or preferred stock, while providing desirable flexibility in connection
with possible acquisitions, investments and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control.
ANTI-TAKEOVER PROVISIONS COULD MAKE A THIRD-PARTY ACQUISITION OF OUR COMPANY
DIFFICULT.
We are a Delaware corporation. The Delaware General Corporation Law
contains provisions that could make it more difficult for a third party to
acquire control of our company. In addition, we have a classified board of
directors, with each board member serving a staggered three-year term. The
existence of a classified board could make it more difficult for a third-party
to acquire control of our company. See the section entitled "Description of Our
Capital Stock."
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will pay more for your
shares than stockholders who purchased their shares from us prior to this
offering. Accordingly, you will experience immediate and substantial dilution of
approximately $ per share representing the difference between the price per
share
15
<PAGE>
to be paid by new investors and the net consolidated tangible book value per
share after giving effect to this offering. See the section entitled "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of future
sales of substantial amounts of our common stock, or the perception that such
sales could occur. Furthermore, certain of our existing stockholders have the
right to require us to register their shares, and the holders of our Series A
convertible preferred stock and Series 1-A and 2-A warrants have the right to
require us to register the shares of common stock underlying these securities,
which may facilitate their sale of shares in the public market. We are required
to use our diligent efforts to register before May 13, 2000, 2,500,000 shares of
our common stock for resale by the investors in the private placement. See the
section entitled "Shares Eligible for Future Sale."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements may be found in the sections of this prospectus
entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and in this prospectus generally. Our actual results could differ
materially from those anticipated in these forward-looking statements as of
result of various factors, including all the risks discussed in the section
entitled "Risk Factors" and elsewhere in this prospectus.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" 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 other risk factors.
See the section entitled "Risk Factors." Investors should not rely on these
statements as an estimate or prediction of future performance. 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.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from this offering will
be approximately $ million (approximately $ if the
underwriters exercise their over-allotment option in full) based on an assumed
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated expenses.
We expect to use the net proceeds from this offering to continue to make
venture and incubator investments and develop our existing incubator companies
and to invest in and provide working capital for our Internet services business.
As of the date of this prospectus, we cannot specify with certainty all of the
particular uses for the net proceeds we will have upon completion of this
offering. Accordingly, our management will have broad discretion in the
application of the net proceeds.
Pending such uses, we intend to invest the net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance operations, to make investments and to expand our business. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon our financial condition, operating results,
capital requirements, Delaware law considerations and other factors that our
board of directors considers.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
Our capitalization is presented:
o on an actual basis;
o on a pro forma basis to give effect to each of
-- the acquisition of Evit Caretni Interactive, Inc., Carlyle Media
Group Limited and College Media, Inc.,
-- the net proceeds of $65.7 million resulting from the private
placement in January 2000 of 2,500,000 shares of common stock, and
-- the issuance in October 1999 of 398,703 shares of common stock to
two noteholders for their beneficial interest in $4 million of the
original principal amount of the Rare Medium Note; and
o on a pro forma, as adjusted basis to give effect to the sale of 2,500,000
shares of common stock from this offering, the foregoing acquisitions,
the private placement and the conversion of a portion of the Rare Medium
Note.
The table excludes:
o shares issued as a result of the underwriters exercising their
over-allotment option;
o shares of common stock issuable upon the exercise of options outstanding
as of September 30, 1999 under our director, officer and employee stock
option plans;
o shares of common stock reserved for future grants under our director,
officer and employee stock option plans; and
o shares of common stock issuable upon conversion and exercise of our
outstanding Series A convertible preferred stock, Series 1-A warrants,
and Series 2-A warrants or any other outstanding warrants or convertible
or exchangeable securities.
We urge you to read this table together with the sections of this
prospectus entitled "Selected Consolidated Financial and Operating Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Our Capital Stock" and the consolidated financial
statements included in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents....................................... $ 59,374 $ 124,092
------------ ------------
------------ ------------
Notes payable, less current portion............................. $ 2,990 $ 1,054
Series A convertible preferred stock(a)......................... 34,553 34,553
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares;
issued 902,000 shares as Series A convertible preferred
stock...................................................... -- --
Common stock, $.01 par value, authorized 200,000,000 shares;
40,359,067 shares issued actual; 43,755,607 shares issued
pro forma, and 46,255,607 shares issued pro forma, as
adjusted................................................... 404 438
Additional paid-in capital.................................... 216,265 300,724
Note receivable from shareholder.............................. (231) (231)
Accumulated deficit........................................... (113,921) (114,320)
Treasury stock................................................ (171) (171)
------------ ------------
Total stockholders' equity...................................... 102,346 186,440
------------ ------------
Total capitalization............................................ $ 139,889 $ 222,047
------------ ------------
------------ ------------
</TABLE>
-----------------------
(a) As a result of the issuance of the preferred stock and related
warrants, the net proceeds were allocated to the preferred stock and
additional paid-in capital based on the relative fair values of the
preferred stock and warrants. The amount at September 30, 1999
represents the initial $29.9 million allocated to the preferred stock,
plus the cumulative in-kind dividends, and accretion of the $29.9
million carrying value up to the $87.0 million face redemption amount
over 13 years.
18
<PAGE>
DILUTION
As of September 30, 1999, our consolidated net tangible book value was
approximately $44.2 million, or approximately $1.09 per share of common stock.
"Consolidated net tangible book value per share" represents the total amount of
our consolidated tangible assets reduced by the amount of our consolidated
liabilities and divided by the number of shares of common stock outstanding.
After giving effect to the sale of 2,500,000 shares of common stock in this
offering and application of the net proceeds from this offering (based on an
assumed public offering price of $ per share), and after deducting estimated
underwriting discounts and commissions and estimated expenses of this offering,
our net tangible book value at September 30, 1999 would have been approximately
$ , or $ per share. This represents an immediate increase in combined
net tangible book value of approximately $ per share to existing
shareholders and an immediate dilution of $ per share to new investors.
Dilution per share represents the difference between the price per share to
be paid by new investors and the net consolidated tangible book value per share
immediately after this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................................................... $
Consolidated net tangible book value per share before the offering........................ $ 1.09
Increase per share attributable to new investors..........................................
Consolidated net tangible book value per share after the offering.........................
---------
Dilution per share to new investors....................................................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the differences between the total consideration paid and the average price
per share paid by the stockholders who purchased shares from us prior to this
offering and the new investors with respect to the number of shares of common
stock purchased from us based on an assumed public offering price of $ per
share. The table excludes:
o shares issued as a result of the underwriters exercising their
over-allotment option;
o shares of common stock issuable upon the exercise of options outstanding
as of September 30, 1999 under our director, officer and employee stock
option plans;
o shares of common stock reserved for future grants under our director,
officer and employee stock option plans; and
o shares of common stock issuable upon conversion and exercise of our
outstanding Series A convertible preferred stock, Series 1-A warrants,
and Series 2-A warrants or any other outstanding warrants or convertible
or exchangeable securities.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ----------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Stockholders who purchased shares from us prior to this
offering................................................... % $ % $
New investors................................................ $
------ ------- ------ -------
Total........................................................ % $ %
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We derived the selected historical and consolidated financial and operating
data presented below from our historical financial statements and related notes
included in this prospectus. You should read the selected consolidated financial
and operating data together with our historical financial statements and the
section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our historical financial statements for the nine months ended September 30,
1998 and September 30, 1999 are unaudited and in our opinion include all
adjustments necessary for a fair presentation of the results for the unaudited
period. You should not rely on interim results as being indicative of results we
may expect for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ -- $ 4,688 $ 2,538 $ 19,081
------------ ------------ ------------ ------------
Expenses:
Compensation expense........................... -- 6,076 3,554 18,626
Sales and marketing expense.................... -- 156 127 1,315
General and administrative expense............. 1,992 3,948 2,250 10,000
Depreciation and amortization.................. -- 12,584 8,415 16,971
------------ ------------ ------------ ------------
Total expenses.............................. 1,992 22,764 14,346 46,912
------------ ------------ ------------ ------------
Loss from operations............................. (1,992) (18,076) (11,808) (27,831)
Interest income (expense), net................... 493 (1,279) (716) (1,407)
------------ ------------ ------------ ------------
Loss before taxes and discontinued
operation................................. (1,499) (19,355) (12,524) (29,238)
Income tax expense............................... -- 355 -- --
------------ ------------ ------------ ------------
Loss before discontinued operation............... (1,499) (19,710) (12,524) (29,238)
------------ ------------ ------------ ------------
Discontinued operation:
Loss from discontinued operation............... (11,985) (5,166) (4,425) --
Gain on restructuring Engelhard/ICC............ -- 24,257 24,257 --
------------ ------------ ------------ ------------
(Loss) income from discontinued operation... (11,985) 19,091 19,832 --
------------ ------------ ------------ ------------
Net (loss) income................................ (13,484) (619) 7,308 (29,238)
Deemed dividend attributable to issuance of
convertible preferred stock................. -- -- -- (29,879)
Cumulative dividends and accretion of
convertible preferred stock to liquidation
value....................................... -- -- -- (4,663)
------------ ------------ ------------ ------------
Net (loss) income attributable to common
stockholders................................... $ (13,484) $ (619) $ 7,308 $ (63,780)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted (loss) earnings per share:
Continuing operations.......................... $ (0.07) $ (0.78) $ (0.48) $ (1.81)
Discontinued operation......................... $ (0.56) $ 0.76 $ 0.76 $ --
------------ ------------ ------------ ------------
Net (loss) income per share...................... $ (0.63) $ (0.02) $ 0.28 $ (1.81)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common shares outstanding....... 21,339,635 25,282,002 26,128,504 35,320,850
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------
(UNAUDITED)
(IN THOUSANDS)
------------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 59,374
Investments in affiliates................................................................ 14,551
Total assets............................................................................. 153,725
Notes payable, less current portion...................................................... 2,990
Total liabilities........................................................................ 16,826
Series A convertible preferred stock..................................................... 34,553
Stockholders' equity..................................................................... 102,346
</TABLE>
21
<PAGE>
UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION
The following unaudited supplemental financial information is based on our
unaudited historical financial statements, and the unaudited historical
financial statements of our wholly owned subsidiary, Rare Medium, Inc. Our
Internet services business is conducted through Rare Medium, Inc. No other
business operations are conducted by or through Rare Medium, Inc.
With respect to Rare Medium Group, Inc., the following unaudited
supplemental operations data for each of the periods presented give effect to
all 17 acquisitions made by us through September 30, 1999, and the acquisitions
of Evit Caretni Interactive, Inc., Carlyle Media Group Limited and College
Media, Inc., which were made in the three-month period ended December 31, 1999,
as if these acquisitions occurred on January 1, 1999. With respect to Rare
Medium, Inc., the following unaudited supplemental operations data for each of
the periods presented give effect to all of these acquisitions, except for the
acquisition of College Media, Inc., as if these acquisitions occurred on January
1, 1999. College Media, Inc. is one of our incubator companies and, accordingly,
is not included in Rare Medium, Inc.'s Internet services operations.
The unaudited supplemental balance sheet data of Rare Medium Group, Inc.
reflects adjustments to the historical financial information as of
September 30, 1999 as if they had occurred on September 30, 1999. These
adjustments include:
o the acquisition of Evit Caretni Interactive, Inc., Carlyle Media Group
Limited and College Media, Inc. as if these acquisitions had occurred on
September 30, 1999. These acquisitions, which occurred during the
three-month period ended December 31, 1999, were accounted for using the
purchase method of accounting and include all adjustments and assumptions
we considered appropriate. The allocation of purchase price to the assets
acquired and liabilities assumed has been made using estimated fair
values. These estimates may be subject to adjustment to reflect actual
amounts, primarily in the case of accrued liabilities. Any subsequent
adjustments are not expected to be material;
o the net proceeds of approximately $65.7 million resulting from the
private placement of 2,500,000 shares of common stock; and
o the issuance of 398,703 shares of common stock to two noteholders for
their beneficial interest in approximately $4 million of the original
principal amount of the Rare Medium Note. In connection with this
transaction, we recognized approximately $0.4 million in non-cash
interest expense to the extent that the market value of the common stock
on the date of conversion exceeded the conversion price.
The unaudited supplemental, as adjusted, balance sheet data of Rare Medium
Group, Inc. gives effect to foregoing adjustments and this offering, without
giving effect to the exercise of the underwriters' over-allotment option.
The unaudited supplemental information is based upon currently available
information of the acquired companies, without audit, and those assumptions and
estimates which management believes are reasonable. These assumptions and
estimates, however, are subject to change, including adjustments for potential
cost savings or other synergies arising from the acquisitions we made during
1998 and 1999. These statements are presented for comparative purposes only and
do not purport to be indicative of the actual results of operations that might
have occurred or expected future results. You should read the unaudited
supplemental financial data in conjunction with our consolidated financial
statements and the related notes.
22
<PAGE>
RARE MEDIUM GROUP, INC.
SUPPLEMENTAL OPERATIONS DATA
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RARE MEDIUM, INC. RARE MEDIUM GROUP, INC.
----------------- -----------------------
<S> <C> <C>
Revenues............................................................. $27,911 $ 31,818
Cost of revenues................................................... 14,339 18,364
------- ---------
Gross profit.................................................... 13,572 13,454
------- ---------
Sales and marketing expense........................................ 910 974
General and administrative expense................................. 16,509 24,523
Depreciation and amortization...................................... 1,115 21,280
------- ---------
18,534 46,777
------- ---------
Operating loss.................................................. $(4,962) $ (33,323)
------- ---------
------- ---------
</TABLE>
RARE MEDIUM, INC.
SUPPLEMENTAL OPERATIONS DATA
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
-------------------------------------- -------------
MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1999 1999
--------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues..................................................... $ 6,158 $ 8,220 $13,533 $27,911
Cost of revenues........................................... 3,199 4,334 6,806 14,339
------- -------- ------- -------
Gross profit............................................ 2,959 3,886 6,727 13,572
------- -------- ------- -------
Sales and marketing expense................................ 97 163 650 910
General and administrative expense......................... 3,574 5,559 7,376 16,509
Depreciation and amortization.............................. 278 340 497 1,115
------- -------- ------- -------
3,949 6,062 8,523 18,534
------- -------- ------- -------
Operating loss.......................................... $ (990) $ (2,176) $(1,796) $(4,962)
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
Rare Medium, Inc.'s actual revenue was $2.5 million, $5.5 million and $11.9
million for the three-month periods ended March 31, 1999, June 30, 1999,
September 30, 1999, respectively, and $19.9 million for the nine-month period
ended September 30, 1999. Rare Medium, Inc.'s revenue includes revenue from our
consolidated subsidiaries of $0.5 million and $0.7 million for the three-month
periods ended June 30, 1999 and September 30, 1999, respectively, and $1.2
million for the nine-month period ended September 30, 1999. These revenues are
eliminated in the consolidated financial statements of Rare Medium Group, Inc.
23
<PAGE>
RARE MEDIUM GROUP, INC.
SUPPLEMENTAL BALANCE SHEET DATA
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------------------------
SUPPLEMENTAL, AS
ACTUAL SUPPLEMENTAL ADJUSTED
-------- ------------ ------------------------
<S> <C> <C> <C>
Cash and cash equivalents..................................... $ 59,374 $124,092
Investments in affiliates..................................... 14,551 14,551
Total assets.................................................. 153,725 241,456
Notes payable, less current portion........................... 2,990 1,054
Total liabilities............................................. 16,826 20,463
Series A convertible preferred stock (a)...................... 34,553 34,553
Stockholders' equity.......................................... $102,346 $186,440
</TABLE>
- ------------------
(a) As a result of the issuance of the preferred stock and related warrants, the
net proceeds were allocated to the preferred stock and additional paid-in
capital based on the relative fair values of the preferred stock and
warrants. The amount at September 30, 1999 represents the initial
$29.9 million allocated to the preferred stock, plus the cumulative in-kind
dividends, and accretion of the $29.9 million carrying value up to the
$87.0 million face redemption amount over 13 years.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto included in another part of this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in those forward-looking statements as a result of certain factors, including
those set forth in the section of this prospectus entitled "Risk Factors."
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
customers include AT&T, Dr. Drew, Epson, Forbes, Microsoft, Nestle, Ritz Carlton
and Weider.
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.
During the nine months ended September 30, 1999, we acquired 17 businesses
for $2.1 million of cash and an aggregate of 4,480,086 shares of common stock
which were issued in private placements. Some of the shares issued in connection
with these transactions are held in escrow as security for covenants contained
in the respective merger agreements. Each of these transactions has been
accounted for under the purchase method of accounting. The purchase prices,
which totaled $35.6 million in stock and cash, were allocated to net tangible
assets, which consisted primarily of cash, accounts receivable, property and
equipment, accounts payable and notes payable. Intangible assets, which consist
primarily of goodwill, of $33.8 million resulting from these transactions are
being amortized over a three-year period.
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 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 and securing repeat engagements with existing
clients are important components of our success.
Compensation expense is comprised of salaries and related employee benefits
of all employees, including those sales and marketing, finance, legal, human
resources and administrative employees. Sales and marketing expense represent
the actual costs associated with our marketing and advertising. General and
administrative expenses include facilities costs, recruiting, training, legal
and other corporate costs.
Prior to March 1999, our name was ICC Technologies, Inc. On April 15, 1998,
ICC acquired Rare Medium, Inc., an Internet services business and shortly
thereafter changed its name to Rare Medium Group,
25
<PAGE>
Inc. Following this acquisition, all non-Internet-related operations were
divested and the chief executive officer of Rare Medium, Inc. became the chief
executive officer of Rare Medium Group, Inc. As a result of these transactions,
the results of operations of the non-Internet-related business for all periods
have been accounted for as a discontinued operation. Accordingly, our discussion
in the section entitled "Results of Operations" focuses on our Internet-related
businesses, and operating results for 1998 are presented on a pro forma basis to
give effect to these transactions, including the operating results of these
Internet-related businesses for the three months ended March 31, 1998. For
information related to the operations of the non-Internet-related businesses
during the first, second and third quarters of 1998, refer to our Forms 10-Q
filed for the applicable quarters. In addition, for a description of the results
of operations for the year ended December 31, 1997 compared with the year ended
December 31, 1996, each of which reflect non-Internet-related businesses only,
see our Annual Report on Form 10-K for the year ended December 31, 1998, as
amended.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
The amounts shown for the nine months ended September 30, 1999 include our
operations as they are currently reported. The amounts shown for the nine months
ended September 30, 1998 include our operations as they are currently reported
for the nine months ended September 30, 1998, combined with the pro forma
results of operations of Rare Medium, Inc. for the nine months ended
September 30, 1998. The results of our divested operations have been condensed
as a single net loss included in "Loss from discontinued operation."
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
----------- --------
PRO FORMA ACTUAL
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................................................. $ 3,579 $ 19,081
Expenses:
Compensation expense................................................................... 4,473 18,626
Sales and marketing expense............................................................ 150 1,315
General and administrative expense..................................................... 2,496 10,000
Depreciation and amortization.......................................................... 8,271 16,971
--------- --------
Total Expenses......................................................................... 15,390 46,912
--------- --------
Loss from operations..................................................................... (11,811) (27,831)
Interest expense, net.................................................................... (821) (1,407)
--------- --------
Loss before discontinued operation....................................................... (12,632) (29,238)
--------- --------
Discontinued operation:
Loss from discontinued operation....................................................... (4,546) --
Gain on restructuring of Englehard/ICC................................................. 24,257 --
--------- --------
Income from discontinued operation....................................................... 19,711 --
--------- --------
Net income (loss)........................................................................ 7,079 (29,238)
Deemed dividend attributable to issuance of convertible preferred stock.................. -- (29,879)
Cumulative dividends and accretion of convertible preferred stock to liquidation value... -- (4,663)
--------- --------
Net income (loss) attributable to common stockholders.................................... $ 7,079 $(63,780)
--------- --------
--------- --------
</TABLE>
26
<PAGE>
REVENUE
Revenue for the nine months ended September 30, 1999 increased to $19.1
million from $3.6 million for the nine months ended September 30, 1998, an
increase of $15.5 million or 433%. The increase is the result of both internal
growth and acquisitions, which have facilitated increases in both the number and
relative size of client engagements. All of the acquired Internet services
businesses' operations have been or are being integrated into the existing
operations of Rare Medium, Inc.
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 2000 or beyond, and we cannot assure you that we will achieve or sustain
profitability.
COMPENSATION EXPENSE
Compensation expense for the nine months ended September 30, 1999 increased
to $18.6 million from $4.4 million for the nine months ended September 30, 1998,
an increase of $14.2 million or 316%. The increase is due primarily to personnel
added in our Internet services business and incubator companies. The increase is
also due to our continued investment in building infrastructure to support
anticipated long-term growth and to a $1.5 million bonus paid in June 1999.
During this period, we also hired a president and senior operations managers for
our major offices in New York and Los Angeles for Rare Medium, Inc. We expect
compensation expenses 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 and the hiring of employees associated
with our venture/incubator strategy. We also expect to hire additional personnel
and increase our spending for marketing and other infrastructure needs.
SALES AND MARKETING EXPENSE
Sales and marketing expense for the nine months ended September 30, 1999
increased to $1.3 million from $0.1 million for the nine months ended
September 30, 1998, an increase of $1.2 million or 775%. The increase is
primarily the result of implementation of a national marketing program to build
the "Rare Medium" brand and an advertising campaign for Rare Medium, Inc. during
the nine months ended September 30, 1999. 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 nine months ended September 30,
1999 increased to $10.0 million from $2.5 million for the nine months ended
September 30, 1998, an increase of $7.5 million or 301%. The increase is
principally a result of the substantial increase in personnel and number of
facilities as we expanded into new markets in Toronto, Dallas, San Francisco,
San Antonio, Detroit, Sydney, Houston and Atlanta as well as the cost associated
with required resources to implement our venture/incubator strategy and the
costs associated with generating the substantial revenue increase from 1998.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense substantially consists of the amortization
of goodwill and acquisition costs. Depreciation and amortization expense for the
nine months ended September 30, 1999 increased to $17.0 million from
$8.3 million for the nine months ended September 30, 1998, an increase of
$8.7 million or 105%. 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.
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INTEREST EXPENSE, NET
Interest expense, net for the nine months ended September 30, 1999 includes
$0.2 million of interest expense related to the Rare Medium Note, $1.1 million
of interest expense related to the conversion of a portion of the Rare Medium
Note by certain holders into common stock, and $1.1 million of interest expense
related to the convertible debentures held by certain investors which were
outstanding during part of 1999 prior to being converted in connection with the
Apollo transaction in June 1999. The interest expense related to the Rare Medium
Note represents the accrued interest on our note payable to the original Rare
Medium, Inc. stockholders, payable in a combination of cash or shares of our
common stock, at our election, subject to some restrictions. The interest
expense relating to the convertible debentures includes $1.0 million for the
amortization of the debt discount and the beneficial conversion feature. Total
interest expense was partially offset by interest income of $1.0 million
relating to the income earned on the net proceeds received from the sale to
Apollo of our Series A convertible preferred stock and Series 1-A and 2-A
warrants.
NET (LOSS) INCOME
For the nine months ended September 30, 1999, we recorded a net loss of
$12.3 million, excluding $17.0 million in amortization and depreciation.
Including these charges, the net loss was $29.2 million. The loss was primarily
due to the factors described in "Compensation Expense," "General and
Administrative Expense" and "Sales and Marketing Expense."
Included in net loss attributable to common shareholders of $63.8 million
was $34.5 million of non-cash deemed dividends and accretion related to issuance
of our Series A convertible preferred stock. These dividends included a one-time
non-cash deemed dividend resulting from the difference between the market price
of our common stock and the conversion price of our Series A convertible
preferred stock on the date of issuance of the Series A convertible preferred
stock. In addition to this non-cash deemed dividend, 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.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Through a series of transactions, we restructured our operations during
1998 to focus solely on the business of providing Internet services primarily to
large and medium sized businesses. This was accomplished by restructuring our
Engelhard/ICC joint venture; purchasing the Internet-related businesses of Rare
Medium, Inc., I/O 360 and DigitalFacades; and disposing of a majority of our
partnership interests in Fresh Air Solutions in October, 1998. Historically, we
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, Inc. as if the
acquisition were 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.
<TABLE>
<CAPTION>
RARE MEDIUM GROUP, INC.
UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
-----------------------
1997
-----------------------
(IN THOUSANDS)
<S> <C>
Revenues.............................................................................. $ 3,856
Expenses:
Operating expense................................................................... 2,781
Corporate general and administrative................................................ 1,991
Stock-based compensation............................................................ 4,589
Depreciation and amortization....................................................... 107
---------
9,468
---------
Loss from operations.................................................................. $ (5,612)
---------
---------
Net loss.............................................................................. $ (17,112)
---------
---------
<CAPTION>
1998
-----------------------
<S> <C>
Revenues.............................................................................. $ 5,830
Expenses:
Operating expense................................................................... 9,541
Corporate general and administrative................................................ 2,054
Stock-based compensation............................................................ --
Depreciation and amortization....................................................... 12,628
---------
24,223
---------
Loss from operations.................................................................. $ (18,393)
---------
---------
Net loss.............................................................................. $ (845)
---------
---------
</TABLE>
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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, an increase of $1.9
million or 48.7%. 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
in revenues resulted from both higher revenues for some of our 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.
EXPENSES
OPERATING EXPENSES
Operating expenses increased to $9.5 million for the year ended
December 31, 1998 from $2.8 million for the year ended December 31, 1997, an
increase of $6.7 million or 239%. 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 we 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 our significant investment of time and resources into: (1) the organizational
restructuring and reengineering of the company; (2) building the systems
infrastructure both in terms of systems (website, Intranet redesign, scaling of
network) and personnel; and (3) the integration of I/O 360 and Digital Facades
into the Rare Medium, Inc. functional and organizational structure. We
anticipate that operating expenses will continue to increase in absolute dollars
as we continue to build our infrastructure to support our expected growth from
both internal sources and through acquisitions.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES
Corporate general and administrative expenses were $2.0 million for each of
the years ended December 31, 1998 and December 31, 1997. For the year ended
December 31, 1998, corporate general and administrative expenses included
professional fees for legal and accounting services and salaries and our
corporate overhead prior to the acquisition of Rare Medium, Inc. in April 1998
and for some of the costs associated with our transitioning to our new business.
Corporate general and administrative expenses for the year ended December 31,
1997 represented expenses not associated with the Internet services business of
Rare Medium, Inc. and were related primarily to legal, accounting, public
relations and other administrative expenses including salaries and our corporate
overhead in support of our then existing businesses.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses for the year ended December 31, 1998
increased to $12.6 million from $0.1 million for the year ended December 31,
1997, an increase of $12.5 million or 12,500%. This increase was due to the
amortization of goodwill related to the acquisitions during 1998 of Rare Medium,
Inc., I/O 360 and DigitalFacades, with $11.4 million related to the Rare Medium,
Inc. 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 for the year ended December 31, 1998 increased to
$18.4 million from a loss of $5.6 million for the year ended December 31, 1997,
an increase of $12.8 million or 229%. 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, Inc. Excluding these non-cash charges, the loss
from operations for 1997 would have been $1.0 million.
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NET (LOSS) INCOME
The net loss for the year ended December 31, 1998 was $0.8 million. The
major difference between the loss from operations and the net loss is a $ 24.8
million gain on the restructuring of our joint venture partnership with the
Englehard Corporation, the Englehard/ICC partnership.
LIQUIDITY AND CAPITAL RESOURCES
We had $59.4 million in cash and equivalents at September 30, 1999. This
amount is substantially a result of the proceeds received from the issuance of
our Series A convertible preferred stock and Series 1-A and 2-A warrants.
Cash used in operating activities was $15.9 million for the nine months
ended September 30, 1999 and resulted primarily from the net loss of $29.2
million, offset by non-cash charges of $19.3 million (which consists of
depreciation, amortization and non-cash interest charges) and changes in working
capital.
Cash used in investing activities was $20.1 million for the nine months
ended September 30, 1999, which primarily consists of the purchase of businesses
and venture investments of $15.8 million, and capital expenditures of
$4.3 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.
Cash provided by financing activities was $94.5 million for the nine months
ended September 30, 1999. This consisted primarily of issuance of $6.0 million
convertible debentures (which was subsequently converted into common stock),
$83.0 million of net proceeds from the issuance of the Series A convertible
preferred stock as discussed below, and the exercise of warrants and options
that yielded $7.1 million, partially offset by repayment of borrowings totaling
$1.6 million.
THE RARE MEDIUM NOTEHOLDERS
During 1999, we issued 1,033,052 shares of common stock to certain
noteholders in exchange for their beneficial interest in $4.5 million of the
original principal amount of the Rare Medium Note. In 1999, we recognized
approximately $1.1 million of non-cash interest expense related to the
conversion to the extent the market value of the stock on the date of conversion
exceeded the conversion price. On September 30, 1999, as a result of these
transactions, there is a remaining principal balance of $6.0 million payable
under the Rare Medium Note, which bears interest payable semi-annually at the
prime rate, and is due in two equal principal installments on April 15, 2000 and
April 15, 2001.
THE APOLLO SECURITIES PURCHASE
On June 4, 1999, we issued and sold to Apollo Investment Fund IV, LP,
Apollo Overseas Partners IV, LP and AIF IV/RRRR LLC, for an aggregate purchase
price of $87.0 million, 126,000 shares of our Series A convertible preferred
stock, 126,000 Series 1-A warrants, 1,916,994 Series 2-A warrants, 744,000
shares of our Series B convertible preferred stock 744,000 Series 1-B warrants
and 10,345,548 Series 2-B warrants. The Series A convertible preferred stock and
Series B convertible preferred stock accrue dividends at an annual rate of 7.5%.
The Series A and Series B convertible preferred stock are subject to mandatory
redemption on June 30, 2012.
Under the terms of the securities purchase agreement with the Apollo
stockholders at the 1999 annual meeting of our stockholders held on
August 19,1999, the holders of common stock approved the conversion of all of
the Series B convertible preferred stock, Series 1-B warrants and Series 2-B
warrants, including such additional Series B securities that have been issued as
dividends, into like amounts of Series A convertible preferred stock,
Series 1-A warrants and Series 2-A warrants, respectively.
Pursuant to the approval, all Series B convertible preferred stock,
Series 1-B warrants and Series 2-B warrants were converted into Series A
convertible preferred stock, Series 1-A warrants and Series 2-A warrants,
respectively. The Series A securities are convertible into or exercisable for
voting common stock whereas the Series B securities were convertible into or
exercisable for non-voting common stock.
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YEAR 2000 ISSUE
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 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 appointed a Year 2000 Task Force to perform an assessment of our
readiness for Year 2000. This assessment included quality assurance testing of
our internally developed software and applications; quality assurance testing of
our overall information technology systems; contacting third-party vendors and
licensors of material software and services that are both directly and
indirectly related to the delivery of our products and services; assessing our
repair and replacement requirements; and creating contingency plans in the event
of Year 2000 failures.
Our material software component vendors and our Internet service provider
informed us that the products we use are currently Year 2000 compliant. We
purchased all of our software and hardware within the past two years, and
therefore we do not have legacy systems that have been historically identified
to have Year 2000 issues. We have not suffered any significant Year 2000
problems with our internal systems or with our third-party vendors and licensors
of material software and services.
We completed our assessment and system tests of all current versions of
hardware and software products and technology information systems that we use
and believe that they are Year 2000 compliant. However, we continue to monitor
our Year 2000 implications. We have not incurred any material costs in
identifying or evaluating Year 2000 compliance issues.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. During June 1999, SFAS No. 137 was issued which delayed
the effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. We have not yet
determined the impact of adopting SFAS No. 133.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that our market risk exposures associated with our outstanding
debt is immaterial since the carrying value of our variable rate debt
obligations approximates fair value as the market rate is based on the prime
rate. Our fixed rate debt obligations are not material.
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BUSINESS
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 service offering encompasses the
entire Internet services spectrum, ranging from strategic and creative
consulting to applications development, implementation and hosting. We assist in
shaping our clients' strategy and adapt Internet technologies to deliver the
best possible solutions for our clients by utilizing our unique methodology and
leveraging our knowledge of vertical markets. Our customers include companies in
the consumer service, financial, technology, entertainment, consumer goods,
retail and automotive industries. Our customers include AT&T, Dr. Drew, Epson,
Forbes, Microsoft, Nestle, Ritz Carlton and Weider.
We also invest in and internally develop, manage and operate companies in
selected Internet-focused market segments. 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.
We provide our incubator companies with capital as well as with a comprehensive
suite of strategic and infrastructure services. These services include Internet
services and financial, legal and accounting advisory services. We believe that
by providing these services we enable our incubator companies to focus on their
core competencies and accelerate the time-to-market of their products and
services.
In addition, we make minority investments in independently managed
companies which we believe represent the next generation of premier Internet
companies. We have co-invested in these companies 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.
We seek to capitalize on the synergies between our Internet services and
our investment businesses in an effort to improve shareholder value. We believe
the collaboration between these two businesses provides us with the following
competitive advantages in each business:
Investment Business
o because of our extensive knowledge and expertise in delivering Internet
services, we are better able to identify promising Internet companies in
the early stages of their development; and
o once we have made an investment in these Internet companies, we have the
capacity to deliver them high quality Internet services, strategic
consulting services and business infrastructure services during their
most critical growth period. We believe our ability to provide these
services to these companies increases the likelihood of their overall
success and the return on our investment.
Internet Services Business
o our venture and incubator investments afford us the opportunity to
provide Internet services to these companies. By executing services
contracts with our portfolio companies, we believe we can capture
additional services revenues without incurring additional business
development costs;
o because our investment business targets Internet companies with highly
innovative and cutting edge business models and technologies, we believe
we can increase our Internet services expertise by working with many of
these companies; and
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o we believe we are better able to attract and retain superior Internet
professionals as compared to our competitors by providing our employees
with the opportunity to share in the financial success of our portfolio
companies and with employment opportunities at our incubator companies.
INDUSTRY BACKGROUND
Advances in technology and functionality have led to the widespread
acceptance of the Internet as a new global medium that allows people to share
information and conduct commerce. The number of Internet users has grown
dramatically. International Data Corporation, an independent research firm,
forecasts that the number of worldwide Internet users will increase from 196
million in 1999 to 502 million in 2003, a compound annual growth rate of 27%.
Similarly, International Data Corporation estimates that the growth of Internet
content, as measured by number of web pages worldwide, will grow from 1.7
billion pages in 1999 to 13.4 billion pages in 2003, a compound annual growth
rate of 67%.
Much of the growth of the Internet has been driven by corporate recognition
that the Internet can be used to achieve competitive advantage. The growth in
the use of the Internet and the expansion of uses for the Internet have led to
the creation of numerous start-up companies that seek to take advantage of new
market opportunities. These new companies generally employ an Internet-focused
business model or provide solutions that enable faster or more efficient use of
the Internet, and are characterized by their focus on high-growth market
segments. These high growth areas include, among others:
o Business-to-Business e-commerce. Through business-to-business e-commerce,
large transactions between enterprises can be made more cheaply and
efficiently and in a more timely manner through use of the Internet.
International Data Corporation projects that the market for
business-to-business e-commerce will grow from $80 billion in 1999 to
$1.1 trillion in 2003, a compound annual growth rate of 94%.
o Internet Enabling Tools. Enabling tools, such as software and services,
optimize the way in which the Internet is utilized, allowing individuals
and businesses to expand their usage of the Internet for information,
communication and e-commerce, as well as for other activities that may
not have existed prior to the proliferation of the Internet.
o Broadband. New broadband Internet technologies deliver high-speed
Internet access, thereby enabling users to access the Internet at much
greater speed. These technologies also create opportunities for companies
to deliver improved content and services online. International Data
Corporation estimates that the number of digital subscriber lines in the
United States will grow from approximately 650,000 in 1999 to more than
27 million in 2003, a compound annual growth rate of 155%.
o Next Generation Communications. Next generation communications, such as
IP telephony, enable the Internet to connect individuals and businesses
in new cost efficient ways. International Data Corporation forecasts that
IP telephony services revenue will grow from $480 million in 1999 at a
compound annual growth rate of 121%, reaching $11.9 billion in 2003.
Businesses increasingly view technology as an important competitive
differentiator. In order to compete effectively, companies must now have an
effective Internet strategy and solution. The skills required to create such a
solution include architecture design, application development, systems
integration, and application hosting, among other disciplines. We believe these
are skills that few companies possess internally due to the scarcity in the
information technology personnel market. As a result, an increasing number of
organizations, from Global 1000 companies to startup Internet businesses, are
engaging Internet services firms. International Data Corporation projects that
spending on Internet-related services will rise from approximately $13 billion
in 1999 to more than $78 billion in 2003, a compound annual growth rate of 57%.
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OUR INTERNET SERVICES BUSINESS
SOLUTIONS
We believe the following elements distinguish us as a leading Internet
services provider:
Vertically Focused Strategic Expertise. Many members of our management
team are recognized experts in the following industries:
o automotive;
o consumer goods and services;
o entertainment and media;
o financial services;
o health care;
o luxury goods;
o nonprofit;
o technology; and
o travel and hospitality.
These professionals have valuable contacts in these industries as well as
substantial Internet business experience. We are able to draw upon this
collective experience to more efficiently develop business solutions that are
tailored to meet the unique needs of companies in these targeted industries.
Broad Skill Set. We complement our industry specialization with expertise
in areas such as e-commerce, supply chain management and interactive marketing.
Our multi-disciplinary team of Internet professionals is comprised of
individuals with strategic, creative and technical expertise. This enables us to
provide our clients with comprehensive solutions that address a wide range of
business challenges such as introducing new Internet brands, optimizing
distribution systems and streamlining internal communications. We are also
developing expertise in emerging areas such as ASP and broadband. We believe by
providing our clients with these comprehensive services we are able to meet
substantially all their online needs on an ongoing basis.
Venture Capital Strategic Consulting. A unique component of our services
offerings is the strategic consulting services that we provide to well respected
venture capital firms that invest in Internet start-up companies. These
consulting services generally consist of evaluating and suggesting modifications
to business models of the targeted Internet start-up companies, performing
market research and assessing the relevant competition. We believe by providing
these strategic consulting services we can enhance our venture and incubator
investment businesses while increasing our Internet services revenues.
Rapid Time to Value. Our unique combination of industry expertise,
strategic thinking, creativity and technological expertise enables us to rapidly
develop powerful, reliable and meaningful Internet solutions for our clients.
This rapid development capability enables us to deliver these solutions to our
clients quickly through our specialized competency centers so that our clients
may, in turn, more rapidly deploy these solutions in the marketplace.
Our Application Service Provider or "ASP" Initiative. Through our ASP
competency group, we have recently begun to offer ASP solutions to the
business-to-business market. The ASP model allows emerging Internet companies to
obtain state-of-the-art applications that they would not otherwise be able to
afford. We also believe that by using our ASP solutions these companies will be
able to achieve faster time-to-market for their products and an increased focus
on their core competencies. We believe our ASP offering will be superior to
those of our competitors due to the unique mix of technology, industry alliances
and services that we can provide our clients quickly and easily in order to help
them develop an on-line business.
Our Broadband Competency Center. Through our rapidly developing broadband
competency center, we are able to offer our clients strategic, creative and
technical broadband resources. Using high-capacity
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communications technology, we will be able to integrate high speed Internet
applications, such as full-motion video, into our customers' Internet solutions.
STRATEGY
Our goal is to enhance our position as a leading Internet services firm
providing complete e-business solutions. Our strategy to achieve this objective
is to:
Attract and Retain a Highly Specialized Workforce. We intend to continue
to recruit highly skilled and experienced professionals who have
industry-specific expertise and who are proficient in a broad range of
technological and business skills. We intend to continue to ensure that our
employees have the requisite expertise to provide our clients with a
comprehensive range of Internet services. We plan to retain and motivate our
employees by giving them the opportunity to work with cutting-edge technologies,
paying competitive compensation packages, granting stock options, allowing
participation in our investment portfolio, giving them the opportunity to work
for one of our incubator companies, reimbursing tuition expenses and encouraging
a corporate culture that is results-driven and rewards creativity, communication
and cooperation.
Expand and Develop Industry-Specific Expertise. Through our experience in
designing, developing, implementing and managing Internet and e-business
solutions for a wide variety of companies, we have gained significant strategic
knowledge and created industry-specific reusable business solutions. This
expertise significantly enhances our ability to help other companies in the same
industries successfully adopt Internet and e-business solutions. We have
developed reusable business solutions for industries such as automotive,
consumer goods and services, entertainment and media, financial services and
health care. We intend to broaden the range of industries in which we have
specialized knowledge and maximize the benefits to our clients of such knowledge
by creating additional industry-specific solution templates and reusable
software. Our strategic consultants, sales, marketing and technical staff have
expertise in industries which we believe can realize significant benefits from
Internet and e-business solutions. Further developing and enhancing this
expertise will increase our knowledge of industry specific business challenges
and increase the industry-targeted services we can offer, thereby improving our
ability to penetrate specific industries.
Leverage Our Strategic Consulting Services. We intend to leverage the
strategic consulting services that we provide to venture capital firms and the
Internet start-up companies in which these firms seek to invest. We believe that
these services will enable us to achieve the following synergies:
o the ability to co-invest with successful venture capital firms;
o generation of service revenues in connection with our venture capital
consulting engagement together with an increase in the overall success of
the Internet start-up companies;
o the ability to generate revenues for our Internet services business as a
result of the end-to-end Internet solution developed during our strategic
consulting engagements;
o the opportunity to improve our own venture capital strategies, enhancing
our reputation in the venture capital community and gaining entrance into
their flow of transactions; and
o the ability to provide our high-quality strategic consulting services to
our own investment business, thereby providing our investment business
with an opportunity to better identify and evaluate potential incubator
and venture investments.
Leverage Our Relationship with Apollo. Affiliates of Apollo Advisors, LP,
our largest shareholder, will own approximately 44% of our outstanding common
stock on a fully diluted basis after giving effect to this offering. Apollo has
significant stakes in more than 50 medium to large traditional enterprises, in a
wide range of industries including manufacturing, consumer products, financial
services, media and telecommunications. Through our relationship with Apollo, we
believe that we will have an introduction into these "brick and mortar"
businesses and will be well placed to address their Internet services needs
going forward.
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Enhance the Rare Medium Brand. We believe that our brand is
well-recognized in the fragmented Internet services industry. We intend to
continue to enhance our brand through an aggressive campaign of advertising,
public relations campaigns and speaking engagements.
Increase Repeat and Recurring Revenues. We plan to increase the proportion
of our revenues which represents repeat business with the same clients. We
intend to generate repeat revenues by cross-selling services and entering into
multiple engagements with our existing clients. In addition, we plan to increase
recurring revenues by selling our ASP solutions to our new and existing clients.
We plan to charge clients who use our ASP solutions either a fixed monthly rate
or on a per transaction basis, or both. Increasing repeat and recurring revenues
will enable us to predict our revenues with greater accuracy and improve our
operating margins.
Leverage Best Practices and Create Operational Efficiencies. We have
implemented an enterprise-wide Intranet to facilitate corporate learning and
knowledge transfer across our various offices. At the conclusion of our client
engagements, our employees participate in post-engagement reviews where "lessons
learned" are discussed and new and innovative creative and technology techniques
are harvested and catalogued on our Intranet. We leverage our experiences across
our entire enterprise in order to allow us to achieve operational efficiencies.
Develop and Maintain Additional Strategic Relationships. We intend to
continue to develop and maintain strategic relationships in order to enable us
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. We have developed a number
of strategic relationships, including relationships with AT&T, IBM, Macromedia,
Microsoft and Oracle.
Continue to Expand Geographic Coverage. We plan to continue to expand the
presence of our Internet services business primarily through internal growth. We
currently have 12 domestic offices and four international offices, and we plan
to open additional domestic and international offices. We believe that
establishing a local presence in the United States enables us to service our
clients better. We also believe that establishing an early presence in select
international markets that are positioned to experience an increasing demand for
Internet services will give us a competitive advantage in these markets.
OUR APPROACH
We have developed a project methodology to help our customers determine
opportunities to transition their businesses in the constantly changing Internet
economy and to plan and implement the strategy, technology and operations
required to succeed in this environment. Our step-by-step methodology described
below is designed to produce high-impact Internet services on time, on budget
and with a continuous enhancement plan that responds to both general market and
Internet technology changes.
Business Strategy
Initially, we use our vertically-focused strategic expertise to develop a
business plan for our clients that includes the financial, marketing and
operational components that provide a convincing rationale for the proposed
Internet solution and guide its development. We provide strategic services
within a proven and refined interdisciplinary consulting model that combines the
best practices of management consulting, innovative technology solutions and the
critical component of usability and human computer interaction. We provide these
strategic services within a flexible methodology customized to each of our
client engagements.
Exploration
Next, we gather user requirements, suggest e-business features and develop
a general project plan. We assess the overall structure and content of the
proposed Internet solution and make technical and design recommendations based
on the findings. We then propose broad technology and creative approaches
including necessary software, infrastructure organization, website navigation
and graphic design concepts. This phase culminates in the delivery of a
high-level project plan which includes recommended features and functionality,
timeframes, personnel resources, projected costs and client responsibilities.
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Ideation
During this phase, the concepts and strategies articulated in the
exploration phase are refined through the creation of content maps, project
specifications, imagery and prototypes. The result is a detailed blueprint from
which the finished Internet solution will be constructed and a list of necessary
hardware and software components. In addition, if requested by our clients, we
will also prepare a proof-of-concept prototype to accompany this blueprint.
Creation
In this phase, we construct the solution using the detailed specifications
established in the ideation phase and tested for reliability using a rigorous
quality assurance process. The goal is a finished product that meets all of our
client's objectives. We seek to accomplish this goal through constant
consultation and collaboration with our clients.
Transfer
During this phase, we implement the Internet solution in its hosting
environment and officially launch the website. We also educate our client's
staff in the operation of its new website and work with the client to develop
procedures to address any changes in technology, system problems, and desired
enhancements. We also assist the client in developing a plan to ensure that it
has the appropriate staff resources to operate the website on a daily basis.
Evolution
Finally, we measure the performance of the Internet solution in its
operational environment, analyze those measurements, recommend enhancements
based on our findings and establish a plan to execute our recommendations.
CASE STUDIES OF OUR INTERNET SERVICES CLIENTS
The following is a description of some of the solutions we have developed
for the challenges presented to us by our Internet services clients.
Microsoft
Challenge: To design a website, eshop.microsoft.com, to showcase
Microsoft's product line, create a rewarding interactive experience for online
customers and offer online customers the choice of shopping on Microsoft's
website or purchasing the same product at a reseller's website.
Solution: We developed a custom solution that allows consumers to choose a
Microsoft product and complete the ordering process through Microsoft's website.
Challenge: To build loyal, repeat visitors to Microsoft Network's default
page, which receives up to 10 million visitors per day, by engaging users and
encouraging them to click through to the full breadth of the network's content.
Solution: We created three main graphic panels to simplify delivery of
information and bring functional and thematic focus to Microsoft Network's page.
We developed the concept of the message center and other personalized custom
features, eventually leading to a central user "command center" designed to
increase a user's investment in the functionality of the website. We prioritized
links, tools, categories and information to make the website user-friendly. We
preserved the identity of the website to retain Microsoft Network's established
audience, while updating and improving the default page in order to gain and
preserve new users.
The New York Times
Challenge: To create an online city guide for New York in a clean and
elegant way that maintains the integrity of the New York Times brand while
delivering optimum functionality and download time for a high-traffic website.
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Solution: We partnered with The New York Times Electronic Media Company to
create New York Today, an online city guide from the New York Times. Recognizing
that download speed and functionality were high priorities for such a heavily
trafficked website, we met the challenge with a design solution that relied on
limited graphic elements and strategic use of negative space. The result is a
website which retains the New York Times' brand identity and provides users with
timely, focused and relevant information. Users can easily customize the website
to suit their interests and synchronize the website with calendar applications
to notify them of upcoming events of interest.
Macy's
Challenge: To bring the Macy's brand into the Internet market by creating a
service-oriented, visually stimulating online shopping experience.
Solution: We partnered with IBM to create macys.com, Macy's e-commerce
website. We designed the website to offer a highly personalized shopping
experience which meets the online shopper's expectations of Macy's traditional
standard of service. For example, the website operates on relational databases
to facilitate flexible keyword searches and features a unique shipping module
designed by us and adopted by IBM for use in future projects. Key features of
the Macy's website include the shopper's e-club, which features electronic
gift-giving reminders, an automatic shipment replenishment feature for preferred
essential products and an extensive bridal registry website. The Macy's solution
was developed on IBM's net.commerce platform while we designed and developed the
actual shopping strategy flows and shopping cart functionality. IBM's Arts Cafe
designed the website's graphics.
Betty Crocker
Challenge: To create a variety of useful, custom-designed database and
search tools to address the needs of today's working families while reinforcing
Betty Crocker's core brand attributes.
Solution: We partnered with General Mills to create bettycrocker.com, the
brand's first online presence. We successfully extended Betty Crocker's core
brand attributes of quality, trust and credibility by creating a user-friendly,
information-rich website that brings Betty Crocker into the Internet market. We
designed a website that offers recipes, meal planning strategies and cooking
hints for website visitors. We created a number of user-friendly custom
databases and search tools to offer unique meal planning and recipe solutions.
OUR INVESTMENT BUSINESS
Our investment business seeks to invest in Internet companies which have
business models that we believe represent paradigm-shifting ideas and for which
we can leverage our industry relationships and expertise to accelerate the
creation of value within our investment portfolio. Our investment business is
currently focused on Internet companies engaged in business-to-business
e-commerce, Internet enabling tools, broadband and next generation
communications sectors. Through our investment process, we decide whether to
take a majority stake and incubate the business or a minority strategic position
as a venture investment.
We believe that we have a significant advantage over many other Internet
investors in identifying and selecting early stage businesses with the most
potential due to our:
o understanding of Internet business models gained through our Internet
services and investment experience;
o our extensive group of Internet professionals that are able to help us
identify high-quality companies and perform diligence on these potential
investments; and
o relationships with financial institutions in the venture and investment
community that expose us to valuable opportunities.
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In addition, we believe that we are better able to manage our investment
portfolio and ensure the success of our portfolio companies. We support the
businesses in which we invest through:
o access that we provide to the scarce talent of our more than 400 Internet
services professionals;
o business development and assistance for our portfolio companies from our
Internet industry veterans, from our other portfolio companies, from our
contacts in the Internet industry and from our contacts at Apollo and at
their portfolio companies;
o incubator services that we provide to our majority-held companies,
including technology infrastructure improvements, web hosting, legal
guidance, and financial and accounting management; and
o leverage of our relationships within the financial community to
facilitate successful financing and mergers and acquisitions transactions
for our portfolio companies.
STRATEGY
Our Incubator Business
Our incubator investment strategy is to realize a significant capital
return on our investment by adding substantial value to our incubator companies
over time. Acting as a long-term partner, we use our resources to actively
develop the business strategies, operations and management teams of our
incubator companies. Our operating strategy for our incubator companies is to
integrate them into a collaborative network that leverages our collective
knowledge and resources.
Our Venture Investment Business
Our venture investment strategy is to realize a significant capital return
on our venture investments by making strategic, early-stage equity investments
in Internet companies which we believe will emerge among the next generation of
premier Internet companies. We seek to accomplish this goal by identifying
promising Internet companies in select industries and assessing our ability to
enhance the future success of these companies by employing our Internet services
expertise and leveraging our relationships.
OUR INVESTMENT PROCESS
We seek to identify high quality investment targets through our
relationships in the Internet, venture capital and financial communities and
seek to co-invest with well-respected investors. Additionally, we empower our
Internet services business to identify investment targets from within its client
portfolio of premier Internet firms. We rigorously screen our venture
investments by targeting areas of significant growth potential by seeking to
identify the industries in which the next generation of premier Internet
companies will emerge. We then seek to accelerate the ability of our venture
companies to compete successfully by providing them with Internet services,
strategic consulting services and business infrastructure services and assisting
them to explore potential strategic transactions. Finally, we introduce our
venture companies to major financial institutions and investment banks in an
effort to create liquidity in our venture investments. We seek to control the
risk in our portfolio by investing in Internet-focused companies in diversified
vertical industries. In addition, we also regularly make our equity purchases in
the form of preferred stock that provides us with governance rights,
anti-dilution rights and liquidation preferences.
INCUBATOR CASE STUDY: CHANGEMUSIC NETWORK.
According to a report by Market Tracking International, worldwide retail
sales in the music industry were $39.7 billion in 1997 and are expected to grow
to $46.9 billion by 2004. The emergence of the Internet as a global
communications standard, the growth of high-speed Internet access, the
development of audio compression techniques, such as MP3, and the proliferation
of hardware and software that enables the management and playback of
downloadable music is currently driving rapid growth in this industry. Forrester
Research estimates that total online music revenues in the United States are
expected to grow from $89.0 million in 1998 to $7.8 billion in 2003. Of this
amount, Forrester further estimates that $1.1 billion will represent sales of
downloadable music in 2003.
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Within the context of this rapidly growing market, we determined that we
could efficiently aggregate highly trafficked sites at a low cost, using cash
and our common stock, from individual entrepreneurs who did not have the
resources or expertise to develop their properties to their fullest potential.
We acquired three of the leading, independent MP3 and digital music information
sites, two highly popular MP3 search engines and one of the most popular music
application customization sites. Together, these properties aggregate a
significant amount of web traffic, making the network of sites one of the
largest music-oriented destinations on the Internet.
After acquiring the individual sites, we developed and refined the new
company's business model; lent management resources to facilitate the initial
marketing, business development, and strategic development of the company; hired
employees; provided office space; and assumed all finance, accounting, and legal
functions. Our services unit was retained to create ChangeMusic.com by
integrating our network of websites and extending our site functionality with a
comprehensive suite of web-based services such as fan management, digital
download, promotion and marketing, to serve the musician and band.
Having established the ChangeMusic Network as an effective platform for the
distribution of music to consumers, we then accelerated our penetration of the
business to business marketplace with the acquisition by ChangeMusic.com of
College Media, Inc. or "CMJ", a music media company with a 20-year heritage and
a strong and stable revenue base. CMJ has a leading position in the college
radio market, maintaining strong relationships with more than 800 college radio
stations, and produces a leading industry trade journal covering emerging music,
a consumer publication and leading industry events. By integrating the
relationships and content of CMJ with the online user base of the original
ChangeMusic Network, we have positioned ChangeMusic.com to provide a unique,
market-leading set of offerings to meet the needs of emerging artists, record
labels and music consumers. In addition, we created a compelling value
proposition for CMJ shareholders by structuring a creative, multi-step
transaction using cash, our common stock and equity in the combined company.
OUR INCUBATOR COMPANIES
Currently, our incubator companies are ChangeMusic Network, Inc., ePrize,
Inc., iFace.com Inc., LiveUniverse.com, Inc., Notus Communications and
Regards.com.
ChangeMusic Network
ChangeMusic Network (also known as CMJ.com, Inc.) has a combination of
online and offline properties that delivers news, information, content and
services to music consumers, artists and the music industry. The ChangeMusic
Network also operates a business-to-business services group under the CMJ brand.
The business-to-business division offers the music industry its CMJ New Music
Report trade publication, one of the largest music industry conferences in the
world, and a website through which subscribers can gain access to various
exclusive data products as well as promotional and talent development (A&R)
services. We own approximately 74% of ChangeMusic Network on a fully diluted
basis.
ePrize
ePrize.net is an online sweepstakes, direct marketing and promotions
company that offers end-to-end solutions for customer acquisition and retention.
ePrize uses its patent-pending Pooled eDrawings to help clients attract new
visitors to websites, increase retention and build long-term online customer
relationships. ePrize professionals help clients design, administer and maintain
successful online sweepstakes and other promotional online efforts. We own
approximately 80% of ePrize on a fully diluted basis.
iFace
iFace.com develops products for telecommunication service providers and for
system integrators that telephony-empower websites and applications. By
developing systems around an architecture that handles thousands of simultaneous
phone calls over multiple transports, such as Public Switched Telephone Network,
Voice over IP and ATM, and providing off-the-shelf applications for
telecommunication service providers,
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iFace provides a robust telephone solution for today's market. We own
approximately 68% of iFace on a fully diluted basis.
LiveUniverse
LiveUniverse.com is an ASP and ASP aggregator dedicated to lowering the
barriers to entering the Internet economy. LiveUniverse currently offers a suite
of advertising-supported hosted community tools through tens of thousands of
websites around the world. LiveUniverse is creating a unique service which will
enable any company to quickly and efficiently create a custom website, intranet
and extranet. LiveUniverse will earn revenue from reselling subscriptions based
ASP services and participating in the various forms of e-commerce it enables for
affiliates. We own approximately 85% of LiveUniverse on a fully diluted basis.
Notus
Notus Communications provides clients with private label Unified Messaging
technology and solutions. Users of Notus technology receive a personal, direct
inward dial local telephone number. Users can keep this number for life,
regardless of the number of times they move. When someone calls the telephone
number, they can leave a voicemail message or send a fax. The system will
automatically detect whether the call is a voice or fax connection. We own
approximately 86% of Notus on a fully diluted basis.
Regards
Regards.com is one of the leading websites for electronic greeting card
distribution and is consistently ranked in the top 10 for the category by
MediaMetrix for unique monthly visitors. With the recent addition of
Buildacard.com, Card4you.com and the other websites in The Greetingland Network,
we expect that Regards.com, which will aggregate traffic from these additional
websites, will become one of the leading websites in the online greeting
industry. Visitors to the website will have the opportunity to create their own
greeting cards and to purchase gifts, as well as additional features and
enhancements such as voice enabled greeting cards, and interactive game cards.
We own approximately 90% of Regards.com on a fully diluted basis.
OUR VENTURE INVESTMENTS
We hold investments in the following companies:
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL DATE OF % OF
COMPANY NAME INVESTMENT OWNERSHIP DESCRIPTION OF BUSINESS
- ------------------------------ --------------- ----------- ---------------------------------------------
<S> <C> <C> <C>
Active Leisure October 1999 25% Internet community for motorcycle enthusiasts
(Competition Accessories) and direct marketer of motorcycles, parts and
accessories.
Archive.com January 2000 3% Provider of secure Internet-based archival
and retrieval services for business critical
document management.
ANT 21 September 1999 33% Internet music label representing top artists
(AtomicPop.com) dedicated to leveraging the digital medium to
change the way music is acquired, promoted,
sold and distributed.
Edmunds.com October 1999 4% Provider of automotive information, including
original editorial content, complete pricing
and specification information and sales
referrals for purchasing, finance, insurance,
warranty and other ancillary services.
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
INITIAL DATE OF % OF
COMPANY NAME INVESTMENT OWNERSHIP DESCRIPTION OF BUSINESS
- ------------------------------ --------------- --------- ---------------------------------------------
<S> <C> <C> <C>
Commerce Dynamics October 1999 5% Provider of enhanced, cost effective co-op
(GoShip.com) shipping and fulfillment solutions for e-
commerce websites.
Howtoguru.com November 1999 13% Provider of sports instructional content and
services for sports participants through
broadband and narrowband technologies.
iParty September 1999 2% Internet-based merchant of party goods, party
related services and party-planning advice.
L90 September 1999 5% Provider of comprehensive online advertising
and direct marketing solutions for
advertisers and Web publishers.
Like.com September 1999 5% Internet recommendation service highlighting
celebrity style choices to drive e-commerce
by collecting and aggregating their likes and
dislikes.
Money Hunt October 1999 16% Online and offline media company dedicated to
entertaining, educating and empowering
entrepreneurs as they seek capital for and
develop their start-up ideas.
QuickNet November 1999 8% Provider of hardware and software low-
density Internet telephony products including
the award winning Internet PhoneJACK and
Internet PhoneCARD hardware and the Internet
SwitchBoard software for Windows and Linux
PCs.
Smart Online September 1999 1% Provider of Web-hosted business productivity
applications and information resources for
small businesses and entrepreneurs.
GFI August 1999 7% Internet information and advocacy portal
(SpeakOut.com) providing a platform for citizens to debate
issues, comment on news and communicate with
government, political and business leaders.
StreamSearch.com September 1999 21% Streaming media search engine that offers the
easiest to use and most complete database of
live events, full-length motion pictures,
sports, weather, entertainment news and
pay-per-view events on the Internet.
</TABLE>
CUSTOMERS
Our customers are engaged in a broad variety of industries, including
consumer service, financial, technology, entertainment, consumer goods, retail
and automotive. Our customers include AT&T, Dr. Drew, Epson, Forbes, Microsoft,
Nestle, Ritz Carlton and Weider. We estimate that our five largest clients in
1999
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accounted for approximately 14% of our revenues and that no single client
accounted for more than 5% of our revenues.
COMPETITION
Competition in the Internet Services Industry
While the market for strategic Internet services is relatively new, it 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 believe that competition will intensify and increase in the future.
Our competitors can be divided into several groups:
o Internet professional service providers, such as Proxicom, iXL
Enterprises, Inc., Scient Corporation, USWeb and Viant Corporation;
o large systems integrators, such as Andersen Consulting, Computer Sciences
Corporation and IBM;
o specialty systems integrators, such as Cambridge Technology Partners,
Inc. and Sapient Corporation;
o strategy consulting firms, such as Boston Consulting Group, Inc. and
McKinsey & Company, Inc.; and
o interactive marketing firms, such as Agency.com, Ltd., Modem Media.Poppe
Tyson, Inc., Organic, Inc. and Razorfish, Inc.
There are relatively low barriers to entry into the strategic Internet
services industry, and the costs to develop and provide Internet services are
low. Therefore, we expect that we will continually face additional competition
from new entrants into the market in the future, and we are also subject to the
risk that our employees may leave us and start competing businesses.
Competition for Venture Investments
We face competition from numerous other capital providers seeking to
acquire interests in Internet-related businesses, including:
o other Internet companies
o venture capital firms;
o large corporations; and
o other capital providers who also offer support services to companies.
Traditionally, venture capital and private equity firms have dominated
investments in emerging technology companies, and many of these types of
competitors may have greater experience and financial resources than us. In
addition to competition from venture capital and private equity firms, several
public companies such as CMGI, Internet Capital Group and Safeguard Scientifics,
as well as private companies such as Idealab!, devote significant resources to
providing capital together with other resources to Internet companies.
Additionally, corporate strategic investors, including Fortune 500 and other
significant companies, are developing Internet strategies and capabilities.
TECHNOLOGY
We develop client solutions on the current state-of-the-art technology
platforms, including Linux and those developed by Microsoft, Sun Microsystems
and IBM. These technologies are applied to client solutions in conjunction with
an in-depth requirements analysis, including business models, existing
infrastructure and technology and business forecasting. These solutions include
existing technology analysis, network and applications architecture and
implementation, security analysis and implementation, application development,
legacy integration, testing, maintenance and transfer. We also provide managed
application services to our clients. In addition, we have built an optimized
wide area network to support our worldwide offices, providing internal knowledge
management, project management and human resources functionality. Both the
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internal and external networks are monitored through our network operations
center, which uses state-of-the-art tools for performance analysis and
assurance.
INTELLECTUAL PROPERTY RIGHTS
We rely upon a combination of trade secret, nondisclosure and other
contractual arrangements, and copyright and trademark laws, to protect our
proprietary rights. We enter into confidentiality agreements with our employees,
generally require that our consultants and clients enter into such agreements
and limit access to and distribution of our proprietary information. We cannot
assure you that the steps taken by us in this regard will be adequate to deter
misappropriation of our proprietary information or that we will be able to
detect unauthorized use and take appropriate steps to enforce our intellectual
property rights.
A portion of our business involves the development of software applications
for specific client engagements. Ownership of such software is the subject of
negotiation and is frequently assigned to our clients, with a license frequently
being retained by us for certain uses. Some of our clients have prohibited us
from marketing the applications developed for them for specified periods of time
or to specified third parties, and we cannot assure you that our clients will
not continue to demand similar or other restrictions in the future. Issues
relating to the ownership of and rights to use software applications can be
complicated, and we cannot assure you that disputes will not arise that affect
our ability to resell such applications. In connection with projects which use
our previously developed solutions, we may, in some cases, obtain a license fee
from the client for use of our solution and a development fee from the client
for any required additional customization.
EMPLOYEES
As of December 31, 1999, we had 728 employees. We believe our relationship
with our employees is good. None of our employees is represented by a union.
Generally, our employees are retained on an at-will basis. We have entered into
employment agreements, however, with many of our key employees. We require all
of our senior managers, as well as most of our key employees, to sign
confidentiality agreements and non-competition agreements which prohibit them
from competing with us during their employment and for various periods
thereafter.
PROPERTIES
We conduct our administrative and operations activities from 22 leased
facilities totaling approximately 250,000 square feet, pursuant to leases
expiring through 2008. These facilities are located in New York, New York;
Dallas, Texas; Los Angeles, California; Atlanta, Georgia; Detroit, Michigan;
Toronto, Ontario; San Francisco, California; Houston, Texas; San Antonio, Texas;
Irvine, California; Scottsdale, Arizona; Kendall Park, New Jersey; Great Neck,
New York; Sydney, Australia; London, England and Singapore. We routinely
evaluate our facilities for adequacy in light of our plans for growth in various
geographic markets. We do not anticipate purchasing property in the foreseeable
future.
LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning our directors and
executive officers as of January 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Glenn S. Meyers........................... 38 Chairman, President and Chief Executive Officer
Jeffrey J. Kaplan......................... 51 Executive Vice President and Chief Financial Officer
Suresh V. Mathews......................... 45 President and Chief Operating Officer of Rare Medium, Inc.
Robert C. Lewis........................... 34 Vice President and General Counsel
Craig Chesser............................. 38 Vice President and Treasurer
Michael A. Hultberg....................... 33 Vice President and Controller
Jeffrey Killeen........................... 46 Director
Richard T. Liebhaber...................... 63 Director
Steven Winograd........................... 44 Director
Andrew D. Africk.......................... 33 Director
Michael S. Gross.......................... 37 Director
Marc J. Rowan............................. 37 Director
</TABLE>
GLENN S. MEYERS is our co-founder, and Chairman, President and Chief
Executive Officer. He is also Chairman and Chief Executive Officer of our
wholly-owned subsidiary, Rare Medium, Inc. and has been a member of our board of
directors as well as our President and Chief Executive Officer since April 15,
1998. Prior to joining Rare Medium, Inc. in September 1996, Mr. Meyers was
President of Brookridge Capital Management, an Internet venture capital firm
from 1994 to September 1996. Mr. Meyers is also a director of L90, Inc.
JEFFREY J. KAPLAN has been our Executive Vice President and Chief Financial
Officer since September 1999. Mr. Kaplan served as Executive Vice President,
Chief Financial Officer and Director of Safety Components International, Inc., a
leading manufacturer of airbag cushions and fabric from February 1997 to August
1999. From October 1993 to February 1997, Mr. Kaplan served as Executive Vice
President, Chief Financial Officer and a Director of International Post Limited,
a leading provider of post-production services for commercial and advertising
markets.
SURESH V. MATHEWS has been the President and Chief Operating Officer of our
wholly-owned subsidiary, Rare Medium, Inc., since January 1999. Prior to joining
Rare Medium, Inc., Mr. Mathews was Senior Vice President and Chief Information
Officer of Quaker State Corporation from June 1991 to December 1998.
ROBERT C. LEWIS has been our Vice President and General Counsel since May
1998. Immediately prior to joining our company, Mr. Lewis was an associate at
the law firm of Fried, Frank, Harris, Shriver & Jacobson from October 1992.
CRAIG CHESSER has been a Vice President since July 1998 and has been our
Treasurer since November 1999. Mr. Chesser served as our Corporate Controller
from July 1998 to November 1999. Prior to joining our company, Mr. Chesser was
Vice President, Finance for TransCare Corporation, a health care industry
consolidator. Previously Mr. Chesser was Vice President, Finance and
Administration for Sunwestern Investment Group, a venture capital organization.
MICHAEL A. HULTBERG joined our company as Vice President and Controller in
November 1999. From July 1988 to November 1999, Mr. Hultberg was employed by
KPMG LLP, most recently as Senior Manager.
JEFFREY KILLEEN has been a member of our board of directors since October
1998. Mr. Killeen has been the Chief Executive Officer of Forbes.com since
August 1999. Prior to that, Mr. Killeen was the Chief Operating Officer of
barnesandnoble.com, an e-commerce company, from January 1998 to March 1999.
Before joining barnesandnoble.com, Mr. Killeen served as President and Chief
Executive Officer of Pacific Bell Interactive Media from August 1994 to January
1998.
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RICHARD T. LIEBHABER has been a member of our board of directors since June
1998. Mr. Liebhaber has been a Managing Director of Veronis, Suhler &
Associates, Inc., the New York media merchant banking firm, since June 1, 1995.
In addition, Mr. Liebhaber is currently a member of the following boards of
directors: Qwest Communications, Inc., Advanced Radio Telecommunications, AVICI
Systems, Inc., Internet Communications Corporation, and Alcatel USA, Inc.
Mr. Liebhaber also serves as a consultant and member of the Advisory Board of
Corning, Inc.
STEVEN WINOGRAD has been a member of our board of directors since October
1998. Mr. Winograd has been a Senior Managing Director at Bear, Stearns & Co.
since 1994, and since 1997 has been Group Head of the Financial Buyers Group.
ANDREW D. AFRICK has been a member of our board of directors since June
1999. Mr. Africk is a partner of Apollo Advisors, L.P. (which, together with its
affiliates, acts as the managing general partner of several private securities
investment funds, including Apollo Investment Fund IV, L.P.) and of Lion
Advisors, L.P. (a financial advisor to, and representative of institutional
investors with respect to, securities investments). Mr. Africk is also a
director of Continental Graphics Holdings, Inc. and Building One Services
Corporation, as well as several private venture companies.
MICHAEL S. GROSS has been a member of our board of directors since August
1999. Mr. Gross is one of the founding principals of Apollo Advisors, L.P. and
of Lion Advisors, L.P. Mr. Gross is also a director of Allied Waste Industries,
Inc., Breuners Home Furnishings, Inc., Clark Enterprises Inc., Converse, Inc.,
Florsheim Group, Inc., United Rentals, Inc., Building One Services Corp. and
Saks Incorporated.
MARC J. ROWAN has been a member of our board of directors since June 1999.
Mr. Rowan is one of the founding principals of Apollo Advisors, L.P., and of
Lion Advisors, L.P. Mr. Rowan is also a director of Samsonite Corporation, Vail
Resorts, Inc., Quality Distribution, Inc., National Financial Partners, Inc.,
Wyndam International and NRT Incorporated.
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DESCRIPTION OF OUR CAPITAL STOCK
OUR AUTHORIZED CAPITAL STOCK
We are authorized to issue up to 200,000,000 shares of our common stock,
100,000,000 shares of our non-voting common stock and 10,000,000 shares of our
preferred stock. The following is a summary of the principal terms of our
capital stock and of relevant provisions of our certificate of incorporation and
by-laws. The following summary is not complete and may not contain all of the
information important to you. You should read carefully the full text of our
certificate of incorporation, by-laws and the certificate of designations
governing our Series A convertible preferred stock.
COMMON STOCK
As of January 10, 2000, there were 45,446,165 shares of our common stock
issued and outstanding. The holders of our common stock are entitled to one vote
for each share held on the appropriate record date for all matters submitted to
a stockholder vote. Holders of our common stock are entitled to receive, on a
pro rata basis, dividends declared on the common stock by our board of
directors, out of legally available funds, unless any outstanding preferred
stock has a preference over the common stock for these dividends. In the event
of a liquidation, dissolution or winding up of Rare Medium Group, Inc., holders
of our common stock would be entitled to a pro rata share of our assets which
are available for distribution and remaining after payment of our liabilities
and the liquidation preference of outstanding preferred stock. Holders of our
common stock have no rights to purchase additional shares of common stock if we
issue additional shares of capital stock and they have no rights to convert
their common stock into any other securities. In addition, the holders of our
common stock have no redemption rights. As of date of this prospectus, all of
the outstanding shares of our common stock are fully paid and holders of our
shares of common stock are not required to make additional capital
contributions.
NON-VOTING COMMON STOCK
As of the date of this prospectus, there are no shares of our non-voting
common stock issued and outstanding. Our non-voting common stock has the same
terms as our voting common stock described above, except that our non-voting
common stock does not carry voting rights.
PREFERRED STOCK
Our board of directors has the authority, in its sole discretion, to issue
preferred stock in one or more classes or series and to fix the designations,
powers, preferences and rights of the shares of each class or series, including
dividend rates, conversion rights, voting rights, terms of redemption and
liquidation preference and the number of shares constituting each class or
series. We currently have one series of preferred stock outstanding, our
Series A convertible preferred stock.
As of January 10, 2000, we had issued and outstanding 907,820 shares of our
Series A convertible preferred stock with an aggregate liquidation preference of
approximately $90.8 million.
SERIES A CONVERTIBLE PREFERRED STOCK
The following is a description of the principal terms of our Series A
convertible preferred stock:
Ranking. The Series A convertible preferred stock ranks senior to our
common stock with respect to both dividends and distributions upon liquidation,
dissolution or winding up of Rare Medium Group, Inc. Until we have paid or
declared and set aside for payment the full amount of the dividends on the
Series A convertible preferred stock for the current dividend period, (1) we
cannot pay or declare or set aside for payment any dividends on our common stock
and (2) we cannot redeem, retire or repurchase any common stock. In the event of
a liquidation, dissolution or winding up of Rare Medium Group, Inc., no
distributions may be made to holders of our common stock until the holders of
our Series A convertible preferred stock have received a liquidation preference
of $100 per share plus all accrued and unpaid dividends.
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Conversion Price. Holders of Series A convertible preferred stock may
initially convert their shares at any time into a number of shares of common
stock determined by dividing (1) the aggregate liquidation preference of the
number of shares of Series A convertible preferred stock held by such holder,
plus accrued and unpaid dividends, by (2) the conversion price in effect at the
time of conversion. The initial conversion price is $7.00 and may be adjusted
from time-to-time in accordance with the anti-dilution provisions described
below.
Dividends. Holders of our Series A convertible preferred stock are
initially entitled to receive quarterly dividends payable at an annual rate of
7.50% of the liquidation preference per share from June 4, 1999, the original
issuance date of our Series A convertible preferred stock, through June 30,
2002. After June 30, 2002, holders of our Series A convertible preferred stock
are entitled to receive quarterly dividends payable at an annual rate of 4.65%
of the liquidation preference purchase. From June 4, 1999 through June 30, 2002,
dividends are payable through the issuance of additional shares of Series A
convertible preferred stock. From June 30, 2002 through June 30, 2004, dividends
are payable through the issuance of additional shares of Series A convertible
preferred stock, unless we or the holders of a majority of then outstanding
shares of Series A convertible preferred stock elect to have these dividends
paid in cash. After June 30, 2004, all dividends on the Series A convertible
preferred stock are payable in cash.
In the event any dividends are declared with respect to our common stock,
the holders of our Series A convertible preferred stock are entitled to receive
as additional dividends an amount (whether in the form of cash, securities or
other property) equal to the amount (and in the form) of the dividends that such
holders would have received had they converted their shares of Series A
convertible preferred stock into common stock on the date immediately prior to
the record date of such dividend on our common stock.
Optional Redemption. We may redeem all, but not less than all, of the
Series A convertible preferred stock at a redemption price equal to 103% of the
liquidation preference per share plus 103% of accrued and unpaid dividends at
any time after (1) June 30, 2002, if the closing price of our common stock
quoted on Nasdaq on each of the previous 30 trading days is greater than $12.00
per share, or (2) June 30, 2004.
Mandatory Redemption. On the earliest of (1) any date in the period
beginning on the 20th day and ending on the 90th day after an event which
constitutes a "change of control," as defined below or (2) June 30, 2012,
holders of our Series A convertible preferred stock may require us to redeem for
cash all shares of Series A convertible preferred stock then outstanding and any
shares of Series A convertible preferred stock issuable in respect of secured
but unpaid dividends at a redemption price per share equal to the liquidation
preference per share plus all accrued and unpaid dividends.
A "change of control" will, with some exceptions, occur if:
o a party other than Apollo Management, L.P. or its affiliates acquires
more than 50% of our outstanding shares of common stock or the combined
voting power of our outstanding voting securities;
o a majority of the directors who, as of June 4, 1999, were not elected by
the holders of the Series A convertible preferred stock cease for any
reason to serve on the board of directors; or
o our stockholders approve a reorganization, merger, consolidation or sale
of all or substantially all of our assets which results in a party other
than Apollo Management, L.P. or its affiliates acquiring more than 50% of
our outstanding common stock or combined voting power of our outstanding
voting securities.
Anti-dilution Adjustments. The conversion price of the shares of Series A
convertible preferred stock will, with some exceptions, be adjusted if we:
o issue common stock at a price below either (1) the conversion price in
effect at the time of issuance or (2) the 20 day average of the closing
prices of the common stock on Nasdaq for the 20 business days prior to
such issuance;
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o redeem or repurchase common stock at a price per share greater than the
twenty day average of the closing prices of the common stock on Nasdaq
for the twenty business days prior to such redemption or repurchase;
o pay a dividend or make any other distribution on our common stock payable
in shares of our common stock;
o subdivide, split or combine our outstanding shares of common stock into a
greater or smaller number of shares;
o enter into a capital reorganization, reclassification of our common stock
or consolidate or merge into another corporation where we are not the
surviving corporation or where there is a change in or a distribution
with respect to the common stock; or
o issue any securities with more favorable anti-dilution provisions than
those described above.
Voting Rights. The holders of shares of our Series A convertible preferred
stock are entitled to vote with the holders of common stock as a single class on
all matters submitted for a vote of holders of common stock. The number of votes
to which the Series A convertible preferred stock is entitled is .875 per
underlying share of common stock into which the Series A convertible preferred
stock is then convertible but in no event may exceed the voting power of
9,750,000 shares of common stock.
In addition, so long as any shares of Series A convertible preferred stock
are outstanding, we may not amend, alter or repeal, in any manner whatsoever,
our certificate of incorporation or by-laws or any provision of the certificate
of designations governing our Series A convertible preferred stock in a manner
that would adversely affect the rights or privileges of our Series A convertible
preferred stock without the consent of the holders of at least a majority of the
then outstanding shares of Series A convertible preferred stock.
Under the terms of the purchase agreement we entered into with Apollo, for
so long as Apollo Investment Fund IV, L.P. or any of its affiliates beneficially
own at least 100,000 shares of Series A convertible preferred stock, the holders
of the Series A convertible preferred stock, voting as a separate class, have
the right to elect two of the members of our board of directors and have certain
approval rights with respect to additional members of our board of directors in
the event that the size of our board of directors is increased.
The holders of Series A convertible preferred stock will also have the
right, voting separately as a class, to elect additional directors so that the
directors elected by the holders of the Series A convertible preferred stock
constitute a majority of the board of directors in the case of any of the
following events or any breach by us of certain of our agreements and covenants
with the holders of the Series A convertible preferred stock, including those
relating to:
o Apollo's participation in unsubscribed offerings to our securityholders
of rights to acquire common stock prior to June 30, 2004;
o the consent rights of Apollo which are described below;
o registration rights with respect to the common stock underlying our
Series A convertible preferred stock and Series 1-A and 2-A warrants;
o the dividend provisions of our Series A convertible preferred stock;
o the redemption provisions of our Series A convertible preferred stock;
o the voting rights of our Series A convertible preferred stock;
o preemptive rights of our Series A convertible preferred stock with regard
to future private placement of equity securities;
o conversion rights and anti-dilution provisions of our Series A
convertible preferred stock;
o any acceleration or default of an obligation for the payment of
indebtedness in excess of $10 million that is not cured within 15 days
from the date of such default; or
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o our common stock is no longer listed for trading on a U.S. national
securities exchange or Nasdaq.
The right of the holders of our Series A convertible preferred stock to elect a
majority of the members of our board of directors will continue until any event
or events of non-compliance have been cured.
Under the terms of the purchase agreement we entered into with Apollo, for
so long as Apollo Investment Fund IV, L.P., or any of its affiliates
beneficially own at least 100,000 shares of Series A convertible preferred
stock, we are precluded from taking various corporate actions and entering into
various transactions without the prior written consent of Apollo. Our proxy
statement for our stockholders meeting held on August 19, 1999, which is
incorporated by reference in this prospectus, describes these consent rights.
Preemptive Rights. The holders of our Series A convertible preferred stock
have the right to purchase their pro rata portions of any future private
placements of our equity or equity-linked securities, other than (1) securities
issued upon exercise of options or warrants outstanding prior to June 4, 1999,
options awarded to employees or directors after June 4, 1999 under our existing
employee incentive plans, and options issued after June 4, 1999 under new
employee incentive plans approved by our board of directors and by Apollo
Investment Fund IV, L.P. or its affiliates; and (2) securities issued as
consideration in acquisitions.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
Some provisions of our certificate of incorporation and bylaws, which
provisions are summarized in the following paragraphs, may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider it its best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, when coupled with the
provision of our certificate of incorporation authorizing the board of directors
to fill vacant directorships or increase the size of the board of directors, may
deter a stockholder from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies created by such
removal with its own nominees.
Authorized But Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
LISTING
Our common stock is quoted on the Nasdaq National Market under the symbol
"RRRR."
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. Its address is 6201 15th Avenue, 3rd Floor, Brooklyn,
NY 11219 and its telephone number at this location is 800-937-5449.
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SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could decline as a result of future
sales of substantial amounts of our common stock, or the perception that such
sales could occur. Furthermore, some of our existing stockholders have the right
to require us to register their shares or the shares underlying the securities
held by them, which may facilitate their sale of shares in the public market.
Upon completion of this offering, we will have 47,946,165 shares of common
stock, issued and outstanding, assuming no exercise of the underwriters'
over-allotment option. Of these shares, 45,446,165 shares of our common stock
which were outstanding immediately prior to this offering and the 2,500,000
shares of common stock being sold in this offering (plus any shares issued upon
exercise of the underwriters' over-allotment option) will be freely transferable
without restriction in the public market, except to the extent these shares have
been acquired by our affiliates, whose sale of such shares is restricted by Rule
144 under the Securities Act of 1933. The remaining shares of our common stock
are "restricted" securities under Rule 144 which, among other things, limits the
number of such shares available for sale in the public market.
We are required to register before May 13, 2000, 2,500,000 shares of our
common stock for resale by the investors in the private placement. The holders
of our Series A convertible preferred stock and Series 1-A and 2-A warrants have
the right to require us to register their underlying shares of common stock
subject to some limitations. In addition, holders of approximately 1,051,000
shares of our common stock have incidental or "piggyback" registration rights
that allow such holders, under certain circumstances, to include their shares of
common stock in registration statements initiated by us or other stockholders.
Under these agreements, the holders of our Series A convertible preferred stock
and Series 1-A and 2-A warrants may require us to register the shares of common
stock underlying these securities under the Securities Act for offer and sale to
the public (including by way of an underwritten public offering) on up to four
occasions. These agreements also permit demand registrations of Form S-3
registration statements provided that we continue to be eligible to register our
capital stock of Form S-3. All such registration rights are subject to
conditions and limitations, including the right of the underwriters of an
offering to limit under certain limited circumstances the number of shares to be
included in a registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
common stock that have been outstanding and not held by any "affiliate" of ours
for a period of one year is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of our common stock (approximately 479,000 shares immediately
after completion of this offering assuming no exercise of the underwriters'
over-allotment option) or the average weekly reported trading volume of our
common stock during the four calendar weeks preceding the date on which notice
of such sale is given, provided certain manner of sale and notice requirements
and requirements as to the availability of current public information are
satisfied. These information requirements have been satisfied by our filing of
reports under the Securities Exchange Act of 1934, as amended. Our affiliates
must comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of common stock
that are not "restricted securities". Under Rule 144(k), a person who is not
deemed one of our "affiliates" at any time during the three months preceding a
sale by him, and who has beneficially owned shares of common stock that were not
acquired from us or one of our "affiliates" within the previous two years, would
be entitled to sell such shares without regard to volume limitations, manner of
sale provisions, notification requirements or the availability of current public
information concerning us. As defined in Rule 144, an "affiliate" of an issuer
is a person that directly or indirectly through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer.
We have agreed that, subject to some exceptions, we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating to,
any shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing, without
the prior written consent of Credit Suisse First Boston Corporation for a period
of 90 days after the date of this prospectus.
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Our officers, directors and Apollo have agreed that, subject to some
exceptions, they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences or ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 90 days after
the date of this prospectus.
We have on file with the SEC effective registration statements under the
Securities Act covering shares of common stock reserved for issuance under our
option plans. Approximately 14.7 million shares of common stock may be issued
pursuant to the exercise of options currently outstanding or issuable in the
future under these plans. Shares registered under that registration statement
will be, subject to Rule 144 volume limitations applicable to affiliates,
available for sale in the open market, unless such shares are subject to vesting
restrictions or the lock-up agreements described above.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income tax
consequences of the ownership and disposition of our common stock by a
beneficial owner that is a non-U.S. holder. For purposes of this discussion, a
non-U.S. holder is a person or entity that, for U.S. federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership, or a foreign estate or trust.
This discussion is based on the Internal Revenue Code and administrative
and judicial interpretations as of the date of this prospectus, all of which are
subject to change, possibly with retroactive effect. This discussion does not
address all aspects of U.S. federal income taxation that may be relevant to
non-U.S. holders in light of their particular circumstances or the tax
consequences to non-U.S. holders subject to special tax rules, including,
without limitation, banks, insurances companies, dealers in securities and
traders in securities, and does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction.
PROSPECTIVE HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING AND DISPOSING OF OUR COMMON STOCK,
INCLUDING THE CONSEQUENCES UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN
JURISDICTION.
DIVIDENDS
Dividends, if any, paid to a non-U.S. holder of our common stock generally
will be subject to withholding tax at a 30% rate or such lower rate as may be
specified by an applicable treaty. For purposes of determining whether tax is to
be withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, we ordinarily will presume that dividends paid on or before
December 31, 2000 to an address in a foreign country are paid to a resident of
such country, absent our knowledge that such presumption is not warranted.
Under U.S. Treasury regulations applicable to dividends paid after
December 31, 2000, to obtain a reduced rate of withholding under a treaty, a
non-U.S. holder generally will be required to provide an IRS Form W-8 BEN
certifying such non-U.S. holder's entitlement to such reduced rate. These
regulations also provide special rules to a non-U.S. holder that is a
partnership, which generally require the partners to satisfy the certification
requirement.
There will be no withholding tax on dividends paid to a non-U.S. holder
that are effectively connected with the non-U.S. holder's conduct of a trade or
business within the U.S. or, if an income tax treaty applies, attributable to a
permanent establishment or fixed base of such non-U.S. holder within the U.S.,
if an IRS Form 4224, or, after December 31, 2000, an IRS Form W-8 ECI, is filed
with us stating that the dividends are so connected. Instead, the effectively
connected dividends will be subject to regular U.S. income tax in the same
manner as if the non-U.S. holder were a U.S. resident. A non-U.S. corporation
receiving effectively connected dividends may also be subject to an additional
"branch profits tax" which is imposed, under certain circumstances, at a rate of
30%, or such lower rate as may be specified by an applicable treaty, of the
non-U.S. corporation's effectively connected earnings and profits, subject to
certain adjustments.
Information Reporting and Backup Withholding
We generally must report annually to the IRS and each non-U.S. holder the
amount of any dividends paid, the name and address of the recipient and the
amount of any tax withheld. Under the terms of tax treaties or other agreements,
the IRS may make this information available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-U.S. holder at an address within the U.S. may be
subject to a 31% backup withholding if the non-U.S. holder fails to establish
that it is entitled to an exemption or to provide a correct taxpayer
identification number and certain other information to us.
Under current U.S. federal income tax law, backup withholding generally
will not apply to dividends paid on or before December 31, 2000 to a non-U.S.
holder at an address outside the U.S. unless the payer has knowledge that the
payee is a U.S. person. Under U.S. Treasury regulations applicable to dividends
paid
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after December 31, 2000, however, a non-U.S. holder will be subject to backup
withholding unless applicable certification requirements are met.
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an applicable income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for
refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of our common stock
unless:
o the gain is effectively connected with the non-U.S. holder's conduct of a
trade or business within the U.S. or, if an income tax treaty applies, is
attributable to a permanent establishment or fixed base of such non-U.S.
holder within the U.S.;
o in the case of certain non-U.S. holders who are nonresident alien
individuals and hold our common stock as a capital asset, such
individuals are present in the U.S. for 183 or more days in the taxable
year of the disposition and certain other conditions are met;
o the non-U.S. holder is subject to tax pursuant to the provisions of the
Internal Revenue Code regarding the taxation of U.S. expatriates; or
o we are or have been a "U.S. real property holding corporation" within the
meaning of Section 897(c)(2) of the Internal Revenue Code at any time
within the shorter of the five-year period preceding such disposition or
such holder's holding period. We do not believe that we are, and do not
anticipate becoming, a U.S. real property holding corporation.
Information Reporting and Backup Withholding
Under current U.S. federal income tax law, information reporting and a 31%
backup withholding will apply to the proceeds of a disposition of our common
stock effected by or through a U.S. office of a broker unless the disposing
holder certifies, under penalties of perjury, as to its non-U.S. status or
otherwise establishes an exemption. U.S. information reporting and backup
withholding generally will not apply to a payment of disposition proceeds where
the transaction is effected outside the U.S. through a non-U.S. office of a
non-U.S. broker unless the non-U.S. broker is a "U.S. related person". In the
case of the payment of disposition proceeds by or through a non-U.S. office of a
broker that is a U.S. person or a "U.S. related person," information reporting,
but not backup withholding, on the payment will apply unless the broker receives
a statement from the holder, signed under penalties of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files that the
holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For purposes of this discussion, a "U.S. related person" is:
o a "controlled foreign corporation" for U.S. federal income tax purposes;
o a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a trade or business within the U.S.;
o effective after December 31, 2000, a foreign partnership at least 50% of
the capital or profits interest in which is owned by U.S. persons or that
is engaged in a U.S. trade or business.
Effective after December 31, 2000, backup withholding may apply to a
payment of disposition proceeds by or through a non-U.S. office of a broker that
is a U.S. person or a "U.S. related person" unless applicable certification
requirements are satisfied or an exemption is otherwise established and the
broker has no actual knowledge that the holder is a U.S. person.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens Inc. are acting as
representatives, the following respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Credit Suisse First Boston Corporation.....................................................
Deutsche Bank Securities Inc...............................................................
FleetBoston Robertson Stephens Inc.........................................................
---------
Total.................................................................................... 2,500,000
---------
---------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock offered in this offering if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 375,000 additional shares of our common stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to the
selling group members at that price less a selling concession of $ per
share. The underwriters and the selling group members may allow a discount of
$ per share on sales to other broker/dealers. After the public offering,
the public offering price and selling concession and discount to dealers may be
changed by the representatives.
The following table summarizes the discounts and commissions and estimated
expenses that we will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions paid by
us.............................................. $ $ $ $
Expenses payable by us............................ $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect sales to accounts
over which they exercise discretionary authority to exceed 5% of our common
stock being offered.
We have agreed that, subject to some exceptions, we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating to,
any shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing, without
the prior written consent of Credit Suisse First Boston Corporation for a period
of 90 days after the date of this prospectus.
Our officers, directors and Apollo have agreed that, subject to some
exceptions, they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a
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transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences or ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, without the prior written consent of
Credit Suisse First Boston Corporation for a period of 90 days after the date of
this prospectus.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Exchange Act.
o Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Syndicate covering transactions involve purchases of our common
stock in the open market after the distribution has been completed
in order to cover syndicate short positions.
o Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when our common stock originally
sold by that syndicate member is purchased in a syndicate covering
transaction to cover syndicate short positions.
o In "passive" market making, market makers in the common stock who
are underwriters on prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until
the time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common stock to be higher than it would otherwise be
in the absence of such transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of our common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
our common stock.
REPRESENTATIONS OF PURCHASERS
Each purchase of our common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase our common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of shares of our common stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of our common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
57
<PAGE>
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York and Robert C.
Lewis, General Counsel of Rare Medium Group, Inc., are acting as our counsel in
connection with this offering. The underwriters are being represented by
Cravath, Swaine & Moore, New York, New York. Certain attorneys at Skadden Arps
own in the aggregate less than 1% of our outstanding common stock.
EXPERTS
The consolidated financial statements of Rare Medium Group, Inc. as of
December 31, 1998 and for the year then ended have been included herein and in
the registration statement in reliance on the report of KPMG LLP, independent
accountants, which includes an explanatory paragraph that states that Rare
Medium Group, Inc. 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
Rare Medium Group, Inc.'s ability to continue as a going concern. KPMG LLP's
report is given on the firm's authority as experts in accounting and auditing.
The consolidated balance sheet as of December 31, 1997 and the consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows of Rare Medium Group, Inc. for each of the two years in the period ended
December 31, 1997 incorporated in this prospectus by reference to the Annual
Report on Form 10-K of Rare Medium Group, Inc. for the year ended December 31,
1998, as amended on Form 10-K/A and on Form 10-K/A-2, have been so incorporated
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, which report includes an explanatory paragraph which refers to
conditions that raise substantial doubt about Rare Medium Group, Inc.'s ability
to continue as a going concern. PricewaterhouseCoopers LLP's report is given on
the firm's authority as experts in accounting and auditing.
The balance sheets as of December 31, 1997 and 1996 and the statements of
operations, changes in partners' capital and cash flows for each of the three
years in the period ended December 31, 1997, of Engelhard/ICC incorporated by
reference in this prospectus by reference to the Annual Report on Form 10- K of
Rare Medium Group, Inc. for the year ended December 31, 1998, as amended on Form
10-K/A and Form 10-K/A-2, have been incorporated herein in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants.
PricewaterhouseCoopers LLP's report is given on the firm's authority as experts
in accounting and auditing.
The combined financial statements of College Media, Inc. and CMJ Online,
Inc. as of December 31, 1997 and 1998 and for each of the years then ended have
been incorporated in this registration statement by reference to the Current
Report on Form 8-K/A of Rare Medium Group, Inc. in reliance upon the report of
Rubin & Katz LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. This prospectus constitutes
a part of a registration statement on Form S-3 (together with all amendments,
supplements, schedules and exhibits to the registration statement, referred to
as the registration statement) which we have filed with the SEC under the
Securities Act, with respect to the common stock offered in this prospectus.
This prospectus does not contain all the information which is in the
registration statement. Certain parts of the registration statement are omitted
as allowed by the rules and regulations of the SEC. We refer you to the
registration statement for further information about our company and the
securities offered in this prospectus. Statements contained in this prospectus
concerning the provisions of documents are not necessarily summaries of the
material provisions of those documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the SEC.
You can inspect and copy the registration statement and the reports and other
information we file with the SEC under the Exchange Act at the public reference
room maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You can obtain information on the operation of the
58
<PAGE>
public reference room by calling the SEC at 1-800-SEC-0330. The same information
will be available for inspection and copying at the regional offices of the SEC
located at 7 World Trade Center, 13th Floor, New York, N.Y. 10048 and at
Citicorp Center, 5000 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You can also obtain copies of this material from the public reference room of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC also maintains a website which provides on-line access to reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC at the address http://www.sec.gov.
Our common stock is quoted on The Nasdaq National Market under the symbol
"RRRR." Reports, proxy statements and other information concerning us can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets at December 31, 1998 and September 30, 1999 (Unaudited)........................ F-2
Unaudited Consolidated Statements of Operations--Three and Nine months ended
September 30, 1998 and 1999.............................................................................. F-3
Unaudited Consolidated Statements of Cash Flows--Nine months ended
September 30, 1998 and 1999.............................................................................. F-4
Notes to Unaudited Consolidated Financial Statements....................................................... F-5
Report of Independent Public Accountants................................................................... F-9
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998............................................................................... F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998............................................................................... F-12
Consolidated Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 1997 and 1998............................................................................... F-13
Notes to Consolidated Financial Statements................................................................. F-14
</TABLE>
F-1
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 917,978 $ 59,373,542
Accounts receivable, net........................................................ 1,184,182 7,296,630
Work in process................................................................. 251,718 3,125,002
Prepaid expenses and other current assets....................................... 443,526 2,621,532
------------ -------------
Total current assets.............................................................. 2,797,404 72,416,706
Property, plant and equipment, net................................................ 1,918,273 7,839,516
Investments in affiliates......................................................... -- 14,550,901
Intangibles, net.................................................................. 39,899,170 57,720,459
Other assets...................................................................... 128,275 1,197,912
------------ -------------
Total assets...................................................................... $ 44,743,122 $ 153,725,494
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 1,634,889 $ 5,115,569
Accrued liabilities............................................................. 1,912,364 4,086,135
Deferred revenue................................................................ 308,898 605,730
Current portion of notes payable--related parties............................... -- 2,990,285
Current portion of notes payable................................................ 129,525 854,159
------------ -------------
Total current liabilities......................................................... 3,985,676 13,651,878
Notes payable--related parties.................................................... 10,591,526 2,990,285
Other noncurrent liabilities...................................................... 344,210 183,658
------------ -------------
Total liabilities................................................................. 14,921,412 16,825,821
------------ -------------
Series A Convertible Preferred stock, $.01 par value, net of unamortized discount
of $55,668,678.................................................................. -- 34,553,354
------------ -------------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares, issued 902 shares
at September 30, 1999........................................................ -- --
Common stock, $.01 par value, authorized 200,000,000 shares, issued 30,696,828
shares at December 31, 1998 and 40,359,067 shares at September 30, 1999...... 306,968 403,591
Additional paid-in capital...................................................... 84,720,304 216,265,552
Note receivable from shareholder................................................ (230,467) (230,467)
Accumulated deficit............................................................. (54,803,665) (113,920,927)
Treasury stock, at cost, 66,227 shares.......................................... (171,430) (171,430)
------------ -------------
Total stockholders' equity........................................................ 29,821,710 102,346,319
------------ -------------
Total liabilities and stockholders' equity........................................ $ 44,743,122 $ 153,725,494
------------ -------------
------------ -------------
</TABLE>
F-2
<PAGE>
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 1,522,839 $ 11,336,636 $ 2,537,929 $ 19,080,519
Expenses:
Compensation expense............................. 2,129,760 9,944,680 3,554,328 18,625,508
Sales and marketing expense...................... 84,977 660,095 126,968 1,315,271
General and administrative expense............... 769,768 5,565,179 2,249,697 9,999,430
Depreciation and amortization.................... 4,165,861 6,807,273 8,414,642 16,971,398
----------- ------------ ----------- ------------
Total expenses.............................. 7,150,366 22,977,227 14,345,635 46,911,607
----------- ------------ ----------- ------------
Loss from operations............................... (5,627,527) (11,640,591) (11,807,706) (27,831,088)
Interest (expense) income, net..................... (449,225) 795,615 (716,656) (1,407,019)
Equity interest in net income (loss) of
investments...................................... 10,650 -- -- --
----------- ------------ ----------- ------------
Loss before discontinued operation.......... (6,066,102) (10,844,976) (12,524,362) (29,238,107)
Discontinued operation:
Loss from discontinued operation................. (1,525,342) -- (4,424,511) --
Gain on restructuring of Engelhard/ICC........... -- -- 24,256,769 --
----------- ------------ ----------- ------------
(Loss) income from discontinued operation... (1,525,342) -- 19,832,258 --
----------- ------------ ----------- ------------
Net (loss) income.................................. (7,591,444) (10,844,976) 7,307,896 (29,238,107)
Deemed dividend attributable to issuance of
convertible preferred stock................... -- -- -- (29,879,155)
Cumulative dividends and accretion of convertible
preferred stock to liquidation value.......... -- (3,470,733) -- (4,662,730)
----------- ------------ ----------- ------------
Net (loss) income attributable to common
stockholders..................................... $(7,591,444) $(14,315,709) $ 7,307,896 $(63,779,992)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Basic and diluted (loss) earnings per share:
Continuing operations............................ $ (0.23) $ (0.37) $ (0.48) $ (1.81)
Discontinued operation........................... $ (0.05) $ -- $ 0.76 $ --
----------- ------------ ----------- ------------
Net (loss) income per share........................ $ (0.28) $ (0.37) $ 0.28 $ (1.81)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Weighted average common shares
outstanding...................................... 26,731,817 38,723,657 26,128,504 35,320,850
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-3
<PAGE>
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1999
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ 7,307,896 $ (29,238,107)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Gain on restructuring of Engelhard/ICC................................... (24,256,769) --
Depreciation and amortization............................................ 8,553,299 16,971,398
Equity interest in net loss of investments............................... 122,800 --
Common stock and stock options issued for services rendered.............. 589,914 --
Loss on disposition of FAS............................................... 252,587 --
Noncash interest expenses................................................ -- 2,358,687
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.................................................... (2,838,441) (3,947,590)
Work in process........................................................ -- (2,873,284)
Prepaid expenses and other assets...................................... -- (1,773,785)
Deferred revenue....................................................... -- 296,832
Accounts payable, accrued and other liabilities........................ -- 2,315,064
----------- -------------
Net cash used in operating activities............................... (10,268,714) (15,890,785)
----------- -------------
Cash flows from investing activities:
Cash paid for acquisitions and investments in affiliates, net of cash
acquired, and acquisition costs.......................................... (10,041,986) (15,809,291)
Cash received in connection with restructuring of Engelhard................. 18,864,003 --
Purchases of property, plant and equipment, net............................. (682,069) (4,305,531)
Redemption of restricted cash deposits...................................... 2,500,000 --
Cash components of assets held for sale..................................... (526,827) --
----------- -------------
Net cash provided by (used in) investing activities................. 10,113,121 (20,114,822)
----------- -------------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures............................ -- 6,000,000
Proceeds from issuance of convertible preferred stock, net of costs......... -- 82,997,651
Repayments of borrowings, net of acquired debt.............................. (181,219) (1,624,566)
Proceeds from issuance of stock in conection with exercise of warrants and
options.................................................................. 53,696 7,088,086
----------- -------------
Net cash provided by (used in) financing activities................. (127,523) 94,461,171
----------- -------------
Net increase (decrease) in cash and cash equivalents.......................... (283,116) 58,455,564
Cash and cash equivalents, beginning of period................................ 1,257,483 917,978
----------- -------------
Cash and cash equivalents, end of period...................................... $ 974,367 $ 59,373,542
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-4
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) THE COMPANY
Rare Medium Group, Inc. ("the Company") conducts its operations primarily
through its subsidiaries, which are organized as two related lines of business:
the Internet solutions business of Rare Medium, Inc., and the venture/incubator
business. The Company is headquartered in New York with offices throughout the
United States, Canada, and abroad.
Through its wholly owned subsidiary, Rare Medium, Inc., the Company 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.
The Company broadened its initial Internet solutions-based strategy with
the advent of its venture/incubator business. The Company uses its knowledge of
the Internet and its existing development platform to incubate new Internet
companies emerging from Silicon Alley in New York, the Digital Coast in Los
Angeles, Dallas, Atlanta, Detroit, Toronto and San Francisco, all cities where
the Company currently has a presence, as well as in Silicon Valley and other
areas. Rare Medium Group's incubator companies include: liveuniverse.com, a
"Micro-Portal Enabler;" iFace.com, a Voice over Internet Protocol, or "VoIP"
company that is "Voice Enabling" the Internet; ChangeMusic.com, which
participates in the emerging MP3 revolution, changing the way music is made,
promoted, distributed, and consumed; and Regards.com, an electronic greeting
card company. The Company also holds investments consistent with its strategy of
developing internet-based enterprises.
The Company restructured its former climate control systems business in
February 1998 and combined with Rare Medium, Inc. in April 1998. Since April
1998 the Company acquired a number of other internet solutions companies. In
October 1998, the Company disposed of its former climate control systems
operations. In March 1999, the Company changed its name to "Rare Medium Group,
Inc."
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K/A-2 for the year then ended.
The accompanying unaudited consolidated financial statements as of
September 30, 1999 include the results of operations and financial position of
the Company on a consolidated basis.
The accompanying unaudited consolidated financial statements as of
September 30, 1998 include the results of operations of the Company and its
formerly 90% owned partnership with Engelhard Corporation, Fresh Air Solutions
("FAS"). 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 FAS. ICC Desiccant Technologies, Inc., which was
subsequently renamed Investment Holding Company, was the general partner of FAS.
In connection with this sale, 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 FAS partnership interests,
ICC Desiccant Technologies, Inc. retained, as its sole asset, a 32.4% passive
investment limited partnership interest in FAS.
F-5
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(2) BASIS OF PRESENTATION--(CONTINUED)
Subsequent to the sale of the FAS 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, Investment
Holding Company's interest in FAS has been increased to a 36% limited
partnership interest. The Company has no future funding responsibilities with
respect to FAS and its 36% limited partnership interest has no voting rights,
and therefore, is accounting for the remaining investment in FAS under the cost
method. Consequently, the results of operations of FAS for the three and nine
months ended September 30, 1998 are accounted for as discontinued operations
(see Note 8). For further information regarding this transaction, refer to the
Current Report on Form 8-K filed by the Company on October 29, 1998 as amended
on Form 8-K/A filed on November 13, 1998.
(3) ACQUISITIONS AND INVESTMENTS
During the three months ended September 30, 1999, the Company issued
896,422 shares of unregistered common stock, valued at $9.0 million and
$1.0 million of cash, in private placements to various founders, investors and
employees as consideration or partial consideration for the acquisitions of all
or substantially all of certain businesses. Certain shares issued in connection
with these transactions are held in escrow as security for covenants contained
in the respective merger agreements. Each of the above transactions has been
accounted for under the purchase method of accounting. The purchase prices,
which totaled $10.5 million in stock, cash and fees, were allocated to the
relative fair values of the net tangible assets, which consisted primarily of
cash, accounts receivable, property and equipment, accounts payable, and notes
payable. Goodwill of $10.2 million resulting from the transactions is being
amortized over a three-year period. The Company also made venture investments
consistent with its strategy of developing internet-based enterprises. The
Company's venture investments, accounted for under the cost and equity method of
accounting, range from 1% to 33% and amounted to $14.6 million.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Internal-Use Software
The Company has adopted the American Institute of Certified Public
Accountants 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 adopted SOP
98-1 effective January 1, 1999. The effect of the adoption of SOP 98-1 was not
material.
Recently Issued Accounting Standards
In July 1999, the Financial Accounting Standards Board issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," which amends SFAS No. 133 and
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000.
F-6
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(5) EQUITY TRANSACTIONS
THE RARE MEDIUM NOTEHOLDERS. As part of the consideration for the Company's
April 15, 1998 acquisition of Rare Medium, Inc., the Company guaranteed a
secured promissory note (the "Rare Medium Note") in the original principal
amount of $22.2 million, payable to the original shareholders of Rare Medium,
Inc. Through June 30, 1999 the Company issued 3,914,866 shares of common stock
of the Company to certain noteholders in exchange for their beneficial interest
in $15.8 million of the original principal amount. Effective August 12, 1999,
the Company issued 70,000 shares of common stock of the Company to a noteholder
in exchange for their beneficial interest in $0.5 million of the original
principal amount. In connection with this transaction the Company recognized
approximately $0.1 million in non-cash interest expense to the extent that the
market value of the common stock on the date of conversion exceeded the
conversion price. At September 30, 1999, as a result of these transactions,
there is a remaining principal balance of $6.0 million payable under the Rare
Medium Note, which bears interest payable semi-annually at the prime rate, and
is due in two equal principal installments on April 15, 2000 and April 15, 2001
(see Note 8).
THE APOLLO SECURITIES PURCHASE. On June 4, 1999, the Company issued and
sold to Apollo Investment Fund IV, LP, Apollo Overseas Partners IV, LP and AIF
IV/RRRR LLC (collectively, the "Preferred Stockholders"), for an aggregate
purchase price of $87.0 million, 126,000 shares of the Company's Series A
Convertible Preferred Stock (the "Series A Preferred Stock"), 126,000 Series 1-A
Warrants (the "Series 1-A Warrants"), 1,916,994 Series 2-A Warrants (the "Series
2-A Warrants"), 744,000 shares of the Company's Series B Preferred Stock (the
"Series B Preferred Stock"), 744,000 Series 1-B Warrants (the "Series 1-B
Warrants") and 10,345,548 Series 2-B Warrants (the "Series 2-B Warrants"). The
Series A Preferred Stock and Series B Preferred Stock accrue dividends at an
annual rate of 7.5%. The Series A and Series B Preferred Stock are subject to
mandatory redemption on June 30, 2012.
Under the terms of the securities purchase agreement with the Preferred
Stockholders, at the Company's 1999 Annual Meeting of its stockholders held on
August 19, 1999, the holders of common stock approved the conversion (the
"Apollo Conversion") of all of the Series B Preferred Stock, Series 1-B Warrants
and Series 2-B Warrants, including such additional Series B Securities that have
been issued as dividends, into like amounts of Series A Preferred Stock, Series
1 Warrants and Series 2 Warrants, respectively.
Pursuant to the approval, all Series B preferred stock and related warrants
were converted into Series A preferred stock and warrants. The Series A
securities are convertible into or exercisable for voting common stock whereas
the Series B securities were convertible into or exercisable for non-voting
common stock.
For further information regarding this transaction, see the Company's
Current Report on Form 8-K as filed on June 21, 1999, and the Company's
Definitive Proxy Statement for its Annual Meeting of Shareholders as filed with
the SEC on July 12, 1999.
(6) INCOME TAXES
The Company and the former stockholders of Rare Medium, Inc. and other
companies subsequently acquired by merger, intend that each of their respective
merger agreements shall constitute a tax-free plan of reorganization pursuant to
Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended. As a
result of various recent equity transactions, management believes the Company
experienced an "ownership change" as defined by section 382 of the Internal
Revenue Code in 1999. Accordingly, the utilization of the net operating loss
carryforward to offset future taxable income is subject to an annual limitation.
F-7
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(7) EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if stock options or warrants were exercised
or converted into common stock. Basic and diluted earnings per share were the
same for the three and nine months ended September 30, 1999 since the effect of
all potential dilutive common shares was antidilutive.
(8) SUBSEQUENT EVENTS
Acquisitions and Investments
Subsequent to September 30, 1999, the Company completed additional venture
investments totaling $3.78 million in cash consistent with its venture/incubator
strategy.
The Rare Medium Noteholders
Effective October 10, 1999, the Company issued 398,703 shares of common
stock of the Company to two noteholders in exchange for their beneficial
interest in $4.0 of the original principal amount of the Rare Medium Note. In
connection with this transaction the Company recognized approximately
$0.4 million in non-cash interest expense to the extent that the market value of
the common stock on the date of conversion exceeded the conversion price.
Investment in FAS
In October 1999, Engelhard Corporation, FAS and the Company entered into an
agreement by which Engelhard Corporation advanced cash and credit support to
FAS. Under the terms of the agreement, the Company's interest in FAS could be
diluted to 13% if all monies are advanced.
F-8
<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
F-9
<PAGE>
RARE MEDIUM GROUP, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,257,483 $ 917,978
Accounts receivable, net......................................................... -- 1,184,182
Unbilled receivables............................................................. -- 251,718
Advertising credits.............................................................. -- 298,083
Prepaid expenses and other current assets........................................ 406,558 145,443
----------- -----------
Total current assets........................................................ 1,664,041 2,797,404
Property and equipment, net........................................................ 7,615 1,918,273
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................................................................ $ 4,521,656 $44,743,122
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable................................................................. $ 97,989 $ 1,634,889
Accrued liabilities.............................................................. 183,515 1,557,364
Deferred revenue................................................................. -- 308,898
Taxes payable.................................................................... -- 355,000
Notes payable--other............................................................. -- 79,525
Note payable--affiliate.......................................................... -- 50,000
----------- -----------
Total current liabilities................................................... 281,504 3,985,676
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........................................................... 7,583,862 14,921,412
----------- -----------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, Authorized 9,510 shares; no shares issued and outstanding....... -- --
Common stock, $.01 par value. Authorized 50,000,000 shares; issued and
outstanding 21,519,998 shares in 1997 and 30,696,828 shares in 1998........... 215,200 306,968
Additional paid-in capital....................................................... 51,308,904 84,720,304
Note receivable from shareholder................................................. (230,467) (230,467)
Accumulated deficit.............................................................. (54,184,413) (54,803,665)
Less: Treasury stock, 66,227 shares in 1997 and 1998, at cost.................... (171,430) (171,430)
----------- -----------
Total stockholders' (deficit) equity........................................ (3,062,206) 29,821,710
----------- -----------
Total liabilities and stockholders' equity............................... $ 4,521,656 $44,743,122
----------- -----------
----------- -----------
</TABLE>
See accompany notes to consolidated financial statements.
F-10
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revenues.......................................................................... $ -- $ 4,688,120
------------ ------------
Expenses:
Operating expenses.............................................................. -- 6,590,061
General and administrative...................................................... 1,991,594 3,590,194
Depreciation and amortization................................................... -- 12,584,177
------------ ------------
Total expenses............................................................. 1,991,594 22,764,432
------------ ------------
Loss from operations.............................................................. (1,991,594) (18,076,312)
------------ ------------
Interest income (expense), net.................................................... 492,870 (1,278,507)
------------ ------------
Loss before taxes and discontinued operation...................................... (1,498,724) (19,354,819)
Income tax expense.............................................................. -- 355,487
------------ ------------
Loss before discontinued operation......................................... (1,498,724) (19,710,306)
------------ ------------
Discontinued operation:
Loss from discontinued operation................................................ (11,985,361) (4,538,128)
Gain on restructuring of Engelhard.............................................. -- 24,256,769
Loss on sale of FAS............................................................. -- (627,587)
------------ ------------
(Loss) income from discontinued operation.................................. (11,985,361) 19,091,054
------------ ------------
Net loss.......................................................................... (13,484,085) (619,252)
Cumulative preferred stock dividend............................................. -- --
------------ ------------
Net loss attributable to common stockholders...................................... $(13,484,085) $ (619,252)
------------ ------------
------------ ------------
Basic and diluted earnings (loss) per share:
Continuing operations........................................................... $ (0.07) $ (0.78)
Discontinued operation.......................................................... (0.56) 0.76
------------ ------------
Net loss per share................................................................ $ (0.63) $ (0.02)
------------ ------------
------------ ------------
Basic weighted average common shares outstanding.................................. 21,339,635 25,282,002
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $(13,484,085) $ (619,252)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain of restructuring of Engelhard........................................... -- (24,256,769)
Depreciation and amortization................................................ 3,927 12,584,177
Equity interest in net loss of Engelhard/ICC................................. 11,985,361 133,450
Common stock and stock options issued for services rendered.................. 52,381 589,914
Loss on disposition of FAS................................................... -- 627,587
Interest expense paid in notes and stock..................................... -- 1,140,413
(Increase) decrease in:
Receivables................................................................ -- 422,567
Prepaid expenses and other................................................. (298,397) 277,142
Increase (decrease) in:
Accounts payable and accrued liabilities................................... 194,030 757,693
Taxes payable -- 362,745
Other liabilities.......................................................... -- (702,625)
------------ ------------
Net cash used in operating activities...................................... (1,546,783) (8,682,958)
------------ ------------
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) --
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........................................ (9,500) (912,239)
------------ ------------
Net cash (used in) provided by investing activities........................ (7,134,950) 8,333,081
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock and
warrants, net................................................................ 298,102 118,385
Cash redemption of preferred stock.............................................. -- --
Repayment of borrowings......................................................... -- (108,013)
Cash dividend on preferred stock................................................ -- --
Repayments of borrowings from stockholders...................................... -- --
------------ ------------
Net cash provided by financing activities.................................. 298,102 10,372
------------ ------------
Net (decrease) in cash and cash equivalents....................................... (8,383,631) (339,505)
Cash and cash equivalents, beginning of period.................................... 9,641,114 1,257,483
------------ ------------
Cash and cash equivalents, end of period.......................................... $ 1,257,483 $ 917,978
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
PREFERRED COMMON STOCK PAID-IN FROM
STOCK ($.01 PAR VALUE) CAPITAL OFFICER
--------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997............................................. -- 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)
----- -------- ----------- ----------
----- -------- ----------- ----------
<CAPTION>
TREASURY TOTAL
ACCUMULATED STOCK STOCKHOLDERS'
DEFICIT AT COST EQUITY (DEFICIT)
------------ --------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1997............................................. (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.
F-13
<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 $54,184,410 through December 31, 1997 and
$54,803,665 through December 31, 1998 and 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, 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.
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:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Equipment............................................... 3 to 5
Furniture and fixtures.................................. 5 to 7
</TABLE>
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
F-14
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
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
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.
F-15
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(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.
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, 1997 and 1998.
For the purposes of computing EPS from continuing operations, the Company
had potentially dilutive common stock equivalents of 1,211,588 and 909,321, for
the years ended December 31, 1997, and 1998, 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
F-16
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
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
(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.
F-17
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) BUSINESS TRANSACTIONS--(CONTINUED)
(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.
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.
Presented below are summary financial statements for Engelhard/ICC,
including a summary balance sheet as of December 31, 1997, and summary
statements of operations for the year ended December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Total current assets........................................................... $ 5,553,118
Property, plant and equipment, net............................................. 9,496,897
Other assets................................................................... 1,711,595
------------
Total assets................................................................... $ 16,761,610
------------
------------
Total current liabilities...................................................... $ 7,588,151
Long-term debt................................................................. 8,629,128
Partners' capital.............................................................. 544,331
------------
Total liabilities and partners' capital........................................ $ 16,761,610
------------
------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1997
---------------
<S> <C>
Revenue....................................................................... $ 12,239,012
Expenses...................................................................... 28,963,373
-------------
Net loss...................................................................... $ (16,724,361)
-------------
-------------
</TABLE>
F-18
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) BUSINESS TRANSACTIONS--(CONTINUED)
(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>
1997 1998
------------ ------------
<S> <C> <C>
Revenue....................................................... $ 6,642,568 $ 8,292,394
------------ ------------
------------ ------------
Net loss before discontinued operations....................... (24,252,664) (25,774,639)
Discontinued operations....................................... (11,985,361) 19,091,054
------------ ------------
Net loss...................................................... $(36,238,025) $ (6,683,585)
------------ ------------
------------ ------------
Net loss per common share basic and diluted................... $ (1.34) $ (0.24)
------------ ------------
------------ ------------
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment....................................................... $ 13,766 $1,469,759
Furniture and fixtures.......................................... 956 168,910
Leasehold improvements.......................................... -- 629,179
---------- ----------
14,722 2,267,848
Less accumulated depreciation and amortization.................. 7,107 349,575
---------- ----------
Property and equipment, net..................................... $ 7,615 $1,918,273
---------- ----------
---------- ----------
</TABLE>
(4) ACCRUED LIABILITIES
Accrued liabilities consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accrued liabilities:
Accrued compensation............................................ -- 474,805
Accrued professional fees....................................... 114,500 417,809
Accrued interest payable........................................ -- 273,309
Other liabilities............................................... 69,015 391,441
---------- ----------
Total accrued liabilities....................................... $ 183,515 $1,557,364
---------- ----------
---------- ----------
</TABLE>
F-19
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
F-20
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) SHAREHOLDERS' EQUITY
Common Stock Transactions
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 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).
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.
(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.
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
F-21
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE COMPENSATION PLANS--(CONTINUED)
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,
1997 and 1998 was $1.38, and $1.96, 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 5.4% to 6.5% in 1997, and 4.5% to 5.6% in 1998,
(2) an expected life of six years for both years, (3) volatility of
approximately 73.9% in 1997 and 91.5% in 1998 and (4) an annual dividend yield
of 0% for both 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>
1997 1998
----------- -----------
<S> <C> <C>
Net loss:
As Reported.................................................. $13,484,085 $ 619,252
Pro Forma.................................................... $13,613,974 $ 6,053,743
Net loss per share:
As Reported.................................................. $ 0.63 $ 0.02
Pro Forma.................................................... $ 0.64 $ 0.24
</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.
F-22
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) EMPLOYEE COMPENSATION PLANS--(CONTINUED)
Stock option activity under the Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
EXERCISE PRICES SHARES
--------------- ----------
<S> <C> <C>
Outstanding at January 1, 1997................................... 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 WEIGHTED WEIGHTED EXERCISABLE AT WEIGHTED
DECEMBER 31, AVERAGE AVERAGE DECEMBER 31, AVERAGE
RANGE OF EXERCISE PRICES 1998 REMAINING LIFE EXERCISE PRICE 1998 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 and 1997 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.
F-23
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) INCOME TAXES--(CONTINUED)
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
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards.............................. $ 17,928,000 $ 12,099,000
Alternative minimum tax carryforwards......................... -- 355,000
Other assets.................................................. -- 86,000
Other accrued expenses........................................ 10,000 281,000
------------ ------------
Total gross deferred tax assets.......................... 17,938,000 12,821,000
Less valuation allowance...................................... (17,938,000) (12,821,000)
------------ ------------
Net deferred tax assets.................................. $ -- $ --
------------ ------------
------------ ------------
</TABLE>
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 1997 and 1998, the
valuation allowance increased by $5,130,000 and decreased by $5,117,000,
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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
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
</TABLE>
Total rent expense under operating leases amounted to $315,048 for 1998.
F-24
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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)
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
F-25
<PAGE>
RARE MEDIUM GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) SUBSEQUENT EVENTS--(UNAUDITED)--(CONTINUED)
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 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
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.
F-26
<PAGE>
[LOGO-Rare Medium Group Inc.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered are set forth in the following table (all amounts
except the registration fee and the listing fee are estimated):
<TABLE>
<S> <C>
SEC Registration Fee $ 28,890
Nasdaq National Market Listing Fees *
Legal Fees and Expenses *
Printer's Fees and Expenses *
Accountants' Fees and Expenses *
National Association of Securities Dealers, Inc's Filing Fee 11,461
Miscellaneous Costs *
--------
Total *
--------
--------
</TABLE>
- ------------------
* To be completed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's certificate of incorporation contains a provision which
provides that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for a breach of fiduciary duty
as a director except for liabilities:
(i) for any breach of the director's duty of loyalty;
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(iii) for an unlawful dividend payment or an unlawful repurchase or
redemption of stock under Section 174 of the Delaware General Corporation
Law; or
(iv) for any transaction from which the director derived an improper
personal benefit.
The Company's certificate of incorporation provides that the Company may
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amount paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, if he acted in good faith in a manner he reasonably believed to be
in or not opposed to the best interest of the Company, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interest of the Company, and with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful.
The Company's certificate of incorporation provides that the Company may
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the
II-1
<PAGE>
Company unless and only to the extent that the court in which such action or
suit was brought shall determine upon application, that despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnify for such expenses which the court of
chancery or such other court shall deem proper.
To the extent that a director, officer, employee or agent of the Company
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above or in defense of any claim, issue or matter
therein, the Company's certificate of incorporation provides that he will be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Any indemnification under the provisions of the Company's certificate of
incorporation (unless ordered by a court) will be made by the Company upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth above. Such determination shall be made (1) by the board of
directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
The Company's certificate of incorporation provides that the Company may
pay expenses incurred by defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding in the manner provided herein upon receipt of any undertaking by or
on behalf of the director, officer, employee or agent to repay such amount if it
is ultimately determined that he is not entitled to be indemnified by the
Company.
The Company's certificate of incorporation provides that the
indemnification and advancement of expenses will, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
The Company's certificate of incorporation provides that the
indemnification and advancement of expenses provided therein will not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or of any disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office.
The Company's certificate of incorporation provides that the Company may
purchase and maintain insurance on behalf of any person who is or was serving
the Company in any capacity referred to above against any liability asserted
against him and incurred by him in such capacity, or arising out of his status
as such, whether or not the Company would have the power to indemnify him
against such liability under the provisions of its certificate of incorporation.
The Company's by-laws provide that the Company will indemnify any director
and any officer of the Company who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, quasi-administrative or investigative,
other than an action by or in the right of the Company (a "Third Party
Proceeding"), by reason of the fact that he or she was or is a director or
officer, employee or agent of the Company, acting solely in such capacity, or a
person serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, committee or other enterprise 50% or more of whose voting stock or
equitable interest shall be owned by this Company (each an "Authorized
Representative") against his or her expenses and liabilities (including
attorneys' fees), actually and reasonably incurred by him or her in connection
with the Third Party Proceeding if he or she acted in good faith and in a manner
reasonably believed by him or her to be in, or not opposed to, the best
interests of the Company and, with respect to any Third Party Proceeding
involving potential criminal liability (a "Criminal Third Party Proceeding"),
had no reasonable cause to believe his or her conduct was unlawful or in
violation of applicable rules. The termination of any Third Party Proceeding by
judgment, order, settlement, consent filing of a criminal complaint or
information, indictment, conviction or upon a plea of nolo contendere or its
equivalent, will not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be in,
or not opposed to, the best interests of the Company or, with
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<PAGE>
respect to any Criminal Third Party Proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
The Company's by-laws provide that the Company will indemnify any director
or officer of the Company who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by the Company to
produce a judgment in favor of its shareholders, or any threatened, pending or
completed action or suit in the right of the Company by its shareholders to
procure a judgment in favor of the Company (a "Derivative Action") by reason of
the fact that the director or officer was or is an Authorized Representative of
the Company, against his or her expenses (including attorneys' fees) actually
and reasonably incurred by the director or officer in the action if he or she
acted in good faith and in a manner reasonably believed by him or her to be in,
or not opposed to, the best interests of the Company; except that no
indemnification will be made in respect of any claim, issue or matter as to
which he or she has been adjudged to be liable for negligence or misconduct in
the performance of his or her duty to the Company unless and only to the extent
that the court of common pleas, or other similarly constituted state court,
located in the county where the registered office of the Company is located or
the court in which such Derivative Action is or was pending, determines upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, he or she is fairly and reasonably entitled to
indemnify for expenses which the court deems proper.
An Authorized Representative of the Company (other than a director or
officer of the Company) may be indemnified by the Company or have his or her
expenses advanced in accordance with the procedures described below. To the
extent that an Authorized Representative of the Company has been successful on
the merits or otherwise in defense of any Third Party Proceeding or Derivative
Action or in defense of any claim, issue or matter therein, the Authorized
Representative will be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
Indemnification under the provisions of the Company's by-laws described
above (unless ordered by a court, in which case the expenses, including
attorneys' fees of the Authorized Representative in enforcing indemnification
will be added to and included in the final judgment against the Company) will be
made by the Company only as authorized in the specific case upon a determination
that the indemnification of the Authorized Representative is required or proper
in the circumstances because he or she has met the applicable standard of
conduct set forth above or has been successful on the merits or as otherwise in
defense of any Third Party Proceeding or Derivative Action and that the amount
requested has been actually and reasonably incurred. Such determination shall be
made:
(a) By the board of directors or a committee thereof, acting by a
majority vote of a quorum consisting of directors of the Company who are
not parties or have no economic or other collateral personal benefit
relating to a Third Party Proceeding or Derivative Action ("Disinterested
Directors"); or
(b) If a quorum is not obtainable or, even if obtainable, a majority
vote of a quorum of Disinterested Directors so directs, by independent
legal counsel in a written opinion.
The Company's by-laws provide that expenses incurred in defending a Third
Party Proceeding or Derivative Action will be paid on behalf of a director or
officer, and may be paid on behalf of any Authorized Representative, by the
Company in advance of the final disposition of the action as authorized in the
manner provided above (except that the person(s) making the determination
thereunder need not make a determination on whether the applicable standard of
conduct has been met unless a judicial determination has been made with respect
thereto, or the person seeking indemnification has conceded that he or she has
not met such standard) upon receipt of an undertaking by or on behalf of the
Authorized Representative to repay the amount to be advanced unless it shall
ultimately be determined that the Authorized Representative is entitled to be
indemnified by the Company as required in the Company's by-laws or authorized by
law. The financial ability of any Authorized Representative to make repayment
will not be a prerequisite to making of an advance.
The Company's by-laws provide the Company may purchase and maintain
insurance on behalf of any person who is or was an Authorized Representative
against any expenses and liabilities asserted against him
or her and incurred by him or her in any such capacity, whether or not the
Company would have the power
II-3
<PAGE>
to indemnify him or her against such expenses and liabilities under the
provisions of the Company's by-laws.
The indemnification provided by the Company's by-laws is not deemed to be
exclusive of any other right to which a person seeking indemnification may be
entitled under any statute, agreement, vote of Disinterested Directors, or
otherwise, regardless of whether the event giving rise to indemnification
occurred before or after the effectiveness thereof, both as to action taken in
another capacity while holding his or her office or position, and will continue
as to a person who has ceased to be an Authorized Representative of the Company
and will inure to the benefit of his or her heirs and personal representatives.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration statement:
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement*
4.1 -- Restated Certificate of Incorporation of Rare Medium Group, Inc.*
4.2 -- Restated By-laws of Rare Medium Group, Inc.*
5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
23.1 -- Consent of KPMG, LLP
23.2 -- Consent of PricewaterhouseCoopers LLP
23.3 -- Consent of Rubin & Katz LLP
23.4 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1)*
24.1 -- Power of Attorney (included on signature page to this Registration Statement)
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions discussed in Item 15 of this registration statement,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registration pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Exchange Act (and where applicable,
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<PAGE>
each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in
this registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK,
NEW YORK ON THE 31ST DAY OF JANUARY, 2000.
RARE MEDIUM GROUP, INC.
By: /s/ GLENN S. MEYERS
----------------------------------
Glenn S. Meyers
Chairman of the Board, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey J. Kaplan and Robert C. Lewis his true
and lawful attorney-in-fact, each acting alone, with full power of substitution
and resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any and all additional registration
statements pursuant to Rule 462(b) relating to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact or his substitutes, each acting alone,
may lawfully do or cause to be done by virtue thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<C> <S> <C>
/s/ GLENN S. MEYERS Chairman of the Board, President and January 31, 2000
- ------------------------------------------ Chief Executive Officer
Glenn S. Meyers
/s/ ANDREW D. AFRICK Director January 31, 2000
- ------------------------------------------
Andrew D. Africk
/s/ MICHAEL GROSS Director January 31, 2000
- ------------------------------------------
Michael Gross
/s/ JEFFREY KILLEEN Director January 31, 2000
- ------------------------------------------
Jeffrey Killeen
/s/ RICHARD T. LIEBHABER Director January 31, 2000
- ------------------------------------------
Richard T. Liebhaber
/s/ MARC J. ROWAN Director January 31, 2000
- ------------------------------------------
Marc J. Rowan
/s/ STEVEN WINOGRAD Director January 31, 2000
- ------------------------------------------
Steven Winograd
/s/ JEFFREY J. KAPLAN Executive Vice President and Chief January 31, 2000
- ------------------------------------------ Financial Officer (Principal Financial
Jeffrey J. Kaplan Officer)
/s/ MICHAEL A. HULTBERG Vice President and Controller (Principal January 31, 2000
- ------------------------------------------ Accounting Officer)
Michael A. Hultberg
</TABLE>
II-6
<PAGE>
The Board of Directors and Stockholders
Rare Medium Group, Inc.:
We consent to the use of our report included herein and the references
to our firm under the headings "Experts" in the prospectus.
KPMG LLP
New York, New York
January 31, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Registration Statement of Rare Medium Group, Inc. (the Company) on Form S-3 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 relating to the consolidated financial statements
of the Company, which appears in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 as amended. We also consent to the
incorporation by reference in this Registration Statement of the Company on Form
S-3 of our report, dated March 20, 1998 relating to the financial statements of
Engelhard/ICC, which also appears in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 as amended. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 31, 2000
<PAGE>
The Board of Directors and Stockholders
Rare Medium Group, Inc.:
We consent to the incorpation by reference in this registration statement on
Form S-3 of Rare Medium Group, Inc. of our report dated December 16, 1999, with
respect to the combined balance sheets of College Media, Inc. and CMJ Online,
Inc. as of December 31, 1998 and 1997, and the related combined statements of
operations, deficiency, and cash flows for each of the years in the two-year
period ended December 31, 1998, which report appears in the Form 8-K/A of Rare
Medium Group, Inc. dated December 23, 1999. We also consent to the reference to
our Firm under the caption "Experts" in the registration statement, which is
part of this registration statement.
Rubin & Katz LLP
New York, New York
January 31, 2000
