SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13865
RARE MEDIUM GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 23-2368845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
565 Fifth Avenue, 29th Floor
New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 883-6940
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares outstanding of the issuer's common stock, as of
November 8, 2000
Common Stock, par value $.01 per share 63,669,740
-------------------------------------- -----------
Class Number of shares outstanding
INDEX
Page Number
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Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Operations
Three and nine months ended September 30, 2000
and 1999 4
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
RARE MEDIUM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -----------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 173,029 $ 28,540
Accounts receivable, net 24,345 12,601
Work in process 5,123 3,171
Notes receivable - 1,100
Prepaid expenses and other current assets 6,862 2,508
----------- ----------
Total current assets 209,359 47,920
Property, plant and equipment, net 26,279 12,100
Investments in affiliates 56,307 26,467
Goodwill and intangibles, net 60,182 72,552
Other assets 4,020 1,384
----------- ----------
Total assets $ 356,147 $ 160,423
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,218 $ 7,097
Accrued liabilities 13,988 5,759
Deferred revenue 5,282 3,044
Current portion of note payable - related parties - 997
Current portion of notes payable 168 579
----------- ----------
Total current liabilities 23,656 17,476
Notes payable 155 -
Note payable - related parties - 997
Other noncurrent liabilities 4,321 735
----------- ----------
Total liabilities 28,132 19,208
----------- ----------
Series A Convertible Preferred Stock, $.01 par value,
net of unamortized discount of $51,262 44,723 36,224
----------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares,
issued 959,849 shares as Series A Convertible Preferred Stock at
September 30, 2000 and 907,820 shares at December 31, 1999 - -
Common stock, $.01 par value, authorized 200,000,000 shares,
issued and outstanding 63,648,965 shares at September 30, 2000
and 42,893,357 shares at December 31, 1999 636 429
Additional paid-in capital 529,260 252,075
Accumulated other comprehensive income 2,953 937
Note receivable from shareholder - (231)
Accumulated deficit (249,386) (148,048)
Treasury stock, at cost, 66,227 shares (171) (171)
----------- ----------
Total stockholders' equity 283,292 104,991
----------- ----------
Total liabilities and stockholders' equity $ 356,147 $ 160,423
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 29,420 $ 11,337 $ 80,943 $ 19,081
Cost of revenues 17,799 5,983 47,524 10,371
-------------- ---------- ------------- ------------
Gross profit 11,621 5,354 33,419 8,710
Expenses:
Sales and marketing expense 6,387 1,293 15,560 2,404
General and administrative expense 25,368 8,861 66,619 17,132
Depreciation and amortization 13,455 6,807 35,469 16,971
-------------- ---------- ------------ ------------
Total expenses 45,210 16,961 117,648 36,507
-------------- ---------- ------------ ------------
Loss from operations (33,589) (11,607) (84,229) (27,797)
Interest income (expense), net 3,015 762 7,587 (1,441)
Equity interest in net loss of investments (1,861) - (4,424) -
Other expense (192) - (454) -
--------------- ----------- ------------- -------------
Net loss (32,627) (10,845) (81,520) (29,238)
Deemed dividend attributable to issuance of
convertible preferred stock - - - (29,879)
Cumulative dividends and accretion of convertible
preferred stock to liquidation value (2,975) (3,471) (19,818) (4,663)
------------- ----------- ------------ --------------
Net loss attributable to common stockholders $ (35,602) $ (14,316) $ (101,338) $ (63,780)
============= =========== ============ ==============
Basic and diluted loss per share $ (0.64) $ (0.37) $ (2.02) $ (1.81)
============= =========== ============= ==============
Basic weighted average common shares outstanding 55,419,834 38,723,657 50,108,149 35,320,850
============= =========== ============= ==============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (81,520) $ (29,238)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 35,469 16,971
Equity interest in net loss of investments 4,424 -
Non-cash interest - 2,359
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (16,580) (3,948)
Work in process (1,952) (2,873)
Prepaid expenses and other assets (5,652) (1,774)
Deferred revenue 2,238 297
Accounts payable and accrued and other liabilities 6,771 2,315
----------- -----------
Net cash used in operating activities (56,802) (15,891)
----------- -----------
Cash flows from investing activities:
Cash paid for investments in affiliates (26,592) (14,551)
Purchases of property, plant and equipment, net (19,154) (4,305)
Decrease in notes receivable 1,000 -
Cash acquired (paid) in acquisitions, net of
acquisition costs 46 (1,258)
----------- ------------
Net cash used in investing activities (44,700) (20,114)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debenture - 6,000
Proceeds from issuance of convertible preferred stock,
net of costs - 82,998
Proceeds from issuance of common stock, net of costs 241,355 -
Repayments of borrowings, net (832) (1,625)
Proceeds from issuance of stock in connection
with exercise of warrants and options 5,468 7,088
----------- -----------
Net cash provided by financing activities 245,991 94,461
----------- -----------
Net increase in cash and cash equivalents 144,489 58,456
Cash and cash equivalents, beginning of period 28,540 918
---------- -----------
Cash and cash equivalents, end of period $ 173,029 $ 59,374
========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
RARE MEDIUM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of the business
Rare Medium Group, Inc. (the "Company") conducts its operations primarily
through its subsidiaries, which are organized as two related lines of
business: the Internet services business and the investment business. The
Company is headquartered in New York with offices throughout the United
States and in the United Kingdom, Australia, Singapore and Canada.
The Company's Internet services business is a provider of Internet
solutions, offering Fortune 1000 companies and others its services to
develop e-commerce Internet strategies, improve business processes and
develop marketing communications, branding strategies and interactive
content using Internet-based technologies and solutions.
Through its incubator investment strategy, the Company invests in and
develops, manages and operates companies in selected Internet-focused
markets. The Company also makes venture investments by making strategic
equity investments in companies with Internet-focused business models.
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature,
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows at the dates and for the periods
indicated. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these consolidated
financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 1999
which are contained in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the "SEC"). The results for the
three and nine month periods ended September 30, 2000 are not necessarily
indicative of the results to be expected for the full year. Certain prior
year amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation.
(3) Investments in Affiliates
The following is a summary of the carrying values of the investments held
by the Company:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------- ----------------------
(In thousands)
<S> <C> <C>
Cost investments $ 44,611 $ 20,876
Marketable securities 11,130 2,060
Equity investments 566 3,531
------------- -------------
$ 56,307 $ 26,467
------------- -------------
</TABLE>
Net unrealized appreciation for marketable securities amounted to $3.0 million
and $0.9 million at September 30, 2000 and December 31, 1999, respectively.
(4) Segment Information
Presented below are the operating results and total assets of the Company's
two primary operating segments: the Internet services business and the
investment business.
<TABLE>
<CAPTION>
Three month period ended Nine month period ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------ ----------------------------------
(In thousands) (In thousands)
Revenues:
<S> <C> <C> <C> <C>
Internet services $ 33,759 $ 11,846 $ 87,274 $ 19,850
Investment 2,410 230 5,726 442
Internet services provided to investments (6,749) (739) (12,057) (1,211)
----------- ---------- ------------ ----------
$ 29,420 $ 11,337 $ 80,943 $ 19,081
=========== ========== ============ ==========
Income (loss) before interest, taxes,
depreciation and amortization:
Internet services 226 (988) (5,533) (2,703)
Investment and corporate (20,360) (3,812) (43,227) (8,123)
------------- ---------- ------------ ----------
$ (20,134) $ (4,800) $ (48,760) $(10,826)
============= ========== ============ ==========
Depreciation and amortization (13,455) (6,807) (35,469) (16,971)
Interest income (expense), net 3,015 762 7,587 (1,441)
Equity interest in net loss on investments (1,861) - (4,424) -
Other expense (192) - (454) -
------------- ---------- ------------ ---------
Net loss $ (32,627) $(10,845) $ (81,520) $(29,238)
============= ========== ============ =========
Total assets: As of As of
September 30, December 31,
2000 1999
------------- ------------
Internet services $ 60,073 $ 31,047
Investment and corporate 296,074 129,376
----------- --------
$ 356,147 $160,423
=========== =========
</TABLE>
(5) Equity Transactions
On January 14, 2000, the Company sold 2,500,000 shares of its common stock
for gross proceeds of $70.1 million (net proceeds of $65.7 million) in a
private transaction to a group of mutual funds managed by Putnam
Investments and Franklin Resources, Inc. On April 18, 2000, the Company
filed a registration statement with the SEC to register the resale of such
shares as required by the purchase agreement executed in connection with
such private transaction.
On March 29, 2000, the Company sold 3,000,000 shares of common stock for
gross proceeds of $186 million (net proceeds of $175.6 million) in a public
offering underwritten by Credit Suisse First Boston Corporation, Deutsche
Bank Securities Inc. and FleetBoston Robertson Stephens Inc.
In August 2000, the holders of the Company's Series 1-A warrants executed a
cashless exercise of all such warrants at a price of $0.01 per share and
received a total of 12,709,499 shares of common stock.
(6) Employee Stock Options
In August 2000, the Board of Directors approved a plan that allowed employee
holders of stock options with exercise prices at or above $30 per share to
exchange either all or 50% of their existing stock options for an agreement
by the Company to issue new options. The exercise price of the new options will
be based on the fair market value of the underlying common stock on March 12,
2001, the date of issuance of the new options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") that involve risks and uncertainties, including
statements regarding our capital needs, business strategy, expectations and
intentions. We urge you to consider that statements which use the terms
"believe," "do not believe", anticipate," "expect," "plan," "estimate,"
"intend," and similar expressions are intended to identify forward-looking
statements. These statements reflect our current views with respect to
future events and because our business is subject to numerous risks,
uncertainties and risk factors, our actual results could differ materially
from those anticipated in the forward-looking statements, including those
set forth below under this "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this
report. Actual results will most likely differ from those reflected in
these statements, and the differences could be substantial. We disclaim any
obligation to publicly update these statements, or disclose any difference
between our actual results and those reflected in these statements. The
information constitutes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.
OVERVIEW
We are an Internet-focused company that:
o provides Internet professional services to companies;
o invests in and develops, manages and operates companies in selected
Internet-focused market segments; and
o takes strategic equity positions in companies that we believe possess
superior Internet-focused business models.
Our end-to-end Internet professional services offering encompasses the
entire Internet services spectrum, ranging from strategic and creative
consulting to applications development, implementation and hosting. Our
strategic approach is to align these service offerings and expertise with
our customers' industries. This vertical market approach allows us to
provide more sophisticated strategic solutions. Our customers include AT&T,
Dr. Drew, Epson, Forbes, Microsoft, Nestle, NextJet, Ritz Carlton, Weider,
Paine Webber, Sun International, Furniture Brands, Wyndham Hotels,
Corporate Express, Red Herring, Providence Health Systems, Cablevision and
Body Shop.
We also invest in and internally develop, manage and operate companies in
selected Internet-focused market segments. In addition, we make minority
investments in independently managed companies, in which we co-invest with
well-known financial and industry partners such as Brentwood Associates,
Compaq Computer Corp., Constellation Ventures, GE Capital Corp., Hicks,
Muse, Tate & Furst, Institutional Venture Partners, Intel, Mayfield
Partners, MCI Worldcom, New Enterprise Associates 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 carrying value of our
investment in these businesses at September 30, 2000 amounted to $70.2
million of which $56.3 million is reflected in our balance sheet as
"investments in affiliates" and of which $13.9 million is included in
"goodwill and intangibles" for our incubators that are accounted as
consolidated subsidiaries.
Our operating results are primarily driven by our Internet services
business. We evaluate the performance of this business as a separate
segment. Revenue and income (loss) before interest, taxes, depreciation
and amortization are used to measure and evaluate our financial results
and make relative comparisons to other entities that operate within the
Internet services industry. Our Internet service business revenue,
including revenue from services provided to our consolidated subsidiaries,
increased to $33.8 million for the three month period ended September 30,
2000 from $30.0 million for the three month period ended June 30, 2000.
This 12% increase in revenue from the second quarter of 2000 was achieved
through organic growth. Earnings before interest, taxes, depreciation and
amortization increased to $0.2 million for the three month period ended
September 30, 2000 from a $2.5 million loss for the three month period
ended June 30, 2000.
Many of our Internet service contracts are currently on a fixed price
basis, rather than a time and materials basis. We recognize revenues from
fixed price contracts based on our estimate of the percentage of each
project completed in a reporting period. To the extent our estimates are
inaccurate, the revenues and operating profits, if any, we report for
periods during which we are working on a project may not accurately reflect
the final results of the project and we would be required to make
adjustments to such estimates in a subsequent period.
Our Internet services clients generally retain us on a project by project
basis, rather than entering into long-term contracts. As a result, a client
may or may not engage us for further services once a project is completed.
Establishment and development of relationships with additional companies
and other corporate users of information technology and securing repeat
engagements with existing clients are important components of our success.
Cost of revenues includes salaries, payroll taxes and related benefits and
other direct costs associated with the generation of revenues. Sales and
marketing expense represents the actual costs associated with our marketing
and advertising. General and administrative expense includes facilities
costs, recruiting, training, finance, legal, and other corporate costs as
well as salaries and related employee benefits for those employees that
support such functions.
We have an equity participation plan that allows our Compensation Committee
to incentivize our employees by allocating to them up to 20% of any profit
we might recognize when and if our investments in portfolio and incubator
companies become liquid, subject to vesting and other requirements. Upon a
liquidation event, we will recognize a compensation charge for that portion
of the profit on the investment that is allocated to the employees. We will
have the right to pay such amount to the employees either in cash, shares
of our common stock, or a combination thereof.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues for the three months ended September 30, 2000 increased to $29.4
million from $11.3 million for the three months ended September 30, 1999,
an increase of $ 18.1 million. This increase reflects increases in both the
number and relative size of client engagements, which has been facilitated
by increases in our billable employees substantially as a result of our
aggressive hiring strategy and, to a lesser extent, acquisitions. All of
the acquired Internet services businesses' operations have been integrated
into our existing operations. Our incubator companies generated revenues
totaling $2.4 million in the third quarter ended September 30, 2000,
compared to $0.2 million in the third quarter ended September 30, 1999.
COST OF REVENUES
Cost of revenues for the three months ended September 30, 2000 increased to
$17.8 million from $6.0 million for the three months ended September 30,
1999, an increase of $11.8 million. This increase is due primarily to a
substantial increase in additional personnel in our Internet services
business. We expect cost of revenues to increase on an absolute dollar
basis as we hire additional personnel and incur additional costs related to
the anticipated growth of our Internet services business. Costs of sales
as a percentage of revenue related to our services business amounted to
49.7% for the three month period ended September 30, 2000. The increase in
cost of revenues also reflects $1.4 million of costs related to our
incubator businesses.
SALES AND MARKETING EXPENSE
Sales and marketing expense for the three months ended September 30, 2000
increased to $6.4 million from $1.3 million for the three months ended
September 30, 1999, an increase of $5.1 million. This increase is primarily
the result of the continued national marketing program to build the "Rare
Medium" brand and the marketing with respect to our incubator companies. We
expect sales and marketing expenses to increase as we continue to build
brand awareness.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the three months ended September 30,
2000 increased to $25.4 million from $8.9 million for the three months
ended September 30, 1999, an increase of $16.5 million. This increase is a
result of the cost of infrastructure needed to support the significant
growth in revenue and our continued expansion into new markets. The
increase in general and administrative expense also relates to the costs
associated with required resources with respect to our venture/incubator
strategy.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense substantially consists of the
amortization of intangible assets. Depreciation and amortization expense
for the three months ended September 30, 2000 increased to $13.5 million
from $6.8 million for the three months ended September 30, 1999, an
increase of $6.7 million. This increase resulted primarily from our
acquisitions during 1999. We anticipate that expenses related to the
amortization of intangible assets will increase in future periods where
we may make additional strategic acquisitions.
INTEREST INCOME, NET
Interest income, net for the three months ended September 30, 2000 is
mainly comprised of the interest earned on the proceeds received from the
sale of our common stock during the first quarter of 2000 as described
below in "Liquidity and Capital Resources."
NET LOSS
For the three months ended September 30, 2000, we recorded a net loss of
$32.6 million. Excluding $13.5 million in amortization and depreciation,
the net loss was $19.1 million. This loss was primarily due to the factors
described above in "Cost of Revenues," "General and Administrative Expense"
and "Sales and Marketing Expense."
Included in net loss attributable to common shareholders of $35.6 million
was $3.0 million of non-cash deemed dividends and accretion related to
the issuance of our Series A convertible preferred stock. Dividends were
accrued related to the pay-in-kind dividends payable quarterly on Series A
convertible preferred stock, and to the accretion of the carrying amount of
the Series A convertible preferred stock up to its face redemption amount
over 13 years.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues for the nine months ended September 30, 2000 increased to $80.9
million from $19.1 million for the nine months ended September 30, 1999, an
increase of $61.8 million. This increase reflects increases in both the
number and relative size of client engagements which has been facilitated
by the increase in our billable employees as a result of acquisitions and
our aggressive hiring strategy. All of the acquired Internet services
businesses' operations have been integrated into our existing operations.
Our incubator companies generated revenues totaling $5.7 million in the
nine months ended September 30, 2000, compared to $0.4 million in the nine
months ended September 30, 1999.
COST OF REVENUES
Cost of revenues for the nine months ended September 30, 2000 increased to
$47.5 million from $10.4 million for the nine months ended September 30,
1999, an increase of $37.1 million. This increase is due primarily to a
substantial increase in additional personnel in our Internet services
business. We expect cost of revenues to increase on an absolute dollar
basis as we hire additional personnel and incur additional costs related to
the anticipated growth of our Internet services business. Costs of sales as
a percentage of revenues related to our services business amounted to 49.8%
for the nine months period ended September 30, 2000. The increase in
cost of revenues also reflects $4.5 million of costs related to our
incubator businesses.
SALES AND MARKETING EXPENSE
Sales and marketing expense for the nine months ended September 30, 2000
increased to $15.6 million from $ 2.4 million for the nine months ended
September 30, 1999, an increase of $13.2 million. This increase is
primarily the result of our continued national marketing program to build
the "Rare Medium" brand and the marketing with respect to our incubator
companies. We expect sales and marketing expenses to increase as we
continue to build our brand awareness.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the nine months ended September 30,
2000 increased to $66.6 million from $17.1 million for the nine months
ended September 30, 1999, an increase of $49.5 million. This increase is a
result of the infrastructure needed to support our significant growth in
revenue and our continued expansion into new markets. The increase in
general and administrative expense also relates to the costs associated
with required resources with respect to our venture/incubator strategy.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense substantially consists of the
amortization of intangible assets. Depreciation and amortization expense
for the nine months ended September 30, 2000 increased to $35.5 million
from $17.0 million for the nine months ended September 30, 1999, an
increase of $18.5 million. This increase resulted primarily from our
acquisitions during 1999. We anticipate that expenses related to the
amortization of intangible assets will increase in future periods where
we may make additional strategic acquisitions.
INTEREST INCOME, NET
Interest income, net for the nine months ended September 30, 2000 is mainly
comprised of the interest earned on the proceeds received from the sale of
our common stock during the period as described below in "Liquidity and
Capital Resources."
NET LOSS
For the nine months ended September 30, 2000, we recorded a net loss of
$81.5 million. Excluding $35.5 million in amortization and depreciation,
our net loss was $46.0 million. This loss was primarily due to the factors
described in "Cost of Revenues," "General and Administrative Expense" and
"Sales and Marketing Expense."
Included in net loss attributable to common shareholders of $101.3 million
was $19.8 million of non-cash deemed dividends and accretion related to
the issuance of our Series A convertible preferred stock. Dividends were
accrued related to the pay-in-kind dividends payable quarterly on the
Series A convertible preferred stock, and to the accretion of the carrying
amount of the Series A convertible preferred stock up to its face
redemption amount over 13 years.
LIQUIDITY AND CAPITAL RESOURCES
We had $173.0 million in cash and cash equivalents at September 30, 2000.
This amount is substantially a result of the proceeds received from (1) the
issuance of 2,500,000 shares of our common stock on January 14, 2000, for
gross proceeds of $70.1 million (net proceeds of $65.7 million) in a private
transaction to a group of mutual funds managed by Putnam Investments and
Franklin Resources, Inc.; and (2) the issuance of 3,000,000 shares of our
common stock on March 29, 2000 for gross proceeds of $186.0 million (net
proceeds of $175.6 million) in an underwritten public offering.
Cash used in operating activities was $56.8 million for the nine months
ended September 30, 2000 and resulted primarily from the net loss of $81.5
million, offset by non-cash charges of $39.9 million (which consists of
depreciation, amortization, and equity interest in net loss on investments)
and increased by changes in working capital.
Cash used in investing activities was $44.7 million for the nine months
ended September 30, 2000, which primarily consists of venture investments
of $26.6 million, and capital expenditures of $19.2 million. Capital
expenditures have generally been comprised of purchases of computer
hardware and software, as well as leasehold improvements related to leased
facilities.
YEAR 2000 ISSUE
We and our subsidiaries have not experienced any material problems with
network infrastructure, software, hardware and computer systems relating to
the inability to recognize appropriate dates related to the Year 2000. We
and our subsidiaries are also not aware of any material Year 2000 problems
with customers, suppliers or vendors. Accordingly, we and our subsidiaries
do not anticipate incurring future material expenses or experiencing any
material operational disruptions as a result of any Year 2000 issues.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting For Certain Transactions Involving Stock
Compensation" ("FIN No. 44") which provides guidance for applying APB
Opinion No. 25, "Accounting For Stock Issued to Employees." With certain
exceptions, FIN No. 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1, 2000. The implementation of
FIN No. 44 did not have a significant effect on its results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101") which
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We
will be required to adopt the accounting provisions of SAB No. 101, no
later than the fourth quarter of 2000. We do not believe that the
implementation of SAB No. 101 will have a significant effect on our results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and hedging
activities. In June 1999, SFAS No. 137 was issued which delayed the
effective date of SFAS No. 133 to January 1, 2001. In June 2000, the
Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment
of FASB Statement No. 133" which intended to simplify the accounting for
derivatives under SFAS 133 and is effective upon adoption of SFAS 133. Our
management has not yet determined the impact of adopting SFAS 133 as
amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that our market risk exposures associated with our outstanding
debt is immaterial as our fixed rate and variable rate debt obligations are
not material.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Currently, we are not a party to any pending material legal
proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following index sets forth those exhibits filed pursuant to
Item 601 of Regulation S-X:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Certificate of Incorporation of Rare Medium
Group, Inc., which was filed as Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31, 1999,
and is hereby incorporated herein by reference.
3.2 -- Amended and Restated By-Laws of Rare Medium Group, Inc.,
which was filed as Exhibit 3.2 to the Company's Form 10-K
for the year ended December 31, 1999, and is hereby
incorporated herein by reference.
10.1 -- Form of Purchase Agreement, dated January 14, 2000,
between the Company and each of the purchasers in the
private placement of the Company's Common Stock on January
14, 2000, which was filed as Exhibit 4.1 to the Company's
Form S-3 (Reg. No. 333-95829) and is hereby incorporated
herein by reference.
10.2 -- Form of Underwriting Agreement by and among the Company
and Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens Inc.
which was filed as Exhibit 1.1 to the Company's
Registration Statement on Form S-3 (Reg. No. 333-95829)
and is hereby incorporated herein by reference.
27 -- Financial Data Schedule.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
By: /s/ GLENN S. MEYERS
-------------------------------------
Date: November 14, 2000 Glenn S. Myers
Chairman and Chief Executive Officer
By: /s/ JEFFREY J. KAPLAN
-------------------------------------
Date: November 14, 2000 Jeffrey J. Kaplan
Executive Vice President and Chief
Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Certificate of Incorporation of Rare Medium
Group, Inc., which was filed as Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31, 1999,
and is hereby incorporated herein by reference.
3.2 -- Amended and Restated By-Laws of Rare Medium Group, Inc.,
which was filed as Exhibit 3.2 to the Company's Form 10-K
for the year ended December 31, 1999, and is hereby
incorporated herein by reference.
10.1 -- Form of Purchase Agreement, dated January 14, 2000,
between the Company and each of the purchasers in the
private placement of the Company's Common Stock on January
14, 2000, which was filed as Exhibit 4.1 to the Company's
Form S-3 (Reg. No. 333-95829) and is hereby incorporated
herein by reference.
10.2 -- Form of Underwriting Agreement by and among the Company
and Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens Inc.
which was filed as Exhibit 1.1 to the Company's
Registration Statement on Form S-3 (Reg. No. 333-95829)
and is hereby incorporated herein by reference.
27 -- Financial Data Schedule.
