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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE
ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-13865
RARE MEDIUM GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 23-2368845
(STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
565 FIFTH AVENUE, 29TH FLOOR
NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S FORMER NAME--ICC TECHNOLOGIES, INC.
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 883-6940
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of February 18, 2000 was $2,286,523,914.
As of February 18, 2000, 45,906,787 shares of our common stock were
outstanding.
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PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 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 "Item 1.
Business," "Item 7. 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. The factors set forth below under "Item 1. Business," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other cautionary statements made in this report should be read
and understood as being applicable to all related forward-looking statements
wherever they appear in this report.
ITEM 1. 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.
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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;
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
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
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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%.
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
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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 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;
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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 our proposed public
offering of common stock in the first quarter of fiscal year 2000, which we
refer to in this report as our "public 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.
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.
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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.
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.
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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.
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.
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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.
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
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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.
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 deliver 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
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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 other Internet
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, 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 68% 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.
10
<PAGE>
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.
ANT 21 September 1999 33% Internet music label representing artists
(AtomicPop.com) dedicated to leveraging the digital medium to
change the way music is acquired, promoted,
sold and distributed.
Archive.com December 1999 3% Provider of secure Internet-based archival and
retrieval services for business critical
document management.
Commerce Dynamics October 1999 5% Provider of enhanced, cost effective
(GoShip.com) cooperative shipping and fulfillment solutions
for e-commerce websites.
Deltathree.com November 1999 Less than Provider of Internet protocol telephony
1% services, including voice and data transmission
and enhanced Internet-based communication
services.
Edmunds.com October 1999 3% 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.
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.
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 14% Online and offline media company dedicated to
entertaining, educating and empowering
entrepreneurs as they seek capital for and
develop their start-up ideas.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL DATE OF % OF
COMPANY NAME INVESTMENT OWNERSHIP DESCRIPTION OF BUSINESS
- ------------------------------ --------------- --------- -----------------------------------------------
<S> <C> <C> <C>
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.
StreamSearch.com September 1999 15% 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 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
12
<PAGE>
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
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.
13
<PAGE>
GOVERNMENT REGULATION
Currently, we are not subject to any direct governmental regulation other
than the securities laws and regulations applicable to all publicly owned
companies, and laws and regulations applicable to businesses generally. Few laws
or regulations are directly applicable to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, it is likely
that a number of laws and regulations may be adopted at the local, state,
national or international levels with respect to the Internet, 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.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock trades on The Nasdaq National Market under the symbol
"RRRR". Prior to February 15, 1996 our common stock was listed on The Nasdaq
Small Cap Market. Based on quotations reported by Nasdaq, the range of high and
low bids for our common stock for the two most recent fiscal years is as
follows:
<TABLE>
<CAPTION>
1999
----------------------------------------
4TH QTR 3RD QTR 2ND QTR 1ST QTR
------- ------- ------- -------
<S> <C> <C> <C> <C>
High Bid:......................................... $44 1/16 $13 7/8 $20 1/8 $5 31/32
Low Bid:.......................................... 9 5/8 6 9/16 4 13/16 3 5/8
<CAPTION>
1998
----------------------------------------
4TH QTR 3RD QTR 2ND QTR 1ST QTR
------- ------- ------- -------
<S> <C> <C> <C> <C>
High Bid:......................................... $4 31/32 $ 6 1/2 $ 7 1/2 $ 3 1/4
Low Bid:.......................................... 1 5/8 1 5/8 2 3/16 1 13/16
</TABLE>
The above quotations reported by Nasdaq represent prices between dealers
and do not include retail mark-ups, mark-downs or commissions. Such quotations
may not represent actual transactions. On February 18, 2000, the last reported
sale price for our common stock was $49.875 per share.
As of February 18, 2000, we had approximately 818 recordholders of our
common stock. This number was derived from our stockholder records, and does not
include beneficial owners of our common stock whose shares are held in the names
of various dealers, clearing agencies, banks, brokers, and other fiduciaries.
Holders of our common stock are entitled to share ratably in dividends, if and
when declared by our board of directors.
We have not paid a dividend on our common stock for the fiscal years ended
December 31, 1998 and December 31, 1999, and it is unlikely that we will pay any
dividends in the foreseeable future. The payment of cash dividends on our common
stock will depend on, among other things, our earnings, capital requirements and
financial condition, and general business conditions. Under the terms of the
purchase agreement we entered into with the holders of our Series A convertible
preferred stock, for so long as such holders beneficially own not less than
100,000 shares of Series A convertible preferred stock, we are prohibited from
declaring or paying, and may not permit any of our subsidiaries to declare or
pay, any dividend or make any other distribution in respect of any other shares
of our capital stock without the prior written consent of such holders. In
addition, future borrowings or issuances of preferred stock may prohibit or
restrict our ability to pay or declare dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following historical selected financial data for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from financial
statements that have been audited by our independent accountants. There were no
cash dividends paid to holders of our common stock in any of these years. The
data should be read in conjunction with our financial statements and the notes
thereto included elsewhere in
15
<PAGE>
this report. The format of prior year data has been conformed to reflect the
accounting for discontinued operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ -- $ -- $ -- $ 4,688 $ 36,694
Cost of revenues........................ -- -- -- 3,610 19,650
----------- ----------- ----------- ----------- -----------
Gross profit.......................... -- -- -- 1,078 17,044
----------- ----------- ----------- ----------- -----------
Expenses:
Sales and marketing................... -- -- -- 896 5,450
General and administrative............ 1,383 1,546 1,992 5,674 32,406
Depreciation and amortization......... -- -- -- 12,584 25,994
----------- ----------- ----------- ----------- -----------
Total expenses...................... 1,383 1,546 1,992 19,154 63,850
----------- ----------- ----------- ----------- -----------
Loss from operations.................... (1,383) (1,546) (1,992) (18,076) (46,806)
Interest income (expense), net.......... 346 686 493 (1,279) (1,396)
Equity interest in net loss of
investments........................... -- -- -- -- (1,468)
Other income............................ -- -- -- -- 200
----------- ----------- ----------- ----------- -----------
Loss before taxes and discontinued
operation............................. (1,037) (860) (1,499) (19,355) (49,470)
Income tax expense.................... -- -- -- 355 --
----------- ----------- ----------- ----------- -----------
Loss before discontinued operation.. (1,037) (860) (1,499) (19,710) (49,470)
----------- ----------- ----------- ----------- -----------
Discontinued operation:
Loss from discontinued operation...... (5,287) (6,295) (11,985) (5,166) --
Gain on restructuring Engelhard/ICC... -- -- -- 24,257 --
----------- ----------- ----------- ----------- -----------
(Loss) income from discontinued
operation........................ (5,287) (6,295) (11,985) 19,091 --
----------- ----------- ----------- ----------- -----------
Net loss................................ (6,324) (7,155) (13,484) (619) (49,470)
Deemed dividend attributable to
issuance of convertible preferred
stock............................... -- -- -- -- (29,879)
Cumulative dividends and accretion of
convertible preferred stock to
liquidation value................... (301) (49) -- -- (13,895)
----------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders.......................... $ (6,625) $ (7,204) $ (13,484) $ (619) $ (93,244)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic and diluted (loss) earnings per
share:
Continuing operations................. $ (0.07) $ (0.04) $ (0.07) $ (0.78) $ (2.55)
Discontinued operation................ $ (0.40) $ (0.31) $ (0.56) $ 0.76 $ --
----------- ----------- ----------- ----------- -----------
Net loss per share...................... $ (0.47) $ (0.35) $ (0.63) $ (0.02) $ (2.55)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic weighted average common shares
outstanding........................... 14,072,867 20,332,952 21,339,635 25,282,002 36,625,457
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------
(IN THOUSANDS)
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 1,573 $ 9,641 $ 1,257 $ 918 $ 28,540
Investments in affiliates.............................. -- -- -- -- 26,467
Total assets........................................... 4,797 12,251 4,522 44,743 160,423
Notes payable, less current portion.................... -- -- -- 10,592 997
Total liabilities...................................... 3,263 2,180 7,584 14,921 19,208
Series A convertible preferred stock................... -- -- -- -- 36,224
Stockholders' equity (deficit)......................... 1,534 10,071 (3,062) 29,822 104,991
</TABLE>
ITEM 7. 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. 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.
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.
Our investment in these businesses amounted to $54.5 million at December 31,
1999.
Our operating results are primarily driven by the Internet services
business of Rare Medium, Inc. We evaluate the performance of Rare Medium, Inc.
as a separate segment. Revenue, operating loss and loss before interest, taxes,
depreciation and amortization are used to measure and evaluate our financial
results and make relative comparisons to other entities that operate within the
Internet services industry. Rare Medium, Inc.'s revenue, including revenue from
services provided to our consolidated subsidiaries, increased to $36.9 million
in 1999 from $4.7 million in 1998. Loss before interest, taxes, depreciation and
amortization increased from $1.9 million to $6.3 million in 1999. These
increases reflect the increase in our billable employees, as a result of our
acquisitions and aggressive hiring strategy, and the increase in our cost
associated with the geographic expansion into select markets. Our sequential
revenue increased 43% from $11.9 million for the third quarter ended
September 30, 1999 to $17.0 million for the fourth quarter ended December 31,
1999.
During the year ended December 31, 1999, we acquired 22 businesses, 9 of
which are in our Internet services business, for $3.2 million of cash and an
aggregate of 4,977,923 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 $51.2 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
17
<PAGE>
consist primarily of goodwill, of $57.3 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.
Cost of revenues includes salaries, payroll taxes and related benefits and
other direct costs associated with the generation of revenues. Sales and
marketing expense represent the actual costs associated with our marketing and
advertising. General and administrative expenses include facilities costs,
recruiting, training, finance, legal, and and other corporate costs as well as
salaries and related employee benefits for those employees that support such
functions.
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, 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. The
amounts shown for the year ended December 31, 1999 include our operations as
they are reported. 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.
Our board of directors has approved 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. We will have the right to pay such amount either in cash, in our
common stock or a combination thereof. Although we expect the Compensation
Committee to make allocations of awards under this plan in the first half of
2000, no awards have been made as of the date of this report. Depending on the
structure of the awards under this plan, we may be required to record
compensation expense in accordance with generally accepted accounting
principles.
18
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1999
----------- --------
UNAUDITED ACTUAL
PRO FORMA
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................................................. $ 5,830 $ 36,694
Cost of Revenues......................................................................... 4,489 19,650
--------- --------
Gross profit........................................................................... 1,341 17,044
--------- --------
Expenses:
Sales and marketing.................................................................... 896 5,450
General and administrative............................................................. 6,210 32,406
Depreciation and amortization.......................................................... 12,628 25,994
--------- --------
Total expenses......................................................................... 19,734 63,850
--------- --------
Loss from operations..................................................................... (18,393) (46,806)
Interest expense, net.................................................................... (1,383) (1,396)
Equity interest in net loss of investments............................................... -- (1,468)
Other income............................................................................. -- 200
--------- --------
Loss before taxes and discontinued operation............................................. (19,776) (49,470)
--------- --------
Income tax expense....................................................................... 355 --
--------- --------
Loss before discontinued operation....................................................... (20,131) (49,470)
Discontinued operation:
Loss from discontinued operation....................................................... (5,166) --
Gain on restructuring of Englehard/ICC................................................. 24,257 --
--------- --------
Income from discontinued operation....................................................... 19,091 --
--------- --------
Net loss................................................................................. (1,040) (49,470)
Deemed dividend attributable to issuance of convertible preferred stock.................. -- (29,879)
Cumulative dividends and accretion of convertible preferred stock to liquidation value... -- (13,895)
--------- --------
Net loss attributable to common stockholders............................................. $ (1,040) $(93,244)
--------- --------
--------- --------
</TABLE>
REVENUES
Revenue for the year ended December 31, 1999 increased to $36.7 million
from $5.8 million for the year ended December 31, 1998, an increase of
$30.9 million or 529%. The increase reflects the increase in our billable
employees as a result of acquisitions and aggressive hiring strategy, that has
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.
Our incubator companies generated revenues totaling $1.6 million in 1999, their
first year of operations.
COST OF REVENUES
Cost of revenues for the year ended December 31, 1999 increased to
$19.7 million from $4.5 million for the year ended December 31, 1998, an
increase of $15.2 million or 338%. The increase is due primarily to a
substantial increase in personnel added in our Internet services business. We
expect cost of revenues to increase on an absolute dollar basis as we hire
additional personnel and incur additional costs related to the anticipated
growth of our Internet services business. The increase in cost of revenues also
reflects $1.0 million of costs related to our incubator businesses.
19
<PAGE>
SALES AND MARKETING EXPENSE
Sales and marketing expense for the year ended December 31, 1999 increased
to $5.5 million from $0.9 million for the year ended December 31, 1998, an
increase of $4.6 million. 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 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 year ended December 31, 1999
increased to $32.4 million from $5.7 million for the year ended December 31,
1998, an increase of $26.7 million or 471%. The increase is due to our continued
investment in building infrastructure to support our business plan. During 1999,
we also hired a president and senior operations managers for our major offices
in New York and Los Angeles for Rare Medium, Inc. and expanded into new markets
in Toronto, Dallas, San Francisco, San Antonio, Detroit, Sydney, Houston and
Atlanta. The increase in general and administrative expenses also relates to the
costs 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 intangible assets. Depreciation and amortization expense for the
year ended December 31, 1999 increased to $26.0 million from $12.6 million for
the year ended December 31, 1998, an increase of $13.4 million or 106%. This
increase resulted primarily from our acquisitions during 1999. We anticipate
that expenses related to the amortization of intangible assets will increase in
future periods as we continue to make acquisitions.
INTEREST EXPENSE, NET
Interest expense, net for the year ended December 31, 1999 includes
$0.6 million of interest expense related to the Rare Medium Note, $1.4 million
of interest expense related to the induced 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 $1.7 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
Series 2-A warrants.
NET (LOSS) INCOME
For the year ended December 31, 1999, we recorded a net loss of
$49.5 million. Excluding $26.0 million in amortization and depreciation, the net
loss was $23.5 million. The 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 $93.2 million
was $43.8 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.
20
<PAGE>
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>
RARE MEDIUM GROUP, INC.
UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
-----------------------
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.............................................................................. $ (1,040)
---------
---------
</TABLE>
REVENUES
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. 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. 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 DigitalFacades
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.
21
<PAGE>
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. 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. 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.
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 $24.3
million gain on the restructuring of our joint venture partnership with the
Englehard Corporation, the Englehard/ICC partnership.
LIQUIDITY AND CAPITAL RESOURCES
We had $28.5 million in cash and equivalents at December 31, 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 Series 2-A warrants
partially offset by the venture and incubator investments and the cash used to
expand our Internet services business into new markets.
Cash used in operating activities was $32.0 million for the year ended
December 31, 1999 and resulted primarily from the net loss of $49.5 million,
offset by non-cash charges of $30.1 million (which consists of depreciation,
amortization, equity interest in net loss on investments and non-cash interest
charges) and changes in working capital.
Cash used in investing activities was $39.9 million for the year ended
December 31, 1999, which primarily consists of the purchase of businesses and
venture investments of $31.1 million, and capital expenditures of $8.8 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 $99.5 million for the year ended
December 31, 1999. This consisted primarily of issuance of $6.0 million
convertible debentures (which were 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 $11.8 million, partially offset by repayment of borrowings totaling
$1.3 million. We currently believe that the net proceeds of our public offering
and the private placement, in addition to cash generated by operations, will be
sufficient to meet our working capital needs for the next twelve months.
22
<PAGE>
THE RARE MEDIUM NOTEHOLDERS
During 1999, we issued 1,431,756 shares of common stock to certain
noteholders in exchange for their beneficial interest in $8.5 million of the
original principal amount of the Rare Medium Note. In 1999, we recognized
approximately $1.4 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. As of December 31, 1999, as a result of these
transactions, there is a remaining principal balance of $2.0 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. In February 2000, the remaining principal balance of
$2.0 million was converted into common stock at fair value.
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.
ISSUANCE OF COMMON STOCK
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 to a group of mutual funds managed by Putnam Investments and
Franklin Resources, Inc., which we refer to in this report as the "private
placement."
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
23
<PAGE>
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 to January 1, 2001. We have not yet
determined the impact of adopting SFAS No. 133, as amended.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by this
Item 8 are set forth in Item 14 of this report. All information which has been
omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information relating to our change of accountants called for by this
item has been previously reported on our Annual Report on Form 10-K for the year
ended December 31, 1998. The decision to change our accountants was approved by
our board of directors, and this change was not related to, or a result of, any
disagreement with our former accountants.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our Annual Meeting of Stockholders to be
held in June 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our Annual Meeting of Stockholders to be
held in June 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our Annual Meeting of Stockholders to be
held in June 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference
to our definitive proxy statement for our Annual Meeting of Stockholders to be
held in June 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following is a list of certain documents filed as a part of this
report:
(1) Financial Statements of the Registrant.
(i) Reports of Independent Accountants
(ii) Consolidated Balance Sheets as of December 31, 1998 and
1999.
(iii) Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.
(iv) Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1997, 1998 and
1999.
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.
(vi) Notes to Consolidated Financial Statements.
(vii) Schedule II--Valuations and Qualifying Accounts.
All other schedules specified in Item 8 or Item 14(d) of Form 10-K are
omitted because they are not applicable or not required, or because the required
information is included in the Financial Statements or notes thereto.
(b) Reports on Form 8-K. The following sets forth the Current Reports on
Form 8-K that were filed with the Securities and Exchange Commission during the
quarterly period ending December 31, 1999:
1. Form 8-K filed on October 14, 1999, relating to the acquisition of
Atomic Pop, LLC; and
2. Form 8-K filed on November 24, 1999, as amended on December 23,
1999, relating to the acquisition of College Media, Inc. The Form 8-K, as
amended, included the following financial statements of College Media, Inc.
and its subsidiary, CMJ Online, Inc.:
(i) Financial Statements of College Media, Inc. and CMJ Online,
Inc.
25
<PAGE>
Independent Auditors' Report
Combined Balance Sheets as of September 30, 1999 (unaudited),
December 31, 1998 and 1997
Combined Statements of Operations and deficiency for the
nine-month period ended September 30, 1999 (unaudited) and for
the years ended December 31, 1998 and 1997
Combined Statements of Cash Flows for the nine-month period
ended September 30, 1999 (unaudited) and for the years ended
December 31, 1998 and 1997
Notes to Combined Financial Statements
(ii) Pro Forma Financial Information.
Overview
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1998 and for the
nine-month period ended September 30, 1999
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1999
Notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements
(c) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-X.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.1 -- Master Agreement, dated November 17, 1997, by and among ICC Technologies, Inc., ICC Investment, L.P.,
ICC Desiccant Technologies, Inc., and Engelhard Corporation, Engelhard DT Inc. and Engelhard/ICC was
filed as Exhibit "B" to ICC Technologies, Inc.'s Definitive Proxy Statement dated February 3, 1998,
for the Special Meeting of Stockholders held on February 23, 1998, and is hereby incorporated herein
by reference.
2.2 -- Contribution Agreement, dated as of November 17, 1997, between Engelhard/ICC and Fresh Air Solutions,
L.P. was filed as Exhibit "C" to ICC Technologies, Inc.'s Definitive Proxy Statement dated
February 3, 1998, for the Special Meeting of the Stockholders held on February 23, 1998, and is
hereby incorporated herein by reference.
2.3 -- E/ICC Purchase and Sale Agreement, dated as of November 17, 1997, by and among ICC Investment, L.P.,
ICC Desiccant Technologies, Inc. and Engelhard DT, Inc., was filed as Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, and is hereby incorporated herein
by reference.
2.4 -- Merger Agreement and Plan of Reorganization, dated as of April 8, 1998, by and among ICC
Technologies, Inc., RareMedium Acquisition Corp., Rare Medium, Inc. and the Founding Stockholders
named therein ("Rare Medium Merger Agreement") was filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K dated April 15, 1998 and is hereby incorporated herein by reference.
2.5 -- Agreement and Plan of Merger, dated as of August 13, 1998, by and among ICC Technologies, Inc., Rare
Medium, Inc., I/O 360, Inc. and the I/O 360 Stockholders named therein was filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated August 13, 1998 and is hereby incorporated herein by
reference.
2.6 -- Agreement and Plan of Merger, dated as of August 13, 1998 by and among ICC Technologies, Inc., Rare
Medium, Inc., DigitalFacades Corporation and the DigitalFacades Stockholders named therein was filed
as Exhibit 2.2 to the Company's Current Report on Form 8-K dated August 13, 1998 and is hereby
incorporated herein by reference.
2.7 -- Purchase and Sale Agreement Relating to Partnership Interests in Fresh Air Solutions, L.P. by and
between ICC Desiccant Technologies, Inc. and Wilshap Investments, LLC dated as of October 14, 1998
was filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 14, 1998 and is
hereby incorporated herein by reference.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.8 -- Agreement and Plan of Merger, dated as of November 12, 1999, by and among Changemusic.com, Inc., a
Delaware corporation, College Media, Inc., a New York corporation, and CMJ.com, Inc., a Delaware
corporation, which was filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated
November 24, 1999, and is hereby incorporated herein by reference.
2.9 -- Stock Purchase Agreement, dated as of November 12, 1999, by and among College Media, Inc., a New York
corporation, Robert Haber, Joanne Haber, Lee Haber, Diane Turofsky, and Rare Medium Group, Inc.,
which was filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated November 24, 1999,
and is hereby incorporated herein by reference.
2.10 -- Securities Purchase Agreement, dated as of November 12, 1999, between Rare Medium Group, Inc. and
CMJ.com, Inc., a Delaware corporation, which was filed as Exhibit 2.3 to the Company's Current Report
on Form 8-K dated November 24, 1999, and is hereby incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of Rare Medium Group, Inc.
3.2 -- Amended and Restated By-Laws of Rare Medium Group, Inc.
10.1 -- Form of Secured Promissory Note of Rare Medium, Inc. ("Rare Medium Note") in the principal amount of
$22 million issued in connection with the acquisition of Rare Medium, Inc., which was filed as
Exhibit C-1 to the Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the Company's
Form 8-K dated April 15, 1998, and is hereby incorporated herein by reference.
10.2 -- Form of Security Agreement between Rare Medium, Inc. and former stockholders of Rare Medium, Inc. in
connection with the acquisition of Rare Medium, Inc., was filed as Exhibit D to the Rare Medium
Merger Agreement, which was filed as Exhibit 2.1 to the Company's Form 8-K dated April 15, 1998, and
is hereby incorporated herein by reference.
10.3 -- Form of Stock Pledge Agreement between ICC Technologies, Inc. and the former stockholders of Rare
Medium, Inc., in connection with the acquisition of Rare Medium, Inc., was filed as Exhibit E to the
Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the Company's Form 8-K dated
April 15, 1998, and is hereby incorporated herein by reference.
10.4 -- Form of Non-Founder Agreement between the Company and certain former stockholders of Rare Medium,
Inc. in connection with the acquisition of Rare Medium, Inc., was filed as Exhibit M to the Rare
Medium Merger Agreement, which was filed as Exhibit 2.1 to the Company's Form 8-K dated April 15,
1998, and is hereby incorporated herein by reference.
10.5 -- Form of Guaranty by ICC Technologies, Inc. of the Rare Medium Note, which was filed as Exhibit N to
the Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the Company's Form 8-K dated
April 15, 1998, and is hereby incorporated herein by reference.
10.6 -- Employment Agreement between the Company and Glenn S. Meyers, dated April 14, 1998, which was filed
as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and
is hereby incorporated herein by reference.
10.7 -- Employment Agreement between the Company and John S. Gross, dated May 13, 1998, which was filed as
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is
hereby incorporated herein by reference.
10.8 -- Lease dated September 12, 1997 between Forty Four Eighteen Joint Venture and Rare Medium, Inc. re:
entire sixth floor, 44-8 West 18th Street thru to 47-53 West 17th Street, Manhattan, New York, New
York, which was filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by reference.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.9 -- Lease dated February 11, 1998 by and between B & G Bailey Living Trust u/t/d March 25, 1975 and
Steaven Jones and DigitalFacades Corporation re: 4081 Redwood Avenue, 1st Floor, Los Angeles,
California, which was filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and is hereby incorporated herein by reference.
10.10 -- The Company's Incentive Stock Option Plan, as amended, which was filed as Exhibit 4(g) to the
Company's Registration Statement on Form S-8, No. 33-85636, filed on October 26, 1994, and is hereby
incorporated herein by reference.
10.11 -- The Company's Nonqualified Stock Option Plan as amended and restated, which was filed as Exhibit C to
the Company's Definitive Proxy Statement dated November 18, 1994, for Stockholders Meeting held
December 15, 1994, and is hereby incorporated herein by reference.
10.12 -- The Company's Equity Plan for Directors is hereby incorporated herein by reference from ICC's
Definitive Proxy Statement dated November 18, 1994, for Stockholders Meeting held December 15, 1994.
10.13 -- The Company's 1998 Long-Term Incentive Plan was filed as Appendix I to the Company's Definitive Proxy
Statement dated February 17, 1999, for the Stockholders Meeting held March 16, 1998, and is hereby
incorporated herein by reference.
10.14 -- Fresh Air Solutions, L.P. Limited Partnership Agreement, dated February, 1998, between ICC Desiccant
Technologies, Inc., as the sole general partner and a limited partner, and Engelhard DT, Inc., a
limited partner, which was filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and is hereby incorporated herein by reference.
10.15 -- Admission of Partner/Amendment of Partnership Agreement dated October 14, 1998 between ICC Desiccant
Technologies, Inc., Wilshap Investments, L.L.C., Engelhard DT, Inc. and Fresh Air Solutions, L.P.,
which was filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by reference.
10.16 -- Form of Exchange Agreement, dated as of December 31, 1998, by and between ICC Technologies, Inc. and
each of certain beneficial holders of the Rare Medium, Inc., Secured Promissory Note, dated
April 15, 1998, which was filed as Exhibit 10.1 to the Company's Form 8-K dated December 31, 1998,
and is hereby incorporated herein by reference.
10.17 -- Securities Purchase Agreement, dated as of January 28, 1999, by and among ICC Technologies, Inc. and
Capital Ventures International ("CVI Securities Purchase Agreement") and Exhibits thereto, which were
filed as Exhibit 10.1 to the Company's Form 8-K dated January 28, 1999, and are hereby incorporated
herein by reference.
10.18 -- Form of Convertible Term Debenture, dated as of January 28, 1999, which was filed as Exhibit A to the
CVI Securities Purchase Agreement, which was filed as Exhibit 10.1 to the Company's Form 8-K dated
January 28, 1999, and is hereby incorporated herein by reference.
10.19 -- Form of Stock Purchase Warrant of ICC Technologies, Inc., dated as of January 28, 1999, which was
filed as Exhibit B to the CVI Securities Purchase Agreement, which was filed as Exhibit 10.1 to the
Company's Form 8-K dated January 28, 1999, and is hereby incorporated herein by reference.
10.20 -- Form of Registration Rights Agreement, dated as of January 28, 1999, which was filed as Exhibit C to
the CVI Securities Purchase Agreement, which was filed as Exhibit 10.1 to the Company's Form 8-K
dated January 28, 1999, and is hereby incorporated herein by reference.
10.21 -- Agreement and Plan of Merger, dated as of March 5, 1999, among Rare Medium, Inc., ICC Technologies,
Inc., Rare Medium Texas I, Inc., Big Hand, Inc., and The Stockholders of Big Hand, Inc., which was
filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31,
1998, and is hereby incorporated herein by reference.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.22 -- The Company's Amended and Restated Equity Plan for Directors, which was filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is hereby incorporated
herein by reference.
10.23 -- Employment Agreement between the Company and Suresh V. Mathews, dated January 29, 1999, which was
filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31,
1998, and is hereby incorporated herein by reference.
10.24 -- Agreement and Plan of Merger, dated as of May 5, 1999, among Rare Medium Group, Inc., Rare Medium
Atlanta, Inc., Struthers Martin, Inc., and certain shareholders of Struthers Martin, Inc. named
herein, which was filed as Exhibit 10 to the Company's Current Report on Form 8-K dated May 17, 1999,
and is hereby incorporated herein by reference.
10.25 -- Amended and Restated Securities Purchase Agreement, dated as of June 4, 1999, among Rare Medium
Group, Inc., Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P. and AIF/RRRR LLC,
which was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 21, 1999,
and is hereby incorporated herein by reference.
10.26 -- Form of Series 1-A Warrant of Rare Medium Group, Inc., which was filed as Exhibit 4.3 to the
Company's Current Report on Form 8-K filed on June 21, 1999, and is hereby incorporated herein by
reference.
10.27 -- Form of Series 2-A Warrant of Rare Medium Group, Inc., which was filed as Exhibit 4.5 to the
Company's Current Report on Form 8-K filed on June 21, 1999, and is hereby incorporated herein by
reference.
10.28 -- Pledge, Escrow and Disbursement Agreement, dated as of June 4, 1999, among Rare Medium Group, Inc.,
Apollo Investment Fund IV, L.P., and The Chase Manhattan Bank, which was filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on June 21, 1999, and is hereby incorporated herein by
reference.
10.29 -- Unit Purchase Agreement dated as of September 27, 1999 by and among Rare Atomic Pop, LLC, a Delaware
limited liability company, New Valley Corporation, a Delaware corporation, and Ant 21 LLC, a Delaware
limited liability company, which was filed as Exhibit 10 to the Company's Current Report on Form 8-K
dated October 12, 1999, and is hereby incorporated herein by reference.
10.30 -- Form of Purchase Agreement, dated January 14, 2000, between the Company and each of the purchasers in
the private placement, which was filed as Exhibit 4.1 to the Company's Form S-3 filed on February 11,
2000, and is hereby incorporated herein by reference.
10.31 -- Form of Stock Option Agreement, dated April 15, 1998, by and between ICC Technologies, Inc. and Glenn
S. Meyers, which was filed as Exhibit 4(e) to the Company's Form S-8 filed on April 23, 1999, and is
hereby incorporated herein by reference.
10.32 -- Employment Agreement between the Company and Jeffrey J. Kaplan, dated February 23, 2000.
16 -- Letter regarding change in certifying accountant from PricewaterhouseCoopers LLP to the Securities
and Exchange Commission, dated August 26, 1998, which was filed as Exhibit 16.1 to the Company's
Current Report on Form 8-K dated August 13, 1998, and is hereby incorporated herein by reference.
21 -- Subsidiaries of the Company are Rare Medium, Inc., a New York corporation; Rare Medium Atlanta, Inc.,
a Delaware corporation; Rare Medium San Francisco, Inc., a Delaware corporation; Rare Medium Detroit,
Inc., a Delaware corporation; Rare Medium Austin, Inc., a Delaware corporation; Evit__Caretni
Interactive, Inc., a California corporation; Carlyle Media Group Limited, a United Kingdom
corporation; ChangeMusic Network, Inc., a Delaware corporation; Liveuniverse.com Inc., a Delaware
corporation; Notus Communications, Inc., a Georgia corporation; Regards.com, Inc., a New York
corporation; Greetingland Network, Inc., a Delaware corporation; and ePrize, Inc., a Michigan
corporation.
23.1 -- Consent of KPMG LLP, Independent Accountants.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
23.2 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 -- Independent Auditor's Report on Schedule.
27 -- Financial Data Schedule.
99 -- Letter on behalf of ICC Technologies, Inc. to PriceWaterhouseCoopers LLP pursuant to Item 304 of
Regulation S-K, which was filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated
August 13, 1998, and is hereby incorporated herein by reference.
</TABLE>
(d) The following is a list of certain documents required by Regulation S-X
consisting of financial statements of the fifty percent owned general
partnership Engelhard/ICC included in this report.
(1) Financial Statements of Engelhard/ICC.
(i) Report of Independent Accountants.
(ii) Balance Sheets as of December 31, 1997 and 1996.
(iii) Statements of Operations for the years ended December 31, 1997,
1996 and 1995.
(iv) Statements of Changes in Partner's Capital for the years ended
December 1997, 1996 and 1995.
(v) Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995.
(vi) Notes to Financial Statement.
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
F-32,
Independent Auditors' Reports........................................................................... 33
Consolidated Balance Sheets as of December 31, 1998 and 1999............................................ F-34
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999...................................................................... F-35
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999...................................................................... F-36
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1998 and 1999...................................................................... F-37
Notes to Consolidated Financial Statements.............................................................. F-38
</TABLE>
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Rare Medium Group, Inc.:
We have audited the accompanying consolidated balance sheets of Rare Medium
Group, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of Rare
Medium Group, Inc. as of and for the year ended December 31, 1997 were audited
by other auditors whose report thereon dated March 20, 1998, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rare Medium Group,
Inc. as of December 31, 1998 and 1999 and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
February 14, 2000
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors of
Rare Medium Group, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Rare Medium Group, Inc. (formerly ICC
Technologies, Inc.) for the year ended December 31, 1997. These consolidated
financial statements are the responsibility of Rare Medium Group's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
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 consolidated results of operations and
cash flows of Rare Medium Group for the year ended December 31, 1997 in
conformity with generally accepted accounting principles. We have not audited
the consolidated financial statements of Rare Medium Group for any period
subsequent to December 31, 1997.
/s/ Coopers & Lybrand LLP
Philadelphia, Pennsylvania
March 20, 1998
33
<PAGE>
RARE MEDIUM GROUP, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 917,978 $ 28,540,444
Marketable securities.......................................................... -- 101,981
Accounts receivable, net of allowance for doubtful accounts of $82,445 and
$544,747.................................................................... 1,184,182 12,600,870
Work in process................................................................ 251,718 3,170,683
Notes receivable............................................................... -- 1,100,000
Prepaid expenses and other current assets...................................... 443,526 2,406,053
----------- -------------
Total current assets...................................................... 2,797,404 47,920,031
Property and equipment, net...................................................... 1,918,273 12,100,237
Investments in affiliates........................................................ -- 26,467,324
Intangibles, net................................................................. 39,899,170 72,552,152
Other assets..................................................................... 128,275 1,383,256
----------- -------------
Total assets.............................................................. $44,743,122 $ 160,423,000
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 1,634,889 $ 7,097,466
Accrued liabilities............................................................ 1,912,364 5,758,573
Deferred revenue............................................................... 308,898 3,043,941
Current portion of note payable--related parties............................... -- 996,765
Notes payable.................................................................. 129,525 579,480
----------- -------------
Total current liabilities................................................. 3,985,676 17,476,225
Note payable--related parties.................................................... 10,591,526 996,765
Other noncurrent liabilities..................................................... 344,210 734,916
----------- -------------
Total liabilities......................................................... 14,921,412 19,207,906
----------- -------------
Series A Convertible Preferred Stock, $.01 par value, net of unamortized discount
of $54,557,732................................................................. -- 36,224,441
----------- -------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000 shares; issued 907,820
shares as Series A Convertible Preferred Stock at December 31, 1999......... -- --
Common stock, $.01 par value. Authorized 200,000,000 shares; issued and
outstanding 30,696,828 shares in 1998 and 42,893,357 shares in 1999......... 306,968 428,933
Additional paid-in capital..................................................... 84,720,304 252,075,058
Accumulated other comprehensive income......................................... -- 936,599
Note receivable from shareholder............................................... (230,467) (230,467)
Accumulated deficit............................................................ (54,803,665) (148,048,040)
Treasury stock, at cost, 66,227 shares......................................... (171,430) (171,430)
----------- -------------
Total stockholders' equity................................................ 29,821,710 104,990,653
----------- -------------
Total liabilities and stockholders' equity............................. $44,743,122 $ 160,423,000
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.......................................................... $ -- $ 4,688,120 $ 36,694,450
Cost of revenues.................................................. -- (3,609,852) (19,650,400)
------------ ------------ ------------
Gross profit.................................................... -- 1,078,268 17,044,050
------------ ------------ ------------
Expenses:
Sales and marketing............................................. -- 896,842 5,450,144
General and administrative...................................... 1,991,594 5,673,561 32,406,565
Depreciation and amortization................................... -- 12,584,177 25,992,997
------------ ------------ ------------
Total expenses............................................. 1,991,594 19,154,580 63,849,706
------------ ------------ ------------
Loss from operations.............................................. (1,991,594) (18,076,312) (46,805,656)
Interest income (expense), net.................................... 492,870 (1,278,507) (1,396,146)
Equity interest in net loss on investments........................ -- -- (1,468,578)
Other income...................................................... -- -- 200,000
------------ ------------ ------------
Loss before taxes and discontinued operation...................... (1,498,724) (19,354,819) (49,470,380)
Income tax expense.............................................. -- 355,487 --
------------ ------------ ------------
Loss before discontinued operation......................... (1,498,724) (19,710,306) (49,470,380)
------------ ------------ ------------
Discontinued operation:
Loss from discontinued operation................................ (11,985,361) (4,538,128) --
Gain on restructuring of Engelhard/ICC.......................... -- 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) (49,470,380)
Deemed dividend attributable to issuance
of convertible preferred stock............................... -- -- (29,879,155)
Cumulative dividends and accretion of convertible
preferred stock to liquidation value......................... -- -- (13,894,840)
------------ ------------ ------------
Net loss attributable to common stockholders...................... $(13,484,085) $ (619,252) $(93,244,375)
------------ ------------ ------------
------------ ------------ ------------
Basic and diluted (loss) earnings per share:
Continuing operations........................................... $ (0.07) $ (0.78) $ (2.55)
Discontinued operation.......................................... (0.56) 0.76 --
------------ ------------ ------------
Net loss per share................................................ $ (0.63) $ (0.02) $ (2.55)
------------ ------------ ------------
------------ ------------ ------------
Basic weighted average common shares outstanding.................. 21,339,635 25,282,002 36,625,457
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $(13,484,085) $ (619,252) $(49,470,380)
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 25,992,997
Equity interest in net loss of investments................... 11,985,361 133,450 1,468,578
Common stock and stock options issued for services
rendered................................................... 52,381 589,914 29,999
Loss on disposition of FAS................................... -- 627,587 --
Interest expense paid in notes and stock..................... -- 1,140,413 2,630,467
Changes in assets and liabilities, net of acquisitions:
Accounts receivable........................................ -- 422,567 (8,527,239)
Work in process............................................ -- -- (2,901,739)
Prepaid expenses and other assets.......................... (298,397) 277,142 (1,622,728)
Deferred revenue........................................... -- 308,898 1,383,416
Accounts payable, accrued and other liabilities............ 194,030 108,915 (1,013,447)
------------ ------------ ------------
Net cash used in operating activities................... (1,546,783) (8,682,958) (32,030,076)
------------ ------------ ------------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired, and
acquisition costs............................................ -- (10,591,856) (2,923,931)
Cash paid for investments in affiliates......................... -- -- (27,075,901)
Purchases of property and equipment, net........................ (9,500) (912,239) (8,791,752)
Cash received in connection with restructuring
of Engelhard/ICC............................................. -- 18,864,003 --
Capital contributions to Engelhard/ICC.......................... (6,775,000) -- --
Issuance of note receivable..................................... (350,450) -- (1,100,000)
Net cash received in connection with sale of
majority interest in FAS..................................... -- 973,173 --
------------ ------------ ------------
Net cash (used in) provided by investing activities..... (7,134,950) 8,333,081 (39,891,584)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debenture................. -- -- 6,000,000
Proceeds from issuance of convertible preferred stock, net of
costs........................................................ -- -- 82,997,651
Proceeds from issuance of common stock in connection with
exercise of warrants and options............................. 298,102 118,385 11,791,695
Repayment of borrowings, net.................................... -- (108,013) (1,245,220)
------------ ------------ ------------
Net cash provided by financing activities............... 298,102 10,372 99,544,126
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents.............. (8,383,631) (339,505) 27,622,466
Cash and cash equivalents, beginning of period.................... 9,641,114 1,257,483 917,978
------------ ------------ ------------
Cash and cash equivalents, end of period.......................... $ 1,257,483 $ 917,978 $ 28,540,444
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Interest paid................................................... $ -- $ 373,699 $ 609,437
------------ ------------ ------------
------------ ------------ ------------
Income taxes paid............................................... $ -- $ -- $ 355,487
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED NOTE
ADDITIONAL OTHER RECEIVABLE
PREFERRED COMMON STOCK PAID-IN COMPREHENSIVE FROM
STOCK ($.01 PAR VALUE) CAPITAL INCOME OFFICER
--------- ---------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997.......................... $ -- $ 212,824 $ 50,730,330 $ -- $ --
Net loss........................................ -- -- -- -- --
Issuance of 237,644 shares of common stock
through exercise of stock options and
warrants...................................... -- 2,376 578,574 -- (230,467)
--------- ------------ ------------ --------- ----------
Balance, December 31, 1997........................ -- 215,200 51,308,904 -- (230,467)
Net loss........................................ -- -- -- -- --
Issuance of 5,775,003 shares of common stock for
acquired businesses........................... -- 57,753 19,988,244 -- --
Issuance of 3,145,709 shares of common stock for
conversion of debt and accrued interest....... -- 31,457 12,717,411 -- --
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 -- --
--------- ------------ ------------ --------- ----------
Balance, December 31, 1998........................ -- 306,968 84,720,304 -- (230,467)
Comprehensive loss:
Net loss...................................... -- -- -- -- --
Other comprehensive income:
Net unrealized gain arising during period... -- -- -- 936,599 --
Total comprehensive loss.................
Issuance of 4,977,923 shares of common stock in
acquired businesses........................... -- 49,779 47,918,148 -- --
Issuance of 3,054,362 shares of common stock for
conversion of debt and accrued interest....... -- 30,543 17,109,350 -- --
Issuance of 2,489 shares of common stock for
services rendered............................. -- 25 29,974 -- --
Issuance of 4,161,755 shares of common stock
through exercise of stock options and
warrants...................................... -- 41,618 11,750,077 -- --
Value of warrants issued in connection with the
Series A preferred stock...................... -- -- 53,118,496 -- --
Intrinsic value of beneficial conversion feature
of Series A preferred stock and pay-in-kind
dividends..................................... -- -- 37,428,709 -- --
Deemed dividends and accretion of preferred
stock......................................... -- -- -- -- --
--------- ------------ ------------ --------- ----------
Balance, December 31, 1999........................ $ -- $ 428,933 $252,075,058 $ 936,599 $ (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
Net loss........................................ (13,484,085) -- (13,484,085)
Issuance of 237,644 shares of common stock
through exercise of stock options and
warrants...................................... -- -- 350,483
------------- --------- ------------
Balance, December 31, 1997........................ (54,184,413) (171,430) (3,062,206)
Net loss........................................ (619,252) -- (619,252)
Issuance of 5,775,003 shares of common stock for
acquired businesses........................... -- -- 20,045,997
Issuance of 3,145,709 shares of common stock for
conversion of debt and accrued interest....... -- -- 12,748,868
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
------------- --------- ------------
Balance, December 31, 1998........................ (54,803,665) (171,430) 29,821,710
Comprehensive loss:
Net loss...................................... (49,470,380) -- (49,470,380)
Other comprehensive income:
Net unrealized gain arising during period... -- -- 936,599
------------
Total comprehensive loss................. (48,533,781)
Issuance of 4,977,923 shares of common stock in
acquired businesses........................... -- -- 47,967,927
Issuance of 3,054,362 shares of common stock for
conversion of debt and accrued interest....... -- -- 17,139,893
Issuance of 2,489 shares of common stock for
services rendered............................. -- -- 29,999
Issuance of 4,161,755 shares of common stock
through exercise of stock options and
warrants...................................... -- -- 11,791,695
Value of warrants issued in connection with the
Series A preferred stock...................... -- -- 53,118,496
Intrinsic value of beneficial conversion feature
of Series A preferred stock and pay-in-kind
dividends..................................... -- -- 37,428,709
Deemed dividends and accretion of preferred
stock......................................... (43,773,995) -- (43,773,995)
------------- --------- ------------
Balance, December 31, 1999........................ $(148,048,040) $(171,430) $104,990,653
------------- --------- ------------
------------- --------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
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 of Rare Medium, Inc. ("Rare Medium"), and the
investment business. The Company is headquartered in New York with offices
throughout the United States, England, Australia, Singapore and Canada.
Rare Medium, a wholly owned subsidiary of 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 restructured its former climate control systems business in
February 1998 and combined with Rare Medium 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 (see
Note 2). In March 1999, the Company changed its name to "Rare Medium Group,
Inc."
In 1999, the Company broadened its strategy with the advent of its
investment business. Through the 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.
The 1999 consolidated financial statements include the results of the
Internet services business and the following majority owned incubator companies.
ChangeMusic Network
ChangeMusic Network has properties that deliver 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 CMJ division offers the music industry trade publications, music industry
conferences, and a website through which subscribers can gain access to various
exclusive data products as well as promotional and talent development (A&R)
services. The Company acquired ChangeMusic in November 1999 and owns
approximately 74% 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 professionals help clients design, administer and maintain successful
online sweepstakes and other promotional online efforts. The Company acquired
ePrize in December 1999 and owns approximately 80% on a fully diluted basis.
iFace
iFace.com develops products for telecommunication service providers and for
system integrators that telephony-empower websites and other Internet
applications. The Company acquired iFace in February 1999 and owns approximately
68% on a fully diluted basis.
LiveUniverse
LiveUniverse.com is an Application Service Provider ("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 that enable any company to quickly and efficiently create a custom
38
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
website, intranet and extranet. The Company acquired LiveUniverse in April 1999
and owns approximately 85% on a fully diluted basis.
Regards
Regards.com has a series of websites for electronic greeting card
distribution. Visitors to these websites 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.
The Company acquired Regards in August 1999 and owns approximately 90% on a
fully diluted basis.
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) Marketable Securities
The Company classifies its investments in marketable equity securities as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The fair value of marketable securities
exceeded cost by $936,599, at December 31, 1999.
(d) Notes Receivable
Notes receivable represent short term financing to selected companies prior
to an acquisition or an investment in affiliated companies. Such receivables,
bearing a market rate of interest are, generally converted into equity or
otherwise receivable on demand. In February 2000, $1,000,000 of the notes
receivable was repaid.
(e) 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.
(f) Intangibles
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the estimated
future period of benefit of three years. The Company periodically assesses the
recoverability of the cost of its goodwill based upon estimated future
profitability of the related operating entities. The agreements pursuant to
which the Company acquired certain companies (see Note 2) include provisions
that could require the Company to issue additional shares if certain performance
targets are met. 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.
39
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
(g) Revenue Recognition
Revenues from the Internet services business are recognized using the
percentage-of-completion method. Unbilled receivables, representing time and
costs incurred on projects in process in excess of amounts billed, are recorded
as work in process in the accompanying balance sheets. 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.
Advertising revenues from CMJ publications are recognized at the time the
related publications are sent to the subscriber or are available at newstands.
Subscription revenue is deferred and recognized as income over the subscription
period. Revenue related to newstand magazine sales are recognized at the time
that the publications are available at the newstands, net of estimated returns.
Advertising revenues derived from the delivery of advertising impressions
are recognized in the period the impressions are delivered, provided the
collection of the resulting receivable is probable.
(h) Investments in Affiliates
The Company accounts for its investments in affiliates in which it owns
less than 20% of the voting stock and does not possess significant influence
over the operations of the investee, under the cost method of accounting. The
Company accounts for those investments where the Company owns greater than 20%
of the voting stock and possesses significant influence under the equity method.
(i) 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.
(j) 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 10).
40
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(k) 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.
(l) 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 the purposes of computing EPS from continuing operations, the Company
had potentially dilutive common stock equivalents of 1,211,588, 909,321 and
6,380,103, for the years ended December 31, 1997, 1998 and 1999, 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.
(m) Fair Value of Financial Instruments
The fair value of cash and cash equivalents, marketable securities,
accounts receivables, notes receivable 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 offerings
completed in 1998 and 1999 (see Note 7).
(n) 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 services related
revenues in 1998, one of which represents approximately 10% of the receivables
as of December 31, 1998. No customer accounted for more than 10% of revenues in
1999.
(o) 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.
41
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(p) 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 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. The Company's management has
not yet determined the impact of adopting SFAS 133 as amended.
(q) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
(2) BUSINESS TRANSACTIONS
(a) Acquisitions
In April 1998, the Company acquired all of the issued and outstanding
shares of capital stock of Rare Medium. 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 7). 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 statements of operations are the results of Rare Medium since the
date of acquisition.
In addition to the acquisition of Rare Medium, during 1998 and 1999, the
Company acquired 100% of the following Internet services businesses. The Company
has accounted for these transactions under the purchase method of accounting.
The aggregate purchase prices, including acquisition costs, exceeded the fair
value of the net assets acquired has been allocated to goodwill and is being
amortized using the straight line method over three years. The results of
operations for these acquisitions have been included in the accompanying
statements of operations since the respective dates of acquisition.
<TABLE>
<CAPTION>
ACQUISITION DATE OF ACQUISITION NUMBER OF SHARES ISSUED PURCHASE PRICES GOODWILL
- ------------------------------------------ ------------------- ----------------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
I/O 360................................... August 1998 786,559 $ 3,000 $3,194
Digital Facades........................... August 1998 719,144 $ 3,000 $3,197
1999
Hype!, Inc................................ March 1999 270,992 $ 1,219 $1,102
FS3, Inc.................................. April 1999 768,975 $ 3,460 $3,571
Big Hand, Inc............................. April 1999 1,460,603 $ 6,573 $6,562
Struthers Martin, Inc..................... May 1999 406,092 $ 6,000 $4,518
Globallink Communications, Inc............ June 1999 445,470 $ 5,511 $5,661
Fire Engine Red, Inc...................... July 1999 333,333 $ 4,000 $4,088
Atension, Inc............................. August 1999 160,450 $ 1,415 $1,432
Evit Caretni Interactive, Inc............. December 1999 256,824 $ 8,328 $8,988
Carlyle Media Group Limited............... December 1999 60,153 $ 2,230 $3,076
</TABLE>
42
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) BUSINESS TRANSACTIONS--(CONTINUED)
In connection with certain acquisitions, the former shareholders 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 these shareholders thereunder,
1,288,057 shares of the Company's common stock delivered to these shareholders,
included as part of the consideration, remain in escrow at December 31, 1999,
and the liability of these shareholders under such indemnification obligations
is expressly limited to the value of such shares held in escrow.
In November 1999, the Company acquired 25% of the common shares, on a fully
diluted basis, of College Media, Inc. (CMJ). Total consideration amounted to
$4,872,212 representing $1,000,000 in cash and 180,860 shares of the Company's
common stock. At such time, the Company also agreed to merge its 96% owned
subsidiary, Changemusic.com with CMJ to form ChangeMusic Network, Inc.
(ChangeMusic). Additionally, the Company acquired 1,000 shares of Series A
Convertible Preferred Stock, par value $0.01 per share of ChangeMusic
("ChangeMusic Preferred Stock") and a warrant to purchase up to an additional
1,000 shares of ChangeMusic Preferred Stock at a price of $8,400 per share. The
consideration price for the ChangeMusic Preferred Stock and warrant was
$7 million in cash. As a result of the Company owning approximately 62% of the
common stock outstanding of ChangeMusic, 74% assuming the conversion of the
ChangeMusic Preferred Stock and exercise of the warrant, the statements of
financial position and the results of operations (from November 1999), have been
consolidated. Total goodwill resulting from these transactions representing
(a) the cash and common stock of the Company, (b) the contribution of the
Company's interest in ChangeMusic and (c) the net liabilities of CMJ and
acquisition costs, amounted to $10,110,917. The book value of the Company's
interest in ChangeMusic and CMJ approximates the value of the Company's
effective ownership in ChangeMusic. No amounts have been recorded with respect
to minority interest receivable as there is no future funding requirement by the
minority interest shareholder. The Company has accounted for this transaction
under the purchase method of accounting. Goodwill is being amortized using the
straight line method over three years.
Pro Forma Financial Information (unaudited)
The following unaudited pro forma information is presented as if the
Company had completed the above 1998 and 1999 acquisitions as of January 1, 1997
and 1998, respectively. The pro forma information is not necessarily indicative
of what the results of operations would have been had the acquisitions taken
place at those dates, or of the future results of operations.
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues...................................... $ 6,642,568 $ 30,060,357 $ 50,811,361
------------ ------------ ------------
------------ ------------ ------------
Loss before discontinued operation............ (24,252,664) (51,842,698) (62,141,328)
Discontinued operation........................ (11,985,361) 19,091,054 --
------------ ------------ ------------
Net loss...................................... $(36,238,025) $ 32,751,644 (62,141,328)
------------ ------------ ------------
------------ ------------ ------------
Net loss attributable to common
stockholders--basic and diluted............. $ (1.34) $ (1.05) $ (2.78)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Also during 1999, the Company completed the acquisition of four other
incubator companies. The combined consideration consisted of cash and 634,171
shares of common stock amounting to $2,209,206 and $5,360,305, respectively. The
Company has accounted for these transactions under the purchase method of
accounting. Amounts allocated to intangible assets including goodwill was
$8,171,113 and are being amortized over three years. The results of these
acquisitions have been included in the accompanying statements of operations
since the respective dates of acquisition. The pro forma effects on the
Company's statements of operations are not material.
43
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) BUSINESS TRANSACTIONS--(CONTINUED)
(b) 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 FAS and 20% of Engelhard Hexcore, L.P.
and Engelhard owned 80% of Engelhard Hexcore, L.P. and 10% of FAS. 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 had 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. 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. As a result
of the cash support to FAS, the Company received $200,000 as a partial payment
on the promissory note.
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.
44
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) BUSINESS TRANSACTIONS--(CONTINUED)
The 1997 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, accounted for under the equity method and included equity losses
of $11,985,361. Presented below are summary financial statements for
Engelhard/ICC, including a summary balance sheet as of December 31, 1997, and
summary statement 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>
(3) SEGMENT INFORMATION
In 1999, as a result of the advent of the Company's investment business
activities to compliment the Internet services business, the Company adopted
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. The Company's operations have been classified into two
primary segments: the Internet services business and the
45
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SEGMENT INFORMATION--(CONTINUED)
investment business. Presented below is summarized financial information of the
Company's continuing operations for each segment.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Internet services............................................................ $ -- $ 4,688 $ 36,870
Investment................................................................... -- -- 1,554
Internet services provided to investments.................................... -- -- (1,730)
-------- -------- --------
$ -- $ 4,688 $ 36,694
-------- -------- --------
-------- -------- --------
Loss before interest, taxes, depreciation and amortization:
Internet services............................................................ $ -- $ (1,902) $ (6,545)
Investment and corporate..................................................... (1,992) (3,590) (14,268)
-------- -------- --------
$ (1,992) $ (5,492) $(20,813)
-------- -------- --------
-------- -------- --------
Loss before interest, taxes, depreciation and amortization..................... $ (1,992) $ (5,492) $(20,813)
Depreciation and amortization.................................................. -- (12,584) (25,993)
Interest income (expense), net................................................. 493 (1,279) (1,396)
Equity in interest in net loss on investments.................................. -- -- (1,468)
Other income................................................................... -- -- 200
Income tax expense............................................................. -- (355) --
-------- -------- --------
Loss before discontinued operation........................................... (1,499) (19,710) (49,470)
Discontinued operation......................................................... (11,985) 19,091 --
-------- -------- --------
Net loss.................................................................. $(13,484) $ (619) $(49,470)
-------- -------- --------
-------- -------- --------
Total assets:
Internet services............................................................ $ -- $ 44,743 $ 31,047
Investment and corporate..................................................... 4,522 -- 129,376
-------- -------- --------
$ 4,522 $ 44,743 $160,423
-------- -------- --------
-------- -------- --------
</TABLE>
(4) INVESTMENTS IN AFFILIATES
During 1999, the Company made investments in 14 companies that possess
Internet-focused business models. The following is a summary of the carrying
value of investments held at December 31, 1999:
<TABLE>
<S> <C>
Cost investments............................................................... $20,875,902
Equity investment.............................................................. 3,531,422
Marketable securities.......................................................... 2,060,000
-----------
$26,467,324
-----------
-----------
</TABLE>
The Company recognized a loss of $1,051,911 representing its proportionate
share of the losses of investee companies, for those investments carried under
the equity method. Additionally, the Company recognized $416,667 representing
the amortization of the net excess of investment over its proportionate share of
the affiliates net assets. Amortization is recorded on a straight line basis
over three years.
46
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment:
Equipment...................................................... $1,469,759 $12,233,614
Furniture and fixtures......................................... 168,910 2,258,566
Leasehold improvements......................................... 629,179 1,648,634
---------- -----------
2,267,848 16,140,814
Less accumulated depreciation and amortization................. 349,575 4,040,577
---------- -----------
Property and equipment, net.................................... $1,918,273 $12,100,237
---------- -----------
---------- -----------
</TABLE>
(6) ACCRUED LIABILITIES
Accrued liabilities consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Accrued liabilities:
Accrued compensation........................................... $ 474,805 $1,064,947
Accrued professional fees...................................... 417,809 2,197,684
Accrued interest payable....................................... 273,309 40,691
Other liabilities.............................................. 746,441 2,455,251
---------- ----------
Total accrued liabilities...................................... $1,912,364 $5,758,573
---------- ----------
---------- ----------
</TABLE>
(7) 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 1998 and 1999, the Company issued 2,951,814 shares and 1,431,756 shares,
respectively, to certain Noteholders in exchange for their beneficial interest
in $12,220,506 and $8,432,581, respectively.
In 1999, $1,460,828 of non-cash interest expense was recognized related to
this conversion to the extent the fair value of the stock on the date of
conversion exceeded the conversion price. On December 31, 1999, as a result of
these transactions, there is a remaining principal balance of $1,993,530 payable
under the Note. In February 2000, the remaining principal balance of
$2.0 million was converted into common stock at fair value.
Accrued interest, included in accrued expenses, on the remaining Notes
relating to the interest payment due April 1, amounted to $230,071 and $40,691
as of December 31, 1998 and 1999, respectively.
47
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) SHAREHOLDERS' EQUITY
Common Stock Transactions
In 1998, the Company issued 5,775,003 shares of common stock as partial
consideration for the acquisition of Rare Medium, Inc. and other Internet
services business acquisitions. The fair value of the common stock was
determined based on the average trading price of the Company's common stock at
the time of the respective acquisitions.
In 1999, the Company issued 4,977,923 shares of common stock as
consideration for the purchase of Internet services business and incubator
acquisitions. The fair value of the common stock was determined based on the
average trading price of the Company's common stock at the time of the
respective acquisitions.
In 1998 and 1999, the Company issued 2,951,814 shares and 1,431,756 shares,
respectively, 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 and 34,144 shares of
common stock were issued with respect to the interest payment made in October
1998 and April 1999, respectively. In 1998, the fair value of the common stock
was determined based on a value of the average trading price of the Company's
common stock at that time. In 1999, $1,460,828 of non cash interest expense was
recognized to the extent that the fair value of the stock on the date of
conversion exceeded the conversion price.
Pursuant to the terms of a Securities Purchase Agreement, dated as of
January 28, 1999, the Company agreed to sell, 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 Company sold the Convertible
Debentures in the aggregate principal amount of $3,500,000 and Warrants to
purchase 404,625 shares of common stock. In 1999, $1,087,698 of noncash interest
expense was recognized representing the accretion of the discount resulting from
the Convertible Debentures' beneficial conversion feature. On June 4, 1999, in
association with the issuance of the redeemable preferred stock (see Note 9),
the Company sold the remaining $2,500,000 of Convertible Debentures and
Warrants. The Convertible Debentures and Warrants were then immediately
converted into 1,588,462 shares of common stock.
(9) REDEEMABLE PREFERRED STOCK
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").
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-A Warrants and Series 2-A 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.
48
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) REDEEMABLE PREFERRED STOCK--(CONTINUED)
The Series A Preferred Stock are subject to mandatory and optional
redemption. On June 30, 2012, the Company will be required to redeem all
Series A Preferred Stock plus any accrued and unpaid dividends. At the option of
the Company, the Series A Preferred Stock can be redeemed after June 30, 2002
provided that the trading price of the Company's common stock for each of the
preceding 30 trading days is greater than $12 per share, or after June 30, 2004
at a price of 103% of the face value of the Series A Preferred Stock plus any
accrued and unpaid dividends. In the event of a change of control, as defined,
at the option of the holders of the majority of the then outstanding shares of
the Series A Preferred Stock, the Company is required to redeem all or any
number of such holders' shares of Series A Preferred Stock plus any accrued and
unpaid dividends. The Series A Preferred Stock are convertible into common stock
at a conversion price of $7.00, subject to adjustment under certain
anti-dilution provisions as defined.
The preferred cumulative quarterly dividends are based on a rate of 7.5%
per annum for the first three years and 4.65% thereafter. For the first three
years, dividends are payable in additional shares of Series A securities. During
the next two years, at the option of the holder, dividends will be paid in
additional shares of Series A securities or in cash. Dividends paid thereafter
will be paid in cash.
Each Series 1-A warrant is exercisable for 13.5 shares of Company common
stock and each Series 2-A warrant is exercisable for one share of Company common
stock. The Series 1-A and Series 2-A warrants are exercisable at any time and
expire ten years from the date issued. The exercise price of the Series 1-A
warrants is dependent on the trading price of the Company's common stock. The
exercise price ranges from $0.01, if the trading price is equal to or greater
than $7.00, to $4.20 if the trading price is equal to or less than $4.00; the
exercise price of the Series 2-A warrants is $7.00. These exercise prices are
subject to adjustment under certain anti-dilution provisions as defined. The
holder of the Series 1-A and Series 2-A warrant has the option to pay the
exercise price of the warrant in cash, Company common stock previously held, or
instructing the Company to withhold a number of Company shares with an aggregate
fair value equal to the aggregate exercise price.
As of December 31, 1999, assuming that affiliates of Apollo convert all
their shares of Series A convertible preferred stock and exercise all their
Series 1-A and Series 2-A warrants, they would own approximately 47% of our
outstanding common stock.
The Company ascribed value to the Series A securities based on their
relative fair value. As such, $29.9 million has been allocated to Series A
Preferred Stock and the remaining $57.1 million has been allocated to the
related Series 1-A and Series 2-A warrants. This transaction has been accounted
for in accordance with FASB Emerging Issues Task Force (EITF) 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features." As a result of
the holders' ability to convert immediately, $29.9 million has been reflected as
a dividend in determining the net loss attributable to common stockholders.
Additional dividends have been recorded, representing the accrual of the annual
7.5% pay-in-kind dividend and the accretion of the $29.9 million carrying value
up to the $87.0 million face redemption over 13 years.
(10) 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 18.6 million shares of authorized common stock for
issuance under the following plans; the Long Term Incentive Plan, Nonqualified
Stock Option Plan and Equity Plan for Directors. 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")
49
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) EMPLOYEE COMPENSATION PLANS--(CONTINUED)
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 13
million shares of common stock and is currently administered by the Compensation
Committee of the Board of Directors. Under the Stock Incentive Plan, the option
price of any ISO may not be less than the fair market value of a share of common
stock on the date on which the option is granted. The option price of an NQSO
may be less than the fair market value on the date of the NQSO is granted if the
Board of Directors so determines. An ISO may not be granted to a "ten percent
stockholder" (as such term is defined in section 422A of the Internal Revenue
Code) unless the exercise price is at least 110% of the fair market value of the
common stock and the term of the option may not exceed five years from the date
of grant. Common stock subject to a restricted stock purchase or a bonus
agreement is transferable only as provided in such agreement. The maximum term
of each stock option granted to persons other than ten percent stockholders is
ten years from the date of grant.
Under the Nonqualified Stock Option Plan, which provides for the issuance
of up to 5,100,000 shares, the option price as determined by the Compensation
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, 1998 and 1999 was $1.38, $1.96 and $6.57, 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,
4.5% to 5.6% in 1998 and 4.7% to 6.5% in 1999, (2) an expected life of six years
in 1997 and 1998, and five years in 1999, (3) volatility of approximately 73.9%
in 1997, 91.5% in 1998 and 96.3% in 1999, and (4) an annual dividend yield of 0%
for all years.
The Company applies the provisions of APB Opinion No. 25 in accounting for
its Stock Incentive Plan and, accordingly no cost has been recognized for its
stock options in the financial statements since the exercise price was equal to
or greater than the fair market value at the date of grant. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As Reported................................... $13,484,085 $ 619,252 $49,470,380
Pro Forma..................................... $13,613,974 $ 6,053,743 $63,927,357
Net loss attributable to common stockholders:
As Reported................................... $ 0.63 $ 0.02 $ 2.55
Pro Forma..................................... $ 0.64 $ 0.24 $ 2.94
</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
50
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) EMPLOYEE COMPENSATION PLANS--(CONTINUED)
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.
Stock option activity under the various option plans 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
Granted....................................................... 11.37 9,705,999
Forfeited..................................................... 4.26 (597,324)
Exercised..................................................... 2.89 (3,237,955)
----------
Outstanding at December 31, 1999................................ 8.80 13,672,892
----------
----------
</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 1999 REMAINING LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- ----------------------------------- -------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.00-$ 2.82...................... 3,222,937 6.2 $ 2.28 1,015,358 $2.08
$ 3.25-$ 4.77...................... 889,081 4.7 4.24 496,110 3.82
$ 5.00-$ 8.56...................... 4,647,855 5.5 6.80 233,288 5.30
$ 9.50-$15.82...................... 3,877,019 5.3 11.83 5,275 12.23
$24.25-$39.06...................... 1,036,000 5.4 30.70 30,000 30.53
---------- ---- ------ ---------- -----
13,672,892 5.6 $ 8.80 1,780,031 $3.50
---------- ---- ------ ---------- -----
---------- ---- ------ ---------- -----
</TABLE>
(11) INCOME TAXES
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the years ended December 31, 1997, 1998 and
1999 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 ("NOL") of approximately $40 million expiring in 2008 through
2019, including $1 million of NOL relating to ChangeMusic (a separate return for
tax purposes) and various foreign subsidiaries. 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 approximately $48 million of net operating loss
carryforwards would be subject to an annual limitation in offsetting future
taxable income.
51
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) 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
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards.............................. $ 12,099,000 $ 26,780,000
Alternative minimum tax carryforwards......................... 355,000 355,000
Other assets.................................................. 86,000 247,000
Other accrued expenses........................................ 281,000 294,000
------------ ------------
Total gross deferred tax assets.......................... 12,821,000 27,676,000
Less valuation allowance...................................... (12,821,000) (27,676,000)
------------ ------------
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.
Due to the Company's operating losses, there is uncertainty surrounding
whether the Company will ultimately realize its deferred tax assets.
Accordingly, these assets have been fully reserved. During 1998 and 1999, the
valuation allowance decreased by $5,117,000 and increased by $14,855,000,
respectively. Of the total valuation allowance of $27,676,000, subsequently
recognized tax benefits, if any, in the amount of $4,395,000 will be applied
directly to contributed capital. This amount relates to the tax effect of
employee stock option deductions included in the Company's net operating loss
carryforward.
(12) RELATED PARTY TRANSACTIONS
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.
(13) COMMITMENTS AND CONTINGENCIES
Leases
The Company has non-cancelable leases, primarily related to the rental of
its operations facilities. 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, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------------------------------------------- -----------
<S> <C>
2000....................................................... $ 3,501,868
2001....................................................... 3,762,227
2002....................................................... 3,525,230
2003....................................................... 3,365,509
2004....................................................... 3,016,495
Thereafter................................................. 5,013,623
-----------
Total minimum lease payments.......................... $22,184,952
-----------
-----------
</TABLE>
52
<PAGE>
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Total rent expense under operating leases amounted to $315,048 and
$1,655,980 for 1998 and 1999, respectively.
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 $250,000 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. Incentive
compensation approximated $35,000 and $650,000, in 1998 and 1999, respectively.
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.
(14) SUBSEQUENT EVENTS (UNAUDITED)
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 February 11, 2000, the Company filed a registration
statement with the Securities and Exchange Commission to register the resale of
such shares.
On January 5, 2000, we completed the acquisition of Notus Communications,
Inc., a privately held Internet communications company based in Atlanta that
provides business to business Internet unified messaging technology solutions.
In connection with this acquisition, the Company issued 56,577 shares of common
stock and an approximate 12% interest in our majority owned subsidiary
iFace.com. Our effective ownership in Notus is 85.5%.
The Company's Board of Directors approved a plan that allows the
Compensation Committee to incentivize employees by allocating to them up to 20%
of any profit that might be recognized when and if our investments in affiliates
and incubator companies become liquid, as defined, subject to vesting and other
requirements. The Company will have the right to pay such amount either in cash,
Company Stock or a combination thereof. No awards relating to this plan have yet
been made. Depending on the structure of the awards under this plan, we may be
required to record compensation expense in accordance with generally accepted
accounting principles.
53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners of Engelhard/ICC
We have audited the accompanying balance sheets of Engelhard/ICC (Partnership)
as of December 31, 1997 and 1996, and the related statements of operations,
changes in partners' capital and cash flows for the years ended December 31,
1997, 1996 and 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Engelhard/ICC as of December
31, 1997 and 1996, the results of its operations and its cash flows for the
years ended December 31, 1997, 1996 and 1995 in conformity with generally
accepted accounting principles.
As more fully described in Notes 1 and 15, on February 27, 1998, the Partners
terminated the Partnership and divided its net assets into two separate limited
partnerships.
/s/ Coopers and Lybrand LLP
Coopers and Lybrand LLP
Philadelphia, Pennsylvania
March 20, 1998
54
<PAGE>
ENGELHARD/ICC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 275,717 $ 1,192,997
Accounts receivable, net of allowance for doubtful accounts
of $444,823 and $39,786, respectively 2,118,138 2,623,769
Accounts receivable - ICC Technologies, Inc. 17,720 17,035
Inventories 3,061,684 4,570,952
Prepaid expenses and other 79,859 278,762
----------- ------------
Total current assets 5,553,118 8,683,515
Property, plant and equipment, net 9,496,897 7,990,125
Cash held in escrow 15,010 307,476
Purchased intangibles, net 866,116 991,883
Other assets, net 830,469 986,232
----------- ------------
Total assets 16,761,610 $189,959,231
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term loan 2,750,000 2,750,000
Current portion of long term debt 69,557 64,529
Accounts Payable:
Trade 965,755 1,404,366
Engelhard Corporation 0 298,084
Accrued liabilities 3,802,839 481,230
----------- ------------
Total current liabilities 7,588,151 4,998,209
----------- ------------
Long-term debt 8,629,128 8,642,330
----------- ------------
Partners' capital 544,331 5,318,692
----------- ------------
Total liabilities and partners' capital $16,761,610 $ 18,959,231
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
ENGELHARD/ICC
STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 12,239,012 $ 10,504,609 $ 8,944,279
Cost of goods sold 17,460,782 13,776,459 10,883,995
------------ ------------ ------------
Gross loss (5,221,770) (3,271,850 (1,939,716)
------------ ------------ ------------
Operating expenses:
Marketing 4,105,228 3,563,817 3,412,008
Engineering 2,074,295 1,053,809 936,415
Research and development 901,523 1,055,758 1,133,780
General and administrative 3,940,813 3,207,460 2,440,722
------------ ------------ ------------
Total operating expenses 11,021,859 8,880,844 7,922,925
------------ ------------ ------------
Loss from operations (16,243,629) (12,152,694) (9,862,641)
------------ ------------ ------------
Interest:
Interest income 54,472 94,766 50,679
Interest expense (535,204) (531,736 (760,261)
(480,732) (436,970) (709,582)
------------ ------------ ------------
Net loss $(16,724,361) $(12,589,664) $(10,572,223)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
ENGELHARD/ICC
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
Partners' capital, December 31, 1994 $ 3,480,579
Conversion of general partners' loan to partners' capital 5,000,000
Capital contributions 6,000,000
Net loss (10,572,223)
- -------- ------------
Partners' capital, December 31, 1995 3,908,356
Capital contributions 14,000,000
Net loss (12,589,664)
-------------
Partners' capital, December 31, 1996 5,318,692
Capital contributions 11,950,000
Net loss (16,724,361)
-------------
Partners' capital, December 31, 1997 $ 544,331
============
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
ENGELHARD/ICC
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,724,361) $(12,589,664) $(10,572,223)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,557,739 1,349,057 1,100,898
Provision for doubtful accounts 443,356 40,000 31,104
Provisions for inventory obsolescence and valuation 1,278,040 941,030 600,000
Write-off of equipment and other assets 446,838 23,471 0
Gain on sale of assets (18,000) 0 0
(Increase) decrease in:
Receivables 111,885 (606,349) (1,424,973)
231,228 (2,126,857) (1,545,616)
Prepaid expenses and other 198,903 (119,823) (83,103)
Increase (decrease) in:
Accounts payable (457,577) 604,077 (509,281)
Payables to ICC Technologies, Inc. (31,191) (178,008) 36,878
Payables to Engelhard Corporation (298,996) 93,548 141,697
Accrued expenses and other liabilities 3,322,380 127,634 119,368
------------ ------------ ------------
Net cash used in operating activities (9,939,756) (12,441,884) (12,105,25l)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,087,444) (928,644) (1,257,464)
Purchases of intangibles (142,371) (346,327) (134,244)
Proceeds from sale of assets 18,000 0 0
Cash held in escrow 292,466 558,268 (865,744)
------------ ------------ ------------
Net cash used in investing activities (2,919,349) (716,703 (2,257,452)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,458 57,072 69,956
Repayments of long-term debt (48,633) (51,968) (43,245)
Proceeds from issuance of bonds 0 0 8,500,000
Bond issuance costs 0 0 (215,979)
Capital contributions by general partners 11,950,000 14,000,000 6,000,000
Proceeds from short-term debt 0 0 2,750,000
Repayment of notes payable to general partners 0 0 (3,000,000)
------------ ------------ ------------
Net cash provided by financing activities 11,941,825 14,005,104 14,060,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (917,280) 846,517 (301,971)
Cash and cash equivalents, beginning of period 1,192,997 346,480 648,451
------------ ------------ ------------
Cash and cash equivalents, end of period $ 275,717 $ 1,192,997 $ 346,480
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
58
<PAGE>
ENGELHARD/ICC
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS:
Partnership Operations and Restructuring
Engelhard/ICC (the "Partnership") is a Pennsylvania general partnership. The
Partnership is engaged in the business of designing, manufacturing and marketing
climate control systems to supplement or replace conventional air conditioning
systems. The Partnership currently markets its systems to certain targeted
applications within the commercial air conditioning market primarily in North
America and Asia-Pacific. On February 7, 1994, ICC Technologies, Inc. ("ICC")
and Engelhard Corporation ("Engelhard"), through their respective subsidiaries
(the "general partners"), formed the Partnership.
On February 27, 1998, ICC and Engelhard restructured the Partnership (the
"Restructuring"). The Partnership was terminated and its net assets were divided
into two separate operating limited partnerships, one to manufacture and market
complete, Active Climate Control Systems under the name Fresh Air Solutions, LP
and the other to manufacture and market heat-exchange and desiccant coated
wheel-shaped rotors, which are components of the climate control systems, under
the name Engelhard HexCore, LP. ICC has a 90% ownership interest and control of
Fresh Air Solutions, LP. Engelhard retains a 10% interest in Fresh Air
Solutions. Engelhard has an 80% ownership interest and control of Engelhard
HexCore LP. ICC retains a 20% equity interest in Engelhard HexCore, LP. Fresh
Air Solutions will purchase rotors exclusively from Engelhard HexCore, LP.
Engelhard will continue its guarantee of the lease on Fresh Air Solutions, LP's
facility until April 2002 (Note 15) and will continue to guarantee $2,000,000 of
Fresh Air Solutions, LP's debt with the guarantee being reduced to $1,000,000
after February 1999 and completely terminated after February 2000. Going
forward, the financial statements of Fresh Air Solutions and Engelhard HexCore
will be consolidated into their majority owners' financial statements, ICC and
Engelhard respectively.
In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions
entered into a rotor supply agreement whereby Engelhard HexCore will supply
Fresh Air Solutions with its heat-exchange and desiccant rotor requirements.
Fresh Air Solutions will be obligated to purchase its rotor requirements from
Engelhard HexCore. All rotors will be sold at prices which are lower than the
best price Engelhard HexCore offers to other customers. The rotor supply
agreement is for a period of fifteen years. Furthermore, Engelhard HexCore and
Fresh Air Solutions entered into reciprocal technology license agreements
whereby nonexclusive, royalty free, perpetual license with the further right to
sublicense, technology related to Engelhard HexCore and Fresh Air Solutions
subject to patents or patent applications existing or filed within one year of
the Restructuring. Fresh Air Solutions was also granted a royalty free license
to use "Engelhard" as part of the "Engelhard/ICC" mark for a thirty month period
following the Restructuring. See note 15 for financial information related to
Fresh Air Solutions and Engelhard HexCore.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements have been prepared on the accrual basis of accounting
and include the accounts of the Partnership for the years ended December 31,
1997, 1996 and 1995. Subsequent to 1997, the Partnership was restructured (Note
1 and Note 15) into two separate limited partnerships.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents for the purpose of
determining cash flows. The carrying amount approximates fair value due to the
short-term maturity of these instruments.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
59
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Assets under capital lease are
recorded at the present value of the future lease payments. Costs of major
additions and improvements are capitalized and replacements, maintenance and
repairs, which do not improve or extend the life of the respective assets, are
charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the
property and equipment and the related accumulated depreciation are removed from
the respective accounts, and any resulting gains or losses are reflected in
operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leased assets under capital leases are amortized
over the period of the lease or the service lives of the improvements, whichever
is shorter, using the straight-line method.
Purchased Intangible Assets
Purchased intangible assets, consisting primarily of a license agreement
acquired in connection with the acquisition of certain assets (See note 6), are
amortized over ten years using the straight-line method.
Patents
Patents are amortized over their estimated useful lives, not exceeding seventeen
years, using the straight-line method.
Bond Issuance Costs
Bond issuance costs are deferred and amortized over the life of the bonds using
the straight-line method. Amortization of bond issuance costs is included in
interest expense.
Income Taxes
Partnership income, if any, is taxable to the general partners. Accordingly, no
provision for income taxes has been made by the Partnership.
Revenue Recognition
Revenues are recognized when equipment is shipped for equipment sales contracts,
and when equipment is installed and operating for installation contracts.
Maintenance service revenue is recognized when services provided are complete.
Processing fees for fabricating raw materials into substrate are recognized in
revenue in the period the substrate material is shipped.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs amounted to approximately $902,000, $1,056,000 and $1,134,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
Warranties
The Partnership`s warranty on its equipment is for eighteen months from date of
shipment or one year from date of original installation, except for desiccant or
thermal rotors which are warranted for five years from the date of shipment. The
Partnership records a reserve for the estimated cost of repairing or replacing
any faulty equipment covered under the Partnership's warranty. During 1997, the
Partnership identified odor creation problems and other quality control issues
related to certain units it manufactured. As a result, management recorded a
provision of $2.2 million related to expenses to be incurred to address these
problems.
Concentration of Credit Risk
The Partnership invests its cash primarily in deposits with major banks. At
times, these deposits may be in excess of federally insured limits. The
Partnership has sold its equipment and services to end-users in the retail
industry, primarily in the continental United States and Asia-Pacific rim.
Concentration of credit risk with respect to trade receivables is moderate due
to the relatively diverse customer base. At December 31, 1997, the Partnership
had trade receivables of approximately $1,000,124 from one customer. During
1997, revenues from this customer amounted to approximately $5.8 million, which
represents approximately 48% of the Partnership revenues. Trade receivables from
this customer were current at December
60
<PAGE>
31, 1997. Ongoing credit evaluations of customers' financial condition are
performed and generally no collateral is required. The Partnership maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations. The partnership does not anticipate non
performance by any of the counterparties that have been granted credit or hold
instruments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-lived Assets
In accordance with the Statement of Financial Accounting Standards SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Partnership reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Partnership is not aware of any events or change in
circumstances which indicate the existence of an impairment of assets which
would be material to the Partnership's financial position or results of
operatons.
(3) INVENTORIES:
Inventories comprise the following:
December 31, December 31,
1997 1996
---- ----
Raw materials and purchased parts $ 1,721,311 $ 2,013,913
Work-in-process 1,504,116 1,547,641
Finished goods 309,128 1,591,228
----------- -----------
3,534,555 5,152,782
Less: Allowance for inventory obsolescence (472,871) (581,830)
----------- -----------
$ 3,061,684 $ 4,570,952
=========== ===========
Inventory is net of an allowance for inventory obsolescence of $472,871, and
$581,830 as of December 31, 1997 and 1996, respectively. The Partnership
recorded provisions of $1,278,040 and $941,000 for inventory obsolescence and
valuation which have been included in cost of goods sold in the statements of
operations for 1997 and 1996, respectively. In 1997 and 1996, the Partnership
wrote-off approximately $1,387,000 and $449,000, respectively, of obsolete
inventory against the allowance for inventory obsolescence.
Raw materials purchased from Engelhard amounted to approximately $155,000,
$272,000 and $86,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Partnership designs, manufactures and markets desiccant based climate
control systems which have not yet achieved consistent sales levels and
consistent product mix. The Partnership's products are also subject to change
due to technological improvements. Consequently, the Partnership may from time
to time have inventory levels in excess of its short-term needs. Items in
inventory may become obsolete due to changes in technology or product design.
Management has developed a program to monitor inventory levels; however, it is
possible that a material loss could ultimately result in the disposal of excess
inventory or due to obsolescence.
61
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net, consist of the following at
December 31:
1997 1996
---- ----
Land $ 390,000 $ 390,000
Building 1,805,741 1,779,721
Machinery and equipment 9,740,532 7,607,702
Furniture, fixtures and
leasehold improvements 1,113,589 794,912
----------- -----------
13,049,862 10,572,335
Less - accumulated depreciation (3,552,965) (2,582,210)
----------- -----------
$ 9,496,897 $ 7,990,125
=========== ===========
(5) OTHER ASSETS:
Other assets consist of the following at December 31:
1997 1996
---- ----
Patents and Trademarks $ 767,478 $ 877,623
Bond Issue Costs 219,483 219,483
Deposits 410 33,854
Other 24,217 2,000
---------- ----------
1,011,588 1,132,960
Accumulated amortization (181,119) (146,728)
---------- -----------
$ 830,469 $ 986,232
========== ==========
(6) ASSET ACQUISITION:
On December 1, 1994, the Partnership acquired for approximately $8.2 million in
cash, real property and substantially all other manufacturing assets of an
existing manufacturing facility located in Miami, Florida from Ciba-Geigy
Corporation ("Ciba"), which currently produces the small cell, honeycomb
structures that are the base material of the desiccant and thermal rotors that
are an integral part of the Partnership's products. The former Ciba plant
produced primarily large cell substrate which the Partnership is prohibited to
produce or sell other than to Ciba. The Partnership also acquired, as part of
the transaction, an exclusive technology license to use Ciba's proprietary
process which is necessary to manufacture such small cell, honeycomb structures.
Assets acquired consisted of approximately: $6.9 million of Plant, Property and
Equipment and $1.3 million of intangibles.
To finance the acquisition, the general partners each lent to the Partnership
$4,000,000 ("General Partners' Loan") bearing interest payable monthly at the
Prime Rate plus 1%. In April 1995, the Partnership obtained financing from the
issuance of $8,500,000 of industrial development revenue bonds (see note 8). In
1995, the proceeds of these bonds were used to repay $3,000,000 of the General
Partners' Loan, $1,500,000 to each general partner, and provide for improvements
and capital equipment at the Miami facility.
62
<PAGE>
(7) ACCRUED LIABILITIES:
Accrued liabilities consist of the following at December 31:
1997 1996
---- ----
Accrued expenses $2,837,272 $168,987
Payroll and employee benefits 748,051 130,301
Commissions 141,251 168,891
Customer deposits 76,265 13,051
---------- --------
$3,802,839 $481,230
========== ========
(8) LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Industrial development revenue bonds; interest determined weekly and
payable weekly; bonds mature on April 2020, but are subject to
redemption at the option of the Partnership from April 2000 $ 8,500,000 $ 8,500,000
Notes payable due April 2000; interest at 2% per annum;
interest payable monthly; interest and principal payable in
equal monthly installments over 60-month period
commencing April 1995 99,418 138,649
Other 99,267 68,210
----------- -----------
8,698,685 8,706,859
Less- current portion (69,557) (64,529)
----------- -----------
$ 8,629,128 $ 8,642,330
=========== ===========
</TABLE>
In connection with the issuance of the industrial revenue bonds (see note 6),
cash of $15,015 is held in escrow pending the Partnership's incurrence of
certain qualified expenditures.
Maturities of long-term debt for each of the next five years are as
follows:
1998 $69,557
1999 64,093
2000 26,024
2001 19,506
2002 19,505
Thereafter 8,500,000
-----------
$ 8,698,685
===========
The general partners are guarantors on the long-term debt. Substantially all of
the assets are pledged as collateral under the various debt agreements. In
addition, Engelhard is the guarantor on the short-term loan which amounts to
$2,750,000 as of December 31, 1997. The short-term loan is payable on demand
with the interest rate adjusted on a weekly basis. The interest rate at December
31, 1997 was 6.0625%. The interest on the long-term debt is adjusted weekly to
current market rates. The fair value of the Partnership's debt was determined by
reference to quotations available in markets where similar issues are traded.
The estimated fair values of long-term debt at December 31, 1997 approximates
the carrying amount. In connection with the Restructuring of the Partnership,
Engelhard remained as guarantor of up to $2 million on the short-term debt that
was transferred to Fresh Air Solutions and became sole guarantor on the $8.5
million industrial revenue bond which was transferred to Engelhard HexCore.
63
<PAGE>
(9) REVENUES:
Revenues are comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Equipment sales $ 6,311,235 $ 6,097,736 $ 2,558,250
Substrate processing 5,823,538 4,302,233 5,801,666
Licensing fees 0 0 500,000
Maintenance and service 104,239 104,640 84,363
------------ ------------ -----------
$ 12,239,012 $ 10,504,609 $ 8,944,279
============ ============ ===========
</TABLE>
The Partnership fabricates large cell honeycomb substrate materials at its Miami
facility under a Manufacturing and Supply Agreement with Hexcel Corporation
("Hexcel"'). Hexcel provides the raw materials to be fabricated into large cell
honeycomb substrate and retains title to the raw materials, work-in-process and
finished goods. The Partnership receives processing fees for fabricating the raw
materials into large cell honeycomb substrate. Processing fees are recognized in
revenues in the period the fabricated substrate material is shipped. The
Manufacturing and Supply Agreement is for a period of five years. The
Partnership is in the fourth year of performing services under such Agreement.
Export sales of equipment were approximately $1,283.000, $1,457,000, and
$643,000 in 1997, 1996 and 1995, respectively.
(10) PARTNERS' CAPITAL:
During 1997, $6,775,000 was contributed by the Company and $5,175,000 by
Engelhard. During 1996 and 1995, $7,000,000 and $3,000,000 respectively was
contributed by each of the general partners to the Partnership. In conjunction
with the General Partners' Loan of $8,000,000 and issuance of $8,500,000 of
industrial development revenue bonds (see note 6), $3,000,000 was repaid to each
general partner and the remaining $5,000,000 outstanding balance on the loan was
converted into a capital contribution, $2,500,000 for each general partner in
1995.
(11) RELATED PARTY TRANSACTIONS:
The Partnership provided approximately $78,000, $95,000, and $83,000 in various
administrative office support services to ICC during the years ended December
31, 1997, 1996 and 1995, respectively. Engelhard provided approximately
$298,000, $504,000, and $351,000 in various administrative office support
services to the Partnership during the years ended December 31, 1997, 1996 and
1995, respectively. Engelhard provided approximately $8,000, $17,000, and
$162,000 in research and development to the Partnership during the years ended
December 31, 1997, 1996 and 1995, respectively. ICC provided approximately
$78,000, $47,000 and $72,000 in various administrative office support services
to the Partnership during the year ended December 31, 1997, 1996, and 1995,
respectively. The Partnership incurred approximately $328,000 during the year
ended December 31, 1995, respectively, of interest expense to the general
partners in connection with the $8,000,000 General Partners' Loan (see note 6).
In accordance with the Transfer Agreement entered into by the general partners,
a distribution of approximately $140,000 was paid to ICC in 1995.
(12) SUPPLEMENTAL CASH FLOW DISCLOSURES:
Excluded from the Statement of Cash Flows for the year ended December 31, 1997
was the write-off of $1,386,999 of inventory and $38,319 of bad debts.
Excluded from the Statement of Cash Flows for the year ended December 31, 1996
was the write-off of $449,200 of inventory and $40,214 of bad debts.
Excluded from the Statement of Cash Flows for the year ended December 31, 1995
was the conversion of $5,000,000 of General Partners' Loans to Partners' Capital
and the write-off of $14,283 of bad debts.
Cash paid for interest amounted to approximately $504,000, $516,000 and $823,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
64
<PAGE>
(13) 401(K) PROFIT SHARING PLAN:
The Partnership provides a benefit for all employees through a 401(k) Profit
Sharing Plan ("the Plan"). Under the Plan, an employee may elect to contribute
on a pre-tax basis to a retirement account up to 15% of the employee's
compensation up to the maximum annual contributions permitted by the Internal
Revenue Code. The Partnership matches 50% of each participant's contributions up
to a maximum of 4% of the participant's compensation. Each employee is fully
vested at all times with respect to his or her contributions. The Partnership's
contribution and administration expense was approximately $104,380, $95,000 and
$80,000 for the years ended December 31, 1997 and 1996, and 1995, respectively.
(14) LEASE COMMITMENTS:
The Partnership has operating lease commitments for its facilities, vehicles and
certain equipment. In certain instances, these leases contain purchase and
renewal options, both of which are at fair market value. The Partnership's
offices are leased on a month-to-month basis.
The future minimum lease payments for these leases at December 31, 1997 are as
follows:
1998 $ 526,440
1999 523,843
2000 521,321
2001 513,918
2002 214,130
Rent expense under these operating leases was $655,551, $469,580, and $224,634
for the years ended December 31,
1997, 1996 and 1995, respectively.
In order to provide capacity and consolidate the Philadelphia office and
manufacturing operations, the Partnership entered into a ten-year lease
commitment which began April 1997, for approximately 140,000 square feet of
office, manufacturing and assembly space. The lease can be terminated after the
fifth year. The Partnership is responsible for paying its allocable portion of
all real estate taxes, water and sewer rates, and common expenses. The
obligations under the lease agreement are guaranteed by the general partners,
ICC and Engelhard.
(15) RESTRUCTURING OF PARTNERSHIP:
As indicated in Note 1, on February 27, 1998, ICC and Engelhard terminated the
Partnership into two limited partnerships, Fresh Air Solutions, LP and Engelhard
HexCore LP. The historical information related to Fresh Air Solutions and
Engelhard HexCore have been designated as "Box Business" and "Wheel Business",
respectively in the accompanying financial presentations. The following
financial statements of Box business and Wheel business have been prepared from
the historical financial statements of the Partnership and contain certain
adjustments to carve out assets, liabilities, net assets, revenues, expenses and
cash flows between the two businesses.
Balance Sheets
As of December 31, 1997
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash $ 235,432 $ 40,285 $ 275,717
Receivables 1,043,734 1,092,124 2,135,858
Inventory 2,101,894 959,790 3,061,684
Other current assets 62,965 16,894 79,859
Property, plant and equipment 2,634,389 6,862,508 9,496,897
Cash held in escrow -- 15,010 15,010
Other noncurrent assets 539,827 1,156,758 1,696,585
----------- ----------- -----------
Total assets $ 6,618,241 $10,143,369 $16,761,610
=========== =========== ===========
Current liabilities 4,306,795 461,799 4,768,594
Short-term loan 2,750,000 -- 2,750,000
Long-term loan 198,685 8,500,000 8,698,685
Partners' capital (deficit) (637,239) 1,181,570 544,331
----------- -----------
Total liabilities and capital $ 6,618,241 $10,143,369 $16,761,610
=========== =========== ===========
</TABLE>
65
<PAGE>
Statements of Operations
for the year ended
December 31, 1997
<TABLE>
<CAPTION>
Box Business Wheel Business Eliminations Partnership
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 6,415,474 $ 6,926,538 $ (1,103,000) $ 12,239,012
Cost of goods sold 11,661,030 6,902,752 (1,103,000) 17,460,782
------------ ------------ ------------ ------------
Gross profit (loss) (5,245,556) 23,786 - (5,221,770)
------------ ------------ ------------ ------------
Operating expenses:
Marketing 4,105,228 - 4,105,228
Engineering 2,074,295 - 2,074,295
Research and developmen 901,523 - 901,523
General and administrative 3,799,838 140,975 3,940,813
------------ ------------ ------------
Loss from operations (16,126,440) (117,189) 16,243,629)
------------ ------------ ------------
Interest expense 136,283 344,449 480,732
------------ ------------ ------------ ------------
Net loss $(16,262,723) $ (461,638) - $(16,724,361)
============ ============ ============ ============
</TABLE>
Condensed Statements of Cash Flows
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,262,723) $ (461,638) $(16,724,361)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 692,641 865,098 1,557,739
Provision for doubtful accounts 443,356 -- 443,356
Provisions for inventory obsolescence and
Valuation 1,278,040 -- 1,278,040
Write-off of equipment and other assets 364,201 82,637 446,838
Gain on sale of assets -- (18,000) (18,000)
(Increase) decrease in current assets 635,470 (93,454) 542,016
Current liabilities increase (decrease) 2,545,000 (10,384) 2,534,616
------------ ------------ ------------
Net cash (used in) provided by
operating activities (10,304,015) 364,259 (9,939,756)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,490,707) (596,737) (3,087,444)
Purchases of intangibles (103,203) (39,168) (142,371)
Proceeds from sale of assets -- 18,000 18,000
------------ ------------ ------------
Cash held in escrow -- 292,466 292,466
------------ ------------ ------------
Net cash used in investing activities (2,593,910) (325,439) (2,919,349)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,458 -- 40,458
Repayments of long-term debt (48,633) -- (48,633)
Capital contributions by general partners 11,950,000 -- 11,950,000
------------ ------------ ------------
Net cash provided by financing activities 11,941,825 -- 11,941,825
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (956,100) 38,820 (917,280)
Cash and cash equivalents, beginning of period 1,191,532 1,465 1,192,997
------------ ------------ ------------
Cash and cash equivalents, end of period $ 235,432 $ 40,285 $ 275,717
============ ============ ============
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Balance Sheets
As of December 31, 1996 Box Business Wheel Business Partnership
------------ ------------- -----------
<S> <C> <C> <C>
Cash $ 1,191,532 $ 1,465 $ 1,192,997
Receivables 2,091,908 548,896 2,640,804
Inventory 3,435,349 1,135,603 4,570,952
Other current assets 265,444 13,318 278,762
Property, plant and equipment 917,593 7,072,532 7,990,125
Cash held in escrow -- 307,476 307,476
Other noncurrent assets 719,550 1,258,565 1,978,115
----------- ----------- -----------
Total assets $ 8,621,376 10,337,855 18,959,231
=========== =========== ===========
Current liabilities 1,989,033 194,647 2,183,680
Short-term loan 2,750,000 -- 2,750,000
Long-term loan 206,859 8,500,000 8,706,859
Partners' capital 3,675,484 1,643,208 5,318,692
----------- ----------- -----------
Total liabilities and net assets $ 8,621,376 $10,337,855 `$18,959,231
=========== =========== ===========
</TABLE>
Statements of Operations
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Box Business Wheel Business Eliminations Partnership
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 6,202,609 $ 6,032,000 $ (1,730,000) $ 10,504,609
Cost of goods sold 9,190,145 6,316,314 (1,730,000) 13,776,459
------------ ------------ ------------ ------------
Gross profit (loss) (2,987,536) (284,314) -- (3,271,850)
------------ ------------ ------------ ------------
Operating expenses:
Marketing 3,563,817 -- 3,563,817
Engineering 1,053,809 -- 1,053,809
Research and development 1,055,758 -- 1,055,758
General and administrative 3,068,859 138,601 3,207,460
------------ ------------ ------------
Loss from operations (11,729,779) (422,915) (12,152,694)
------------ ------------ ------------
Interest expense 98,872 338,098 436,970
------------ ------------ ------------ ------------
Net loss $(11,828,651) $ (761,013) -- $(12,589,664)
============ ============ ============ ============
</TABLE>
67
<PAGE>
Condensed Statements of Cash Flows
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,828,651) $ (761,013) $(12,589,664)
Adjustments to reconcile net loss to net cash (used in)
Provided by
Operating activities:
Depreciation and amortization 581,092 767,965 1,349,057
Provision for doubtful accounts 40,000 -- 40,000
Provisions for inventory
obsolescence and valuation 941,030 -- 941,030
Write-off of equipment 23,471 -- 23,471
(Increase) decrease in current assets (3,038,921) 185,892 (2,853,029)
Increase (decrease) in current liabilities 641,348 5,903 647,251
------------ ------------ ------------
Net cash (used in) provided by operating activities (12,640,631) 198,747 (12,441,884)
Cash flows from investing activities: (211,189) (717,455) (928,644)
Purchases of property, plant and equipment (305,799) (40,528) (346,327)
Purchases of intangibles -- 558,268 558,268
------------ ------------ ------------
Cash held in escrow (516,988) (199,715) (716,703)
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt 57,072 -- 57,072
Repayments of long-term debt (51,968) -- (51,968)
Capital contributions by general partners 14,000,000 -- 14,000,000
---------- ------------ ------------
Net cash provided by financing activities 14,005,104 -- 14,005,104
Net increase (decrease) in cash and cash equivalents 847,485 (968) 846,517
Cash and cash equivalents, beginning of period 344,047 2,433 346,480
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,191,532 $ 1,465 $ 1,192,997
============ ============ ============
</TABLE>
68
<PAGE>
Statements of Operation
for the year December 31, 1995
<TABLE>
<CAPTION>
Box Business Wheel Business Elimination Partnership
------------ -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,142,613 $ 6,768,666 (967,000) $ 8,944,279
Cost of goods sold 5,190,059 6,660,936 (967,000) 10,883,995
------------ ------------ --------- ------------
Gross profit (loss) (2,047,446) 107,730 -- (1,939,716)
------------ ------------ --------- ------------
Operating expenses:
Marketing 3,412,008 3,412,008
Engineering 936,415 936,415
Research and development 1,133,780 1,133,780
General and administrative 2,305,888 134,834 2,440,722
------------ ------------ ------------
Loss from operations (9,835,537) (27,104) (9,862,641)
Interest expense 438,447 271,135 709,582
------------ ------------ --------- ------------
Net loss $(10,273,984) $ (298,239) $(10,572,223)
============ ============ ========= ==========
</TABLE>
Statements of Cash Flows
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Cash flows from operating activities Box Business Wheel Business Partnership
------------ -------------- -----------
<S> <C> <C> <C>
Net loss $(10,273,984) $ (298,239) $(10,572,223)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 401,851 699,047 1,100,898
Provision for doubtful accounts 31,104 -- 31,104
Provisions for inventory obsolescence and valuation 600,000 -- 600,000
(Increase) decrease in current assets (758,389) (2,295,303) (3,053,692)
Current liabilities increase (decrease) (405,374) 194,036 (211,338)
------------ ------------ ------------
Net cash used in operating activities (10,404,792) (1,700,459) (12,105,251)
Cash flows from investing activities
Purchases of property, plant and equipment (572,097) (685,367) (1,257,464)
Purchases of intangibles (102,544) (31,700) (134,244)
Cash held in escrow -- (865,744) (865,744)
------------ ------------ ------------
Net cash used in investing activities (674,641) (1,582,811) (2,257,452)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 69,956 -- 69,956
Repayments of long-term debt (43,245) -- (43,245)
Proceeds from issuance of bonds -- 8,500,000 8,500,000
Transfer of bond proceeds between businesses 5,000,000 (5,000,000) --
Bond issuance costs (215,979) (215,979)
Capital contributions by general partners 6,000,000 -- 6,000,000
Proceeds from short-term debt 2,750,000 -- 2,750,000
Repayment of notes payable to general partner (3,000,000) -- (3,000,000)
------------ ------------ ------------
Net cash provided by financing activities 10,776,711 3,284,021 14,060,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (302,722) 751 (301,971)
Cash and cash equivalents, beginning of period 646,769 1,682 648,451
------------ ------------ ------------
Cash and cash equivalents, end of period $ 344,047 $ 2,433 $ 346,480
`============ ============ ============
</TABLE>
69
<PAGE>
RARE MEDIUM GROUP
SCHEDULE II--VALUATIONS AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED ADDITIONS
BALANCE AT TO COSTS CHARGED BALANCE AT
BEGINNING AND TO OTHER END OF
DEDUCTIONS -- DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ------------------------------------------------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted asset accounts:
Allowances for uncollectible accounts receivable
Year ended December 31, 1997..................... -- -- -- -- --
Year ended December 31, 1998..................... -- -- $ 82,445(1) -- $ 82,445
Year ended December 31, 1999..................... $ 82,445 544,747 -- $ (82,445) $ 544,747
Allowances for uncollectible notes receivable
Year ended December 31, 1997..................... -- -- -- -- --
Year ended December 31, 1998..................... -- -- $ 375,000 -- $ 375,000
Year ended December 31, 1999..................... $ 375,000 (200,000) -- -- $ 175,000
</TABLE>
- ------------------
(1) Existing reserves for acquired companies.
70
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ Glenn S. Meyers Chairman of the Board, President and February 23, 2000
- ------------------------------------------ Chief Executive Officer
Glenn S. Meyers
/s/ Andrew D. Africk Director February 23, 2000
- ------------------------------------------
Andrew D. Africk
/s/ Michael Gross Director February 23, 2000
- ------------------------------------------
Michael Gross
/s/ Jeffrey Killeen Director February 23, 2000
- ------------------------------------------
Jeffrey Killeen
/s/ Richard T. Liebhaber Director February 23, 2000
- ------------------------------------------
Richard T. Liebhaber
/s/ Marc J. Rowan Director February 23, 2000
- ------------------------------------------
Marc J. Rowan
/s/ Steven Winograd Director February 23, 2000
- ------------------------------------------
Steven Winograd
/s/ Jeffrey J. Kaplan Executive Vice President and Chief February 23, 2000
- ------------------------------------------ Financial Officer (Principal Financial
Jeffrey J. Kaplan Officer)
/s/ Michael A. Hultberg Vice President and Controller (Principal February 23, 2000
- ------------------------------------------ Accounting Officer)
Michael A. Hultberg
</TABLE>
71
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------------- -----------
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2.1 -- Master Agreement, dated November 17, 1997, by and among ICC Technologies, Inc., ICC
Investment, L.P., ICC Desiccant Technologies, Inc., and Engelhard Corporation, Engelhard
DT Inc. and Engelhard/ICC was filed as Exhibit "B" to ICC Technologies, Inc.'s Definitive
Proxy Statement dated February 3, 1998, for the Special Meeting of Stockholders held on
February 23, 1998, and is hereby incorporated herein by reference.
2.2 -- Contribution Agreement, dated as of November 17, 1997, between Engelhard/ICC and Fresh
Air Solutions, L.P. was filed as Exhibit "C" to ICC Technologies, Inc.'s Definitive Proxy
Statement dated February 3, 1998, for the Special Meeting of the Stockholders held on
February 23, 1998, and is hereby incorporated herein by reference.
2.3 -- E/ICC Purchase and Sale Agreement, dated as of November 17, 1997, by and among ICC
Investment, L.P., ICC Desiccant Technologies, Inc. and Engelhard DT, Inc., was filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, and is hereby incorporated herein by reference.
2.4 -- Merger Agreement and Plan of Reorganization, dated as of April 8, 1998, by and among ICC
Technologies, Inc., RareMedium Acquisition Corp., Rare Medium, Inc. and the Founding
Stockholders named therein ("Rare Medium Merger Agreement") was filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated April 15, 1998 and is hereby incorporated
herein by reference.
2.5 -- Agreement and Plan of Merger, dated as of August 13, 1998, by and among ICC Technologies,
Inc., Rare Medium, Inc., I/O 360, Inc. and the I/O 360 Stockholders named therein was
filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated August 13, 1998
and is hereby incorporated herein by reference.
2.6 -- Agreement and Plan of Merger, dated as of August 13, 1998 by and among ICC Technologies,
Inc., Rare Medium, Inc., DigitalFacades Corporation and the DigitalFacades Stockholders
named therein was filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated
August 13, 1998 and is hereby incorporated herein by reference.
2.7 -- Purchase and Sale Agreement Relating to Partnership Interests in Fresh Air Solutions,
L.P. by and between ICC Desiccant Technologies, Inc. and Wilshap Investments, LLC dated
as of October 14, 1998 was filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated October 14, 1998 and is hereby incorporated herein by reference.
2.8 -- Agreement and Plan of Merger, dated as of November 12, 1999, by and among
Changemusic.com, Inc., a Delaware corporation, College Media, Inc., a New York
corporation, and CMJ.com, Inc., a Delaware corporation, which was filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated November 24, 1999, and is hereby
incorporated herein by reference.
2.9 -- Stock Purchase Agreement, dated as of November 12, 1999, by and among College Media,
Inc., a New York corporation, Robert Haber, Joanne Haber, Lee Haber, Diane Turofsky, and
Rare Medium Group, Inc., which was filed as Exhibit 2.2 to the Company's Current Report
on Form 8-K dated November 24, 1999, and is hereby incorporated herein by reference.
2.10 -- Securities Purchase Agreement, dated as of November 12, 1999, between Rare Medium Group,
Inc. and CMJ.com, Inc., a Delaware corporation, which was filed as Exhibit 2.3 to the
Company's Current Report on Form 8-K dated November 24, 1999, and is hereby incorporated
herein by reference.
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3.1 -- Restated Certificate of Incorporation of Rare Medium Group, Inc.
3.2 -- Amended and Restated By-Laws of Rare Medium Group, Inc.
10.1 -- Form of Secured Promissory Note of Rare Medium, Inc. ("Rare Medium Note") in the
principal amount of $22 million issued in connection with the acquisition of Rare Medium,
Inc. was filed as Exhibit C-1 to the Rare Medium Merger Agreement, which was filed as
Exhibit 2.1 to the Company's Form 8-K dated April 15, 1998, and is hereby incorporated
herein by reference.
10.2 -- Form of Security Agreement between Rare Medium, Inc. and former stockholders of Rare
Medium, Inc. in connection with the acquisition of Rare Medium, Inc., was filed as
Exhibit D to the Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the
Company's Form 8-K dated April 15, 1998, and is hereby incorporated herein by reference.
10.3 -- Form of Stock Pledge Agreement between ICC Technologies, Inc. and the former stockholders
of Rare Medium, Inc., in connection with the acquisition of Rare Medium, Inc., was filed
as Exhibit E to the Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the
Company's Form 8-K dated April 15, 1998, and is hereby incorporated herein by reference.
10.4 -- Form of Non-Founder Agreement between the Company and certain former stockholders of Rare
Medium, Inc. in connection with the acquisition of Rare Medium, Inc., was filed as
Exhibit M to the Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the
Company's Form 8-K dated April 15, 1998, and is hereby incorporated herein by reference.
10.5 -- Form of Guaranty by ICC Technologies, Inc. of the Rare Medium Note, which was filed as
Exhibit N to the Rare Medium Merger Agreement, which was filed as Exhibit 2.1 to the
Company's Form 8-K dated April 15, 1998, and is hereby incorporated herein by reference.
10.6 -- Employment Agreement between the Company and Glenn S. Meyers, dated April 14, 1998, which
was filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by reference.
10.7 -- Employment Agreement between the Company and John S. Gross, dated May 13, 1998, which
was filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by reference.
10.8 -- Lease dated September 12, 1997 between Forty Four Eighteen Joint Venture and Rare Medium,
Inc. re: entire sixth floor, 44-8 West 18th Street thru to 47-53 West 17th Street,
Manhattan, New York, New York, which was filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is hereby incorporated
herein by reference.
10.9 -- Lease dated February 11, 1998 by and between B & G Bailey Living Trust u/t/d March 25,
1975 and Steaven Jones and DigitalFacades Corporation re: 4081 Redwood Avenue, 1st Floor,
Los Angeles, California, which was filed as Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, and is hereby incorporated herein by
reference.
10.10 -- The Company's Incentive Stock Option Plan, as amended, which was filed as
Exhibit 4(g) to the Company's Registration Statement on Form S-8, No. 33-85636, filed on
October 26, 1994, and is hereby incorporated herein by reference.
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10.11 -- The Company's Nonqualified Stock Option Plan as amended and restated, which was filed as
Exhibit C to the Company's Definitive Proxy Statement dated November 18, 1994, for
Stockholders Meeting held December 15, 1994, and is hereby incorporated herein by
reference.
10.12 -- The Company's Equity Plan for Directors is hereby incorporated herein by reference from
ICC's Definitive Proxy Statement dated November 18, 1994, for Stockholders Meeting held
December 15, 1994.
10.13 -- The Company's 1998 Long-Term Incentive Plan was filed as Appendix I to the Company's
Definitive Proxy Statement dated February 17, 1999, for the Stockholders Meeting held
March 16, 1998, and is hereby incorporated herein by reference.
10.14 -- Fresh Air Solutions, L.P. Limited Partnership Agreement, dated February, 1998, between
ICC Desiccant Technologies, Inc., as the sole general partner and a limited partner, and
Engelhard DT, Inc., a limited partner, which was filed as Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, and is hereby
incorporated herein by reference.
10.15 -- Admission of Partner/Amendment of Partnership Agreement dated October 14, 1998 between
ICC Desiccant Technologies, Inc., Wilshap Investments, L.L.C., Engelhard DT, Inc. and
Fresh Air Solutions, L.P., which was filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is hereby incorporated
herein by reference.
10.16 -- Form of Exchange Agreement, dated as of December 31, 1998, by and between ICC
Technologies, Inc. and each of certain beneficial holders of the Rare Medium, Inc.,
Secured Promissory Note, dated April 15, 1998, which was filed as Exhibit 10.1 to the
Company's Form 8-K dated December 31, 1998, and is hereby incorporated herein by
reference.
10.17 -- Securities Purchase Agreement, dated as of January 28, 1999, by and among ICC
Technologies, Inc. and Capital Ventures International ("CVI Securities Purchase
Agreement") and Exhibits thereto, which were filed as Exhibit 10.1 to the Company's
Form 8-K dated January 28, 1999, and are hereby incorporated herein by reference.
10.18 -- Form of Convertible Term Debenture, dated as of January 28, 1999, which was filed as
Exhibit A to the CVI Securities Purchase Agreement, which was filed as Exhibit 10.1 to
the Company's Form 8-K dated January 28, 1999, and is hereby incorporated herein by
reference.
10.19 -- Form of Stock Purchase Warrant of ICC Technologies, Inc., dated as of January 28, 1999,
which was filed as Exhibit B to the CVI Securities Purchase Agreement, which was filed as
Exhibit 10.1 to the Company's Form 8-K dated January 28, 1999, and is hereby
incorporated herein by reference.
10.20 -- Form of Registration Rights Agreement, dated as of January 28, 1999, which was filed as
Exhibit C to the CVI Securities Purchase Agreement, which was filed as Exhibit 10.1 to
the Company's Form 8-K dated January 28, 1999, and is hereby incorporated herein by
reference.
10.21 -- Agreement and Plan of Merger, dated as of March 5, 1999, among Rare Medium, Inc., ICC
Technologies, Inc., Rare Medium Texas I, Inc., Big Hand, Inc., and The Stockholders of
Big Hand, Inc., which was filed as Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, and is hereby incorporated herein by
reference.
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10.22 -- The Company's Amended and Restated Equity Plan for Directors, which was filed as Exhibit
10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and is hereby incorporated herein by reference.
10.23 -- Employment Agreement between the Company and Suresh V. Mathews, dated January 29, 1999,
which was filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and is hereby incorporated herein by reference.
10.24 -- Agreement and Plan of Merger, dated as of May 5, 1999, among Rare Medium Group, Inc.,
Rare Medium Atlanta, Inc., Struthers Martin, Inc., and certain shareholders of Struthers
Martin, Inc. named herein, which was filed as Exhibit 10 to the Company's Current Report
on Form 8-K dated May 17, 1999, and is hereby incorporated herein by reference.
10.25 -- Amended and Restated Securities Purchase Agreement, dated as of June 4, 1999, among Rare
Medium Group, Inc., Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P.
and AIF/RRRR LLC, which was filed as Exhibit 10.1 to the Company's Current Report on Form
8-K filed on June 21, 1999, and is hereby incorporated herein by reference.
10.26 -- Form of Series 1-A Warrant of Rare Medium Group, Inc., which was filed as Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on June 21, 1999, and is hereby
incorporated herein by reference.
10.27 -- Form of Series 2-A Warrant of Rare Medium Group, Inc., which was filed as Exhibit 4.5 to
the Company's Current Report on Form 8-K filed on June 21, 1999, and is hereby
incorporated herein by reference.
10.28 -- Pledge, Escrow and Disbursement Agreement, dated as of June 4, 1999, among Rare Medium
Group, Inc., Apollo Investment Fund IV, L.P., and The Chase Manhattan Bank, which was
filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 21, 1999,
and is hereby incorporated herein by reference.
10.29 -- Unit Purchase Agreement dated as of September 27, 1999 by and among Rare Atomic Pop, LLC,
a Delaware limited liability company, New Valley Corporation, a Delaware corporation, and
Ant 21 LLC, a Delaware limited liability company, which was filed as Exhibit 10 to the
Company's Current Report on Form 8-K dated October 12, 1999, and is hereby incorporated
herein by reference.
10.30 -- Form of Purchase Agreement, dated January 14, 2000, between the Company and each of the
purchasers in the private placement, which was filed as Exhibit 4.1 to the Company's Form
S-3 filed on February 11, 2000, and is hereby incorporated herein by reference.
10.31 -- Form of Stock Option Agreement, dated April 15, 1998, by and between ICC Technologies,
Inc. and Glenn S. Meyers, filed as Exhibit 4(e) to the Company's Form S-8 filed on April
23, 1999, and is hereby incorporated herein by reference.
10.32 -- Employment Agreement between the Company and Jeffrey J. Kaplan, dated February 23, 2000.
16 -- Letter regarding change in certifying accountant from PricewaterhouseCoopers LLP to the
Securities and Exchange Commission, dated August 26, 1998, which was filed as
Exhibit 16.1 to the Company's Current Report on Form 8-K dated August 13, 1998, and is
hereby incorporated herein by reference.
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21 -- Subsidiaries of the Company are Rare Medium, Inc., a New York corporation; Rare Medium
Atlanta, Inc., a Delaware corporation; Rare Medium San Francisco, Inc., a Delaware
corporation; Rare Medium Detroit, Inc., a Delaware corporation; Rare Medium Austin, Inc.,
a Delaware corporation; Evit__Caretni Interactive, Inc., a California corporation;
Carlyle Media Group Limited, a United Kingdom corporation; ChangeMusic Network, Inc., a
Delaware corporation; Liveuniverse.com Inc., a Delaware corporation; Notus
Communications, Inc., a Georgia corporation; Regards.com, Inc., a New York corporation;
Greetingland Network, Inc., a Delaware corporation; and ePrize, Inc., a Michigan
corporation.
23.1 -- Consent of KPMG LLP, Independent Accountants.
23.2 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 -- Independent Auditor's Report on Schedule.
27 -- Financial Data Schedule.
99 -- Letter on behalf of ICC Technologies, Inc. to PriceWaterhouseCoopers LLP pursuant to
Item 304 of Regulation S-K, which was filed as Exhibit 99.1 to the Company's Current
Report on Form 8-K dated August 13, 1998, and is hereby incorporated herein by reference.
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RESTATED CERTIFICATE OF INCORPORATION
OF
RARE MEDIUM GROUP, INC.
(pursuant to Section 245 of the
Delaware General Corporation Law)
RARE MEDIUM GROUP, INC., a Delaware corporation (the
"Company"), the original Certificate of Incorporation of which was filed with
the Secretary of State of the State of Delaware on August 15, 1985 under the
name International Cogeneration Corporation, HEREBY CERTIFIES AS FOLLOWS:
This Restated Certificate of Incorporation hereby restates
and inte grates, without further amendment, pursuant to Section 245 of the
General Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code, the Company's Certificate of Incorporation, as amended to date.
There is no discrepancy between the terms of this Restated Certificate of
Incorporation and the terms of the Company's Certificate of Incorporation, as
amended to date. The text of this Restated Certificate of Incorporation, as so
restated, is as follows:
FIRST: The name of the Company is Rare Medium Group, Inc.
SECOND: The address of the Company's registered office in the
State of Delaware is Corp. Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle 19801. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Company is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The aggregate number of shares which the Company
shall have authority to issue shall be:
Three Hundred Ten Million (310,000,000) shares, consisting of
Two Hundred Million (200,000,000) shares of Common Stock, with a par value of
One Cent ($0.01) per share, One Hundred Million
<PAGE>
(100,000,000) shares of Non-Voting Common Stock, with a par value of
One Cent ($0.01) per share, and Ten Million (10,000,000) shares of
Preferred Stock, with a par value of One Cent ($0.01) per share. The
Board of Directors, in its sole direction, shall have full and complete
authority, by resolutions, from time to time, to establish one or more
series or classes to issue shares of Preferred Stock, and to fix,
determine and vary the voting rights, designations, preferences,
restrictions, qualifications, privileges, limitations, options,
conversion rights and other special rights of each series or class of
Preferred Stock, including, but not limited to, dividend rates and
manner of payment, preferential amounts payable upon voluntary or
involuntary liquida tion, voting rights, conversion rights, redemption
prices, terms and conditions and sinking fund and stock purchase
prices, terms and conditions.
Pursuant to the authority expressly granted to and vested in
the Board of Directors of the Company (the "Board of Directors") by the
provisions of this Restated Certificate of Incorporation of the Company
(the "Restated Certificate of Incorporation"), there is hereby created,
out of the 10,000,000 shares of Preferred Stock, par value $0.01 per
share, of the Company authorized and unissued in Article Fourth of this
Restated Certificate of Incorporation (the "Preferred Stock"), a series
of Preferred Stock consisting of 2,000,000 shares, which series shall
have the following powers, designations, prefer ences and relative,
participating, optional or other rights, and the following
qualifications, limitations and restrictions (in addition to any
powers, designations, preferences and relative, participating, optional
or other rights, and any qualifications, limitations and restrictions,
set forth in this Restated Certificate of Incorporation which are
applicable to the Preferred Stock):
1. Designation of Amount. The 2,000,000 shares of Preferred
Stock shall be designated the "Series A Convertible Preferred Stock" (the
"Series A Preferred Stock") and the authorized number of shares constituting
such series shall be 2,000,000.
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2. Dividends.
---------
(a) The holders of the then outstanding shares of Series A
Preferred Stock will be entitled to receive, when, as and if declared by the
Board of Directors out of funds of the Company legally available therefor,
cumulative dividends, accruing on a daily basis from the Original Issuance Date
through and including the date on which such dividends are paid at the annual
rate of (A) 7.50% from the Original Issuance Date through June 30, 2002 and (B)
thereafter, 4.65% (in either case, the "Applicable Rate"), of the Liquidation
Preference (as hereinafter defined) per share of the Series A Preferred Stock,
payable in arrears on the last day of each of December, March, June and
September, commencing on June 30, 1999; provided that: (i) if any such payment
date is not a Business Day then such dividend shall be payable on the next
Business Day, and (ii) accumulated and unpaid dividends for any prior quarterly
period may be paid at any time. Such dividends shall be deemed to accrue on the
Series A Preferred Stock from the Original Issuance Date and be cumulative
whether or not earned or declared and whether or not there are profits, surplus
or other funds of the Company legally available for the payment of dividends.
The term "Business Day" means a day other than a Saturday, Sunday or day on
which banking institutions in New York are authorized or required to remain
closed. The term "Original Issuance Date" means, with respect to the Series A
Preferred Stock, the first date of issuance, i.e., June 4, 1999, and, with
respect to any Additional Securities (as hereinafter defined), the date upon
which they are issued or, if not issued, the applicable dividend payment date on
which the Additional Securities were to have been issued.
(b) On any dividend payment date occurring on or prior to June
30, 2002, the Company shall pay a dividend on such Series A Preferred Stock
through the issuance of additional shares of Series A Preferred Stock
("Additional Securities"). On any dividend payment date occurring after June 30,
2002 and on or prior to June 30, 2004, the Company shall pay a dividend on such
Series A Preferred Stock through the issuance of Additional Securities, provided
that at the option of either the holders of a majority of the then outstanding
shares of Series A Preferred Stock (the "Requisite Holders") or the Company, the
Company shall pay the dividends in whole in cash. In the event the Company or
the Requisite Holders, as the case may be, elect to have such dividends paid in
cash, they shall provide the other party written notice of such election not
less than ten days prior to the applicable dividend payment date. On any
dividend payment date occurring after June 30, 2004, all dividends on such
Series A Preferred Stock shall be paid in cash. Shares of
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Series A Preferred Stock issued in payment of dividends shall be valued at all
times at $100 per share and each such share shall be issued with a detachable
ten-year warrant (each a "Series 1-A Warrant") that entitles its holder to
purchase from the Company thirteen and one-half (13.5) shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"). The number of
Additional Securities that are issued to the holders of the Series A Preferred
Stock under this paragraph (b) will be the number obtained by dividing (i) the
total dollar amount of cumulative dividends due and payable on the applicable
dividend payment date by (ii) the Liquidation Preference, provided, that the
Company shall not be required to issue fractional shares of Series A Preferred
Stock, but in lieu thereof shall pay in cash the portion of any dividend payable
in shares of Series A Preferred Stock that would otherwise require the issuance
of a fractional share, provided further, that in any such case, the Company
shall issue the holders fractional Series 1-A Warrants in an amount appropriate
to reflect the fractional share of Series A Preferred Stock.
(c) Holders of shares of the Series A Preferred Stock shall be
entitled full cumulative dividends, as herein provided, on the Series A
Preferred Stock and no additional amounts. Except as set forth in paragraph (f)
below, no interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the Series A Preferred Stock that
may be in arrears.
(d) If dividends are not paid in full, or declared in full and
sums set apart for the payment thereof, upon the shares of Series A Preferred
Stock and the shares of any other series of Preferred Stock ranking on a parity
as to dividends with the Series A Preferred Stock ("Parity Stock"), all
dividends declared upon shares of Series A Preferred Stock and upon all Parity
Stock shall be paid or declared pro rata so that in all cases the amount of
dividends paid or declared per share on the Series A Preferred Stock and such
Parity Stock shall bear to each other the same ratio that unpaid accumulated
dividends per share, including dividends accrued or in arrears, if any, on the
shares of Series A Preferred Stock and such other shares of Parity Stock, bear
to each other. Unless and until full cumulative dividends on the shares of
Series A Preferred Stock in respect of all past quarterly dividend periods have
been paid, and the full amount of dividends on the shares of Series A Preferred
Stock in respect of the then current quarterly dividend period shall have been
or are contemporane ously declared in full and sums set aside for the payment
thereof, (i) no dividends shall be paid or declared or set aside for payment or
other distribution upon the Common Stock, or any other capital stock of the
Company ranking junior to the Series A Preferred Stock as to dividends (together
with the Common Stock, "Junior
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Stock"), other than in shares of, or warrants or rights to acquire, Junior
Stock; and (ii) no shares of Junior Stock or Parity Stock shall be redeemed,
retired, purchased or otherwise acquired for any consideration (or any payment
made to or available for a sinking fund for the redemption of any such shares)
by the Company or any Subsid iary of the Company (except by conversion into or
exchange for shares of Junior Stock). For the purposes hereof, a "Subsidiary"
shall mean any corporation, associa tion or other business entity (i) at least
50% of the outstanding voting securities of which are at the time owned or
controlled by the Company; or (ii) with respect to which the Company possesses,
directly or indirectly, the power to direct or cause the direction of the
affairs or management of such person. Holders of shares of Series A Preferred
Stock shall not be entitled to any dividends, whether payable in cash, property
or shares of capital stock, in excess of full accrued and cumulative dividends
as herein provided.
The terms "accrued dividends," "dividends accrued" and
"dividends in arrears," whenever used herein with reference to shares of Series
A Preferred Stock shall be deemed to mean an amount which shall be equal to
dividends thereon at the Applicable Rate per share for the respective series
from the date or dates on which such dividends commence to accrue to the end of
the then current quarterly dividend period for such Preferred Stock (or, in the
case of redemption, to the date of redemp tion), whether or not earned or
declared and whether or not assets for the Company are legally available
therefor, and if full dividends are not declared or paid (whether in cash or in
Additional Securities), then such dividends shall cumulate, with additional
dividends thereon, compounded quarterly, at the Applicable Rate, for each
quarterly period during which such dividends remain unpaid, less the amount of
all such dividends paid, or declared in full and sums set aside for the payment
thereof, upon such shares of Preferred Stock.
(e) The amount of any dividends per share of Series A
Preferred Stock for any full quarterly period shall be computed by multiplying
the Applicable Rate for such quarterly dividend period by the Liquidation
Preference per share and dividing the result by four. Dividends payable on the
shares of Series A Preferred Stock for any period less than a full quarterly
dividend period shall be computed on the basis of a 360-day year of twelve
30-day months and the actual number of days elapsed for any period less than one
month.
(f) In the event any dividends are declared with respect to
the Common Stock, the holders of the Series A Preferred Stock as of the record
date established by the Board of Directors for such dividend shall be entitled
to receive as
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additional dividends (the "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 holder would have received had the Series A Preferred
Stock been converted into Common Stock as of the date immediately prior to the
record date of such dividend, such Additional Dividends to be payable on the
payment date of the dividend established by the Board of Directors (the
"Additional Dividend Payment Date"). The record date for any such Additional
Dividends shall be the record date for the applicable dividend, and any such
Additional Dividends shall be payable to the persons in whose name this Series A
Preferred Stock is registered at the close of business on the applicable record
date.
3. Liquidation Preference. In the event of a liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of Series A Preferred Stock then outstanding shall be entitled to
receive out of the available assets of the Company, whether such assets are
stated capital or surplus of any nature, an amount on such date equal to $100
per share of Series A Preferred Stock (the "Liquidation Preference") plus the
amount of any accrued and unpaid dividends as of such date, calculated pursuant
to Section 2 hereinabove. Such payment shall be made before any payment shall be
made or any assets distributed to the holders of any class or series of the
Common Stock or any other class or series of the Company's capital stock ranking
junior as to liquidation rights to the Series A Preferred Stock. If upon any
such liquidation, dissolution or winding up of the Company the assets available
for payment of the Liquidation Preference are insufficient to permit the
payment to the holders of the Series A Preferred Stock of the full preferential
amounts described in this paragraph, then all the remaining available assets
shall be distributed among the holders of the then outstanding Series A
Preferred Stock pro rata according to the number of then outstanding shares of
Series A Preferred Stock held by each holder thereof. No event that constitutes
a Change of Control (as defined in Section 5(b) below) shall be considered a
liquidation, dissolution or winding up of the Company for purposes of this
Section 3 (unless in connection therewith the liquidation of the Company is
specifically approved).
4. Mandatory Redemption. On June 30, 2012 (the "Redemption
Date"), the Company shall redeem for cash all shares of Series A Preferred Stock
that are then outstanding and any shares of Series A Preferred Stock then
issuable in respect of accrued but unpaid dividends, in each case, at a
redemption price per share equal to the Liquidation Preference thereof plus the
amount of any accrued and unpaid dividends as of such date ("Redemption Price").
Not more than sixty (60) nor less than thirty (30) days prior to the Redemption
Date, notice by first class mail,
6
<PAGE>
postage prepaid, shall be given to each holder of record of the Series A
Preferred Stock, at such holder's address as it shall appear upon the stock
transfer books of the Company on such date. Each such notice of redemption shall
be irrevocable and shall specify the date that is the Redemption Date, the
Redemption Price, the identification of the shares to be redeemed, the place or
places of payment and that payment will be made upon presentation and surrender
of the certificate(s) evidencing the shares of Series A Preferred Stock to be
redeemed and that dividends on the shares of the Series A Preferred Stock cease
to accrue on the Redemption Date. On or after the Redemption Date, each holder
of shares of Series A Preferred Stock shall surrender the certificate evidencing
such shares to the Company at the place designated in such notice and shall
thereupon be entitled to receive payment of the Redemption Price in the manner
set forth in the notice. If, on the Redemption Date, funds in cash in an amount
sufficient to pay the aggregate Redemption Price for all outstanding shares of
Series A Preferred Stock shall be available therefor and shall have been
irrevocably set aside and deposited with a bank or trust company in trust for
purposes of payment of such Redemption Price, then, notwithstanding that the
certificates evidencing any shares so called for redemption shall not have been
surrendered, the shares shall no longer be deemed outstanding, the holders
thereof shall cease to be stockholders, and all rights whatsoever with respect
to the shares so called for redemption (except the right of the holders to
receive the Redemption Price upon surrender of their certificates therefor)
shall terminate. If at the Redemption Date, the Company does not have sufficient
funds legally available to redeem all the outstanding shares of Series A
Preferred Stock, the Company shall take all measures permitted under the
Delaware General Corporation Law to increase the amount of its capital and
surplus legally available, and the Company shall purchase as many shares of
Series A Preferred Stock as it may legally redeem, ratably from the holders
thereof in proportion to the number of shares held by them, and shall thereafter
from time to time, as soon as it shall have funds available therefor, redeem as
many shares of Series A Preferred Stock as it legally may until it has redeemed
all of the outstanding shares of Series A Preferred Stock.
5. Optional Redemption.
-------------------
(a) Change of Control. In the event that any Change of Control
(as hereinafter defined) shall occur at any time while any shares of Series A
Preferred Stock are outstanding, the Requisite Holders shall have the right to
give notice that they are exercising a Change of Control election (a "Change of
Control Election"), with respect to all or any number of such holders' shares of
Series A Preferred Stock, during the period (the "Exercise Period") beginning on
the 20th day and ending on
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the 90th day after the date of such Change of Control. Upon any such election,
the Company shall redeem for cash each of such holders' shares (including any
shares then issuable in respect of accrued but unpaid dividends) for which such
an election is made, to the extent permitted by applicable law, at the
Redemption Price.
(b) As used herein, "Change of Control" means the occurrence of any of
the following events:
(1) the acquisition by any individual, entity or
group other than Apollo Management, L.P. or its affiliates (a
"Person"), or any Holder (as such term is defined in the
Amended and Restated Securities Purchase Agreement (the
"Agreement") dated as of June 4, 1999 among the Company,
Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV,
L.P. and AIF IV/RRRR LLC), including any "person" within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), of
beneficial ownership within the meaning of Rule 13d-3 promul
gated under the Exchange Act, of more than 50% of either (i)
the then outstanding shares of Common Stock (the "Outstanding
Company Common Stock") or (ii) the combined voting power of
the then outstanding securities of the Company entitled to
vote generally in the election of directors (the "Outstanding
Company Voting Securities"); excluding, however, the
following: (A) any acquisition directly from the Company of
Common Stock (excluding any acquisition resulting from an
exercise, conversion or exchange privilege unless the security
being so exercised, converted or exchanged was acquired
directly from the Company), (B) any acquisition of Common
Stock by the Company, (C) any acquisition of Common Stock by
an employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by
the Company or (D) any acquisition of Common Stock by any
corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (3) of this Section
5(b);
(2) a majority of the individuals who, as of the
Original Issuance Date of the Series A Preferred Stock,
constitute the members of the Board of Directors not elected
by the holders of Series A Preferred Stock (the "Incumbent
Board") cease for any reason to serve on such Board of
Directors; provided that any individual who becomes
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a director of the Company subsequent to such Original Issuance
Date, whose election, or nomination for election by the Com
pany's stockholders, was approved by the vote of at least a
majority of the directors then comprising the Incumbent Board
shall be deemed a member of the Incumbent Board; and provided
further, that any individual who was initially elected as a
director of the Company as a result of an actual or threatened
election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, or any
other actual or threatened solicitation of proxies or consents
by or on behalf of any Person other than the Board of
Directors shall not be deemed a member of the Incumbent Board;
or
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation of the Company or sale
or other disposition of all or substantially all of the assets
of the Company (a "Corporate Transaction"); excluding,
however, a Corporate Transaction pursuant to which (i) the
individuals or entities who are the beneficial owners,
respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to
such Corporate Transaction will beneficially own, directly or
indirectly, more than 50% of, respectively, the out standing
shares of common stock, and the combined voting power of the
outstanding securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such
transaction owns 100% of the Outstanding Company Common Stock
or all or substantially all of the Company's assets either
directly or indirectly) in substantially the same proportions
relative to each other as their ownership, immediately prior
to such Corporate Transaction, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as
the case may be, (ii) no Person (other than: the Company; any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by
the Company; the corporation resulting from such Corporate
Transaction; and any Person which beneficially owned,
immediately prior to such Corporate Transaction, directly or
indirectly, 30% or more of the Outstanding Company Common
Stock or the Outstanding Company Voting Securities, as the
case may be) will beneficially own, directly or indirectly,
30% or
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<PAGE>
more of, respectively, the outstanding shares of common stock
of the corporation resulting from such Corporate Transaction
or the com bined voting power of the outstanding securities of
such corporation entitled to vote generally in the election of
directors and (iii) individuals who were members of the
Incumbent Board will continue to serve as members of the board
of directors of the corporation resulting from such Corporate
Transaction.
(c) On or before the tenth (10th) day after a Change of
Control, the Company shall mail to all holders of record of the Series A
Preferred Stock at their respective addresses as the same shall appear on the
books of the Company as of such date, a notice disclosing (i) the Change of
Control, (ii) the Redemption Price per share of the Series A Preferred Stock
applicable hereunder, (iii) the determination of the Requisite Holders to
exercise a Change of Control Election (or the date on which such a determination
is scheduled to be made) and (iv) the procedure which the holder must follow to
exercise the redemption right provided above. To exercise the Change of Control
Election, if applicable, a holder of the Series A Preferred Stock must deliver
during the Exercise Period written notice to the Company (or an agent designated
by the Company for such purpose) of the holder's exercise of the Change of
Control Election, accompanied by each certificate evidencing shares of the
Series A Preferred Stock with respect to which the Change of Control Election is
being exercised, duly endorsed for transfer. On or prior to the fifth (5th)
business day after receipt of delivery of such written notice, the Company shall
accept for payment all shares of Series A Preferred Stock properly surrendered
to the Company (or an agent designated by the Company for such purpose) during
the Exercise Period for redemption in connection with the exercise of the Change
of Control Election and shall cause payment to be made in cash for such shares
of Series A Preferred Stock. If at the time of any Change of Control, the
Company does not have sufficient capital and surplus legally available to
purchase all of the outstanding shares of Series A Preferred Stock, the Company
shall take all measures permitted under the Delaware General Corporation Law to
increase the amount of its capital and surplus legally available, and the
Company shall offer in its written notice of such Change of Control to purchase
as many shares of Series A Preferred Stock as it has capital and surplus legally
available therefor, ratably from the holders thereof in proportion to the total
number of shares tendered, and shall thereafter from time to time, as soon as it
shall have capital and surplus legally available therefor, offer to purchase as
many shares of Series A Preferred Stock as it has capital and surplus available
therefor until it has offered to purchase all of the outstanding shares of
Series A Preferred Stock.
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<PAGE>
(d) Optional Redemption by Company. (A) At any time (i) after
June 30, 2004 or (ii) after June 30, 2002 if the closing price of the Common
Stock quoted on the NASDAQ National Market System (or the primary national
securities exchange on which the Common Stock is then listed) on each of the
preceding thirty (30) trading days is greater than $12.00 per share (the
"Redemption Threshold"), the Company may, upon sixty (60) days notice, redeem
all, but not less than all, of the then outstanding shares of Series A Preferred
Stock (including shares issuable in respect of accrued but unpaid dividends) for
cash in an amount per share equal to 103% of the Redemption Price.
(B) The Redemption Threshold is subject to adjustment from
time to time, in the event of any increase or decrease by way of a subdivision
or split-up of the outstanding shares of Common Stock or any decrease by way of
a combination of the outstanding shares of Common Stock into a smaller number of
shares of Common Stock. In any such case, an appropriate adjustment shall be
made to the Redemption Threshold in a manner and on terms that effect the intent
of paragraph (A) above.
(e) Status of Redeemed Shares. Any shares of Series A
Preferred Stock which shall at any time have been redeemed pursuant to Section 4
or 5 hereof shall, after such redemption, have the status of authorized but
unissued shares of Preferred Stock, without designation as to series.
6. Voting Rights. Except as otherwise provided by applicable
law and in addition to any voting rights provided by law, the holders of Series
A Preferred Stock:
i. shall be entitled to vote together with the holders
of the Common Stock as a single class on all matters
submitted for a vote of holders of Common Stock
(except for matters submitted to the holders of
Common Stock in connection with the transaction
contemplated by the Agreement);
ii. shall have such other voting rights as are specified
in the Certificate of Incorporation or as otherwise
provided by Delaware law; and
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<PAGE>
iii. shall be entitled to receive notice of any
stockholders' meeting in accordance with the
Certificate of Incorporation and By-laws of the
Company.
Each share of Series A Preferred Stock shall entitle the
holder thereof to cast 0.875 votes for each whole vote that such holder would be
entitled to cast had such holder converted its Series A Preferred Stock into
shares of Common Stock as of the date immediately prior to the record date for
determining the stockholders of the Company eligible to vote on any such matter;
provided that the total voting power of the holders of the Series A Preferred
Stock shall in no event exceed the voting power of 2,120,000 shares of Common
Stock prior to the obtaining of stockholder approval (the "Stockholder
Approval") for the transactions pursuant to which the Series A Preferred Stock
was issued, as contemplated by the Agreement, and shall in no event exceed the
voting power of 9,750,000 shares of Common Stock in the event Stockholder
Approval is obtained.
(b) In addition to the other voting rights set forth herein,
for so long as the Apollo Stockholders (as such term is defined below)
beneficially own not less than 100,000 shares of Series A Preferred Stock, the
following provisions shall apply:
The holders of Series A Preferred Stock shall have the
exclusive right, voting separately as a single class, to elect
one person to serve on the Board of Directors (such director
is referred to as a "Preferred Stock Director"); provided,
that if the size of the Board of Directors shall be increased,
then the holders of Series A Preferred Stock shall have the
right to elect that number of Preferred Stock Directors such
that the number of Preferred Stock Directors divided by the
total number of members of the Board of Directors (the
"Preferred Director Percent age") is at least equal to the
Preferred Director Percentage immediately prior to the
increase in the size of the Board of Directors (without
regard to any vacancy that shall exist from time to time). On
or after the date of Stockholder Approval (if such approval is
obtained), the holders of Series A Preferred Stock shall have
the right to elect two Preferred Stock Directors. In any such
election the holders of Series A Preferred Stock shall be
entitled to cast one vote per share of Series A Preferred
Stock held of record on the record date for the determination
of the holders of Series A Preferred Stock entitled to vote on
such election. The initial Preferred Stock Director shall be
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<PAGE>
appointed by the Board of Directors on the Original Issuance
Date to serve until his or her successor is duly elected; in
the event Stockholder Approval is obtained, the second
Preferred Stock Director shall be appointed immediately after
Stockholder Approval to serve until his or her successor is
duly elected; and thereafter the Preferred Stock Directors
shall be elected at the same time as other members of the
Board of Directors. A Preferred Stock Director may only be
removed by the vote of the Requisite Holders, at a vote of the
then outstanding shares of Series A Preferred Stock, voting as
a single class, at a meeting called for such purpose. If for
any reason a Preferred Stock Director shall resign or
otherwise be removed from the Board of Directors, then his or
her replacement shall be a person elected by the holders of
the Series A Preferred Stock, in accordance with the voting
procedures set forth in this Section 6(b). The Preferred Stock
Directors shall be appointed by the Board of Directors to
serve on each committee of the Board of Directors in the same
proportions that the number of Preferred Stock Directors bears
to the total number of directors then comprising the Board of
Directors.
(c) So long as any Series A Preferred Stock remains
outstanding, the Company shall not, without the written consent or affirmative
vote of the Requisite Holders, at a meeting of the holders called for that
purpose, amend, alter or repeal, whether by merger, consolidation, combination,
reclassification or otherwise, the Certificate of Incorporation, By-Laws of the
Company or any provision thereof (including the adoption of a new provision
thereof) which would adversely affect the voting power of the Series A Preferred
Stock or any other rights or privileges of the holders of the Series A Preferred
Stock hereunder.
7. Conversion Rights.
-----------------
(a) General. Subject to and upon compliance with the
provisions of this Section 7, the holders of the shares of Series A Preferred
Stock shall be entitled, at their option, at any time prior to the date fixed
for redemption of such shares, to convert all or any such shares of Series A
Preferred Stock into a number of fully paid and non-assessable shares
(calculated as to each conversion to the nearest 1/100th of a share) of Common
Stock. The number of shares of Common Stock to which a holder of Series A
Preferred Stock shall be entitled upon conversion shall be determined by
dividing (x) the Liquidation Preference of such Series A Preferred Stock
(including shares issuable in respect of accrued but unpaid dividends), plus the
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<PAGE>
amount of any accrued but unpaid dividends as of the Conversion Date by (y) the
Conversion Price in effect at the close of business on the Conversion Date
(determined as provided in this Section 7).
(b) Conversion Price. The conversion price (the "Conversion
Price") shall initially be $7.00 per share of Common Stock, subject to
adjustment from time to time in accordance with Section 7(d).
(c) Fractions of Shares. No fractional share of Common Stock
shall be issued upon conversion of shares of Series A Preferred Stock. If more
than one share of Series A Preferred Stock shall be surrendered for conversion
at one time by the same holder, the number of full shares of Common Stock to be
issued and which shall be computed on the basis of the aggregate number of
shares of Series A Preferred Stock so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Preferred Stock, the Company shall pay a cash adjustment in
respect of such fractional share in an amount equal to the product of such
fraction multiplied by the Fair Market Value (as hereinafter defined) of one
share of Common Stock on the Conversion Date (as hereinafter defined).
(d) Adjustments to Conversion Price. The Conversion Price
shall be subject to adjustment from time to time as follows:
i. Upon Issuance of Common Stock. If the Company shall,
at any time or from time to time after the Original
Issuance Date, issue any shares of Common Stock,
options to purchase or rights to subscribe for Common
Stock, securities by their terms convertible into or
exchangeable for Common Stock, or options to purchase
or rights to subscribe for such convertible or
exchangeable securities, other than Additional
Securities, Series B Preferred Stock or Excluded
Stock, without consideration or for consideration
per share less than either (x) the Conversion Price
or (y) the Fair Market Value of the Common Stock, in
effect immediately prior to the issuance of such
Common Stock or securities, then such Conversion
Price shall forthwith be lowered to a price equal to
the price obtained by multiplying:
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<PAGE>
(A) the Conversion Price in effect
immediately prior to the issuance
of such Common Stock or securities
by
(B) a fraction of which (x) the
denominator shall be the number of
shares of Common Stock outstanding
on a fully-diluted basis
immediately after such issuance and
(y) the numerator shall be the sum
of (i) the number of shares of
Common Stock outstanding on a
fully-diluted basis immediately
prior to the date of such issuance
and (ii) the number of additional
shares of Common Stock which the
aggregate consideration for the
number of shares of Common Stock so
offered would purchase at the
greater of the Conversion Price or
the Fair Market Value per share of
Common Stock.
For purposes of this Section 7(d), "fully diluted basis" shall
be determined in accordance with the treasury method of GAAP.
ii. Upon Acquisition of Common Stock. If the Company or
any Subsidiary shall, at any time or from time to
time after the Original Issuance Date, directly or
indirectly, redeem, purchase or otherwise acquire
any shares of Common Stock, options to purchase or
rights to subscribe for Common Stock, securities by
their terms convertible into or exchangeable for
Common Stock (other than shares of Series A Preferred
Stock or Series B Preferred Stock that are redeemed
according to their terms), or options to purchase or
rights to subscribe for such convertible or
exchangeable securities, for a consideration per
share greater than the Fair Market Value (plus, in
the case of such options, rights, or securities, the
additional consideration required to be paid to the
Company upon exercise, conversion or exchange) for
shares of Common Stock in effect immediately prior to
such event, then the Conversion Price shall forthwith
be lowered to a price equal to the price obtained by
multiplying:
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<PAGE>
(A) the Conversion Price in effect
immediately prior to such event by
(B) a fraction of which (x) the
denominator shall be the Fair Market
Value per share of Common Stock
immediately prior to such event and
(y) the numerator shall be the
result of dividing:
(a) (1) the product of (A) the
number of shares of Common Stock
outstanding on a fully-diluted basis
and (B) the Fair Market Value per
share of Common Stock, in each case
immediately prior to such event,
minus (2) the aggregate
consideration paid by the Company in
such event (plus, in the case of
such options, rights, or convertible
or exchangeable securi ties, the
aggregate additional consideration
to be paid by the Company upon
exercise, conversion or exchange),
by
(b) the number of shares of Common
Stock outstanding on a fully-diluted
basis immediately after such event.
iii. For the purposes of any adjustment of a Conversion
Price pursuant to paragraphs (i) and (ii) of this
Section 7(d), the following provisions shall be
applicable:
(1) In the case of the issuance of Common Stock for
cash in a public offering or private placement, the
consideration shall be deemed to be the amount of cash paid
therefor before deducting therefrom any discounts, commissions
or placement fees payable by the Company to any underwriter or
placement agent in connection with the issuance and sale
thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the Fair
Market Value thereof as determined in accordance with the
Appraisal Procedure.
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<PAGE>
(3) In the case of the issuance of options to
purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common
Stock, or options to purchase or rights to subscribe for such
convertible or exchangeable securities, except for Additional
Securities, Shares of Series B Preferred Stock or options to
acquire Excluded Stock:
(a) the aggregate maximum number of
shares of Common Stock deliverable
upon exercise of such options to
purchase or rights to subscribe for
Common Stock shall be deemed to
have been issued at the time such
options or rights were issued and
for a consideration equal to the
consideration (determined in the
manner provided in subparagraphs
(1) and (2) above), if any,
received by the Company upon the
issu ance of such options or rights
plus the minimum purchase price
provided in such options or rights
for the Common Stock covered
thereby;
(b) the aggregate maximum number of
shares of Common Stock deliverable
upon conversion of or in exchange
of any such convertible or
exchangeable securities or upon the
exercise of options to purchase or
rights to subscribe for such
convertible or exchangeable
securities and subsequent
conversion or exchange thereof
shall be deemed to have been issued
at the time such securities,
options, or rights were issued and
for a consideration equal to the
consideration received by the
Company for any such securities and
related options or rights
(excluding any cash received on
account of accrued interest or
accrued dividends), plus the
additional consideration, if any,
to be received by the Company upon
the conversion or exchange of such
securities or the exercise of any
related options or rights (the
consideration in each case
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<PAGE>
to be determined in the manner
provided in paragraphs (1) and (2)
above) and
(c) on any change in the number of
shares or exer cise price of Common
Stock deliverable upon exercise of
any such options or rights or con
versions of or exchanges for such
securities, other than a change
resulting from the anti-dilution
provisions thereof, the applicable
Conversion Price shall forthwith
be readjusted to such Conversion
Price as would have been obtained
had the adjustment made upon the
issuance of such options, rights or
securities not converted prior to
such change or options or rights
related to such securities not
converted prior to such change been
made upon the basis of such change.
(d) No further adjustment of the
Conversion Price adjusted upon the
issuance of any such options,
rights, convertible securities or
exchangeable securities shall be
made as a result of the actual
issuance of Common Stock on the
exercise of any such rights or
options or any conversion or
exchange of any such securities.
iv. Upon Stock Dividends, Subdivisions or Splits. If, at
any time after the Original Issuance Date, the number
of shares of Common Stock outstanding is increased by
a stock dividend payable in shares of Common Stock or
by a subdivision or split-up of shares of Common
Stock, then, following the record date for the
determination of holders of Common Stock entitled to
receive such stock dividend, or to be affected by
such subdivision or split-up, the Conversion Price
shall be appropriately decreased so that the number
of shares of Common Stock issuable on conversion of
Series A Preferred Stock shall be increased in
proportion to such increase in outstanding shares.
18
<PAGE>
v. Upon Combinations. If, at any time after the Original
Issuance Date, the number of shares of Common Stock
outstanding is decreased by a combination of the
outstanding shares of Common Stock into a smaller
number of shares of Common Stock, then, following the
record date to determine shares affected by such
combination, the Conversion Price shall be
appropriately increased so that the number of shares
of Common Stock issuable on conversion of each share
of Series A Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares.
vi. Upon Reclassifications, Reorganizations,
Consolidations or Mergers. In the event of any
capital reorganization of the Company, any
reclassification of the stock of the Company (other
than a change in par value or from par value to no
par value or from no par value to par value or as a
result of a stock dividend or subdivision, split-up
or combination of shares), or any consolidation or
merger of the Company with or into another
corporation (where the Company is not the surviving
corporation or where there is a change in or
distribution with respect to the Common Stock), each
share of Series A Preferred Stock shall after such
reorganization, reclassification, consolidation, or
merger be convertible into the kind and number of
shares of stock or other securities or property of
the Company or of the successor corporation resulting
from such consolidation or surviving such merger, if
any, to which the holder of the number of shares of
Common Stock deliverable (immediately prior to the
time of such reorganization, reclassification,
consolidation or merger) upon conversion of such
Series A Preferred Stock would have been entitled
upon such reorganization, reclassification,
consolidation or merger. The provisions of this
clause shall similarly apply to successive
reorganizations, reclassifications, consolidations,
or mergers.
vii. Deferral in Certain Circumstances. In any case in
which the provisions of this Section 7(d) shall
require that an adjustment shall become effective
immediately after a record date of an event, the
Company may defer until the occurrence of such event
(1) issuing to the holder of any Series A Preferred
Stock
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<PAGE>
converted after such record date and before the
occurrence of such event the shares of capital stock
issuable upon such conversion by reason of the
adjustment required by such event and issuing to such
holder only the shares of capital stock issuable upon
such conversion before giving effect to such
adjustments, and (2) paying to such holder any amount
in cash in lieu of fractional share of capital stock
pursuant to Section 7(c) above; provided, however,
that the Company shall deliver to such holder an
appropriate instrument or due bills evidencing such
holder's right to receive such additional shares and
such cash.
viii. Other Anti-Dilution Provisions. If the Company has
issued or issues any securities on or after the
Original Issuance Date containing provisions
protecting the holder or holders thereof against
dilution in any manner more favorable to such holder
or holders thereof than those set forth in this
Section 7(d), such provisions (or any more favorable
portion thereof) shall be deemed to be incorporated
herein as if fully set forth in this Restated
Certificate of Incorporation and, to the extent
inconsistent with any provision of this Restated
Certificate of Incorporation shall be deemed to be
substituted therefor.
ix. Appraisal Procedure. In any case in which the
provisions of this Section 7(d) shall necessitate
that the Appraisal Procedure be utilized for purposes
of determining an adjustment to the Conversion Price,
the Company may defer until the completion of the
Appraisal Procedure and the determination of the
adjustment (1) issuing to the holder of any share of
Series A Preferred Stock converted after the date of
the event that requires the adjustment and before
completion of the Appraisal Procedure and the
determination of the adjustment, the shares of
capital stock issuable upon such conversion by reason
of the adjustment required by such event and issuing
to such holder only the shares of capital stock
issuable upon such conversion before giving effect to
such adjustment and (2) paying to such holder any
amount in cash in lieu of a fractional share of
capital stock pursuant to Section 7(c) above;
provided, however, that the Company shall deliver to
such
20
<PAGE>
holder an appropriate instrument or due bills
evidencing such holder's right to receive such
additional shares and such cash.
x. Exceptions. Section 7(d) shall not apply to (i) any
issuance of Common Stock upon exercise of any
warrants or options (A) outstanding on the Original
Issuance Date of the Series A Preferred Stock or (B)
awarded to employees or directors of the Company
pursuant to an employee stock option plan or stock
incentive plan approved by the Board of Directors;
(ii) any issuance of securities by the Company in
underwritten public offerings; and (iii) repurchases
by the Company of Common Stock approved by the Board
of Directors (collectively, the "Excluded Stock").
Notwithstanding the foregoing, in the case of shares of Series
A Preferred Stock called for redemption, conversion rights will expire at the
close of business on the last Business Day preceding any redemption date unless
the Company defaults in making the payment due upon redemption.
(e) Exercise of Conversion Privilege. In order to exercise the
conversion privilege, the holder of any share of Series A Preferred Stock shall
surrender such Series A Preferred Stock, duly endorsed or assigned to the
Company in blank, at any office or agency of the Company maintained for such
purpose, accompanied by written notice to the Company at such office or agency
that the holder elects to convert such Series A Preferred Stock or, if less than
the entire amount thereof is to be converted, the portion thereof to be
converted.
Series A Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day (the "Conversion
Date") of surrender of such shares of Series A Preferred Stock for conversion in
accordance with the foregoing provisions, and at such time the rights of the
holders of such shares of Series A Preferred Stock as holder shall cease, and
the Person or Persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock as and after such time. As promptly as practicable on or after
the Conversion Date, the Company shall issue and shall deliver at any office or
agency of the Company maintained for the surrender of Series A Preferred Stock a
certificate or certificates for the number of full shares of Common Stock
issuable upon conversion, together with payment in lieu of any fraction of a
share, as provided in Section 7(c).
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<PAGE>
In the case of any Series A Preferred Stock which is converted
in part only, upon such conversion the Company shall execute and deliver a new
share of Series A Preferred Stock of authorized denomination in aggregate
principal amount equal to the unconverted portion of the principal amount of
such share of Series A Preferred Stock.
(f) Notice of Adjustment of Conversion Price. Whenever
the Conversion Price is adjusted as herein provided:
i. the Company shall compute the adjusted Conversion
Price in accordance with Section 7(d) and shall
prepare a certificate signed by the Treasurer or
Chief Financial Officer of the Company setting forth
the adjusted Conversion Price and showing in
reasonable detail the facts upon which such
adjustment is based, and such certificate shall
forthwith be filed at each office or agency
maintained for such purpose or conversion of shares
of Series A Preferred Stock; and
ii. a notice stating that the Conversion Price has been
adjusted and setting forth the adjusted Conversion
Price shall forthwith be prepared by the Company, and
as soon as practicable after it is prepared, such
notice shall be mailed by the Company at its expense
to all holders at their last addresses as they shall
appear in the stock register.
(g) Notice of Certain Corporate Action.
In case:
(a) the Company shall take an action or an event
shall occur, that would require a Conversion Price adjustment
pursuant to Section 7(d); or
(b) the Company shall grant to the holders of its
Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class;
(c) of any reclassification of the Common Stock
(other than a subdivision or combination of the
outstanding shares of Com-
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mon Stock), or of any consolidation, merger or share
exchange to which the Company is a party and for which
approval of any stockholders of the Company is required, or
of the sale or transfer of all or substantially all of the
assets of the Company; or
(d) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(e) the Company or any Subsidiary shall commence a
tender offer for all or a portion of the outstanding shares of
Common Stock (or shall amend any such tender offer to change
the maximum number of shares being sought or the amount or
type of consideration being offered therefor);
then the Company shall cause to be filed at each office or agency maintained for
such purpose, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the stock register, at least 30 days prior to
the applicable record, effective or expiration date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution or granting of rights or warrants, or, if a record
is not to be taken, the date as of which the holders of Common Stock of record
who will be entitled to such dividend, distribution, rights or warrants are to
be determined, (y) the date on which such reclassification, consolidation,
merger, share exchange, sale, transfer, dissolution, liquidation or winding up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up, or (z) the date on which such tender
offer commenced, the date on which such tender offer is scheduled to expire
unless extended, the consideration offered and the other material terms thereof
(or the material terms of the amendment thereto). Such notice shall also set
forth such facts with respect thereto as shall be reasonably necessary to
indicate the effect of such action on the Conversion Price and the number, kind
or class of shares or other securities or property which shall be deliverable or
purchasable upon the occurrence of such action or deliverable upon conversion of
the Series A Preferred Stock. Neither the failure to give any such notice nor
any defect therein shall affect the legality or validity of any action described
in clauses (a) through (e) of this Section 7(g).
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<PAGE>
(h) Company to Reserve Common Stock.
The Company shall at all times reserve and keep available,
free from preemptive rights, out of the authorized but unissued Common Stock or
out of the Common Stock held in treasury, for the purpose of effecting the
conversion of Series A Preferred Stock, the full number of shares of Common
Stock then issuable upon the conversion of all outstanding shares of Series A
Preferred Stock.
Before taking any action that would cause an adjustment
reducing the conversion price below the then par value (if any) of the shares of
Common Stock deliverable upon conversion of the Series A Preferred Stock, the
Company will take any corporate action that, in the opinion of its counsel, is
necessary in order that the Company may validly and legally issue fully paid and
non-assessable shares of Common Stock at such adjusted conversion price.
(i) Taxes on Conversions.
The Company will pay any and all original issuance, transfer,
stamp and other similar taxes that may be payable in respect of the issue or
delivery of shares of Common Stock on conversion of Series A Preferred Stock
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the holder of
the share(s) of Series A Preferred Stock to be converted, and no such issue or
delivery shall be made unless and until the Person requesting such issue has
paid to the Company the amount of any such tax, or has established to the
satisfaction of the Company that such tax has been paid.
(j) Cancellation of Converted Series A Preferred Stock.
All Series A Preferred Stock delivered for conversion shall be
delivered to the Company to be canceled.
(k) Certain Definitions.
As used in this Section 7, the following terms shall have the
following respective meanings:
"Appraisal Procedure" if applicable, shall mean the following
procedure to determine the fair market value, as to any security, for purposes
of the
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<PAGE>
definition of "Fair Market Value" or the fair market value, as to any other
property (in either case, the "valuation amount"). So long as Apollo Investment
Fund IV, L.P. or any of its affiliates (the "Apollo Stockholders") beneficially
own sufficient shares of Series A Preferred Stock to constitute the Requisite
Holders, the valuation amount shall be determined in good faith jointly by the
Board of Directors and the Requisite Holders; provided, however, that if such
parties are not able to agree on the valuation amount within a reasonable period
of time (not to exceed twenty (20) days), the valuation amount shall be
determined by an investment banking firm of national recognition, which firm
shall be reasonably acceptable to the Board of Directors and the Requisite
Holders. If the Board of Directors and the Requisite Holders are unable to agree
upon an acceptable investment banking firm within ten (10) days after the date
either party proposed that one be selected, the investment banking firm will be
selected by an arbitrator located in New York City, New York, selected by the
American Arbitration Association (or if such organization ceases to exist, the
arbitrator shall be chosen by a court of competent jurisdiction). The arbitrator
shall select the investment banking firm (within ten (10) days of his
appointment) from a list, jointly prepared by the Board of Directors and the
Requisite Holders, of not more than six investment banking firms of national
standing in the United States, of which no more than three may be named by the
Board of Directors and no more than three may be named by the Requisite Holders.
The arbitrator may consider, within the ten-day period allotted, arguments from
the parties regarding which investment banking firm to choose, but the selection
by the arbitrator shall be made in its sole discretion from the list of six. The
Board of Directors and the Requisite Holders shall submit their respective
valuations and other relevant data to the investment banking firm, and the
investment banking firm shall as soon as practicable thereafter make its own
determination of the valuation amount. The final valuation amount for purposes
hereof shall be the average of the two valuation amounts closest together, as
determined by the investment banking firm, from among the valuation amounts
submitted by the Company and the Requisite Holders and the valuation amount
calculated by the investment banking firm. The determination of the final
valuation amount by such investment-banking firm shall be final and binding upon
the parties. The Company shall pay the fees and expenses of the investment
banking firm and arbitrator (if any) used to determine the valuation amount. If
required by any such investment banking firm or arbitrator, the Company shall
execute a retainer and engagement letter containing reasonable terms and
conditions, including, without limitation, customary provisions concerning the
rights of indemnification and contribution by the Company in favor of such
investment banking firm or arbitrator and its officers, directors, partners,
employees, agents and affiliates. If the Apollo
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<PAGE>
Stockholders no longer constitute the Requisite Holders, the valuation amount
shall be determined in good faith by the Board of Directors.
"Fair Market Value" means, as to any security, the Twenty Day
Average of the average closing prices of such security's sales on all domestic
securities exchanges on which such security may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ National Market System
as of 4:00 P.M., New York City time, on such day, or, if on any day such
security is not quoted in the NASDAQ National Market System, the average of the
highest bid and lowest asked prices on such day in the domestic over-the-counter
market as reported by the National Quotation Bureau, Incorporated, or any
similar or successor organization (and in each such case excluding any trades
that are not bona fide, arm's length transactions). If at any time such security
is not listed on any domestic securities exchange or quoted in the NASDAQ
National Market System or the domestic over-the-counter market, the "Fair Market
Value" of such security shall be the fair market value thereof as determined in
accordance with the Appraisal Procedure, using any appropriate valuation method,
assuming an arms-length sale to an independent party. In determining the fair
market value of any class or series of Common Stock, a sale of all of the issued
and outstanding Common Stock will be assumed, without giving regard to the lack
of liquidity of such stock due to any restrictions (contractual or otherwise)
applicable thereto or any discount for minority interests and assuming the
conversion or exchange of all securities then outstanding that are convertible
into or exchangeable for Common Stock and the exercise of all rights and
warrants then outstanding and exercisable to purchase shares of such stock or
securities convertible into or exchangeable for shares of such stock; provided,
however that such assumption will not include those securities, rights and
warrants convertible into Common Stock where the conversion, exchange or
exercise price per share is greater than the fair market value; provided,
further, however, that fair market value shall be determined with regard to the
relative priority of each class or series of Common Stock (if more than one
class or series exists.) "Fair Market Value" means with respect to property
other than securities, the "fair market value" determined in accordance with the
Appraisal Procedure.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the Ameri-
26
<PAGE>
can Institute of Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board, which are in effect from time to
time.
"Twenty Day Average" means, with respect to any prices and in
connection with the calculation of Fair Market Value, the average of such prices
over the twenty Business Days ending on the Business Day immediately prior to
the day as of which "Fair Market Value" is being determined.
8. Preemptive Rights. Holders of shares of Series A Preferred
Stock will have the right to purchase their pro rata portions of any future
private placements by the Company of equity or equity-linked securities, other
than (i) securities issued pursuant to the exercise of options or warrants
currently outstanding, options awarded to employees or directors of the Company
after the date hereof pursuant to currently existing employee incentive plans,
and options hereinafter issued under new employee incentive plans approved by
the Board of Directors and by the Apollo Stockholders and (ii) securities issued
as consideration in acquisitions by the Company.
9. Limitations. In addition to any other rights provided by
applicable law, so long as any shares of Series A Preferred Stock are
outstanding, the Company shall not, without the affirmative vote, or the written
consent as provided by law, of the Requisite Holders, at a vote of the holders
of Series A Preferred Stock, voting separately as a class,
(a) create, authorize or issue any class, series or shares of
Preferred Stock (other than Additional Securities issued pursuant to Section
2(b) hereof and Series B Preferred Stock issued as dividends) or any other class
of capital stock ranking either as to payment of dividends or distribution of
assets upon liquidation (i) prior to the Series A Preferred Stock, or (ii) on a
parity with the Series A Preferred Stock, or (iii) junior to the Series A
Preferred Stock, if such junior securities may be redeemed, in any circumstance,
on or prior to the Redemption Date; or
(b) change the preferences, rights or powers with respect to
the Series A Preferred Stock so as to affect the Series A Preferred Stock
adversely.
10. Dividend Received Deduction. For federal income tax
purposes, the Company shall report distributions on the Series A Preferred Stock
as dividends, to the extent of the Company's current and accumulated earnings
and profits (as determined for federal income tax purposes).
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<PAGE>
11. Event of Non-Compliance. Whenever an Event of Non-
Compliance (as hereinafter defined) shall have occurred and be continuing, the
holders of Series A Preferred Stock shall have the exclusive right, voting
separately as a class, to elect a sufficient number of additional directors such
that the Preferred Stock Directors constitute a majority of the Board of
Directors, at the Company's next annual meeting of stockholders and at each
subsequent annual meeting of stockholders; provided, however, that if such
voting rights shall become vested more than 90 days or less than 20 days before
the date prescribed for such meeting of stockholders, thereupon the holders of
the shares of Series A Preferred Stock shall be entitled to exercise their
voting rights at a special meeting of the holders of Series A Preferred Stock as
hereinafter set forth. At elections for Preferred Stock Directors, each holder
of Series A Preferred Stock shall be entitled to one vote for each share of
Series A Preferred Stock held. Upon the vesting of such right of the holders of
Series A Preferred Stock, the maximum authorized number of members of the Board
of Directors shall automatically be increased by such number as is required for
the Preferred Stock Directors to constitute a majority of the Board of Directors
and the vacancies so created shall be filled by vote of the holders of
outstanding Series A Preferred Stock as hereinabove set forth. The right of
holders of Series A Preferred Stock, voting separately as a class, to elect
members of the Board of Directors as aforesaid shall continue until such time as
all Events of Non-Compliance shall have been cured, at which time such rights
shall terminate, except as herein or by law expressly provided, subject to
revesting in the event of each and every subsequent Event of Non-Compliance.
Whenever such voting right shall have vested, such right may be exercised
initially either, as provided above, at a special meeting of the holders of
Series A Preferred Stock called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors, and
thereafter at such meetings or by the written consent of such holders pursuant
to Section 228 of the Delaware General Corporation Law. The Preferred Stock
Directors elected pursuant to Section 11 shall serve until the next annual
meeting of stockholders of the Company or until their respective successors
shall be elected and shall qualify. Any director elected by the holders of
Series A Preferred Stock may be removed by, and shall not be removed otherwise
than by, the vote of the Requisite Holders, at a vote of the then outstanding
shares of Series A Preferred Stock, voting as a separate class, at a meeting
called for such purpose or by written consent as permitted by law and the
Certificate of Incorporation and By-Laws of the Company. If the office of any
Preferred Stock Director becomes vacant by reason of death, resignation,
retirement, disqualification or removal from office or otherwise, such vacancy
shall be filled by the holders of Series A Preferred Stock voting as a class as
herein
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<PAGE>
provided. Upon any termination of the right of the holders of Series A Preferred
Stock to vote for directors as herein provided, the term of office of the
Preferred Stock Director then in office shall terminate immediately. Whenever
the terms of office of a Preferred Stock Director shall so terminate and the
special voting powers vested in the holders of Series A Preferred Stock shall
have expired, the number of directors shall be such number as may be provided
for pursuant to the By-Laws of the Company irrespective of any increase made
pursuant to the provisions of this Section 11, and such Preferred Stock Director
or Directors shall forthwith resign or the holders of Series A Preferred Stock
shall promptly vote, or act by written consent, to remove such Preferred Stock
Director or Directors pursuant to the procedures set forth above.
The term "Event of Non-Compliance" shall mean (A) any breach
by the Company of any of its agreements and covenants set forth (i) in Section
7.12, Section 8.2 or Article 9 of the Agreement, (ii) in Sections 2, 4, 5, 6, 7
or 8 of Article Fourth of this Restated Certificate of Incorporation, or (B) any
obligation of the Company, whether as principal, guarantor, surety or other
obligor, for the payment of indebtedness for borrowed money in excess of
$10,000,000 (i) shall become or shall be declared due and payable prior to the
expressed maturity thereof, or (ii) shall not be paid when due or within any
grace period for the payment thereof, and such default shall remain uncured for
15 days, or (C) the Common Stock shall no longer be listed for trading on a
United States national securities exchange or the NASDAQ National Market
(provided, that such Event of Non-Compliance shall be deemed to be cured
immediately on the date upon which the Common Stock is again listed for trading
on a United States national securities exchange or the NASDAQ National Market).
FIFTH: The name and mailing address of the incorporator is
International Cogeneration Corporation, a Nevada corporation, with principal
offices at 320 Walnut Street, Suite 105, Philadelphia, Pennsylvania 19106. The
powers of the incorporator terminated upon the filing of the original
Certificate of Incorporation of the Company on August 15, 1985.
SIXTH: Election of directors need not be by written ballot.
SEVENTH: The Board of Directors is authorized to adopt, amend
or repeal By-Laws of the Company.
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EIGHTH: The following provisions are inserted to limit the
liability of directors and officers of the Company to the full extent of the law
allowable and for the conduct of the affairs of the Company, and it is expressly
provided that they are intended to be in furtherance and not in limitation or
exclusion of the powers conferred by law:
(a) No director shall be personally liable to the Company or
its stockholders for monetary damages for breach of his or her fiduciary duty as
a director, except (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
paying a dividend or approving a stock repurchase which is illegal under section
174 of Title 8 of the Delaware Code relating to the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit.
(b) No contract or other transaction between the Company and
any other firm or corporation shall be affected or invalidated by reason of the
fact that any one or more of the directors or officers of this Company is or are
interested in, or is a member, stockholder, director or officer or are members,
stockholders, directors or officers, individually or jointly, may be a party or
parties to, or may be interested in, any contract or transaction of this Company
or in which this Company with any person or persons, firm, association or
corporation, shall be affected or invalidated by reason of the fact that any
director or officer or officers of this Company is a party, or are parties to,
or interested, such contract, act of transaction, or in any way connected, with
such person or persons, firms, association or corporation, and each and every
person who may become a director or officer of this Company is relieved from any
liability that might otherwise exist from thus contracting with this Company
for the benefit of himself or any firm, association, or corporation in which he
may be in any way interested.
(c) Subject to such restrictions and regulations contained in
by- laws adopted by the stockholders, the Board of Directors may make, alter,
amend and rescind the by-laws, and may provide therein for the appointment of an
executive committee from their own members, to exercise all or any of the powers
of the board, which may be amended or repealed, at any time, by the
stockholders.
(d) The Board of Directors shall have power, in its
discretion, to provide for and to pay for directors rendering unusual or
exceptional services to the Company special compensation appropriate to the
value of such services.
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<PAGE>
(e) By resolution duly adopted by the holders of not less than
a majority of the shares of stock then issued and outstanding and entitled to
vote at any regular or special meeting of the stockholders of the Company duly
called and held as provided in the by-laws of the Company, any director or
directors of the Company may be removed from office at any time or times, with
or without cause. The Board of Directors may at any time remove any officers of
the Company with or without cause.
(f) 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 interests of the
Company, and with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
(g) 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, 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 Company unless and only to the extent that the
31
<PAGE>
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 indemnity for such
expenses which the Court of Chancery or such other Court shall deem proper.
(h) 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 herein or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(i) Any indemnification under paragraphs herein (unless
ordered by a Court) shall 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 in
said paragraphs. 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.
(j) 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 shall be ultimately determined that he is not entitled
to be indemnified by the Company as authorized in this section.
The indemnification and advancement of expenses provided for
herein shall, 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.
(k) The indemnification and advancement of expenses provided
herein or granted pursuant to this provision shall 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.
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<PAGE>
(l) The Company may purchase and maintain insurance on behalf
of any person who is or was serving the Company in any capacity referred to
hereinabove 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 herein.
(m) The provisions herein shall be applicable to all claims,
action, suits, or proceedings made or commenced after the adoption hereof,
whether arising from acts or omissions to act occurring before or after the
adoption hereof.
NINTH: The Board of Directors shall be divided into three
classes, each composed of as nearly equal a number of directors as the then
total number of directors constituting the entire Board of Directors permits
with the term of office of one class expiring each year. At the 1999 Annual
Meeting of Stockholders, directors of the first class shall be elected to hold
office for a term expiring at the next succeeding Annual Meeting of
Stockholders, directors of the second class shall be elected to hold office for
a term expiring at the second succeeding Annual Meeting of Stockholders, and
directors of the third class shall be elected to hold office for a term expiring
at the third succeeding Annual Meeting of Stockholders. Subject to the
foregoing, at each Annual Meeting of Stockholders the successors to the class of
directors whose term shall then expire shall be elected to hold office for a
term expiring at the third succeeding Annual Meeting of Stockholders. Directors
shall serve for their respective terms except in the event of their earlier
death, resignation or removal, and until their successors are duly elected and
shall qualify. Newly created directorships, resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, removal from office,
disqualification or other cause, may be filled by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the Annual Meeting of Stockholders at
which the term of office of the class to which they have been elected expires.
No decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Restated
Certificate of Incorporation to be executed this ____ day of February, 2000.
RARE MEDIUM GROUP, INC.
By:
-----------------------------------
Name: Glenn S. Meyers
Title: Chairman, President and
Chief Executive Officer
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<PAGE>
February, 2000
RARE MEDIUM GROUP, INC.
(a Delaware corporation)
AMENDED AND RESTATED BY-LAWS
-------------------------
ARTICLE I
Offices
1.1 Principal Offices. The principal office of the Corporation shall
be located at 565 Fifth Avenue, 29th Floor, New York, New York 10017. The
Corporation may also have offices at such other places as the Board of Directors
may from time to time appoint or as the business of the Corporation may require.
1.2 Registered Office. The registered office of the Corporation in the
State of Delaware is Corp. Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle 19801, and may be changed from time to time as the Board of
Directors may determine.
ARTICLE II
Shareholders
2.1 Annual Meeting. The annual meeting of the shareholders shall be
held on the fourth Tuesday of April, in each year commencing in 1985, at 11:00
o'clock A.M. local time or on such other date and at such other time within any
particular calendar year as the Board of Directors may adopt by a two-thirds
vote thereof. Such approval shall be appropriately filed with the Secretary of
the Corpora tion. If the day fixed for the annual meeting shall be a legal
holiday in the State of Delaware, such meeting shall be held on the next
succeeding business day. If the annual meeting has not been held during a
calendar year, any shareholder may call such meeting by following the procedure
set forth in Section 2.2 hereof.
<PAGE>
At the annual meeting, the shareholders shall elect Directors for the
ensuing year and may transact such other business as may property come before
the meeting.
2.2 Special Meetings. Special meetings of the shareholders may be
called at any time by the President, or by the Board of Directors, or by the
shareholders entitled to cast at least one-fifth (1/5) of the votes which all
shareholders are entitled to cast at the particular meeting. Upon written
request of any person or persons who have duly called a special meeting, the
Secretary shall fix the date of meeting to be held not more than sixty (60) days
after receipt of the request and give due notice thereof to the shareholders
entitled to vote thereat. If the Secretary shall neglect or refuse to fix such
date or give such notice, the person or persons calling the meeting may do so.
2.3 Place of Meeting. The Board of Directors may designate any place,
either within or without the State of Delaware, as the place of a shareholders'
meeting. If no designation is made by the Board of Directors, the place of
meeting shall be at the principal office of the Corporation.
2.4 Notice of Meeting. Written notice shall, unless otherwise provided
by statute, be given by, or at the direction of, the person authorized to call
the meeting, to shareholders as of the record date as provided in Section 2.6
hereof, not less than ten (10) nor more than sixty (60) days before the date of
the meeting, either personally or by sending a copy thereof through the mail, or
by telegram, charges prepaid, to the address of the shareholder appearing on the
books of the Corporation, or supplied by the shareholder to the Corporation for
the purpose of notice. Such notice shall state the place, date and hour of the
meeting. When required by these By-Laws or by statute, such notice shall also
state the general nature of the business to be transacted.
2.5 Sufficiency of Notice. Any given notice required hereunder shall
be deemed to have been given to the person entitled thereto (a) if sent by mail,
when deposited in the United States mail, postage prepaid, or (b) when lodged
with a telegraph office for transmission with charges prepaid, or (c) when
delivered personally.
Whenever notice is required to be given, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether signed before
or after the time stated, shall be deemed, equivalent to the giving of such
notice. Attendance of a person at any meeting, either in person or by proxy,
shall constitute a waiver of notice of such meeting except where a person
attends a meeting for the express and stated
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<PAGE>
purpose of objecting to the transaction of any business because the meeting was
not lawfully called or convened.
2.6 Record Date. The Board of Directors may fix in advance a date as
the record date for the determination of shareholders entitled to notice of, or
to vote at, any meeting of shareholders, or shareholders entitled to receive
payment of any dividend or distribution, or in order to make a determination of
shareholders for any other proper purpose, such date in any case to be not more
than sixty (60) days and, in case of a meeting of shareholders, not less than
ten (10) days, prior to the date for which such determination of shareholders is
necessary or proper. If no record date is fixed for the determination of
shareholders entitled to receive notice of, or to vote at, a meeting of
shareholders, or shareholders entitled to receive payment of a dividend or such
other entitlement, the date on which notice of the meeting is mailed, or the
date on which the resolution of the Board of Directors declaring such dividend
or together entitlement is adopted, as the case may be, shall be the record date
for such determination of shareholders.
2.7 Voting List. The officer or agent having charge of the transfer
book for shares of the Corporation shall make, at least ten (10) days before
each meeting of shareholders, a complete list of the shareholders entitled to
vote at the meeting, arranged in alphabetical order, with the address and the
number of shares held by each. The list shall be kept file at the principal
office of the Corporation and shall be subject to inspection by any shareholder
at any time during usual business hours, and shall also be produced and kept
open at the time and place of the meeting, and shall be subject to the
inspection of any shareholder during the whole time of the meeting. The stock
ledger shall be used to determine who are the shareholders entitled to examine
such list or stock ledger or to vote, in person, or by proxy, at any meeting of
the shareholders.
2.8 Quorum. Except as otherwise required by law, the presence of
shareholders, in person or by proxy, entitled to cast at least a majority of the
votes which all Common Stock holders (plus such other shareholders who may from
time to time be entitled to vote with the holders of Common Stock) are entitled
to cast shall constitute a quorum. With respect to the consideration of any
particular matter as to which the shareholders of any class or series shall be
entitled to cast a vote separate from the vote of the Common Stock holders, the
presence of shareholders are entitled to cast on such particular matter shall
constitute a quorum of such class or series of shareholders for the purpose of
considering such matters. The shareholders present at a duly organized meeting
can continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum.
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If a meeting cannot be organized because a quorum has not attended,
those present may adjourn the meeting to such time and place as they may
determine. When a meeting called for the election of Directors has been once
adjourned because a quorum had not attended, those shareholders entitled to vote
in the election of Directors who attend the second of such adjourned meetings,
although less than a quorum as fixed in these By-Laws or in the Certificate of
Incorporation or by statute, shall nevertheless constitute a quorum for the
purpose of electing Directors.
2.9 Acts of Shareholders. Unless a greater or different vote shall be
required as to a particular matter by the Certificate of Incorporation or by
these By-Laws or by applicable statute, an act authorized by the vote of the
holders of a majority of those Common Shares (plus holders of such other shares
which may from time to time be entitled to vote with the holders of Common
Shares) present in person or by proxy at a duly organized meeting shall be the
act of the shareholders.
2.10 Adjournment. Adjournment or adjournments at any annual or special
meeting may be taken as may be directed by a majority of votes cast by the
shareholders present in person, or by proxy entitled to cast the votes which the
Common Stockholders (plus such other shareholders who shall at the time be
entitled to vote with the holders of Common Shares on the matters to be
considered at the meeting) may cast. When a meeting is adjourned, it shall not
be necessary to give any notice of the adjourned meeting if the time and place
thereof are announced at the meeting at which such adjournment is taken. If the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at the
meeting. Adjournment of any meeting at which directors are to be elected shall
be adjourned only from day to day, or for such longer periods, not to exceed
fifteen (15) days each, as directed by the shareholders present in person or by
proxy, provided that they constitute at least a majority of the votes entitled
to be cast at an election of directors.
2.11 Proxies. At all meetings of shareholders, a shareholder entitled
to vote on a particular matter may vote in person or may authorize another
person or persons to act for him by proxy. Every proxy shall be executed in
writing by the shareholder, or by his duly authorized attorney in fact. Such
proxies shall be filed with the Secretary of the Corporation before or at the
time of the meeting. A proxy, unless coupled with interest, shall be revocable
at will, notwithstanding any other agreement or any provision in the proxy to
the contrary, but the revocation of the proxy shall not
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be effective until notice thereof has been given to the Secretary of the
Corporation. The Secretary may treat any proxy delivered to him as valid, unless
before the vote is counted or the authority is exercised, written notice of any
invalidity, together with such supporting information as shall enable a judgment
to be rendered, is given to the Secretary.
2.12 Voting Rights. Unless otherwise provided in the Certificate of
Incorporation or in a duly filed statement establishing the rights of classes or
series, only the holders of Common Stock shall be entitled to vote at a meeting
of the shareholders, and every shareholder having the right to vote shall be
entitled to one vote for every share of Common Stock standing in his name on the
books of the Corporation.
2.13 Nomination of Directors. Nominations for election to the office
of Director at an annual or special meeting of shareholders shall be made by the
Board of Directors, or by the Executive Committee, or by petition in writing
delivered to the Secretary of the Corporation not fewer than thirty-five (35)
days prior to such shareholders' meeting, signed by the holders' shares entitled
to be voted in the election of Directors. Unless nominations shall have been
made as aforesaid, they shall not be considered at such shareholders' meeting
unless the number of persons nominated as aforesaid shall be fewer than the
number of persons to be elected to the office of Director at such meeting, in
which event nominations may be made at the shareholders' meeting by a person
entitled to vote in the election of Directors.
2.14 Election by Ballot. The election of Directors shall be by ballot
upon demand before the voting begins by a shareholder entitled to vote at such
election. Unless so demanded, voting need not be by ballot.
2.15 Judges of Election. In advance of any meeting of shareholders,
the Board of Directors may appoint Judges of Election, who need not be
shareholders, to act at such meeting or any adjournment thereof. The number of
Judges shall be one or three. The Judges of Election shall determine the number
of shares outstanding and the voting power of each; the shares represented at
the meeting; the existence of a quorum, the authenticity, validity and effect of
proxies; hear and determine all challenges and questions arising in connection
with the right to vote; receive, count and tabulate all votes or ballots, and
determine the result; and do such other acts as may be necessary and proper to
conduct the election or vote with fairness to all shareholders. On request of
the Chairman of the Meeting, or of any shareholder or his proxy, the Judges
shall make a report in writing of any challenge, question or matter determined
by them, and execute a certificate of any fact found by them. If there be three
Judges
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of Election, the decision, act or certificate of a majority shall be effective
in all respects as the decision and/or certificate of all. Any report or
certificate made by the Judges of Election shall be prima facie evidence of the
facts stated therein.
2.16 Consent of Shareholders in Lieu of Meeting. Any action which may
be taken at any annual or special meeting of the shareholders or of a class of
shareholders may be taken without a meeting, if a consent or consents in
writing, setting forth the action so taken, shall be signed by 1/3 of the
shareholders who would be entitled to vote at a meeting for such purpose and
shall be filed with the Secretary of the Corporation.
ARTICLE III
Board of Directors
3.1 Number, Tenure and Qualifications. The business and affairs of the
Corporation shall be managed by its Board of Directors, constituted of such
number of persons as shall be determined from time to time by resolution of the
Board of Directors, but shall not be more than twelve nor less than three, and
only less than three if all the shares of the corporation are owned beneficially
or of record by 1 or 2 shareholders, in which case there may be less than three
(3) but not less than the number of shareholders. Directors shall be natural
persons of full age and need not be shareholders in the Corporation.
3.2 Powers and Authorization. In addition to the powers and authority
by these By-Laws expressly conferred, the Board of Directors may exercise all
the powers of the Corporation and do all lawful acts not by statute or by the
Certificate of Incorporation or by these By-Laws directed or required to be
exercised or done only by the shareholders. The Board shall have the power to
elect the Chairman of the Board by majority vote, to delegate any of the powers
exercised or exercisable by the Board to any standing or special committee, or
to any Officer or Agent, or to appoint any person to be the Agent of the
Corporation, with such powers, including the power to subdelegate, and upon such
terms as the Board shall deem appropriate.
3.3 Meetings. Meetings of the Board of Directors shall be held at such
times and places, either within or without the State of Delaware, as may be
fixed by resolution of the Board, or by the President, or upon written demand of
a majority of the Directors.
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3.4 Notice. Notice of a meeting of Directors or of any Committee of
the Board of Directors shall be delivered at least one day prior to such meeting
by oral, telegraphic or written notice. If mailed, such notice shall be deemed
to be delivered on the second day following the day deposited in the United
States mail, addressed to the Director at his business address, with postage
thereon prepaid. If notice be given by telegram, such notice shall be deemed to
be delivered on the day the telegram is delivered prepaid to the telegraph
company, addressed to the Director at his business office. Notice of a meeting
need only state the place, day and hour of the said meeting.
A Director may waive notice of any meeting in a writing signed either
before or after the time stated. The attendance of a Director at a meeting shall
constitute a waiver of notice of such meeting, except where a Director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened.
3.5 Quorum. A majority of the Directors then in office shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors, but if less than such quorum is present at a meeting, one-third of
the Directors present may adjourn the meeting from time to time without further
notice.
Directors shall be deemed present at a meeting of the Board of
Directors if by means of conference telephone or similar communications
equipment all persons participating in the meeting can hear each other.
The act of the majority of the Directors voting at a meeting at which
a quorum is present shall be the act of the Board of Directors.
3.6 Unanimous Consent. Any action which may be taken at the meeting of
the Directors, or by action of the members of the Executive Committee or by the
members of any other Committee appointed by the Board, may be taken without a
meeting, if a consent or consents in writing setting forth the action so taken
shall be signed by all of the Directors or the members of the Committee, as the
case may be, and filed with the Secretary of the Corporation.
3.7 Compensation. Directors as such need not receive any compensation
for their services. By resolution of the Board, a stated salary may be fixed for
the Directors, or a fixed sum for, and expenses of, attendance may be allowed
for attendance at each regular or special meeting of the Board. Nothing herein
contained
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shall be construed to preclude any Director from serving the Corporation as
member of a Committee or an officer or in any other capacity and receiving
compensation therefor.
3.8 Committees of the Board. The Board may, by resolution adopted by a
majority of the whole Board, delegate two or more of its number to constitute an
Executive Committee, which, unless otherwise provided in such resolution, shall
have and exercise the authority of the Board of Directors in the management of
the business and affairs of the Corporation. The Board may by resolution adopted
by a majority of the whole Board delegate two or more of its members to act as a
committee to exercise all power and authority which the Board might exercise in
matters as to which the Committee is authorized to act.
The presence in person or as hereafter provided of one-half (1/2) of
the members of the Executive Committee or any other Committee shall constitute a
quorum for the transaction of business at any meeting of such Committee, and the
act of a majority of those members of such Committee voting at a meeting at
which a quorum is present shall be the act of the Committee. Members of the
Executive Committee or any other Committee shall be deemed as being present at a
meeting of such Committee if by means of conference telephone or similar
communications equipment all persons participating in the meeting can hear each
other. In the absence or disqualification of any member of such Committee or
Committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
3.9 Removal of Directors. Any individual Director may be removed from
office without assigning any cause by the vote of shareholders entitled to cast
at least a majority of the votes which all shareholders would be entitled to
cast at any annual election of Directors, but such removal shall not occur if
the votes of a sufficient number of shares are cast against the resolution for
his removal which, if cumulatively voted at an annual meeting of shareholders,
would be sufficient to elect one or more Directors.
The entire Board of Directors may be removed from office without
assigning any cause by the vote of shareholders entitled to cast at least a
majority of the votes shareholders would be entitled to cast at any annual
election of Directors.
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The Board of Directors may declare vacant the office of a Director if
he be declared of unsound mind by an Order of Court, or convicted of a felony or
other crime, or for any other proper cause.
3.10 Vacancies. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of Directors, shall be filed
by a majority vote of the remaining members of the Board though less than a
quorum. A Director elected to fill a vacancy shall be a Director until a
successor is elected by the shareholders, who may make such election at the next
annual meeting of the sharehold ers or any special meeting duly called for that
purpose and held prior thereto.
ARTICLE IV
Officers
4.1 Executive Officers. The Executive Officers of the Corporation
shall be chosen by the Directors and shall be a Chairman of the Board, Vice
Chairman of the Board, President, Secretary, and Treasurer. The Board of
Directors may also choose one or more Vice Presidents and such other officers
and agents as it shall deem necessary, who shall hold their offices for such
terms and shall have authority and shall perform such duties as from time to
time shall be prescribed by the Board.
4.2 Qualifications. Any number of officers may be held by the same
person. The Chairman of the Board, Vice Chairman of the Board, President, any
Vice President, Treasurer and Secretary shall be natural persons of full age. It
shall not be necessary for the officers to be Directors.
4.3 Salaries. The salaries of the Chairman of the Board, Vice Chairman
of the Board, President, and Vice President, the Secretary and the Treasurer of
the Corporation shall be fixed by the Board of Directors.
4.4 Term of the Office; Removal. The officers of the Corporation shall
hold office for one year and until their successors are chosen and qualify.
Notwithstanding the foregoing, every officer and agent may be removed
at any time by the Board of Directors, without assigning any cause therefor.
4.5 Chairman of the Board. The Chairman of the Board shall preside at
meetings of the Board of Directors and of the shareholders. He shall have such
other
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duties and powers as are assigned to him by the Board of Directors. Except as
otherwise provided by the Board or these By-Laws, he shall be a voting member ex
officio of all standing committees.
4.6 President. The president shall have general supervision of the
business of the Corporation. He shall prescribe duties of the other officers
(other than the Chairman of the Board) and employees and see to the proper
performance thereof and shall be responsible for having all orders and
resolutions of the Board of Directors carried into effect. He may execute on
behalf of the Corporation, and may authorize the corporate seal to be affixed
to, all instruments requiring such execution. In the absence of the Chairman of
the Board, the president shall preside at meetings of the Board of Directors and
of the Shareholders. He shall have such other duties and powers as are assigned
to him by the Board of Directors. Except as otherwise provided by the Board or
these By-Laws, he shall be voting member ex officio of all standing committees.
4.7 Vice President. The vice president shall have such duties as are
prescribed by the Board of Directors or the president. The vice president as
designated by the Board of Directors shall perform the duties and have the
powers of the president during his absence or disability.
4.8 Treasurer. The treasurer shall act under the direction of the
president and shall have such duties as are prescribed by the Board of Directors
or the president.
4.9 Secretary. The secretary shall act under the direction of the
president. Unless a designation to the contrary is made at a meeting, the
secretary shall attend all meetings of the Board of Directors and all meetings
of the shareholders and record the proceedings of such meetings in the corporate
minute book. The secretary shall give, or cause to be given, notice of all
meetings of the shareholders and of all special meetings of the Board of
Directors, and shall have custody of the corporate seal of the Company. The
secretary shall have such other duties as are prescribed by the Board of
Directors or the president.
4.10 Assistant Officers. The Board of Directors may elect such
assistant officers at such times and for such terms (which, if not otherwise
stated, shall be at the pleasure of the Board) as it deems advisable. Each
assistant officer shall have such duties as are prescribed by the Board of
Directors, the president or the officer to whom he is an assistant. During the
absence or disability of an officer, his assistant
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officers, as designated by the Board of Directors (or, in the absence of such
designation, by the president), shall perform the duties and have the power of
such officer.
4.11 Vacancies. If the office of any officer or agent, one or more,
becomes vacant for any reason, the Board of Directors may choose a successor or
successors, who shall hold office at the pleasure of the Board.
ARTICLE V
Indemnifications of Directors and Officers
5.1 Definitions. Certain terms used in this Article V shall be defined
as follows or, where so indicated, shall include the following meanings in
addition to their normal and their statutory meanings.
(a) "Authorized Representative" shall mean a director or officer,
employee or agent of the Corporation, acting solely in such capacity, or a
person serving at the request of the Corporation 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 Corporation.
(b) "Criminal Third Party Proceeding" shall include any Third
Party Proceedings involving potential criminal liability.
(c) "Derivative Action" shall mean any threatened, pending or
completed action or suit by the Corporation to produce a judgment in favor of
its shareholders, or any threatened, pending or completed action or suit in the
right of the Corporation by its shareholders to procure a judgment in favor of
the Corporation.
(d) "Disinterested Directors" shall include directors of the
Corporation who are not parties or have no economic or other collateral personal
benefit relating to a Third Party Proceeding or Derivative Action.
(e) "Party" shall include any person who is required to give
testimony or becomes similarly involved, whether or not named in the action as a
party thereto.
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(f) "Third Party Proceeding" shall mean 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 Corporation.
5.2 Directors and Officers -- Third Party Proceedings. The Corporation
shall indemnify any director and any officer of the Corporation who was or is a
party or is threatened to be made a party to any Third Party Proceeding by
reason of the fact that he or she was or is an Authorized Representative of the
Corporation 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 Corporation and, with respect to any 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, shall 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 Corporation or,
with respect to any Criminal Third Party Proceeding, had reasonable cause to
believe that his or her conduct was unlawful.
5.3 Directors and Officers -- Derivative Actions. The Corporation
shall indemnify any director or officer of the Corporation who was or is a party
or is threatened to be made a party to any Derivative Action by reason of the
fact that the director or officer was or is an Authorized Representative of the
Corporation, 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 Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which he or she shall have been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the Corporation 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 Corporation is located or the court in which such Derivative Action is or
was pending, shall determine 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 indemnity for expenses which the court shall deem proper.
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5.4 Authorized Representatives Not Directors or Officers. An
Authorized Representative of the Corporation other than a director or officer of
the Corporation may be indemnified by the Corporation or have his or her
expenses advanced in accordance with the procedures set forth in paragraphs 5.2,
5.3, 5.5, 5.6 and 5.7 of this Article. To the extent that an Authorized
Representative of the Corporation 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 shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
5.5 Procedure for Effecting Indemnification. Indemnification under
paragraphs 5.2, 5.3 or 5.4 of this Article (unless ordered by a court, in which
case the expenses, including attorneys' fees of the Authorized Representative in
enforcing indemnification shall be added to and included in the final judgment
against the Corporation) shall be made by the Corporation 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 in paragraphs 5.2 or
5.3 of this Article or has been successful on the merits or as otherwise set
forth in paragraph 5.4 of this Article 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 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.
5.6 Independent Legal Counsel. Independent legal counsel may be
appointed by the Board of Directors, even if a quorum of Disinterested Directors
is not available, or by persons designated by the Board of Directors.
Independent legal counsel shall not include any employee of the Corporation or
any person who has been or is a member or employee of any firm which has
rendered services for a fee to the Corporation during the one year immediately
preceding the appointment. If independent legal counsel shall determine in a
written opinion that indemnification is proper under this Article,
indemnification shall be made without further action of the Board of Directors.
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5.7 Advancing Expenses. Expenses incurred in defending a Third Party
Proceeding or Derivative Action shall be paid on behalf of a director or
officer, and may be paid on behalf of any Authorized Representative, by the
Corporation in advance of the final disposition of the action as authorized in
the manner provided by paragraph 5.5 of this Article (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 Corporation as required in
this Article or authorized by law. The financial ability of any Authorized
Representative to make repayment shall not be a prerequisite to making of an
advance.
5.8 Conditions. The Corporation may impose reasonable restrictions
upon any persons seeking indemnification (including advanced expenses) under
this Article including, but not limited to, a condition to the effect that,
except to the extent differing interests compel another result, persons to be
indemnified under this paragraph may be required to share the same counsel and
other services.
5.9 Insurance. The Corporation shall have the power to 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 Corporation
would have the power to indemnify him or her against such expenses and
liabilities under the provisions of this Article.
5.10 Scope of Article. Each person who shall act as an Authorized
Representative of the Corporation shall be deemed to be doing so in reliance
upon the rights of indemnification provided in this Article.
The indemnification provided by this Article shall not be deemed
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 shall continue
as to a person who has ceased to be an Authorized Representative of the
Corporation and shall inure to the benefit of his or her heirs and personal
representatives.
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ARTICLE VI
Corporate Records and Statement
6.1 Records. There shall be kept at the principal office of the
Corporation an original or duplicate record of the proceedings of the
shareholders and of the Directors, and the original or copy of its By-Laws,
including all amendments or alterations thereto to date. An original or
duplicate share register shall also be kept at the principal office and at the
office of its transfer agent or registrar, giving the names of the shareholders,
their respective addresses, and the number and classes of shares held by each.
The Corporation shall also keep appropriate, complete and accurate books or
records of account, which may be kept at its registered office, or at its
principal place of business.
6.2 Annual Statement. The President and Board of Directors shall
present at each annual meeting of shareholders such statement of the business
and affairs of the Corporation for the preceding year as they shall deem
appropriate. No financial or other statement of the Corporation need be sent to
shareholders unless the Board of Directors shall so determine. Such Statements
shall be prepared and presented in whatever manner the Board of Directors shall
deem advisable and need not be verified by a Certified Public Accountant.
ARTICLE VII
Share Certificates, Transfer of Stock, Etc.
7.1 Issuance. The Board of Directors shall have the power, by
Resolution duly adopted, to issue from time to time, in whole or in part, the
kinds or classes of shares authorized in the Certificate of Incorporation.
Share certificates shall bear the signature of the President and
Secretary and the corporate seal, which may be a facsimile, engraved or printed.
Where such certificate is signed by a transfer agent or a registrar, the
signature of the President or Secretary upon such certificate may be a
facsimile, engraved or printed.
7.2 Transfer of Shares. Transfers of shares shall be made on the books
of the Corporation upon surrender of the certificates therefor, endorsed by the
person named in the certificate or by attorney, lawfully constituted in writing.
No
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transfer need be made inconsistent with the provisions of the Uniform Commercial
Code or other applicable Federal, State or local law.
No transfer or assignment shall effect the right of the Corporation to
pay any dividend due upon the stock, or to treat the registered holder as the
holder in fact, until such transfer assignment is registered on the books of the
Corporation.
7.3 Absolute Owner. The Corporation shall be entitled to treat the
registered holder of any shares as the prima facie owner thereof. If objection
is made by the actual shareholder at the time the ballot is tendered, which
objection is accompanied by a written statement under oath that the person in
whose name such stock is registered is not true owner thereof, it shall be the
duty of the judges of the election to inquire and determine summarily whether
the facts are as represented in such statement, and if so the vote tendered
shall be rejected.
7.4 Lost, Destroyed or Mutilated Certificate. In the event that a
share certificate shall be lost, destroyed or mutilated, a new certificate may
be issued therefor upon such terms and indemnity to the Corporation as the Board
of Directors may prescribe.
ARTICLE VIII
Miscellaneous Provisions
8.1 Signatures on Checks. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
8.2 Securities of Other Corporations. The President, or the Secretary,
shall have full power to vote, appoint proxies, or otherwise perform any act as
a shareholder with respect to any shares or other securities of any corporation
owned by this Corporation, including the power to sell, convert, exchange,
pledge or encumber such securities.
8.3 Fiscal Year. The fiscal year shall begin the first day of January
of each year.
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ARTICLE IX
Amendments
9.1 These By-Laws may be altered, amended or repealed by a majority of
the holders of all Common Shares entitled to vote (plus the holders of such
other shares as may then be entitled to vote with the holders of Common Shares)
present in person or by proxy at any regular or special meeting duly convened.
These By-Laws may also be altered, amended or repealed by a majority vote of
Directors.
9.2 Record of Amendments.
Section Manner in Which Date of
Amended Amendment Effected Amendment
------- ------------------ ---------
Section 1.1 Unanimous Written February __, 2000
Consent of Directors
17
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, made effective as of the 21st day of
September, 1999 between RARE MEDIUM GROUP, INC. ("RMGI" or the "Company"), a
Delaware corporation, with its principal offices at 565 Fifth Avenue, 29th
Floor, New York, NY 10017 and Jeffrey J. Kaplan, an individual residing at 310
River Road, Grandview, NY 10960 (the "Employee").
In consideration of their mutual promises and covenants set
forth herein, and intending to be legally bound hereby, Company and Employee
agree as follows:
1. Employment. The Company hereby employs the Employee
and the Employee accepts such employment on the terms and conditions hereinafter
set forth.
2. Term. The term of this Agreement shall begin on
September 21, 1999 and shall terminate on September 20, 2003, unless sooner
terminated in accordance with Paragraph 6 hereof.
3. Duties. The Employee is engaged hereunder as
Executive Vice President and Chief Financial Officer of the Company and he
agrees to perform the duties and services incident to that position, or such
other or further duties and services of a similar nature as may be reasonably
required of him by the Board of Directors of the Company or the Board's
designee. Employee shall at all times be subject to the supervision of the Board
of Directors of the Company and of such other persons as the Board may
designate.
The Employee shall devote his full business time,
attention, energies and best efforts to the performance of his duties hereunder
and to the promotion of the business and interests of the Company and of any
corporate subsidiaries or affiliated companies. The foregoing shall not be
construed, however, as preventing the Employee from investing his assets in such
form or manner as will not require services on the part of the Employee in the
operations of the business in which such investment is made and provided such
business is not in competition with the Company or, if in competition, such
business has a class of securities registered under the Securities Exchange Act
of 1934 and the interest of Employee therein is solely that of an investor
owning not more than 3% of any class of the outstanding equity securities of
such business.
The Employee recognizes that he will be required by
the Company to travel outside of the New York metropolitan area in order to
perform a portion of the services to be rendered hereunder, but the nature or
extent of such traveling shall not be such as to make it reasonably necessary
for the Employee to relocate his permanent residence from the New York
metropolitan area.
<PAGE>
4. Compensation: Expenses.
(a) Base Salary. The Employee shall be paid a
salary at the rate of not less than $225,000 per year (the "Base Salary"). The
Base Salary shall be paid in installments in arrears in accordance with the
Company's regular payroll practices. The Company may, in its discretion,
increase the Employee's Base Salary and his other compensation provided for
herein. Employee shall be entitled to annual increases in Base Salary as
determined by the Board of Directors, provided however, that such increase shall
not be less than 4% per annum.
(b) Fringe Benefits.
(i) The Employee shall be entitled to
participate in all current and future insurance, vacation and other fringe
benefit programs of the Company to the extent and on the same terms and
conditions as are accorded to other management employees of the Company,
provided, however, that nothing herein shall be deemed to require grants or
awards to Employee under any benefit plans which provide for awards or grants at
the discretion of the Board of Directors or of any committee or administrator ,
and that entitlement to vacations shall be governed solely by clause (ii) of
this subparagraph (b).
(ii) The Employee shall be entitled in
each calendar year commencing with 2000 to a vacation of four (4) weeks, without
loss of or reduction in his compensation. Each vacation shall be taken by the
Employee at such time or times as agreed upon by the Company and Employee. Any
portion of Employee's vacation not used during any calendar year shall be
carried forward, provided that Employee may not take more than six (6) weeks
vacation during any calendar year. For the remainder of calendar year 1999,
Employee shall be entitled to one (1) week of vacation.
(c) Business Expenses. The Company will pay,
or reimburse the Employee for, all ordinary and reasonable out-of-pocket
business expenses incurred by Employee in connection with his performance of
services hereunder during the Employment Term in accordance with the Company's
expense authorization and approval procedures then in effect upon presentation
to the Company of an itemized account and written proof of such expenses.
Employee shall also have a monthly nonaccountable expense allowance of $1,500.
(d) Stock Options. Concurrently with the
execution of this Agreement, RMGI shall grant to Employee, Stock Options to
purchase an aggregate of 350,000 shares of Common Stock of RMGI at the exercise
price equal to the closing price on the day the Board of Directors of RMGI
approves the issuance of the options which shall become exercisable 87,500 after
the first anniversary; an additional 87,500 on each 12-month anniversary
thereafter all over a period of four (4) years from the date of grant. The
options shall expire ten (10) years from the date
(2)
<PAGE>
of grant. Such options shall entitle the Holder to exercise them through a
service without requiring that cash be advanced by the Holder and the Option
Agreement shall so provide.
If the employee is terminated without cause,
50% of all outstanding options not vested shall vest, and all vested options
shall be exercisable through their initial expiration date.
(e) Entire Compensation. The compensation
provided for in this Agreement is in full payment of the services to be rendered
by the Employee to the Company hereunder, except that Employee shall be eligible
to participate in any performance based bonus plan in effect at the relevant
time as determined by the Board of Directors.
5. Death or Total Disability of the Employee.
(a) Death. In the event of the death of the
Employee during the term of this Agreement, this Agreement shall terminate
effective as of the date of the Employee's death, and the Company shall not have
any further obligation or liability hereunder except that the Company shall pay
to Employee's designated beneficiary or, if none, his estate the portion, if
any, of the Employee's Base Salary for the period up to the Employee's date of
death which remains unpaid; and 50% of unvested stock options shall vest and the
employee's named beneficiary shall have , through their initial expiration date,
to exercise all vested options.
(b) Total Disability. In the event of the
Total Disability (as that term is hereinafter defined) of the Employee, the
Company shall have the right to terminate the Employee's employment hereunder by
giving the Employee 10 days' written notice thereof and, upon expiration of such
10-day period, the Company shall not have any further obligation or liability
under this Agreement except that the Company shall pay to the Employee the
portion, if any, of the Employee's Base Salary for the period up to the date of
termination which remains unpaid, provided that if the Employee, during any
period of disability, receives any periodic payments representing lost
compensation under any health and accident policy or under any salary
continuation insurance policy, the premiums for which have been paid by the
Company, the amount of Base Salary that the Employee would be entitled to
receive from the Company during such period of disability shall be decreased by
the amounts of such payments and 50% of unvested stock options shall continue to
vest according to their regular schedule and all vested options shall be
exercisable through their initial expiration date. (This should be interpreted
to mean 43,750 shares of each 87,500 share block yet to be vested.)
The term "Total Disability," when used herein, shall mean a
mental, emotional or physical condition which either (i) has rendered the
Employee for a period of 90 consecutive days, or for a total of 150 days during
any period of 24 consecutive months, during the term of this Agreement, or (ii)
in the reasonable opinion of the Company is expected to render the Employee, for
a period of 3 months, unable or incompetent to carry out, on a substantially
full-time basis, the job
(3)
<PAGE>
responsibilities he held or tasks that he was assigned at the time the
disability was incurred. The Employee agrees, in the event of any dispute as to
the determination made pursuant to this paragraph, to submit to a physical or
other examination by a licensed physician selected by the Company, the cost of
which examination shall be paid by the Company.
6. Termination of Employment. In addition to
termination pursuant to paragraph 5, the Company may discharge the Employee and
thereby terminate his employment hereunder for the following reasons ("for
cause"): (i) habitual intoxication which materially affects the Employee's
performance; (ii) drug addiction; (iii) conviction of a felony materially
adversely affecting the Company or the Employee's ability to perform his duties
hereunder; (iv) adjudication as an incompetent; or (v) misappropriation of
corporate funds or other acts of dishonesty; or (vi) the Employee's willful
breach of this Agreement in any other material respect which are not remedied
within 30 days from the event.
In the event that the Company shall discharge the Employee
pursuant to this paragraph 6, the Company shall not have any further obligations
or liability under this Agreement.
In the event that the Company shall discharge the Employee
other than "For Cause" Employee shall continue to receive his then current Base
Salary for a period of 12 months after such discharge and except as set forth in
this sentence, the Company shall not have any further obligations or liability
under this Agreement, except with respect to the provisions set forth in Section
4(d) of this Agreement.
In the event of a "Change in Control" of the Company as
defined below, at Employee's option, Employee shall have the right to terminate
this Agreement. Upon said election to terminate by Employee: (a) Employee shall
receive a lump sum payment from the Company which shall be equal to (i) the
total of Employee's salary plus all incentive compensation for the remaining
portion of the term of this Agreement, plus (ii) the cash value of all benefits
which would have been received by the Employee for the remaining portion of the
term of this Agreement, plus (iii) all unexercised stock options (whether or not
vested).
For purposes of this Agreement, a "Change of Control" means
the happening of any of the following: When any "person" as defined in Section
3(a)(9) of the Securities Exchange Act of 1934 ("Exchange Act") and as used in
Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d)
of the Exchange Act but excluding RMGI, any subsidiary and any employee benefit
plan sponsored or maintained by RMGI, or any subsidiary (including any trustee
of such plan acting as trustee), and excluding Apollo Management and its
affiliates, directly or indirectly becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act, as amended from time to time), of securities
of RMGI representing 50 percent or more of the combined voting power of RMGI
representing 50 percent or more of RMGI's then outstanding securities including
the options written relating to a financing by RMGI.
(4)
<PAGE>
7. Non-Disclosure.
(a) Non-Disclosure. The Employee recognizes and
acknowledges that he will have access to certain confidential information of the
Company and that such information constitutes valuable, special and unique
property of the Company. The Employee agrees that he will not, for any reason or
purpose whatsoever, during or after the term of his employment, use any of such
confidential information or disclose any of such confidential information to any
party without express authorization of the Company, except as necessary in the
ordinary course of performing his duties hereunder. The obligation of
confidentiality imposed by this subparagraph shall not apply to information
which appears in issued patents or printed publications or which otherwise
becomes generally known in the industry through no act of the Employee in breach
of this Agreement.
(b) Inventions, Designs and Product Developments.
All inventions, discoveries, concepts, improvements, formulas, processes,
devices, methods, innovations, designs, ideas and product developments
(collectively, the "Developments"), developed or conceived by Employee, solely
or jointly with others, whether or not patentable or copyrightable, at any time
during the Employment Term or within one year after the termination hereof and
which relate to the actual or planned business activities of the Company and all
of the Employee's right, title and interest therein, shall be the exclusive
property of the Company. The Employee hereby assigns, transfers and conveys to
the Company all of his right, title and interest in and to any and all such
Developments. Employee shall disclose fully, as soon as practicable and in
writing, all Developments to the Board of Directors of the Company. At any time
and from time to time, upon the request of the Company, the Employee shall
execute and deliver to the Company any and all instruments, documents and
papers, give evidence and do any and all other acts which, in the opinion of
counsel for the Company, are or may be necessary or desirable to document such
transfer or to enable the Company to file and prosecute applications for and to
acquire, maintain and enforce any and all patents, trademark registrations or
copyrights under United States or foreign law with respect to any such
Developments or to obtain any extension, validation, reissue, continuance or
renewal of any such patent, trademark or copyright. The Company will be
responsible for the preparation of any such instruments, documents and papers
and for the prosecution of any such proceedings and will reimburse the Employee
for all reasonable expenses the Employee incurs upon authorization of the Board
of Directors of the Company.
8. Noncompetition. The Employee agrees that during
the term of this agreement and for a period of one (1) year thereafter, the
Employee shall not, unless acting pursuant hereto or with the prior written
consent of the Board of Directors of the Company, directly or indirectly:
(a) solicit business from or perform services
for, any persons, company or other entity which at any time during the
Employee's employment by the Company is a client or customer of the Company if
such business or services are of the same general character as those engaged in
or performed by the Company;
(5)
<PAGE>
(b) solicit for employment or in any other
fashion hire any of the employees of the Company;
(c) own, manage, operate, finance, join,
control or participate in the ownership, management, operation, financing or
control of, or be connected as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise with any business or
enterprise engaged in the business of designing, developing, and implementing
Internet web site applications and strategies, or any other business engaged in
by the Company for which Employee had primary responsibility, or any of its
affiliates (collectively, the "Business") within a radius of 20 miles from
Company's or any of Company's affiliates principal places of business (the
"Restricted Area");
(d) use or permit his name to be used in
connection with, any business or enterprise engaged in the Business within the
Restricted Area; or
(e) use the name of the Company or any name
similar thereto, but nothing in this clause shall be deemed, by implication, to
authorize or permit use of such name after expiration of such period;
provided, however, that this provision shall not be-construed to prohibit the
ownership by the Employee of not more than 3% of any class of the outstanding
equity securities of any corporation which is engaged in any of the foregoing
businesses having a class of securities registered pursuant to the Securities
Exchange Act of 1934. In the event that the provisions of this Section should
ever be adjudicated to exceed the time, geographic, service or product
limitations permitted by applicable law in any jurisdiction, then such
provisions shall be deemed reformed in such jurisdiction to the maximum time,
geographic, service or product limitations permitted by applicable law.
Notwithstanding the foregoing, if employee is terminated
other "than for cause" as defined in this Agreement, Employee's obligations
pursuant to provision 8(c) and 8(d) shall be terminated, but all other
subdivisions of this paragraph shall remain in effect.
9. Equitable Relief; Survival.
(a) The Employee acknowledges that the
restrictions contained in paragraphs 7(a), 7(b) and 8 hereof are, in view of the
nature of the business of the Company, reasonable and necessary to protect the
legitimate interests of the Company, and that any violation of any provisions of
those Sections will result in irreparable injury to the Company. The Employee
also acknowledges that the Company shall be entitled to temporary and permanent
injunctive relief, without the necessity of proving actual damages, and to an
equitable accounting of all earnings, profits and other benefits arising from
any such violation, which rights shall be cumulative and in
(6)
<PAGE>
addition to any other rights or remedies to which the Company may be entitled.
In the event of any such violation, the Company shall be entitled to commence an
action for temporary and permanent injunctive relief and other equitable relief
in any court of competent jurisdiction and Employee further irrevocably submits
to the jurisdiction of any New York State court or Federal court sitting in the
Southern District of New York over any suit, action or proceeding arising out of
or relating to paragraph 7 or 8. The Employee hereby waives, to the fullest
extent permitted by law, any objection that he may now or hereafter have to such
jurisdiction or to the venue of any such suit, action or proceeding brought in
such a court and any claim that such suit, action or proceeding has been brought
in any inconvenient forum. Effective service of process may be made upon the
Employee by mail under the notice provisions contained in paragraph 12 hereof.
(b) Survival of Covenants. The provisions of
paragraphs 7 and 8 shall survive the termination of this Agreement.
10. Remedies Cumulative; No Waiver. No remedy conferred
upon the Company by this Employment Agreement is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to any other remedy given hereunder or now or hereafter existing at law
or in equity. No delay or omission by the Company in exercising any right,
remedy or power hereunder or existing at law or in equity shall be construed as
a waiver thereof-, and any such right, remedy or power may be exercised by the
Company from time to time and as often as may be deemed expedient or necessary
by the Company in its sole discretion.
11. Enforceability. If any provision of this Agreement
shall be invalid or unenforceable, in whole or in part, then such provision
shall be deemed to be modified or restricted to the extent and in the manner
necessary to render the same valid and enforceable, or shall be deemed excised
from this Agreement, as the case may require, and this Agreement shall be
construed and enforced to the maximum extent permitted by law, as if such
provision had been originally incorporated herein as so modified or restricted,
or as if such provision had not been originally incorporated herein, as the case
may be.
12. Notices. All notices, requests, demands, claims,
and other communications hereunder will be in writing. Any notice, request,
demand, claim, or other communication hereunder shall be deemed duly given if
(and then two business days after) it is sent by registered or certified mail,
return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
<TABLE>
<CAPTION>
If to Company: Copy to:
<S> <C>
Rare Medium Group, Inc. Gregory Fernicola, Esq.
565 Fifth Avenue Skadden, Arps, Slate, Meagher & Flom
29th Floor 919 Third Avenue
New York, NY 10017 New York, NY 10022
Attention: Glenn S. Meyers
</TABLE>
(7)
<PAGE>
If to Employee:
Jeffrey J. Kaplan
310 River Road
Grandview, NY 10960
Any party hereto may give any notice, request, demand, claim
or other communication hereunder using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex, ordinary mail,
or electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party hereto
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other parties hereto
notice in the manner herein set forth.
13. Governing Law. This Agreement shall be governed by
and construed in accordance with the internal laws (and not the law of
conflicts) of the State of New York.
14. Contents of Agreement: Amendment and Assignment.
This Agreement sets forth the entire understanding between the parties hereto
with respect to the subject matter hereof and supersedes and is instead of all
other employment arrangement between the Employee and the Company. This
agreement cannot be changed, modified or terminated except upon written
amendment duly executed by the parties hereto. All of the terms and provisions
of this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, representatives, successors and assigns of
the parties hereto, except that the duties and responsibilities of the Employee
hereunder are of a personal nature and shall not be assignable in whole or in
part by the Employee.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties on the date first above written.
RARE MEDIUM GROUP, INC.
By: /s/ Glenn S. Meyers
------------------------------------
Name: Glenn S. Meyers
Title: Chairman, President and CEO
/s/ Jeffrey J. Kaplan
------------------------------------
Jeffrey J. Kaplan (Employee)
(8)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Rare Medium Group, Inc.:
We consent to the incorporation by reference in the registration statements of
Rare Medium Group, Inc. Nos. 33-37036, 33-37037, 33-85634, 33-85636, 33-89122,
33-89124 and 333-76957 on Form S-8, and the registration statements Nos.
333-76107, 333-95829 and 333-30170 on Form S-3, of our reports dated February
14, 2000, relating to the consolidated balance sheets of Rare Medium Group, Inc.
as of December 31, 1998 and 1999 and the related consolidated statements of
operations, stockholders' equity (deficit), cash flows and financial statement
schedule for the years then ended which reports are included in the annual
report on Form 10-K.
/S/ KPMG LLP
New York, New York
February 22, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of Rare Medium Group, Inc. (formerly ICC Technologies, Inc.) (the
Company) on Form S-8 (File Nos. 33-37036, 33-37037, 33-85634, 33-85636,
33-89122, 33-89124 and 333-76957) and Registration Statements on Form S-3 (File
Nos. 33-76107, 333-95829 and 333-30170) of our report, 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,
1999. We also consent to the incorporation by reference in these registration
statements of our report, dated March 20, 1998, relating to the financial
statements of Engelhard/ICC, which also appears in such Annual Report on Form
10-K for the year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 22, 2000.
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders of Rare Medium Group, Inc.:
The audit referred to in our report dated Feburary 14, 2000, included the
related financial statement schedule as of and for the year ended December 31,
1999, included in the annual report on Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/ KPMG LLP
New York, New York
February 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,540,444
<SECURITIES> 101,981
<RECEIVABLES> 13,145,617
<ALLOWANCES> (544,747)
<INVENTORY> 0
<CURRENT-ASSETS> 47,920,031
<PP&E> 16,140,814
<DEPRECIATION> (4,040,577)
<TOTAL-ASSETS> 160,423,000
<CURRENT-LIABILITIES> 17,476,225
<BONDS> 996,765
36,224,441
0
<COMMON> 428,933
<OTHER-SE> 103,619,107
<TOTAL-LIABILITY-AND-EQUITY> 160,423,000
<SALES> 0
<TOTAL-REVENUES> 36,694,450
<CGS> 19,650,400
<TOTAL-COSTS> 19,650,400
<OTHER-EXPENSES> 63,849,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (49,470,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,470,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,470,380)
<EPS-BASIC> (2.55)
<EPS-DILUTED> (2.55)
</TABLE>
