-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jr+sY4XRnWn0joaz3BBbVF3Gcp1GFFUfH2vfCoy5nXcepiGxKr9XDZcyvSuf3HZV Do5fUrOLe1m7nq8QQM+uSQ== 0000889812-00-000979.txt : 20000225 0000889812-00-000979.hdr.sgml : 20000225 ACCESSION NUMBER: 0000889812-00-000979 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RARE MEDIUM GROUP INC CENTRAL INDEX KEY: 0000756502 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 232368845 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13865 FILM NUMBER: 552741 BUSINESS ADDRESS: STREET 1: 565 FIFTH AVE STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2128836940 MAIL ADDRESS: STREET 1: 565 FIFTH AVE STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: ICC TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL COGENERATION CORP DATE OF NAME CHANGE: 19891005 10-K 1 ANNUAL REPORT 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) DELAWARE 23-2368845 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 565 FIFTH AVENUE, 29TH FLOOR NEW YORK, NEW YORK 10017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S 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. 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. 1 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 2 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 3 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; 4 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. 5 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. 6 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. 7 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 8 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 9 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 OUR VENTURE INVESTMENTS We hold investments in the following companies:
APPROXIMATE INITIAL DATE OF % OF COMPANY NAME INVESTMENT OWNERSHIP DESCRIPTION OF BUSINESS - ------------------------------ --------------- ----------- ----------------------------------------------- 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.
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APPROXIMATE INITIAL DATE OF % OF COMPANY NAME INVESTMENT OWNERSHIP DESCRIPTION OF BUSINESS - ------------------------------ --------------- --------- ----------------------------------------------- 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.
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 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 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 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:
1999 ---------------------------------------- 4TH QTR 3RD QTR 2ND QTR 1ST QTR ------- ------- ------- ------- 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 1998 ---------------------------------------- 4TH QTR 3RD QTR 2ND QTR 1ST QTR ------- ------- ------- ------- 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
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 this report. The format of prior year data has been conformed to reflect the accounting for discontinued operations.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS EXCEPT SHARE DATA) 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
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YEARS ENDED DECEMBER 31 -------------------------------------------------------- (IN THOUSANDS) 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- 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
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 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 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 ----------- -------- UNAUDITED ACTUAL PRO FORMA (IN THOUSANDS) 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) --------- -------- --------- --------
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 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 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.
RARE MEDIUM GROUP, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ----------------------- 1997 ----------------------- (IN THOUSANDS) 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) --------- --------- RARE MEDIUM GROUP, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ----------------------- 1998 ----------------------- 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) --------- ---------
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 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 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 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 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 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.
EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- 2.1 -- Master Agreement, dated November 17, 1997, by and among ICC Technologies, Inc., ICC Investment, L.P., ICC Desiccant Technologies, Inc., and Engelhard Corporation, Engelhard DT Inc. and Engelhard/ICC was filed as Exhibit "B" to ICC Technologies, Inc.'s Definitive Proxy Statement dated February 3, 1998, for the Special Meeting of Stockholders held on February 23, 1998, and is hereby incorporated herein by reference. 2.2 -- Contribution Agreement, dated as of November 17, 1997, between Engelhard/ICC and Fresh Air Solutions, L.P. was filed as Exhibit "C" to ICC Technologies, Inc.'s Definitive Proxy Statement dated February 3, 1998, for the Special Meeting of the Stockholders held on February 23, 1998, and is hereby incorporated herein by reference. 2.3 -- E/ICC Purchase and Sale Agreement, dated as of November 17, 1997, by and among ICC Investment, L.P., ICC Desiccant Technologies, Inc. and Engelhard DT, Inc., was filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and is hereby incorporated herein by reference. 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.
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EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- 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.
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EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- 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.
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EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- 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.
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EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- 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.
(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 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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
31 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 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 RARE MEDIUM GROUP, INC CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999
1998 1999 ----------- ------------- 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 ----------- ------------- ----------- -------------
See accompanying notes to consolidated financial statements. 34 RARE MEDIUM GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ------------ ------------ ------------ 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 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 35 RARE MEDIUM GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ------------ ------------ ------------ 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 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 36 RARE MEDIUM GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
ACCUMULATED NOTE ADDITIONAL OTHER RECEIVABLE PREFERRED COMMON STOCK PAID-IN COMPREHENSIVE FROM STOCK ($.01 PAR VALUE) CAPITAL INCOME OFFICER --------- ---------------- ------------ ------------- ---------- 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) --------- ------------ ------------ --------- ---------- --------- ------------ ------------ --------- ---------- TREASURY TOTAL ACCUMULATED STOCK STOCKHOLDERS' DEFICIT AT COST EQUITY (DEFICIT) ------------- --------- ---------------- 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 ------------- --------- ------------ ------------- --------- ------------
See accompanying notes to consolidated financial statements. 37 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 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:
YEARS -------- Equipment............................................... 3 to 5 Furniture and fixtures.................................. 5 to 7
Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the improvement, whichever is shorter. (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 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 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 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.
ACQUISITION DATE OF ACQUISITION NUMBER OF SHARES ISSUED PURCHASE PRICES GOODWILL - ------------------------------------------ ------------------- ----------------------- --------------- -------- (IN THOUSANDS) 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
42 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.
1997 1998 1999 ------------ ------------ ------------ 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) ------------ ------------ ------------ ------------ ------------ ------------
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 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 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:
DECEMBER 31, 1997 ------------ 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 ------------ ------------
YEAR ENDED DECEMBER 31, --------------- 1997 --------------- Revenue....................................................................... $ 12,239,012 Expenses...................................................................... 28,963,373 ------------- Net loss...................................................................... $ (16,724,361) ------------- -------------
(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 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.
1997 1998 1999 -------- -------- -------- 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 -------- -------- -------- -------- -------- --------
(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: Cost investments............................................................... $20,875,902 Equity investment.............................................................. 3,531,422 Marketable securities.......................................................... 2,060,000 ----------- $26,467,324 ----------- -----------
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 RARE MEDIUM GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (5) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1998 1999 ---------- ----------- 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 ---------- ----------- ---------- -----------
(6) ACCRUED LIABILITIES Accrued liabilities consists of the following at December 31:
1998 1999 ---------- ---------- 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 ---------- ---------- ---------- ----------
(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 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 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 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:
1997 1998 1999 ----------- ----------- ----------- 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
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 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:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICES SHARES --------------- ---------- 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 ---------- ----------
The following table summarizes weighted-average option price information:
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 - ----------------------------------- -------------- -------------- -------------- -------------- --------------- $ 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 ---------- ---- ------ ---------- ----- ---------- ---- ------ ---------- -----
(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 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):
DECEMBER 31 ---------------------------- 1998 1999 ------------ ------------ 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.................................. $ -- $ -- ------------ ------------ ------------ ------------
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:
YEAR ENDING DECEMBER 31 AMOUNT - ----------------------------------------------------------- ----------- 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 ----------- -----------
52 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 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 ENGELHARD/ICC BALANCE SHEETS
December 31, December 31, 1997 1996 ------------ ------------ 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 =========== ============
The accompanying notes are an integral part of the financial statements. 55 ENGELHARD/ICC STATEMENTS OF OPERATIONS for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ 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) ============ ============ ============
The accompanying notes are an integral part of the financial statements. 56 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 ENGELHARD/ICC STATEMENTS OF CASH FLOWS for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ 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 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 58 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 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 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 (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 (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:
1997 1996 ----------- ----------- 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 =========== ===========
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 (9) REVENUES: Revenues are comprised of the following:
1997 1996 1995 ------------ ------------ ----------- 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 ============ ============ ===========
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 (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
Box Business Wheel Business Partnership ------------ -------------- ----------- 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 =========== =========== ===========
65 Statements of Operations for the year ended December 31, 1997
Box Business Wheel Business Eliminations Partnership ------------ -------------- ------------ ----------- 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) ============ ============ ============ ============
Condensed Statements of Cash Flows for the year ended December 31, 1997
Box Business Wheel Business Partnership ------------ -------------- ----------- 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 ============ ============ ============
66
Balance Sheets As of December 31, 1996 Box Business Wheel Business Partnership ------------ ------------- ----------- 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 =========== =========== ===========
Statements of Operations for the year ended December 31, 1996
Box Business Wheel Business Eliminations Partnership ------------ -------------- ------------ ----------- 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) ============ ============ ============ ============
67 Condensed Statements of Cash Flows For the year ended December 31, 1996
Box Business Wheel Business Partnership ------------ -------------- ----------- 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 ============ ============ ============
68 Statements of Operation for the year December 31, 1995
Box Business Wheel Business Elimination Partnership ------------ -------------- ----------- ----------- 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) ============ ============ ========= ==========
Statements of Cash Flows for the year ended December 31, 1995
Cash flows from operating activities Box Business Wheel Business Partnership ------------ -------------- ----------- 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 `============ ============ ============
69 RARE MEDIUM GROUP SCHEDULE II--VALUATIONS AND QUALIFYING ACCOUNTS
ADDITIONS CHARGED ADDITIONS BALANCE AT TO COSTS CHARGED BALANCE AT BEGINNING AND TO OTHER END OF DEDUCTIONS -- DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR - ------------------------------------------------- ---------- --------- --------- ---------- ---------- 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
- ------------------ (1) Existing reserves for acquired companies. 70 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.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------------------- ------------------- /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
71 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ----------------------------------------------------------------------------------------------- ----------- 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.
72
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ----------------------------------------------------------------------------------------------- ----------- 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.
73
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ----------------------------------------------------------------------------------------------- ----------- 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.
74
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ----------------------------------------------------------------------------------------------- ----------- 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.
75
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ----------------------------------------------------------------------------------------------- ----------- 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.
76 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 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 (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. 2 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 3 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 4 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 5 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 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 7 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 8 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 9 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. 10 (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 11 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 12 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 13 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: 14 (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: 15 (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. 16 (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 17 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 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 19 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 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). 21 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- 22 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). 23 (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 24 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 25 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 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). 27 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 28 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. 29 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. 30 (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 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. 32 (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. 33 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 34 EX-3.2 3 AMENDED AND RESTATED BY-LAWS 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. 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 2 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. 3 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 4 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 5 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. 6 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 7 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. 8 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 9 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 10 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. 11 (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. 12 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. 13 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. 14 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 15 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. 16 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 EX-10.32 4 EMPLOYMENT AGREEMENT 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. 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) 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) 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) 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) (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) 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:
If to Company: Copy to: 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
(7) 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) EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS 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 EX-23.2 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS 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. EX-23.3 7 INDEPENDENT AUDITORS' REPORT ON SCHEDULE 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 1 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 28,540,444 101,981 13,145,617 (544,747) 0 47,920,031 16,140,814 (4,040,577) 160,423,000 17,476,225 996,765 36,224,441 0 428,933 103,619,107 160,423,000 0 36,694,450 19,650,400 19,650,400 63,849,706 0 0 (49,470,380) 0 (49,470,380) 0 0 0 (49,470,380) (2.55) (2.55)
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