-----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, CDi1JqTZQuzjgYn5EI6u6ETpvtEXKgnuZOQkJKt25HR7QtJwbKvgNKtkWOqRQUTU v1S9hvGkjuhEEEsJGAoleQ== 0000889812-99-001068.txt : 19990414 0000889812-99-001068.hdr.sgml : 19990414 ACCESSION NUMBER: 0000889812-99-001068 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICC TECHNOLOGIES INC CENTRAL INDEX KEY: 0000756502 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99583988 BUSINESS ADDRESS: STREET 1: 44 WEST 18TH STREET CITY: NEW YORK STATE: NY ZIP: 10011 BUSINESS PHONE: 2126346950 MAIL ADDRESS: STREET 1: 330 SOUTH WARMINSTER RD STREET 2: 441 NORTH FIFTH STREET CITY: HATBORO STATE: PA ZIP: 19040 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL COGENERATION CORP DATE OF NAME CHANGE: 19891005 10-K 1 QUARTERLY 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 [Fee Required] for the fiscal year ended December 31, 1998, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] 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 (I.R.S. Employer incorporation or organization) Identification Number) 44 West 18th Street New York, New York 10011 --------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's former name - ICC Technologies, Inc. Registrant's telephone number, including area code: (212) 634-6950 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 March 29, 1999 was $111,686,000. As of March 29, 1999, 31,462,828 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's Definitive Proxy Statement for its 1999 Annual Meeting of Stockholders will be filed on or before April 30, 1999 and is incorporated by reference in Part III of this Form 10-K. 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, including statements regarding the Company's capital needs, business strategy, the listing of its common stock on the Nasdaq National Market, Year 2000 compliance, expectations and intentions. The words "believe," "anticipate," "expect," "estimate," "intend," and similar expressions identify forward-looking statements. Forward-looking statements necessarily involve risks and uncertainties, and the Company's actual results could differ materially from those anticipated in the forward-looking statements, including those set forth below under "Item 1. Description of Business" below and elsewhere in this report. The factors set forth below under "Item 1. Business" 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 DESCRIPTION OF BUSINESS BACKGROUND Currently, Rare Medium Group, Inc., a Delaware corporation (the "Company"), through its wholly-owed subsidiary, Rare Medium, Inc. ("Rare Medium") and that company's subsidiaries, provides creative and innovative business solutions for the emerging digital economy. The Company provides integrated, Internet-based services that include: digital business and marketing strategy and consulting services, creative design services, and technology and systems integration services. These services are generally delivered in partnership with clients using a methodology designed for rapid delivery. The Company provides Internet-based solutions primarily for large and medium-sized companies including companies in the Fortune 500. The Company was incorporated in the State of Delaware in 1985, as ICC Technologies, Inc. Prior to April 1998, the Company had been principally engaged in the design, development, manufacture and marketing of desiccant-based climate control systems. On April 15, 1998, the Company acquired Rare Medium, Inc, a New York corporation engaged in providing Internet professional services which was founded in September 1995 and has a limited operating history. Following the acquisition of Rare Medium, the Company divested itself of its desiccant-based air conditioning systems operations. On March 16, 1999, the Company's stockholders formally approved the change of the Company's name to Rare Medium Group, Inc. Providing Internet professional services and other Internet related products and services are the Company's sole businesses. INDUSTRY BACKGROUND The Internet has created a new paradigm for conducting business in the digital age, creating new forms of commerce, communicating with prospects, customers and business partners and for distributing products and services to consumers. Intranets, Extranets and Web sites (collectively, "Internet solutions") enhance the ability of businesses to create, store, process and distribute information. Intranets enable a company's employees to receive corporate information and training efficiently, communicate through e-mail, use the internal network's business applications, and access proprietary information. Similarly, an Extranet can extend part or all of the functionality of an Intranet to selected business partners outside of the company, for example, by providing a select group of customers with access to certain parts of its internal network. As a result of the availability of Internet solutions, companies fundamentally need to re-think their go-to-market strategies, business operating models and value chains. By many industry analyst estimates, the Internet solutions marketplace is forecasted to be very robust in the 21st century. Forrester Research, Inc. estimates that the worldwide Internet professional services market will grow from $2.4 billion in 1997 to $32.8 billion in 2002, a compound annual growth rate of 68.7%. Other industry analysts estimate that the Internet and E-Commerce services spending will be $43.6 billion by 2002. Businesses seeking to capitalize on the significant opportunities provided by Internet solutions face a formidable series of challenges integrating traditional and digital business models. Many of the traditional components of a company's value chain must be evaluated to determine the relevance in the new digital world. Many organizations are ill-equipped to think outside of their current, and often successful, business models. In addition, recent trends are changing the marketing communications requirements of businesses throughout the world. Businesses must also be able to rapidly develop and execute marketing strategies because shortening product life cycles reduce preparation time for marketing campaigns. New media, including Internet-based services, as well as CD ROMs, laptop PC presentations and interactive kiosks, have emerged as an integral component of marketing and communication strategy. These new media and the increasing complexity of sophisticated digital delivery, storage and multimedia enhancement tools and technologies enable companies to improve the effectiveness of communications, but pose additional challenges to businesses striving to link business strategy with rapidly changing technologies. To perform the multitude of Internet professional services in-house, a company would have to make substantial commitments of time, money and technical personnel to keep current with rapidly evolving technologies, content presentation techniques and competitors' offerings. Professionals with the requisite strategic, technical and creative skills are often difficult to find and retain. In addition, many businesses are hesitant to expand their internal information systems or marketing departments for particular engagements at a time when they are attempting to minimize fixed costs to increase returns on investment. At the same time, external economic factors encourage organizations to focus on their core competencies and limit work forces in the information technology management and marketing areas. Accordingly, many businesses have chosen to outsource a significant portion of the design, development and maintenance of their Intranets, Extranets and Web sites and the development and implementation of their marketing strategies to independent professionals. These independent professionals can leverage accumulated strategic, technical and creative talent and track developments in a field characterized by extremely short technology, process and content life cycles. Companies seeking to establish Internet solutions may turn to their traditional marketing or technology service providers for assistance. However, most of these providers have neither a proven track record of successful Internet solution deployment nor the full portfolio of strategy, technology, marketing and creative skills required to serve client needs effectively. Most advertising and marketing communications agencies lack the extensive technical skills, such as application development and legacy system and database integration, required to produce the increasingly complex and functional solutions demanded by clients. Most national information technology consulting service providers have sizable corporate infrastructures and have therefore chosen to focus on multi-million dollar engagements such as Year 2000 projects and client/server enterprise resource planning software deployments, not Internet solution consulting engagements. Most large computer technology product and service vendors lack the creative and marketing skills required to build audiences and deliver unique and compelling content, and are further constrained by their need to recommend their proprietary brands. Internet access service providers, whose core strength is in providing Internet access and site hosting rather than solution development, typically lack both the necessary creative and application development skills. A number of small Internet professional services firms have emerged to address the significant and rapidly growing market for Internet solutions. However, the small size and capital constraints of most of these firms restrict their ability to supply clients with the necessary depth and integration of strategic, technical and creative skills. Furthermore, many of these providers tend to develop expertise in a limited number of vertical markets because of the need to leverage the information and experiences gained from the relatively small number of Internet solution engagements they have completed. We believe that the rapidly increasing demand for Internet solutions and integrated marketing communications services, combined with the inability of most current providers to supply the full range and integration of strategic, technical and creative skills required by clients, has created a significant market opportunity for a scaled Internet professional services and integrated marketing communications services firm. In the currently fragmented and rapidly changing environment, an organization that could deliver the creative strengths of advertising and marketing firms, the strategic skills and technical capabilities of information technology consulting service providers, and the national reputation, economies of scale, multiple points of local presence and information sharing capabilities of a large organization could capitalize on this opportunity to help companies significantly improve their business processes. STRATEGY The Company's goal is to make Rare Medium a leading Internet professional services firm. The Company's strategy to achieve this objective includes: i) expanding operations by acquisition and internal growth; ii) leveraging best practices, reuse and creating operational efficiencies; iii) enhancing the Rare Medium brand; iv) continuously enhancing strategy, creative and technology service delivery excellence; and v) developing additional strategic relationships. In addition, the Company intends to continue to explore other Internet businesses that management believes may compliment the core Rare Medium business or can capitalize on the Rare Medium expertise. Expanding Operations by Acquisitions and Internal Growth. Rare Medium is continuing to expand through acquisitions and internal growth. In addition, the Company has recently recruited senior executive talent from various management consulting and systems integration services companies. The Company believes that in the fragmented market for providing Internet professional services, rapidly building a critical mass of strategic, creative, technical and managerial talent through internal growth and acquisitions will provide Rare Medium with a distinct competitive advantage. As of December 31, 1998, the Company had offices in New York, Los Angeles, Atlanta and Phoenix with pending transactions that would add offices in Toronto, Dallas and San Francisco. The Company intends to continue to identify acquisition candidates that meet the Company's criteria for revenues, profitability, growth potential and operating strategy and to acquire and integrate additional companies, both in the United States and abroad, that meet those criteria. We expect the competition for acquisition candidates to continue to increase. There is no assurance that we will identify and compete for attractive acquisition candidates or complete acquisitions at reasonable purchase prices, in a timely manner or at all. To the extent our management must devote significant time and attention to the integration of technology, operations, businesses and personnel as a result of these acquisitions, our ability to service current clients and win new clients may suffer. In addition, our senior management faces the difficult and potentially time consuming challenge of implementing uniform standards, controls, procedures and policies throughout our current and future acquisitions. We could also experience financial or other setbacks if any of the acquired businesses experienced problems in the past of which our management is not presently aware. For example, if an acquired business had dissatisfied customers or had any performance problems, our reputation could suffer as a result of our association with that business. In addition, the Company may experience disputes with the sellers of acquired businesses and may fail to retain key acquired personnel. Our success depends largely on the skills of certain key management and technical personnel, as well as key management and technical personnel of companies acquired by us. Several of our executive officers have recently joined the Company and many of our key personnel have worked together for a relatively short period. The loss of one or more of our key management and technical personnel may materially and adversely affect our business, results of operations and financial condition. We do not currently maintain key man insurance for any of our employees. We cannot guarantee that we will be able to replace any of such persons in the event their services become unavailable. While we have applied for $3 million in Key Man Insurance on our Chairman and Chief Executive Officer Glenn S. Meyers, there is no guarantee that we will receive such insurance. Leveraging Best Practices, Reuse and Creating Operational Efficiencies. The Company has recently implemented an enterprise-wide knowledge Intranet to facilitate corporate learning across the various Rare Medium offices. At the conclusion of client engagements, Rare Medium employees will participate in post-engagement review where "lessons learned" and new and innovative creative and technology techniques will be harvested and catalogued on the Intranet. This Intranet will serve as a vehicle for capturing engagement best practices and "lessons learned" and leveraging these experiences across the enterprise to achieve operational efficiencies. Enhancing the Rare Medium Brand. In a fragmented industry like Internet professional services, the Company believes that its brand is well-recognized. Nonetheless, enhancing the Rare Medium brand will be important to the Company's success. The Company markets itself through traditional brand promotion and other marketing strategies such as creation and distribution of sales and marketing collateral material, public relations campaigns and speaking engagements. The Company's success in its branding will likely also depend on establishing and maintaining close relationships with industry analysts, industry publications and continuing to obtain speaking engagements. Continuously Enhancing Strategy, Creative and Technology Service Delivery Excellence. Rare Medium strives to provide creative and innovative Internet-based business solutions across the various service lines. Our work has received numerous honors and awards. In order to maintain high levels of creativity and quality, we place great importance on recruiting and retaining talented employees. Developing and Maintaining Additional Strategic Relationships. The Company intends to continue to develop strategic relationships. Such relationships enable Rare Medium 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. Rare Medium has developed a number of strategic relationships, including relationships with Microsoft, Macromedia, IBM, Oracle, Vignette and Advanced Technology Group. The loss or diminution of one or several of these or other strategic relationships would deprive us of the opportunity to (i) gain early access to leading-edge technology, (ii) cooperatively market products with the vendor, (iii) cross-sell additional services, and (iv) gain enhanced access to vendor training and support. THE RARE MEDIUM APPROACH Rare Medium employs a service delivery methodology that ensures rapid speed to market of business solutions, iterative refinement of the solution, and a solution that is linked to business benefit. The delivery methodology enables projects to be conducted in both a fixed price, fixed time and a time and materials manner. The Rare Medium delivery methodology is comprised of four discrete phases: Exploration, Ideation, Creation and Evolution. Exploration Phase. The objective of the exploration phase is to conduct a strategic visioning session with the client's executive team to identify potential opportunities where the client may use Internet solutions for business benefit. The exploration also begins the requirements capture and scoping effort. A business case is also developed to provide a tool for prioritizing the scope of solution requirements as well as a benchmark to evaluate the effectiveness and success of the Internet solution. The key deliverable of this phase is a road map to implement and promote the Internet solution. Ideation Phase. The objective of this phase is to rapidly construct a proof-of-concept prototype of the proposed Internet solution. In addition to initiating the design process, this phase is intended to build support from the various corporate constituencies and stakeholders as well as build momentum across the client organization. Creation Phase. The object of this phase is to design, build, test and implement the Internet solution. The project team uses an iterative refinement approach to design and build the solution. The project team works very closely with the client executive sponsor and solicits continuous feedback from the various stakeholders. Evolution Phase. The objective of this phase is to implement the Internet solution and monitor the performance and effectiveness of the solution in the context of the business case and specific target market metrics. The information collected during the evolution phase provides valuable feedback for the next iteration of the Internet solution and provides a mechanism to measure the overall effectiveness of the solution. In addition, many of the assumptions made during the exploration phase in terms of the new digital business model and targeted market segments are either validated or calibrated. COMPETITION The market for Internet professional services is relatively new, intensely competitive, rapidly evolving and subject to rapid technological change. While relatively new, the market is already highly competitive and characterized by an increasing number of entrants that have introduced or developed products and services similar to those offered by us. We expect competition not only to persist, but to increase. Increased competition may result in price reductions, reduced margins and loss of market share. Our competitors fall into several categories, including Internet service firms, technology consulting firms, technology integrators, strategic consulting firms, and in-house information technology, marketing and design departments of our potential clients. Most of our current and potential competitors have longer operating histories, larger installed customer bases, greater name recognition, longer relationships with clients and significantly greater financial, technical, marketing and public relations resources than we do. At any time our current and potential competitors could increase their resource commitments to our markets. The barriers to entry into our business are also relatively low. As a result, we expect to face additional competition from new market entrants in the future. The market for our services is rapidly evolving and is subject to continuous technological change. As a result, our competitors may be better positioned to address these developments or may react more favorably to these changes. We compete on the basis of a number of factors, including the attractiveness of the Internet services offered, the breadth and quality of these services, creative design and systems engineering expertise, pricing, technological innovation, and understanding clients' strategies and needs. Many of these factors are beyond our control. Existing or future competitors may develop or offer strategic Internet services that provide significant technological, creative, performance, price or other advantages over the services offered by us. CUSTOMERS Rare Medium focuses primarily on large and medium sized businesses. The Company believes that the needs of such businesses provide excellent market opportunities. Rare Medium's customers are from a broad variety of industries including financial services, technology, consumer goods, pharmaceuticals, publishing and entertainment. The Company's two largest clients in 1998, Nestle USA, Inc. and General Mills, each accounted for more than approximately 10% of Internet related revenues of the Company. As of December 31, 1998, Rare Medium had a backlog of approximately $3 million. Our failure or inability to meet a client's expectations in the performance of services could injure our business reputation or result in a claim for substantial damages against us regardless of our responsibility for such failure. In addition, the services we provide for our clients may include confidential or proprietary client information. Although we have implemented policies to prevent such client information from being disclosed to unauthorized parties or used inappropriately, any such unauthorized disclosure or use could result in a claim against us for substantial damages. Our contractual provisions attempting to limit such damages may not be enforceable in all instances or may otherwise fail to protect us from liability for damages. Moreover, the Company does not currently have errors and omissions insurance. EMPLOYEES As of December 31, 1998, the Company had approximately 120 employees. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and the Company generally believes that its relationship with its employees is good. Competition for qualified personnel in the industry is intense. The Company believes that its future success in the industry will depend in part on its ability to attract, hire or acquire and retain qualified employees. 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. 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. RECENT DEVELOPMENTS The Acquisition of Rare Medium, Inc. On April 15, 1998, the Company acquired by merger all of the stock of Rare Medium, Inc., a privately held New York corporation("Rare Medium"). Rare Medium is an Internet professional services company engaged in the design, delivery and implementation of Internet web site applications and strategies, with its principal offices located in New York City. Total consideration for the purchase was approximately $46.2 million, consisting of a combination of $10 million in cash, 4,269,300 shares of common stock of the Company in a private placement of securities, and the balance in a secured promissory note dated April 15, 1998 (the "issued Rare Medium Note"). The Exchange with Rare Medium Noteholders. In connection with certain Exchange Agreements between the Company and certain of the holders of the Rare Medium Note, effective December 31, 1998 the Company in a private placement of securities issued an aggregate of 2,951,814 shares of common stock of the Company to such Noteholders in exchange for their beneficial interest in $11,773,881 of the original principal amount of the Rare Medium Note and accrued and unpaid interest thereunder through December 31, 1998. As a result, there is a remaining principal balance of $10,426,119 payable under the Note, which bears interest at the prime rate, payable semi-annually, with principal due in two equal installments on April 15, 2000 and April 15, 2001. The Acquisition of I/O 360, Inc. and DigitalFacades Corporation. On August 14, 1998, the Company acquired by merger all of the stock of I/O 360, Inc., a privately held New York corporation ("I/O 360"), and DigitalFacades Corporation, a privately held California corporation ("DigitalFacades"). I/O 360 and DigitalFacades are Internet professional services companies engaged in the design, delivery and implementation of Internet web site applications and strategies. In consideration of the purchase of I/O 360, the Company issued 786,559 shares of common stock of the Company in a private placement of securities valued at $3.0 million (based on the average closing price per shares of ICC common stock for the 15 trading days during the period from August 3, 1998 through August 21, 1998, inclusive, as reported in The Wall Street Journal). In consideration for the purchase of DigitalFacades, the Company issued 719,144 shares of common stock of the Company valued at $3.0 million (based on the average closing price per share of ICC common stock for the 20 trading days prior to August 13, 1998, as reported in The Wall Street Journal). Currently, the Company is integrating the operations of Rare Medium, I/O 360 and DigitalFacades under the Rare Medium brand name while achieving economies of marketing, purchasing, and operations, and while simultaneously leveraging relationships with various clients that existed prior to the mergers. To that end, the operations of Rare Medium and I/O 360 have largely been physically integrated due to I/O 360's move to a location in New York City adjacent to Rare Medium, and the Los Angeles operations of Rare Medium and DigitalFacades have been consolidated into one location. The Sale of a Majority of its Partnership Interests in Fresh Air Solutions, L.P. On October 14, 1998, the Company, through its wholly-owned subsidiary, ICC Desiccant Technologies, Inc., completed the sale of a majority of its partnership interests in Fresh Air Solutions, L.P. ("FAS") for total consideration of $1,500,000, of which $1,125,000 was paid in cash and $375,000 was paid by delivery of an unsecured promissory note issued by FAS. In addition, the unaffiliated investment entity that purchased the partnership interests assumed the liabilities of FAS as general partner, with certain exceptions. As a result of the sale of partnership interests, ICC Desiccant Technologies, Inc. retained, as its sole asset, a 32.4% passive investment limited partnership interest in FAS. Subsequent to the sale of the partnership interests referred to above, FAS redeemed the 10% limited partnership interest in FAS held by Engelhard Corporation in exchange for the 20% limited partnership interest in Engelhard Hexcore, L.P. held by FAS and $1 million in cash. As a result, ICC Desiccant Technologies, Inc.'s interest in FAS has been increased to a 36% limited partnership interest. The Private Placement of Convertible Debentures and Warrants to Capital Ventures International. Pursuant to the terms of a Securities Purchase Agreement, dated as of January 28, 1999, Capital Ventures International agreed to purchase from the Company in a private placement of securities, 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 Capital Ventures International purchased Convertible Debentures in the aggregate principal amount of $3,500,000 and Warrants to purchase 404,625 shares of common stock. Upon the timely satisfaction of the conditions to the closing of the second tranche, Capital Ventures International will purchase the remaining Convertible Debentures and Warrants. The term of the Convertible Debentures is four years. The principal amount of the Convertible Debentures plus accrued interest thereon at 8% per annum are convertible, at the option of the Selling Securityholder, into shares of common stock at a conversion price equal to $5.27 per share until July 27, 1999 (unless certain events occur earlier) and, thereafter, at a per share price equal to the lowest of (i) $5.27, (ii) 105% of the average closing bid price of the common stock for the lowest two trading days during the 15 trading days ending on July 27, 1999, and (iii) 92% of the average closing bid price of the common stock for the lowest two trading days during the 15 trading days ending on the trading day immediately preceding the applicable conversion date, but in no event less than $2.49 per share, subject to adjustment (the "Floor Price"). In the event that the common stock trades below the Floor Price for a certain period of time, the Company has the right to prepay the Convertible Debentures at an amount equal to 120% of principal plus accrued interest. Except under certain limited circumstances, Capital Ventures International is not entitled to convert the Convertible Debentures or exercise the Warrants to the extent that the shares to be received by Capital Ventures International upon such conversion or exercise would cause Capital Ventures International to beneficially own more than 4.9% of the outstanding common stock. On February 25, 1999, the Company acquired the assets of Interface Alternatives, Inc. through a newly-formed subsidiary, iface.com, which is in the business of providing software and solutions for voice-over-internet protocol ("VOIP") for voice, video and fax communications via the Internet. The Company owns 80% of the stock of iface.com, and previous management of Interface Alternative, Inc. owns the remaining 20%. As consideration for the assets of Interface Alternatives, Inc., which are currently estimated at $350,000, iface.com assumed the liabilities of Interface Alternatives, Inc., which are currently estimated at $250,000. In addition, the Company provided cash at closing to iface.com in the amount of $250,000 and a one-year line of credit in the amount of $250,000. The acquisition will be accounted for under the purchase method of accounting. On February 26, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of FS3 Interactive, Inc. FS3 creates Internet-based business solutions, including Web marketing, design, programming, and E-commerce enabling. As consideration for the purchase, the Company will issue common stock valued at two times FS3's annual revenue, which is currently estimated at $1.7 million. The number of shares to be issued will be determined based on the lesser of $4.50 or the average closing bid price for the ten days prior to closing. On March 9, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of Big Hand, Inc. and its subsidiary, Circumstance Design, Inc. Big Hand creates Internet-based solutions, including Web marketing, design, programming, and E-commerce enabling. As consideration for the purchase the Company will issue common stock valued at two times the trailing twelve month consolidated revenue of Big Hand and Circumstance, which is currently estimated at $3.0 million. The number of shares to be issued will be determined based on the lesser of $4.50 or the average closing bid price for the ten days prior to closing. On March 19, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of Hype! Inc., a Canadian corporation. Hype! is an Internet marketing and communications company. As consideration for the purchase, Rare Medium Group, Inc. will issue 270,729 shares of common stock. On March 16, 1999, the Company, formerly known as ICC Technologies, Inc., officially changed its name to Rare Medium Group, Inc. by a vote at a special meeting of the stockholders, increased the number of authorized shares from 50,000,000 to 200,000,000, adopted staggered terms for directors and received approval for the 1998 Long-Term Incentive Plan. On February 25, 1999, the Company acquired the assets of Interface Alternatives, Inc. through a newly-formed subsidiary, iface.com, which is in the business of providing software and solutions for voice-over-internet protocol ("VOIP") for voice, video and fax communications via the Internet. The Company owns 80% of the stock of iface.com, and previous management of Interface Alternative, Inc. owns the remaining 20%. As consideration for the assets of Interface Alternatives, Inc., which are currently estimated at $350,000, iface.com assumed the liabilities of Interface Alternatives, Inc., which are currently estimated at $250,000. In addition, the Company provided cash at closing to iface.com in the amount of $250,000 and a one-year line of credit in the amount of $250,000. The acquisition will be accounted for under the purchase method of accounting. On February 26, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of FS3 Interactive, Inc. FS3 creates Internet-based business solutions, including Web marketing, design, programming, and E-commerce enabling. As consideration for the purchase, the Company will issue common stock valued at two times FS3's annual revenue, which is currently estimated at $1.7 million. The number of shares to be issued will be determined based on the lesser of $4.50 or the average closing bid price for the ten days prior to closing. On March 9, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of Big Hand, Inc. and its subsidiary, Circumstance Design, Inc. Big Hand creates Internet-based solutions, including Web marketing, design, programming, and E-commerce enabling. As consideration for the purchase the Company will issue common stock valued at two times the trailing twelve month consolidated revenue of Big Hand and Circumstance, which is currently estimated at $3.0 million. The number of shares to be issued will be determined based on the lesser of $4.50 or the average closing bid price for the ten days prior to closing. On March 19, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of Hype! Inc., a Canadian corporation. Hype! is an Internet marketing and communications company. As consideration for the purchase, Rare Medium Group, Inc. will issue 270,729 shares of common stock. On March 16, 1999, the Company, formerly known as ICC Technologies, Inc., officially changed its name to Rare Medium Group, Inc. by a vote at a special meeting of the stockholders, increased the number of authorized shares from 50,000,000 to 200,000,000, adopted staggered terms for directors and received approval for the 1998 Long-Term Incentive Plan. ITEM 2. PROPERTIES The Company conducts its administrative and operations activities primarily from two adjacent facilities in New York, New York totaling approximately 20,000 square feet, pursuant to leases expiring in 2007 and 2002, and a facility in Los Angeles consisting of approximately 12,000 square feet pursuant to a lease expiring in 2003. The Company is currently evaluating whether its New York facilities are adequate to meet its needs for the foreseeable future, but has determined that its Los Angeles facility has capacity for additional growth. The Company routinely evaluates the facilities used by the businesses it acquires in light of its plans for growth in various geographic markets, and is currently evaluating space in Dallas. The Company does not anticipate purchasing property in the foreseeable future ITEM 3. LEGAL PROCEEDINGS Currently, the Company is not engaged in any material lawsuits. 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, 1998. A Special Meeting of Stockholders of ICC was held on March 16, 1999, at 10:30 AM EST in the ballroom of the Masonic Hall located at 71 West 23rd Street, New York, NY 10010 to consider for approval the following proposals: 1. To approve a proposal to amend the Company's Certificate of Incorporation to change the name of the Company to Rare Medium Group, Inc; 2. To approve a proposal to amend the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock of the Company from 50,000,000 shares to 200,000,000 shares; 3. To approve a proposal to amend the Company's Certificate of Incorporation to divide the Board of Directors into three classes; and 4. To approve a proposal to adopt the Company's 1998 Long-Term Incentive Plan. All of the proposals were approved. The result of the stockholders' votes on the Proposals is as follows: Proposal 1: Votes cast: 27,765,079 183,471 111,478 83,874 -------------- -------------- -------------- ----------------- For Against Abstention Broker Non-Votes Proposal 2: Votes cast: 24,283,774 3,645,045 131,209 83,874 -------------- -------------- -------------- ----------------- For Against Abstention Broker Non-Votes Proposal 3: Votes cast: 15,688,961 3,346,034 431,328 8,667,579 -------------- -------------- -------------- ----------------- For Against Abstention Broker Non-Votes Proposal 4: Votes cast: 15,427,939 3,616,806 421,578 8,677,579 -------------- -------------- -------------- ----------------- For Against Abstention Broker Non-Votes
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ICC's Common Stock trades on the NASDAQ National Market under the symbol RRRR. Prior to February 15, 1996 the Company's Stock was listed on the NASDAQ Small Cap Market. Based on reports provided by NASDAQ, the range of high and low bids for ICC's Common Stock for the two most recent fiscal years are as follows: 1998 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr ------- ------- ------- ------- High Bid: $4.97 $6.50 $7.50 $3.25 Low Bid: $1.63 $1.63 $2.19 $1.81 1997 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr ------- ------- ------- ------- High Bid: $4.81 $5.25 $6.88 $7.06 Low Bid: $1.56 $4.25 $4.38 $4.88 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 March 29, 1999, the last reported sale price for the Common Stock was $4.72 per share. As of March 29, 1999, ICC had approximately 1,074 recordholders of Common Stock. This number was derived from the Company's stockholder records, and does not include beneficial owners of the Common Stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers, and other fiduciaries. Holders of Common Stock are entitled to share ratably in dividends, if and when declared by the Board of Directors. Other than an in-kind warrant dividend declared by the Board of Directors in June 1990, the Company has never paid a dividend on its Common Stock and it is unlikely that any dividends will be paid in the foreseeable future. The payment of cash dividends on the Common Stock will depend on, among other things, the earnings, capital requirements and financial condition of the Company, and general business conditions. In addition, future borrowings or issuances of Preferred Stock may prohibit or restrict the Company's ability to pay or declare dividends. ITEM 6. SELECTED FINANCIAL DATA The following historical selected financial data of the Company for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 have been derived from financial statements that have been audited by the Company's Independent Accountants, whose reports thereon include an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern. There were no cash dividends paid to holders of Common Stock in any of these years. The data should be read in conjunction with the Company's financial statements and the notes thereto included elsewhere in this Form 10-K. (ALL AMOUNTS EXPRESSED IN DOLLARS EXCEPT WEIGHTED AVERAGE SHARES OUTSTANDING)
----------------------------------------------------------------------------------------- Years ended December 31 ----------------------------------------------------------------------------------------- INCOME STATEMENT DATA 1998 1997 1996 1995 1994 (1) ----------------- ---------------- ----------------- ----------------- ----------------- Revenues $ 4,688,120 $ - $ - $ - $ - Expenses (2) (3) 5,307,372 13,484,085 7,154,609 6,323,373 4,391,082 ----------------- ---------------- ----------------- ----------------- ----------------- Net Loss (619,252) (13,484,085) (7,154,609) (6,323,373) (4,391,082) Cumulative preferred stock dividend requirements 0 0 (49,655) (301,413) (227,750) ----------------- ---------------- ----------------- ----------------- ----------------- Net loss applicable to common stockholders $ (619,252) $ (13,484,085) $ (7,204,264) $ (6,624,786) $(4,618,832) ================= ================ ================= ================= ================= Loss per common share (.02) (.63) (.35) (.47) (.41) Weighted average shares outstanding 25,282,002 21,339,635 20,322,952 14,072,867 11,390,981 ----------------------------------------------------------------------------------------- Years ended December 31 ----------------------------------------------------------------------------------------- BALANCE SHEET DATA 1998 1997 1996 1995 1994 (1) ----------------- ---------------- ----------------- ----------------- ----------------- Total assets $ 44,743,122 $ 4,521,656 $ 12,250,865 $ 4,796,426 $ 2,397,522 Working capital (1,188,272) 1,382,537 9,661,805 1,827,797 1,072,485 Long-term obligations 10,935,736 0 0 0 150,000 Total Liabilities 14,921,412 7,583,862 2,179,467 3,262,614 426,782 Stockholders' equity (deficit) 29,821,710 (3,062,206) 10,071,398 1,533,812 1,970,740
(1) On February 7, 1994, the Company transferred its desiccant climate control business in exchange for a 50% interest in the Partnership. (2) Includes interest income and other income for 1994, 1995, 1996 and 1997. (3) Expenses consists of discontinued operations, general and administrative expense and interest expense for 1994, 1995, 1996 and 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of the Company's disposition of its desiccant based air conditioning operations, Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1998 compared with December 31, 1997 will focus on its sole business of providing Internet professional services and other Internet related products and services. The following financial information includes the results of Rare Medium as of January 1, 1997 and the results of Digital Facades and I/O 360 as of August 1998.
Rare Medium Group, Inc. Unaudited Pro Forma Statement of Operations 1997 1998 ---------------- ---------------- Revenue $ 3,856,233 $ 5,829,819 Expenses: Operating expenses 2,781,332 9,541,510 Corporate General and Administrative 1,991,594 2,053,639 Stock-Based Compensation 4,588,641 - Depreciation and Amortization 106,840 12,627,553 ---------------- ---------------- 9,468,407 24,222,702 ---------------- ---------------- Loss from operations (5,612,184) (18,392,883) ================ ================ ================ ================ Net income (loss) (17,111,889) (844,517) ================ ================
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS The following discussion of the Financial Condition and Results of Operations of the Company contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of, among other things, those factors described in this quarterly report. OVERVIEW Rare Medium, I/O 360 and DigitalFacades (the "Internet Businesses") are wholly-owned subsidiaries of the Company. Rare Medium was acquired on April 15, 1998, and is an Internet professional services firm that provides Internet professional services to businesses. Rare Medium offers a comprehensive range of services to deliver Internet solutions designed to improve clients' business processes, and as such include strategy consulting; needs analysis; creative, design and technology development; content development, implementation and integration; audience development; application development; maintenance and hosting. Rare Medium markets its services primarily to large and medium-sized companies. Both I/O 360 and DigitalFacades were acquired on August 13, 1998. DigitalFacades is a Los Angeles-based Internet professional services firm whose clients included Bugle Boy, Epson America, Inc. and Beckman Coulter. I/O 360 is a New York-based interactive design studio specializing in visual and engineering solutions for all technology-mediated business environments. I/O 360's clients included the New York Times, Yahoo Internet Life, Microsoft Press, and other complex projects for such clients as Microsoft, Mitsubishi, Citicorp, Sony Fujitsu, Barnes & Noble and Prodigy. The Company has integrated the operations of Rare Medium, I/O 360 and DigitalFacades under the Rare Medium brand name while achieving economies of marketing, purchasing, and operations, and while simultaneously leveraging relationships with various clients that existed prior to the mergers. To that end, the operations of Rare Medium and I/O 360 have largely been physically integrated due to I/O 360's move to a location in New York City adjacent to Rare Medium, and the Los Angeles operations of Rare Medium and DigitalFacades have been consolidated in one location. Our recent growth has strained our managerial and operational resources. A key part of our strategy is to grow, both by hiring more personnel and through acquisitions, which will continue to strain our resources. To manage future growth, our management must continue to improve our operational and financial systems and expand, train, retain and manage our employee base. There can be no assurance that we will be able to manage our growth effectively. If our systems, procedures and controls are inadequate to support our operations, our expansion would be halted and we could lose our opportunity to improve market share. On October 14, 1998, the Company, through its wholly-owned subsidiary, ICC Desiccant Technologies, Inc., completed the sale of a majority of its partnership interests in Fresh Air Solutions, L.P. ("FAS") for total consideration of $1,500,000, of which $1,125,000 was paid in cash and $375,000 was paid by delivery of an unsecured promissory note issued by FAS. In addition, the unaffiliated investment entity that purchased the partnership interests assumed the liabilities of FAS as general partner, with certain exceptions. As a result of the sale of partnership interests, ICC Desiccant Technologies, Inc. retained, as its sole asset, a 32.4% passive investment limited partnership interest in FAS. Subsequent to the sale of the partnership interests referred to above, FAS redeemed the 10% limited partnership interest in FAS held by Engelhard Corporation in exchange for the 20% limited partnership interest in Engelhard Hexcore, L.P. held by FAS and $1 million in cash. As a result, ICC Desiccant Technologies, Inc.'s interest in FAS has been increased to a 36% limited partnership interest. RESULTS OF OPERATIONS Year Ended December 31, 1998 compared with Year Ended December 31, 1997 During 1998, through a series of transactions, the Company has restructured its operations to focus on the business of providing Internet professional services primarily to large and medium sized businesses. This was accomplished by restructuring its Engelhard/ICC joint venture; purchasing the Internet-related businesses of Rare Medium,, I/O 360, and DigitalFacades; and disposing of a majority of its partnership interests in Fresh Air Solutions in October, 1998. Historically the Company 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 as if the acquisition was 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. Revenue Revenues for the year ended December 31, 1998 increased to $ 5.8 million from $ 3.9 million for the year ended December 31, 1997. 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 the Company's 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. The Company anticipates that revenues in future periods will continue to be positively impacted by both internal growth in addition to acquisitions of additional Internet professional services businesses. Although we have experienced revenue growth, this growth may not be sustainable or indicative of future operating results. In addition, we have incurred substantial costs to expand and integrate our operations and we intend to continue to invest heavily in ongoing expansion. Our ongoing integration costs will include the combination of the financial, information and communications systems of the various companies that we have acquired and expect to acquire. Our ongoing expansion costs will include the leasing of additional office space and the purchase of new computer and communications equipment. As a result of these and other costs, we may continue to incur operating losses through 1999 or beyond, and there can be no assurance that we will achieve or sustain profitability. Most of our contracts are currently on a fixed-price basis, rather than a time and materials basis. Further, the average size of our contracts is currently increasing, which results in a corresponding increase in our exposure to the financial risks of fixed price contracts. We assume greater financial risk on fixed-price contracts than on time and materials engagements. We have only a limited history in estimating our costs for our engagements, particularly for larger projects. We have had to commit unanticipated resources to complete certain projects, resulting in lower gross margins on certain contracts. We may experience similar situations in the future. In addition, we typically assume the fixed-price contracts of the companies we acquire. If we fail to estimate accurately the resources and time required for an engagement, to manage client expectations effectively or to complete fixed-price engagements within our budget, on time and to our clients' satisfaction, we would be exposed to cost overruns, potentially leading to losses on these engagements. In addition, we recognize revenues from fixed-fee 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 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 is an important component of profitability. The absence of long-term contracts and the need for new clients create an uncertain revenue stream. There is no assurance that we will be able to add new major clients or to secure new engagements with existing clients. In addition, certain of our existing clients may unilaterally reduce the scope of, or terminate, existing projects. There is no assurance that we will be able to maintain our business relationship or avoid a material reduction in the use of our services by any of our significant existing clients. EXPENSES Operating Expenses Operating expenses increased to $ 9.5 million for the year ended December 31, 1998 from $ 2.8 million in fiscal 1997. 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 the Company 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 the Company's significant investment of time and resources into: (i) the organizational restructuring and reengineering of the Company; (ii) building the systems infrastructure both in terms of systems (web site, Intranet redesign, scaling of network) and personnel; and (iii) the integration of I/O 360 and Digital Facades into the Rare Medium functional and organizational structure. The expenses associated with these activities represent an investment in the operating infrastructure of the Company, which are not only necessary to support the anticipated future growth of the Company, but are also part of the Company's plan to build a national presence in the Internet professional services' business and be competitive in our service offerings to current and potential clients. The Company anticipates that operating expenses will continue to increase in absolute dollars as the Company continues to build its infrastructure to support its expected growth from both internal sources and through acquisitions. Corporate General and Administrative Expenses Corporate general and administrative expenses for the year ended December 31, 1997 of $ 2.0 million represent expenses not associated with the web services business of Rare Medium and were related primarily to legal, accounting, public relations and other administrative expenses including salaries and corporate overhead of the Company in support of its then existing businesses. For the year ended December 31, 1998, corporate general and administrative expenses were $2.0 million and included professional fees for legal and accounting services and salaries and corporate overhead for the Company prior to the acquisition of Rare Medium in April, 1998 and for some of the costs associated with transitioning the Company to its new business. Depreciation and Amortization Expenses Depreciation and amortization expenses for the fiscal year ended December 31, 1998 increased to $ 12.6 million form $ 0.1 million for the year ended December 31, 1997. The increase of $ 12.5 million is due to the amortization of goodwill related to the acquisitions during 1998 of Rare Medium, I/O 360 and DigitalFacades, with $ 11.4 million related to the Rare Medium 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 was $ 18.4 million for the year ended December 31, 1998 as compared to a loss of $ 5.6 million for the previous fiscal year. 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. Excluding these non-cash charges, the loss from operations for 1997 would have been $ 1.0 million. Net Income The net loss for the year ended December 31,1998 was $ 0.8 million. The major differences between the loss from operations and the net loss is a $ 24.8 million gain on the restructuring of the Company's joint venture partnership with the Englehard Corporation, the Englehard/ICC partnership and it was partially offset by the loss related to discontinued operations of $ 4.7 million. For the year ended December 31, 1997, the Company had a net loss of $ 17.1 million, which included a loss of $ 12.0 million from the equity in the loss of the Engelhard/ICC joint venture. Liquidity and Capital Resources The Company had $ 0.9 million in cash and cash equivalents at December 31, 1998, as compared with $1.3 million at December 31, 1997. On December 31, 1998, in connection with certain Exchange Agreements between the Company and certain of the holders of the Rare Medium Note, the Company issued an aggregate of 2,951,814 shares of common stock of the Company to such Note holders in exchange for their beneficial interest in approximately $ 11.8 million of the original principal amount of the Rare Medium Note and accrued and unpaid interest thereunder through December 31, 1998. As a result, the original Note has a remaining principal balance of $ 10.4 million, payable one half on April 15, 2000 and the balance on April 15, 2001, with interest accruing at prime and payable semi-annually each April 1 and October 1. In January 1999, the Company raised $ 3.5 million in a private placement of 8% Convertible Debentures and Warrants with Capital Ventures International. Upon timely satisfaction of the conditions to closing for a second tranche on or before May 28, 1999, the Company would receive $2.5 million for the placement of additional 8% Convertible Debentures and Warrants. In order to fund the Company's capital requirements and to satisfy its remaining debt obligations to the former stockholders of Rare Medium, Inc., the Company will need to sell additional equity or debt securities or seek credit facilities within six to twelve months. As of the date hereof, the Company has not entered into any agreements or commitments to sell additional equity or debt securities or to obtain a credit facility for such purposes. Sales of additional equity or convertible debt securities would result in additional dilution to the Company's stockholders. The Company may need to raise additional funds sooner in order to support more rapid expansion, develop new or enhanced services and products, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. The Company's future liquidity and capital requirements will depend upon numerous factors, including the success of the Company's existing and new service offerings and competing technological and market developments. There is no guaranty that such funding will be available, or available under terms acceptable to the Company. If the Company requires and is unable to obtain such funding, there would be a material adverse effect on the Company's business, results of operations and financial condition. Since our common stock has continued to trade at or below $5.00 per share during recent months and the Company does not have net tangible assets of at least $4 million, we received notice from Nasdaq that we must take steps to come into compliance with the Nasdaq National Market listing standards or our common stock will be delisted from the Nasdaq National Market. A hearing with Nasdaq was held on February 4, 1999. We have proposed a plan to Nasdaq which we believe should enable us to remain listed on the Nasdaq National Market if accepted by Nasdaq. In the event we are unable to maintain our listing on the Nasdaq National Market, we currently meet the listing standards for, and would seek to apply for, listing on the Nasdaq SmallCap Market. There can be no assurance, however, that such an application would be approved. In the event we were unable to list the Company's common stock on the Nasdaq SmallCap Market or any other exchange at such time, there would be no established trading market for the Company's common stock except as may be established in the National Association of Securities Dealers Inc.'s OTC Bulletin Board Service or in the "pink sheets," which would have a material adverse effect on the liquidity and market price of the Company's common stock. Market Risk Exposure The financial position of the Company is subject to market risk associated with interest rate movements on outstanding debt. The Company has debt obligations with both fixed and variable terms. The carrying value of the Company's variable rate debt obligations approximates fair value as the market rate is based on prime. A 10 percent increase in the underlying interest rates would result in an increase of interest expense of approximately $95,000. Year 2000 Our Systems May Not Be Year 2000 Compliant. 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 and those of our vendors, clients and content partners 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 have appointed a Year 2000 Task Force to perform an audit to assess the scope of our risks and bring our computer and our applications into compliance. This Task Force is currently in the process of completing its identification of applications that are not Year 2000 compliant. In addition, we have been discussing with our vendors, clients and content partners their progress in identifying and addressing problems that their computer systems may face in correctly processing date information related to the Year 2000. Moreover, clients increasingly require that we warrant that the applications we create are year 2000 compliant. Should they prove not to be, it could have a material adverse effect on our business. Based on this task force work to date, we believe that most of our applications are Year 2000 compliant, and that expenditures to correct any deficiencies not yet identified will not be significant. In addition, the Company is in the process of developing a contingency plan to address any significant deficiencies in the event that they are identified. There can be no assurance, however, that any or all of the Company's or third party systems, including those of our clients, are or will be Year 2000 compliant or that the costs required to address the Year 2000 issue or the impact of a failure to achieve substantial Year 2000 compliance will not have a material adverse effect on our business. Year Ended December 31, 1997 compared with Year Ended December 31, 1996 The following discussion relating to the results of operations of the Company and its former joint venture partnership, Engelhand/ICC (the "Partnership") for the year ended December 31, 1997 compared with the year ended December 31, 1996 pertains to the operations of the desicant air conditioning business which the Company disposed of in October 1998 and is identical to the corresponding section appearing under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as amended on Form 10-K/A. The Company does not believe that this discussion is relevant to an understanding of the Company's current business. The Partnership's revenue for the year ended December 31, 1997 increased $1,734,403 to $12,239,012 from $10,504,609 for the year ended December 31, 1996. This increase in revenues is due primarily to increased substrate sales and equipment sales. Sales of substrate from the Miami plant to Hexcel pursuant to a supply agreement increased 35% to approximately $5.8 million in 1997 from $4.3 million in 1996. Equipment sales increased 4% to approximately $6.3 million in 1997 compared to approximately $6.1 million in 1996. The Partnership's gross loss for the year ended December 31, 1997 increased $1,949,920 to $5,221,770 from $3,271,850 for the year ended December 31,1996. The increase in gross loss is due primarily to increased provisions for inventory obsolescence and warranty costs. The provision for inventory obsolescence increased by approximately $1,300,000 to cover primarily slow moving components related to older desiccant unit versions. The Partnership incurred warranty costs of $2.2 million in 1997 related primarily to premature component failures and odor issues which the Company believes it has rectified through design changes, system operation modifications and quality control improvements. Premature component failures related primarily to failures of certain castor wheels upon which the desiccant or heat exchange wheels rotate. In certain installations the desiccant wheel adsorbed not only moisture but compounds in the air that produced odors. Through modifications to the operation of the system cycles, addition of dampers and replacement of contaminated wheels, Fresh Air Solutions believes it can control the odors that are created under certain circumstances. The Company believes that Fresh Air Solutions has adequately provided for existing and potential future warranty claims. The Partnership's active humidity climate control systems are an emerging technology and have been subject to numerous improvements and modifications. Sales volumes have been lower than the capacity to produce and revenues have not been sufficient to cover fixed and variable costs of production. As a result of the Partnership Restructuring, Fresh Air Solutions' will not receive any revenues from ongoing substrate sales, as that business was retained by Engelhard HexCore. The Partnership's operating expenses increased $2,141,015 to $11,021,859 for the year ended December 31, 1997 compared to $8,880,844 for the year ended December 31, 1996, due to higher marketing, engineering and general and administrative costs which more than offset reduced research and development costs. General and administrative costs increased approximately $733,000 due to increased depreciation and amortization of approximately $275,000 and an increase in the bad debt provision of approximately $403,000. Marketing expenses increased approximately $541,000 as a result of increased marketing efforts and increased sales and marketing personnel. Engineering costs increased approximately $1,020,000 due to increased engineering staff costs of approximately $461,000 and increased engineering consulting services of approximately $465,000. The loss from operations for the year ended December 31,1997 increased $4,090,935 to $16,243,629 compared to $12,152,694 for the year ended December 31, 1996. The Partnership's net loss increased $4,134,697 to $16,724,361 for the year ended December 31, 1997 from $12,589,664 for the year ended December 31, 1996 due to the increase in the loss from operations of $4,090,935 discussed above and reduced interest income. The Company realized a decrease in interest and other income of $195,541 to $492,870 for the year ended December 31, 1997 as compared to $688,411 for the year ended December 31,1996, which was primarily attributable to a decrease in the average balance of cash and cash equivalents. The Company's increase in its equity interest in the net loss of the Partnership increased $5,690,529 to $ 11,985,361 for the year ended December 31, 1997 as compared to $6,294,832 for the year ended December 31, 1996 which was due to the increased Partnership loss and the increased share of the loss recognized by the Company as a result of a limit placed on the loss recognized by Engelhard of approximately $4,700,000 in connection with Master Agreement governing the Restructuring. The Company's general and administrative expenses increased $446,000 to $1,991,594 for the year ended December 31, 1997 compared to $1,545,594 for the same period in 1996 primarily the result of an increase in professional and consulting fees. The Company's net loss for the year ended December 31, 1997 increased $6,329,476 to $13,484,085 from $7,154,609 for the same period in 1996. Net loss per share of Common Stock increased $.28 to $.63 for the year ended December 31, 1997 from $.35 for the same period in 1996 primarily the result of the increased loss of the Partnership and the increased share of the Partnership loss recognized by the Company in connection with the Master Agreement governing the Restructuring. The backlog of purchase orders as of March 25, 1998 is approximately $2 million which is approximately $1 million less than the comparable period in 1997. The decrease in backlog is primarily attributable to a significant decline in orders from the Asia-Pacific market and to customer concerns over component failures and odor issues. The decline in the Asia-Pacific market activity is largely attributable to the Asian-Pacific economies experiencing lower economic growth than had been previously enjoyed resulting in declines in many of the Asia-Pacific currencies in comparison to the US dollar. Continued weakness in Asian-Pacific currencies could adversely impact Asian-Pacific market activities. In connection with the Restructuring, Engelhard HexCore and Fresh Air Solutions entered into the Rotor Supply Agreement whereby Engelhard HexCore will supply Fresh Air Solutions with its heat-exchange and desiccant rotor requirements. Fresh Air Solutions is obligated to purchase its rotor requirements from Engelhard HexCore. All rotors will be purchased at prices which are lower than the best price Engelhard HexCore offers to other customers. The term of the rotor supply agreement is fifteen years. Under the Rotor Supply Agreement, Engelhard HexCore will sell all desiccant and heat-exchange rotors to Fresh Air Solutions at prices which are lower than it will sell rotors to others ("Favorable Wheel Prices"). Moreover, during the first two years under the Rotor Supply Agreement, Engelhard HexCore has agreed to sell such rotors at prices which are lower than the Favorable Wheel Prices. Although Fresh Air Solutions will receive preferential pricing for such purchases, it is required to purchase rotors that will cover approximately $600,000 in costs annually. Initially the Company believes that rotor costs will be obtained at prices higher than had been obtained when rotors were transferred intra-partnership at cost prior to the Restructuring of the Partnership; however, the Company believes as the demand for rotors increase and as Engelhard HexCore begins to sell to other end users, the price of rotors will decline. ICC, through Fresh Air Solutions continued to have the right to use the technology covered by the patents and the proprietary desiccant system design in conducting the business of Fresh Air Solutions and expected to derive benefit from the ETS(TM) and small-cell, honeycomb substrate material used to make the Engelhard HexCore rotors through the purchase of rotors under the Rotor Supply Agreement; however, Fresh Air Solutions no longer had or shared in the exclusive right to any such technology. Moreover, Engelhard, through Engelhard HexCore received the right to use and, except with respect to Hexcel, the successor corporation to the former owner of the Partnership's Miami Plant, sublicense others to use, such technology through its rights under the Box Technology License and ownership of the patented ETS(TM) and the Hexcel license. Fresh Air Solutions retained exclusive rights to sell its systems to standalone supermarkets, ice rinks, and pachinko halls in North America, Japan and Korea for a seven year period provided that Fresh Air Solutions meet certain agreed to performance targets for sales to these markets. The independent accountants' report on the audit of the Company's 1997 financial statements includes an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern. The Company's financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses since inception amounting to approximately $54 million through December 31, 1997. In order to continue operations, the Company has had to raise additional capital to offset cash consumed in operations and support of the Partnership. The Company's continuation as a going concern is dependent upon its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis; (ii) obtain additional financing or refinancing as may be required; and (iii) ultimately, attain profitable operations and positive cash flow from its operations and its investment in Fresh Air Solutions. 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 Form 10-K 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 On April 15, 1998, pursuant to the terms of a Merger Agreement and Plan of Reorganization, the Company acquired by merger Rare Medium, Inc., a privately held New York corporation, which is an Internet professional services company engaged in the design, delivery and implementation of Internet site applications and strategies, primarily to large and medium sized businesses, including global 2000 companies, with its principal offices located in New York City. On August 13, 1998, PricewaterhouseCoopers LLP ("PWC"), the Company's principal accountant, was replaced by the Board of Directors of the Company, based upon the Company's moving into this new line of business and moving its operations to New York City. On August 13, 1998, the Board of Directors of the Company retained KPMG, LLP ("KPMG") to audit its financial statements for the year ended December 31, 1998. In compliance with Item 304 of Regulation S-K and as reported in the Company's report on form 8-K dated August 13, 1998, the Company provides the following information: 1. The Board of Directors of the Company on August 13, 1998 chose KPMG to perform the auditing engagement for the Company. 2. In their report dated March 20, 1998, PWC expressed an opinion that the December 31, 1997 financial statements were prepared assuming that the Company will continue to exist as a going concern and that the Company incurred losses accumulating to $54,184,410 through December 31, 1997. This factor, among others, raised substantial doubt about the Company's ability to continue as a going concern. Other than the above, the reports of PWC on the Company's financial statements for the Company's last two fiscal years did not in either case contain an adverse opinion or a disclaimer of opinion, nor were either of the same qualified or modified as to uncertainty, audit scope or accounting principles. 3. The decision to change accountants was approved by the Board of Directors of the Company. 4. During the Company's two most recent fiscal years and any subsequent interim period to date, there have been no disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. 5. None of the events referred to in paragraphs (a)(1)(v)(A) through (D) of Item 304 occurred within the Company's two most recent fiscal years or any subsequent interim period. 6. KPMG was engaged by the Company on August 13, 1998. The Company did not consult KPMG on any of the matters described in Items 304(a)(1)(iv) or 304 (a)(1)(v) of Regulation S-K. 7. The Company is providing PWC with a copy of this report pursuant to the requirements of Item 304(a)(3). PART III Item 10. Directors and Executive Officers of the Registrant. The required information with respect to each director and executive officer is to be contained in the Company's definitive Proxy Statement in connection with its 1999 Annual Meeting ("1999 Annual Meeting") to be filed with the Securities and Exchange Commission (the "Commission") within 120 days of the Registrant's fiscal year ended December 31, 1998, which information is hereby incorporated by reference in this Form 10-K Annual Report. Item 11. Executive Compensation. The required information with respect to executive compensation is to be contained in the Company's definitive Proxy Statement in connection with its 1999 Annual Meeting to be filed with the Commission within 120 days of the Registrant's fiscal year ended December 31, 1998, which information is hereby incorporated by reference in this Form 10-K Annual Report. Item 12. Security Ownership of Certain Beneficial Owners and Management. The required information with respect to security ownership of certain beneficial owners and management is to be contained in the Company's definitive Proxy Statement in connection with its 1999 Annual Meeting to be filed with the Commission within 120 days of the Registrant's fiscal year ended December 31, 1998, which information is hereby incorporated by reference in the Form 10-K Annual Report Item 13. Certain Relationships and Related Transactions. The required information with respect to certain relationships and related transactions is to be contained in the Company's definitive Proxy Statement in connection with its 1999 Annual Meeting to be filed with the Commission within 120 days of the Registrant's fiscal year ended December 31, 1998, which information is hereby incorporated by reference in this Form 10-K Annual Report. 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 Form 10-K Report: (1) Financial Statements of the Registrant. (i). Report of Independent Accountants (ii). Consolidated Balance Sheet as of December 31, 1998 and 1997. (iii). Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. (iv). Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996. (v). Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. (vi). Notes to Consolidated Financial Statements. 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 and subsequent to the quarterly period ending December 31, 1998: 1. Form 8-K filed on October 29, 1998, as amended on November 13, 1998, relating to the sale of partnership interests in Fresh Air Solutions, L.P. by ICC Technologies, Inc., through its wholly-owned subsidiary, ICC Desiccant Technologies, Inc., to Wilshap Investments, LLC, dated October 14, 1998; 2. Form 8-K filed on February 4, 1999, relating to the sale of Convertible Debentures by ICC to Capital Ventures International, dated January 28, 1999; 3. Form 8-K filed on February 10, 1999, relating to the exchange of Common Stock for the beneficial interest in approximately $11.8 million of the principal amount of the Rare Medium Secured Promissory Note held by certain former stockholders of Rare Medium, Inc., dated December 31, 1998. (c) The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-X. Exhibit 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. 3.1 Articles of Incorporation and By-laws of Rare Medium Group, Inc., formerly known as ICC Technologies, Inc., are hereby incorporated herein by reference from the Company's Form 10 filed on September 16, 1985. 3.2 Amendment to Articles of Incorporation, changing name to ICC Technologies, Inc., is hereby incorporated herein by reference from the Company's Form 8-K dated June 12, 1990. 3.3 Amendment to Articles of Incorporation, changing name to Rare Medium Group, Inc., filed with the Secretary of State of the State of Delaware on March 17, 1999. 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 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. 10.7 Employment Agreement between the Company and John S. Gross dated May 13, 1998. 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. 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. 10.10 The Company's Incentive of Stock Option Plan, as amended 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, 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, 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. 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 Rate Medium, Inc., Secured Promissory Note, dated April 15, 1998 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 were filed as Exhibit 10.1 to the Company's Form 8-K dated January 28, 1999 and is hereby incorporated herein by reference. 10.18 Form of Convertible Term Debenture dated as of January 28, 1999 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 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 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. 16 Letter regarding change in certifying accountant from PricewaterhouseCoopers LLP to the Securities and Exchange Commission dated August 26, 1998 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; I/O 360, Inc., a New York corporation; DigitalFacades, Inc., a California corporation; Investment Holding Co., f/k/a ICC Desiccant Technologies, Inc., a Delaware corporation; ICC Investment L.P., a Pennsylvania limited partnership; Maintain Corp., a Delaware corporation; and ICC Advanced Technologies, Inc., a Delaware corporation. 23.1 Consent of KPMG LLP, Independent Accountants. 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 27 Financial Data Schedule. 99 Letter on behalf of ICC Technologies, Inc. to PriceWaterhouseCoopers LLP pursuant to Item 304 of Regulation S-K 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 Form 10-K Annual Report. (1) Financial Statements of Engelhard/ICC. (i) Report of Independent Accountants. (ii) Balance Sheets as of December 31, 1998 and 1997. (iii) Statements of Operations for the years ended December 31, 1998, 1997 and 1996. (iv) Statements of Changes in Partner's Capital for the years ended December 1998, 1997 and 1996. (v) Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. (vi) Notes to Financial Statement. Independent Auditors' Report The Board of Directors and Stockholders Rare Medium Group, Inc.: We have audited the accompanying consolidated balance sheet of Rare Medium Group, Inc. as of December 31, 1998 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company as of December 31, 1997 and for each of the years in the two-year period ended December 31, 1997 were audited by other auditors whose report, dated March 20, 1998, on those statements included an explanatory paragraph that states that the Company has incurred losses accumulating to $54,184,410 through December 31, 1997, which raises substantial doubt of their ability to continue as a going concern. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rare Medium Group, Inc. as of December 31, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that Rare Medium Group, Inc. will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered net losses and losses from continuing operations, has a working capital deficiency and has incurred accumulated losses through December 31, 1998. These factors, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP New York, New York March 29, 1999 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors of Rare Medium Group, Inc. We have audited the accompanying consolidated balance sheets of Rare Medium Group, Inc. (formerly ICC Technologies, Inc.) as of December 31, 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period 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 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 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 consolidated financial position of Rare Medium Group as of December 31, 1997 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that Rare Medium Group will continue as a going concern. As discussed in Note 1, Rare Medium Group incurred losses accumulating to a $54,184,410 through December 31, 1997. This factor among others, raises substantial doubt about Rare Medium Group's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Coopers & Lybrand LLP Philadelphia, Pennsylvania March 20, 1998 RARE MEDIUM GROUP, INC CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ------------------ ------------------ Assets Current assets: Cash and cash equivalents $ 917,978 $ 1,257,483 Accounts receivable, net 1,184,182 - Unbilled receivables 251,718 - Advertising credits 298,083 - Prepaid expenses and other current assets 145,443 406,558 ------------------ ------------------ Total current assets 2,797,404 1,664,041 Property and equipment, net 1,918,273 7,615 Goodwill, net of accumulated amortization of $12,234,602 39,899,170 - Notes receivable, net - 350,000 Restricted cash equivalents - 2,500,000 Other assets 128,275 - ------------------ ------------------ Total assets $44,743,122 $ 4,521,656 ================== ================== Liabilities and Stockholders' Equity (Deficit) Current liabilities Accounts payable 1,634,889 $ 97,989 Accrued liabilities 1,557,364 183,515 Deferred revenue 308,898 - Taxes payable 355,000 - Notes payable - other 79,525 - Note payable - affiliate 50,000 - ------------------ ------------------ Total current liabilities 3,985,676 281,504 Notes payable - related parties 10,591,526 - Notes payable - other 235,145 - Deferred rent 109,065 - Loss in excess of investment balance - 7,302,358 ------------------ ------------------ Total liabilities 14,921,412 7,583,862 ------------------ ------------------ Commitments and contingencies Stockholders' equity (deficit): Preferred stock, Authorized 9,510 shares; no shares issued and outstanding - - Common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 30,696,828 shares in 1998 and 21,519,998 shares in 1997 306,968 215,200 Additional paid-in capital 84,720,304 51,308,904 Note receivable from shareholder (230,467) (230,467) Accumulated deficit (54,803,665) (54,184,413) Less: Treasury stock, 66,227 shares in 1998 and 1997, at cost (171,430) (171,430) ------------------ ------------------ Total stockholders' equity (deficit) 29,821,710 (3,062,206) ------------------ ------------------ Total liabilities and stockholders' equity $ 44,743,122 $ 4,521,656 ================== ==================
See accompany notes to consolidated financial statements. RARE MEDIUM GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- Revenues $ 4,688,120 $ - $ - ----------------- ----------------- ----------------- Expenses: Operating expenses 6,590,061 - - General and administrative 3,590,194 1,991,594 1,545,594 Depreciation and amortization 12,584,177 - - ----------------- ----------------- ----------------- Total expenses 22,764,432 1,991,594 1,545,594 ----------------- ----------------- ----------------- Loss from operations (18,076,312) (1,991,594) (1,545,594) ----------------- ----------------- ----------------- Interest (expense) income, net (1,278,507) 492,870 685,817 ----------------- ----------------- ----------------- Loss before taxes and discontinued operation (19,354,819) (1,498,724) (859,777) Income tax expense 355,487 - - ----------------- ----------------- ----------------- Loss before discontinued operation (19,710,306) (1,498,724) (859,777) ----------------- ----------------- ----------------- Discontinued operation: Loss from discontinued operation (4,538,128) (11,985,361) (6,294,832) Gain on restructuring of Engelhard 24,256,769 - - Loss on sale of FAS (627,587) - - ----------------- ----------------- ----------------- Income (Loss) from discontinued operation 19,091,054 (11,985,361) (6,294,832) ----------------- ----------------- ----------------- Net loss (619,252) (13,484,085) (7,154,609) Cumulative preferred stock dividend - - (49,655) ----------------- ----------------- ----------------- Net loss attributable to common stockholders $ (619,252) $ (13,484,085) $ (7,204,264) ================= ================= ================= Basic and diluted earnings (loss) per share Continuing operations $(0.78) $(0.07) $(0.04) Discontinued operation 0.76 (0.56) (0.31) ----------------- ----------------- ----------------- Net loss per share $(0.02) $(0.63) $(0.35) ================= ================= ================= Basic weighted average common shares outstanding 25,282,002 21,339,635 20,332,952 ================= ================= =================
See accompanying notes to consolidated financial statements. RARE MEDIUM GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------------ ------------------ ----------------- Cash flows from operating activities: Net loss $ (619,252) $ (13,484,085) $ (7,154,609) Adjustments to reconcile net loss to net cash used in Operating activities: Gain of restructuring of Engelhard (24,256,769) - - Depreciation and amortization 12,584,177 3,927 1,590 Equity interest in net loss of Engelhard/ICC 133,450 11,985,361 6,294,832 Common stock and stock options issued for services rendered 589,914 52,381 12,500 Loss on disposition of FAS 627,587 - - Interest expense paid in notes and stock 1,140,413 - - (Increase) decrease in: Receivables 422,567 - 189,640 Prepaid expenses and other 277,142 (298,397) 172,349 Increase (decrease) in: Accounts payable and accrued liabilities 757,693 194,030 (227,977) Taxes payable 362,745 - - Other liabilities (702,629) - - ------------------ ------------------ ----------------- Net cash used in operating activities (8,682,962) (1,546,783) (711,675) ------------------ ------------------ ----------------- Cash flows from investing activities: Acquisitions, net of cash acquired (10,591,856) - - Cash received in connection with restructuring of Engelhard/ICC 18,864,003 - - Capital contributions to Engelhard/ICC - (6,775,000) (7,000,000) Issuance of note receivable - (350,000) - Net cash received in connection with sale of majority interest in FAS 973,173 - - Purchases of property and equipment, net (912,239) (9,500) - ------------------ ------------------ ----------------- Net cash provided by (used in) investing activities 8,333,081 (7,134,950) (7,000,000) ------------------ ------------------ ----------------- Cash flows from financing activities Proceeds from issuance of common stock and warrants, net 118,385 298,102 17,305,194 Cash redemption of preferred stock - - (981,270) Repayment of borrowings (108,013) - - Cash dividend on preferred stock - - (394,610) Repayments of borrowings from stockholders - - (150,000) ------------------ ------------------ ----------------- Net cash (used in) provided by financing activities (10,372) 298,102 15,779,314 ------------------ ------------------ ----------------- Net increase (decrease) in cash and cash equivalents (339,505) (8,383,631) 8,067,639 Cash and cash equivalents, beginning of period 1,257,483 9,641,114 1,573,475 ------------------ ------------------ ----------------- Cash and cash equivalents, end of period $ 917,978 $ 1,257,483 $ 9,641,114 ================== ================== =================
See accompanying notes to consolidated financial statements. RARE MEDIUM GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the years ended December 31, 1998, 1997 and 1996
Common stock Additional Note receivable Preferred ($.01 par paid-in from stock value) capital officer ----- ------ ------- ------- Balance, January 1, 1996 $ 27 $ 146,923 $35,104,011 $ - Issuance of 2,686,813 shares of common stock through a secondary offering, net of offering expenses - 26,868 16,739,905 - Issuance of 3,772,045 shares of common stock through conversion and redemption of the outstanding preferred stock (27) 37,720 (1,413,573) - Issuance of 131,300 shares of common stock through exercise of stock options - 1,313 299,987 - Net loss - - - - ------------- ---------------- -------------- ------------------ Balance, December 31, 1996 - 212,824 50,730,330 - Issuance of 237,644 shares of common stock through exercise of stock options and warrants - 2,376 578,574 (230,467) Net loss - - - - ------------- ---------------- -------------- ------------------ Balance, December 31, 1997 - 215,200 51,308,904 (230,467) Issuance of 5,775,003 shares of common stock for acquired businesses - 57,753 19,988,244 - Issuance of 193,895 shares of common stock for payment of interest on Note - 1,939 526,423 - Issuance of 2,951,814 shares of common stock for conversion of debt and accrued interest - 29,518 12,190,988 - Issuance of 55,800 shares of common stock through exercise of stock options and warrants - 558 117,831 - Issuance of 200,000 shares of common stock and options for services rendered - 2,000 587,914 - Net loss - - - - ------------- ---------------- -------------- ------------------ Balance, December 31, 1998 $ - $ 306,968 $84,720,304 $ (230,467) ============= ================ ============== ==================
Treasury Total Accumulated stock stockholders' deficit at cost Equity (deficit) ------- ------- ---------------- Balance, January 1, 1996 $(33,545,719) $ (171,430) $ 1,533,812 Issuance of 2,686,813 shares of common stock through a secondary offering, net of offering expenses - - 16,766,773 Issuance of 3,772,045 shares of common stock through conversion and redemption of the outstanding preferred stock - - (1,375,880) Issuance of 131,300 shares of common stock through exercise of stock options - - 301,300 Net loss (7,154,609) - (7,154,609) ---------------- ----------------- ----------------- Balance, December 31, 1996 (40,700,328) (171,430) 10,071,396 Issuance of 237,644 shares of common stock through exercise of stock options and warrants - - 350,483 Net loss (13,484,085) - (13,484,085) ---------------- ----------------- ----------------- Balance, December 31, 1997 (54,184,413) (171,430) (3,062,206) Issuance of 5,775,003 shares of common stock for acquired businesses - - 20,045,997 Issuance of 193,895 shares of common stock for payment of interest on Note - - 528,362 Issuance of 2,951,814 shares of common stock for conversion of debt and accrued interest - - 12,220,506 Issuance of 55,800 shares of common stock through exercise of stock options and warrants - - 118,389 Issuance of 200,000 shares of common stock and options for services rendered - - 589,914 Net loss (619,252) - (619,252) ---------------- ----------------- ----------------- Balance, December 31, 1998 $(54,803,665) $ (171,430) $ 29,821,710 ================ ================= =================
See accompanying notes to consolidated financial statements. RARE MEDIUM GROUP, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies and Practices (a) Description of Business Rare Medium Group, Inc. (the "Company"), formerly known as ICC Technologies, Inc. ("ICC"), through a series of transactions, has restructured its operations to focus on the business of providing Internet professional services to large and medium size businesses. This was accomplished by restructuring its Engelhard/ICC Partnership, purchasing the Internet-related businesses of Rare Medium, Inc. ("Rare Medium"), I/O 360, Inc. and DigitalFacades Corporation; and disposing of Fresh Air Solutions (see Note 2). Historically the Company had been engaged in the design, development, manufacture and marketing of climate control systems. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Revenues have been insufficient to cover costs of operations for the year ended December 31, 1998 primarily as a result of the Company's increase in headcount, investment in infrastructure and acquisitions. The Company has a working capital deficiency and has incurred cumulative losses since inception of $54,803,665 through December 31, 1998 and $54,184,410 through December 31, 1987 substantially all related to the air conditioning business. The Company's continuation as a going concern is dependent on its ability to ultimately attain profitable operations and positive cash flows from operations. Company management believes that the additional financing together with improved operating cash flows in the future will enable the Company to continue to exist through the next year. The accompanying financial statements do not include any adjustments that may result from the Company's inability to continue as a going concern. During 1997 and 1996, the consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiary, ICC Desiccant Technologies, Inc. ICC Desiccant Technologies, Inc. owned the Company's 50% interest in Engelhard/ICC, a Partnership between the Company and Engelhard Corporation. Engelhard/ICC, accounted for under the equity method, is included in the consolidated financial statements as discontinued operations. Equity in losses of Engelhard/ICC was $11,985,361 in 1997 and $6,294,832 in 1996. All intercompany accounts and transactions are eliminated in consolidation. (b) Cash and Cash Equivalents The Company considers all highly liquid investments with remaining maturities of three months or less at the time of purchase to be cash equivalents. (c) Property and Equipment The Company uses the straight-line method of depreciation. The estimated useful lives of property and equipment are as follows: 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. (d) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over three years. The Company periodically assesses the recoverability of the cost of its goodwill based upon estimated future profitability of the related operating entities. The agreements pursuant to which the Company acquired certain companies (see Note 2) include provisions that could require the Company to issue additional shares if the acquired company meets certain performance targets. The value of any such shares issued will be added to the goodwill related to such acquisition and amortized over the remainder of that goodwill's useful life. Long-lived assets and certain identifiable intangibles, including goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (e) Advertising Credits The Company has advertising credits that are to be used in the purchase of advertising time or space in the United States. These trade credits will be expensed as utilized. (f) Revenue Recognition Revenues from the design and development of Internet web sites, interactive and traditional marketing services are recognized using the percentage-of-completion method. Unbilled receivables represent time and costs incurred on projects in progress in excess of amounts billed, and are recorded as assets. Deferred revenue represent amounts billed in excess of costs incurred, and are recorded as liabilities. To the extent costs incurred and anticipated costs to complete projects in progress exceed anticipated billings, a loss is recognized in the period such determination is made for the excess. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Stock Option Plans The Company accounts for its stock option plan in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123 which allows entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method, as defined in SFAS No. 123, had been applied. The Company has elected to apply the provisions of APB No. 25 and provide the pro forma disclosure required by SFAS No. 123. See Note 7. (i) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (j) Net Loss Per Share Basic earnings per share ("EPS") is computed by dividing income or loss plus preferred dividends by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock. Cumulative dividends on preferred stock of $49,655 in 1996 were added to the net loss to determine the net loss attributable to common stockholders. Net loss and weighted average shares outstanding used for computing diluted loss per common share were the same as that used for computing basic loss per common share for each of the years ended December 31, 1998, 1997 and 1996. For the purposes of computing EPS from continuing operations, the Company had potentially dilutive common stock equivalents of 909,321, 1,211,588 and 2,002,305, for the years ended December 31, 1998, 1997, and 1996, respectively, made up of stock options and common stock purchase warrants. These common stock equivalents were not included in the computation of earnings per common share because they were antidilutive on continuing operations for the periods presented. (k) Fair Value of Financial Instruments The fair value of cash and cash equivalents, accounts receivables, accounts and notes payable, and short-term debt approximate book value. The fair value of long-term notes payable approximates market value based on the recent exchange offering completed in December 1998 (see Note 6). (l) Concentration of Credit Risk, Major Customers and Geographic Information Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivables. Cash and cash equivalents consist of deposits and money market funds placed with various high credit quality financial institutions. Concentrations of credit risk with respect to receivables is limited due to the geographically diverse customer base. The Company routinely assesses the financial strength of its customers and does not require collateral or other security to support customer receivables. Credit losses are provided for in the consolidated financial statements in the form of an allowance for doubtful accounts. The Company generates revenue principally from customers located in North America, many of which are large multi-national organizations. Two customers each separately accounted for approximately 10% of Internet related revenues in 1998, one of which represents approximately 10% of the receivables as of December 31, 1998. (m) Recently Issued Accounting Standards In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring recognition of those instruments as assets and liabilities and to measure them at fair value. SFAS 133 will be effective for the Company in 2000. The Company's management has not completed its analysis of the impact, however, currently does not expect the impact to be material. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance for determining whether computer software qualifies as internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company has not yet determined the impact, if any, of adopting SOP 98-1, which will be effective for the Company's year ending December 31, 1999. (n) Segment Accounting All of the of the Company's continuing operations are in one business segment, which is that of providing Internet professional services to large and medium size businesses, and are all located in the United States. (2) Business Transactions (a) Acquisition of Rare Medium In April 1998, the Company acquired all of the issued and outstanding shares of capital stock of Rare Medium, Inc., ("Rare Medium") which provides Internet professional services. As consideration for the purchase of Rare Medium, the Company issued 4,269,000 shares of Common Stock valued at $14,045,997, paid $10,000,000 in cash and issued a secured promissory note in the principal amount of $22,200,000 (see Note 5). In the event that on the first anniversary of the transaction the shares issued have a value of less than $3.00 per share, the Company shall issue additional Notes valued at the difference between $3.00 per share and the actual value of the shares. The Company has accounted for this transaction under the purchase method of accounting. The aggregate purchase price, including acquisition costs, exceeded the fair value of Rare Medium's net assets by $45,743,000. This amount has been allocated to Goodwill and is being amortized using the straight line method over three years. Included in the accompanying statement of operations are the results of Rare Medium since the date of acquisition. (b) Acquisition of I/O 360 In August 1998, the Company acquired all of the issued and outstanding shares of capital stock of I/O 360, which provides Internet professional services. As consideration for the purchase of I/O 360, the Company issued 786,559 shares of Common Stock valued at $3,000,000. In the event on the first anniversary of the transaction the shares issued have an aggregate value of less than $3,000,000, the Company shall issue additional shares valued at the difference between $3,000,000 and the actual value of the shares. The Company has accounted for this transaction under the purchase method of accounting. The aggregate purchase price, including acquisition costs, exceeded the fair value of I/O 360's net assets by $3,194,000. This amount has been allocated to Goodwill and is being amortized using the straight line method over three years. Included in the accompanying statement of operations are the results of I/O 360 since the date of acquisition. (c) Acquisition of DigitalFacades In August 1998, the Company acquired all of the issued and outstanding shares of capital stock of DigitalFacades, which provides Internet professional services. As consideration for the purchase of DigitalFacades, the Company issued 719,144 shares of Common Stock valued at $3,000,000. In the event on the first anniversary of the transaction the shares issued have an aggregate value of less than $3,000,000, the Company shall issue additional shares valued at the difference between $3,000,000 and the actual value of the shares. The Company has accounted for this transaction under the purchase method of accounting. The aggregate purchase price, including acquisition costs, exceeded the fair value of DigitalFacades's net assets by $3,197,000. This amount has been allocated to Goodwill and is being amortized using the straight line method over three years. Included in the accompanying statement of operations are the results of DigitalFacades since the date of acquisition. (d) Disposal of Engelhard/ICC Partnership and Fresh Air Solutions Engelhard/ICC ("E/ICC"), a partnership between ICC and Engelhard Corporation ("Engelhard"), was formed in February 1994 to design, manufacture and sell desiccant climate control systems and desiccant and heat-exchange wheel components. ICC and Engelhard each owned a 50% interest in E/ICC. On February 27, 1998, ICC and Engelhard effected the restructuring of E/ICC by dividing E/ICC into two separate operating limited partnerships: Fresh Air Solutions L.P. ("FAS") to manufacture and market active climate control systems; and Engelhard Hexcore, L.P. to manufacture and market the heat exchange and desiccant coated wheel components. This transaction included the exchange by ICC and Engelhard of certain of their respective interests in each partnership and the payment by Engelhard to ICC of approximately $18,600,000. After the restructuring, the Company owned 90% of Fresh Air Solutions, L.P. and 20% of Engelhard Hexcore, L.P. and Engelhard owned 80% of Engelhard Hexcore, L.P. and 10% of Fresh Air Solutions, L.P. The Company recognized a gain of $24,256,769 on this transaction, including approximately $7 million relating to the liabilities assumed by the acquiror. In October 1998, the Company sold its 1% general partnership and its 56% limited partnership interest in FAS for $1,500,000 of which $1,125,000 was paid in cash and $375,000 by delivery of an unsecured promissory note. The Company incurred a loss of $627,587 on this transaction. As of December 31, 1998, the Company has written down its investment including the related note to $0, as a result of the current financial position and recurring losses of FAS. The Company has no future funding responsibilities with respect to FAS has a 32% passive limited partnership interest with no voting rights, and therefore, is accounting for the remaining investment in FAS under the cost method. As a result of these transactions, the Company has recorded the operating results, gain on restructuring, and loss on disposal of FAS as discontinued operations. (e) Escrow Shares In connection with the purchases of I/O 360 and DigitalFacades, the former shareholders of I/O 360 and DigitalFacades have agreed to indemnify the Company for any losses resulting from a breach of, among other things, their respective representations, warranties and covenants. To secure the indemnification obligations of the I/O 360 and DigitalFacades stockholders thereunder, 104,874 and 119,857 shares of the Company's common stock delivered to the I/O 360 and DigitalFacades shareholders, respectively, included as part of the Merger Considerations, have been placed in escrow, and the liability of the I/O 360 and DigitalFacades shareholders under such indemnification obligations is expressly limited to the value of such shares held in escrow. (f) Pro Formas (unaudited) The following unaudited pro forma information is presented as if the Company had completed the acquisitions as January 1, 1997. The pro forma information is not necessarily indicative of what the results of operations would have been had the acquisitions taken place at January 1, 1997, or of the future results of operations.
1998 1997 ----------------- ------------------ Revenue $ 8,292,394 $ 6,642,568 ================== ================== Net income (loss) before discontinued operations (25,774,639) (24,252,664) Discontinued operations 19,091,054 (11,985,361) ------------------ ------------------ Net loss $ (6,683,585) $ (36,238,025) ================== ================== Net loss per common share basic and diluted $(0.24) $(1.34) ================== ==================
(3) Property and Equipment Property and equipment consists of the following at December 31:
1998 1997 ------------------ ----------------- Property and equipment Equipment $1,469,759 $13,766 Furniture and fixtures 168,910 956 Leasehold improvements 629,179 - ------------------ ----------------- 2,267,848 14,722 Less accumulated depreciation and amortization 349,575 7,107 ------------------ ----------------- Property and equipment, net $1,918,273 $7,615 ================== =================
(4) Accrued Liabilities Accrued liabilities consists of the following at December 31:
1998 1997 ------------------ ----------------- Accrued liabilities Accrued compensation 474,805 - Accrued professional fees 417,809 114,500 Accrued interest payable 273,309 - Other liabilities 391,441 69,015 ------------------ ----------------- Total accrued liabilities $1,557,364 183,515 ================== =================
(5) Debt (a) Notes Payable - related parties In connection with the Company's acquisition of Rare Medium on April 15, 1998, a secured promissory note (the "Note") was issued to the former shareholders of Rare Medium in the original aggregate principal amount of $22,200,000. The principal amount of the Note is payable in two equal annual installments on the second and third anniversary of the date of issuance, interest accrued at the prime rate and is payable semi-annually in the form of cash or shares of the Company's common stock at the election of the Company subject to certain limitations. The first interest payment due on October 1, 1998 has been satisfied by delivery of a combination of common stock of the Company and an unsecured promissory note of Rare Medium (the "Interest Note"). The Note and Interest Note are secured by all of the assets of Rare Medium. In addition, the Company has guaranteed the obligations of Rare Medium under the Note. In December 1998, the Company and certain beneficial holders of the Note, Interest Note and accrued interest amounting to $12,220,506 reached an agreement to convert all of their Notes and accrued interest for common stock of the Company for the price of $4.14 per share, the trading price of the Company's common stock at that time. Pursuant to certain agreements between the Company and its lenders, the Company is subject to certain limitations on indebtedness. Such limitations could adversely affect the Company's ability to secure debt financing in the future. These limitations include the payment within 5 days of the Note should the Company close a secondary offering or other financing which results in net proceeds to the Company of $50,000,000 or more. Additionally, should the Company close a secondary offering or financing which results in net proceeds which exceeds $20,000,000 but is less that $50,000,000, the Company must make a payment which is equal to 40% of the Note within 5 days. Accrued interest, included in accrued expenses, on the remaining notes relating to the interest payment due April 1, 1999, amounted to $230,071 as of December 31, 1998. (b) Note payable - affiliate As part of the acquisition of DigitalFacades, the Company assumed a promissory note to the former President of DigitalFacades. The total principal and interest due at December 31, 1998 on this note is $50,000. The note was paid on the due date of March 25, 1999. (c) Notes payable - other As part of the acquisition of DigitalFacades, the Company assumed an installment note payable to Wells Fargo Bank. The note calls for monthly payments of principal and interest with a final due date of Mach 15, 2001 with interest payable at a rate of 12.1%. The total principal and interest due at December 31, 1998 on this note is $26,885. In August 1998, the Company issued a promissory note to First Insurance Fund Group as a payment for a Directors and Officers insurance policy. The note calls for monthly payments of principal and interest with a final due date of May 10, 1999 with interest payable at a rate of 6.83%. The total principal and interest due at December 31, 1998 on this note is $50,320. Through its wholly owned subsidiaries I/O 360 and DigitalFacades, the Company has bank lines of credit of $445,930. As of December 31, 1998, the Company had drawn down $237,445 of this amount. (6) Shareholders' Equity Common Stock Transactions In December 1998, the Company issued 2,951,814 shares of common stock to certain beneficial holders of the Note held by the former shareholders of Rare Medium in exchange for the principal amount of the Note and accrued interest. Additionally, 193,895 shares of common stock were issued with respect to the interest payment made in October 1998. The fair value of the common stock was determined based on a value of the average trading price of the Company's common stock at that time. In April 1998, the Company issued 4,269,300 shares of common stock as partial consideration for the acquisition of Rare Medium, Inc.. In accordance with the Rare Medium Merger Agreement, the fair value of the common stock was determined based on a value of $3.29 per share (the average trading price of the Company's common stock at that time). In August 1998, the Company issued 786,559 shares of common stock as consideration for the purchase of I/O 360 in August, 1998. In accordance with the I/O 360 Merger Agreement, the fair value of the common stock was determined based on a value of $3.81 per share (the average trading price of the Company's common stock at that time). The Company issued 719,144 shares of common stock as consideration for the purchase of DigitalFacades in August, 1998. In accordance with the DigitalFacades Merger Agreement, the fair value of the common stock was determined based on a value of $4.17 per share (the average trading price of the Company's common stock at that time). The Company received proceeds of approximately $238,000 from the exercise of stock options to purchase approximately 125,000 shares of common stock granted under its option plans during 1997. The Company received proceeds of approximately $60,000 from the exercise of warrants to purchase approximately 30,000 shares of common stock during 1997. In February 1996, the Company issued 2,500,000 shares in a secondary offering at $7 per share less underwriting discounts and commissions of $.49 per share. Proceeds of $16,275,000 were offset by costs of approximately $750,000 incurred in connection with the offering. In connection with the offering, all outstanding preferred stock was converted into 3,609,696 shares of common stock or redeemed in cash for $981,270. In addition, accrued dividends on the preferred stock amounting to approximately $1,044,000 were declared and paid in cash, except for $649,396 of dividends associated with the Series H preferred stock which were paid in the form of 162,349 shares of common stock in accordance with the original terms of such series. As a result of such conversion and redemption of preferred stock, there are no shares of preferred stock outstanding. In April 1996, the underwriters of the secondary offering exercised their overallotment option and purchased 186,813 of common stock for proceeds of approximately $1.2 million after underwriting discounts and commissions. The Company received proceeds of approximately $183,000 from the exercise of stock options to purchase approximately 106,000 shares of common stock granted under its option plans for 1996. The Company received proceeds of approximately $119,000 from the exercise of warrants to purchase approximately 25,000 shares of common stock for 1996. (7) Employee Compensation Plans The Company provides incentive and nonqualified stock option plans for directors, officers, and key employees of the Company and others. The Company had reserved a total of 13,600,000 shares of authorized common stock for issuance under the following plans; the Long Term Incentive Plan, Nonqualified Stock Option Plan and Equity Plan for Director. The number of options to be granted and the option prices are determined by the Compensation Committee of the Board of Directors in accordance with the terms of the plans. Options generally expire five to ten years after the date of grant. During 1998, the Board of Directors approved the 1998 Long-Term Incentive Plan, ("Stock Incentive Plan") under which "non-qualified" stock options ("NQSOs") to acquire shares of common stock may be granted to non-employee directors and consultants of the Company, and "incentive" stock options ("ISOs") to acquire shares of common stock may be granted to employees. The Stock Incentive Plan also provides for the grant of stock appreciation rights ("SARs"), shares of restricted stock, deferred stock awards, dividend equivalents, and other stock-based awards to the Company's employees, directors, and consultants. The Stock Incentive Plan provides for the issuance of up to a maximum of 8,000,000 shares of common stock and is currently administered by the Compensation Committee of the Board of Directors. Under the Stock Incentive Plan, the option price of any ISO may not be less than the fair market value of a share of common stock on the date on which the option is granted. The option price of an NQSO may be less than the fair market value on the date of the NQSO is granted if the Board of Directors so determines. An ISO may not be granted to a "ten percent stockholder" (as such term is defined in section 422A of the Internal Revenue Code) unless the exercise price is at least 110% of the fair market value of the common stock and the term of the option may not exceed five years from the date of grant. Common stock subject to a restricted stock purchase or a bonus agreement is transferable only as provided in such agreement. The maximum term of each stock option granted to persons other than ten percent stockholders is ten years from the date of grant. Under the Nonqualified Stock Option Plan, which provides for the issuance of up to 5,100,000 shares, the option price as determined by the Stock Option Committee may be greater or less than the fair market value of the common stock as of the date of the grant, and the options are generally exerciseable for three to five years subsequent to the grant date. The Company also authorized in 1994 the Equity Plan For Directors. The Equity Plan For Directors is a fixed stock option plan whereby vesting is dependent upon the performance of the market price of the Common Stock. Under the Equity Plan For Directors, options may be granted for the purchase of up to 500,000 shares of Common Stock to outside directors. Under the terms of the Equity Plan For Directors, the option price cannot be less than 100% of the fair market value of the Common Stock on the date of the grant. The per share weighted average fair value of stock options granted during 1998, 1997 and 1996 was $1.96, $1.38, and $3.64, 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 4.5% to 5.6% in 1998, 5.4% to 6.5% in 1997, and 5.4% to 7.2% in 1996, (2) an expected life of six years for all years, (3) volatility of approximately 91.5% in 1998, 73.9% in 1997, and 69.7% in 1996 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:
1998 1997 ------------------ ------------------ Net loss: As Reported $ 619,252 $13,484,085 Pro Forma $6,053,743 $13,613,974 Net loss per share: As Reported $0.02 $0.63 Pro Forma $0.24 $0.64
Pro forma net loss reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts because compensation cost is reflected over the various options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. Stock option activity under the Stock Incentive Plan is shown below:
Weighted Number of Average shares Exercise Prices Outstanding at January 1, 1996 3.83 2,923,626 Granted 6.23 356,000 Forfeited 5.65 (163,000) Exercised 1.72 (106,300) ---------------- Outstanding at December 31, 1996 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 ================
The following table summarizes weighted-average option price information:
Number Number outstanding at exercisable at December 31, Weighted Weighted December 31, Weighted average Range of exercise 1998 average average 1998 exercise price prices remaining life exercise price $1.00 - $2.16 1,054,996 3.82 $1.75 884,358 $1.71 $2.25 - $3.25 5,351,948 6.96 2.41 1,026,527 2.58 $3.63 - $5.32 1,351,290 6.32 3.91 1,279,672 3.86 $6.88 - $10.75 43,938 7.96 8.14 19,964 8.16 ----------------- ----------------- ----------------- ------------------ ------------------ 7,802,172 6.43 $2.61 3,210,521 $2.89
Additionally, at December 31, 1998 there are approximately 1,065,000 warrants outstanding with exercise prices ranging from $2.00-$13.42; 750,000 of these warrants expired or were exercised in January 1999. The balance of these warrants expire in May 1999. (8) Income Taxes The difference between the statutory federal income tax rate and the company's effective tax rate for the years ended December 31, 1998, 1997 and 1996 is principally due to the Company incurring net operating losses for which no tax benefit was recorded and in 1998 alternative minimum taxes of $355,000. For Federal income tax purposes, the Company has unused net operating loss carryforwards of approximately $31.8 million expiring in 1999 through 2012. The availability of the net operating loss carryforwards to offset income in future years, if any, is limited by Internal Revenue Code Section 382 as a result of certain changes in ownership that have occurred. 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 1997 ---- ---- Net operating loss carryforwards $ 12,099,000 $ 17,928,000 Alternative minimum tax carryforwards 355,000 - Other assets 86,000 - Other accrued expenses 281,000 10,000 ------------------ ------------------ Total gross deferred tax assets 12,821,000 17,938,000 Less valuation allowance (12,821,000) (17,938,000) ------------------ ------------------ 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. During 1998 and 1997, the valuation allowance decreased by $5,117,000 and increased by $5,130,000, respectively. (9) Related Party Transactions The Company received advertising credits of $300,000 in exchange for shares of common stock in the year ended December 31, 1997. The trade credits are to be used in the purchase of advertising time or space in the United States. As of December 31, 1998, $1,917 of these trade credits had been utilized. The remaining $299.083 will be expensed as utilized. The Company loaned $230,467 to its then Chairman in July 1997 in connection with exercise of an option to acquire 82,753 shares of Common Stock. The loan was in the form of a full recourse note which matures in five years. Such note bears interest equal to the prime rate, with such rate adjusted to the current prime rate at each anniversary date. (10) Commitments and Contingencies Leases The Company has non-cancelable leases, primarily related to its operations in New York and Los Angeles. Future minimum payments, by year and in the aggregate, under operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1998: Year ending December 31 Amount ----------- ------ 1999 $402,625 2000 404,635 2001 415,363 2002 348,232 2003 259,158 Thereafter 950,784 ---------- Total minimum lease payments $2,780,797 ========== Total rent expense under operating leases amounted to $315,048 for 1998. Employment Agreements The Company is a party to employment agreement with the Chief Executive Officer of the Company. The agreement term is from April 15, 1998 to April 15, 2003 and calls for a minimum base salary of $250,00 per year with annual increases of his base salary of not less than 4% per year. The minimum salary commitment for this agreement is $1,354,081. Additionally, this officer is entitled to incentive compensation equal to 2% of the Company's revenues for such year in excess of the revenues of the immediate preceding year. In addition, this officer was granted options to acquire an aggregate of 2,000,000 shares of the Company's common stock at the exercise prices equal to $2.375 per share, the fair value at the time of the agreement, which options will become exercisable ratably on a monthly basis over a period of 60 months from the date of grant and expire ten years from the date of grant. Litigation From time to time, the Company is subject to litigation in the normal course of business. The Company is of the opinion that, based on information presently available, the resolution of any such legal matters will not have a material adverse effect on the financial position or results of operations of the Company. (11) Subsequent Events - (unaudited) Pursuant to the terms of a Securities Purchase Agreement, dated as of January 28, 1999, the Selling Securityholder agreed to purchase from the Company, in two tranches, 8% Convertible Term Debentures of the Company in the aggregate principal amount of $6,000,000 (the "Convertible Debentures") and five year warrants to purchase an aggregate of 693,642 shares of common stock at an exercise price of $5.27 per share, subject to reset (the "Warrants"). The first tranche of the transaction closed effective January 28, 1999, at which time the Selling Securityholder purchased Convertible Debentures in the aggregate principal amount of $3,500,000 and Warrants to purchase 404,625 shares of common stock. Upon the timely satisfaction of the conditions of the closing of the second tranche, the Selling Securityholder will purchase the remaining Convertible Debentures and Warrants. The term of the Convertible Debentures is four years. The principal amount of the Convertible Debentures plus accrued interest thereon at 8% per annum are convertible, at the option of the Selling Securityholder, into shares of common stock at a conversion price equal to $5.27 per share until July 27, 1999 (unless certain events occur earlier) and, therefore, at a per share price equal to the lowest of (i) $5.27, (ii) 105% of the average closing bid price of the common stock for the lowest two trading days during the 15 trading days ending on July 27, 1999, and (iii) 92% of the average closing bid price of the common stock for the lowest two trading days during the 15 trading days ending on the trading day immediately preceding the applicable conversion date, but in no event less than $2.49 per share, subject to adjustment (the "Floor Price"). In the event that the common stock trades below the Floor Price for a certain period of time, the Company has the right to prepay the Convertible Debentures at an amount equal to 120% of principal plus accrued interest. Except under certain limited circumstances, the Selling Securityholder is not entitled to convert the Convertible Debentures or exercise the Warrants to the extent that the shares to be received by the Selling Securityholder upon such conversion or exercise would cause the Selling Securityholder to beneficially own more than 4.9% of the outstanding common stock. On February 25, 1999, the Company acquired the assets of Interface Alternatives, Inc. through a newly-formed subsidiary, iface.com, which is in the business of providing software and solutions for voice-over-internet protocol ("VOIP") for voice, video and fax communications via the Internet. The Company owns 80% of the stock of iface.com, and previous management of Interface Alternative, Inc. owns the remaining 20%. As consideration for the assets of Interface Alternatives, Inc., which are currently estimated at $350,000, iface.com assumed the liabilities of Interface Alternatives, Inc., which are currently estimated at $250,000. In addition, the Company provided cash at closing to iface.com in the amount of $250,000 and a one-year line of credit in the amount of $250,000. The acquisition will be accounted for under the purchase method of accounting. On February 26, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of FS3 Interactive, Inc. FS3 creates Internet-based business solutions, including Web marketing, design, programming, and E-commerce enabling. As consideration for the purchase, the Company will issue common stock valued at two times FS3's annual revenue, which is currently estimated at $1.7 million. The number of shares to be issued will be determined based on the lesser of $4.50 or the average closing bid price for the ten days prior to closing. On March 9, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of Big Hand, Inc. and its subsidiary, Circumstance Design, Inc. Big Hand creates Internet-based solutions, including Web marketing, design, programming, and E-commerce enabling. As consideration for the purchase the Company will issue common stock valued at two times the trailing twelve month consolidated revenue of Big Hand and Circumstance, which is currently estimated at $3.0 million. The number of shares to be issued will be determined based on the lesser of $4.50 or the average closing bid price for the ten days prior to closing. On March 19, 1999, the Company signed a definitive agreement to acquire 100% of the outstanding stock of Hype! Inc., a Canadian corporation. Hype! is an Internet marketing and communications company. As consideration for the purchase, Rare Medium Group, Inc. will issue 270,729 shares of common stock. On March 16, 1999, the Company, formerly known as ICC Technologies, Inc., officially changed its name to Rare Medium Group, Inc. by a vote at a special meeting of the stockholders, increased the number of authorized shares from 50,000,000 to 200,000,000, adopted staggered terms for directors and received approval for the 1998 Long-Term Incentive Plan. 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 statement 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. Pricewaterhouse Coopers LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania March 20, 1998 35 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. 36 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. 37 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. 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. 38 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. 39 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 40 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. 41 (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. 42 (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. 43 (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. 44 (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 =========== =========== ===========
45 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 ============ ============ ============
46
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) ============ ============ ============ ============
47 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 ============ ============ ============
48 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 `============ ============ ============
Rare Medium Group Schedule II - Valuations and Qualifying Accounts
Additions Additions Balance at charged to charged to Balance at beginning costs and other end Description of year expenses Accounts Deductions of year - - ---------------------------------------------------------- ------------- -------------- -------------- ---------- ---------- Reserves and allowances deducted asset accounts: Allowances for uncollectible accounts receivable Year ended December 31, 1996 - - - - Year ended December 31, 1997 - - - - Year ended December 31, 1998 - - $ 82,445(1) $ 82,445 Allowances for uncollectible notes receivable Year ended December 31, 1996 - - - - Year ended December 31, 1997 - - - - Year ended December 31, 1998 - $ 375,000 - $ 375,000
(1) Existing reserves for acquired companies. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant): Rare Medium Group, Inc. ---------------------- By: /s/ Glenn S. Meyers (Signature) Name and Title: Glenn S. Meyers, President and Chief Executive Officer Date: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE - - --------- -------- ---- /s/ Glenn S. Meyers Chairman of the Board, March 31, 1999 - - ------------------------- President and Chief Glenn S. Meyers Executive Officer /s/ John S. Gross Senior Vice President, March 31, 1999 - - ------------------------- Chief Financial Officer, John S. Gross Treasurer and Assistant Secretary /s/ Jeffrey Killeen Director March 31, 1999 - - ------------------------- Jeffrey Killeen /s/ Richard T. Liebhaber Director March 31, 1999 - - ------------------------- Richard T. Liebhaber /s/ Steven Winograd Director March 31, 1999 - - ------------------------- Steven Winograd 62 EX-3.3 2 ARTICLES OF INCORPORATION Exhibit 3.3 Amendment to Articles of Incorporation CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF ICC TECHNOLOGIES, INC. ICC TECHNOLOGIES, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That during a meeting of the Board of Directors of ICC TECHNOLOGIES, INC. held on November 20, 1998, resolutions were duly adopted setting forth proposed amendments to the Certificate of Incorporation of said corporation, declaring said amendments to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolutions setting forth the proposed amendments are as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered FIRST, so that, as amended said Article shall be and read as follows: "FIRST: The name of the corporation is Rare Medium Group, Inc." FURTHER RESOLVED, that the Certificate of Incorporation of this corporation be further amended by changing the Article thereof numbered FOURTH, so that, as amended said Article shall be and read as follows: "FOURTH: The aggregate number of shares which the corporation shall have the authority to issue shall be: Two Hundred Million (200,000,000) shares of Common Stock, each of which shall have a par value of One Cent ($0.01), and Ten Million (10,000,000) shares of Preferred Stock, each of which shall have a par value of One Cent ($0.01). 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 and 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 liquidation, voting rights, conversion rights, redemption prices, terms and conditions and sinking fund and stock purchase prices, terms and conditions." FURTHER RESOLVED, that the Certificate of Incorporation of this corporation be further amended by adding the Article numbered NINTH, so that said Article shall be and read as follows: "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." SECOND: That thereafter, pursuant to resolution of the Board of Directors, a special meeting of stockholders of ICC Technologies, Inc., was duly called and held on March 16, 1999, at which meeting the necessary number of stockholders voted in favor of the aforementioned amendments. THIRD: That said amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of Delaware. IN WITNESS WHEREOF, said ICC TECHNOLOGIES, INC., has caused this Certificate to be signed by Glenn S. Meyers, it's President and Chief Executive Officers, on this 16th day of March, 1999. Attest: ______________________ By: _______________________________ Robert Lewis, Esq., Secretary Glenn S. Meyers, President and Chief Executive Officer
EX-10.6 3 EMPLOYMENT AGREEMENT Exhibit 10.6 Employment Agreement - Glenn S. Meyers EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of the 14th day of April 1998 between ICC TECHNOLOGIES, INC, a Delaware corporation (the Company") and Glenn S. Meyers, an individual (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 April 15, 1998 and shall terminate on April 15, 2003 unless sooner terminated in accordance with Paragraph 7 hereof. 3. Duties. The Employee is engaged hereunder as President and Chief Executive Officer and he agrees to perform the duties and services incident to that position, and shall have they customary powers, responsibilities and authority of a Chief Executive Officer of a publicly traded company similar to the Company. Employee shall at all times be subject to the supervision of the Board of Directors of the Company. 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 being a member of the Board of Directors of other companies provided however, that during the 18 month period following the commencement of this Agreement, Employee shall not serve on the Board of more than 3 other companies investing his assets in such form or manner as will not require more than a minimal amount of 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 may 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 travelling 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 $250,000 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; provided, however, that Employee shall receive a minimum annual increase of his Base Salary of not less than 4% per annum. (b) Incentive Compensation. In addition to Base Compensation, Employee shall be entitled to receive for each calendar year during the Employment Term, Incentive Compensation equal to 2% of Company's revenues for such calendar year in excess of the revenues for the preceding year ("Base Revenues"). For the purposes of this Agreement, Revenues shall mean the revenues derived from the activities conducted by RareMedium and that for the first year ending December 31, 1998 the Base Revenues shall be $4,000,000. Revenues for the Company shall be determined by the Company's auditors as reflected on the Company's audited statements for the years ending December 31. Any incentive compensation shall be payable within 30 days after the delivery of the audited financial statements of the Company. (c) Stock Options. Concurrently with the execution of this Agreement, the Company shall grant to Employee Incentive Stock Options and Non-Statutory Stock Options to purchase an aggregate of 2,000,000 shares of Common Stock of the Company in such proportions which will enable Employee to take full advantage of the benefits afforded Incentive Stock Options at exercise prices equal to $2.50 per share which shall become exercisable ratably on a monthly basis over a period of 60 months from the date of grant and shall expire ten years from the date of grant. Such options shall entitle the Holder to exercise them with cashless exercise and the Option Agreement shall so provide. (d) Fringe Benefits. (i) The Employee shall be entitled to participate in all 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 1998 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 the calendar year accrued and carried forward to a subsequent year during the Employment Term. (e) Business Expenses. The Company will pay, or reimburse the Employee for, all ordinary and reasonable out-of-pocket business expenses customarily incurred by a CEO of a company similar to the Company 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 which shall include a monthly automobile allowance of $1,000. (b) 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. 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. (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. The term "Total Disability," when used herein, shall mean a mental or physical condition which either has rendered the Employee for a period of 120 consecutive days, or for a total of 180 days during any period of 12 consecutive months, during the term of this Agreement, unable to carry out, on a substantially full-time basis, the job responsibilities he held or tasks that he was assigned at the time the disability was incurred. To determine whether there is a "Total Disability" hereunder, the Employee shall submit to a physical or other examination by a licensed physician mutually acceptable to the Company and Employee, the cost of which examination shall be paid by the Company. If the Employee and the Company cannot agree as to a qualified independent physician, each shall appoint a physician and those two physicians shall select a third who shall make such determination 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; drug addiction; or conviction of a felony which materially and adversely affects the Company or the Employee's ability to perform his duties hereunder; (ii) adjudication as an incompetent; or (iii) the Employee's breach of this Agreement in any other material respect. 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, except that the Company shall pay to Employee the portion, if any, of the Employee's Base Salary for the period up to the date of termination which remains unpaid, except the Employee shall not be entitled to such unpaid Base Salary for termination pursuant to paragraph 6(a). In the event of either a breach of this Agreement by the Company or a "Change in Control" of the Company, as defined below, at Employee's option, Employee shall have the right to terminate this Agreement. Upon such election to terminate by Employee: (a) Employee shall receive a lump sum payment from the Company which shall 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 Employee for the remaining potion of the term of this Agreement, plus (iii) the cash value of all unexercised stock options (whether or not vested) or the cashless exercise value thereof. 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 the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 30 percent or more of the combined voting power of the Company's then outstanding securities excluding the options written relating to a financing by the Company. 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; (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 management, operation, 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 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. 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 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. (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: RareMedium, Inc. Richard P. Jaffe, Esq. c/o ICC Technologies, Inc. Mesirov Gelman Jaffe Cramer & Jamieson, LLP 1735 Market Street Philadelphia, PA 19103 If to Glenn S. Meyers: 44 West 18th Street 6th Floor New York, New York 10011 Copy to: [Legal Counsel] 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 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. ICC TECHNOLOGIES, INC. By:________________________________ Name: Title: ----------------------------------- Glenn S. Meyers (EMPLOYEE) EX-10.7 4 EMPLOYMENT AGREEMENT Exhibit 10.7 Employment Agreement - John S. Gross EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of the 13th day of May, 1998 between RARE MEDIUM, INC; a New York corporation with its principal offices at 44 West 18th Street, 6th Floor, New York, New York 10011 (the "Company") and JOHN GROSS, an individual (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 May 13, 1998 and shall terminate on May 12, 2001, unless sooner terminated in accordance with Paragraph 6 hereof. 3. Duties. The Employee is engaged hereunder as Senior 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 reasonably be 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 President and CEO of the Company and of such other persons as the President 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 may 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 travelling 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 $175,000 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 and incentive bonus compensation as determined by the Board of Directors in its discretion. (b) Stock Options. (i) Concurrently with the execution of this Agreement, the Company shall grant to Employee Incentive Stock Options and Non-Statutory Stock Options to purchase an aggregate of 100,000 shares of Common Stock of ICC Technologies, Inc., a Delaware corporation ("ICC") (collectively the "Stock Options") in such proportions which will enable Employee to take full advantage of the benefits afforded Incentive Stock Options at exercise prices equal to the fair market value of the Common Stock of ICC as of the date of this Agreement, which shall become exercisable ratably on a yearly basis over a three year period from the date of grant commencing on the first anniversary of the date hereof and shall expire ten years from the date of grant. Such options shall entitle the Holder to exercise them with cashless exercise and the Option Agreement shall so provide. (ii) In addition to the Stock Options referred to in clause (i) above, the Company shall grant to Employee Incentive Stock Options and Non-Statutory Stock Options to purchase an additional aggregate 50,000 shares of Common Stock of ICC ("Additional Stock Options") in the event of, and effective upon, the first to occur during the first year of the term of employment hereunder of any of the following: (1) the closing of a secondary offering or other financing by ICC or the Company which results in the net proceeds to ICC or the Company of at least $20 million, (2) the closing on at lease five (5) Acquisitions (as such term is hereinafter defined) or such number of Acquisitions which achieve an aggregate Run Rate in Revenue (as such term in hereinafter defined) of $25 million, or (3) a daily closing price per share of Common Stock of ICC as reported by The Wall Street Journal of at least $10.00 for a period of 30 consecutive trading days. The exercise prices of such Additional Stock Options shall be equal to the market price per share as of the effective date of grant and such Additional Stock Options shall become exercisable ratably on a yearly basis over a three year period from the date of this Agreement commencing on the first anniversary of the date hereof and shall otherwise be on terms consistent with the Stock Options described above. (iii) As used in this Agreement (1) the term "Acquisition" shall mean the acquisition by ICC or the Company of a business, through asset or stock purchase or merger, which is engaged in web site services or such other related businesses, and (2) the term "Run Rate in Revenue" shall mean the annualized revenues of the entity acquired from the beginning of the most recent fiscal year of such entity. (c) Fringe Benefits. (i) The Employee shall be entitled to participate in all 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 senior 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 (c). (ii) The Employee shall be entitled in each calendar year commencing with 1998 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. (d) 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, provided, however, that Employee shall be entitled to, and such expense reimbursement shall include, a monthly non-accountable expense allowance of $500. (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. 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. (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. 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 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. (a) 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; (v) misappropriation of corporate funds or other acts of dishonesty; or (vi) the Employee's breach of this Agreement in any other material respect. In the event that the Company shall discharge the Employee pursuant to this paragraph 6(a), the Company shall not have any further obligations or liability under this Agreement. (b) In the event of either a breach of this Agreement by the Company or a "Change in Control" of the Company, as defined below, at Employee's option, Employee shall have the right to terminate this Agreement. Upon such election to terminate by Employee: (a) Employee shall receive a lump sum payment from the Company within 10 days of said election which shall be equal to (i) one year's Base Salary, in effect at the date immediately preceding the Change of Control or breach, plus (ii) the cash value of all benefits which would have been received by Employee for a one year period, and (b) all unvested Stock Options and Additional Stock Options, if any, shall become immediately exercisable. 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 Section13(d) of the Exchange Act but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly becomes the "beneficial owner" (as defined in Rul3e 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 30 percent or more of the combined voting power of the Company's then outstanding securities excluding the options written relating to the financing by the Company. 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; (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. 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 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: RareMedium, Inc. Richard P. Jaffe, Esq. 44 West 18th Street Mesirov Gelman Jaffe Cramer & Jamieson, LLP New York, NY 10011 1735 Market Street Attention: Glenn S. Meyers Philadelphia, PA 19103
If to John Gross Copy to: 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, INC. By:____________________________ Glenn S. Meyers, President ------------------------------- John Gross, Employee EX-10.8 5 MATERIAL CONTRACTS Exhibit 10.8 Lease dated September 12, 1997 between Forty Four Eighteen Joint Venture and Rare Medium, Inc. STANDARD FORM OF LOFT LEASE The Real Estate Board of New York, Inc. Agreement of Lease, made as of this 12TH day of SEPTEMBER 1997, between FOURTY FOUR EIGHTEEN JOINT VENTURE party of the first part, hereinafter referred to as LANDLORD, and RARE MEDIUM, INC., a New York corporation party of the second part, hereinafter referred to as TENANT. Witnesseth: Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the ENTIRE (6TH) FLOOR in the building known as 44-8 WEST 18TH STREET thru to 47-53 WEST 17TH STREET in the Borough of MANHATTAN, City of New York, for the term of TEN (10) YEARS and TWO (2) MONTHS (or until such term shall sooner cease and expire as hereinafter provided) to commence on the 1ST day of NOVEMBER nineteen hundred and NINETY-SEVEN, and to end on the 31ST day of DECEMBER two thousand and SEVEN both dates inclusive, at annual rental rates hereinafter set forth in Article #44 which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term at the office of Landlord or such other place as Landlord may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Landlord pursuant to the terms of another lease with Landlord or with Landlord's predecessor in interest, Landlord may at Landlord's option and without notice to Tenant add the amount of such arrearages to any monthly installment of rent payable hereunder and the same shall be payable to Landlord as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: Rent: 1. Tenant shall pay the rent as above and as hereinafter provided. Occupancy: 2. Tenant shall use and occupy demised premises for executive and sales offices for the design of software programs and for no other purpose. Alterations: 3. Tenant shall make no changes in or to the demised premises of any nature without Landlord's prior written consent. Subject to the prior written consent of Landlord, and to the provisions of this article, Tenant at Tenant's expense, may make alterations, installations, additions or improvements which are non-structural and which do not affect utility services or plumbing and electrical lines in or to the interior of the demised premises by using contractors or mechanics first approved by Landlord. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Landlord in Tenant's behalf, shall, upon installation, become the property of Landlord and shall remain upon and be surrendered with the demised premises unless Landlord, by notice to Tenant no later than twenty days prior to the date fixed as the termination of this lease, elects to relinquish Landlord's right thereto and to have them removed by Tenant, in which event, the same shall be removed from the premises by Tenant prior to the expiration of the lease, at Tenant's expense. Nothing in this article shall be construed to give Landlord title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises or upon removal of other installations as may be required by Landlord, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All properly permitted or required to be removed by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Landlord, either be retained as Landlord's property or may be removed from the premises by Landlord at Tenant's expense. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Landlord and Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Landlord may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within ten days thereafter, at Tenant's expense, by filing the bond required by law. See Addendum Repairs: 4. Landlord shall maintain and repair the public portions of the building, both exterior and interior. Tenant shall, throughout the term of this lease, take good care of the demised premises and the fixtures and appurtenances therein and at Tenant's sole cost and expense, make all non-structural repairs thereto as and when needed to preserve them in good working order and condition, reasonable wear and tear, obsolescence and damage from the elements, fire or other casualty, excepted. Notwithstanding the foregoing, all damage or injury to the demised premises or to any other part of the building or to its fixtures, equipment and appurtenances, whether requiring structural or non-structural repairs, caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's servants, employees, invitees or licensees, shall be repaired promptly by Tenant at its sole cost and expense to the satisfaction of Landlord reasonably exercised. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture or equipment. All the aforesaid repairs shall be of quality or class equal to the original work or construction. If Tenant fails after ten days notice to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by the Landlord at the expense of Tenant and the expenses thereof incurred by Landlord shall be collectible as additional rent after rendition of a bill or statement therefor. If the demised premises be or become infested with vermin, Tenant shall at Tenant's expense, cause the same to be exterminated from time to time to the satisfaction of Landlord. Tenant shall give Landlord prompt notice of any defective condition in any plumbing, heating system or electrical lines located in, servicing or passing through the demised premises and following such notice, Landlord shall remedy the condition with due diligence but at the expense of Tenant if repairs are necessitated by damage or injury attributable to Tenant, Tenant's servants, agents, employees, invitees or licensees as aforesaid. Except as specifically provided in Article 9 or elsewhere in this lease, there shall be no allowance to the Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making or failing to make any repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. The provisions of this Article 4 with respect to the making of repairs shall not apply in the case of fire or other casualty which are dealt with in Article 9 hereof. Window Cleaning: 5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the New York State Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. Requirements of Law, Fire Insurance, Floor Loads: 6. Prior to commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters or any similar body which shall impose any violation, order or duty upon Landlord or Tenant with respect to the demised premises whether or not arising out of Tenant's use or manner of use thereof, or with respect to the building if arising out of Tenant's use or manner of use of the premises or the building (including the use permitted under the lease). Except as provided in Article 29 hereof, nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Landlord to Landlord's satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorneys' fees, by cash deposit or by surety bond in an amount and in a company satisfactory to Landlord, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeals shall not subject Landlord to prosecution for a criminal offense or constitute a default under any lease or mortgage under which Landlord may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Landlord with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Landlord to any liability or responsibility to any person or for property damage, nor shall Tenant keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties or damages, which may be imposed upon Landlord by reason of Tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Landlord, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Landlord which shall have been charged because of such failure by Tenant, and shall make such reimbursement upon the first day of the month following such outlay by Landlord. In any action or proceeding wherein Landlord and Tenant are parties a schedule or "make-up" of rate for the building or demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rate then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's judgment, to absorb and prevent vibration, noise and annoyance. Subordination: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessee or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall execute promptly any certificate that Landlord may request. Property--Loss, Damage, Reimbursement, Indemnity: 8. Landlord or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence of Landlord, its agents, servants or employees; nor shall Landlord or its agents be liable for any such damage caused by other tenants or persons in, upon or about said building or caused by operations in construction of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to Landlord's own acts, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensations therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the building without Landlord's prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Landlord may designate. Tenant shall indemnify and save harmless Landlord against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Landlord shall not be reimbursed by insurance, including reasonable attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any subtenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Landlord by reason of any such claim, Tenant, upon written notice from Landlord, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Landlord in writing, such approval not be unreasonably withheld. Rider to be added if necessary. Destruction, Fire and Other Casualty: 9. (a) If the demised premises of any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Landlord and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Landlord and the rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Landlord, subject to Landlord's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Landlord shall decide to demolish it or to rebuild it, then, in any of such events, Landlord may elect to terminate this lease by written notice to Tenant given within 90 days after such fire or casualty specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Landlord shall serve a termination notice as provided for herein, Landlord shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Landlord's control. After any such casualty, Tenant shall cooperate with Landlord's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume five (5) days after written notice from Landlord that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Landlord and Tenant each hereby releases and waives all right of recovery against the other or any one claiming through or under each of them by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance and also, provided that such a policy can be obtained without additional premiums. Tenant acknowledges that Landlord will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Landlord will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. Eminent Domain: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease. Assignment, Mortgage, Etc.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Landlord in each instance. If this lease be assigned or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Landlord to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or underletting. This Article is modified by Article #56. Electric Current: 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all time its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which in Landlord's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Landlord liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain. See Addendum Access to Premises: 13. Landlord or Landlord's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times, to examine the same and to make such repairs, replacements and improvements as Landlord may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Landlord may elect to perform following Tenant's failure to make repairs or perform any work which Tenant is obligated to perform under this lease, or for the purpose of complying with laws, regulations and other directions of governmental authorities, Tenant shall permit Landlord to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein. Landlord may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Landlord shall have the right to enter the demised premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants. If Tenant is not present to open and permit an entry into the premises, Landlord or Landlord's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property and such entry shall not render Landlord or its agents liable therefor, nor in any event shall the obligations of tenant hereunder be affected. If during the last months of the term Tenant shall have removed all or substantially all of Tenant's property therefrom, Landlord may immediately enter, alter, renovate, or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligations hereunder. Landlord shall have the right at any time, without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets, or other public parts of the building and to change the name, number or designation by which the building may be known. Vault, Vault Space, Area: 14. No Vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building is lease hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Landlord makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. Occupancy: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Landlord's work, if any. In any event, Landlord makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations whether or not of record. See Addendum Bankruptcy: 16. (a) If at the date fixed as the commencement of the term of this lease or if at any time during the term hereby demised there shall be filed by or against Tenant in any court pursuant to any statute either of the United State or of any state, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's property and within 60 days thereof, Tenant fails to secure a dismissal thereof, or if Tenant make an assignment for the benefit of creditors or petition for or enter into an arrangement, this lease, at the option of Landlord, exercised within a reasonable time after notice of the happening of any one or more of such events, may be cancelled an terminated by written notice to the Tenant (but if any of such events occur prior to the commencement date, this lease shall be ipso factor cancelled and terminated) and whether such cancellation and termination occur prior to or during the term, neither Tenant nor any person claiming through or under Tenant by virtue of any statute or of any order of any court, shall be entitled to possession or to remain in possession of the premises demised but shall forthwith quit and surrender the premises, and Landlord, in addition to the other rights and remedies Landlord has by virtue of any other provision herein or elsewhere in this lease contained or by virtue of any statute or rule of law, may retain as liquidated damages, any rent, security deposit or moneys received by him from Tenant or others in behalf of Tenant. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) It is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Landlord shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be re-let by the Landlord for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damage to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Landlord to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. Default: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; or if the demised premises become vacant or deserted; or if the demised premises are damaged by reason of negligence or carelessness of Tenant, its agents, employees or invitees; or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if Tenant shall make default with respect to any other lease between Landlord and Tenant; or if Tenant shall fail to move into or take possession of the premises within fifteen (15) days after the commencement of the term of this lease, of which fact Landlord shall be the sole judge; then, in any one or more of such events, upon Landlord serving a written ten (10) days notice upon Tenant specifying the nature of said default and upon the expiration of said ten (10) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said ten (10) day period, and if Tenant shall not have diligently commenced curing such default within such ten (10) day period, and shall not thereafter with reasonable diligence and in good faith proceed to remedy or cure such default, then Landlord may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days, this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Landlord but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required; then and in any of such events Landlord may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Landlord may cancel and terminate such renewal or extension agreement by written notice. Remedies of Landlord and Waiver of Redemption: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, together with such expenses as Landlord may incur for legal expenses, attorneys' fees, brokerage, and/or putting the demised premises in good order, or for preparing the same for re-rental; (b) Landlord may re-let the premises or any part or parts thereof, either in the name of Landlord or otherwise, for a term or terms, which may at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay Landlord as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Landlord to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Landlord may incur in connection with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this leases and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Landlord to collect the deficiency for any subsequent month by a similar proceeding. Landlord, in putting the demised premises in good order or preparing the same for re-rental may, at Landlord's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Landlord, in Landlord's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Landlord shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Landlord hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Landlord shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Landlord from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. Fees and Expenses: 19. If tenant shall default in the observance or performance of any term or covenant on tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, then, unless otherwise provided elsewhere in this lease, landlord may immediately or at any time thereafter and without notice perform the obligation of tenant thereunder, and if landlord, in connection therewith or in connection with any default by tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to attorney's fees, in instituting, prosecuting or defending any action or proceeding, such sums so paid or obligations incurred with interest and costs shall be deemed to be additional rent hereunder and shall be paid by tenant to landlord within five (5) days of rendition of any bill or statement to tenant therefor, and if tenant's lease terms shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by landlord as damages. No Representations by Landlord: 20. Neither Landlord nor Landlord's agents have made any representations or promises with respect to the physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the premises except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition, and agrees to take the same "as is' and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Landlord and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. End of Term: 21. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Landlord the demised premises, broom clean, in good order and condition, ordinary wear excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. Quiet Enjoyment: 22. Landlord covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 33 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. Failure to Give Possession: 23. If Landlord is unable to give possession of the demised premises on the date of the commencement of the term hereof, because of the holding-over, or retention of possession of any tenant, undertenant or occupants, or if the premises are located in a building being constructed because such building has not been sufficiently completed to make the premises ready for occupancy or because of the fact that a certificate of occupancy has not been procured or for any other reason, Landlord shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for the inability to obtain possession) until after Landlord shall have given Tenant written notice that the premises are substantially ready for Tenant's occupancy. If permission is given to Tenant to enter into the possession of the demised premises or to occupy premises other than the demised premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except as to the covenant to pay rent. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. No Waiver: 24. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations set forth or hereafter adopted by Landlord, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Landlord or Landlord's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or Landlord's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. Waiver of Trial by Jury: 25. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Landlord commences any summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding. Inability to Perform: 26. This lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Landlord is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption in connection with a National Emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. Bills and Notices: 27. Except as otherwise in this lease provided a bill statement, notice or communication which Landlord may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if in writing, delivered to Tenant personally or sent by registered mail addressed to Tenant at the building of which the demised premises form a part or at the last known residence address or business address of Tenant or left at any of the aforesaid premises addressed to Tenant, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant, mailed, or left at the premises as herein provided. Any notice by Tenant to Landlord must be served by registered or certified mail addressed to Landlord at the address first hereinabove given or at such other address as Landlord shall designate by written notice. Water Charges: 28. If Tenant requires, uses or consumes water for any purpose in addition to ordinary lavatory purposes (of which fact Tenant constitutes Landlord to be the sole judge) Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on said meter as and when bills are rendered, and on default in making such payment Landlord may pay such charges and collect the same from Tenant. Tenant covenants and agrees to pay the sewer rent, charge or any other tax, rent, levy or charge which now or hereafter is assessed, imposed or a lien upon the demised premises or the realty of which they are part pursuant to law, order or regulation made or issued in connection with the use, consumption, maintenance or supply of water, water system or sewage or sewage connection or system. The bill rendered by Landlord shall be payable by Tenant as additional rent. If the building or the demised premises or any part thereof be supplied with water through a meter through which water is also supplied to other premises Tenant shall pay to Landlord as additional rent, on the first day of each month, $50.OO of the total meter charges, as Tenant's portion. Independently of and in addition to any of the remedies reserved to Landlord hereinabove or elsewhere in this lease, Landlord may sue for and collect any monies to be paid by Tenant or paid by Landlord for any of the reasons or purposes hereinabove set forth. Sprinklers: 29. Anything elsewhere in this lease to the contrary notwithstanding, if the New York Board of Fire Underwriters or the New York Fire Insurance Exchange or any bureau, department or official of the federal, state or city government require or recommend the installation of a sprinkler system or that any changes, modifications, alterations, or additional sprinkler heads or other equipment be made or supplied in an existing sprinkler system by reason of Tenant's business, or the location of partitions, trade fixtures, or other contents of the demised premises, or for any other reason, or if any such sprinkler system installations, changes, modifications, alterations, additional sprinkler heads or other such equipment, become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate set by any said Exchange or by any fire insurance company. Tenant shall, at Tenant's expense, promptly make such sprinkler system installations, changes, modifications, alterations, and supply additional sprinkler heads or other equipment as required whether the work involved shall be structural or nonstructural in nature. Tenant shall pay to Landlord as additional rent the sum of $150.00, on the first day of each month during the term of this lease, as Tenant's portion of the contract price for sprinkler supervisory service. Elevators, Heat, Cleaning: 30. As long as Tenant is not in default under any of the covenants of this lease Landlord shall: (a) provide necessary elevator facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m.; (b) furnish heat to the demised premises, when and as required by law on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m.; (c) at Landlord's expense cause to be kept clean the public halls and public portions of the building, which are used in common by all tenants. Tenant shall at Tenant's expense, keep the demised premises clean and in order, to the satisfaction of Landlord and for that purpose shall employ the person or persons or corporation approved by Landlord. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish from the building. Bills for the same shall be rendered by Landlord to Tenant at such time as Landlord may elect and shall be due and payable when rendered, and the amount of such bills shall be deemed to be, and be paid as, additional rent. Tenant shall, however, have the option of independently contracting for the removal of such rubbish and refuse in the event that Tenant does not wish to have same done by employees of Landlord. Under such circumstances, however, the removal of such refuse and rubbish by others shall be subject to such rules and regulations as, in the judgment of Landlord, are necessary for the proper operation of the building. Landlord reserves the right to stop service of the heating, elevator, plumbing and electric systems, when necessary, by reason of accident, or emergency, or for repairs, alterations, replacements or improvements, in the judgment of Landlord desirable or necessary to be made, until said repairs, alterations, replacements or improvements shall have been completed. And Landlord shall have no responsibility or liability for failure to supply heat, elevator, plumbing and electric service, during said period or when prevented from so doing by strikes, accidents or by any cause beyond Landlord's control, or by laws, orders or regulations of any Federal, State or Municipal Authority, or failure of coal, oil or other suitable fuel supply, or inability by exercise of reasonable diligence to obtain coal, oil or other suitable fuel. If the building of which the demised premises are a part supplies manually operated elevator service, Landlord may proceed with alterations necessary to substitute automatic control elevator service upon ten (10) day written notice to Tenant without in any way affecting the obligations of Tenant hereunder, provided that the same shall be done with the minimum amount of inconvenience to Tenant, and Landlord pursues with due diligence the completion of the alterations. Security: 31. Tenant has deposited with Landlord the sum of $30,400.00 as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Landlord may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the re-letting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Landlord. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Landlord shall have the right to transfer the security to the vendee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Landlord solely for the return of said security; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. See Article #55. Captions: 32. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provision thereof. Definitions: 33. The term "Landlord" as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Landlord shall be and hereby is entirely freed and relieved of a1l covenants and obligations of Landlord hereunder, and it shall be deemed an construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. The words "re-enter" and re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays (except such portion thereof as is covered by specific hours in Article 30 hereof), Sundays and all days observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. Adjacent Excavation--Shoring: 34. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Landlord, or diminution or abatement of rent. Rules and Regulations: 35. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Landlord or Landlord's agents may from time to time adopt. Notice of any additional rules or regulations shall be given in such manner as Landlord may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Landlord or Landlord's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Landlord within ten (10) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Glass: 36. Landlord shall replace, at the expense of Tenant, any and all plate and other glass damaged or broken from any cause whatsoever in and about the demised premises. Landlord may insure, and keep insured, at Tenant's expense, all plate and other glass in the demised premises for and in the name of Landlord. Bills for the premiums therefor shall be rendered by Landlord to Tenant at such times as Landlord may elect, and shall be due from, and payable by, Tenant when rendered, and the amount thereof shall be deemed to be, and be paid as, additional rent. Successors and Assigns: 37. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Riders containing Articles #38 through #58 inclusive, annexed hereto and forming part of this lease. In Witness Whereof, Landlord and Tenant have respectively signed and sealed this lease as of the day and year first above written IMPORTANT-PLEASE READ RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 35. 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress to and egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Landlord. There shall not be used in any space, or in the public hallway of the building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situate on the ground floor of the building Tenant thereof shall further clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose clerks, agents, employees, or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building; and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the building by reason of noise, odors, and/or vibrations, or interfere in any way, with other Tenants or those having business therein, nor shall any animals or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Landlord. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same is visible from the outside of the premises without the prior written consent of Landlord, except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted of affixed for each Tenant by Landlord at the expense of such Tenant, and shall be of a size, color, and style acceptable to Landlord. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to be used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Landlord. Landlord reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations or the lease of which these Rules and Regulations are a part. 9. No Tenant shall obtain for use upon the demised premises ice, drinking water, towel and other similar services, or accept barbering or bootblacking services in the demised premises, except from persons authorized by Landlord, and at hours and under regulations fixed by Landlord. Canvassing, soliciting, and peddling in the building is prohibited and each Tenant shall co-operate to prevent the same. 10. Landlord reserves the right to exclude from the building between the hours of 6 P.M. and 8 A.M and at all hours on Sundays, and legal holidays all persons who do not present a pass to the building signed by Landlord. Landlord will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Landlord for all acts of such persons. 11. Landlord shall have the right to prohibit any advertising by any Tenant which in Landlord's opinion, tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. RIDER AGREEMENT: To be attached to and form a part of: LEASE dated SEPTEMBER 12, 1997, Premises ENTIRE 6TH FLOOR - 44-8 WEST l8TH STREET thru to 47-53 WEST 17TH STREET Between FORTY FOUR EIGHTEEN JOINT VENTURE as Landlord and RARE MEDIUM, INC. as Tenant. 38. It is specifically understood and agreed that this lease is offered to the Tenant for signature by the Managing Agent of the building solely in its capacity as such Agent and subject to the Landlord's acceptance and approval, and that the Tenant has hereunto affixed its signature with the understanding that the said lease shall not in any way bind the Landlord or its Agent until such time as the Landlord has approved said lease and same is executed and delivered to the Tenant. 39. The Tenant will indemnify and save harmless the Landlord from and against any and all liability, penalties, losses, damages, expenses, suits and judgments arising from injury during the term of this lease to person or property of any nature, in the building of which the demised premises form a part from any matter or thing growing out of the use or occupation of the demised premises and the Tenant agrees throughout the term of this lease to keep the Landlord insured against General Public Liability in limits of $1,000,000. per person, $3,000,000. per incident and against Property Damage in the amount of $500,000. Such policies of insurance and certificates thereof shall be obtained by the Tenant and delivered to the Landlord showing the payment of the premium thereon. On the failure of the Tenant to obtain and pay for such insurance, the Landlord may, but shall not be obligated to, procure the same and pay the premiums thereon, and the cost thereof shall be added to the monthly rent next due and shall be collectible as additional rent. 40. Prior to installing new or additional air conditioning unit or units in the premises, the Tenant shall first obtain the written consent of the Landlord or its Managing Agent. Tenant shall pay for all electrical current consumed in the operation thereof. In the event such unit or units utilize circulating water, it shall be equipped with an approved water conserving device and in connection therewith, Tenant shall install and maintain in good working order, at its own cost and expense, a water meter which shall meter all make-up water used in such air conditioning equipment and shall pay for such water as per meter reading and in addition thereto, sewerage or any other charge, tax or levy which now or hereafter is imposed by the City of New York in connection with said use of water. Any charge for electricity or water consumed as herein provided, shall be deemed to be additional rent and payable as such. 41. If the Landlord or any successor in interest be an individual, joint venture, tenancy in common, co-partnership, unincorporated association, or other unincorporated aggregate of individuals (all of which are referred to below, individually and collectively, as an "unincorporated Landlord"), then, anything elsewhere to the contrary notwithstanding, Tenant shall look solely to the estate and property of such unincorporated Landlord in the land and building of which the leased premises are a part, for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of the lease to be observed and/or performed by Landlord, and no other property or assets of such unincorporated Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies. 42. The provisions of Article #19 of this lease shall apply to any action or special proceeding the Landlord may institute should the Tenant fail to vacate the premises at the expiration of the term of this lease. 43. (a) For the purpose of this Article, the term "lease year" shall mean the period of twelve (12) months commencing with the term commencement date and ending on the following OCTOBER 31ST and each successive period of twelve (12) months thereafter during the term. The term "base year" as applied to real estate taxes, shall mean the City tax year July 1, 1998 to June 30, 1999. (b) In the event that the real estate taxes payable with respect to the building and the land on which it is located, during any lease year shall be greater than the amount of such taxes due and payable during the base year, whether by reason of an increase in either the tax rate or the assessed valuation or by reason of the levy, assessment or imposition of any tax on real estate as such, not now levied, assessed or imposed, or for any other reason, Tenant shall pay to Landlord, as additional rent for the lease year in which such increase occurs, an amount equal to 8 1/3% of the difference between the amount of such tax or installment and the corresponding tax or installment paid during the base year. Such additional rent shall be paid in twelve (12) equal monthly installments beginning on the first day of the month next succeeding receipt by the Tenant of a bill therefor. The amount of such taxes actually paid by Landlord during the base year shall determine the amount of additional rent payable under this paragraph (b) until, as the result of a final determination in legal proceedings or otherwise, the amount of such taxes shall be reduced. In the event of such final determination, the reduced amount of such taxes shall thereafter be the base tax upon which shall be determined the amount of additional rent payable by Tenant pursuant to this paragraph (b), the additional rent theretofore payable hereunder shall be recomputed on the basis of such reduction, unless the taxes for any subsequent year exceeds the original tax prior to reduction, in which event the base tax shall be the original tax and Tenant shall pay to the Landlord such additional rent in twelve (12) equal monthly installments after being billed therefor, any deficiency between the amount of such additional rent as theretofore computed and the amount thereof due as the result of such recomputation. If Landlord shall be the lessee under an underlying lease, the term "real estate taxes" as used in this paragraph (b) shall be deemed to mean and include the amounts payable as additional rental under said underlying lease based on the taxes payable with respect to said building and land. (c) If the amount of additional rent payable by Tenant pursuant to the foregoing paragraph (b) shall be affected by any application filed by or on behalf of Landlord for a reduction in the assessed valuation of the said building and land or by any proceedings instituted by or on behalf of Landlord in a court of competent jurisdiction for judicial review of said assessed valuation, and if, after Tenant shall have made a payment of additional rent under said paragraph (b) Landlord shall receive a refund of any portion of the real estate taxes on which such payment shall have been based as the result of any such application or proceeding, Landlord shall pay to Tenant 8 1/3% of the refund less any amount owing by Tenant for expenses in connection therewith as provided in the preceding sentence. Nothing in this paragraph (c) contained shall be deemed or construed to require Landlord to pay to Tenant any portion of a refund of taxes paid by Landlord during the base year. 44. The Tenant shall pay the following annual rental rates during the term of this lease in the manner set forth in this lease: $150,000. ($12,500.00 per mo.) from MAY 1, 1998 to APRIL 30, 1999; $154,500. ($12,875.00 per mo.) from MAY 1, 1999 to APRIL 30, 2000; $159,135. ($13,261.25 per mo.) from MAY 1, 2000 to APRIL 30, 2001; $163,909. ($13,659.09 per mo.) from MAY 1, 2001 to APRIL 30, 2002; $168,826. ($14,068.86 per mo.) from MAY 1, 2002 to OCTOBER 31, 2002; $198,826. ($16,568.86 per mo.) from NOVEMBER 1, 2002 to APRIL 30, 2003; $204,801. ($17,066.78 per mo.) from MAY 1, 2003 to APRIL 30, 2004; $210,945. ($17,578.79 per mo.) from MAY 1, 2004 to APRIL 30, 2005; $217,274. ($18,106.15 per mo.) from MAY 1, 2005 to APRIL 30, 2006; $223,792. ($18,649.34 per mo.) from MAY 1, 2006 to APRIL 30, 2007; and $230,506. ($19,208.82 per mo.) from MAY 1, 2007 to DECEMBER 31, 2007, (each being the base rent for the period involved). 45. If Tenant holds over in possession after the expiration or sooner termination of the original term or of any extended term of this lease, such holding over shall not be deemed to extend the term or renew the lease, but such holding over thereafter shall continue upon the covenants and conditions herein set forth except that the charge for use and occupancy of such holding over for each calendar month or part thereof (even if such part shall be a small fraction of a calendar month) shall be the sum of: (a) 1/12 of the highest base annual rental rate set forth on page one of this lease times 2.5, plus (b) 1/12 of all other items of annual additional rental, which annual additional rental would have been payable pursuant to this lease had this lease not expired, plus (c) those other items of additional rent (not annual additional rent) which would have been payable monthly pursuant to this lease, had this lease not expired, which total sum Tenant agrees to pay to Landlord promptly upon demand, in full, without setoff or deduction. Neither the billing nor the collection of use and occupancy in the above amount shall be deemed a waiver of any right of Landlord to collect damages for Tenant's failure to vacate the demised premises after the expiration or sooner termination of this lease. The aforesaid provisions of this Article shall survive the expiration or sooner termination of this lease. 46. Tenant's obligation to pay additional rent under this lease for the final lease year shall survive the expiration of the term of this lease, and any additional rent due for any partial lease year shall be prorated. 47. If tenant is late in making any payment due to Landlord from Tenant under this lease for ten (10) or more days, Tenant shall pay Landlord a late charge of $.05 for each $1.00 which remains unpaid after such period to compensate Landlord for additional expense in processing such late payment. In addition, if Tenant is late in making any payment due to Landlord under this lease for ten (10) or more days, then interest shall become due and owing on such payment and shall be paid by Tenant to Landlord from the date when it was due until the date payment is made, computed at a rate equal to the lesser of eighteen (18%) per cent per annum or the highest rate permitted by law. 48. All charges which are the obligation of the Tenant shall be additional rent and collectible as such. 49. The Landlord agrees to accept checks in payment of any obligations of the Tenant under this lease provided, however, they are drawn on a bank, which has an office or branch in the city of New York. In the event any check tendered in payment of rent or additional rent is dishonored for any reason whatsoever, its substitute shall be a certified or bank check and all future checks tendered to the Landlord shall be certified or bank checks. 50. Every notice, invoice, or demand given by the Landlord to the Tenant for any item of additional rent under this lease shall be conclusive and building upon the Tenant unless within 30 days after the giving of such notice, invoice, or demand the Tenant shall notify the Landlord in writing as required by the pertinent provision of this lease that the Tenant disputes the correctness of the notice, invoice, or demand, specifying the particular item claimed to be incorrect. In the event the dispute shall not thereafter be settled by agreement between the parties within 30 days thereafter the Landlord shall within the next 90 days institute a summary proceeding or an action to determine the issue. During the pendency of such action or proceeding the Tenant shall pay all of the items on such notice, invoice, or demand including the disputed items without prejudice to Tenant's position on such disputed items and in the event there is a final determination in the Tenant's favor the Landlord shall forthwith refund to the Tenant the amount overpaid. 51. It is understood and agreed that the Tenant shall have possession of the demised premises on or before NOVEMBER 1, 1997, free of base rent through APRIL 30, 1998, and at one-half the base rent for the period of MAY 1, 1998 through FEBRUARY 28, 1999, otherwise subject to the terms and conditions hereof, and with the express understanding that the Tenant shall pay all items of additional rent and other charges reserved under this lease commencing with the date the Tenant receives an executed copy of this lease, provided however, that in the event Tenant defaults in fulfilling any of the monetary terms of this lease at any time during the term or defaults in the payment of rent or additional rent after the free rent period, the rent for the entire free rent period shall immediately become due and payable. Any defaults shall be subject to applicable cure periods. 52. Tenant represents that it dealt with no broker except WILLIAMS REAL ESTATE CO. INC. Tenant agrees to hold Landlord and ADAMS & CO. REAL ESTATE, INC. harmless from and against any and all claims or demands for brokerage commissions arising out of or in connection with the execution of this lease or any conversations or negotiations thereto with any broker other than the above named broker. 53. Upon the execution of this lease the Tenant shall furnish to the Landlord a list of all of its officers and their respective residence addresses. If during the term of this lease there is any change in the officers or addresses, the Landlord shall be notified of the same within five (5) days thereafter. This is a substantial obligation of this lease. 54. The Tenant hereby agrees to pay as additional rent the monthly charge of $74.76 in the manner provided for in this lease for the payment of rent, as Tenant's contribution toward the Landlord's cost for furnishing guard service in the passenger lobby of the building Monday through Friday five (5) days per week during the hours from 9:30 A.M. to 5:30 P.M. In the event the Landlord's cost for such service is increased, the Tenant agrees to pay its proportionate shares of such increase. The Tenant understands that the Landlord is not obligated to maintain this service and Landlord may discontinue this additional service at any time without notice to the Tenant at which time the Tenant's contribution shall cease. 55. The security as set forth in Article #31 hereof shall be deposited in the Emigrant Savings Bank located at 5 East 42nd Street, New York, NY 10017, in an interest-bearing account and the interest earned thereon shall accrue to Tenant less 1% to be retained by the Landlord as an administrative charge. 56. (A) Subject to the provisions of paragraph (F) of this Article, the provisions of Article #11 of this lease are amended to the extent that, Landlord agrees that it will not withhold its consent unreasonably to a subletting of the entire demised premises or an assignment of this lease provided that (a) as to a sublease, Tenant delivers to Landlord a copy of the proposed sublease in form to be executed, together with reasonably detailed statements of the proposed subtenant's business and financial references; (b) as to an assignment, Tenant delivers to Landlord reasonably detailed statements of the proposed assignee's business and financial references; (c) the purpose for which the proposed subtenant of assignee intends to use the demised premises are uses expressly permitted by and not expressly prohibited by this lease; (d) the date when the proposed sublease or assignment is to become effective is at least 30 days after the submission to Landlord of the aforesaid documentation; (e) Tenant shall not be in default in the performance of any of its obligations under this lease; (f) the proposed subtenant or assignee is not then a tenant of any space in the building of which the demised premises form a part; (g) no advertisement with respect to the demised premises shall quote a rental below that of the demised premises or comparable space in the building; (h) any request for consent to such subletting or assignment shall be made by notice pursuant to the provisions of Article #27 of this lease. (B) Any such subletting or assignment shall not release the Tenant herein from any liability or responsibility under the terms, covenants or conditions of the within lease. (C) It is expressly agreed that in the event of an assignment, the Assignee shall assume all the obligations of the lease jointly with the Tenant herein, and the Tenant shall deliver to the Landlord a duplicate-original of such assignment and the assumption by the Assignee, duly executed and acknowledged by the Tenant and such Assignee as soon as same has been executed. (D) No further or additional subletting of the demised premises or assignment of this lease shall be made, except with the prior written approval of the Landlord pursuant to this Article. (E) It is further understood and agreed that the Tenant shall designate Adams & Co. Real Estate, Inc. as Tenant's exclusive Agent to effect any sublet, assignment or release, and Tenant shall pay to Adams & Co. Real Estate, Inc. upon the execution of such subleasing, assignment or release, a commission compute in accordance with the rates and rules established by Adams & Co. Real Estate, Inc. Such exclusive shall be limited to ninety (90) days only, after Tenant submits a request. (F) Notwithstanding the provisions of this Article, in the event Tenant requests Landlord's consent to a subletting of the entire demised premises or an assignment of this lease, Landlord shall have the right to cancel and terminate this lease as of the effective date set for such proposed subletting or assignment by giving Tenant notice to that effect within 30 days from the receipt of such request and thereupon, on such effective date, this lease shall terminate and come to an end as though that were the date originally set forth for the termination of this lease. Tenant agrees to vacate and surrender possession of the premises to the Landlord on or before said date, leaving same broom clean, in good order and condition. Thereupon, both parties will be released and relieved from further liability under the within lease, except that Tenant's obligation to perform all of the terms, obligations and covenants, including the obligation to pay rent and additional rent, up to and including the date of termination, shall survive such termination. See Addendum 57. Subject to all of the terms and conditions of Article #3 of the within lease, permission is hereby granted to the Tenant to make, at its own cost and expense, all alterations, improvements and installations in the demised premises. Prior to the commencement of any and all work and installations, Tenant shall submit to the Landlord or its Managing Agent, for its approval in writing, plans and specifications for all work and installations, which approval Landlord agrees shall not be unreasonably withheld or delayed. All work shall be in strict conformity with all rules, regulations and ordinances of any governmental authority or bureau having jurisdiction thereof, including the New York Board of Fire Underwriters or any other similar body, and the Tenant agrees to procure any permits needed in connection with such work prior to the commencement thereof. In the event the Tenant is required to do any work in connection with the building sprinkler system, water and/or electrical risers or any other building riser or facility, the Tenant agrees that all work in connection therewith shall be done by plumbing, electrical, sprinkler and/or other contractors designated by the Landlord at the Tenant's sole cost. Tenant further agrees that it shall require its contractors and/or subcontractors to furnish the Landlord with Certificates of Insurance for Workers' Compensation, Public Liability and Property Damage, as provided for in Article #3 of this lease and otherwise comply with the terms and conditions of this lease and particularly Article #3 thereof. 58. In consideration of the Tenant, at its own cost and expense, doing work in the demised premises and upon the completion of such work and the presentation by the Tenant to the Landlord of receipted bills for all such work as evidence that same has been paid for, the Landlord agrees to grant to the Tenant an allowance in an amount not to exceed the sum of SIXTY THOUSAND ($60,000.) DOLLARS against the actual cost of such work and the presentation of said receipted bills. The allowance shall be paid to the Tenant as follows: Upon completion of work, the Tenant shall provide Landlord with a copy of all invoices. Landlord, or its representative shall then have a period of ten (10) days to inspect and approve the work, and upon such approval, Landlord shall promptly pay to the Tenant the amount of such invoice subject to the maximum amount of the allowance. ADDENDUM to ARTICLE #3: Tenant may, without Landlord's prior written consent, make non-structural changes not to exceed $5,000. ADDENDUM to ARTICLE #12: Landlord shall provide 8 watts per square foot of electricity. ADDENDUM to ARTICLE #15: Landlord represents that the use set forth in Article #2 of this lease is a duly authorized use of the premises. ADDENDUM to ARTICLE #30: Notwithstanding the hours mentioned in Article #30, the Tenant shall have access to the demised premises seven (7) days per week, twenty-four (24) hours per day. ADDENDUM to ARTICLE #56: Any assignment or subletting pursuant to a merger, consolidation or acquisition of or by the Tenant and to any affiliate, subsidiary or parent of the Tenant or of any successor in interest of the Tenant or of a bona fide sale of Tenant's business, shall not be subject to the provisions of subparagraphs (E) and (F) of this Article. ELECTRICITY (a) Tenant may make its own arrangements with the public utility company servicing the demised premises for the payment of all charges for electricity consumed at the demised premises by Tenant. In no event shall Landlord be responsible for charges for electricity consumed at the demised premises by Tenant. Notwithstanding the foregoing, if electric current be supplied by Landlord, which Landlord reserves the right to do at its sole option, Tenant covenants and agrees to purchase the same from Landlord or Landlord's designated agent at terms and rates set by Landlord in subparagraph (b) below. Where more than one meter measures the service of Tenant in the building, the service rendered through each meter may be computed and billed separately in accordance with the rates herein. Bills therefor shall be rendered at such times as Landlord may elect in the amount computed from a meter. In the event that such bills are not paid within fifteen (15) days after the same are rendered, the Landlord may, without further notice, discontinue the service of electric current to the demised premises without releasing Tenant from any liability under this lease and without Landlord or Landlord's agent incurring any liability for any damage or loss sustained by Tenant by such discontinuance of service. Landlord shall not in any wise be liable or responsible for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Tenant's electrical requirements. Any riser or risers to supply Tenant's electrical requirements, upon written request of Tenant, will be installed by Landlord, at the sole cost and expense of Tenant, if, in Landlord's sole judgment, the same are necessary and will not cause permanent damage or injury to the building or demised premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants of the building. In addition to the installation of such riser or risers, Landlord will also at the sole cost and expense of Tenant, install all other equipment proper and necessary in connection therewith subject to the aforesaid terms and conditions. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the building or the risers or wiring installations. Landlord may discontinue any of the aforesaid services upon thirty (30) days notice to Tenant without being liable to Tenant therefor or without in any way affecting this lease or the liability of Tenant hereunder or causing a diminution of rent and the same shall not be deemed to be lessening or diminution of services within the meaning of any law, rule or regulation now or hereafter enacted, promulgated or issued. In the event Landlord gives such notice of discontinuance Landlord shall permit Tenant to receive such service direct from a public utility company. Tenant shall make no alteration or addition to the electric equipment and/or appliances without prior written consent of Landlord in each instance. If any tax is imposed upon Landlord's receipt from the sale or resale of electrical energy or gas or telephone service to Tenant by any Federal, State or Municipal Authority, Tenant covenants and agrees that, where permitted by law, Tenant's pro-rata share of such taxes shall be passed on to, and included in the bill and paid by Tenant to Landlord. (b) The Tenant shall purchase electricity from the Landlord or Landlord's Agent at a charge which shall be computed by adding 10% to the total of (1) the meter readings for energy use, the demand, and fuel adjustments under Consolidated Edison Service Classification 4 or like or similar rate by any other utility company servicing the building, and (2) all taxes imposed on each of such components plus sales tax. All charges incurred by the Tenant under this Article shall be additional rent and collectible by the Landlord as such. EX-10.9 6 LEASE DATED FEBRUARY 11, 1998 Exhibit 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. AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Lease Provisions ("Basic Lease Provisions") 1.1 Parties: This lease, dated, for reference purposes only, February 11, 1998 is made by and between C & G Bailey Living Trust u/t/d 3/25/75 and Steaven Jones (Family Limited Partnership II, a California Limited Partnership, Joint Tenants) (herein called "Lessor") and DigitalFacades Corporation, a California Corporation, doing business under the name of DigitalFacades (herein called "Lessee"). 1.2 Premises: Fist (1st) floor consisting of approximately 12,158 rentable square feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). Premises address is 4081 Redwood Avenue. 1.3 Building: Commonly described as being located at 4077-4081 Redwood Avenue in the City of Los Angeles, County of Los Angeles, State of California, as more particularly described in Exhibit A hereto, and as defined in paragraph 2. 1.4 Use: general offices and production space for interactive communications agency and other related uses subject to paragraph 8. 1.5 Term: five (5) years commencing May 1, 1998 ("Commencement Date") and ending April 30, 2003 as defined in paragraph 3. 1.6 Base Rent: $14,087.10 per month, payable on the 1st day of each month per paragraph 4.1 Fourteen Thousand eighty-seven and .10/100. See Paragraph 5.3 of the Addendum. 1.7 Bare Rent Increase: On each anniversary of the Lease, the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 Rent Paid Upon Execution: $12,468.00 (Twelve Thousand Four Hundred Sixty-Eight and .00/100 Dollars) for May 1998. 1.9 Security Deposit: $14,087.10 (see paragraph 64 of the Lease). 1.10 Lessee's Share of Operating Expenses: 43.7% as defined in paragraph 4.2. 2. Premises, Parking and Common Areas. 2.1 Premises: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2 as the "Premises," including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking: See paragraph 51 of the Addendum. 2.2.1 If Lessee commits, permits or allows any of the prohibited parking-related activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies (that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2. Monthly parking fees shall be payable one (1) month in advance prior to the first day of each calendar month. 2.3 Common Areas - Definition: The term "Common Area" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public rest rooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, pathways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas - Rules and Regulations: Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect tot he Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to reasonably modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. Rider 1. 2.5 Common Areas - Changes: Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make reasonable and necessary changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law and this Lease; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To use the Common Areas while engaged in making repairs or alterations to the Office Building Project, or any portion thereof; (d) To do and perform such other acts and make such other reasonable and necessary changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. Term. 3.1 Term: The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession: Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the Terms of this Lease, except as may be otherwise provided in this Lease until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within thirty (30) days following aid Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburse Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improve-ment); and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) days period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force and effect. 3.2.1 Possession Tendered-Defined: Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed; (2) the Building utilities are ready for use in the Premises; (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 Delays Caused by Lessee: There shall be no abatement of rent, and the thirty (30) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omission of Lessee, its agents, employees and contractors. 3.3 Early Possession: If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 Uncertain Commencement: In the event commencement of the Lease term is defined as the completion of the Improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. Rent. 4.1 Base Rent: Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction, Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.6 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expenses: Except as otherwise provided in this Lease, Lessee shall pay to Lessor during the term hereof. In addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except with Lessee's written consent in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for: (i) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and un-loading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directories, dire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to e provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to e maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 10.1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and/or parking or other service charges and accounting and a management fee attributable to the operation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal Income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessors' accountants); (ix) Rider 2 (c) Operating Expenses shall not include the costs of replacements of equipment or improve-ments that have a useful life for Federal income tax purses in excess of five (5) years unless it is the type described in paragraph 4.2(b)(viii), in which case their cost shall be included as above provided. (d) Operating Expenses shall not include any expenses paid by any lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party other tenant, or by insurance proceeds. (e) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. (f) Rider 3 4.3 Rent Increase. 4.3.1 At the times set forth in paragraph 1.7 of the Basic Lease Provisions, the monthly Base Rent payable under paragraph 4.1 of this Lease shall be adjusted by the increase, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for all Urban consumers (1987 = 100). "All items," for the city nearest the location of the Building, herein referred to as "C.P.I.," since the date of this Lease. 4.3.2 The monthly Base Rent payable pursuant to paragraph 4.3.1 shall be calculated as follows: the Base Rent payable for the first month of the term of this Lease, as set forth in paragraph 4.1 of this Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commences. The sum so calculated shall constitute the new monthly Base Rent hereunder, but, in no event, shall such new monthly Base Rent be less than the Base Rent payable for the month immediately preceding the date for the rent adjustment. 4.3.3 In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculations. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in the county in which the Premises are located, in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties, notwithstanding one party failing to appear after due notice of the proceeding. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. 4.3.4 Lessee shall continue to pay the rent at the rate previously in effect until the increase, if any, is determined. Within fifteen (15) days following the date on which the increase is determined. Lessee shall make such payment to Lessor as will bring the increased rental current, commencing with the effective date of such increase through the date of any rental installments then due. Thereafter the rental shall be paid at the increased rate. 4.3.5 At such time as the amount of any change in rental required by this Lease is known or determined, Lessor and Lessee shall execute an amendment to this Lease setting forth such change. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby if Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, tot he last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. Lessor retains the right to increase the amount of the security deposit if Lessee leases additional space in the Office Building Project. 6. Use. 6.1 Use: The Premises shall be used and occupied only for the purposes set forth in paragraph 1.4 of the Basic Lease Provision or any other use which is reasonably comparable to that use and for no other use. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record or any applic-able building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any life insurance underwriters or rating bureaus, now in effect or which may here-after come into effect, whether or not they reflect a change in policy from that now existing, during the term of any part of the term hereof relating in any manner to the Premises and the occupation and use by Lessee of the Premises, Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tent to unreasonably create waste or a nuisance or shall tend to unreasonably disturb other occupants of the Office Building Project. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commence-ment Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, existing lighting, air conditioning and heating system stubbed to or existing in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations: Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any material damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any material damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting, fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the Premises and in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition in all material respects at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, within thirty (30) days of learning thereof, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, which proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor of the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do if Lessee does not perform in compliance with this paragraph. (e) All alterations, improvements, additions and Utility installations (whether or not such Utility Installations constitute trade fixtures of Lessee) which may be made to the Premises by Lessee, including but not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is no in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provision of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specification for any alterations, improvements, additions or Utility installations. 7.3 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (FL0404), or equivalent, in an amount of not less than $1,000,000.00 per occur-rence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall Insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or mainte-nance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 Property Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project Improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services standard form, or equivalent providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one (1) year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be name in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not knowingly do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirely of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary, all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnity and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suited or suffered by Lessee in or about the Premises or elsewhere and shall indemnity and hold harmless Lessor from and against any and all claims, costs and expenses arising from any material breach or default in the perform-ance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees or invitees and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith; including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall co-operate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places; or from new construction or the repair, alteration or improvement of any part of the Office Building Project; or of the equipment fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or use of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Neither Lessee or Lessor makes any representa-tion that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover either party's property or obligations under this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the Building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be required to be covered by the insurance described in paragraph 8. The fact that an insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to repair or rebuild the damaged are to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage; Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall promptly at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full effect and force. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an insured Loss and which falls into the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense) which damage prevents Lessee from using any significant portion of the Premises, Lessor may at Lessor's option either (i) repair such damage promptly at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within twenty (20) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraph 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction at Lessor's expenses to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within twenty (20) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within twenty (20) days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, promptly repair such damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within five (5) business days after the expiration of said twenty (20) day period, notwith-standing any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provision of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expenses) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provision of this Paragraph 9 and shall not commence such repair or restoration within thirty (30) days after such occurrence, or if Lessor shall not complete the restoration and repair within five (5) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event, this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in all reasonable respects in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination - Advance Payments. Upon termination of this Lease pursuant to paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor, shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Damage or Destruction. 10.1 Payment of Taxes. Lessor shall pay the real property tax as defined in paragraph 10.3 applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirely of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or change (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 105 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Tax. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, tele-phone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay a reasonable proportion to be mutually determined by Lessor and Lessee of all charges jointly metered with other premises in the Building. 11.3 Hours of Service. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor, may, in its sole discretion, install at Lessee's expense supplemental equip-ment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions, provided that Lessor uses its best efforts to help correct the problem on a prompt basis. 12. Assignment and Subletting. See Paragraph 50 of the Lease 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold, Lessor shall respond to Lessee's request for consent here-under in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation more than fifty-one percent (51%) voting stock of such corporation or (b) Lessee is a partnership more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease unless the provisions of the Lease are materially changed without Lessee's consent. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no subletting shall release Lessee of Lessee's obligations hereunder or after the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 of this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any subletting shall not constitute a consent to any subsequent subletting by Lessee or to any subsequent or successive subletting by the sublessee. (f) In the event of any default under this Leas, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rent to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to delivery a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees, not to exceed One Thousand Dollars ($1,000.00). 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of this Office Building Project and not in violation of any exclusives or rights than held by other tenants, and (b) the proposes assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The material breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (Insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30.(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to materially observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's of Lessee's interest in this Lease, where such seizure is not discharge within thirty (30) days. In the event that any provision o this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all material damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth of the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event, Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy nor or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commence within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, not prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised on in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expenses shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking of condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. Fort that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. 15. Broker's Fee. (a) The brokers involved in this transaction are Lee and Associates as "listing broker" and Westmac Commercial Brokerage as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s) for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) [intentionally deleted] (c) Lessor agrees to pay said fee not only on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suite with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), if any, whose names are set forth in paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated thereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. Estoppel Certificate. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one (1) month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. Rider 5 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a Lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects, Lessor's obligations thereafter to be performed provided that any funds in the hands of Lessor or the then grantor at the times of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Leas as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to either party not paid when due shall bear interest a the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by either party under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction not the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respec-tive parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight (48) hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by either party of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach of the same or any other provision. Either party's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of consent to or approval of any subsequent act. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. All costs to be paid by the requesting party. 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee; except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. Subordination. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long s Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Leas and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the data of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents reasonably required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorneys' Fees. (a) If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. (b) The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. (c) Both parties shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such default. 32. Lessor's Access. (a) Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 0100.0108.4208 (b) All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. (c) Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. Signs. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or termination by Lessor, shall not work a merger, and shall at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provision on Lessee's part to be observed and performed hereunder. Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provi-sions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options. 39.1 Definition. As used in this paragraph the word "Option" has the following meaning: (1) the right to option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to leave the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises of the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises of any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee six (6) or more notices of default for material defaults under the Lease under paragraph 13.1(d), whether or not the defaults are cured, during the twelve (12) month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, (iii) Lessor gives to Lessee three (3) or more notices of default for material defaults under the Lease under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures - Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing reasonable security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building which the Premises are located upon not less than ninety (90) days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas. 41. Easements. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents that are reasonably upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as voluntar payment, and there shall survive the right on the part of said party to institute suite for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. Authority. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity, represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten provisions. 45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. Lender Modification. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender as long as the business terms are not altered in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. Multiple Parties. If more than one person or entity is named as Lessor or Lessee herein the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. Work Letter. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee attached hereto as Exhibit C and incorporated herein by this reference. 49. Attachments. Attached hereto are the following documents which constitute a part of this Lease. Addendum with Paragraphs 50 - 74; Riders 1 - 7. Guaranty of Lease. Exhibit A: Description of the Premises. Exhibit B: Parking Rules and General Rules. Exhibit C: Tenant Improvement Plans (approved by lessor). Exhibit E: Building Signage Program. Exhibit E-1: Lessee's Allowable Signage on the North Side of the Office Building Project. Exhibit F: Lessee's Approved Building Signage. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMITTION TO YOUR ATTORNEY FOR HIS APPROVAL NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE C & G BAILEY LIVING TRUST DIGITALFACADES CORPORATION By__________________________________________ By____________________________ Its Trustee Its President STEAVEN JONES FAMILY LIMITED PARTNERSHIP II By__________________________________________ Steaven Jones Its General Partner Executed at ________________________________ on _________________________________________ Address_____________________________________ ADDENDUM TO THAT CERTAIN LEASE DATED FEBRUARY 11, 1998 BY AND BETWEEN C & G BAILEY LIVING TRUST U/T/D 3/25/75 AND STEAVEN JONES FAMILY LIMITED PARTNERSHIP II, JOINT TENANTS, AS LESSOR, AND DIGITALFACADES CORPORATION, A CALIFORNIA CORPORATION, AS LESSEE, FOR THOSE CERTAIN PREMISES KNOWN AS 4081 REDWOOD AVENUE, LOS ANGELES, CA, AS FOLLOWS: Rider 1 (insert at the end of Paragraph 2.4): , unless such non-compliance interferes with the rights of Lessee under this Lease. Rider 2 (insert as part of Paragraph 4.2 (b): (ix) Replacements of equipment or capital improvements or lease of equipment which would be deemed to be of a capital nature, however Lessee's responsibility shall be limited solely to that portion of the capital improvement cost or lease expense (as determined by the useful life for depreciation purposes according to Federal Income Tax guidelines) which relates to the remaining term of the Lease. For example, if the roof needs to be replaced (a 15 year useful life) and there are two years remaining on the Lease Term, Lessee would pay 2/15 of the cost thereof, multiplied by its share of Operating Expenses. Rider 3 (insert as part of Paragraph 4.2): (e) Operating Expenses shall not include any expenses specifically allocated to Lessor under other provisions of this Lease, notwithstanding the fact that such expenses may be included in the foregoing definition of Operating Expenses. Rider 4 (insert at end of Paragraph 13.3): Notwithstanding the foregoing, Lessor shall be in default if Lessor fails to perform according to other specific time periods outlined elsewhere in this Lease. Rider 5: (d) In the event of any request under this Paragraph 16, the requesting party shall pay the responding party a fee of $350 toward expenses incurred in performing such request, including attorneys' fees. Rider 6: Lessor shall pay Lessee a fee of $350 toward expenses incurred in performing under Paragraph 30, including attorneys' fees. Rider 7: Lessor shall pay Lessee a fee of $350 toward expenses incurred in performing under Paragraph 41.1, including attorneys' fees. 50. Commencement Date: The commencement Date shall be May 1, 198. 51. Parking. Lessee shall have twenty (20) parking spaces for its use during the term of the Lease at the initial rate of $30 per space per month Said rate shall increase annually at the same rate as the CPI as specified in Paragraph 4.3 of the Lease. 52. Valet Parking. During the term of the Lease, Lessee may find that it needs more than the number of parking spaces allowed in Paragraph 51 above. Lessor reserves the right, at any time after the Office Building Project (the "Project") is 80% leased, to conduct a tenant survey to determine how many parking spaces all tenants in the Project require. Should the total number of parking spaces exceed fifty-five (55) (15% over the normal number of parking spaces, forty-eight (48)), then Lessor will retain the services of a valet parking service to provide valet parking for the Project, for the number of hours required to accommodate all tenants in the Project. Lessee shall pay for said service as an Operating Expense on a monthly basis, based on the number of spaces it needs over the amount allotted in Paragraph 51 above as a percentage of all spaces required over the normal number of spaces. The valet parking service will account for the number of spaces actually used by each tenant to ensure accurate billing. For example, should Lessee require 25 parking spaces (5 over its allotted number of 29) and all tenants in the Project require 75 spaces 927 over the normal number of 48), then Lessee will pay 5/27 (or 18.5%) of the valet parking cost for that month. 53. Rental Rates. The Base Rent, as defined in Paragraph 1.6 of the Lease, shall be as follows: May - July 1998: $12,468 per month; August 1998 - April 1999; $14,087, 10 per month; May 1999 - April 2000 $15,386.65 per month; May 2000 - April 2001 17,377.85 per month; May 2001 - April 2002 17,864.17 per month; May 2002 - April 2003 18,455.32 per month; 54. Heating, Venting and Air Conditioning. Lessee shall have unrestricted use and control of the HVAC system 24 hours per day, 365 days per year. 55. Signage. Lessee shall have the right to exterior building signage subject to Lessor's reasonable approval. Said signage shall be both as part of the building directory (located by the intercom system) and also immediately adjacent to Lessee's front door (see Building Signage Program attached as Exhibit "E" of the Lease). Lessee will also have signage on the north side of the building, adjacent to the street; size and location of said signage to be mutually agreed upon between Lessor and Lessee (shown on Exhibit "E-1" of the Lease). Lessee's signage will comply with the current codes for the City of Los Angeles and any other applicable government agency. When approved, Lessor and Lessee will attach a copy of the approved diagram of said sign as Exhibit "F" annexed hereto. 56. Tenant Improvements. Lessee shall provide all its own tenant improvements at its sole cost and expense. Lessee shall pay all invoices promptly, and shall provide Lessor copies of any and all lien releases related to said work. Lessee shall be responsible for ensuring that Lessee's contractor has liability and workman's compensation insurance of a minimum of $1 million, and that Lessor is named as additional insured on said policies. Lessor shall approve Lessee's tenant improvement plans; said approval shall not be unreasonably withheld or delayed. Upon approval, copies of said plans shall be attached hereto as Exhibit C-2 and made a part of this Lease. Lessee may competitively bid its tenant improvement work. 57. Option to Renew. Subject to the conditions in Paragraph 39 of the Lease, Lessee shall have one (1) option to renew the term of the Lease an additional five (5) years by providing Lessor written notice no later than six (6) months prior to the expiration of the primary Lease Term. All other terms and conditions shall remain the same. 58. Non-Disturbance. Lessor shall use its best efforts to obtain from each lender with respect to the real property the subject of this lease a non-disturbance agreement in recordable form, providing that in the event of any foreclosure, sale under a power of sale, ground or master lease termination, or transfer in lieu of any of the foregoing, or the exercise of any other remedy under any lien on the real property that: a. Lessee's use, possession and enjoyment of the Premises shall not be disturbed and this Lease shall continue in full force and effect as long as Lessee is not in default; and b. This Lease shall automatically become a lease directly between any successor to Lessor's interest, as landlord, and Lessee, as if that successor were the landlord originally named in the Lease. 59. Lessee's Alterations. Pursuant to Paragraph 7.3 of the Leas, when Lessee submits plans for Lessor's approval, Lessee must submit a list of any and all improvements it would like to remove at the termination of the Lease. At the time when Lessor grants its approval for Lessee's improvements, Lessor must specify which improvements Lessee must remove at the end of the Lease Term. Any improvements which are not specified as outlined above must remain in the Premises at the termination of the Lease. Lessee shall repair any damage valued at $250 or more caused by any removal of said improvements, at Lessee's sole cost and expense. 60. Profits from Subletting or Assignment. Pursuant to Paragraph 12.4 of the Lease, should Lessee obtain any profits from said assignment or subletting (after amortization of tenant improvements and assignment/subleasing expenses), and Lessee is occupying less than 50% of the Premises, any and all profits shall be split 50% to lessee and 50% to Lessor. If Lessee is occupying 50% or more of the Premises, any and all profits are retained by Lessee. 61. Building Warranty. Pursuant to Paragraphs 6.3 and 7.2 of the Lease, Lessor and Lessee hereby acknowledge that the Building has been newly reconstructed, and is covered under a one year contractor's warranty, as required by the laws of the State of California. Certain portions of the building (e.g. roof and HVAC equipment) have warranties extending beyond said one year period. Lessor hereby agrees to extend any and all building warranties to Lessee, and Lessee shall receive any and all benefits therefrom. Lessee hereby agrees to do nothing knowingly which would compromise said warranties (e.g. make penetrations in the roof without contracting the roof contractor who has provided the roof warranty). Should said warranties become null and void due to Lessee's actions, Lessee shall be responsible for any and all costs related thereto. 62. Early Occupancy. Lessee may take occupancy of the space prior to the Commencement Date for construction of its interior improvements. 63. Increase in Property Taxes. Lessee shall not be responsible for any increase in property taxes resulting from a sale or refinance of the Property during the first three (3) years of the Lease Term. 64. Letter of Credit. In addition to the Security Deposit outlined in Paragraph 1.9 of the Lease, Lessee shall, at Lessee's sole cost and expense and within five (5) business days of executing the Lease, provide Lessor an irrevocable letter of credit with Wells Fargo Bank or another financial institution approved by Lessor in the amount of $100,000.00 (One Hundred Thousand Dollars). Should Lessee materially default on said Lease, pursuant to Paragraph 13.1 of the Lease, Lessor may draw down on said Letter of Credit in an amount appropriate to cure said default provided Lessor first gives notice to Lessee of such default and of Lessor's intent to draw down on said Letter of Credit. Lessee must then increase the amount of the Letter of Credit so that the sum of $100,000.00 remains available. Should Lessor draw down on the Letter of Credit and it is found at a later date that Lessor was not entitled to said monies under the Lease, whether repaid or otherwise, Lessor shall pay Lessee a penalty fee equal to twenty-five (25%) percent of the monies on which Lessor drew down but to which Lessor was not entitled. 65. Right of First Refusal. Lessor grants to Lessee the Right of First Refusal to lease the vacant contiguous 4,874 rentable square feet (shown as "Refusal" Space o Exhibit "A" attached) under the same terms and conditions of the original lease, with the lease rate the same rate per square foot as paid in the initial Lease without the three month reduction, except that monthly rental shall commence one hundred eighty (180) days from lease execution, and the Letter of Credit shall be increased to $150,000. During the period immediately following the execution of the Lease, Lessor shall proceed to attempt to lease the "Refusal" Space to other prospective tenants. Lessor shall notify lessee within one business day of receipt of a bona fide proposal from another tenant to lease the Refusal Space. Lessee shall have five (5) business days to notify Lessor in writing and execute the necessary lease documents to include the Refusal Space as part of the Premises. Once the Refusal Space has been leased by Lessee or another tenant, said Right of First Refusal shall become null and void and no longer in effect under the Lease. 66. Release from Guaranty. Should John G. and/or Yvonne Lin sell stock such that fifth and 10/100 percent (50.1%) of Lessee is owned by the public through an initial public offering or by another publicly held company and the net work of said entity is greater than $ten million ($10,000,000.00), then Lessor shall release the Guarantors from said Guaranty and the Guarantors shall have no further liability hereunder. 67. Consent/Duty to Act Responsibly. Notwithstanding any provisions to the contrary in this Lease, any time the consent or approval of Lessor or Lessee is required, such consent or approval shall not be unreasonably withheld or delayed. Whenever this Lease grants Lessor or Lessee the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations, Lessor or Lessee shall act reasonably and in good faith and take no action which might result in the frustration of the other party's reasonable expectations concerning the benefits to be enjoyed under this Lease. 68. Exclusions from Operating Expenses. Notwithstanding any provisions to the contrary in this Lease, the term "Operating Expenses" shall not include the following: (i) Any ground lease rental; (ii) Costs incurred by Lessor for the repair of damage to the Office Building Project, to the extent that Lessor is reimbursed by insurance proceeds (the deductible, however, is included); (iii) Costs, including permit, license and inspection costs, incurred with respect to the installation of tenant or other occupant improvements made for tenants or other occupants in the Office Building Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Office Building Project; (iv) Depreciation, amortization and interest payments, expect on materials, tools, supplies and vendor-type equipment purchased by lessor to enable Lessor to supply services Lessor might otherwise contract for with a third party where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with generally accepted accounting principles, consistently applied, and when depreciation or amortization is permitted, the items shall be amortized over its reasonably anticipated useful life; (v) Leasing commissions, attorneys' fees, space planning costs, and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Office Building Project; (vi) Expenses in connection with services which are not offered to lessee but which are provided to another tenant or occupant of the Office Building Project; (vii) Costs incurred by Lessor due to the violation by lessor or any tenant of the terms and conditions of any lease of space in the Office Building Project; (viii) Overhead and profit increment paid to lessor or to subsidiaries or affiliates of Lessor for goods and/or services in the Office Building Project to the extent the same exceeds the cost of such goods and/or services rendered by unaffiliated third parties on a competitive basis; (ix) Interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the Office Building Project; (x) Lessor's general corporate overhead and general administrative expenses, unless covered under goods and services provided to the Office Building Project; (xi) All items and services for which Lessee or any other tenant in the Office Building Project reimburses Lessor (other than through Lessee's Share of Operating Expenses); (xii) Advertising and promotional expenditures and costs of signs in or on the Office Building Project identifying the owner of the Office Building Project or other tenants' signs; (xiii) Services provided, taxes attributable to and costs incurred in connection with the operation of any retail or restaurant in the Office Building Project without Lessee's consent; (xiv) Costs incurred in connection with upgrading the Office Building Project to comply with any current federal, state or local laws, ordinances, rules, regulations or code (including, without limitation, those pertaining to fire, safety, earthquake and handicapped access) for the Office Building Project in its "shell complete" condition; (xv) Tax penalties incurred as a result of Lessor's negligence, inability or unwillingness to make payments when due, as long as Lessor has been paid in full by Lessee; (xvi) All assessment which can be paid by Lessor in installments shall be paid by Lessor in the maximum number of installments permitted by law or by the assessor and not included as Operating Expenses except in the year in which the assessment installment is actually paid; (xvii) Costs for which Lessor has been compensated by a management fee; (xix) Costs arising from Lessor's or another tenant's negligence or intentional acts, as long as it can be proved that Lessor or another tenant was at fault; (xx) Premiums for earthquake insurance, unless approved by Lessee; (xxi) Costs for sculptures, painting or other objects of art, unless approved by Lessee. 69. Eminent Domain. Notwithstanding any provisions to the contrary in this Lease, in the event that the entire Office Building Project, or such portion thereof as shall materially interfere with Lessee's use and occupancy thereof, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Lessee shall have the right to recover the amount necessary to compensate Lessee for the taking or purchase of Lessee's property, chattels or trade fixtures and the relocation of Lessee's business. 70. Indemnity. Except for Lessee's gross negligence, willful misconduct and/or breach or express warranties, Lessor shall indemnify, protect, defend and hold harmless Lessee and Lessee's agents, officers, directors, shareholders and employees, from and against any and all claims, damages, costs, liens, judgments, penalties, permits, attorneys' fees and consultants' fees, expenses and/or liabilities arising out of, involving or in dealing with the Office Building Project, the conduct of lessor's principals, and out of any default or breach by Lessor in the performance in a timely manner of any obligation of Lessor's part to be performed under this Lease. The foregoing shall include, but shall not be limited to the defense or pursuit of any claim or any claim or any action or proceeding involved therein, whether or not (in the case of claims made against Lessee), litigated and/or reduced to judgment, and whether well-founded or not. In case any claim or any action or proceeding is brought against Lessee by reason of the foregoing matters, Lessor, upon notice from Lessee, shall defend the same at Lessor's expense by counsel reasonably satisfactory to Lessee and lessee shall cooperate with Lessor in such defense. Lessee shall not be required to first have paid any such claim in order to be so indemnified. 71. Hazardous Materials. Lessor represents and warrants to Lessee that, as of the commencement of the term of this Lease, there is no evidence of Hazardous Material located on, under, about or near the Office Building Project or the lot or lots on which the Office Building Project is located, or has at any time been generated, stored, treated, deposited, discharged, placed or disposed of, under, about or near the Office Building Project or the lot or lots on which the Office Building Project is located, and Lessor's consultant, ATC Associates, Inc. will issue a warranty letter to this effect to the benefit of Lessee. Lessor further represents and warrants to Lessee that, as of the commencement of the term of this Lease, the Office Building Project and the lot or lots on which the Office Building Project is located are in compliance with all federal, state and local laws, ordinances, rules, regulations and codes relating to Hazardous Material. Lessor agrees to indemnify, defend, protect and hold harmless Lessee from and against any and all claims, demands, liabilities, obligations, damages, causes of action, judgments, losses, penalties, fines, cost and expenses (including, without limitation, the fees of attorneys, consultants and experts and the costs associated with any investigative, clean-up, remedial, removal or restoration work) which Lessee may incur of suffer by reason of or in connection with (a) any breach of Lessor's representations and warranties contained in this paragraph, (b) any Hazardous Material existing on the Office Building Project as of the Commencement Date or (c) the generation, storage, treatment, deposit, discharge, placement or disposal of any Hazardous Material during the term of this Lease on, under, about or near the Office Building Project or the lot or lots on which the Office Building Project is located by any person or entity other than Lessee or Lessee's employees, agents, representatives, contractors or invitees. As used in this paragraph, the term "Hazardous Material" means any hazardous or toxic substance, material or waste including, without limitation, petroleum, petroleum products, asbestos and any substance, material, waste or other matter which is designated as hazardous or toxic (or similarly designated) under any federal, state or local laws, ordinances, rules, regulations or codes. The provisions of this paragraph shall survive the expiration or any earlier termination of the term of this Lease. 73. Additional Mezzanine Space. Lessor hereby agrees that Lessee may improve the Premises at Lessee's sole cost and expense at any time during the term of the Lease by adding additional mezzanine space. Lessor hereby agrees during the term of the lease or any extensions thereof that Lessor will not adjust the rent, security depositor Lessee's share of Operating Expenses for said additional mezzanine space. 74. Conflict. In the event of any conflict between the provisions of this Addendum and any other provisions of this Lease, the provisions of this Addendum shall control. EX-10.15 7 ADMISSION-PARTNER/AMENDMENT-PARTNERSHIP AGREEMENT Exhibit 10.15 Admission of Partner/Amendment of Partnership Agreement ADMISSION OF PARTNER/AMENDMENT TO PARTNERSHIP AGREEMENT This Admission of Partner/Amendment to Partnership Agreement ("Agreement") is made this 14th day of October, 1998, by and between ICC Desiccant Technologies, Inc., a Delaware corporation ("I Partner"), Wilshap Investments, L.L.C., a Delaware limited liability company ("Wilshap"), Engelhard DT, Inc., a Delaware corporation ("E Partner"), and Fresh Air Solutions, L.P., a Pennsylvania limited partnership ("FAS"). BACKGROUND I Partner is the sole general partner of FAS with a 1% general partnership interest and a limited partner of FAS with a 89% limited partnership interest therein. E Partner is a limited partner with a 10% limited partnership interest in FAS. I Partner and Wilshap are parties to that certain Purchase and Sale Agreement Relating to Partnership Interests in Fresh Air Solutions, L.P. (the "Purchase and Sale Agreement") of even date herewith. Unless otherwise defined, capitalized terms used herein shall have the meaning ascribed to them in the Purchase and Sale Agreement. Pursuant to the Purchase and Sale Agreement, I Partner has agreed to sell, transfer and convey to Wilshap certain of its Partnership Interests in FAS, consisting of a 1% general partnership interest and a 56.6% limited partnership interest in FAS, and Wilshap has agreed to assume all of the rights and obligations arising in connection with such Partnership Interests. To effectuate the terms of the Purchase and Sale Agreement and in connection with the execution and delivery of the Assignment and Assumption of FAS Partnership Interest Agreement of even date herewith by and between I Partner and Wilshap, Wilshap desires to be admitted, and the parties desire to admit Wilshap, as the sole general partner and as a limited partner of FAS, all as more fully set forth in this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereby agree as follows: Admission of Partner. Wilshap is hereby (i) admitted to FAS as a Substituted General Partner (as such term is defined in the Fresh Air Solutions, L.P. Limited Partnership Agreement dated February 27, 1998 (the "Partnership Agreement")) to replace I Partner as the sole general partner of FAS with a 1% general partnership interest in FAS, and (ii) admitted to FAS as a Limited Partner of FAS with a 56.6% limited partnership interest therein, in each case subject to the terms and conditions of the Partnership Agreement. Acceptance. Wilshap hereby acknowledges, adopts and agrees to be bound by all of the terms, conditions and covenants of the Partnership Agreement both (i) as a Substituted General Partner to replace I Partner as the sole general partner of FAS with a 1% general partnership interest therein, and (ii) as a Limited Partner of FAS with a 56.6% limited partnership interest therein. Amendment to Partnership Agreement. The parties hereby amend the Partnership Agreement as follows: Exhibit 1 of the Partnership Agreement is hereby amended and restated as follows: Schedule of Partners: General Partner Number of Units --------------- --------------- Wilshap Investments, LLC 1.0 Limited Partners ---------------- Wilshap Investments, LLC 56.6 ICC Desiccant Technologies, Inc. 32.4 Engelhard DT, Inc. 10.0 ----- Total 100.0 ===== All references to the "General Partner" shall refer solely and exclusively to Wilshap Investments, LLC. All references to "Limited Partners" shall refer to ICC Desiccant Technologies, Inc., Wilshap Investments, LLC, and Engelhard DT, Inc. Article IX of the Partnership Agreement is hereby deleted in its entirety. In all other respects, the Partnership Agreement shall be and is hereby ratified, confirmed and approved, the same to continue in full force and effect, except as modified herein. Amendment to Certificate of Limited Partnership. Wilshap shall promptly cause an amendment to the Certificate of Limited Partnership of FAS reflecting the admission of Wilshap as the sole general partner of FAS to be filed in the office of the Secretary of State of the Commonwealth of Pennsylvania as required under the Pennsylvania Revised Uniform Limited Partnership Act, as amended. Timing and Effect. The Parties hereby acknowledge and agree that Wilshap's admission as a general partner and as a limited partner of FAS pursuant to this Agreement is being effected immediately upon giving effect to the Transaction contemplated by the Purchase and Sale Agreement. IN WITNESS WHEREOF, each party has executed this Admission of Partner/Amendment to Partnership Agreement as of the day and year first above written. ICC DESICCANT TECHNOLOGIES, INC. By: _____________________________________ Glenn S. Meyers Executive Vice President WILSHAP INVESTMENTS, LLC By: _____________________________________ William A. Wilson President FRESH AIR SOLUTIONS, L.P., By: ICC DESICCANT TECHNOLOGIES, INC., Withdrawing General Partner By: _____________________________________ Glenn S. Meyers Executive Vice President By: WILSHAP INVESTMENTS, LLC, Substituted General Partner By: _____________________________________ William A. Wilson President ENGELHARD DT, INC. By: _____________________________________ Name: Title: EX-10.21 8 MATERIAL CONTRACTS Exhibit 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. AGREEMENT AND PLAN OF MERGER AMONG RARE MEDIUM, INC., ICC TECHNOLOGIES, INC., RARE MEDIUM TEXAS I, INC, BIG HAND, INC. AND THE STOCKHOLDERS OF BIG HAND, INC. NAMED HEREIN March 5, 1999 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is entered into as of March 5, 1999 by and among ICC Technologies, Inc., a Delaware corporation ("Parent"), Rare Medium, Inc., a New York corporation and a wholly-owned subsidiary of Parent ("Rare Medium" or "Buyer"), Rare Medium Texas I, Inc., a Delaware corporation and a wholly owned subsidiary of the Buyer (the "Acquisition Subsidiary"), Big Hand, Inc., a Texas corporation (the "Company"), and the stockholders of the Company named on the signature page hereto (each a "Principal" and collectively, the "Principals"). The Buyer, Parent, the Acquisition Subsidiary, the Company, and the Principals are referred to herein individually as a "Party" and collectively as the "Parties." This Agreement contemplates a tax-free merger of the Company into the Acquisition Subsidiary. In such merger, the stockholders of the Company will receive capital stock of the Parent in exchange for their capital stock of the Company. Now, therefore, in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows: THE MERGER The Merger. Upon and subject to the terms and conditions of this Agreement, the Company shall merge with and into the Acquisition Subsidiary (with such merger referred to herein as the "Merger") at the Effective Time (as defined below). From and after the Effective Time, the separate corporate existence of the Company shall cease and the Acquisition Subsidiary shall continue as the surviving corporation in the Merger (the "Surviving Corporation"). The "Effective Time" shall be the time at which the Company and the Acquisition Subsidiary file the certificate(s) of merger or other appropriate documents prepared and executed in accordance with the relevant provisions of each of the Delaware General Corporation Law with the Secretary of State of the State of Delaware and the Texas Business Corporation Act (the "Texas Act") with the Secretary of State of the State of Texas (collectively, the "Certificates of Merger"). The Merger shall have the effects of a merger as set forth in the Delaware General Corporation Law and the Texas Act. 1.1 The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Morrison & Foerster LLP in New York, New York, commencing at 10:00 a.m. local time on March 26, 1999 (provided that the physical presence of a party shall not be required thereat if all appropriate documents required to be delivered by such party have been received by mail or overnight courier), or, if all of the conditions to the obligations of the Parties to consummate the transactions contemplated hereby have not been satisfied or waived by such date, on such mutually agreeable later date as soon as practicable after the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (the "Closing Date"). 1.2 Actions at the Closing. At the Closing, (a) the Company shall deliver to the Buyer and the Acquisition Subsidiary the various certificates, instruments and documents referred to in Section 5.2, (b) the Buyer, the Acquisition Subsidiary and Parent shall deliver to the Company the various certificates, instruments and documents referred to in Section 5.3, (c) the Company shall file with the Secretary of State of the State of Texas a certificate of merger with respect to the Merger as required by the Texas Act and the Acquisition Subsidiary shall file with the Secretary of State of the State of Delaware a certificate of merger with respect to the Merger as required by the Delaware General Corporation Law, (d) each stockholder of the Company, other than holders of Dissenting Shares (as defined in Section 1.6), shall deliver to the Buyer for cancellation the certificate(s) representing his or her Company Shares (as defined in Section 1.5(a)), (e) Parent shall authorize the transfer agent for its shares of stock (the "Exchange Agent") to issue to each holder of Company Shares who has delivered for cancellation his or its certificates for Company Shares ("Certificates") pursuant to clause (d) of this Section certificate(s) for the Initial Shares (as defined below) as provided in Section 1.5 below, and (e) the Buyer, Parent, the Principals and the Escrow Agent (as defined therein) shall execute and deliver the Escrow Agreement attached hereto as Exhibit A (the "Escrow Agreement") and the Buyer shall deliver to the Escrow Agent a certificate for the Escrow Shares (as defined below) being placed in escrow (the "Escrow") on the Closing Date pursuant to Section 1.9. 1.3 Additional Action. The Surviving Corporation may, at any time after the Effective Time, take any action, including executing and delivering any document, in the name and on behalf of either the Company or the Acquisition Subsidiary, in order to consummate the transactions contemplated by this Agreement. 1.4 Conversion of Shares; Merger Consideration. At the Effective Time, by virtue of the Merger and without any action on the part of any Party or the holder thereof: Each share of common stock, $.01 par value per share, of the Company ("Company Shares") issued and outstanding immediately prior to the Effective Time (other than Company Shares owned beneficially by the Buyer, Parent, or the Acquisition Subsidiary, Dissenting Shares (as defined in Section 1.6) and Company Shares held in the Company's treasury) shall be converted into and represent the right to receive (subject to the provisions of Section 1.9) the following (collectively, the "Merger Consideration"): such number of shares of common stock, $.01 par value per share, of Parent ("Parent Common Stock") as is equal to the fraction: (x) the numerator of which shall be a fraction equal to (A) 95% of the Purchase Price (as defined below) divided by (B) the Closing Price (as defined below); and (y) the denominator of which shall be the Total Outstanding Company Shares (as defined below). For purposes of this Agreement, the following terms shall have the following meanings: "Total Outstanding Company Shares" shall mean the total number of Company Shares outstanding at the Effective Time (after giving effect to (x) the exercise of all options to purchase Company Shares issued by the Company pursuant to its stock option plans or otherwise ("Options") as provided in Section 1.10, and (y) the conversion or exercise of all outstanding securities convertible or exercisable into Company Shares); "Purchase Price" shall mean the product of (x) two (2) and (y) the Gross Revenues (as herein defined) of the Company for the twelve calendar months ending February 28, 1999 (subject to adjustment as provided in Section 1.5(f)); "Gross Revenues" shall mean the gross revenues of the Company and its consolidated subsidiaries determined on an accrual basis in accordance with U.S. generally accepted accounting principles ("GAAP"); and "Closing Price" shall mean the lower of (x) four dollars and fifty cents ($4.50) or (y) the average of the last reported per share sale price of Parent Common Stock over the ten (10) trading days prior to, but not including, the Closing Date as reported in The Wall Street Journal or its successor. Stockholders of record of the Company (the "Company Stockholders") shall be entitled to receive promptly following the Closing all of the shares of Parent Common Stock into which their Company Shares were converted pursuant to this Section 1.5(a); provided, that shares of Parent Common Stock with an aggregate value of $800,000 (the "Escrow Shares"), based on the Closing Price, which would otherwise have been issued to the Principals shall instead be delivered to the Escrow Agent and be held in escrow subject to the Escrow Agreement. Such total number of shares of Parent Common Stock minus the Escrow Shares shall be referred to herein as the "Initial Shares". The Initial Shares and the Escrow Shares shall together be referred to herein as the "Merger Shares." (a) Each Company Share held in the Company's treasury immediately prior to the Effective Time and each Company Share owned beneficially by the Buyer, Parent or the Acquisition Subsidiary shall be cancelled and retired without payment of any consideration therefor. (b) Each share of common stock, $.01 par value per share, of the Acquisition Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into and thereafter evidence one share of common stock, $.01 par value per share, of the Surviving Corporation. (c) An independent certified public accounting firm selected by Buyer shall as soon as practicable after the Closing conduct a post-Closing audit of the Company's balance sheet as of the Closing Date (such balance sheet, as adjusted to the extent necessary to enable such accounting firm to issue an unqualified opinion, the "Closing Balance Sheet") and the income statement used to determine the Purchase Price (such income statement, as adjusted to enable such accounting firm to issue an unqualified opinion, the "Income Statement"). If the net worth of the Company as determined pursuant to the Closing Balance Sheet (the "Audited Closing Net Worth") was less than $100,000.00 as of the Closing Date, the Purchase Price shall be reduced by an amount equal to the difference between $100,000.00 and the Audited Closing Net Worth, with such reduction in the 2 Purchase Price offset against, and recoverable by Buyer from, the Escrow Shares held in escrow pursuant to the Escrow Agreement. If the Gross Revenues of the Company as determined pursuant to the Income Statement were less than the Gross Revenues used to initially determine the Purchase Price for purposes of the Closing, the Purchase Price shall be recalculated based upon the Income Statement and any reduction in the Purchase Price shall be offset against, and recoverable by Buyer from, the Escrow Shares pursuant to the Escrow Agreement. If the Gross Revenues of the Company as determined pursuant to the Income Statement were greater than the Gross Revenues used to initially determine the Purchase Price for purposes of the Closing, the Purchase Price shall be recalculated based upon the Income Statement and shares of Parent Common Stock with respect to any such increase in the Purchase Price shall be issued to the former Company Stockholders in accordance with Section 1.5 as soon as is practicable following the determination of such adjustment. Dissenting Shares. For purposes of this Agreement, "Dissenting Shares" means Company Shares held as of the Effective Time by a Company Stockholder who has not voted such Company Shares in favor of the adoption of this Agreement and the Merger and with respect to which appraisal shall have been duly demanded and perfected in accordance with the Texas Act and not effectively withdrawn or forfeited prior to the Effective Time. Dissenting Shares shall not be converted into or represent the right to receive the Merger Consideration, unless such Company Stockholder shall have forfeited his right to appraisal under the Texas Act or withdrawn, with the consent of the Company, his demand for appraisal. If such Company Stockholder has so forfeited or withdrawn his right to appraisal of Dissenting Shares, then (i) as of the occurrence of such event, such holder's Dissenting Shares shall cease to be Dissenting Shares and shall be converted into and represent the right to receive the Merger Consideration issuable in respect of such Company Shares pursuant to Sections 1.5(a), and (ii) promptly following the occurrence of such event, the Buyer shall deliver to the Exchange Agent a certificate representing such percentage of the Merger Shares to which such holder is entitled pursuant to Sections 1.5(a) as is identical to the percentage of such shares delivered to the Exchange Agent at (or promptly following) the Closing with respect to the Company Stockholders other than the Principals (which shares shall be considered Initial Shares for all purposes of this Agreement). (d) The Company shall give the Buyer (i) prompt notice of any written demands for appraisal of any Company Shares, withdrawals of such demands, and any other instruments that relate to such demands received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the Texas Act. The Company shall not, except with the prior written consent of the Buyer, make any payment with respect to any demands for appraisal of Company Shares or offer to settle or settle any such demands. Fractional Shares. No certificates or script representing fractional Merger Shares shall be issued to former Company Stockholders upon the surrender for exchange of Certificates, and such former Company Stockholders shall not be entitled to any voting rights, rights to receive any dividends or distributions or other rights as a stockholder of the Buyer with respect to any fractional Merger Shares that would otherwise be issued to such former Company Stockholders. In lieu of any fractional Merger Shares that would otherwise be issued, each former Company Stockholder that would have been entitled to receive a fractional Merger Share shall, upon proper surrender of such person's Certificates, receive such whole number of Merger Shares as is equal to the precise number of Merger Shares to which such person would be entitled, rounded up or down to the nearest whole number (with a fractional interest equal to .5 rounded to the nearest odd number); provided that each such holder shall receive at least one Initial Share or Escrow Share, as the case may be. Dividends. No dividends or other distributions that are payable to the holders of record of Parent Common Stock as of a date on or after the Closing Date shall be paid to former Company Stockholders entitled by reason of the Merger to receive Merger Shares until such holders surrender their Certificates. Upon such surrender, the Buyer shall pay or deliver to the persons in whose name the certificates representing such Merger Shares are issued any dividends or other distributions that are payable to the holders of record of Parent Common Stock as of a date on or after the Closing Date and which were paid or delivered between the Effective Time and the time of such surrender; provided that no such person shall be entitled to receive any interest on such dividends or other distributions. 3 Escrow. On the Closing Date, the Buyer, Parent, the Escrow Agent and the Principals shall enter into the Escrow Agreement. On the Closing Date, (i) the Buyer shall deliver to the Escrow Agent a certificate (issued in the name of the Principals pro-rata based on the number of Company Shares held by each such Principal) representing the Escrow Shares, as described in Sections 1.5(a), for the purpose of securing the indemnification obligations of the Principals set forth in this Agreement and (ii) the Principals shall deliver to the Escrow Agent a stock power in blank, duly executed with signatures medallion guaranteed. The Escrow Shares shall be held by the Escrow Agent under the Escrow Agreement pursuant to the terms thereof. The Escrow Shares shall be held as a trust fund and shall not be subject to any lien, attachment, trustee process or any other judicial process of any creditor of any party, and shall be held and disbursed solely for the purposes and in accordance with the terms of the Escrow Agreement. Options and Bonus Pool. (e) As of immediately prior to the Effective Time, all Options (as defined above), whether vested or unvested, shall either be cancelled or exercised in full. With respect to any such Options that are exercised, the full exercise price in respect thereof shall be remitted to the Company. (f) The Company shall obtain, prior to the Closing, the agreement from each holder of an Option that all Options held by such holder shall either be cancelled or exercised in full as provided in this Section (unless such agreement is not required under the terms of the applicable agreement, instrument or plan to effectuate such cancellation or exercise). The Parties agree that shares of Parent Common Stock equal to (x) 5% of the Purchase Price divided by (y) the Closing Price (as defined in Section 1.5(b)) (the "Bonus Pool") shall be issued, for no additional consideration, by Parent promptly following the Effective Time to certain designated employees of the Surviving Corporation pursuant to a schedule to be agreed upon between Buyer and the Principals (the "Designated Employees"); provided, that, such shares shall be issued pursuant to restricted stock agreements to be entered into between Parent and each Designated Employee, which agreements shall provide, in addition to such other terms and conditions as are customary and reasonable, (i) that such shares shall vest on the first anniversary of the Effective Time (the "Vesting Date"), (ii) that if any such Designated Employee is not an employee of either the Surviving Company, Rare Medium or Parent (or any of their successors) at any time prior to the Vesting Date, such shares as shall have been allocated to such Designated Employee hereunder shall be forfeited by such employee and returned to Parent; and (iii) that prior to the Vesting Date no Designated Employee shall (x) sell, offer to sell, pledge, transfer or otherwise dispose of any shares of Parent Common Stock received by him or her in respect of the Bonus Pool, or (y) engage in any transaction with respect to any such shares the intent or effect of which is to reduce the risk of owning such shares (including, by way of example and not limitation, engaging in put, call, short-sale, straddle or similar market transactions). Any shares in the Bonus Pool forfeited by a Designated Employee as provided above (a "Former Designated Employee") shall be cancelled by Buyer and, promptly following the Vesting Date, all such forfeited shares shall be reissued to the Company Stockholders pro rata based upon the number of Company Shares held by each such Company Stockholder as of the Effective Time; and such Former Designated Employees shall no longer be deemed Designated Employees and shall have no rights to or in respect of the Bonus Pool. Certificate of Incorporation. The Certificate of Incorporation of the Surviving Corporation shall be the same as the Certificate of Incorporation of the Acquisition Subsidiary immediately prior to the Effective Time. 1.5 By-laws. The By-laws of the Surviving Corporation shall be the same as the By-laws of the Acquisition Subsidiary immediately prior to the Effective Time. 1.6 Directors and Officers. The officers and directors of the Acquisition Subsidiary shall become the officers and directors of the Surviving Corporation as of the Effective Time. 1.7 No Further Rights. From and after the Effective Time, no Company Shares shall be deemed to be outstanding, and holders of Certificates shall cease to have any rights with respect thereto, except as provided herein or by law. 1.8 Closing of Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of Company Shares shall thereafter be made. If, after the Effective Time, Certificates are presented to the Surviving Corporation or the Exchange Agent, they shall be cancelled and exchanged for the Merger Consideration in accordance herewith (subject to Section 1.9) and subject to applicable law in the case of Dissenting Shares. 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPALS Except as set forth in the Disclosure Schedule attached hereto (which schedule shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article II, and the disclosures in any paragraph of the Disclosure Schedule shall qualify only the corresponding paragraph in this Article II, the "Disclosure Schedule"), the Company and the Principals jointly and severally represent and warrant to Buyer, Parent and Acquisition Subsidiary, as of the date of this Agreement and as of the Closing (which representations and warranties shall survive the Closing to the extent provided in Section 6.3 hereof), as follows: Organization, Qualification and Corporate Power. The Company is a corporation duly organized, validly existing and in corporate and tax good standing under the laws of the State of Texas. The Company is duly qualified to conduct business and is in corporate and tax good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, business prospects, assets, results of operations or financial condition (a "Material Adverse Effect") of the Company. The Company has all requisite corporate power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it. The Company has furnished to the Buyer true and complete copies of its Certificate of Incorporation and By-laws, each as amended and as in effect on the date hereof. The Company is not in default under or in violation of any provision of its Certificate of Incorporation or By-laws. 1.9 Capitalization. The authorized capital stock of the Company consists solely of 20,000,000 shares of Common Stock, $.01 par value per share, of which 15,780,250 shares are issued and outstanding, and no shares of such stock are held in the treasury of the Company. Section 2.2 of the Disclosure Schedule sets forth a complete and accurate list of (i) all stockholders of record of the Company, indicating the number of Company Shares held of record by each stockholder, and (ii) all holders of Options, indicating the number of Company Shares subject to each Option and the exercise price thereof. Except as set forth on Section 2.2 of the Disclosure Schedule, to the knowledge of the Company each stockholder of the Company is an "accredited investor" within the definition set forth in Rule 501(a) promulgated under the Securities Act of 1933, as amended (the "Securities Act"). All of the issued and outstanding Company Shares are, and all Company Shares that may be issued upon exercise of Options will be, duly authorized, validly issued, fully paid, nonassessable and free of all preemptive rights. There are no outstanding or authorized options, warrants, rights, agreements or commitments to which the Company is a party or which are binding upon the Company providing for the issuance, disposition or acquisition of any of its capital stock, other than the Options listed in Section 2.2 of the Disclosure Schedule. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company. There are no agreements, voting trusts, proxies, or understandings with respect to the voting, or registration under the Securities Act, of any Company Shares. All of the issued and outstanding Company Shares were issued in compliance with applicable federal and state securities laws. (a) Except as set forth in this Section 2.2 or as reserved for future grants of options under any stock option plan of the Company, there are no equity securities of any class of the Company or any Subsidiary (as defined in Section 2.5 below) or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as set forth in this Section or the Disclosure Schedule, there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which the Company or any Subsidiary is a party or by which it is bound obligating the Company or any Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company or any Subsidiary or obligating either of them to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement, including as a result of the transaction contemplated by this Agreement. Authorization of Transaction. The Company and the Principals have all requisite power and authority to execute and deliver this Agreement and, subject to obtaining the Requisite Stockholder Approval, to perform their 5 respective obligations hereunder. The execution and delivery of this Agreement and, subject to the adoption of this Agreement and the approval of the Merger by a majority of the votes represented by the outstanding Company Shares entitled to vote on this Agreement and the Merger (the "Requisite Stockholder Approval"), the performance by the Company and the Principals of this Agreement and the consummation by the Company and the Principals of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company and the Company Stockholders. This Agreement has been duly and validly executed and delivered by the Company and the Principals and, assuming the due authorization, execution and delivery hereof by each of Buyer, Parent and Acquisition Subsidiary and subject to obtaining the Requisite Stockholder Approval, constitutes a valid and binding obligation of the Company and each Stockholder, enforceable against each of them in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditor's rights generally, or by general equitable principles, and to the extent any indemnification or contribution provisions thereof may be limited by applicable federal or state securities laws. 1.10 Noncontravention. Subject to the filing of the Certificates of Merger as required by applicable law and obtaining the Requisite Stockholder Approval and except as set forth on Section 2.4 of the Disclosure Schedule, neither the execution and delivery of this Agreement by the Company, nor the consummation of the transactions contemplated hereby, will (a) conflict with or violate any provision of the charter or By-laws of the Company, (b) require on the part of the Company or any Subsidiary any filing with, or any permit, authorization, consent or approval of, any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory authority or agency (a "Governmental Entity"), (c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice, consent or waiver under, any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest (as defined below) or other arrangement to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or to which any of their assets is subject, (d) result in the imposition of any Security Interest upon any assets of the Company or any Subsidiary or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, any Subsidiary or any of their respective properties or assets. For purposes of this Agreement, "Security Interest" means any mortgage, pledge, security interest, encumbrance, charge, or other lien (whether arising by contract or by operation of law), other than (i) mechanic's, materialmen's, and similar liens, (ii) liens arising under worker's compensation, unemployment insurance, social security, retirement, and similar legislation, and (iii) liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the ordinary course of business consistent with past custom and practice and in amount (including with respect to frequency and amount) ("Ordinary Course of Business") of the Company and which would not have a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole. Subsidiaries. Section 2.5 of the Disclosure Schedule sets forth (a) the name of each subsidiary of the Company (individually a "Subsidiary" and collectively the "Subsidiaries"); (b) the name of each other corporation, partnership or other entity in which the Company has, directly or indirectly, an equity interest; (c) in the case of each corporation specified in (a) and (b) above (i) the jurisdiction of its incorporation; (ii) the capitalization thereof and the percentage of each class of voting capital stock owned directly or indirectly by the Company; (iii) the names and percentage ownership of all record and beneficial owners of shares of capital stock of each such corporation; (iv) a description of any limitations on the holder's ability to vote or alienate such securities; (v) a description of any outstanding options, warrants or other rights to purchase or acquire securities of such corporation, including those with respect to securities held by the Company; (vi) a description of any other charge or impediment which would materially limit or impair the ownership of such entity or interest or the ability effectively to exercise the full rights of ownership of such entity or interest; and (vii) a description of any contracts, commitments, understandings, arrangements or restrictions by which any such corporation is bound to issue any additional shares of its capital stock; and (d) in the case of each unincorporated entity specified pursuant to (b) above, the equivalent of the information provided pursuant to the preceding clause (c) with respect to corporate entities. Except as set forth in Section 2.5 of the Disclosure Schedule, all shares of capital stock of each corporation and ownership interests of each unincorporated entity identified in the 6 preceding sentence are owned directly or indirectly by the Company free and clear of all mortgages, pledges, liens, security interests, encumbrances, restrictions or charges of any kind. Each Subsidiary (i) is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (ii) has full power and authority to carry on its business as it is now being conducted and to own, lease or operate its properties and assets; and (iii) is duly qualified or licensed to do business as a foreign corporation in good standing in every jurisdiction in which the character or location of the properties and assets owned, leased or operated by it or the conduct of its business requires such licensing or qualification, except where the failure to be so qualified would not have a Material Adverse Effect on such Subsidiary. All of the outstanding capital stock of each Subsidiary is duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. The Company has heretofore delivered to Buyer complete and correct copies of the charter and bylaws of each Subsidiary, as presently in effect. 1.11 Financial Statements. The Company has provided to the Buyer the consolidated balance sheets and consolidated statements of income, changes in stockholders' equity and cash flows of the Company as of and for each of the latest three completed fiscal years (the balance sheet included therein and dated as of December 31, 1998 being referred to herein as (the "Most Recent Balance Sheet"). Such financial statements (collectively, the "Financial Statements") have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, fairly present the consolidated financial condition, results of operations and cash flows of the Company and the Subsidiaries as of the respective dates thereof and for the periods referred to therein and are consistent with the books and records of the Company and the Subsidiaries. 1.12 Absence of Certain Changes. Since the date of the Most Recent Balance Sheet, (a) there has not been any material adverse change in the assets, business, financial condition or results of operations of the Company or the Subsidiaries, taken as a whole, nor has there occurred any event or development which could reasonably be foreseen to result in such a material adverse change in the future, and (b) neither the Company nor any Subsidiary has taken any of the actions set forth in Section 4.5. 1.13 Undisclosed Liabilities. The Company has no liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due), except for (a) liabilities shown on the Most Recent Balance Sheet, (b) liabilities which have arisen since the Most Recent Balance Sheet in the Ordinary Course of Business and not in excess of $25,000 in the aggregate or $2,500 individually and (c) contractual liabilities incurred in the Ordinary Course of Business which are not required by GAAP to be reflected on a balance sheet and which are disclosed on Section 2.15 of the Disclosure Schedule. 1.14 Tax Matters. Each of the Company and each Subsidiary has filed all Tax Returns (as defined below) that it was required to file prior to the date of this Agreement and all such Tax Returns were correct and complete in all material respects. The Company and the Subsidiaries have paid all Taxes (as defined below) that are shown to be due on any such Tax Returns. The unpaid Taxes of the Company for tax periods through the date of the Most Recent Balance Sheet do not exceed the accruals and reserves for Taxes set forth on the Most Recent Balance Sheet. The Company has no actual or potential liability for any Tax obligation of any taxpayer (including without limitation any affiliated group of corporations or other entities that included the Company during a prior period) other than the Company. All Taxes that either the Company or any Subsidiary is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Entity. For purposes of this Agreement, "Taxes" means all taxes, charges, fees, levies or other similar assessments or liabilities, including without limitation income, gross receipts, ad valorem, premium, value-added, excise, real property, personal property, sales, use, transfer, withholding, employment, payroll and franchise taxes imposed by the United States of America or any state, local or foreign government, or any agency thereof, or other political subdivision of the United States or any such government, and any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any tax or any contest or dispute thereof. For purposes of this Agreement, "Tax Returns" means all reports, returns, declarations, statements or other information required to be supplied to a taxing authority in connection with Taxes. (a) The Company has delivered to the Buyer correct and complete copies of all federal income Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by the 7 Company or any Subsidiary since January 1, 1993. The federal income Tax Returns of the Company and its Subsidiaries have never been audited by the Internal Revenue Service. No examination or audit of any Tax Returns of the Company or any Subsidiary by any Governmental Entity is currently in progress or, to the knowledge of the Company and the Principals, threatened or contemplated. Neither the Company nor any Subsidiary has waived any statute of limitations with respect to taxes or agreed to an extension of time with respect to a tax assessment or deficiency. (b) Neither the Company nor any Subsidiary is a "consenting corporation" within the meaning of Section 341(f) of the Code and none of their respective are subject to an election under Section 341(f) of the Code. Neither the Company nor any Subsidiary has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code. Neither the Company nor any Subsidiary is a party to any Tax allocation or sharing agreement. (c) The Company is not or has never been a member of an "affiliated group" of corporations (within the meaning of Section 1504 of the Code). Neither the Company nor any Subsidiary has made an election under Treasury Reg. Section 1.1502-20(g). Neither the Company nor any Subsidiary is nor has any of them ever been required to make a basis reduction pursuant to Treasury Reg. Section 1.1502-20(b) or Treasury Reg. Section 1.337(d)-2T(b). Assets. The Company and its Subsidiaries own or lease all tangible assets necessary and sufficient for the conduct of their respective businesses as presently conducted and as presently proposed to be conducted. Each such tangible asset is free from material defects, has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it presently is used. No asset of the Company or any Subsidiary (tangible or intangible) is subject to any Security Interest. 1.15 Real Property. Neither the Company nor any Subsidiary owns any real property. 1.16 Intellectual Property. Each of the Company and its Subsidiaries owns or has the right to use all Intellectual Property (as defined below) incorporated in their respective products or necessary for, or used in, the operation of their respective businesses as presently conducted (the "Company Intellectual Property"). Each item of Company Intellectual Property will be owned or available for use by the Surviving Corporation on substantially identical terms and conditions immediately following the Closing. The Company and the Subsidiaries each has taken all reasonable measures to protect the proprietary nature of each item of Company Intellectual Property, and to maintain in confidence all trade secrets and confidential information, that it owns or uses, including, without limitation, maintaining all registrations and paying all fees associated therewith. To the knowledge of the Company and the Principals, (a) no other person or entity has any rights to any of the Company Intellectual Property owned by the Company or any Subsidiary (except pursuant to agreements or licenses specified in Section 2.12(c) of the Disclosure Schedule), and (b) no other person or entity is infringing, violating or misappropriating any of the Company Intellectual Property. The Company has made available to the Buyer complete and accurate copies of all written documentation in the Company's or any Subsidiary's possession relating to claims or disputes known to any of them concerning any item of Company Intellectual Property. For purposes of this agreement, "Intellectual Property" means all (i) patents and patent applications, (ii) copyrights and registrations thereof, (iii) mask works and registrations and applications for registration thereof, (iv) computer software, data and documentation, (v) trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice, know-how, manufacturing and production processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (vi) trademarks, service marks, trade names and applications and registrations therefor and (vii) other proprietary rights relating to any of the foregoing. Section 2.12(a) of the Disclosure Schedule lists each patent, patent application, copyright registration, mask work registration or application therefor, and trademark or service mark registration or application therefor of the Company or any Subsidiary. None of the activities or business presently conducted by the Company or any Subsidiary infringes or violates, or constitutes a misappropriation of, any 8 Intellectual Property rights of any person or entity. Neither the Company nor any Subsidiary has received any complaint, claim or notice alleging any such infringement, violation or misappropriation and no such claim has been threatened by any third party. Section 2.12(c) of the Disclosure Schedule identifies each license or other agreement (or type of license or other agreement) pursuant to which the Company or any Subsidiary has licensed, distributed or otherwise granted any rights to any third party with respect to, any of Company Intellectual Property. Section 2.12(d) of the Disclosure Schedule identifies each item of Company Intellectual Property that is owned by a party other than the Company or any Subsidiary, and the license or agreement pursuant to which the Company or any Subsidiary uses it (excluding off-the-shelf software programs licensed by the Company or any Subsidiary pursuant to "shrink wrap" licenses). Neither the Company nor any Subsidiary has disclosed the source code for any of the software owned by the Company or any Subsidiary and incorporated in any of their products or necessary for the operation of their respective businesses as presently conducted (the "Software") or, other than to the creators or persons involved in the creation of such code, other confidential or proprietary information constituting, embodied in or pertaining to the Software to any person or entity and has taken reasonable measure to prevent such disclosure. All of the Software that is, individually or in the aggregate, material to the Company's business has been created by employees of the Company or a Subsidiary within the scope of their employment or by independent contractors who have executed agreements expressly assigning all right, title and interest in the Software to the Company or a Subsidiary. Inventory. All inventory of the Company and the Subsidiaries, whether or not reflected on the Most Recent Balance Sheet, consists of a quality and quantity useable and saleable in the Ordinary Course of Business, except for obsolete items and items of below-standard quality, all of which have been written-off or written-down to net realizable value on the Most Recent Balance Sheet. The quantities of each type of inventory, whether raw materials, work-in-process or finished goods, are not excessive in the present circumstances of the Company and its Subsidiaries. Section 2.13 of the Disclosure Schedule lists all of the Company's and each Subsidiary's work in process (identified by project), the percentage of completion of each such project, and the total agreed upon retail price the Company expects to receive with respect to each such project. 1.17 Real Property Leases. Section 2.14 of the Disclosure Schedule lists and describes briefly all real property leased or subleased to the Company or any Subsidiary and lists the term of such lease, any extension and expansion options, and the rent payable thereunder. The Company has delivered to the Buyer correct and complete copies of the leases and subleases (as amended to date) listed in Section 2.14 of the Disclosure Schedule. With respect to each lease and sublease listed in Section 2.14 of the Disclosure Schedule: the lease or sublease is legal, valid, binding, enforceable and in full force and effect; the lease or sublease will continue to be legal, valid, binding, enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing, subject to any consents with respect thereto listed on Section 2.4 of the Disclosure Schedule; no party to the lease or sublease is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification, or acceleration thereunder; there are no disputes, oral agreements or forbearance programs in effect as to the lease or sublease; neither the Company nor any Subsidiary has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; all facilities leased or subleased thereunder are supplied with utilities and other services necessary for the operation of said facilities; and to the knowledge of the Company and the Principals, the owner of the facility leased or subleased has good and clear record and marketable title to the parcel of real property, free and clear of any Security Interest, easement, covenant or other restriction, except for recorded easements, covenants, and other restrictions which do not impair the intended uses, occupancy or value of the property subject thereto. Contracts. Section 2.15 of the Disclosure Schedule lists the following written arrangements (including without limitation written agreements) to which either the Company or a Subsidiary is a party: any written arrangement (or group of related written arrangements) for the lease of personal property from or to third parties providing for lease payments in excess of $5,000 per annum; 9 any written arrangement (or group of related written arrangements) for the purchase or sale of raw materials, commodities, supplies, products or other personal property or for the furnishing or receipt of services (i) which calls for performance over a period of more than one year, (ii) which involves more than the sum of $5,000, or (iii) in which either the Company or any Subsidiary has granted manufacturing rights, "most favored nation" pricing provisions or exclusive marketing or distribution rights relating to any products or territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a certain party; any written arrangement establishing a partnership or joint venture; any written arrangement (or group of related written arrangements) under which it has created, incurred, assumed, or guaranteed (or may create, incur, assume, or guarantee) indebtedness (including capitalized lease obligations) involving more than $15,000 or under which it has imposed (or may impose) a Security Interest on any of its assets, tangible or intangible; any written arrangement concerning confidentiality or noncompetition; any written arrangement involving any of the Company Stockholders or their affiliates, as defined in Rule 12b-2 under the Exchange Act ("Affiliates"); any written arrangement under which the consequences of a default or termination could have a material adverse effect on the assets, business, financial condition, results of operations or future prospects of the Company and its Subsidiaries, taken as a whole; and any other written arrangement (or group of related written arrangements) currently in existence or which any provisions thereof are currently binding on the Company either (x) involving more than $15,000 or (y) not entered into in the Ordinary Course of Business. The Company has delivered to the Buyer a correct and complete copy of each written arrangement (as amended to date) listed in Section 2.15 of the Disclosure Schedule. With respect to each written arrangement so listed: (i) the written arrangement is legal, valid, binding and enforceable and in full force and effect; (ii) the written arrangement will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing, subject to obtaining the consents required by such arrangement that are listed on Section 2.4 of the Disclosure Schedule; and (iii) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration, under the written arrangement. Neither the Company nor any Subsidiary is a party to any oral contract, agreement or other arrangement which, if reduced to written form, would be required to be listed in Section 2.15 of the Disclosure Schedule under the terms of this Section 2.15. Accounts Receivable. All accounts receivable of the Company reflected on the Most Recent Balance Sheet are valid receivables subject to no setoffs or counterclaims and are current and collectible (within 90 days after the date on which it first became due and payable), net of the applicable reserve for bad debts on the Most Recent Balance Sheet. All accounts receivable reflected in the financial or accounting records of the Company that have arisen since the Most Recent Balance Sheet are valid receivables subject to no setoffs or counterclaims and are collectible, net of a reserve for bad debts in an amount proportionate to the reserve shown on the Most Recent Balance Sheet. Section 2.16 of the Disclosure Schedule lists an aging schedule of all accounts receivable from any one person in excess of $15,000. 1.18 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of the Company or any Subsidiary. 1.19 Insurance. Section 2.18 of the Disclosure Schedule sets forth the name of the insurer, the name of the policyholder, the name of each covered insured, the policy number, the period of coverage with respect to each insurance policy and the annual premium in respect of each such policy (including fire, theft, casualty, general liability, workers compensation, business interruption, environmental, product liability and automobile insurance policies and bond and surety arrangements) to which the Company or any Subsidiary has been a party, a named insured, or otherwise the beneficiary of coverage at any time within the past five years. (i) Each such insurance policy is enforceable and in full force and effect; (ii) such policy will continue to be enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing, subject to obtaining any consents required pursuant to such policy that are listed on Section 2.4 of the Disclosure Schedule; (iii) neither the Company nor any Subsidiary is in breach or 10 default (including with respect to the payment of premiums or the giving of notices) under such policy, and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default or permit termination, modification or acceleration, under such policy; and (iv) neither the Company nor any Subsidiary has received any notice from the insurer disclaiming coverage or reserving rights with respect to a particular claim or such policy in general. Neither the Company nor any Subsidiary has incurred any loss, damage, expense or liability covered by any such insurance policy for which it has not properly asserted a claim under such policy. The Company and the Subsidiaries are covered by insurance in scope and amount customary and reasonable for the businesses in which each is engaged. 1.20 Litigation. Section 2.19 of the Disclosure Schedule identifies, and contains a brief description of, (a) any unsatisfied judgment, order, decree, stipulation or injunction and (b) any claim, complaint, action, suit, proceeding, hearing or investigation of or in any Governmental Entity or before any arbitrator to which the Company or any Subsidiary is a party or, to the knowledge of the Company and the Principals, either is threatened to be made a party. None of the complaints, actions, suits, proceedings, hearings, and investigations set forth in Section 2.19 of the Disclosure Schedule could have a material adverse effect on the assets, business, financial condition, results of operations or future prospects of the Company and the Subsidiaries, taken as a whole. 1.21 Product Warranty. No product manufactured, sold, leased, licensed or delivered by the Company or any Subsidiary is subject to any guaranty, warranty, right of return or other indemnity which if enforced, either individually or in the aggregate, would have a Material Adverse Effect on the Company. The Company's standard terms and conditions of sale or lease are set forth in Section 2.20 of the Disclosure Schedule. Section 2.20 of the Disclosure Schedule sets forth the aggregate expenses incurred by the Company and the Subsidiaries in fulfilling their obligations under their guaranty, warranty, right of return and indemnity provisions during each of the fiscal years and the interim period covered by the Financial Statements; and neither the Company nor any Subsidiary knows of any reason why such expenses should significantly increase as a percentage of sales in the future. 1.22 Employees; Labor Matters. Section 2.21 of the Disclosure Schedule contains a list of all employees of each of the Company and each Subsidiary, along with the position and the annual rate of compensation of each such person and the amount and date of each such employee's last raise. To the knowledge of the Company and the Principals, no key employee or group of employees of the Company or any Subsidiary has any plans to terminate employment with such employer. There are no disputes, employee grievances or disciplinary actions pending, or to the knowledge of the Company and the Principals threatened, involving either the Company or any Subsidiary and any of its present or former employees, except as disclosed on Section 2.21 of the Disclosure Schedule. The Company and its Subsidiaries each has complied with all provisions of law relating to employment and employment practices, terms and conditions of employment, wages and hours, the failure to comply with which would have a Material Adverse Effect upon the Company and its Subsidiaries, taken as a whole. Neither the Company nor any Subsidiary is engaged in any unfair labor practice and neither has any liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of law. Neither the Company nor any Subsidiary is a party to or bound by any collective bargaining agreement, nor has any of them experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. Neither the Company nor the Principals have any knowledge of any organizational effort made or threatened, either currently or within the past two years, by or on behalf of any labor union with respect to employees of the Company or any Subsidiary. 1.23 Employee Benefits. Section 2.22(a) of the Disclosure Schedule contains a complete and accurate list of all Employee Benefit Plans (as defined below) maintained, or contributed to, by the Company or any ERISA Affiliate (as defined below)(all such plans, whether or not listed on such schedule, being referred to herein as the "Company Employee Benefit Plans"). For purposes of this Agreement, "Employee Benefit Plan" means any "employee pension benefit plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), any "employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and any other written or oral plan, agreement or arrangement involving direct or indirect compensation, including without limitation insurance coverage, severance benefits, 11 disability benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement compensation. For purposes of this Agreement, "ERISA Affiliate" means any entity which is a member of (i) a controlled group of corporations (as defined in Section 414(b) of the Code), (ii) a group of trades or businesses under common control (as defined in Section 414(c) of the Code), or (iii) an affiliated service group (as defined under Section 414(m) of the Code or the regulations under Section 414(o) of the Code), any of which includes the Company or a Subsidiary. Complete and accurate copies of (i) all Company Employee Benefit Plans which have been reduced to writing, (ii) written summaries of all unwritten Company Employee Benefit Plans, (iii) all related trust agreements, insurance contracts and summary plan descriptions, and (iv) all annual reports filed on IRS Form 5500, 5500C or 5500R for the last five plan years for each Company Employee Benefit Plan, have been delivered to the Buyer. Each Company Employee Benefit Plan has been administered in all material respects in accordance with its terms and each of the Company and any ERISA Affiliates has in all material respects met its obligations with respect to such Company Employee Benefit Plan and has made all required contributions thereto. The Company, each Subsidiary and all Company Employee Benefit Plans are in compliance in all material respects with the currently applicable provisions of ERISA and the Code and the regulations thereunder. (a) There are no investigations by any Governmental Entity, termination proceedings or other claims (except claims for benefits payable in the normal operation of the Company Employee Benefit Plans and proceedings with respect to qualified domestic relations orders), suits or proceedings against or involving any Company Employee Benefit Plan or asserting any rights or claims to benefits under any Company Employee Benefit Plan that could give rise to any material liability of the Company, any Subsidiary or any ERISA Affiliate. (b) All the Company Employee Benefit Plans that are intended to be qualified under Section 401(a) of the Code have received determination letters from the Internal Revenue Service to the effect that such Company Employee Benefit Plans are qualified and the plans and the trusts related thereto are exempt from federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, no such determination letter has been revoked and revocation has not been threatened, and no such Company Employee Benefit Plan has been amended since the date of its most recent determination letter or application therefor in any respect, and no act or omission has occurred, that would adversely affect its qualification or materially increase its cost. (c) Neither the Company nor any ERISA Affiliate has ever maintained an Employee Benefit Plan subject to Section 412 of the Code or Title IV of ERISA. (d) At no time has the Company or any ERISA Affiliate been obligated to contribute to any "multi-employer plan" (as defined in Section 4001(a)(3) of ERISA). (e) There are no unfunded obligations under any Company Employee Benefit Plan providing benefits after termination of employment to any employee of the Company (or to any beneficiary of any such employee), including but not limited to retiree health coverage and deferred compensation, but excluding continuation of health coverage required to be continued under Section 4980B of the Code and insurance conversion privileges under state law. (f) No act or omission has occurred and no condition exists with respect to any Employee Benefit Plan maintained by the Company or any ERISA Affiliate that would subject the Company to any material fine, penalty, tax or liability of any kind imposed under ERISA or the Code. (g) No Company Employee Benefit Plan is funded by, associated with, or related to a "voluntary employee's beneficiary association" within the meaning of Section 501(c)(9) of the Code. (h) No Company Employee Benefit Plan, plan documentation or agreement, summary plan description or other written communication distributed generally to employees by its terms prohibits the Company from amending or terminating any such Company Employee Benefit Plan. (i) Section 2.22(j) of the Disclosure Schedule discloses each: (i) agreement with any director, executive officer or other key employee of the Company or any Subsidiary (A) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company or any Subsidiary of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee or 12 (C) providing severance benefits or other benefits after the termination of employment of such director, executive officer or key employee; (ii) agreement, plan or arrangement under which any person may receive payments from the Company or any Subsidiary that may be subject to the tax imposed by Section 4999 of the Code or included in the determination of such person's "parachute payment" under Section 280G of the Code; and (iii) agreement or plan binding the Company or any Subsidiary, including without limitation any stock option plan, stock appreciation right plan, restricted stock plan, stock purchase plan, severance benefit plan, or any Employee Benefit Plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. Environmental Matters. Each of the Company and its Subsidiaries has complied with all applicable Environmental Laws (as defined below), except for violations of Environmental Laws that do not and will not, individually or in the aggregate, have a material adverse effect on the assets, business, financial condition, results of operations or future prospects of the Company and its Subsidiaries, taken as a whole. There is no pending or, to the knowledge of the Company or the Principals, threatened civil or criminal litigation, written notice of violation, formal administrative proceeding, or investigation, inquiry or information request by any Governmental Entity, relating to any Environmental Law involving the Company or any Subsidiary, except for litigation, notices of violations, formal administrative proceedings or investigations, inquiries or information requests that will not, individually or in the aggregate, have a material adverse effect on the assets, business, financial condition, results of operations or future prospects of the Company and its Subsidiaries, taken as a whole. For purposes of this Agreement, "Environmental Law" means any federal, state or local law, statute, rule or regulation or the common law relating to the environment or occupational health and safety, including without limitation any statute, regulation or order pertaining to (i) treatment, storage, disposal, generation and transportation of industrial, toxic or hazardous substances or solid or hazardous waste; (ii) air, water and noise pollution; (iii) groundwater and soil contamination; (iv) the release or threatened release into the environment of industrial, toxic or hazardous substances, or solid or hazardous waste, including without limitation emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals; (v) the protection of wildlife, marine sanctuaries and wetlands, including without limitation all endangered and threatened species; (vi) storage tanks, vessels and containers; (vii) underground and other storage tanks or vessels, abandoned, disposed or discarded barrels, containers and other closed receptacles; (viii) health and safety of employees and other persons; and (ix) manufacture, processing, use, distribution, treatment, storage, disposal, transportation or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or oil or petroleum products or solid or hazardous waste. As used above, the terms "release" and "environment" shall have the meaning set forth in the federal Comprehensive Environmental Compensation, Liability and Response Act of 1980 ("CERCLA"). (j) There have been no releases of any Materials of Environmental Concern (as defined below) into the environment at any parcel of real property or any facility formerly or currently owned, operated or controlled by the Company or any Subsidiary. With respect to any such releases of Materials of Environmental Concern, the Company and each Subsidiary have given all required notices to Governmental Entities (copies of which have been provided to the Buyer). Neither the Company nor any Subsidiary is aware of any releases of Materials of Environmental Concern at parcels of real property or facilities owned, operated or controlled by persons other than the Company or a Subsidiary that could reasonably be expected to have an impact on the real property or facilities owned, operated or controlled by the Company or its Subsidiaries. For purposes of this Agreement, "Materials of Environmental Concern" means any chemicals, pollutants or contaminants, hazardous substances (as such term is defined under CERCLA), solid wastes and hazardous wastes (as such terms are defined under the federal Resources Conservation and Recovery Act), toxic materials, oil or petroleum and petroleum products, or any other material subject to regulation under any Environmental Law. 13 (k) Set forth in Section 2.23(c) of the Disclosure Schedule is a list of all environmental reports, investigations and audits relating to premises currently or previously owned or operated by the Company or any Subsidiary (whether conducted by or on behalf of the Company or a third party, and whether done at the initiative of the Company or directed by a Governmental Entity or other third party) which were issued or conducted during the past five years and which the Company or any Subsidiary has possession of or access to. Complete and accurate copies of each such report, or the results of each such investigation or audit, have been provided to the Buyer. (l) Set forth in Section 2.23(d) of the Disclosure Schedule is a list of all of the solid and hazardous waste transporters and treatment, storage and disposal facilities that have been utilized by the Company or any Subsidiary since November 19, 1980. Neither the Company nor any Subsidiary is aware of any material environmental liability of any such transporter or facility. Legal Compliance. Each of the Company and its Subsidiaries, and the conduct and operations of their respective businesses, are in compliance with each law (including rules and regulations thereunder) of any federal, state, local or foreign government, or any Governmental Entity, which (a) affects or relates to this Agreement or the transactions contemplated hereby or (b) is applicable to the Company, any Subsidiary or their respective businesses, except for any violation of or default under a law referred to in clause (b) above which reasonably may be expected not to have a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole. 1.24 Permits. Section 2.25 of the Disclosure Schedule sets forth a list of all permits, licenses, registrations, certificates, orders or approvals from any Governmental Entity (including without limitation those issued or required under Environmental Laws and those relating to the occupancy or use of owned or leased real property) ("Permits") issued to or held by the Company or any Subsidiary. Such listed Permits are the only Permits that are required for either the Company or any Subsidiary to conduct its business as presently conducted or as proposed to be conducted, except for those the absence of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole. Each such Permit is in full force and effect and, to the best of the knowledge of the Company and the Principals, no suspension or cancellation of such Permit is threatened and there is no basis for believing that such Permit will not be renewable upon expiration. Each such Permit will continue in full force and effect following the Closing. 1.25 Certain Business Relationships With Affiliates. No Affiliate of the Company (a) owns any property or right, tangible or intangible, which is used in the business of the Company or any Subsidiary other than as set forth in Section 2.36 herein, (b) has any claim or cause of action against the Company or any Subsidiary, or (c) owes any money to the Company or any Subsidiary. Section 2.26 of the Disclosure Schedule describes any transactions or relationships between the Company or any Subsidiary and any Affiliate thereof which are reflected in the statements of operations of the Company included in the Financial Statements. 1.26 Brokers' Fees. Neither the Company nor any Subsidiary has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. 1.27 Books and Records. The minute books and other similar records of the Company and each Subsidiary contain true and complete records of all actions taken at any meetings of such company's stockholders, Board of Directors or any committee thereof and of all written consents executed in lieu of the holding of any such meeting. The books and records of the Company and the Subsidiaries accurately reflect in all material respects the assets, liabilities, business, financial condition and results of operations of such entities and have been maintained in accordance with good business and bookkeeping practices. The Company has furnished or made available to Buyer or its representatives for their examination true and complete copies of the Company's and the Subsidiaries' minute books and their stock transfer books. 1.28 Customers and Suppliers. No unfilled customer order or commitment obligating either the Company or any Subsidiary to process, manufacture or deliver products or perform services will result in a loss to the Company or such Subsidiary upon completion of performance. No purchase order or commitment of the Company or any Subsidiary is in excess of normal requirements, nor are prices provided therein in excess of current market prices for the products or services to be provided thereunder. No material supplier of the Company or any Subsidiary has indicated within the past year that it will stop, or materially decrease the rate 14 of, supplying materials, products or services to the Company or such Subsidiary and no material customer of either the Company or any Subsidiary has indicated within the past year that it will stop, or materially decrease the rate of, buying, leasing or licensing materials, products or services from them. Section 2.29 of the Disclosure Schedule sets forth a list of (a) each customer that accounted for more than 5% of the consolidated revenues of the Company during the last full fiscal year or the interim period through the Most Recent Balance Sheet and the approximate amount of revenues accounted for by such customer during each such period and (b) each supplier that is the sole supplier of any significant product or component to either the Company or any Subsidiary. 1.29 Company Action. The Board of Directors of the Company, at a meeting duly called and held, has by the unanimous vote of all directors present (i) determined that the Merger is fair and in the best interests of the Company and its stockholders, (ii) adopted this Agreement in accordance with the provisions of the Texas Act, and (iii) directed that this Agreement and the Merger be submitted to the Company Stockholders for their adoption and approval and resolved to recommend that Company Stockholders vote in favor of the adoption of this Agreement and the approval of the Merger. 1.30 Disclosure. No representation or warranty by the Company or the Principals contained in this Agreement, and no statement contained in the Disclosure Schedule or any other document, certificate or other instrument delivered to or to be delivered by or on behalf of the Company or the Principals pursuant to this Agreement, and no other statement made by the Company, the Principals or any of their representatives in connection with this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. The Company has disclosed to the Buyer all material information relating to the business of the Company and its Subsidiaries or the transactions contemplated by this Agreement. 1.31 Year 2000. Section 2.32 of the Disclosure Schedule attached hereto identifies each "year 2000" audit, report or investigation that has been performed by or on behalf of the Company or any Subsidiary with respect to their businesses and operations, and the Company has provided to the Buyer true and correct copies of all such audits, reports or investigations. Except as set forth in such audits, reports and investigations, neither the Company nor any Subsidiary is aware of any failure of either (i) their computer software systems, or (ii) other computer software used by or licensed to or by any of them from or to third parties, to be Year 2000 Compliant. For purposes of this Agreement, "Year 2000 Compliant" means, with respect to each system referred to in the prior sentence, that such system (i) will accurately receive, record, store, provide, recognize and process all date and time data from, during, into and between the twentieth and twenty-first centuries; (ii) will accurately perform all date-dependent calculations and operations (including, without limitation, mathematical operations, sorting, comparing and reporting) from, during, into and between the twentieth and twenty- first centuries; and (iii) will not malfunction, cease to function or provide invalid or incorrect results as a result of (x) the change of century, (y) date data, including date data which represents or references different centuries or more than one century or (z) the occurrence of any particular date; in each case without human intervention, other than original data entry. Neither the Company nor any Subsidiary has provided any guarantee or warranty for any product sold or licensed, or services provided, by the Company or any Subsidiary to the effect that such product or service (i) complies with or accounts for the fact of the arrival of the year 2000 or (ii) will not be adversely affected with respect to functional interoperability, performance or volume capacity (including without limitation the processing and reporting of data) by virtue of the arrival of the year 2000. Government Contracts. Neither the Company nor any Subsidiary has ever been, nor as a result of the consummation of the transactions contemplated by this Agreement is it reasonable to expect that any of them will be, suspended or debarred from bidding on contracts or subcontracts for any agency of the United States government, nor has such suspension or debarment been threatened or action for such suspension or debarment been commenced. Neither the Company nor any Subsidiary has ever been nor is any of them now being audited or investigated by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United 15 States government, nor has such audit or investigation been threatened. There is no valid basis for the Company's or any Subsidiary's suspension or debarment from bidding on contracts or subcontracts for any agency of the United States government and there is no valid basis for a claim pursuant to an audit or investigation by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, or any prime contractor. Absence of Questionable Payments. Neither the Company, any Subsidiary nor any director, officer, agent, employee or other person acting on behalf of any of them has used any of the Company's or any Subsidiary's funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to government officials or others. Neither the Company, any Subsidiary nor any current director, officer, agent, employee or other person acting on behalf of any of them has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. Bank Accounts. Section 2.35 of the Disclosure Schedule sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company or any Subsidiary maintains safe deposit boxes or accounts of any nature and the names of all persons authorized to draw thereon, make withdrawals therefrom or have access thereto. Insider Interests. No Company Stockholder nor any officer or director of the Company or any Subsidiary has any interest (other than as stockholders of the Company) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the Company's or any Subsidiary's business, including, without limitation, inventions, patents, trademarks or trade names other than the trade names and related logos Big Hand, Inc. and CircumStance, Inc., and the two internet addresses (URL's) for the foregoing two trade names which have been previously assigned to the Principals via an intellectual property assignment agreement identified on Section 2.15 of the Disclosure Schedule (the "Assignment Agreement"). The Principals hereby agree not to use, and shall ensure that no other persons use, the property assigned pursuant to the Assignment Agreement until after the expiration of 30 months from the date of the Closing and after such time only in a manner which shall not cause confusion in the market place as determined in good faith by Buyer and in no event shall any such property be used in furtherance of any business, venture, or enterprise which competes with Buyer's, its subsidiaries, and/or its affiliates' business without the express written consent of Buyer. Notwithstanding the foregoing restrictions, in the event of Buyer's filing for bankruptcy, insolvency, or dissolution, the Principals shall have the immediate right to employ and use the property described herein for any purpose, or (b) in any agreement, contract, arrangement or obligation relating to the Company or any Subsidiary, their present or prospective businesses or operations, except for the employment agreements to be entered into between the Principals and the Surviving Corporation at the Closing and the intellectual property assigned pursuant to the Assignment Agreement. REPRESENTATIONS AND WARRANTIES OF THE BUYER, PARENT AND THE ACQUISITION SUBSIDIARY Each of the Buyer, Parent and the Acquisition Subsidiary jointly and severally represent and warrant to the Company and the Principals, as of the date of this Agreement and as of the Closing (which representations and warranties shall survive the Closing to the extent provided in Section 6.3 hereof), as follows: Organization. Each of the Parent and the Acquisition Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Each such corporation is duly qualified to conduct business and is in corporate and tax good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. Each such corporation has all requisite corporate power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it. Buyer has furnished to the Company true and complete copies of Parent's Certificate of Incorporation and By-laws, each as amended and as in effect on the date hereof. Neither Parent, Buyer 16 nor Acquisition Subsidiary is in default under or in violation of any provision of its Certificate of Incorporation or By-laws. 1.32 Capitalization. The authorized capital stock of Parent consists of 50,050,000 shares of capital stock, of which 50,000,000 shares are Parent Common Stock, of which 31,462,528 shares are issued and outstanding on the date hereof, and 50,000 shares are preferred stock, $.01 par value per share, of which no shares are issued and outstanding on the date hereof. All of the issued and outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of all preemptive rights. All of the Merger Shares will be, when issued in accordance with this Agreement, duly authorized, validly issued, fully paid, nonassessable and free and clear of all liens, claims, pledges, options, adverse claims or charges of any nature whatsoever. All of the outstanding shares of capital stock of Buyer are owned by Parent. All of the outstanding shares of capital stock of Acquisition Subsidiary are owned by Buyer. As of the date hereof, Parent has outstanding under its stock option plans option grants to purchase approximately 6,000,000 shares of Parent Common Stock. 1.33 Authorization of Transaction. Each of the Buyer, Parent and the Acquisition Subsidiary has all requisite power and authority to execute and deliver this Agreement and (in the case of the Buyer and Parent) the Escrow Agreement and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and (in the case of the Buyer and Parent) the Escrow Agreement by the Buyer, Parent and the Acquisition Subsidiary, the performance of this Agreement and (in the case of the Buyer and Parent) the Escrow Agreement and the consummation of the transactions contemplated hereby and thereby by the Buyer, Parent and the Acquisition Subsidiary have been duly and validly authorized by all necessary corporate action on the part of the Buyer, Parent and Acquisition Subsidiary. This Agreement has been duly and validly executed and delivered by the Buyer, Parent and the Acquisition Subsidiary and constitutes a valid and binding obligation of each of them, enforceable against them in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditor's rights generally, or by general equitable principles, and to the extent any indemnification or contribution provisions thereof may be limited by applicable federal or state securities laws. 1.34 Noncontravention. Subject to the filing of the Certificates of Merger as required by applicable law, neither the execution and delivery of this Agreement or (in the case of the Buyer and Parent) the Escrow Agreement by the Buyer, Parent or the Acquisition Subsidiary, nor the consummation by the Buyer, Parent or the Acquisition Subsidiary of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the charter or By-laws of the Buyer, Parent or the Acquisition Subsidiary, (b) require on the part of the Buyer, Parent or the Acquisition Subsidiary any filing with, or permit, authorization, consent or approval of, any Governmental Entity, other than any filing, permit, authorization, consent or approval which if not obtained or made would not have a material adverse effect on the assets, business, financial condition, results of operations or future prospects of the Buyer or Parent or on the ability of the Parties to consummate the transactions contemplated by this Agreement, (c) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of, create in any party any right to accelerate, terminate, modify or cancel, or require any notice, consent or waiver under, any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest or other arrangement to which the Buyer, Parent or Acquisition Subsidiary is a party or by which either is bound or to which any of their assets are subject, other than any conflict, breach, default, acceleration, termination, modification or cancellation which individually or in the aggregate would not have a material adverse effect on the assets, business, financial condition, results of operations or future prospects of the Buyer or Parent or on the ability of the Parties to consummate the transactions contemplated by this Agreement, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Buyer or the Acquisition Subsidiary or any of their properties or assets. 1.35 Reports and Financial Statements. Parent has previously furnished to the Company complete and accurate copies, as amended or supplemented, of each report, schedule and proxy statement filed with the Securities and Exchange Commission (the "SEC") on or after December 31, 1997 (collectively, the "Buyer Reports"). As 17 of their respective dates, the Buyer Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. To the knowledge of senior management of Parent, no material adverse development has occurred with respect to Parent's business since its most recently filed Form 10-Q, except as disclosed in any Buyer Report (including, without limitation, any Form 8-K) filed or amended after the date of such Form 10-Q and except for any changes in the economy in general (or in the overall industry in which Parent operates) or in any stock market or trading system (including, without limitation, any change in the value of any trading indicies with respect thereto). 1.36 Brokers' Fees. Neither the Buyer, Parent nor the Acquisition Subsidiary has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. 1.37 Experience. Rare Medium acknowledges that Rare Medium and its representatives are experienced in, and capable of, evaluating the financial condition and prospects of corporations like the Company. Rare Medium has had access to the records of the Company and has had the opportunity to ask questions concerning the Company's business, financial condition, prior transactions, and corporate history. Rare Medium further understands that the financial statements of the Company previously provided to Rare Medium have not been audited. The foregoing however, shall not limit or modify the representation and warranties of the Company or the Principals contained in Article II. COVENANTS Best Efforts. Each of the Parties shall use its best efforts, to the extent commercially reasonable, to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement. 1.38 Notices and Consents. The Company shall use its best efforts to obtain (and cause each Subsidiary to obtain), at its expense, all such waivers, permits, consents, approvals or other authorizations from third parties and Governmental Entities, and to effect all such registrations, filings and notices with or to third parties and Governmental Entities, as may be required by or with respect to the Company or the Subsidiaries in connection with the transactions contemplated by this Agreement (including without limitation those listed in Section 2.4 or Section 2.25 of the Disclosure Schedule). 1.39 Stockholder Consents/Agreements. The Company shall use its best efforts to obtain the Requisite Stockholder Approval as soon as reasonably practical after the date hereof. (a) Until this Agreement is terminated in accordance herewith, each Principal agrees (i) to vote all Company Shares that are beneficially owned by him, or for which he has voting authority, in favor of the adoption of this Agreement and the approval of the Merger, (ii) to otherwise use his best efforts to obtain the Requisite Stockholder Approval, and (iii) not to (A) sell, offer to sell, pledge, transfer or otherwise dispose of any Company Shares, or (B) engage in any transaction, whether or not with respect to any Company Shares or any interest herein, the intent or effect of which is to reduce the risk of owning any Company Shares (including, by way of example and not limitation, engaging in put, call, short-sale, straddle or similar market transactions); provided, that, the term ""best efforts" as used in this section shall not require any Principal to incur any material expense or commence or participate in any litigation. Restriction on Sale of Parent Common Stock. Each of the Principals agrees that, for a period of eighteen (18) months after the Effective Time of the Merger, such stockholder will not (i) sell, offer to sell, pledge, transfer or otherwise dispose of any shares of Parent Common Stock received by him, her or it in the Merger, or (ii) engage in any transaction, whether or not with respect to any shares of Parent Common Stock or any interest herein, the intent or effect of which is to reduce the risk of owning the shares of Parent Common Stock acquired hereunder (including, by way of example and not limitation, engaging in put, call, short-sale, straddle or similar market transactions); provided, that, notwithstanding the foregoing after the one (1) year 18 anniversary of the Effective Time, any Principal may enter into any of the foregoing transactions, except that, until such eighteen (18) month period has expired, no Principal or any such transferee shall sell, or enter into any transaction with respect to, any such shares on the public market (which shall be deemed to include any stock exchange or dealer quotation system, including NASDAQ), whether pursuant to Rule 144 promulgated by the Securities and Exchange Commission or otherwise and provided, further that no Principal (or any such transferee) shall sell or otherwise transfer any such shares unless and until the transferee of such shares enters into a written agreement with Buyer agreeing to the restrictions contained in this Section 4.5. The transfer of any shares of ICC Common Stock among the former Company Stockholders required by the Stock Purchase Agreement dated November 16, 1998 among the Company and its stockholders within the first thirty days following the Effective Time shall not be deemed a violation of this Section; provided the recipient of any such shares is bound by either this Section or has executed a lock-up letter contemplated by Section 5.2(i). (b) All shares of Parent Common Stock subject to the provisions of paragraph (a) above shall, until the expiration of the stated time periods, bear a legend substantially as follows: "The shares represented by this certificate may not be offered, sold, pledged, transferred or otherwise disposed of except in accordance with the conditions specified in that certain Agreement and Plan of Merger Agreement , dated March __, 1999, by and among the holder of this certificate, ICC Technologies, Inc. and the other parties thereto, a copy of which may be inspected by the holder of the certificate at the principal offices of ICC Technologies, Inc. or furnished by ICC Technologies, Inc. to the holder of this certificate upon written request and without charge." Operation of Business. Except as contemplated by this Agreement, during the period from the date of this Agreement to the Effective Time (or termination of this Agreement), the Company and each Subsidiary shall conduct its operations in the Ordinary Course of Business and in compliance with all applicable laws and regulations and, to the extent consistent therewith, use all reasonable efforts to preserve intact its current business organization, keep its physical assets in good working condition (normal wear and tear excepted), keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall not be impaired in any material respect. Without limiting the generality of the foregoing, prior to the Effective Time (or termination of this Agreement), neither the Company nor any Subsidiary shall, without the prior written consent of the Buyer: issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) or authorize the issuance, sale or delivery of, or redeem or repurchase, any stock of any class or any other securities or any rights, warrants or options to acquire any such stock or other securities (except pursuant to the conversion or exercise of convertible securities or Options outstanding on the date hereof), or amend any of the terms of any such convertible securities or Options; provided, that, this subsection (a) shall not prohibit the transfer of any Company Shares among the Company Stockholders required by the Stock Purchase Agreement dated November 16, 1998 among the Company and its stockholders prior to the Effective Time; (c) split, combine or reclassify any shares of its capital stock; declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock; (d) create, incur or assume any debt not currently outstanding (including obligations in respect of capital leases); assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person or entity; or make any loans, advances or capital contributions to, or investments in, any other person or entity; (e) enter into (including the hiring of any new employees, other than at-will employees), adopt or amend any Employee Benefit Plan or any employment or severance agreement or arrangement (whether written or oral) of the type described in Section 2.22(j) or (except for normal increases in the Ordinary Course of Business) increase in any manner the compensation or fringe benefits of, or materially modify the employment terms of, its directors, officers or employees, generally or 19 individually, or pay any benefit not required by the terms in effect on the date hereof of any existing Employee Benefit Plan; (f) acquire, sell, lease, encumber or dispose of any assets or property (including without limitation any shares or other equity interests in or securities of any corporation, partnership, association or other business organization or division thereof), other than purchases and sales of assets in the Ordinary Course of Business; (g) amend its charter or By-laws; (h) change in any material respect its accounting methods, principles or practices, except insofar as may be required by a generally applicable change in GAAP; (i) discharge or satisfy any Security Interest or pay any obligation or liability other than in the Ordinary Course of Business (except that the foregoing shall not restrict the Company from paying its accountants, attorneys and financial advisors fees and expenses incurred with respect to this Agreement and the transactions contemplated hereby, subject to Section 8.11); (j) mortgage or pledge any of its property or assets or subject any such assets to any Security Interest; (k) sell, assign, transfer or license any Intellectual Property, other than in the Ordinary Course of Business; (l) enter into, amend, terminate, take or omit to take any action that would constitute a violation of or default under, or waive any material right under, any contract or agreement; except for any such transactions which are in the Ordinary Course of Business and which would not, individually or in the aggregate, have a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole; (m) make or commit to make any capital expenditure in excess of $4,000 per item or $20,000 in the aggregate; (n) take any action or fail to take any action permitted by this Agreement with the knowledge that such action or failure to take action would result in (i) any of the representations and warranties of the Company or the Principals set forth in this Agreement becoming untrue or (ii) any of the conditions to the Merger set forth in Article V not being satisfied; or (o) agree in writing or otherwise to take any of the foregoing actions. Full Access. The Company shall permit representatives of the Buyer to have full access (at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Company) to all premises, properties, financial and accounting records, contracts, other records and documents, and personnel, of or pertaining to the Company and its Subsidiaries. Each of the Buyer, Parent and the Acquisition Subsidiary (a) shall treat and hold as confidential any Confidential Information (as defined below), (b) shall not use any of the Confidential Information except in connection with this Agreement, and (c) if this Agreement is terminated for any reason whatsoever, shall return to the Company all tangible embodiments (and all copies) thereof which are in its possession. For purposes of this Agreement, "Confidential Information" means any confidential or proprietary information of the Company or any Subsidiary that is furnished in writing to the Buyer, Parent or the Acquisition Subsidiary by the Company or such Subsidiary in connection with this Agreement; provided, however, that it shall not include any information (i) which, at the time of disclosure, is available publicly, (ii) which, after disclosure, becomes available publicly through no fault of the Buyer, Parent or the Acquisition Subsidiary, or (iii) which the Buyer, Parent or the Acquisition Subsidiary knew or to which the Buyer, Parent or the Acquisition Subsidiary had access prior to disclosure. 1.40 Notice of Breaches. Each party hereto shall promptly deliver to the others written notice of any event or development that would (a) render any statement, representation or warranty of such party in this Agreement (including the Disclosure Schedule) inaccurate or incomplete in any material respect, or (b) constitute or result in a breach by such party of, or a failure by such party to comply with, any agreement or covenant in this Agreement applicable to such party. No such disclosure shall be deemed to avoid or cure any such misrepresentation or breach. Exclusivity. Neither the Company nor any Principal shall, and the Company and the Principals shall use their respective best efforts to cause their respective Affiliates and each of their officers, directors, employees, representatives and agents not to, directly or indirectly, (a) encourage, solicit, initiate, engage or participate in discussions or 20 negotiations with any person or entity (other than the Buyer and Parent) concerning any merger, consolidation, sale of material assets, tender offer, recapitalization, accumulation of Company Shares, proxy solicitation or other business combination involving the Company, any Subsidiary or any division of the Company or (b) provide any non-public information concerning the business, properties or assets of the Company or any Subsidiary to any person or entity (other than the Buyer). The Company shall immediately notify the Buyer of, and shall disclose to the Buyer all details of, any inquiries, discussions or negotiations of the nature described in the first sentence of this Section 4.8. Without the prior written consent of Parent, neither the Company, any Subsidiary nor any Stockholder or any of their respective representatives will disclose to any other person the fact that the Confidential Information has been made available, or any of the terms, conditions or other facts with respect to the Merger, including the status thereof, except as required by law or permitted under the terms of this Agreement. Principal Guaranties. As soon as is practicable following the Closing, Buyer shall eliminate the personal liability of the Principals with respect to obligations of the Company secured by any guaranties made in connection with any contract or agreement listed in the Disclosure Schedule. CONDITIONS TO CONSUMMATION OF MERGER Conditions to Each Party's Obligations. The respective obligations of each Party to consummate the Merger are subject to the satisfaction of the following conditions: this Agreement and the Merger shall have received the Requisite Stockholder Approval; (a) no action, suit or proceeding shall be pending or threatened by or before any Governmental Entity wherein an unfavorable judgment, order, decree, stipulation or injunction would (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (iii) affect adversely the right of the Buyer to own, operate or control any of the assets and operations of the Surviving Corporation following the Merger, and no such judgment, order, decree, stipulation or injunction shall be in effect; and (b) the execution by Buyer, Parent, the Principals and the Escrow Agent of the Escrow Agreement; provided that no party who refuses to sign such agreement may utilize this subsection if the terms of the Escrow Agreement are substantially as set forth in Exhibit A attached hereto. Conditions to Obligations of the Buyer, Parent and the Acquisition Subsidiary. The obligation of each of the Buyer, Parent and the Acquisition Subsidiary to consummate the Merger is subject to the satisfaction or waiver by such Party of the following additional conditions: there shall be no Dissenting Shares as of the Effective Time; (c) the Company and each Subsidiary shall have obtained all of the waivers, permits, consents, approvals or other authorizations, and effected all of the registrations, filings and notices, referred to in Section 4.2; (d) the representations and warranties of the Company and the Principals set forth in Article II shall be true and correct when made on the date hereof and as of the Effective Time as if made as of the Effective Time, except for representations and warranties expressly made only as of a specific date, which shall be true and correct as of such date; (e) the Company shall have performed or complied (and caused the Subsidiaries to have performed or complied) with the agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Effective Time; (f) the Company shall have delivered to the Buyer, Parent and the Acquisition Subsidiary a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in clauses (a) and (b) of Section 5.1 and clauses (a) through (d) of this Section 5.2 have been satisfied in all respects; (g) the Buyer, Parent the Acquisition Subsidiary shall have received from counsel to the Company an opinion with respect to the matters and in a form as substantially set forth in Exhibit B attached 21 hereto, addressed to the Buyer, Parent and the Acquisition Subsidiary and dated as of the Closing Date; (h) each Stockholder and such other employees of the Company as shall be determined by Buyer prior to Closing shall have entered into an employment agreement with the Buyer and/or the Surviving Corporation on terms and conditions acceptable to Buyer; (i) the Buyer shall have received from each of the Principals and each other Company Stockholder the investment representation letter in substantially the form of Exhibit C and the issuance of the Merger Shares as contemplated hereby shall, in the opinion of counsel to the Buyer, be exempt from the registration requirements of the Securities Act of 1933, as amended; (j) each Company Stockholder (other than the Principals) shall have executed and delivered to Buyer a lock-up letter agreeing in form and substance to the restrictions contained in Section 4.4; (k) all Options shall have been exercised or cancelled and the agreement of each holder of an Option shall have been obtained as contemplated by Section 1.10 of this Agreement; and (l) all actions to be taken by the Company, the Subsidiaries and the Company Stockholders in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to the Buyer, Parent and the Acquisition Subsidiary. Conditions to Obligations of the Company. The obligation of the Company to consummate the Merger is subject to the satisfaction of the following additional conditions: the representations and warranties of the Buyer, Parent and the Acquisition Subsidiary set forth in Article III shall be true and correct when made on the date hereof and shall be true and correct as of the Effective Time as if made as of the Effective Time, except for representations and warranties expressly made only as of a specific date, which shall be true and correct as of such date; (m) each of the Buyer, Parent and the Acquisition Subsidiary shall have performed or complied with its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Effective Time; (n) each of the Buyer, Parent and the Acquisition Subsidiary shall have delivered to the Company a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in clauses (a) and (b) of Section 5.1 and clauses (a) and (b) of this Section 5.3 is satisfied in all respects; (o) the Company shall have received from counsel to the Buyer, Parent and the Acquisition Subsidiary an opinion with respect to the matters and in a form as substantially set forth in Exhibit D attached hereto, addressed to the Company and the Principals and dated as of the Closing Date; (p) each Principal shall have entered into an employment agreement with the Buyer and/or the Surviving Corporation on terms and conditions acceptable to such Principal; and (q) all actions to be taken by the Buyer, Parent and the Acquisition Subsidiary in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to the Company. INDEMNIFICATION Indemnification. The Principals shall indemnify the Surviving Corporation, Parent, the Buyer, their successors and assigns, and the officers, directors, affiliates, employees, controlling persons and agents of the foregoing (collectively, the "Buyer Indemnified Persons"), and hold each of them harmless against and in respect of any and all debts, obligations and other liabilities (whether absolute, accrued, contingent, fixed or otherwise, or whether known or unknown, or due or to become due or otherwise), monetary damages, fines, fees, penalties, interest obligations, deficiencies, losses and 22 expenses (including without limitation amounts paid in settlement, interest, court costs, costs of investigators, fees and expenses of attorneys, accountants, financial advisors and other experts, and other expenses of litigation) (collectively, "Damages") incurred or suffered by any of them by reason of (i) a breach of any of the representations or warranties made by the Company or the Principals in this Agreement, (ii) the nonperformance (whether partial or total) of any covenants or agreements made by the Company, the Subsidiaries or the Principals in this Agreement, (iii) the failure of any Company Stockholder to have good, valid and marketable title to the issued and outstanding Company Shares held by such Company Stockholder, free and clear of all liens, claims, pledges, options, adverse claims or charges of any nature whatsoever, or (iv) any claim by a stockholder or former stockholder of the Company or any Subsidiary, or any other person, firm, corporation or entity, seeking to assert, or based upon: (A) ownership or rights to ownership of any shares of stock of the Company or any Subsidiary; (B) any rights of a stockholder (other than the right to receive the Merger Consideration pursuant to this Agreement or appraisal rights under the applicable provisions of the Texas Act), including any option, preemptive rights or rights to notice or to vote; (C) any rights under the Certificate of Incorporation or By-laws of the Company or any Subsidiary; or (D) any claim that his, her or its shares were wrongfully repurchased by the Company or any Subsidiary. Parent agrees to indemnify and to hold harmless the Principals, the Company Stockholders, and their successors, assigns heirs, and legatees (the "Indemnified Persons") against and in respect of any and all Damages incurred or suffered by them by reason of (i) a breach of any of the representations or warranties made by the Buyer, Parent or the Acquisition Subsidiary in this Agreement, (ii) the nonperformance (whether partial or total) of any covenants or agreements made by the Buyer, Parent or the Acquisition Subsidiary in this Agreement, or (iii) the failure of the Merger Shares to be either duly authorized, validly issued, fully paid and nonassessable or delivered to the Company Stockholders by Parent free and clear of all liens, claims, pledges, options, adverse claims or charges of any nature whatsoever. Method of Asserting Claims. If any person entitled to indemnification pursuant to Section 6.1 hereof (an "Indemnitee") is threatened in writing with any claim, or any claim is presented in writing to, or any action or proceeding is formally commenced against, any of the Indemnitees which may give rise to the right of indemnification hereunder, the Indemnitee will promptly give written notice thereof to each indemnifying party; provided, however, that any delay by an Indemnitee in so notifying the indemnifying party shall not relieve the indemnifying party of any liability to any of the Indemnitees hereunder except to the extent that the indemnifying party shall have been actually prejudiced as a result of such failure. The indemnifying party or parties, by delivery of written notice to an Indemnitee within 30 days of notice of claim to indemnity from an Indemnitee, may elect to assume the defense of such claim, action or proceeding at the expense of the indemnifying party; provided, however, that (a) unless such written notice shall be accompanied by a written agreement of each indemnifying party acknowledging the liability of the indemnifying parties to the Indemnitees as a result of this Agreement for any indemnified damage which any Indemnitee might incur or suffer as a result of such claim, action or proceeding or the contesting thereof, each indemnifying party shall be jointly and severally liable for the attorneys' fees and expenses of the Indemnitee, if any, incurred in connection with defending such claim; (b) counsel undertaking such defense shall be reasonably acceptable to the Indemnitee; (c) the indemnifying parties shall mutually elect to contest such claim, action or proceeding and shall conduct and settle such contest in a joint manner, and if the indemnifying parties shall fail at any time to agree, the Indemnitee shall have no obligation to contest such claim, action or proceeding and (d) if the Indemnitee requests in writing that such claim, action or proceeding not to be contested, then it shall not be contested but shall not be covered by the indemnities provided herein. The indemnifying parties may settle an indemnifiable matter after delivering a written description of the proposed settlement to and receiving consent from the Indemnitee. In the event the Indemnitee unreasonably declines to consent to such settlement, then the Indemnitee shall have no right to indemnification beyond the amount of the proposed settlement. In the event the indemnifying parties jointly elect to contest an indemnifiable matter, the Surviving Corporation, Parent and the Principals shall permit each other reasonable access, subject to the provisions of Section 4.6 hereof, to their respective books and records and shall otherwise cooperate in connection with such claim. If the indemnifying parties do not jointly elect to contest an indemnifiable matter, they shall cooperate with the Indemnitee to the extent any of them has knowledge of facts or circumstances relating to such matter, and the Indemnitee shall have the exclusive right to prosecute, defend, compromise, settle or pay any claim, but the Indemnitee shall not be obligated to do so; provided, 23 however, that, should the Indemnitee elect not to exercise its right exclusively to prosecute, defend, compromise, settle or pay such claim, any indemnifying party may elect to do so at its sole expense. To secure their obligations pursuant to the provisions of this Section, the Principals agree to escrow shares of Parent Common Stock issuable to them in the Merger with an aggregate value of $800,000.00 (based upon the Closing Price), pursuant to the terms and conditions of the Escrow Agreement. Indemnity obligations hereunder shall be satisfied, in the case of indemnification of any Buyer Indemnified Person, through the release of Parent Common Stock pursuant to the Escrow Agreement, such shares to be valued as of the last reported sale on the last trading day prior to the release as reported in The Wall Street Journal, or its successor. Survival. The representations and warranties of the Parties set forth in this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby and continue until 12 months after the Closing Date and shall not be affected by any examination made for or on behalf of any Party or the knowledge of any of their respective officers, directors, stockholders, employees or agents. Notwithstanding the foregoing, the representations and warranties contained in Section 2.23 relating to environmental matters shall survive the Closing and the consummation of the transactions contemplated thereby indefinitely; and the representations and warranties contained in Section 2.9 relating to tax matters shall survive the Closing and the consummation of the transactions contemplated thereby and continue until the expiration of the applicable statute of limitations relating to such tax representations. If a notice is given in accordance with the Escrow Agreement before expiration of such periods, then (notwithstanding the expiration of such time period) the representation or warranty applicable to such claim shall survive until, but only for purposes of, the resolution of such claim. Limitation. Notwithstanding anything to the contrary herein, except as provided in Section 6.4(c), the aggregate liability of the Principals for Damages under this Article VI shall not exceed the fair market value of the Escrow Shares, as determined in accordance with the Escrow Agreement, and the sole remedy of any Buyer Indemnified Person hereunder shall be to make a claim against the Escrow Shares as provided in the Escrow Agreement. Notwithstanding anything to the contrary herein, except as provided in Section 6.4(c), the aggregate liability of Parent for Damages under this Article VI shall not exceed $800,000. Except with respect to claims based on fraud, the rights of the Indemnitees under this Article VI shall be the exclusive remedy of the Buyer Indemnified Persons and the Indemnified Persons with respect to claims resulting from or relating to any misrepresentation, breach of warranty or failure to perform any covenant or agreement of any party hereto contained in this Agreement (provided that nothing contained in this Agreement shall limit or restrict any right or remedy Parent, the Buyer or the Surviving Corporation may have under any Environmental Law). No Company Stockholder shall have any right of contribution against the Company with respect to any breach by the Company of any of its representations, warranties, covenants or agreements. TERMINATION Termination of Agreement. The Parties may terminate this Agreement prior to the Effective Time (whether before or after Requisite Stockholder Approval) as provided below: the Parties may terminate this Agreement by mutual written consent; (r) the Buyer may terminate this Agreement by giving written notice to the Company in the event the Company, any Subsidiary or any Company Stockholder is in material breach, and the Company may terminate this Agreement by giving written notice to the Buyer and the Acquisition Subsidiary in the event the Buyer or the Acquisition Subsidiary is in material breach, of any representation, warranty or covenant contained in this Agreement, and such breach is not remedied within 10 days of delivery of written notice thereof; (s) any Party may terminate this Agreement by giving written notice to the other Parties at any time after the Company Stockholders have voted on whether to approve this Agreement and the Merger in the event this Agreement and the Merger failed to receive the Requisite Stockholder Approval; (t) Buyer may terminate this Agreement by giving written notice to the Company if the Closing shall not have occurred on or before the 45th day following the date of this Agreement by reason of the 24 failure of any condition precedent under Section 5.1 or 5.2 hereof (unless the failure results primarily from a breach by the Buyer, Parent or the Acquisition Subsidiary of any representation, warranty or covenant contained in this Agreement); or (u) the Company may terminate this Agreement by giving written notice to the Buyer if the Closing shall not have occurred on or before the 45th day following the date of this Agreement by reason of the failure of any condition precedent under Section 5.1 or 5.3 hereof (unless the failure results primarily from a breach by the Company or any Principal of any representation, warranty or covenant contained in this Agreement). Effect of Termination. If any Party terminates this Agreement pursuant to Section 7.1, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party for breaches of this Agreement); provided, however, that the confidentiality provisions contained in Section 4.6 shall survive any such termination. MISCELLANEOUS Press Releases and Announcements. No Party shall issue any press release or public disclosure relating to the subject matter of this Agreement without the prior written approval of the other Parties; provided, however, that any Party may make any public disclosure it believes in good faith is required by law or regulation (in which case the disclosing Party shall advise the other Parties and provide them with a copy of the proposed disclosure prior to making the disclosure). 1.41 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns; provided, however, that (a) the provisions in Article I concerning issuance of the Merger Consideration are intended for the benefit of the Company Stockholders, and (b) the provisions in Section 1.10(c) are intended for the benefit of the Designated Employees. 1.42 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, with respect to the subject matter hereof, including the letter of intent dated October 13, 1998 and any nondisclosure agreement entered into prior to the date hereof. 1.43 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties; provided that the Acquisition Subsidiary may assign its rights, interests and obligations hereunder to an Affiliate of the Buyer. 1.44 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Facsimile signatures delivered shall be deemed to constitute originals. 1.45 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 1.46 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly delivered two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid; one business day after it is sent via a reputable nationwide overnight courier service; or upon receipt if delivered personally, in each case to the intended recipient as set forth below: If to the Company or the Principals: Copy to: Steve O'Brien Block & Balestri, P.C. c/o Big Hand, Inc. 15851 Dallas Parkway 2140 Commerce Street Suite 1020 Dallas, Texas 75201 Addison, Texas 75001 25 Attn: David Ross, Esq. If to the Buyer, Parent or Acquisition Copy to: Subsidiary: Rare Medium, Inc. Morrison & Foerster LLP 44 West 18th Street 1290 Avenue of the Americas New York, NY 10011 New York, New York 10104 Fax: (212) 634-6951 Fax: (212) 468-7900 Attn: Robert C. Lewis Attention: John B. Kennedy, Esq. ICC Technologies, Inc. 44 West 18th Street New York, NY 10011 Fax: (212) 634-6951 Attn: Robert C. Lewis
Any Party may give any notice, request, demand, claim, or other communication hereunder using any other means, 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 party for whom it is intended. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 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. 1.47 Amendments and Waivers. The Parties may mutually amend any provision of this Agreement at any time prior to the Effective Time; provided, however, that any amendment effected subsequent to the Requisite Stockholder Approval shall be subject to the restrictions contained in any applicable provision of the either the Delaware General Corporation Law or the Texas Act. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 1.48 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 1.49 Expenses. Except as set forth in the Escrow Agreement, each of the Parties shall bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby; provided, however, that if the Merger is consummated, the Company shall not incur 26 more than an aggregate of $30,000 in legal and accounting fees and expenses in connection with the Merger (excluding the post closing audit), and any fees and expenses incurred by the Company in excess of such amount shall be recovered by the Buyer pursuant to Article VI. 1.50 Specific Performance. Each of the Parties acknowledges and agrees that one or more of the other Parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter (subject to the provisions of Section 8.13), in addition to any other remedy to which it may be entitled, at law or in equity. 1.51 Submission to Jurisdiction. Each of the Parties (a) submits to the jurisdiction of any state or federal court sitting in the Southern District of New York in any action or proceeding arising out of or relating to this Agreement, (b) agrees that all claims in respect of the action or proceeding may be heard and determined in any such court, and (c) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Party with respect thereto. Any Party may make service on another Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 8.7. Nothing in this Section 8.13, however, shall affect the right of any Party to serve legal process in any other manner permitted by law. 1.52 Construction. The language used in this Agreement shall be deemed to be the language chosen by the Parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any Party. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. 1.53 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. ICC TECHNOLOGIES, INC. By:/s/Glenn Meyers --------------- Name: Title: RARE MEDIUM TEXAS I, INC. By:/s/Glenn Meyers --------------- Name: Title: RARE MEDIUM, INC. By:/s/Glenn Meyers --------------- Name: Title: 27 BIG HAND, INC. By:/s/Steve O'Brien ----------------- Name: Title: THE PRINCIPALS: /s/ Steve O'Brien ------------------ Steve O'Brien /s/ Jay Wolff ------------------ Jay Wolff /s/ Tim Barber ------------------ Tim Barber /s/ Dave Bliss ------------------ Dave Bliss 28 TABLE OF CONTENTS
PAGE ARTICLE I THE MERGER..................................................................................1 1.1 The Merger.................................................................................1 1.2 The Closing................................................................................1 1.3 Actions at the Closing.....................................................................1 1.4 Additional Action..........................................................................2 1.5 Conversion of Shares; Merger Consideration.................................................2 1.6 Dissenting Shares..........................................................................3 1.7 Fractional Shares..........................................................................3 1.8 Dividends..................................................................................3 1.9 Escrow.....................................................................................4 1.10 Options and Bonus Pool.....................................................................4 1.11 Certificate of Incorporation...............................................................4 1.12 By-laws....................................................................................4 1.13 Directors and Officers.....................................................................4 1.14 No Further Rights..........................................................................4 1.15 Closing of Transfer Books..................................................................4 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPALS...........................5 2.1 Organization, Qualification and Corporate Power............................................5 2.2 Capitalization.............................................................................5 2.3 Authorization of Transaction...............................................................5 2.4 Noncontravention...........................................................................6 2.5 Subsidiaries...............................................................................6 2.6 Financial Statements.......................................................................7 2.7 Absence of Certain Changes.................................................................7 2.8 Undisclosed Liabilities....................................................................7 2.9 Tax Matters................................................................................7 2.10 Assets.....................................................................................8 2.11 Real Property..............................................................................8 2.12 Intellectual Property......................................................................8 2.13 Inventory..................................................................................9 2.14 Real Property Leases.......................................................................9 2.15 Contracts..................................................................................9 2.16 Accounts Receivable.......................................................................10 2.17 Powers of Attorney........................................................................10 2.18 Insurance.................................................................................10 2.19 Litigation................................................................................11 2.20 Product Warranty..........................................................................11 2.21 Employees; Labor Matters..................................................................11 2.22 Employee Benefits.........................................................................11 2.23 Environmental Matters.....................................................................13 2.24 Legal Compliance..........................................................................14 2.25 Permits...................................................................................14 2.26 Certain Business Relationships With Affiliates............................................14 2.27 Brokers'Fees..............................................................................14 2.28 Books and Records.........................................................................14 2.29 Customers and Suppliers...................................................................14 2.30 Company Action............................................................................15 2.31 Disclosure................................................................................15 2.32 Year 2000.................................................................................15 2.33 Government Contracts......................................................................15 2.34 Absence of Questionable Payments..........................................................16 2.35 Bank Accounts.............................................................................16 2.36 Insider Interests.........................................................................16
29 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER, PARENT AND THE ACQUISITION SUBSIDIARY.......16 3.1 Organization..............................................................................16 3.2 Capitalization............................................................................17 3.3 Authorization of Transaction..............................................................17 3.4 Noncontravention..........................................................................17 3.5 Reports and Financial Statements..........................................................17 3.6 Brokers'Fees..............................................................................18 3.7 Experience................................................................................18 ARTICLE IV COVENANTS.................................................................................18 4.1 Best Efforts..............................................................................18 4.2 Notices and Consents......................................................................18 4.3 Stockholder Consents/Agreements...........................................................18 4.4 Restriction on Sale of Parent Common Stock................................................18 4.5 Operation of Business.....................................................................19 4.6 Full Access...............................................................................20 4.7 Notice of Breaches........................................................................20 4.8 Exclusivity...............................................................................20 4.9 Principal Guaranties......................................................................21 ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER.......................................................21 5.1 Conditions to Each Party's Obligations....................................................21 5.2 Conditions to Obligations of the Buyer and the Acquisition Subsidiary.....................21 5.3 Conditions to Obligations of the Company..................................................22 ARTICLE VI INDEMNIFICATION...........................................................................22 6.1 Indemnification...........................................................................22 6.2 Method of Asserting Claims................................................................23 6.3 Survival..................................................................................24 6.4 Limitation................................................................................24 ARTICLE VII TERMINATION..............................................................................24 7.1 Termination of Agreement..................................................................24 7.2 Effect of Termination.....................................................................25 ARTICLE VIII MISCELLANEOUS...........................................................................25 8.1 Press Releases and Announcements..........................................................25 8.2 No Third Party Beneficiaries..............................................................25 8.3 Entire Agreement..........................................................................25 8.4 Succession and Assignment.................................................................25 8.5 Counterparts..............................................................................25 8.6 Headings..................................................................................25 8.7 Notices...................................................................................25 8.8 Governing Law.............................................................................26 8.9 Amendments and Waivers....................................................................26 8.10 Severability..............................................................................26 8.11 Expenses..................................................................................26 8.12 Specific Performance......................................................................27 8.13 Submission to Jurisdiction................................................................27 8.14 Construction..............................................................................27 8.15 Incorporation of Exhibits and Schedules...................................................27
30 EXHIBITS: A - Escrow Agreement B - Opinion of Seller's Counsel C - Investment Representation Letter D - Opinion of Buyer's Counsel 31 EX-23.1 9 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT The Board of Directors and Stockholders Rare Medium Group, Inc.: The audit referred to in our report dated March 29, 1999, included the related financial statement schedule as of and for the year ended December 31, 1998, 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. We consent to the incorporation by reference in the registration statements Nos. 33-37036, 33-37037, 33-85634, 33-85636, 33-89122 and 33-89124 on Form S-8, of our reports dated March 29, 1999, relating to the consolidated balance sheet as of December 31, 1998 and the related consolidated statements of operations, stockholders' equity (deficit), cash flows and financial statement schedule for the year then ended which reports are included in the annual report on Form 10-K. Our report dated March 29, 1999, contains an explanatory paragraph that states that the Company has suffered net losses and losses from continuing operations, has a working capital deficiency, and has incurred losses through December 31, 1998. These factors, raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty. KPMG LLP New York, New York March 29, 1999 32 EX-23.2 10 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 33 CONSENT OF INDEPENDENT ACCOUNTANTS We 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 and 33-89124) of our report, which includes an explanatory paragraph which refers to conditions that raise substantial doubt about the Company's ability to continue as a going concern, dated March 20, 1998, on our audits of the consolidated financial statements of the Company as of December 31, 1997 and for the years ended December 31, 1997 and 1996, which report is included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. We also consent to the incorporation by reference in the Registration Statements (set forth above) of the Company of our report, dated March 20, 1998, on our audits of the financial statements of Engelhard/ICC as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, which report is also included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Pricewaterhouse Coopers LLP Philadelphia, Pennsylvania March 31, 1999 34 EX-27 11 FINANCIAL DATA SCHEDULE
5 1 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 917,978 0 1,518,345 (82,445) 0 2,797,404 22,678,848 (349,575) 44,743,122 3,985,676 10,826,671 0 0 306,968 29,514,742 44,743,122 0 4,688,120 0 22,764,432 1,278,507 0 0 (19,354,819) 0 44,743,122 (19,354,819) 0 0 (619,252) (0.02) (0.02)
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