UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2003, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13865
RARE MEDIUM GROUP, INC.
------------------------------------------------------
(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)
19 WEST 44TH STREET, SUITE 507
NEW YORK, NEW YORK 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 730-7540
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes / / No /x/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 14, 2003, 6,071,360 shares of the registrant's voting common
stock and 8,990,212 shares of the registrant's non-voting common stock were
outstanding.
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and June 30, 2003
(Unaudited) 2
Unaudited Consolidated Statements of Operations - Three and
six months ended June 30, 2002 and 2003 3
Unaudited Consolidated Statements of Cash Flows - Six months ended June 30,
2002 and 2003 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
RARE MEDIUM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
DECEMBER 31, JUNE 30,
2002 2003
---------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $37,484 $28,694
Short-term investments 2,008 6,473
---------------- ----------------
Total cash, cash equivalents and short-term investments 39,492 35,167
Prepaid expenses and other current assets 1,412 455
---------------- ----------------
Total current assets 40,904 35,622
Property and equipment, net 24 22
Notes receivable from the Mobile Satellite Venture, L.P. 56,823 59,671
Note receivable from Motient Corporation, net -- --
Investments in affiliates 2,343 2,500
Other assets 252 165
---------------- ----------------
Total assets $100,346 $97,980
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,105 $1,621
Accrued liabilities 5,610 4,596
---------------- ----------------
Total current liabilities 7,715 6,217
Other noncurrent liabilities -- --
---------------- ----------------
Total liabilities 7,715 6,217
---------------- ----------------
Series A Convertible Preferred Stock, $.01 par value, net of unamortized
discount of $41,373 and $39,176, respectively 70,495 75,308
---------------- ----------------
Minority interest 11,334 11,889
---------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000 shares; issued
1,118,684 shares as Series A Convertible Preferred Stock at December 31,
2002 and 1,144,843 shares at June 30, 2003 -- --
Common stock, $.01 par value. Authorized 200,000,000 shares; issued and
outstanding 6,682,615 shares at December 31, 2002 and 6,071,360 shares at June
30, 2003 67 61
Non-voting common stock, $.01 par value. Authorized 100,000,000 shares; issued and
outstanding 8,990,212 shares at December 31, 2002 and June 30, 2003 90 90
Additional paid-in capital 547,250 546,291
Accumulated deficit (536,434) (541,705)
Treasury stock, at cost, 6,622 shares (171) (171)
---------------- ----------------
Total stockholders' equity 10,802 4,566
---------------- ----------------
Total liabilities and stockholders' equity $100,346 $97,980
================ ================
See accompanying notes to unaudited consolidated financial statements.
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
2002 2003 2002 2003
-------------- -------------- -------------- --------------
Revenues $-- $-- $-- $--
Cost of revenues -- -- -- --
-------------- -------------- -------------- --------------
Gross profit -- -- -- --
Expenses:
Selling, general and administrative 1,028 1,469 3,641 3,321
Depreciation and amortization 30 6 59 13
-------------- -------------- -------------- --------------
Total expenses 1,058 1,475 3,700 3,334
-------------- -------------- -------------- --------------
Loss from operations (1,058) (1,475) (3,700) (3,334)
Interest income, net 1,372 1,555 2,704 3,064
Loss on investments in affiliates (57) (100) (57) (199)
Other income (expense), net 10 -- 14 (5)
Minority interest (248) (278) (488) (547)
-------------- -------------- -------------- --------------
Income (loss) before taxes and discontinued operations 19 (298) (1,527) (1,021)
Income tax benefit -- -- 350 --
-------------- -------------- -------------- --------------
Income (loss) before discontinued operations 19 (298) (1,177) (1,021)
Gain from wind-down of discontinued operations 11,458 109 11,458 563
-------------- -------------- -------------- --------------
Net income (loss) 11,477 (189) 10,281 (458)
Cumulative dividends and accretion of convertible
preferred stock to liquidation value (3,111) (2,414) (6,184) (4,813)
-------------- -------------- -------------- --------------
Net income (loss) attributable to common stockholders $8,366 $(2,603) $4,097 $(5,271)
============== ============== ============== ==============
Basic and diluted (loss) earnings per share:
Continuing operations $(0.30) $(0.18) $(0.87) $(0.38)
Discontinued operations 1.11 0.01 1.36 0.04
-------------- -------------- -------------- --------------
Net earnings (loss) per share $0.81 $(0.17) $0.49 $(0.34)
============== ============== ============== ==============
Weighted average common shares outstanding 10,352,824 15,301,999 8,445,767 15,638,769
============== ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements.
RARE MEDIUM GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30,
--------------------------------
2002 2003
------------- --------------
Cash flows from operating activities:
Net income (loss) $10,281 $ (458)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain from discontinued operations (11,458) (563)
Depreciation and amortization 59 13
Loss on investments in affiliates 57 199
Non-cash compensation (contra-expense) expense (215) 122
Non-cash charge for issuance of warrant by consolidated subsidiary -- 28
Changes in assets and liabilities:
Prepaid expenses, interest receivable and other assets (2,161) (1,323)
Accounts payable, accrued and other liabilities 225 (495)
------------- --------------
Net cash used in continuing operations (3,212) (2,477)
Net cash used in discontinued operations (1,282) (299)
------------- --------------
Net cash used in operating activities (4,494) (2,776)
Cash flows from investing activities:
Cash paid for investments in affiliates (400) (356)
Cash received from investment in affiliates 300 --
Purchases of short-term investments (4,267) (6,499)
Sales and maturities of short-term investments 6,809 2,000
Purchases of property and equipment -- (3)
------------- --------------
Net cash provided by (used in) continuing operations 2,442 (4,858)
Net cash provided by discontinued operations 500 --
------------- --------------
Net cash provided by (used in) investing activities 2,942 (4,858)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of costs 7,652 --
Proceeds from issuance of common stock in connection with the exercise of
warrants and options 3 --
Cash paid in connection with tender offer -- (1,204)
Proceeds from contributions to a consolidated subsidiary -- 48
------------- --------------
Net cash provided by financing activities 7,655 (1,156)
------------- --------------
Net decrease in cash and cash equivalents 6,103 (8,790)
Cash and cash equivalents, beginning of period 7,061 37,484
------------- --------------
Cash and cash equivalents, end of period $13,164 $28,694
============= ==============
See accompanying notes to unaudited consolidated financial statements.
(1) DESCRIPTION OF THE BUSINESS
Rare Medium Group, Inc. (the "Company") conducts its business through its
subsidiaries. Through its 80% owned MSV Investors, LLC subsidiary ("MSV
Investors Subsidiary"), the Company is an active participant in the Mobile
Satellite Venture, L.P. joint venture ("MSV Joint Venture"), a joint venture
that also includes TMI Communications, Inc., Motient Corporation ("Motient"),
and certain other investors (collectively, the "Other MSV Investors"). The MSV
Joint Venture is currently a provider of mobile digital voice and data
communications services via satellite in North America. The Company has
designated three members of the 12-member board of directors of the MSV Joint
Venture's corporate general partner. In addition, in May 2002, the Company
became affiliated with Miraxis, LLC ("Miraxis"), a development stage company
that has access to a Ka-band license with which it intends to provide
satellite based multi-channel, broadband data and video services in North
America (see Note 4).
On February 10, 2003, the Federal Communications Commission (the "FCC")
released an order relating to an application submitted by the MSV Joint
Venture and certain of its competitors that could greatly expand the scope of
the MSV Joint Venture's business by permitting the incorporation of an
ancillary terrestrial base stations (which we refer to as an "ancillary
terrestrial component" or "ATC") into its mobile satellite network. A similar
application is pending before Industry Canada, the FCC's counterpart in
Canada. The MSV Joint Venture cannot expand its mobile satellite services
business using ATC base stations into Canada until this application pending
before Industry Canada is approved. With the FCC's issuance of the ATC order,
the Company expects the MSV Joint Venture to enter a new stage of development
which requires significant future funding requirements and/or a need for one
or more strategic partners.
From 1998 through the third quarter of 2001, the Company's principal
business was conducted through Rare Medium, Inc., which developed Internet
e-commerce strategies, business processes, marketing communications, branding
strategies and interactive content using Internet-based technologies and
solutions. As a result of the weakening of general economic conditions that
caused many companies to reduce spending on Internet-focused business
solutions and in light of their performance and prospects, a decision to
discontinue Rare Medium, Inc.'s operations, along with those of its
LiveMarket, Inc. subsidiary ("LiveMarket"), was made at the end of the third
quarter of 2001 (see Note 6).
From 1999 through the first quarter of 2001, the Company made venture
investments by taking strategic minority equity positions in other
independently managed companies. Additionally, during that period, the Company
developed, managed and operated companies in selected Internet-focused market
segments ("Start-up Companies"). During the first quarter of 2001, the Company
reduced its focus on these businesses and substantially ceased providing
funding to its Start-up Companies.
The Company's current operations consist of actively participating in the
MSV Joint Venture, directing the operations of Miraxis and seeking other
complementary operational opportunities. The Company's principal assets
consist of its interest in the MSV Joint Venture, a promissory note from
Motient, its interest in Miraxis, the remaining investments in its venture
portfolio companies and cash, cash equivalents and short-term investments. As
a result of uncertainty with respect to the ultimate collection on the Motient
note, the Company recognized a reserve for the entire amount of the note (see
Note 8).
As a result of the decision to discontinue the operations of Rare Medium,
Inc. and LiveMarket, the operating results reported in the statements of
operations as continuing operations include the consolidated results of the
Company, its MSV Investors Subsidiary and certain Start-up Companies through
their respective dates of dissolution. The results of Rare Medium, Inc. and
LiveMarket are reflected as discontinued operations.
The Company is headquartered in New York, New York.
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated. While
the Company believes that disclosures presented are adequate to make the
information not misleading, these unaudited consolidated financial statements
should be read in conjunction with the audited financial statements and
related notes for the year ended December 31, 2002 which are contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of the three and six months ended June 30, 2003 are
not necessarily indicative of the results to be expected for the full year.
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year's presentation.
(3) INTEREST IN THE MSV JOINT VENTURE
On November 26, 2001, through its MSV Investors Subsidiary, the Company
purchased an interest in the MSV Joint Venture in the form of a convertible
note with a principal amount of $50.0 million. Immediately prior to the
purchase of the convertible note, the Company contributed $40.0 million to the
MSV Investors Subsidiary and a group of unaffiliated third parties
collectively contributed $10.0 million. The note bears interest at a rate of
10% per year, has a maturity date of November 26, 2006, and is convertible at
any time at the option of the MSV Investors Subsidiary into equity interests
in the MSV Joint Venture.
On August 13, 2002, the MSV Joint Venture completed a rights offering
allowing its investors to purchase their pro rata share of an aggregate $3.0
million of newly issued convertible notes with terms similar to the
convertible note already held by the MSV Investors Subsidiary. The MSV
Investors Subsidiary exercised its basic and over subscription rights and
purchased approximately $1.1 million of the convertible notes. The group of
unaffiliated third parties collectively contributed $0.2 million to the MSV
Investors Subsidiary in connection with the MSV Joint Venture rights offering.
Pursuant to the joint venture agreement among the partners of the MSV
Joint Venture (the "MSV Joint Venture Agreement"), in the event that the MSV
Joint Venture had received final regulatory approval from the FCC, as that
phrase is defined in the MSV Joint Venture Agreement, by March 31, 2003 for
its ATC applications, the Other MSV Investors would have been obligated to
invest an additional $50.0 million in the MSV Joint Venture. As the final
regulatory approval from the FCC, as defined in the MSV Joint Venture
Agreement, was not received by March 31, 2003, the additional investment was
not required. However, the Other MSV Investors retained the option to invest
the $50.0 million at the same terms and conditions until June 30, 2003. Prior
to its expiration, the option was extended until August 2003. On August 8,
2003, the MSV Joint Venture Agreement was amended and certain of the Other MSV
Investors agreed to invest $3.7 million in the MSV Joint Venture and retain
the option to invest an additional $17.6 million under certain terms and
conditions. This new option will expire either December 31, 2003 or March 31,
2004, depending on when certain regulatory appeals are decided. Under the
amended MSV Joint Venture Agreement, the convertible notes held by the MSV
Investors Subsidiary will automatically convert into equity interests in the
MSV Joint Venture upon additional equity investments at a valuation of the MSV
Joint Venture equal to or greater than the valuation at the time the MSV
Investors Subsidiary purchased the notes. Such additional equity investments
must total $41.6 million if made by December 31, 2003 and will need to
increase thereafter by an amount equal to the additional interest accrued on
the MSV Joint Venture's outstanding debt. Currently, the MSV Investors
Subsidiary owns, upon conversion, approximately 30.3% of the equity interests
in the MSV Joint Venture. If the Other MSV Investors exercise their option,
the MSV Investors Subsidiary would own, upon conversion, approximately 27.4%
of the equity interests.
The $10.2 million received from unaffiliated persons as an investment
into the MSV Investors Subsidiary, as well as their share of the equity in
earnings of the MSV Investors Subsidiary, is reflected in the accompanying
consolidated financial statements as minority interest.
(4) BUSINESS TRANSACTIONS
In May 2002, the Company acquired Series B Preferred Shares and a warrant
from Miraxis for approximately $0.4 million, representing an ownership of
approximately 30%. Miraxis is a development stage, privately held
telecommunications company that has access to a Ka-band license with which it
intends to provide satellite based multi-channel, broadband data and video
services in North America. The Company has the right to appoint two of the
seven directors of the manager of Miraxis. Additionally, the Company entered
into a management support agreement with Miraxis under which the Company's
current Chief Executive Officer and President provided certain services to
Miraxis through February 2003 in exchange for additional Series B Preferred
Shares and warrants being issued to the Company. In addition, in December
2002, the Company acquired Series C Preferred Shares and warrants from Miraxis
for approximately $0.1 million.
In February 2003, the Company entered into a consulting agreement with
Miraxis pursuant to which Miraxis personnel provided services to the Company
through May 2003. In addition, Miraxis extended the management support
agreement whereby the Company's current Chief Executive Officer and President
continued to provide certain services to Miraxis through May 2003. In
connection with these agreements, the Company paid Miraxis approximately
$40,000 but also received additional Series C Preferred Shares and warrants.
In April 2003, the Company acquired additional Series C Preferred Shares
and warrants for approximately $40,000, increasing the Company's ownership
interest to approximately 44.0%. In June 2003, the Company purchased a 12%
promissory note from Miraxis with a principal amount of approximately $0.1
million and a due date of October 2003. Given the uncertainty with respect to
Miraxis' ability to repay the promissory note, the Company has recognized a
reserve for the entire amount of the note.
In May 2003, the Company acquired Series B Preferred Shares from IQStat
Inc. ("IQStat") for approximately $0.3 million, representing an ownership
interest of approximately 4.4%. IQStat is a privately held company that has
developed a patent pending, in-vehicle device that permits the measurement of
radio listening habits and transmits the data over a national wireless
communication network to IQStat's office for processing. IQStat intends to
market the aggregated data to broadcasters and advertisers to allow real-time
tracking of consumer behavior.
The investments in Miraxis, including the promissory note, and IQStat are
included in "Investments in Affiliates" on the accompanying consolidated
balance sheets. The investment in Miraxis is being accounted for under the
equity method with the Company's share of Miraxis' loss being recorded in
"Loss on Investments in Affiliates" on the accompanying consolidated
statements of operations. The investment in IQStat is being accounted for
under the cost method.
(5) STOCK OPTION PLANS
The Company accounts for its stock option plan in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
allows entities to continue to apply the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), as
clarified by Financial Accounting Standards Board ("FASB") Interpretation No.
44, "Accounting For Certain Transactions Involving Stock Compensation," and
provides 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 Opinion No. 25 and provide
the pro forma disclosure required by SFAS No. 123.
APB Opinion No. 25 does not require the recognition of compensation
expense for stock options granted to employees at fair market value. However,
any modification to previously granted awards generally results in
compensation expense or contra-expense recognition using the cumulative
expense method, calculated based on quoted prices of the Company's common
stock and vesting schedules of underlying awards. As a result of the
re-pricing of certain stock options in 2001, for the three and six months
ended June 30, 2002, the Company recognized compensation contra-expense of
approximately $37,000 and $0.2 million, respectively, resulting from the
decrease in the price of the Company's common stock from December 31, 2001 to
June 30, 2002. For the three and six months ended June 30, 2003, the Company
recognized compensation expense of approximately $0.1 million relating to the
re-pricing of certain stock options in 2001 and 2002.
The following table provides a reconciliation of net loss to pro forma
net loss as if the fair value method had been applied to all awards:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- --------------------------------
2002 2003 2002 2003
------------- -------------- -------------- --------------
Net income (loss), as reported $11,477 $(189) $10,281 $(458)
(Deduct) Add: Stock-based compensation
(contra-expense) expense, as reported (37) 115 (215) 122
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards (175) (87) (481) (246)
------------- -------------- -------------- --------------
Pro forma net income (loss) $11,265 $(161) $9,585 $(582)
============= ============== ============== ==============
Basic and diluted net loss attributable
to common stockholders per share:
As reported $0.81 $(0.17) $0.49 $(0.34)
Pro forma $0.79 $(0.17) $0.40 $(0.34)
For the three and six months ended June 30, 2002, the Company issued
options to purchase 25,000 shares of common stock at a weighted average fair
value of $1.22 using the Black-Scholes option pricing model. For the three and
six months ended June 30, 2003, the Company issued options to purchase 195,000
shares of common stock at a weighted average fair value of $0.74 using the
Black-Scholes option pricing model.
(6) DISCONTINUED OPERATIONS
At the end of the third quarter of 2001, a decision to discontinue the
operations of Rare Medium, Inc. and its LiveMarket subsidiary was made in
light of their performance and prospects. As of June 30, 2003, the remaining
assets of Rare Medium, Inc. and LiveMarket totaled approximately $0.1 million,
consisting of cash (excluding the $0.3 million of cash collateralizing a
letter of credit). The liabilities of these subsidiaries totaled approximately
$3.1 million, consisting of accounts payable and accrued expenses. Included in
the total liabilities of these subsidiaries is $1.0 million related to a lease
obligation which is guaranteed by the Company. The total maximum potential
liability of this guarantee is $3.2 million, subject to certain defenses by
the Company. Rare Medium, Inc. holds $0.3 million of cash in a certificate of
deposit which is maintained as collateral for a letter of credit supporting
the lease obligation. For the three and six months ended June 30, 2002, the
Company recognized a gain of approximately $11.5 million as a result of the
settlement of Rare Medium, Inc. liabilities at amounts less than their
recorded amounts. For the three and six months ended June 30, 2003, the
Company recognized a gain of $0.1 million and approximately $0.6 million,
respectively, as a result of the settlement of Rare Medium, Inc. liabilities
at amounts less than their recorded amounts.
(7) TENDER OFFER
On March 13, 2003, the Company commenced a cash tender offer at a price
of $1.00 per share for up to 2,500,000 shares of its common stock. The tender
offer expired on April 23, 2003 with 968,398 shares purchased by the Company
for an aggregate cost, including all fees and expenses applicable to the
tender offer, of approximately $1.2 million. The primary purpose of the tender
offer was to provide the Company's public stockholders with additional
liquidity for their shares of common stock, particularly in light of decreased
liquidity arising from the decision of Nasdaq to delist the Company's common
stock, and to do so at a premium over the stock price before the tender offer
and without the usual transaction costs associated with open market sales. The
Company's preferred stockholders did not sell any shares of common stock in
the tender offer.
(8) CONTINGENCIES
Motient Notes
On May 1, 2002, to mitigate the risk, uncertainties and expenses
associated with Motient's plan of reorganization, the Company cancelled the
outstanding amounts due under the original promissory notes issued by Motient
and accepted a new note in the principal amount of $19.0 million (the "New
Motient Note") that was issued by a new, wholly-owned subsidiary of Motient
that owns 100% of Motient's interests in the MSV Joint Venture ("MSV Holdings
Inc."). The New Motient Note is due on May 1, 2005 and bears interest at a
rate of 9% per annum. Although the New Motient Note is unsecured, there are
material restrictions placed on MSV Holdings Inc.'s assets, and MSV Holdings
Inc. is prohibited from incurring or guarantying any debt in excess of $21.0
million (including the New Motient Note). Additionally, there are events of
default (e.g., a bankruptcy filing by Motient) that would accelerate the due
date of the New Motient Note. As a result of the uncertainty with respect to
the ultimate collection on the New Motient Note, a reserve continues to be
maintained for the entire amount of the note. If the Company recovers any
amount on the New Motient Note, adjustments to the reserve would be reflected
in the accompanying consolidated statements of operations.
Litigation
On May 16, 2001, plaintiffs Jay M. Wolff, David Bliss, Tim Barber and
Steve O'Brien filed suit against Rare Medium, Inc., Rare Medium Group, Inc.,
and Rare Medium Texas I, Inc. in the United States District Court for the
Southern District of New York, Wolff, et al. v. Rare Medium, Inc., et al., CV
No 01-4279. The plaintiffs asserted claims for breach of contract, tortious
interference with contractual relations, tortious interference with
prospective advantage, and breach of implied obligation of good faith, arising
out of the plaintiffs' alleged attempt to engage in transactions involving
some or all of the approximately 1,200,000 shares of the Company's common
stock (prior to the reverse stock split) that the plaintiffs obtained in the
Company's acquisition of Big Hand, Inc. The plaintiffs sought unspecified
compensatory and punitive damages, interest, attorneys' fees and costs. On
October 31, 2001, the Court dismissed the case without prejudice. The
plaintiffs filed an amended complaint on December 7, 2001 based on
substantially the same alleged facts. The amended complaint asserts the
following causes of action: (1) breach of contract; (2) tortious interference
with contract; and, (3) tortious interference with prospective business
advantage. The amended complaint also sought an unspecified amount of actual
damages, punitive damages, interest, and costs. On June 27, 2002, the Court
dismissed the case with prejudice. On July 16, 2002, the plaintiffs filed a
notice of appeal. On March 14, 2003, the Court of Appeals denied the appeal in
its entirety. Further, on April 11, 2003, the Court of Appeals denied a
request for rehearing. The Company believes that no further appeals can or
will be filed with respect to this matter.
On November 19, 2001, five of the Company's shareholders filed a
complaint against the Company, certain of its subsidiaries and certain of
their current and former officers and directors in the United States District
Court for the Southern District of New York, Dovitz v. Rare Medium Group, Inc.
et al., No. 01 Civ. 10196. Plaintiffs became owners of restricted Company
stock when they sold the company that they owned to the Company. Plaintiffs
assert the following four claims against defendants: (1) common-law fraud; (2)
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder; (3) violation of the Michigan Securities Act;
and (4) breach of fiduciary duty. These claims arise out of alleged
representations by defendants to induce plaintiffs to enter into the
transaction. The complaint seeks compensatory damages of approximately $5.6
million, exemplary and/or punitive damages in the same amount, as well as
attorney fees. On January 25, 2002, the Company filed a motion to dismiss the
complaint in its entirety. On June 3, 2002, the Court dismissed the matter
without prejudice. On or about July 17, 2002, the plaintiffs filed an amended
complaint asserting similar causes of action to those asserted in the original
complaint. On September 12, 2002, the Company filed a motion to dismiss on
behalf of itself and its current and former officers and directors. On March
7, 2003, the Court denied the motion to dismiss, and discovery has commenced.
The Company intends to continue to dispute this matter vigorously.
The Company and certain of its subsidiaries (along with the Engelhard
Corporation) are parties to an arbitration relating to certain agreements that
existed between or among the claimant and ICC Technologies, Inc., the
Company's former name, and the Engelhard/ICC ("E/ICC") joint venture arising
from the desiccant air conditioning business that the Company and its
subsidiaries sold in 1998. The claimant has sought $8.5 million for (1) its
alleged out of pocket losses in investing in certain of E/ICC's technology;
(2) unjust enrichment resulting from the reorganization of E/ICC in 1998; and
(3) lost profits arising from the fact that it was allegedly forced to leave
the air conditioning business when the E/ICC joint venture was dissolved. The
Company intends to vigorously dispute this action.
On July 26, 2002, plaintiffs James D. Loeffelbein, Terrie L. Pham and
certain related parties filed suit against the lead plaintiff's counsel in the
class action lawsuit, the Company, certain of its current and former officers,
its former investor relations firm and a former employee of plaintiff
Loeffelbein in the District Court of Johnson County, Kansas, Loeffelbein v.
Milberg Weiss Bershad Hynes & Lerach, LLP, et al., 02 CV 04867. The plaintiffs
assert claims for fraud, negligence and breach of fiduciary duty against all
of the Company and certain of its current and former officers in connection
with allegedly false statements purportedly made to the plaintiffs. The
plaintiffs have sought unspecified damages from the defendants. On September
11, 2002, the matter was removed to the United States District Court for the
District of Kansas (the "Federal District Court"). On October 11, 2002, the
plaintiffs sought to have the matter remanded to state court. On May 7, 2003,
the Federal District Court denied the plaintiffs request to remand the matter
as it related to the Company, the Company defendants and an additional
defendant. On June 9, 2003, the Company and Company defendants filed a motion
to dismiss. On August 4, 2003, the plaintiffs responded. The Company intends
to continue to dispute this matter vigorously.
Though it intends to continue to vigorously contest each of the
aforementioned cases, the Company is unable to predict their respective
outcomes, or reasonably estimate a range of possible losses, if any, given the
current status of these cases. Additionally, 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 additional legal matters will not have a material adverse effect on the
Company's financial position or results of its operations.
The employment contract of the Company's Chairman and Chief Executive
Officer expired on April 15, 2003, and he resigned from the Company's board of
directors on the same date. The Company's President and Chief Operating
Officer was subsequently appointed Chief Executive Officer. In addition, the
Company's Controller and its Treasurer ceased full time employment as of April
15, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve risks and uncertainties, including
statements regarding our capital needs, business strategy, expectations and
intentions. We urge you to consider that statements that use the terms
"believe," "do not believe," "anticipate," "expect," "plan," "estimate,"
"intend" and similar expressions are intended to identify forward-looking
statements. These statements reflect our current views with respect to future
events and because our business is subject to numerous risks, uncertainties
and risk factors, our actual results could differ materially from those
anticipated in the forward-looking statements, including those set forth below
under this "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report. Actual
results will most likely differ from those reflected in these statements, and
the differences could be substantial. We disclaim any obligation to publicly
update these statements, or disclose any difference between our actual results
and those reflected in these statements. The information constitutes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
OVERVIEW
We conduct our business through our subsidiaries. Through our 80% owned
MSV Investors Subsidiary, we are an active participant in the MSV Joint
Venture, a joint venture that also includes TMI, Motient, and the Other MSV
Investors. The MSV Joint Venture is currently a provider of mobile digital
voice and data communications services via satellite in North America. We have
designated three members of the 12-member board of directors of the MSV Joint
Venture's corporate general partner. In addition, in May 2002, we became
affiliated with Miraxis, a development stage company that has access to a
Ka-band license with which it intends to provide satellite based
multi-channel, broadband data and video services in North America.
On February 10, 2003, the FCC released the ATC Order that relates to an
application submitted by the MSV Joint Venture and certain of its competitors
that could greatly expand the scope of the MSV Joint Venture's business by
permitting the incorporation of an ancillary terrestrial component into its
mobile satellite network. A similar application is pending before Industry
Canada, the FCC's counterpart in Canada. The MSV Joint Venture cannot expand
its mobile satellite services business using ATC base stations into Canada
until this application pending before Industry Canada is approved. With the
FCC's issuance of the ATC Order alone, however, we expect the MSV Joint
Venture to enter a new stage of development which will require significant
future funding requirements and/or a need for one or more strategic partners.
Our current operations consist of actively participating in the MSV Joint
Venture, directing the operations of Miraxis and seeking other complementary
operational opportunities. Our principal assets consist of our interest in the
MSV Joint Venture, a promissory note from Motient, our interest in Miraxis,
the remaining investments in our venture portfolio companies and cash, cash
equivalents and short-term investments. As a result of uncertainty with
respect to the ultimate collection on the Motient note, we recognized a
reserve for the entire amount of the note. See "Liquidity and Capital
Resources" under this Item 2.
From 1998 through the third quarter of 2001, our principal business was
conducted through Rare Medium, Inc., which developed Internet e-commerce
strategies, business processes, marketing communications, branding strategies
and interactive content using Internet-based technologies and solutions. As a
result of the weakening of general economic conditions that caused many
companies to reduce spending on Internet-focused business solutions and in
light of their performance and prospects, a decision to discontinue Rare
Medium, Inc.'s operations, along with those of its LiveMarket subsidiary, was
made at the end of the third quarter of 2001.
From 1999 through the first quarter of 2001, we made venture investments
by taking strategic minority equity positions in other independently managed
companies. Additionally, during that period, we developed, managed and
operated our Start-up Companies. During the first quarter of 2001, we reduced
our focus on these businesses and substantially ceased providing funding to
our Start-up Companies.
As a result of the decision to discontinue the operations of Rare Medium,
Inc. and its subsidiary LiveMarket, the results of operations of these
businesses have also been accounted for as discontinued operations.
Accordingly, our discussion in the section entitled "Results of Operations"
focuses on our continuing operations and includes our results and those of our
MSV Investors Subsidiary and certain of our Start-up Companies up to their
respective dates of dissolution.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 2002
Selling, General and Administrative Expense
Selling, general and administrative expense includes facilities costs,
finance, legal and other corporate costs, as well as the salaries and related
employee benefits for those employees that support such functions. Selling,
general and administrative expense for the three months ending June 30, 2003
increased to $1.5 million from $1.0 million for the three months ended June
30, 2002, an increase of $0.5 million. This increase was primarily related to
a $0.2 million increase in legal and advisory fees associated with the
exploration of complementary business opportunities and the recognition of a
$0.1 million non-cash compensation expense in the three months ended June 30,
2003 relating to the re-pricing of certain stock options which occurred in
2001 and 2002. As these costs relate to our current operations, we expect our
selling, general and administrative expense, excluding any non-cash
compensation expense arising from fluctuations in the price of our common
stock in association with the repricing of certain stock options in 2001 and
2002, to remain approximately at this level in future periods.
Depreciation and Amortization Expense
Depreciation and amortization expense consists of the depreciation of
property and equipment and the amortization of the financing costs associated
with the issuance of our Series A convertible preferred stock. Depreciation
and amortization expense for the three months ended June 30, 2003 decreased to
approximately $6,000 from $30,000 for the three months ended June 30, 2002, a
decrease of approximately $24,000. This decrease is primarily the result of
the reduction in property and equipment used in our continuing operations. As
our capital expenditures remain nominal, we expect depreciation and
amortization expense to remain at this level in future periods.
Interest Income, Net
Interest income, net for the three months ended June 30, 2003 is mainly
comprised of the interest earned on our cash, cash equivalents, and short-term
investments and on our convertible notes receivable from the MSV Joint
Venture.
Loss on Investment in Affiliates
For the three months ended June 30, 2003 and 2002, we recorded a loss on
investments in affiliates of approximately $0.1 million for our proportionate
share of Miraxis' operating loss and, in 2003, the reserve for the promissory
note issued by Miraxis. We will continue to monitor the carrying value our
remaining investments in affiliates.
Minority Interest
For the three months ended June 30, 2003, we recorded minority interest
of approximately $0.3 million relating to the equity in earnings, primarily
the interest income earned on the convertible notes from the MSV Joint
Venture, which is attributable to the group of unaffiliated third parties who
invested approximately $10.2 million in our MSV Investors Subsidiary.
Gain from Discontinued Operations
At the end of the third quarter of 2001, a decision to discontinue the
operations of Rare Medium, Inc. and its LiveMarket subsidiary was made in
light of their performance and prospects. For the three months ended June 30,
2003 and 2002, we recognized a gain of approximately $0.1 million and $11.5
million, respectively, as a result of the settlement of Rare Medium, Inc.
liabilities at amounts less than their recorded amounts.
Net Loss
For the three months ended June 30, 2003, we recorded a net loss of
approximately $0.2 million. The loss was primarily due to the factors
described in "Selling, General and Administrative Expense," "Depreciation and
Amortization Expense," "Interest Income, Net," "Loss on Investments in
Affiliates," "Minority Interest" and "Gain from Discontinued Operations."
Included in net loss attributable to common shareholders of $2.6 million
was approximately $2.4 million of non-cash deemed dividends and accretion
related to the issuance of our Series A convertible preferred stock. Dividends
were accrued related to the pay-in-kind dividends payable quarterly on Series
A convertible preferred stock and to the accretion of the carrying amount of
the Series A convertible preferred stock up to its $100 per share face
redemption amount over 13 years.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 2002
Selling, General and Administrative Expense
Selling, general and administrative expense includes facilities costs,
finance, legal and other corporate costs, as well as the salaries and related
employee benefits for those employees that support such functions. Selling,
general and administrative expense for the six months ending June 30, 2003
decreased to $3.3 million from $3.6 million for the six months ended June 30,
2002, a decrease of $0.3 million. This decrease was primarily related to the
$1.1 million charge recognized in the six months ended June 30, 2002 related
to the settlement of the class action lawsuit and the reduced legal and
advisory fees after the settlement of the class action lawsuit, partially
offset by the approximately $0.4 million charge recognized in the six months
ended June 30, 2003 relating to the severance for the Company's former
Controller and former Treasurer and the $0.2 million compensation
contra-expense and $0.1 million compensation expense recognized in the six
months ended June 30, 2002 and 2003, respectively, relating to the re-pricing
of certain stock options in 2001 and 2002. As these costs relate to our
current operations, we expect our selling, general and administrative expense,
excluding any non-cash compensation expense arising from fluctuations in the
price of our common stock in association with the repricing of certain stock
options in 2001 and 2002, to remain approximately at this level in future
periods.
Depreciation and Amortization Expense
Depreciation and amortization expense consists of the depreciation of
property and equipment and the amortization of the financing costs associated
with the issuance of our Series A convertible preferred stock. Depreciation
and amortization expense for the six months ended June 30, 2003 decreased to
approximately $13,000 from $0.1 million for the six months ended June 30,
2002, a decrease of approximately $0.1 million. This decrease is primarily the
result of the reduction in property and equipment used in our continuing
operations. As our capital expenditures remain nominal, we expect depreciation
and amortization expense to remain at this level in future periods.
Interest Income, Net
Interest income, net for the six months ended June 30, 2003 is mainly
comprised of the interest earned on our cash, cash equivalents, and short-term
investments and on our convertible notes receivable from the MSV Joint
Venture.
Loss on Investment in Affiliates
For the six months ended June 30, 2003 and 2002, we recorded a loss on
investments in affiliates of approximately $0.2 million and $0.1 million,
respectively, for our proportionate share of Miraxis' operating loss and, in
2003, the reserve for the promissory note issued by Miraxis. We will continue
to monitor the carrying value our remaining investments in affiliates.
Minority Interest
For the six months ended June 30, 2003, we recorded minority interest of
approximately $0.5 million relating to the equity in earnings, primarily the
interest income earned on the convertible notes from the MSV Joint Venture,
which is attributable to the group of unaffiliated third parties who invested
approximately $10.2 million in our MSV Investors Subsidiary.
Gain from Discontinued Operations
At the end of the third quarter of 2001, a decision to discontinue the
operations of Rare Medium, Inc. and its LiveMarket subsidiary was made in
light of their performance and prospects. For the six months ended June 30,
2003 and 2002, we recognized a gain of approximately $0.6 million and $11.5
million, respectively, as a result of the settlement of Rare Medium, Inc.
liabilities at amounts less than their recorded amounts.
Net Loss
For the six months ended June 30, 2003, we recorded a net loss of
approximately $0.5 million. The loss was primarily due to the factors
described in "Selling, General and Administrative Expense," "Depreciation and
Amortization Expense," "Interest Income, Net," "Loss on Investments in
Affiliates," "Minority Interest" and "Gain from Discontinued Operations."
Included in net loss attributable to common shareholders of $5.3 million
was approximately $4.8 million of non-cash deemed dividends and accretion
related to the issuance of our Series A convertible preferred stock. Dividends
were accrued related to the pay-in-kind dividends payable quarterly on Series
A convertible preferred stock and to the accretion of the carrying amount of
the Series A convertible preferred stock up to its $100 per share face
redemption amount over 13 years.
LIQUIDITY AND CAPITAL RESOURCES
We had $35.2 million in cash, cash equivalents and short-term investments
as of June 30, 2003. Cash used in operating activities from continuing
operations was $2.5 million for the six months ended June 30, 2003 and
resulted primarily from cash used for general corporate overhead including
payroll and professional fees. We expect cash used in continuing operations to
remain at approximately this level in future periods. Cash used by
discontinued operations was $0.3 million for the six months ended June 30,
2003 and resulted from cash used for settlement of vendor liabilities and
legal and advisory fees.
For the six months ended June 30, 2003, cash used by investing activities
from continuing operations was approximately $4.9 million and primarily
consisted of $6.5 million used to purchase short-term investments and $0.4
million used to purchase investments in IQStat and Miraxis, partially offset
by proceeds of $2.0 million resulting from the sale of short-term investments.
We do not have any future funding commitments with respect to any of our
investments. However, we expect that the MSV Joint Venture and Miraxis will
require additional funding from time to time, and we may choose to provide
additional funding, subject to our liquidity and capital resources at the
time.
For the six months ended June 30, 2003, cash used in financing activities
was approximately $1.2 million and resulted primarily from the repurchase of
shares of common stock in the tender offer as described below.
Motient Promissory Notes
On May 1, 2002, to mitigate the risk, uncertainties and expenses
associated with Motient's plan of reorganization, we cancelled the outstanding
amounts due under the original promissory notes issued by Motient and accepted
a new note in the principal amount of $19.0 million that was issued by MSV
Holding, Inc., a new, wholly-owned subsidiary of Motient that owns 100% of
Motient's interests in the MSV Joint Venture. The New Motient Note is due on
May 1, 2005 and bears interest at a rate of 9% per annum. Although the New
Motient Note is unsecured, there are material restrictions placed on the use
of MSV Holdings Inc.'s assets, and MSV Holdings Inc. is prohibited from
incurring or guarantying any debt in excess of $21.0 million (including the
New Motient Note). Additionally, there are events of default (e.g., a
bankruptcy filing by Motient) that would accelerate the due date of the New
Motient Note. As a result of the uncertainty with respect to the ultimate
collection on the New Motient Note, a reserve continues to be maintained for
the entire amount of the note. If we recover any amount on the New Motient
Note, adjustments to the reserve would be reflected in the accompanying
consolidated statements of operations. Furthermore, we have been conducting
periodic discussions with Motient concerning alternatives related to the New
Motient Note including the exchange of such note, or a portion thereof, into
an additional equity interest in the MSV Joint Venture.
MSV Joint Venture Convertible Note Receivable
Through our 80% owned MSV Investors Subsidiary, we are an active
participant in the MSV Joint Venture, a joint venture that also includes TMI,
Motient and the Other MSV Investors. The MSV Joint Venture is currently a
provider of mobile digital voice and data communications services via
satellite in North America. On November 26, 2001, through our MSV Investors
Subsidiary, we purchased a $50.0 million interest in the MSV Joint Venture in
the form of a convertible note. Immediately prior to the purchase of the
convertible note, Rare Medium Group contributed $40.0 million to the MSV
Investors Subsidiary and a group of unaffiliated third parties collectively
contributed $10.0 million. The note bears interest at a rate of 10% per year,
has a maturity date of November 26, 2006, and is convertible at any time at
the option of our MSV Investors Subsidiary into equity interests in the MSV
Joint Venture.
On August 13, 2002, the MSV Joint Venture completed a rights offering
allowing its investors to purchase their pro rata share of an aggregate $3.0
million of newly issued convertible notes with terms similar to the
convertible note already held by our MSV Investors Subsidiary. The MSV
Investors Subsidiary exercised its basic and over subscription rights and
purchased approximately $1.1 million of the convertible notes. The group of
unaffiliated third parties collectively contributed $0.2 million to the MSV
Investors Subsidiary in connection with the MSV Joint Venture rights offering.
Pursuant to the joint venture agreement among the partners of the MSV
Joint Venture (the "MSV Joint Venture Agreement"), in the event that the MSV
Joint Venture had received final regulatory approval from the FCC, as that
phrase is defined in the MSV Joint Venture Agreement, by March 31, 2003 for
its ATC applications, the Other MSV Investors would have been obligated to
invest an additional $50.0 million in the MSV Joint Venture. As the final
regulatory approval from the FCC, as defined in the MSV Joint Venture
Agreement, was not received by March 31, 2003, the additional investment was
not required. However, the Other MSV Investors retained the option to invest
the $50.0 million at the same terms and conditions until June 30, 2003. Prior
to its expiration, the option was extended until August 2003. On August 8,
2003, the MSV Joint Venture Agreement was amended and certain of the Other MSV
Investors agreed to invest $3.7 million in the MSV Joint Venture and retain
the option to invest an additional $17.6 million under certain terms and
conditions. This new option will expire either December 31, 2003 or March 31,
2004, depending on when certain regulatory appeals are decided. Under the
amended MSV Joint Venture Agreement, the convertible notes held by our MSV
Investors Subsidiary will automatically convert into equity interests in the
MSV Joint Venture upon additional equity investments at a valuation of the MSV
Joint Venture equal to or greater than the valuation at the time the MSV
Investors Subsidiary purchased the notes. Such additional equity investments
must total $41.6 million if made by December 31, 2003 and will need to
increase thereafter by an amount equal to the additional interest accrued on
the MSV Joint Venture's outstanding debt. Currently, our MSV Investors
Subsidiary owns, upon conversion, approximately 30.3% of the equity interests
in the MSV Joint Venture. If the Other MSV Investors exercise their option,
our MSV Investors Subsidiary would own, upon conversion, approximately 27.4%
of the equity interests.
The fair value of the convertible notes approximates book value based on
the equity value of the MSV Joint Venture's recent funding transactions
assuming conversion of such note.
Other Transactions
As part of our regular on-going evaluation of business opportunities, we
are currently engaged in a number of separate and unrelated preliminary
discussions concerning possible joint ventures and other transactions
(collectively, the "Transactions"). We are in the early stages of such
discussions and have not entered into any agreement in principle with respect
to any of the Transactions. Prior to consummating any Transaction, we will
have to, among other things, initiate and satisfactorily complete a due
diligence investigation, negotiate the financial and other terms (including
price) and conditions of such Transaction, obtain appropriate board of
directors', regulatory and other necessary consents and approvals and secure
financing, to the extent deemed necessary. We cannot predict if any such
Transaction will be consummated or, if consummated, will result in a financial
or other benefit to us.
Tender Offer
On March 13, 2003, we commenced a cash tender offer at a price of $1.00
per share for up to 2,500,000 shares, or approximately 35.5% of our
outstanding voting common stock. The tender offer expired on April 23, 2003
with 968,398 shares purchased by us for an aggregate cost, including all fees
and expenses applicable to the tender offer, of approximately $1.2 million.
The primary purpose of the tender offer was to provide our public stockholders
with additional liquidity for their shares of common stock, particularly in
light of decreased liquidity arising from the decision of Nasdaq to delist our
common stock, and to do so at a premium over the stock price before the tender
offer and without the usual transaction costs associated with open market
sales. Our preferred stockholders did not sell any shares of common stock in
the tender offer.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN No. 46").
FIN No. 46 provides clarification on the consolidation of certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties or in which equity investors do not have certain characteristics of a
controlling financial interest ("variable interest entities" or "VIEs"). FIN
No. 46 requires that VIEs be consolidated by the entity considered to be the
primary beneficiary of the VIE and is effective immediately for VIEs created
after January 31, 2003 and in the first fiscal year or interim period
beginning after June 15, 2003 for any VIEs created prior to January 31, 2003.
We are currently reviewing our investments and other arrangements to determine
whether any of our investee companies are VIEs.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how a company
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires the classification of certain
financial instruments as a liability (or in certain circumstances an asset)
because that instrument embodies an obligation of the company. SFAS No. 150 is
effective immediately for instruments entered into or modified after May 31,
2003 and in the first interim period beginning after June 15, 2003 for all
instruments entered into before May 31, 2003. The adoption of SFAS No. 150
will not have a material impact on our financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2003, we had $35.2 million of cash, cash equivalents and
short-term cash investments. These cash, cash equivalents and short-term cash
investments are subject to market risk due to changes in interest rates. In
accordance with our investment policy, we diversify our investments among
United States Treasury securities and other high credit quality debt
instruments that we believe to be low risk. We are averse to principal loss
and seek to preserve our invested funds by limiting default risk and market
risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
principal accounting officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, our chief executive officer and principal accounting officer
have concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by us in the reports
that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 2001, plaintiffs Jay M. Wolff, David Bliss, Tim Barber and
Steve O'Brien filed suit against Rare Medium, Inc., Rare Medium Group, Inc.,
and Rare Medium Texas I, Inc. in the United States District Court for the
Southern District of New York, Wolff, et al. v. Rare Medium, Inc., et al., CV
No 01-4279. The plaintiffs asserted claims for breach of contract, tortious
interference with contractual relations, tortious interference with
prospective advantage, and breach of implied obligation of good faith, arising
out of the plaintiffs' alleged attempt to engage in transactions involving
some or all of the approximately 1,200,000 shares of our common stock (prior
to the reverse stock split) that the plaintiffs obtained in our acquisition of
Big Hand, Inc. The plaintiffs sought unspecified compensatory and punitive
damages, interest, attorneys' fees and costs. On October 31, 2001, the Court
dismissed the case without prejudice. The plaintiffs filed an amended
complaint on December 7, 2001 based on substantially the same alleged facts.
The amended complaint asserts the following causes of action: (1) breach of
contract; (2) tortious interference with contract; and, (3) tortious
interference with prospective business advantage. The amended complaint also
sought an unspecified amount of actual damages, punitive damages, interest,
and costs. On June 27, 2002, the Court dismissed the case with prejudice. On
July 16, 2002, the plaintiffs filed a notice of appeal. On March 14, 2003, the
Court of Appeals denied the appeal in its entirety. On April 11, 2003, the
Court of Appeals denied a request for rehearing. We believe that no further
appeals can or will be filed with respect to this matter.
On November 19, 2001, five of our shareholders filed a complaint against
us, certain of our subsidiaries and certain of their current and former
officers and directors in the United States District Court for the Southern
District of New York, Dovitz v. Rare Medium Group, Inc. et al., No. 01 Civ.
10196. Plaintiffs became owners of restricted stock when they sold the company
that they owned to us. Plaintiffs assert the following four claims against
defendants: (1) common-law fraud; (2) violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; (3)
violation of the Michigan Securities Act; and (4) breach of fiduciary duty.
These claims arise out of alleged representations by defendants to induce
plaintiffs to enter into the transaction. The complaint seeks compensatory
damages of approximately $5.6 million, exemplary and/or punitive damages in
the same amount, as well as attorney fees. On January 25, 2002, we filed a
motion to dismiss the complaint in its entirety. On June 3, 2002, the Court
dismissed the matter without prejudice. On or about July 17, 2002, the
plaintiffs filed an amended complaint asserting similar causes of action to
those asserted in the original complaint. On September 12, 2002, we filed a
motion to dismiss on behalf of our self and our current and former officers
and directors. On March 7, 2003, the Court denied the motion to dismiss, and
discovery has commenced. We intend to continue to dispute this matter
vigorously.
We and certain of our subsidiaries (along with the Engelhard Corporation)
are parties to an arbitration relating to certain agreements that existed
between or among the claimant and ICC Technologies, Inc., our former name, and
the Engelhard/ICC ("E/ICC") joint venture arising from the desiccant air
conditioning business that we and our subsidiaries sold in 1998. The claimant
has sought $8.5 million for (a) its alleged out of pocket losses in investing
in certain of E/ICC's technology, (b) unjust enrichment resulting from the
reorganization of E/ICC in 1998, and (c) lost profits arising from the fact
that it was allegedly forced to leave the air conditioning business when the
E/ICC joint venture was dissolved. We intend to vigorously dispute this
action.
On July 26, 2002, plaintiffs James D. Loeffelbein, Terrie L. Pham and
certain related parties filed suit against the lead plaintiff's counsel in the
class action lawsuit, us, certain of our current and former officers, our
former investor relations firm and a former employee of plaintiff Loeffelbein
in the District Court of Johnson County, Kansas, Loeffelbein v. Milberg Weiss
Bershad Hynes & Lerach, LLP, et al., 02 CV 04867. The plaintiffs assert claims
for fraud, negligence and breach of fiduciary duty against all of us and
certain of our current and former officers in connection with allegedly false
statements purportedly made to the plaintiffs. The plaintiffs have sought
unspecified damages from the defendants. On September 11, 2002, the matter was
removed to the United States District Court for the District of Kansas. On
October 11, 2002, the plaintiffs sought to have the matter remanded to state
court. On May 7, 2003, the Federal District Court denied the plaintiffs
request to remand the matter as it related to us, our defendants and an
additional defendant. On June 9, 2003, we and our defendants filed a motion to
dismiss. On August 4, 2003, the plaintiffs responded. We intend to continue to
dispute this matter vigorously.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
31.1 - Certification of Jeffrey A. Leddy, Chief Executive
Officer and President of Rare Medium Group, Inc.,
required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Craig J. Kaufmann, Controller and
Treasurer of Rare Medium Group, Inc., required by
Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 - Certification of Jeffrey A. Leddy, Chief Executive
Officer and President of Rare Medium Group, Inc.,
Pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 - Certification of Craig J. Kaufmann, Controller and
Treasurer of Rare Medium Group, Inc., Pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) The following sets forth the Company's reports on Form 8-K that have
been filed during the quarter for which this report is filed:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2003 By: /s/ JEFFREY A. LEDDY
-------------------------------------
Jeffrey A. Leddy
Chief Executive Officer and President
(Principal Executive Officer and
Principal Financial Officer)
Date: August 14, 2003 By: /s/ CRAIG J. KAUFMANN
-------------------------------------
Craig J. Kaufmann
Controller and Treasurer
(Principal Accounting Officer)
EXHIBIT 31.1
CERTIFICATIONS
I, Jeffrey A. Leddy, certify that:
1. I have reviewed this Form 10-Q of Rare Medium Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 By: /s/ JEFFREY A. LEDDY
-------------------------------------
Jeffrey A. Leddy
Chief Executive Officer and President
(Principal Executive Officer and
Principal Financial Officer)
EXHIBIT 31.2
CERTIFICATIONS
I, Craig J. Kaufmann, certify that:
1. I have reviewed this Form 10-Q of Rare Medium Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 By: /s/ CRAIG J. KAUFMANN
-------------------------------------
Craig J. Kaufmann
Controller and Treasurer
(Principal Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey A. Leddy, Chief Executive Officer and President of Rare
Medium Group, Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to my knowledge:
(1) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
By: /s/ JEFFREY A. LEDDY
--------------------------------------
Name: Jeffrey A. Leddy
Title: Chief Executive Officer and President
(Principal Executive Officer and
Principal Financial Officer)
Date: August 14, 2003
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to the Company
and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Craig J. Kaufmann, Controller and Treasurer of Rare Medium Group, Inc.
(the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge:
(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(4) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
By: /s/ CRAIG J. KAUFMANN
--------------------------------------
Name: Craig J. Kaufmann
Title: Controller and Treasurer
(Principal Accounting Officer)
Date: August 14, 2003
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to the Company
and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.