UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ Annual report pursuant to Section 13
or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended
December 31, 2001, or
/ / Transition report pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from
to
Commission file number 0-13865
RARE MEDIUM GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
23-2368845
(I.R.S. Employer Identification Number)
44 West 18th Street, 6th Floor
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: (646) 638-9700
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 7, 2002 was $23,143,472.
As of March 7, 2002, 65,324,966 shares of our common stock were outstanding.
PART I
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve risks and uncertainties, including
statements regarding our capital needs, business strategy, expectations and
intentions. 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 other factors, our actual
results could differ materially from those anticipated in the forward-looking
statements, including those set forth below under "Item 1. Business," "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report. Actual results will most likely
differ from those reflected in these statements, and the differences could be
substantial. We disclaim any obligation to publicly update these statements,
or disclose any difference between our actual results and those reflected in
these statements. The information constitutes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
The factors set forth below under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other cautionary statements made in this report should be read and understood
as being applicable to all related forward-looking statements wherever they
appear in this report.
Item 1. Business
Overview
From 1998 through the third quarter of 2001, our principal business was
conducted through our subsidiary 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 which
caused many companies to reduce spending on Internet-focused business
solutions, a decision to discontinue Rare Medium, Inc.'s operations, along
with those of its LiveMarket, Inc. 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, in the past, we have
developed, managed and operated companies in selected Internet-focused
market segments ("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. Additionally, we sold a majority of our
equity interest in the operations of three of our Start-up Companies:
ChangeMusic Network ("ChangeMusic") and ePrize in April 2001 and
Regards.com in December 2001. Currently, we are no longer actively seeking
new start-up opportunities or venture investments, nor are we managing or
operating any Start-up Companies.
As a result of the decision to discontinue the operations of Rare
Medium, Inc. and LiveMarket, the operating results reported in our statements
of operations as continuing operations include the consolidated results of
Rare Medium Group, Inc., our 80% owned MSV Investors, LLC subsidiary ("MSV
Investors Subsidiary"), and our Start-up Companies, up to their respective
dates of sale or shutdown. The results of Rare Medium, Inc. and LiveMarket
are reflected as discontinued operations.
In November 2001, through our MSV Investors Subsidiary, we became a
participant in the Mobile Satellite Ventures, L.P. joint venture (the "MSV
Joint Venture"), a joint venture which includes TMI Communications, Inc.
("TMI"), Motient Corporation ("Motient"), and certain other investors (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 expect to become an increasingly active participant in the MSV
Joint Venture and have designated three members of the 12-member board of
directors of the MSV Joint Venture's corporate general partner.
In addition to winding down Rare Medium, Inc., our current operations
consist of actively managing our interest in the MSV Joint Venture. Our
principal assets consist of our interest in the MSV Joint Venture, five
million shares of XM Satellite Radio, Inc. ("XM Satellite Radio") common
stock, promissory notes from Motient Corporation with a principal amount of
$26.2 million, our 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 notes, we recognized a reserve for the entire amount of these
notes. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
We were incorporated in Delaware in 1985 as ICC Technologies, Inc.
MSV Joint Venture's Business
Overview
The MSV Joint Venture was originally formed in June 2000 as a
subsidiary of Motient. In November 2001, following the receipt of
regulatory and other governmental approvals, including approvals under the
Hart-Scott-Rodino Antitrust Improvements Act, by the Federal Communications
Commission ("FCC") and by Canadian regulatory authorities, Motient combined
its existing satellite assets and authorizations with certain assets and
authorizations of the satellite communications business of TMI, a
subsidiary of Bell Canada Enterprises, and these assets and authorizations
were contributed to the MSV Joint Venture. The assets and authorizations of
the satellite business formerly owned by Motient which were contributed to
the MSV Joint Venture included a satellite with coverage of most of North
America and its surrounding waters and the associated existing FCC licenses
and authorizations. The assets and capabilities of the satellite business
contributed to the MSV Joint Venture by TMI included a second satellite
(technologically identical to the satellite contributed to the MSV Joint
Venture by Motient) with similar geographic coverage, as well as the
associated Canadian satellite licenses.
Following the approvals described above and consistent with the terms
of an agreement which we entered into in October 2001 with the MSV Joint
Venture and certain other investors, 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, Inc. contributed $40 million to
the MSV Investors Subsidiary and unrelated third parties 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 our option into
equity interests in the MSV Joint Venture. Currently, the approximate
ownership of the MSV Joint Venture's equity interests, assuming conversion of
all convertible notes, is as follows: our MSV Investors Subsidiary, 30.8%;
TMI, 26.4%; Motient, 33.3%; and the Other MSV Investors, 9.5%. However, in
the event that the MSV Joint Venture receives approval from the FCC by March
31, 2003 with regard to its plans for a next-generation satellite system
complemented by ancillary terrestrial base stations as described below in
"Business - MSV Joint Venture's Strategy," the Other MSV Investors are
obligated to invest an additional $50.0 million in the MSV Joint Venture and,
thereafter, the approximate ownership of the MSV Joint Venture's equity
interest would be as follows: our MSV Investors Subsidiary, 23.6%; TMI,
20.2%; Motient, 25.5%; and the Other MSV Investors, 30.7%. Because our
interest in the MSV Joint Venture is in the form of a note, we do not reflect
the results of the MSV Joint Venture's operations in our statements of
operations. We are under no obligation to make any further investments in our
MSV Investors Subsidiary or in the MSV Joint Venture.
MSV Joint Venture's Current Business
The MSV Joint Venture is currently a provider of mobile digital voice
and data communications services via satellite in North America.
Satellite Voice and Data Services. The MSV Joint Venture's satellite
phone service supports two-way circuit-switched voice, facsimile and data
communication service. The MSV Joint Venture markets satellite telephone and
data services to businesses that have nationwide coverage requirements,
particularly those operating in geographic areas that lack significant
terrestrial coverage, such as natural resource companies, utilities and
telecommunications companies that require backup and restorable support, and
public safety organizations.
Satellite Dispatch Service. The MSV Joint Venture's satellite dispatch
service allows voice communications among users in a customer-defined group
using a push-to-talk device. This service facilitates team-based,
contingency-driven operations of groups over wide and/or remote areas. The
MSV Joint Venture's targeted customer groups for satellite dispatch service
include oil and gas pipeline companies, utilities and telecommunications
companies with outside maintenance fleets, state and local public safety
organizations, and public service organizations who need to seamlessly link
resources on a nationwide basis.
MSV Joint Venture's Strategy
The MSV Joint Venture plans, subject to the receipt of further
regulatory and government approvals, including certain FCC approvals and
certain approvals by Canadian regulatory authorities, to develop, build and
operate a next-generation satellite system complemented by ancillary
terrestrial base stations (which we sometimes refer to as the "ancillary
terrestrial component" or "ATC"). The MSV Joint Venture expects to use L-band
spectrum and two satellites to provide mobile digital voice and data
communications services in North America.
The FCC and the Canadian equivalent to the FCC, Industry Canada, are
currently considering applications submitted by the MSV Joint Venture which
could, if granted by both regulatory authorities, greatly expand the scope of
the MSV Joint Venture's business by permitting the MSV Joint Venture to
incorporate an ATC into its mobile satellite network. An ATC would permit the
MSV Joint Venture to reuse its satellite spectrum terrestrially. In this
regard, an ATC will allow MSV Joint Venture phones to operate inside of
buildings and throughout urban environments, which is currently not possible
due to terrain blockage from buildings and other urban structures which
interrupt the satellite signal's path. In response to the MSV Joint Venture's
application, the FCC is currently seeking public comment on proposals to
permit the incorporation of an ATC into mobile satellite services in various
frequency bands, including the Big LEO bands where certain competitors
provide service, as well as other mobile satellite frequency bands. If the
FCC were to adopt all such proposals, the MSV Joint Venture would face
increased competition in the provision of mobile satellite service using an
ATC. Moreover, if the FCC grants these potential competitors approval prior
to the MSV Joint Venture receiving approval for its application or grants
more extensive or more favorable approvals to these potential competitors,
the MSV Joint Venture's ability to implement its business strategy and
compete effectively could also be harmed. If an ATC is not authorized,
however, the MSV Joint Venture's business will be severely limited and the
value of our interest in the MSV Joint Venture will be significantly
impaired.
The business conducted and proposed to be conducted by the MSV Joint
Venture involves a high degree of risk. In addition, there is significant
uncertainty as to whether the additional regulatory approvals described above
will be received in the form requested or at all. Therefore, we cannot assure
you that the venture will ever be profitable or that any of the additional
regulatory approvals will be obtained.
Our Start-up and Venture Businesses
Historically, our start-up and venture businesses focused on Internet
companies engaged in business-to-business e-commerce, Internet enabling
tools, enterprise-level software infrastructure and next generation
communications sectors. Additionally, in the past, we have developed,
managed and operated our Start-up Companies. Through our investment
process, we decided whether to take a majority stake and incubate the
business or a minority strategic position as a venture investment. During
the first quarter of 2001, we reduced our focus on these businesses and
substantially ceased providing funding to our Start-up Companies.
Additionally, we sold a majority of our equity interest in the operations
of three of our Start-up Companies: ChangeMusic and ePrize in April 2001
and Regards.com in December 2001. Currently, we are no longer actively
seeking new start-up opportunities or venture investments, nor are we
managing or operating any Start-up Companies.
Most of the companies in which we have made venture investments are in
the early stages of development and many have been adversely affected by the
economic downturn in the Internet environment. Many have already been forced
out of business. Through December 31, 2001, we made venture investments in 24
companies, with our equity stakes in these companies ranging from less than
1% to 32%. In light of their early stage of development, current economic
conditions and the difficulty which these companies have had in obtaining
additional funding, we have reduced the carrying value of our venture
portfolio to $2.6 million. We attribute this value to our investments in
Cidera, DataSynapse, Edmunds, NextJet, Smart Online, and Totality.
Customers
Currently, as a result of discontinuing Rare Medium, Inc.'s operations
at the end of the third quarter of 2001, we do not directly have any
customers. However, the MSV Joint Venture, in which we are an active
participant, currently provides its mobile satellite communications services
to customers in North America. The MSV Joint Venture's significant satellite
telephone customers include Stratos Global, the Red Cross, Federal Emergency
Management Agency, Western Atlas Logging, and Halliburton. Significant
satellite dispatch customers include AT&T and MCI WorldCom.
Competition
Currently, as a result of discontinuing Rare Medium, Inc.'s operations
at the end of the third quarter of 2001, we do not have any direct
competitors. However, the MSV Joint Venture competes in the wireless
communications industry which is highly competitive and is characterized by
continuing technological innovation. The MSV Joint Venture's competitors
primarily include wireless communications service providers in the following
markets:
o PCS/Cellular - PCS and cellular services presently serve the
majority of mobile communications users in the United States.
There are a large number of cellular and PCS carriers providing
voice service throughout most of the densely populated regions of
the United States, including Verizon Wireless, Cingular Wireless,
AT&T Wireless, Sprint PCS and Nextel Communications. Numerous
paging companies also provide services similar to those offered or
proposed to be offered by the MSV Joint Venture.
o Mobile Satellite Services - A number of companies are selling or
developing mobile satellite services utilizing a variety of
satellite technologies that compete or will compete with the MSV
Joint Venture's services.
Non-Geostationary Earth Orbit (NGSO) Systems - Unlike
geostationary earth orbit (GSO) satellite systems, which orbit
approximately 22,000 miles above the earth's equator and appear
fixed in the sky to an observer on the earth, NGSO satellite
systems use satellites that orbit much closer to the earth's
surface and appear to traverse the sky when viewed by an observer
on the earth. The benefit of NGSO systems is the reduced time
delay in transmitting and receiving signals to and from the
satellite due to the satellite's proximity to the earth's surface.
Because NGSO systems orbit closer to the earth, however, each
satellite covers a smaller region of the earth's surface and,
accordingly, many more satellites are required to provide global
coverage, which generally makes NGSO systems more expensive to
launch and operate. Globalstar's NGSO satellite communications
service, which was launched in 2000, provides voice and data
services in most areas of the world, including the service areas
covered by the MSV Joint Venture. In addition, Iridium Satellite
LLC provides satellite voice services using an NGSO satellite
system. The Iridium service area overlaps with the service area of
the MSV Joint Venture. Another company, New ICO Global
Communications (Holdings) Limited, intends to launch commercial
satellite services late in 2003 over an NGSO system, and to offer
services including global Internet protocol services; Internet
connectivity; data, voice and fax services; and other data
communications services, such as global real-time and near
real-time two-way messaging services. New ICO and Iridium both
have entered into and emerged from bankruptcy court protection.
Globalstar is currently under bankruptcy court protection.
Geostationary Earth Orbit (GSO) Systems - GSO satellite systems
cover much larger areas of the earth with a single satellite
because they orbit farther away from the earth's surface than do
NGSO satellite systems. Consequently, GSO satellite systems
generally are less expensive to launch and operate than NGSO
satellite systems. GSO satellites, however, face difficulties with
time delay in the satellite signal given the distance that must be
traveled for the signal to reach the satellite and return to the
earth's surface, though recent developments in echo-canceling
technology have significantly diminished the negative effects of
this inherent time delay. The satellite signals of both NGSO and
GSO satellite systems are unable to penetrate buildings without an
ATC. The FCC recently authorized several companies to use mobile
earth terminals in the United States over the Inmarsat GSO
satellite system. The MSV Joint Venture's next-generation
satellite will use a GSO satellite architecture, as did the
satellite systems of Motient and TMI prior to the assignment of
their satellites and related authorizations to the MSV Joint Venture.
Employees
As of December 31, 2001, we had seven employees. We have entered into
employment agreements with our key employees. We require all of our senior
managers, as well as most of our key employees, to sign confidentiality
agreements and non-competition agreements that prohibit them from competing
with us during their employment and for various periods thereafter and limit
access to and distribution of proprietary information.
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.
However, the mobile satellite communications business of the MSV Joint Venture
is subject to pervasive government regulation in the United States and Canada.
The ownership and operation of the MSV Joint Venture's mobile satellite
communications business is subject to the rules and regulations of the FCC,
which acts under the authority established by the Communications Act of 1934,
as amended, and related federal laws, as well as Industry Canada. Among other
things, the FCC and Industry Canada allocate portions of the radio frequency
spectrum to certain services and grant licenses to and regulate individual
entities using that spectrum. The MSV Joint Venture operates pursuant to
various licenses granted by the FCC and Industry Canada.
The MSV Joint Venture's plan to develop, build and operate a
next-generation satellite system complemented by an ancillary terrestrial
component is subject to the receipt of further regulatory approvals. The MSV
Joint Venture's application to launch and operate this type of
next-generation mobile satellite system has been opposed by a number of
parties, some of whom argue that the FCC should reallocate satellite spectrum
in the L-band to terrestrial use only, or that rights to use portions of
spectrum currently allocated to satellite use should be separately auctioned.
In response to the MSV Joint Venture's application, the FCC is currently
seeking public comment on proposals to permit the incorporation of an ATC into
mobile satellite services in various frequency bands, including the Big LEO
bands where Iridium and Globalstar provide service, as well as other mobile
satellite frequency bands. On March 6, 2002, the FCC requested additional
public comment on the technological feasibility of terrestrial and satellite
services being separately offered within the same frequency ranges by
different operators. If the FCC determines that terrestrial services can be
severed from satellite services in the L-band, the FCC will be more likely to
auction the terrestrial rights contemplated by an ATC to third parties and
less likely to grant the MSV Joint Venture application insofar as it requests
the exclusive right to implement an ATC in conjunction with the MSV Joint
Venture's satellite service. The failure of the MSV Joint Venture to obtain
the regulatory approvals it has requested may harm the MSV Joint Venture's
ability to implement its business strategy and compete effectively, which may
cause our joint venture interest in the MSV Joint Venture to depreciate or
never appreciate in value and this could have a material adverse effect on our
financial condition. See "- Risk Factors - The value of our interest in the
MSV Joint Venture may never appreciate or may decline significantly in the
future because the MSV Joint Venture is entering a new stage of development
and its business involves a high degree of risk" under this Item 1.
Risk Factors
You should carefully consider the risks described below in evaluating
our common stock. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known
to us may also impair our operations and business. If we do not
successfully address any of the risks described below, there could be a
material adverse effect on our financial condition, operating results and
business, and the trading price of our common stock may decline. We cannot
assure you that we will successfully address these risks.
The recent winding down of our Internet professional services business has
resulted in uncertainty about our prospects and future operating results.
During the year ended December 31, 2001, we ceased funding our
Internet professional services subsidiary, Rare Medium, Inc. and its
LiveMarket subsidiary, and recognized restructuring charges of
approximately $55.6 million related to these businesses. In addition to
winding down Rare Medium, Inc., our current operations consist of actively
managing our interest in the MSV Joint Venture, described further in "Item 1.
Business" beginning on page 2. Our interests in the MSV Joint Venture,
our investment in XM Satellite Radio common stock, our Motient promissory
notes and our remaining investments in our venture portfolio companies are
subject to a number of significant risks and uncertainties. As a result of
these and other costs and risks, we may incur losses in the future, and our
prospects, financial condition and future results are uncertain.
The value of our interest in the MSV Joint Venture may never appreciate or
may decline significantly in the future because the MSV Joint Venture is
entering a new stage of development and its business involves a high degree
of risk.
Our interest in the MSV Joint Venture represents a substantial
portion of the value of our total assets. The value of our investment in
the MSV Joint Venture may never appreciate in value or may decline rapidly
in value in the future. The MSV Joint Venture is entering a new stage of
development with significant future funding requirements and its business
is subject to a number of significant risks and uncertainties. These risks
include (1) rapid technological change, (2) intense competition and (3)
pervasive government regulation by the FCC in the United States and by
Industry Canada, its counterpart in Canada.
The FCC and Industry Canada are currently considering applications
submitted by the MSV Joint Venture which could, if granted by both
regulatory authorities, greatly expand the scope of the MSV Joint Venture's
business by permitting the MSV Joint Venture to incorporate an ATC into its
mobile satellite network. An ATC would permit the MSV Joint Venture to
reuse its satellite spectrum terrestrially. In this regard, an ATC will
allow communications devices on the MSV Joint Venture's system to operate
inside of buildings and throughout urban environments, which is currently
not possible due to terrain blockage from buildings and other urban
structures which interrupt the satellite signal's path. In response to the
MSV Joint Venture's application, the FCC is currently seeking public
comment on proposals to permit the incorporation of an ATC into mobile
satellite services in various frequency bands, including the Big LEO bands
where Iridium and Globalstar provide service, as well as other mobile
satellite frequency bands. If the FCC were to adopt all such proposals, the
MSV Joint Venture would face increased competition in the provision of
mobile satellite service using an ATC. Moreover, if the FCC grants these
potential competitors approval prior to the MSV Joint Venture receiving
approval for its application or grants more extensive or more favorable
approvals to these potential competitors, the MSV Joint Venture's ability
to implement its business strategy and compete effectively could also be
harmed. If an ATC is not authorized, however, the MSV Joint Venture's
business may be severely limited and the value of our interest in the MSV
Joint Venture may be significantly impaired.
Satellite services face numerous uncertainties that are unique to the
industry. Satellite launches are inherently risky and launch failures occur.
Moreover, once in orbit, satellites experience failures or technical
anomalies that could damage the MSV Joint Venture's ability to provide
services to its customers. While the MSV Joint Venture's satellites have not
experienced significant anomalies, no assurance can be given that such
anomalies will not occur. Satellites cannot easily be repaired once in orbit
and, accordingly, even a technical anomaly short of total failure of the
satellite could render the satellite useless. The MSV Joint Venture's
application to incorporate an ATC contemplates that these services will be
provided over a next-generation satellite. Accordingly, the MSV Joint Venture
will face the risks attendant with launching new satellites in the near term
should ATC be authorized and the MSV Joint Venture's application granted.
It is likely that the MSV Joint Venture will need to raise additional
funds through public or private debt or equity financings in order to (1)
implement its business plans; (2) take advantage of opportunities, including
acquisitions of, or investments in, businesses or technologies; (3) develop
new services; or (4) respond to competitive pressures. We cannot assure you
that any such additional financing will be available on terms favorable to the
MSV Joint Venture, or at all. If the MSV Joint Venture does not receive
certain regulatory approvals by the FCC and Industry Canada by March 31, 2003,
the Other MSV Investors are not obligated to invest an additional $50.0
million as currently anticipated, and this could materially adversely affect
MSV Joint Venture's implementation of its business plans if it is unable to
raise additional funds from other sources.
These risks and uncertainties may impair the value of our joint venture
investment in the MSV Joint Venture, which represents a substantial portion of
our total assets.
Governmental regulation of the mobile satellite services industry could
negatively impact the value of our interest in the MSV Joint Venture.
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.
The mobile satellite services business of the MSV Joint Venture, however, is
subject to pervasive government regulation in the United States and Canada.
Unlike some satellite services where a satellite licensee is granted an
exclusive right to a predetermined amount of spectrum for a definite time
period, L-band spectrum historically has been shared among five different
licensees (Solidaridad in Mexico, TMI in Canada, Motient in the U.S., the
Russian Federation, and Inmarsat), and these five licensees have agreed to
coordinate their spectrum needs on an annual basis and divide the available
L-band spectrum among themselves. Among other considerations, prior usage of
the L-band to provide service is one factor determining the allotment to each
licensee on an annual basis. Notwithstanding the agreement among these five
countries to coordinate annually their spectrum usage in the L-band, the five
licensees currently continue to operate pursuant to a coordination agreement
reached in Mexico City in 1995 and annual coordination meetings have not been
held since 1999. Motient and TMI were licensed by their respective
communications regulatory agencies many years ago to use L-band spectrum in
their respective countries. Following FCC and Industry Canada consent, each
company recently assigned its respective L-band satellite licenses to the MSV
Joint Venture. It is unclear how the annual coordination process described
above will be affected by the assignment of the Motient and TMI licenses to
the MSV Joint Venture and, accordingly, the MSV Joint Venture cannot be
assured that it will have access to sufficient L-band spectrum to meet its
needs in the future pursuant to this annual coordination process.
Moreover, several companies recently were authorized by the FCC to use
mobile earth terminals in the U.S. over the Inmarsat L-band satellites. These
authorizations could increase the demand for and usage of the L-band by
Inmarsat, which in turn could increase Inmarsat's demand for L-band spectrum
pursuant to the annual coordination process in the L-band. The FCC also
recently concluded a long-pending proceeding in which it originally had
proposed to coordinate up to 28 MHz of L-band spectrum solely for Motient. The
FCC determined early this year that numerous advances in satellite technology
during the intervening years suggested that Motient's L-band spectrum needs
could be satisfied with only 20 MHz of L-band spectrum. The FCC also indicated
it would count toward Motient's 20 MHz allotment any spectrum assigned to the
MSV Joint Venture from TMI as part of the MSV Joint Venture's application.
These actions may cap the MSV Joint Venture's L-band spectrum at 20 MHz. The
FCC further proposed that any new spectrum that becomes available in the
L-band may be awarded to competing mobile satellite service providers. If the
FCC adopts this proposal, the MSV Joint Venture could face increased
competition in the mobile satellite services marketplace.
Our investment in XM Satellite Radio common stock involves a high degree of
risk because XM Satellite Radio is a company which only recently commenced
generation of revenues.
We own five million shares of XM Satellite Radio common stock, which
represents a substantial portion of our total assets based on the current
market price of XM Satellite Radio common stock. The value of our investment
in XM Satellite Radio has fluctuated significantly in the past and may decline
rapidly in the future. XM Satellite Radio was a development stage company
through the fourth quarter of 2001 and has just recently started to generate
revenues. XM Satellite Radio has limited revenues, has incurred significant
capital expenditures and losses and will likely require significant additional
funding. XM Satellite Radio's business is subject to a number of significant
risks and uncertainties such as rapid technological change, intense
competition from Sirius Satellite Radio Inc., currently its sole competitor in
the satellite radio market, and pervasive regulation by the FCC.
Malfunctions in satellite technology could damage XM Satellite
Radio's ability to provide services to its customers. While XM Satellite
Radio's two satellites have been successfully launched into their
respective orbital locations and have not yet experienced significant
anomalies, no assurance can be given that such anomalies will not occur.
Satellites cannot easily be repaired once in orbit and, accordingly, even a
technical anomaly short of total failure of the satellite could render the
satellite useless, thereby harming XM Satellite Radio's ability to provide
its service to its customers.
On February 14, 2002, XM Satellite Radio's primary competitor, Sirius
Satellite Radio, commenced commercial service in four markets in the U.S.
Sirius also announced that it plans a nationwide rollout of commercial service
before the end of 2002. Sirius Satellite Radio will compete directly with XM
Satellite Radio for customers.
Both XM Satellite Radio and Sirius Satellite Radio require the use of
terrestrial repeaters to augment the satellite signal in certain locations in
order to overcome the effects of terrain blockage (e.g., tall buildings or
tunnels) and provide a robust, uninterrupted signal. XM Satellite Radio and
Sirius Satellite Radio currently operate numerous terrestrial repeaters
nationwide pursuant to special temporary authority ("STA") from the FCC. STAs
generally run for a period of 180 days and may be renewed by the FCC upon
request. XM Satellite Radio cannot be assured that the FCC will renew the
current STA for the use of its terrestrial repeaters, which expires in March
of this year. The FCC currently is seeking comment on proposed rules that will
grant permanent authority to XM Satellite Radio and Sirius Satellite Radio to
operate terrestrial repeaters. Several comments from the public have opposed
the authorization of terrestrial repeaters. XM Satellite Radio cannot be
assured that the FCC will adopt its proposed rules governing terrestrial
repeaters or that the rules as adopted will be sufficient to permit XM
Satellite Radio to operate the terrestrial repeaters at the requisite power
levels. If the FCC fails to extend XM Satellite Radio's current STA or to
adopt suitable rules governing terrestrial repeaters, XM Satellite Radio's
business will be harmed.
XM Satellite Radio will likely need to raise additional funds through
public or private debt or equity financings in order to (1) implement its
business plans; (2) take advantage of opportunities, including acquisitions
of, or investments in, businesses or technologies; (3) develop new services;
or (4) respond to competitive pressures. We cannot assure you that any such
additional financing will be available on terms favorable to XM Satellite
Radio, or at all.
These risks and uncertainties may impair the value of our investment in
XM Satellite Radio common stock. The value of our investment in XM Satellite
Radio represents a significant portion of our total assets and fluctuates with
the market price of XM Satellite Radio's common stock.
Our common stock could be delisted from the Nasdaq National Market which
could seriously limit the liquidity and negatively affect the value of our
common stock.
By letter dated February 14, 2002, Nasdaq notified us that if prior to
May 15, 2002, the bid price of our Common Stock is not at least $1.00 for a
minimum of 10 consecutive trading days, Nasdaq will notify us that the Common
Stock will be delisted from the Nasdaq National Market for failure to satisfy
the minimum bid price requirement. In order to regain compliance with the
requirements for continued listing on the Nasdaq National Market, absent a
significant change in market price, our board of directors and our
stockholders will have to approve and we will need to implement a reverse
stock split. If such action is not taken or approved, then it is likely,
depending on the volatility of our common stock and our ability to meet the
listing criteria described above, that we will not satisfy the requirements
for continued listing on the Nasdaq National Market or initial registration on
either the New York Stock Exchange or the American Stock Exchange. Even if
such a split were approved by our stockholders, the market sometimes views
reverse stock splits negatively and there can be no assurance that following
such stock split we would be successful in meeting the listing criteria
described above.
If Nasdaq determines to delist our common stock, we plan to appeal the
determination pursuant to Nasdaq's procedures. We cannot assure you that we
would be successful in appealing any determination by Nasdaq to delist our
common stock. If our common stock is delisted from the Nasdaq National Market,
we would seek to maintain the listing of our common stock on the Nasdaq
SmallCap Market. However, if our common stock is delisted from the Nasdaq
National Market, the delisting would result in a reduction in the liquidity
and market price of our shares of common stock. This lack of liquidity would
also make it difficult for us to raise capital.
If we are unable to demonstrate compliance with the minimum bid price
requirement on or prior to May 15, 2002, or such other date as Nasdaq may
permit, and any appeal to Nasdaq for relief from this requirement is
unsuccessful, our common stock will be delisted from the Nasdaq National
Market. If this were to happen, trading in our common stock would decrease
substantially.
In addition, the delisting of our common stock from the Nasdaq National
Market would result in an event of non-compliance under the provisions of our
Series A convertible preferred stock. If we are unable to obtain a waiver of
this event of non-compliance, the holders of the Series A convertible
preferred stock would be entitled to elect a majority of the members of our
board of directors which would provide them with control over our management
and policies.
The outcome and effects of the Motient bankruptcy proceedings on the
Motient Notes and the MSV Joint Venture's regulatory approvals are highly
uncertain.
On January 10, 2002, Motient Corporation and its subsidiaries filed for
protection under Chapter 11 of the United States Bankruptcy Code. As part of
its filing Motient indicated that it may challenge our right to the $26.2
million of outstanding principal amount of the exchangeable notes issued to
us by Motient in October 2001. In addition to the uncertainties of retaining
all or part of the $26.2 million of the original principal on the Motient
notes, Motient's bankruptcy proceedings could have other effects on us,
including the initiation of litigation directly against us to challenge the
delivery of the shares of XM Satellite Radio common stock by Motient to us as
partial repayment of the aggregate $50.0 million principal amount of the
exchangeable notes arising from two $25.0 million loans made to Motient by us
in April and July 2001. In light of, among other things, the operating
results and financial condition of Motient and the uncertainties as to the
outcome of Motient's bankruptcy, there can be no assurance that we will be
able to recover any of the remaining $26.2 million of original principal of
the Motient notes or that we will not compromise our claim. Negotiations with
Motient and its creditors committee are ongoing and we believe that our
recovery on these notes could be substantial. As a result of uncertainty
with respect to the ultimate collection on the Motient notes, we recognized a
reserve for the entire amount of these notes. While we do not believe such
claims have merit, if successful, such actions could also adversely impact
the value of our investment in XM Satellite Radio's common stock.
Motient and TMI filed applications with the FCC and Industry Canada
seeking regulatory approval to (1) assign certain of their respective
satellite assets and authorizations to the MSV Joint Venture and (2) operate a
next-generation satellite that incorporates an ATC for the provision of a more
robust wireless communications offering through the MSV Joint Venture's
next-generation satellite. Motient's bankruptcy could negatively impact the
MSV Joint Venture's ability to obtain approval of its application to operate a
next-generation satellite incorporating an ATC. In this regard, the MSV Joint
Venture's application to launch and operate a next-generation mobile satellite
system and to incorporate an ATC has been opposed by a number of parties, some
of which argue that the FCC should reallocate satellite spectrum in the L-band
to terrestrial use only. These parties have argued that, among other things,
the inability of Motient to develop a vibrant business constitutes evidence
that the mobile satellite industry is no longer viable and, therefore, the
L-band spectrum should be reallocated to terrestrial wireless uses.
Apollo beneficially owns a large percentage of our voting stock.
As of March 7, 2001, Apollo Investment Fund IV, L.P., Apollo Overseas
Partners IV, L.P. and AIF IV/RRRR LLC (collectively, "Apollo") owned
12,709,499 shares of our outstanding voting common stock and all of the
1,053,259 outstanding shares our Series A convertible preferred stock and all
of our outstanding Series 1-A and Series 2-A warrants. Assuming that all
currently outstanding shares of our Series A convertible preferred stock are
converted and all Series 1-A warrants and Series 2-A warrants are exercised,
Apollo would own approximately 44% of our outstanding common stock.
Additionally, Apollo's ownership interest in our company may increase upon its
conversion of additional shares of Series A convertible preferred stock or its
exercise of additional Series 1-A warrants received as in-kind dividends on
its shares of Series A convertible preferred stock. As long as Apollo owns at
least 100,000 shares of the Series A convertible preferred stock, we are
precluded from taking various corporate actions and entering into various
transactions, without Apollo's consent. These corporate actions and
transactions are described in our proxy statement for the stockholders'
meeting held on August 19, 1999. As long as Apollo owns at least 100,000
shares of our Series A convertible preferred stock, the holders of the Series
A convertible preferred stock, voting as a separate class, have the right to
elect two of the members of our board of directors and have certain approval
rights with respect to additional members of our board of directors in the
event that the size of our board of directors is increased. In addition,
Apollo is entitled to an aggregate limit of 9,750,000 votes with respect to
the Series A convertible preferred stock, or 9.26 votes per share of Series A
convertible preferred stock as of March 7, 2002.
Because of Apollo's large percentage of ownership and its rights as the
holder of Series A convertible preferred stock, Apollo may have significant
influence over our management and policies, such as the election of our
directors, the appointment of new management and the approval of any other
action requiring the approval of our stockholders, including any amendments to
our certificate of incorporation and mergers or sales of all or substantially
all of our assets. In addition, the level of Apollo's ownership of our shares
of common stock and these rights could have the effect of discouraging or
impeding an unsolicited acquisition proposal.
We may suffer adverse consequences if we are deemed to be an investment
company.
We may suffer adverse consequences if we are deemed to be an
investment company under the Investment Company Act of 1940. A company may
be deemed to be an investment company if it owns investment securities with
a value exceeding 40% of its total assets, subject to certain exclusions.
Some investments made by us may constitute investment securities under the
Investment Company Act of 1940. If we were to be deemed an investment
company, we would become subject to registration and regulation as an
investment company under the Investment Company Act of 1940. If we failed
to do so, we would be prohibited from engaging in business or issuing our
securities and might be subject to civil and criminal penalties for
noncompliance. In addition, certain of our contracts might be voidable, and
a court-appointed receiver could take control of our company and liquidate
our business. If we registered as an investment company, we would be
subject to restrictions regarding our operations, investments, capital
structure, governance and reporting of our results of operations, among
other things, and our ability to operate as we have in the past would be
adversely affected.
Although our investment securities currently comprise more than 40%
of our assets, fluctuations in the value of these securities or of our
other assets may cause this limit to be satisfied. In addition, we expect
any excess value of our investment securities to be temporary as we intend
to continue to increase our interests in non-investment businesses such as
the MSV Joint Venture. Unless an exclusion or safe harbor were available to
us, in certain circumstances, we would have to attempt to reduce our
investment securities as a percentage of our total assets in order to avoid
becoming subject to the requirements of the Investment Company Act of 1940.
This reduction can be attempted in a number of ways, including the
disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may
sell them sooner than we otherwise would. These sales may be at depressed
prices, and we may never realize anticipated benefits from, or may incur
losses on, these investments. Some investments may not be sold due to
contractual or legal restrictions or the inability to locate a suitable
buyer. Moreover, we may incur tax liabilities when we sell assets. We may
also be unable to purchase additional investment securities that may be
important to our operating strategy. If we decide to acquire non-investment
security assets, we may not be able to identify and acquire suitable assets
and businesses.
Fluctuations in our financial performance could adversely affect the
trading price of our common stock.
Our financial results may fluctuate as a result of a variety of factors,
many of which are outside of our control, including:
o risks and uncertainties affecting the current and proposed business
of the MSV Joint Venture and the mobile satellite services industry;
o increased competition in the mobile satellite services industry;
o fluctuations in the market price of XM Satellite Radio common stock;
o costs associated with discontinuing our Internet professional
services business; and
o general economic conditions.
As a result of these possible fluctuations, period-to-period comparisons
of our financial results may not be reliable indicators of future performance.
The price of our common stock has been volatile.
The market price of our common stock has been, and is likely to continue
to be, volatile, experiencing wide fluctuations. In recent years, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many companies
providing Internet-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of
such companies. Future market movements may materially and adversely affect
the market price of our common stock.
Our business is subject to general economic conditions. Future economic
downturns could have an adverse impact on the value of our interest in the
MSV Joint Venture and our investment in XM Satellite Radio common stock.
Our business is subject to fluctuations based upon the general economic
conditions in North America and, to a lesser extent, the global economy.
Future general economic downturns or a recession in the United States could
substantially reduce the demand for satellite communications services,
thereby reducing the market price of XM Satellite Radio common stock and the
value of our interest in the MSV Joint Venture. A deterioration in existing
economic conditions could therefore materially and adversely affect our
financial condition, operating results and business.
We do not intend to pay dividends on shares of our common stock in the
foreseeable future.
We currently expect to retain our future earnings, if any, for use in
the operation and expansion of our business. We do not anticipate paying any
cash dividends on shares of our common stock in the foreseeable future.
The issuance of preferred stock or additional common stock may adversely
affect our stockholders.
Our board of directors has the authority to issue up to 10,000,000
shares of our preferred stock and to determine the terms, including voting
rights, of those shares without any further vote or action by our common
stockholders. The voting and other rights of the holders of our common
stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future.
Similarly, our board may issue additional shares of common stock without
any further vote or action by common stockholders, which would have the
effect of diluting common stockholders. An issuance could occur in the
context of another public or private offering of shares of common stock or
preferred stock or in a situation where the common stock or preferred stock
is used to acquire the assets or stock of another company. The issuance of
common stock or preferred stock, while providing desirable flexibility in
connection with possible acquisitions, investments and other corporate
purposes, could have the effect of delaying, deferring or preventing a
change in control.
Anti-takeover provisions could make a third-party acquisition of our
company difficult.
We are a Delaware corporation. The Delaware General Corporation Law
contains provisions that could make it more difficult for a third party to
acquire control of our company. In addition, we have a classified board of
directors, with each board member serving a staggered three-year term. The
existence of a classified board could make it more difficult for a third-party
to acquire control of our company.
Shares eligible for future sale could cause our stock price to decline.
The market price of our common stock could decline as a result of future
sales of substantial amounts of our common stock, or the perception that such
sales could occur. Furthermore, certain of our existing stockholders have the
right to require us to register their shares, and the holders of our Series A
convertible preferred stock and Series 1-A and 2-A warrants have the right to
require us to register the shares of common stock underlying these securities,
which may facilitate their sale of shares in the public market.
Item 2. Properties
We conduct our administrative and operations activities from a leased
facility in New York, New York. We routinely evaluate our facilities for
adequacy and necessity in light of our plans for the future. We do not
anticipate purchasing real property in the foreseeable future.
Item 3. Legal Proceedings
We are aware of a number of purported class action lawsuits that have
been filed by the holders of our common stock in the Court of Chancery of the
State of Delaware which challenged the plan of merger with Motient Corporation
that was terminated on October 1, 2001. All of the complaints name us and
members of our board of directors as defendants. Most of the complaints name
the holders of our preferred stock, and certain of their affiliates, as
defendants, and some of the complaints name Motient as a defendant. On June
22, 2001, the Delaware court entered an order to consolidate all of the
Delaware lawsuits for all purposes into a single purported class action, In re
Rare Medium Group, Inc. Shareholders Litigation, C.A. No. 18879-NC. On August
7, 2001, a Consolidated Amended Class Action Complaint was filed in Delaware
Chancery Court. The Delaware Chancery Court has not yet certified the
consolidated lawsuit as a class action. The lawsuit alleges that the
defendants breached duties allegedly owed to the holders of our common stock
in connection with the merger agreement and sought to stop the merger and/or
obtain monetary damages. On October 19, 2001, we filed a motion to dismiss the
Consolidated Amended Class Action Complaint on a variety of grounds, including
mootness. Settlement negotiations are underway. If unsuccessful, we intend to
continue to vigorously contest this lawsuit.
A purported class action was filed in New York, titled Brickell Partners
v. Rare Medium Group, Inc., et al., N.Y.S. Index No. 01602694, in the New York
State Supreme Court, making similar allegations to the Consolidated Amended
Class Action Complaint in Delaware. The complaint was dismissed on February
21, 2002.
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, tortuous
interference with contractual relations, tortuous 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 1.2 million shares of our common stock 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.
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) tortuous interference
with contract; and, (3) tortuous interference with prospective business
advantage. The amended complaint seeks an unspecified amount of actual
damages, punitive damages, interest, and costs. Defendants moved to dismiss
the amended complaint on December 27, 2001, and briefing has been completed.
We intend to dispute this matter vigorously.
In July 2001, Rare Medium, Inc. received a notice of arbitration demand
from a third party (the "Partner") with whom it had entered a strategic
alliance agreement, as amended (the "Agreement"). The Agreement provided,
among other things, for the Partner to assist in the training of personnel
and development and delivery by Rare Medium, Inc. of solutions built
utilizing the Partner's technology. Under the terms of the Agreement, the
Partner was to provide Rare Medium, Inc. with refundable advances of
approximately $17.1 million, on an interest free basis, to be paid to Rare
Medium, Inc. over the term of the two-year Agreement, subject to Rare Medium,
Inc.'s compliance with certain requirements set forth in the agreement. The
amount and timing of the repayment of the advances was subject to adjustment
based on Rare Medium, Inc.'s achievement of certain milestones in accordance
with the terms of the Agreement. A dispute arose with respect to Rare Medium,
Inc.'s achievement of the milestones. As a result, the Partner has asserted
that the Agreement has terminated and commenced an arbitration seeking the
return of all of the approximately $8.6 million that had been advanced under
the Agreement. Rare Medium, Inc. intends to contest the Partner's claims.
There can be no assurance that Rare Medium, Inc. will be successful in
contesting this action and that accelerated repayment, along with attorney's
fees and interest, will not be required.
On July 23, 2001, plaintiff Microsoft Corporation filed suit against
Rare Medium, Inc. in the United States District Court for the Western District
of Washington, CO1-1130P. The plaintiff alleges breach of contract in
connection with a consulting agreement and an alliance agreement entered
between the parties seeking $2.3 million in damages, interest and attorney's
fees. Rare Medium, Inc. plans to defend the matter vigorously.
On November 19, 2001, five of our shareholders filed a complaint in the
United States District Court for the Southern District of New York against the
Company, Dovitz v. Rare Medium Group, Inc. et al., No. 01 Civ. 10196, certain
of its subsidiaries and certain of their current and former officers and/or
directors. 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. We intend to dispute this
matter vigorously.
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, 2001.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Our common stock trades on The Nasdaq National Market under the symbol
"RRRR." Prior to February 15, 1996, our common stock was listed on The Nasdaq
Small Cap Market. Based on quotations reported by Nasdaq, the range of high
and low bids for our common stock for the two most recent fiscal years is as
follows:
2001
----------------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
---------- ----------- ---------- ---------
High Bid:... $0.96 $0.54 $2.08 $4.16
Low Bid:.... 0.09 0.08 0.37 1.19
2000
----------------------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
---------- ----------- ---------- ---------
High Bid:... $7.63 $17.88 $44.88 $94.75
Low Bid:.... 1.31 5.16 12.50 27.00
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 7, 2002, the last
reported sale price for our common stock was $0.44 per share.
As of March 7, 2002, we had approximately 857 recordholders of our
common stock. This number was derived from our stockholder records, and does
not include beneficial owners of our common stock whose shares are held in
the names of various dealers, clearing agencies, banks, brokers, and other
fiduciaries. Holders of our common stock are entitled to share ratably in
dividends, if and when declared by our board of directors.
We have not paid a cash dividend on our common stock for the fiscal
years ended December 31, 2000 and December 31, 2001, and it is unlikely that
we will pay any cash dividends on our common stock in the foreseeable future.
The payment of cash dividends on our common stock will depend on, among other
things, our earnings, capital requirements and financial condition, and
general business conditions. Under the terms of the purchase agreement we
entered into with the holders of our Series A convertible preferred stock,
for so long as such holders beneficially own not less than 100,000 shares of
Series A convertible preferred stock, we are prohibited from declaring or
paying, and may not permit any of our subsidiaries to declare or pay, any
dividend or make any other distribution in respect of any other shares of our
capital stock without the prior written consent of such holders. In addition,
future borrowings or issuances of preferred stock may prohibit or restrict
our ability to pay or declare dividends.
Item 6. Selected Financial Data
The following historical selected financial data for the years ended
December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from financial
statements that have been audited by our independent accountants. There were
no cash dividends paid to holders of our common stock in any of these years.
The data should be read in conjunction with our financial statements and the
notes thereto included elsewhere in this report. The format of prior year data
has been conformed to reflect the accounting for discontinued operations.
Years Ended December 31,
-----------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ----------- -------------- ------------
(in thousands except share data)
Consolidated Statements of Operations
Data:
Revenues $-- $-- $1,569 $8,284 $1,906
Cost of revenues -- -- 1,019 6,102 1,337
------------ ------------ ----------- -------------- ------------
Gross profit -- -- 550 2,182 569
------------ ------------ ----------- -------------- ------------
Expenses:
Sales and marketing -- -- 267 14,224 1,257
General and administrative 1,992 2,054 14,551 44,536 18,858
Depreciation and amortization -- 25 1,848 8,187 3,028
Restructuring charges -- -- -- -- 1,071
------------ ------------ ----------- -------------- ------------
Total expenses 1,992 2,079 16,666 66,947 24,214
------------ ------------ ----------- -------------- ------------
Loss from operations (1,992) (2,079) (16,116) (64,765) (23,645)
Interest income (expense), net 493 (1,181) (1,479) 10,182 9,189
Loss on investments in affiliates -- -- (1,469) (11,102) (54,633)
Minority interest -- -- -- -- (97)
Other income (expense), net -- -- 200 (205) (22,239)
------------ ------------ ----------- -------------- ------------
Loss before taxes and discontinued (1,499) (3,260) (18,864) (65,890) (91,425)
operations
Income taxes -- 355 -- -- --
------------ ------------ ----------- -------------- ------------
Loss before discontinued operations (1,499) (3,615) (18,864) (65,890) (91,425)
Discontinued operations:
Loss from discontinued operations (11,985) (21,261) (30,606) (62,532) (116,046)
Loss from wind-down of Rare Medium,
Inc. and LiveMarket -- -- -- -- (2,873)
Gain on restructuring Engelhard/ICC -- 24,257 -- -- --
------------ ------------ ----------- -------------- ------------
(Loss) income from discontinued (11,985) 2,996 (30,606) (62,532) (118,919)
operations
------------ ------------ ----------- -------------- ------------
Net loss (13,484) (619) (49,470) (128,422) (210,344)
Deemed dividend attributable to
issuance of convertible preferred
stock -- -- (29,879) -- --
Cumulative dividends and accretion of
convertible preferred stock to
liquidation value -- -- (13,895) (22,718) (11,937)
------------ ------------ ----------- -------------- ------------
Net loss attributable to common $(13,484) $(619) $(93,244) $(151,140) $(222,281)
stockholders
============ ============ =========== ============== ============
Basic and diluted (loss) earnings per share:
Continued operations $(0.07) $(0.14) $(1.71) $(1.66) $(1.62)
Discontinued operation (0.56) 0.12 (0.84) (1.17) (1.87)
------------ ------------ ----------- -------------- ------------
Net loss per share $(0.63) $(0.02) $(2.55) $(2.83) $(3.49)
============ ============ =========== ============== ============
Basic weighted average common shares
outstanding 21,339,635 25,282,002 36,625,457 53,488,951 63,740,209
============ ============ =========== ============== ============
December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- --------- ----------- ---------- -----------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term
investments $1,257 $918 $28,540 $157,483 $16,807
Investment in XM Satellite Radio -- -- -- -- 91,800
Notes receivable, net -- -- -- -- 50,486
Investments in affiliates -- -- 26,467 48,016 2,600
Total assets 4,522 44,743 160,423 317,491 163,716
Notes payable, less current portion -- 10,592 997 -- --
Total liabilities 7,584 14,921 19,208 40,761 24,757
Series A convertible preferred stock, net -- -- 26,224 47,621 59,558
Minority interest -- -- -- -- 10,097
Stockholders' (deficit) equity (3,062) 29,822 104,991 229,109 69,304
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in those forward-looking statements.
Overview
From 1998 through the third quarter of 2001, our principal business was
conducted through our subsidiary 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 which
caused many companies to reduce spending on Internet-focused business
solutions, a decision to discontinue Rare Medium, Inc.'s operations, along
with those of its LiveMarket, Inc. 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, in the past, we have
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. Additionally, we sold a
majority of our equity interest in the operations of three of our Start-up
Companies: ChangeMusic and ePrize in April 2001 and Regards.com in December
2001. Currently, we are no longer actively seeking new start-up
opportunities or venture investments, nor are we managing or operating any
Start-up Companies.
As a result of the decision to discontinue the operations of Rare
Medium, Inc. and LiveMarket, the operating results reported in our statements
of operations as continuing operations include the consolidated results of
Rare Medium Group, Inc., our MSV Investors Subsidiary, and our Start-up
Companies, up to their respective dates of sale or shutdown. The results of
Rare Medium, Inc. and LiveMarket are reflected as discontinued operations.
In November 2001, through our MSV Investors Subsidiary, we became a
participant in the MSV Joint Venture, a joint venture which 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 expect to become an increasingly active
participant in the MSV Joint Venture and have designated three members of
the 12-member board of directors of the MSV Joint Venture's corporate
general partner. In addition to winding down Rare Medium, Inc., our current
operations consist of actively managing our interest in the MSV Joint
Venture.
Our principal assets consist of our interest in the MSV Joint
Venture, five million shares of XM Satellite Radio common stock, promissory
notes from Motient Corporation with a principal amount of $26.2 million,
our remaining investments in affiliates, and cash, cash equivalents and
short-term investments. As a result of uncertainty with respect to the
ultimate collection on the Motient notes, we recognized a reserve for the
entire amount of these notes. See "Liquidity and Capital Resources" under
this Item 7.
Prior to March 1999, our name was ICC Technologies, Inc. ("ICC"). On
April 15, 1998, ICC acquired Rare Medium, Inc., an Internet services
business, and shortly thereafter ICC changed its name to Rare Medium Group,
Inc. Following this acquisition, all non-Internet-related operations were
divested, and the chief executive officer of Rare Medium, Inc. became the
chief executive officer of Rare Medium Group, Inc. ICC was the legal and
accounting acquirer. As a result of these transactions, the results of
operations of the non-Internet-related business for all periods have been
accounted for as a discontinued operation. Furthermore, 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 our Start-up Companies up to their respective
dates of sale or shutdown.
Critical Accounting Policies and Estimates
Investment in XM Radio
We account for our investment in XM Satellite Radio common stock as an
available-for-sale, marketable security and report such investment at fair
value with net unrealized gains and losses recorded in stockholders'
equity. Gains and losses will be recognized in our statements of operations
when realized. At December 31, 2001, the reported value of XM Satellite
Radio common stock in our balance sheet was approximately $91.8 million, or
$18.36 per share, resulting in an unrealized gain of approximately $60.3
million. Changes in the market price of XM Satellite Radio common stock
could cause fluctuations in our earnings and financial position. From
January 1, 2002 to March 7, 2002, the market price of XM Satellite Radio
common stock traded in a range of $10.70 to $19.20 per share. As of the
close of business on March 7, 2002, the market price of XM Satellite Radio
common stock was $13.30 per share.
Notes Receivable from Motient and MSV Joint Venture
We value our notes receivable based on the face amount, net of a
valuation reserve for unrealized amounts. We review the net balance of our
notes for changes to the reserve, either increases or decreases, whenever
events or circumstances indicate that the carrying amount differs from its
expected recovery.
At December 31, 2001, as a result of the uncertainty with respect to
the ultimate collection on the Motient notes, we recognized a reserve for
the entire amount of these notes. Negotiations with Motient and its
creditors committee are ongoing, and we believe that our recovery on these
notes could be substantial. Any adjustments to the reserve would be
reflected as income in the statements of operations.
At December 31, 2001, the carrying value of our MSV Joint Venture
Convertible note approximates its fair value based on recent funding
transactions of the underlying equity value in which it converts. The MSV
Joint Venture plans, subject to the receipt of further regulatory and
government approvals including certain FCC approvals and certain approvals
by Canadian regulatory authorities, to develop, build and operate a
next-generation satellite system complemented by ATC. If the ATC is not
authorized, the MSV Joint Venture's business will be limited, and the value
of our interest in the MSV Joint Venture will be significantly impaired.
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues for the year ended December 31, 2001 decreased to $1.9 million
from $8.3 million for the year ended December 31, 2000, a decrease of $6.4
million. These revenues reflect the operations of our remaining Start-up
Companies through their respective dates of sale or shutdown. The decrease is
primarily the result of the sale of our majority interest in the operations
of three Start-up Companies in 2001.
Cost of Revenues
Cost of revenues includes salaries and related benefits and other
direct costs associated with the generation of revenues. Cost of revenues for
the year ended December 31, 2001 decreased to $1.3 million from $6.1 million
for the year ended December 31, 2000, a decrease of $4.8 million. The
decrease is primarily the result of the sale of our majority interest in the
operations of three Start-up Companies in 2001.
Sales and Marketing Expense
Sales and marketing expense primarily includes the costs associated with
the respective sales force of each Start-up Company, marketing and
advertising. Sales and marketing expense for the year ended December 31, 2001
decreased to $1.3 million from $14.2 million for the year ended December 31,
2000, a decrease of $12.9 million. The decrease is primarily the result of the
sale of our majority interest in the operations of three Start-up Companies
in 2001.
General and Administrative Expense
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. General and
administrative expense for the year ending December 31, 2001 decreased to
$18.9 million from $44.5 million for the year ended December 31, 2000, a
decrease of $25.6 million. This decrease was primarily related to the reduced
infrastructure needed to manage our continuing operations and the sale of our
majority interest in the operations of three Start-up Companies in 2001,
partially offset by the legal and advisory costs associated with our
terminated merger with Motient Corporation. We expect these costs to continue
to decrease as we have reduced our overhead significantly during the year.
Depreciation and Amortization Expense
Depreciation and amortization expense substantially consists of the
depreciation of property and equipment and amortization of intangible assets
as a result of the acquisitions of our Start-up Companies. Depreciation and
amortization expense for the year ended December 31, 2001 decreased to $3.0
million from $8.2 million for the year ended December 31, 2000, a decrease of
$5.2 million. This decrease is primarily the result of the sale or shutdown
of the operations of our Start-up Companies in 2001 and the disposal of
property and equipment associated with our restructuring activities. As we
have reduced our capital expenditures and have written off all remaining
goodwill, we expect depreciation and amortization expense to decrease in
future periods.
Restructuring Charges
During the year ended December 31, 2001, we recorded restructuring
charges of approximately $1.1 million primarily relating to the disposition of
property and equipment. These restructuring charges were the result of the
reduction of our infrastructure needed to manage our continuing operations.
Interest Income, Net
Interest income, net for the year ended December 31, 2001 is mainly
comprised of the interest earned on our cash, cash equivalents and
short-term investments, on our Motient promissory notes and on the
convertible note receivable from the MSV Joint Venture.
Loss on Investment in Affiliates
Loss on investments in affiliates for the year ended December 31, 2001
increased to $54.6 million from $11.1 million for the year ended December 31,
2000, an increase of $43.5 million. For the year ended December 31, 2001, loss
on investments in affiliates consisted of $43.8 million for the impairment to
the carrying value of certain affiliates accounted for under the cost method,
$3.6 million for the realized loss on the sale of publicly traded securities,
$2.7 million for our proportionate share of affiliates' operating losses and
amortization of our net excess investment over our equity in each affiliate's
net assets for those affiliates accounted for under the equity method, and
$4.5 million related to the sale or shutdown of our Start-up Companies. For
the year ended December 31, 2000, loss on investments in affiliates consisted
of $5.4 million for the impairment to the carrying value of certain affiliates
accounted for under the cost method and $5.7 million for our proportionate
share of affiliates' operating losses and amortization of our net excess
investment over our equity in each affiliate's net assets for those affiliates
accounted for under the equity method. The increase in our loss on investments
in affiliates in 2001 was primarily related to additional write-offs of our
venture portfolio as many of these companies have been forced out of business
as a result of not being able to obtain additional funding due to the general
economic downturn. We will continue to monitor the carrying value of our
investments in affiliates for further impairment.
Minority Interest
We received $10.0 million from unaffiliated persons as an investment
into our MSV Investors Subsidiary. Minority interest relates to the equity in
earnings, primarily the interest income earned on the $50.0 million
convertible note from the MSV Joint Venture, which is attributable to those
unaffiliated investors.
Other Income (Expense), net
Other income (expense), net for the year ended December 31, 2001
primarily relates to the promissory notes from Motient. On October 12, 2001,
in accordance with the terms of the notes, we received five million shares of
XM Satellite Radio common stock as payment for $26.2 million of the aggregate
$52.4 million principal and accrued interest of the notes as of that date
leaving a remaining principal balance of the notes at $26.2 million. As a
result of uncertainty with respect to the ultimate collection on the
remaining balance of the Motient notes, we recognized a reserve for the
entire amount of these notes. This approximate loss of $26.9 million was
partially offset by a gain of $5.3 million that resulted from difference
between the value of the XM Satellite Radio common stock received in
connection with partial repayment of the Motient Notes in accordance with
their terms and the value of XM Satellite Radio common stock using its
closing price on the date of partial repayment.
Loss 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. The wind-down of these businesses is
expected to be completed during 2002. In connection with the discontinuance of
these businesses, we recorded restructuring charges in 2001 of $55.6 million
related to severance and benefits resulting from headcount reductions,
facility consolidations, an accrual for estimated losses of $2.9 million
during the wind-down period and the write-off of unamortized goodwill and
property and equipment, net of expected proceeds. The remaining loss of $63.3
million resulted from operations prior to the decision to discontinue the
businesses.
Net Loss
For the year ended December 31, 2001, we recorded a net loss of $210.3
million. The loss was primarily due to the factors described in "Revenues,"
"Cost of Revenues," "General and Administrative Expense," "Depreciation and
Amortization Expense," "Sales and Marketing Expense," "Restructuring
Charges," "Loss on Investments in Affiliates," "Minority Interest," "Other
Income (Expense), net" and "Loss from Discontinued Operations."
Included in net loss attributable to common shareholders of $222.3
million was $11.9 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.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues for the year ended December 31, 2000 increased to $8.3 million
from $1.6 million for the year ended December 31, 1999, an increase of $6.7
million. The increase is primarily a result of our Start-up Companies
acquired in the fourth quarter of 1999 and the first quarter of 2000.
Cost of Revenues
Cost of revenues includes salaries and related benefits and other direct
costs associated with the generation of revenues. Cost of revenues for the
year ended December 31, 2000 increased to $6.1 million from $1.0 million for
the year ended December 31, 1999, an increase of $5.1 million. The increase is
primarily a result of our Start-up Companies acquired in the fourth quarter
of 1999 and the first quarter of 2000.
Sales and Marketing Expense
Sales and marketing expense primarily includes the costs associated with
the respective sales force of each Start-up Company, marketing and
advertising. Sales and marketing expense for the year ended December 31, 2000
increased to $14.2 million from $0.3 million for the year ended December 31,
1999, an increase of $13.9 million. The increase is primarily a result of our
Start-up Companies acquired in the fourth quarter of 1999 and the first
quarter of 2000.
General and Administrative Expense
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. General and
administrative expense for the year ended December 31, 2000 increased to $44.5
million from $14.6 million for the year ended December 31, 1999, an increase
of $29.9 million. The increase is primarily a result of our Start-up
Companies acquired in the fourth quarter of 1999 and the first quarter of
2000, our continued investment in building an infrastructure to support the
growth in our services business which was discontinued in 2001, and the costs
associated with resources required for our investment business.
Depreciation and Amortization Expense
Depreciation and amortization expense substantially consists of the
amortization of intangible assets as a result of the acquisitions of our
Start-up Companies. Depreciation and amortization expense for the year ended
December 31, 2000 increased to $8.2 million from $1.8 million for the year
ended December 31, 1999, an increase of $6.4 million. This increase resulted
primarily from the acquisition of Start-up Companies during the fourth
quarter of 1999 and the first quarter of 2000.
Interest Income (Expense), Net
Interest income, net for the year ended December 31, 2000 is mainly
compromised of the interest earned on the proceeds received from the sale of
our common stock during the first quarter of 2000 as described below in
"Liquidity and Capital Resources."
Loss on Investment in Affiliates
Loss on investments in affiliates for the year ended December 31, 2000
increased to $11.1 million from $1.5 million for the year ended December 31,
1999, an increase of $9.6 million. For the year ended December 31, 2000, loss
on investments in affiliates consisted of $5.4 million for the impairment to
the carrying value of certain affiliates accounted for under the cost method
and $5.7 million for our proportionate share of affiliates' operating losses
and amortization of our net excess investment over our equity in each
affiliate's net assets for those affiliates accounted for under the equity
method. For the year ended December 31, 1999, loss on investments in
affiliates related to our proportionate share of affiliates' operating losses
and amortization of our net excess investment over our equity in each
affiliate's net assets for those affiliates accounted for under the equity
method.
Loss from Discontinued Operations
As a result of the decision to discontinue the operations of Rare
Medium, Inc. and the LiveMarket subsidiary in the third quarter of 2001, the
prior years results of these subsidiaries have been reclassified to
discontinued operations. As such, losses of $62.5 million in 2000 and $30.6
million in 1999 resulted from operations prior to the decision to discontinue
the businesses. The increase in the loss in 2000 represents additional
investment in the growth of the businesses, marketing, and the cost of
increased infrastructure.
Net Loss
For the year ended December 31, 2000, we recorded a net loss of $128.4
million. The loss was primarily due to the factors described in "Revenues,"
"Cost of Revenues," "General and Administrative Expense," "Depreciation and
Amortization Expense," "Loss on Investments in Affiliates," "Sales and
Marketing Expense," and "Loss from Discontinued Operations."
Included in net loss attributable to common shareholders of $151.1
million was $22.7 million of non-cash deemed dividends and accretion related
to 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 $16.8 million in cash, cash equivalents and short-term
investments as of December 31, 2001. Cash used in operating activities from
continuing operations (including our Start-up Companies through their
respective dates of sale or shutdown) was $15.4 million for the year ended
December 31, 2001 and resulted primarily from cash used in our Start-up
Companies through their respective dates of sale or shutdown and general
corporate overhead including costs associated with our terminated merger with
Motient. Cash used in operating activities from discontinued operations was
$29.5 million for the year ended December 31, 2001. We expect cash used in
operations to decrease in future periods as we are no longer operating any
Start-up Companies and have reduced our infrastructure needed to manage our
remaining business activities.
Cash used in investing activities was $103.1 million, excluding the
$32.0 million resulting from the net sale of short-term investments, for
the year ended December 31, 2001, which primarily consists of the $50.0
million used to purchase the promissory notes from Motient, $40.0 million
used to purchase the convertible note from the MSV Joint Venture (net of
$10.0 million received from third parties), and cash paid for venture
investments of $6.2 million, partially offset by $3.8 million of cash
received from the sale of investments in affiliates. We do not have any
future funding commitments with respect to any of our investments. However,
we expect that the MSV Joint Venture will require additional funding from
time to time, and we may choose to exercise our preemptive right to provide
our pro rata share of such funding, subject to our liquidity and capital
resources at the time.
Motient Promissory Notes
In April 2001, we agreed to purchase from Motient 12.5% secured
promissory notes, issuable in two tranches, each in the principal amount of
$25.0 million. The Motient notes were collateralized by five million shares of
XM Satellite Radio common stock owned by Motient. The first tranche was
purchased on April 4, 2001, and the second tranche was purchased on July 16,
2001. The principal of and accrued interest on the Motient notes were payable
on October 1, 2001 in either cash, shares of XM Satellite Radio, or any
combination thereof at Motient's option, as set forth in the agreement. At our
option, the Motient notes may have been exchanged for a number of XM Satellite
Radio shares equivalent to the principal of the Motient notes and any accrued
interest thereon, as set forth in the agreement.
On October 1, 2001, and again on October 8, 2001, we extended the
maturity date of the Motient notes. On October 12, 2001, in accordance with
the terms of the Motient notes, we received five million shares of XM
Satellite Radio as payment for $26.2 million of the notes and related
interest. The maturity date for the remaining balance of notes in the
principal amount of approximately $26.2 million, and interest thereon, was
extended for 60 days. On January 10, 2002, Motient and its subsidiaries filed
for protection under Chapter 11 of the United States Bankruptcy Code. As part
of its filing, Motient indicated that it may challenge our right to the $26.2
million outstanding principal balance and accrued interest thereon. Motient
may also initiate litigation directly against us to challenge the delivery of
the shares of XM Satellite Radio common stock by Motient to us as partial
repayment of the aggregate $50.0 million principal amount of the notes.
Negotiations with Motient and its creditors committee are ongoing, and we
believe that our recovery on these notes should be substantial. As a result of
uncertainty with respect to the ultimate collection on these notes, we
recognized a reserve for the entire amount of these notes.
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 includes TMI
Communications, Inc., 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 with a
principal amount of $50.0 million (the "MSV Note"). Immediately prior to
the purchase of the convertible note, Rare Medium Group contributed $40.0
million to the MSV Investors Subsidiary and unrelated third parties
contributed $10.0 million. The MSV 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. The MSV Note automatically converts into equity
interests upon the MSV Joint Venture obtaining certain approvals from the
FCC and its Canadian equivalent, Industry Canada. Upon conversion, our MSV
Investors Subsidiary would own approximately 30.8% of the equity interests
in the MSV Joint Venture. However, in the event that the MSV Joint Venture
receives approval from the FCC by March 31, 2003 with regard to its plans
for a next-generation satellite system complemented by ancillary
terrestrial base stations as described above in "Item 1. Business - MSV Joint
Venture's Strategy," the Other MSV Investors are obligated to invest an
additional $50.0 million in the MSV Joint Venture and, thereafter, our MSV
Investors Subsidiary would own approximately 23.6% of the equity interests
in the MSV Joint Venture. The fair value of the MSV Note approximates book
value based on the equity value of the MSV Joint Venture's recent funding
transactions assuming conversion of such note.
Listing on the Nasdaq National Market
By letter dated, February 14, 2002, Nasdaq notified us that if prior to
May 15, 2002, the bid price of our Common Stock is not at least $1.00 for a
minimum of 10 consecutive trading days, Nasdaq will notify us that the Common
Stock will be delisted from the Nasdaq National Market for failure to satisfy
the minimum bid price requirement. In order to regain compliance with the
requirements for continued listing on the Nasdaq National Market, absent a
significant change in market price, our board of directors and our
stockholders will have to approve and we will have to enact a reverse stock
split. If such action is not taken or approved, then it is likely, depending
on the volatility of our common stock and our ability to meet the listing
criteria described above, that we will not satisfy the requirements for
continued listing on the Nasdaq National Market or initial registration on
either the New York Stock Exchange or the American Stock Exchange. Even if
such a split were approved by our stockholders, the market sometimes views
reverse stock splits negatively and there can be no assurance that following
such stock split we would be successful in meeting the listing criteria
described above.
If we are unable to demonstrate compliance with the minimum bid price
requirement on or prior to May 15, 2002, or such other date as Nasdaq may
permit, and any appeal to Nasdaq for relief from this requirement is
unsuccessful, our common stock will be delisted from the Nasdaq National
Market. If this were to happen, trading in our common stock would decrease
substantially. If our common stock is delisted from the Nasdaq National
Market, we would seek to maintain the listing of our common stock on the
Nasdaq SmallCap Market. However, if our common stock is delisted from the
Nasdaq National Market, the delisting would result in a reduction in the
liquidity and market price of our shares of common stock. This lack of
liquidity would also make it difficult for us to raise capital.
The Apollo Securities Purchase
On June 4, 1999, we issued and sold to Apollo Investment Fund IV, LP,
Apollo Overseas Partners IV, LP and AIF IV/RRRR LLC, for an aggregate purchase
price of $87.0 million, 126,000 shares of our Series A convertible preferred
stock, 126,000 Series 1-A warrants, 1,916,994 Series 2-A warrants, 744,000
shares of our Series B convertible preferred stock, 744,000 Series 1-B
warrants and 10,345,548 Series 2-B warrants. The Series A convertible
preferred stock and Series B convertible preferred stock accrue dividends at
an annual rate of 7.5% through June 30, 2002 and 4.65% thereafter. For the
first three years, dividends are payable in additional shares of Series A
securities. During the next two years, beginning in September 2002, dividends
are payable, at the option of the holder, in additional shares of Series A
securities or in cash. Dividends paid thereafter are payable in cash. The
Series A and Series B convertible preferred stock are subject to mandatory
redemption on June 30, 2012.
Under the terms of the securities purchase agreement with the Apollo
stockholders at the 1999 annual meeting of our stockholders held on August
19, 1999, the holders of common stock approved the conversion of all of the
Series B convertible preferred stock, Series 1-B warrants and Series 2-B
warrants, including such additional Series B securities that have been issued
as dividends, into like amounts of Series A convertible preferred stock,
Series 1-A warrants and Series 2-A warrants, respectively. Pursuant to the
approval, all Series B convertible preferred stock, Series 1-B warrants and
Series 2-B warrants were converted into Series A convertible preferred stock,
Series 1-A warrants and Series 2-A warrants, respectively. The Series A
securities are convertible into or exercisable for voting common stock
whereas the Series B securities were convertible into or exercisable for
non-voting common stock.
On August 22, 2000, the Company issued 12,709,499 shares of common stock
to holders of our Series 1-A Warrants as a result of a cashless exercise of
all Series 1-A Warrants outstanding at that time. The effective exercise price
at the time of exercise was $0.01 per share. We withheld 9,986 shares of
common stock as payment of the aggregate exercise price.
Issuance of Common Stock
On January 14, 2000, we sold 2,500,000 shares of our common stock for
gross proceeds of $70.1 million (net proceeds of $65.7 million) in a private
transaction to a group of mutual funds managed by Putnam Investments and
Franklin Resources, Inc., which we refer to in this report as the "private
placement." On April 18, 2000, we filed a registration statement with the SEC
to register the resale of such shares as required by the purchase agreement
executed in connection with such private transaction.
On March 29, 2000, we sold 3,000,000 shares of our common stock for
gross proceeds of $186.0 million (net proceeds of $175.2 million) in a public
offering underwritten by Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc. and FleetBoston Robertson Stephens, Inc.
Supplementary Unaudited Quarterly Financial Information
2000 2001
----------------------------------------------- ------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- -------- --------- -------- --------- --------- ----------
(in thousand, except per share data)
Revenue $1,478 $1,838 $2,311 $2,657 $1,602 $260 $25 $19
Gross profit 137 82 1,401 562 299 228 23 19
Net loss (21,193) (27,700) (33,171) (46,358) (61,859) (25,864) (87,038) (35,583)
Basic and
diluted loss
per share (0.74) (0.66) (0.65) (0.78) (1.03) (0.46) (1.42) (0.60)
Recently Issued Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No. 141
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. The
adoption of SFAS No. 141 did not have a material effect on our results of
operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142")
which is effective January 1, 2002. SFAS No. 142 eliminates the current
requirement to amortize goodwill and indefinite-lived intangible assets and
replaces the amortization with an impairment test which must be performed
at least annually. For intangible assets with definite useful lives, SFAS
142 requires amortization over their respective expected useful lives to
their estimated residual values and review for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Additionally, SFAS No. 142
requires that a transitional goodwill impairment test be completed six
months from the date of adoption. The adoption of SFAS No. 142 is not
expected to have a material effect on our results of operations.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations," which is effective January 1, 2003. SFAS No. 143 addresses the
financial accounting and reporting for obligations and retirement costs
related to the retirement of tangible long-lived assets. The adoption of SFAS
No. 143 is not expected to have a material effect on our results of
operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets," which is effective January 1, 2002. SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board Opinion No. 30. The adoption of SFAS
No. 144 is not expected to have a material effect on our results of
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks from changes in the price of the
XM Satellite Radio publicly traded common stock. We account for our investment
in XM Satellite Radio common stock as an available-for-sale, marketable
security and report such investment at fair value with net unrealized gains
and losses recorded in stockholders' equity. Gains and losses will be
recognized in our statements of operations when realized. At December 31,
2001, the reported value of XM Satellite Radio common stock in our balance
sheet was approximately $91.8 million, or $18.36 per share, resulting in an
unrealized gain of approximately $60.3 million. Changes in the market price of
XM Satellite Radio common stock could cause fluctuations in our earnings and
financial position. From January 1, 2002 to March 7, 2002, the market price of
XM Satellite Radio common stock traded in a range of $10.70 to $19.20 per
share. As of the close of business on March 7, 2002, the market price of XM
Satellite Radio common stock was $13.30 per share.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial data required by
this Item 8 are set forth in Item 14 of this report. All information which has
been omitted is either inapplicable or not required.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information concerning our directors
and executive officers as of March 7, 2002:
NAME AGE POSITION
----------------------------- ---- -----------------------------------------------------
Glenn S. Meyers 40 Chairman and Chief Executive Officer
Robert C. Lewis 36 Senior Vice President, General Counsel and Secretary
Craig C. Chesser 41 Senior Vice President, Finance and Treasurer
Michael A. Hultberg 36 Senior Vice President and Controller
William F. Stasior 61 Director
Jeffrey M. Killeen 48 Director
Andrew D. Africk 35 Director
Marc J. Rowan 38 Director
Michael S. Gross 39 Director
------------
Glenn S. Meyers - Chairman and Chief Executive Officer. Mr. Meyers is the
co-founder, Chairman and Chief Executive Officer of Rare Medium Group. He also
served as Chairman and Chief Executive Officer of our wholly-owned subsidiary,
Rare Medium, Inc. and has been a member of our board of directors as well as
our Chief Executive Officer since April 1998. Prior to joining Rare Medium,
Inc. in September 1996, Mr. Meyers was President of Brookridge Capital
Management, an Internet venture capital firm from 1994 to September 1996.
Robert C. Lewis - Senior Vice President, General Counsel and Secretary. Mr.
Lewis has been our Vice President and General Counsel since May 1998 and our
Secretary since August 1998. Mr. Lewis was appointed our Senior Vice President
on July 26, 2000. Prior to joining Rare Medium Group, Mr. Lewis was an
associate at the law firm of Fried, Frank, Harris, Shriver & Jacobson from
October 1992.
Craig C. Chesser - Senior Vice President Finance and Treasurer. Mr. Chesser
has been a Vice President of Rare Medium Group since July 1998 and has been
Vice President Finance since February 2001 and our Treasurer since November
1999. Mr. Chesser served as our Corporate Controller from July 1998 to
November 1999. Prior to joining Rare Medium Group, Mr. Chesser was Vice
President, Finance for TransCare Corporation, a health care industry
consolidator. Previously, Mr. Chesser was Vice President, Finance and
Administration for Sunwestern Investment Group, a venture capital
organization.
Michael A. Hultberg - Senior Vice President and Controller. Mr. Hultberg
joined Rare Medium Group as Vice President and Controller in November 1999.
From July 1988 to November 1999, Mr. Hultberg was employed by KPMG LLP, most
recently as Senior Manager.
William F. Stasior - Director. Mr. Stasior joined our board of directors in
April 2000. Mr. Stasior was the Chairman and Chief Executive Officer of Booz
Allen & Hamilton Inc., a management and technology consulting firm, from 1991
to 1999, and had served on the board of directors of Booz Allen since 1979.
Since October 1999, Mr. Stasior has been the Senior Chairman of Booz Allen.
Mr. Stasior also serves on the board of directors of OPNET, a software company
that specializes in enhancing network performance for the Internet and other
applications.
Jeffrey M. Killeen - Director. Mr. Killeen joined our board of directors in
October 1998. Effective January 1, 2002, Mr. Killeen became Chairman and Chief
Executive Officer of Globalspec, Inc., an information services company. Mr.
Killeen was the Chief Executive Officer of Forbes.com from August 1999 to
March 2001. Prior to that, Mr. Killeen was the Chief Operating Officer of
barnesandnoble.com, an e-commerce company from January 1998 to March 1999.
Before joining barnesandnoble.com, Mr. Killeen served as President and Chief
Executive Officer of Pacific Bell Interactive Media from August 1994 to
January 1998.
Andrew D. Africk - Director. Mr. Africk joined our board of directors in June
1999. Mr. Africk is a partner of Apollo Advisors, L.P. (which, together with
its affiliates, acts as the managing general partner of several private
securities investment funds, including Apollo Investment Fund IV, L.P.). Mr.
Africk is also a director of Encompass Services Corporation, as well as
several private venture companies.
Marc J. Rowan - Director. Mr. Rowan joined our board of directors in June
1999. Mr. Rowan is one of the founding principals of Apollo Advisors, L.P.
(which, together with its affiliates, acts as the managing general partner of
several private securities investment funds, including Apollo Investment Fund
IV, L.P.). Mr. Rowan is also a director of Vail Resorts, Inc., Quality
Distribution, Inc., National Financial Partners, Inc., Samsonite Corporation,
Wyndham International and NRT Incorporated.
Michael S. Gross - Director. Mr. Gross joined our board of directors since
August 1999. Mr. Gross is one of the founding principals of Apollo Advisors,
L.P. Mr. Gross is also a director of Allied Waste Industries, Inc., Breuners
Home Furnishing, Inc., Clark Enterprises Inc., CVEO Corporation, Florsheim
Group, Inc., United Rentals, Inc., Encompass Services Corporation and Saks
Incorporated.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers, and persons who own more than
10% of a registered class of our securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. Officers, directors
and greater than 10% stockholders are required by Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a) forms
they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us, we believe that during the year ended December 31, 2001 our
officers, directors and greater than 10% stockholders complied with all
Section 16(a) filing requirements.
Item 11. Executive Compensation
The following Summary Compensation Table sets forth, for the three years
ended December 31, 2001, the compensation for services in all capacities
earned by the Company's Chief Executive Officer and its next most highly
compensated executive officers.
Summary Compensation Table
NAME AND YEAR SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
PRINCIPAL POSITION COMPENSATION STOCK UNDERLYING PAY- COMPENSATION
AWARD(S) OPTIONS/ SARS OUTS
($) (#) ($)
Glenn S. Meyers 2001 $278,096 -- $18,000(1) -- -- -- --
Chairman and 2000 267,400 $1,469,090 18,000(1) -- -- -- --
Chief Executive 1999 257,192 2,157,889 17,600(1) -- -- -- --
Officer
Craig C. Chesser 2001 164,077 90,000 1,500(1) -- 100,000 -- $2,500(2)
Senior Vice 2000 133,961 40,000 6,000(1) -- 25,000 -- 2,500(2)
President Finance
and Treasurer (3) 1999 118,692 10,000 3,000(1) -- 32,500 -- 2,500(2)
Michael A. 2001 177,135 90,000 3,000(1) -- 100,000 -- --
Hultberg
Senior Vice 2000 145,000 40,000 -- -- -- -- --
President and
Controller (3) 1999 25,096 -- -- -- 75,000 -- --
Robert C. Lewis 2001 140,000 90,000 6,000(1) -- 100,000 -- 2,500(2)
Senior Vice 2000 128,692 40,000 -- -- -- -- 2,500(2)
President,
General Counsel 1999 110,135 -- -- -- 68,000 -- 2,500(2)
and
Secretary(3)
--------------
(1) Represents non-accountable expense allowance.
(2) Represents 401(k) employer matching contributions.
(3) Subject to certain conditions, including such officer's continued
employment with the Company through January 5, 2002, the exercise prices
of these options (excluding options granted in 2001) were repriced to
$0.13, the fair market value of the common stock as of October 5, 2001,
the date of repricing.
The following table sets forth information concerning grants of stock
options to purchase common stock during the year ended December 31, 2001 to
the named executive officers.
NAME NUMBER OF PERCENT OF TOTAL EXERCISE OR EXPIRATION POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/SARS BASE PRICE DATE ASSUMED ANNUAL RATES OF
UNDER- GRANTED TO ($/SHARE) STOCK APPRECIATION FOR OPTION TERM
LYING EMPLOYEES IN
OPTIONS/ FISCAL YEAR (1)
SARS
GRANTED
5% 10%
Glenn S. Meyers -- 0.0% N/A N/A N/A N/A
Craig C. Chesser 100,000(2)(3) 3.3% $0.60 12/20/06 6,150 12,600
Michael A. Hultberg 100,000(2)(3) 3.3% $0.60 12/20/06 6,150 12,600
Robert C. Lewis 100,000(2)(3) 3.3% $0.60 12/20/06 6,150 12,600
--------------
(1) The number of shares of Common Stock covered by the options is subject to
anti-dilution adjustments in the event of any stock dividend, stock split or
combination of shares, recapitalization or other change in the Company's
capital stock.
(2) The vesting of the options is subject to acceleration in the event of a
change in control of the Company, which means, generally, the consummation of
any merger or consolidation involving the Company, any sale of substantially
all of the Company's assets or other transaction or related transactions as a
result of which a single person or several persons acting in concert own a
majority of the shares of Common Stock.
(3) These options were granted on December 21, 2001 at an exercise price of
$0.60, the per share fair market vale of the Common Stock at that time. The
options have a term of five (5) years. Options are exercisable on the one-year
anniversary of the date of grant.
The following table sets forth information concerning the exercise of
options to purchase shares of common stock by the named executive officers
during the year ended December 31, 2001, as well as the number and potential
value of unexercised options (both options which are presently exercisable and
options which are not presently exercisable) as of December 31, 2001.
NAME NUMBER OF VALUE NUMBER OF VALUE OF
SECURITIES REALIZED SECURITIES UNEXERCISED
UNDERLYING UNDERLYING IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON FISCAL Y/E (#) FISCAL Y/E
EXERCISE (#) EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
Glenn S. Meyers -- -- 866,666/533,334 0/0
Craig C. Chesser -- -- 58,334/100,000 35,584/14,000
Michael A. Hultberg -- -- 50,000/125,000 30,500/29,250
Robert C. Lewis -- -- 95,000/100,000 57,950/14,000
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
MEYERS EMPLOYMENT AGREEMENT
In connection with the transactions consummated pursuant to the 1998
acquisition of Rare Medium, Inc., we entered into an employment agreement
effective April 15, 1998 with Glenn S. Meyers (the "Meyers Employment
Agreement"). Pursuant to the Meyers Employment Agreement, as amended, Mr.
Meyers was engaged as the Chairman, President and Chief Executive Officer of
Rare Medium Group and Rare Medium, Inc. to serve for a term of five years,
expiring April 15, 2003. Mr. Meyers receives an annual base salary of
$250,000, with a minimum annual increase during the term of not less than 4%
per annum. In addition to base compensation, Mr. Meyers is entitled to
receive, for each calendar year during the term, incentive compensation equal
to 2.0% of revenues derived from activities of Rare Medium, Inc. for such
calendar year in excess of the revenues of Rare Medium, Inc. for the preceding
year. Effective June 4, 1999, the Meyers Employment Agreement has been amended
and restated to effect a ceiling of $150,000,000 on revenues for determining
such annual incentive compensation payable to Mr. Meyers. In addition, the
amended and restated agreement provides that, in the event gross revenues
exceed such revenue ceiling, the compensation committee of the board of
directors will, with such assistance as it will deem necessary, establish an
incentive bonus program for Mr. Meyers based on objective and subjective
factors to appropriately incentivize him. This revised incentive bonus program
shall be designed to allow Mr. Meyers to continue to receive increases in
annual bonuses based on, and subject to, the targets and criteria established
by the compensation committee, in amounts similar to the incentive bonuses
previously received by him. The Meyers Employment Agreement provides Mr.
Meyers with a right to terminate his employment agreement upon a breach of
such agreement or upon the occurrence of certain events constituting a "change
in control" of Rare Medium Group as defined therein. Upon such a "change in
control," Mr. Meyers would be entitled to receive a lump sum payment from Rare
Medium Group which shall be equal to all salary and incentive compensation for
the remaining term and the cash value of all benefits which would have been
received by him for the remaining term. In addition, all of his unvested stock
options shall immediately vest and become exercisable. The Meyers Employment
Agreement also contains a covenant not to compete with Rare Medium Group or
any of its affiliates for the term of the agreement, plus one additional year.
Concurrently with the execution of the Meyers Employment Agreement, we granted
to Mr. Meyers options to acquire an aggregate of 2,000,000 shares of common
stock at exercise prices equal to $2.375 per share (the fair market value at
the time of issuance), which options 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.
OTHER CURRENT EMPLOYMENT AGREEMENTS
We have employment agreements with Craig Chesser, Michael Hultberg and
Robert Lewis, each of who is an officer of Rare Medium Group. Under these
agreements, if, after 90 days following a change in control of Rare Medium
Group, the executive terminates his employment, the executive is entitled to
receive severance compensation and benefits in a lump sum payment consisting
of one year of his current salary and the right to exercise all vested stock
options and unvested stock options which become exercisable upon a change of
control through the option expiration date for such options.
STOCK PLANS
On May 6, 1998, the board of directors adopted our 1998 Long Term
Incentive Plan (the "Plan"). The Plan was approved by our stockholders on
March 16, 1999. The Plan provides for the granting of awards to directors
(whether or not employees), executive officers, key employees and consultants
and other service providers in the form of stock options, stock appreciation
rights, restricted stock awards, deferred stock awards, bonus stock awards,
dividend equivalents, and other types of stock based awards. The variety of
awards authorized by the Plan is intended to give us flexibility to adapt our
compensation practices as the business environment in which we operate
changes. The maximum aggregate number of shares of common stock that may be
delivered for all purposes under the Plan is 23,000,000, subject to
adjustment. The Plan is administered by the compensation committee of the
board of directors. These options generally carry five year terms and become
exercisable cumulatively in three equal installments, with the first
installment becoming exercisable on the one year anniversary of each grantee's
date of employment. In 2000, the board of directors amended and restated the
Plan to: (1) increase the number of shares of common stock available for
issuance under the Plan to 23,000,000; (2) provide that no participant in the
Plan may be granted options and stock appreciation rights, or SARs, that
become exercisable in any one year for more than 700,000 shares of common
stock and awards other than options and SARs that may be settled for the first
time in any one year by delivery of more than 350,000 shares of common stock;
and (3) provide that all options and SARs will terminate no later than the
tenth anniversary of the date of grant. These amendments to the Plan were
ratified by our stockholders on June 15, 2000. As of December 31, 2000 and
2001, there were approximately 7.3 million and 19.2 million options,
respectively, available for grant under the Plan.
Our Nonqualified Stock Plan for our directors, officers and key
employees expired on July 18, 2000 after which date no additional grants can
be made under such plan.
In 1994, we adopted an Equity Plan for Directors (the "Equity Plan for
Directors") pursuant to which our non-employee directors received automatic
option grants whose vesting was dependent on the market price of the common
stock. On October 26, 1998, the board of directors amended and restated the
Equity Plan for Directors to change the plan from a formula based stock option
plan as described above to a discretionary plan (the "Amended and Restated
Equity Plan for Directors"), thereby providing more flexibility in determining
incentive based stock option awards for our non-employee directors. The
Amended and Restated Equity Plan for Directors authorized 500,000 aggregate
shares of common stock for the granting of such options under the plan, of
which 258,000 were available for granting stock options as of December 31,
2001. We did not make any grants to directors under the Amended and Restated
Equity Plan for Directors in 2001. Subsequent to November 1998, grants of
stock options to directors have been made under the Company's Amended and
Restated 1998 Long Term Incentive Plan.
See Item 13. "Certain Relationships and Related Transactions" for a
discussion of certain agreements between Rare Medium Group and affiliates of
certain of our directors.
REPRICING OF OPTIONS
Report of the Compensation Committee. On October 5, 2001, the
compensation committee determined that because the outstanding options held by
certain executive officers and employees were exercisable at prices that were
significantly above prevailing market prices for our common stock, they no
longer provided an adequate level of incentive. Accordingly, to reincentivize
certain of our remaining executive officers and employees and in recognition
of their service to us the compensation committee approved the repricing of
the exercise prices of options to purchase an aggregate of 328,334 shares of
common stock to $0.13 per share, the fair market value at the date of the
repricing. On December 21, 2001, the compensation committee approved an
additional repricing of the exercise prices of options to purchase an
aggregate of 400,000 shares of common stock held by non-management directors
to $0.60, per share, the fair market value at the date of the repricing.
10-Year Option Repricings. The following table provides information
related to the repricing of each option held by our executive officers during
the last ten completed fiscal years.
NAME DATE NUMBER OF MARKET PRICE OF EXERCISE PRICE NEW LENGTH OF
SECURITIES STOCK AT TIME OF AT TIME OF EXERCISE PRICE ORIGINAL
UNDERLYING REPRICING OR REPRICING OR ($) OPTION TERM
OPTIONS AMENDMENT AMENDMENT REMAINING
REPRICED OR ($) AT DATE OF
AMENDED REPRICING OR
(#) AMENDMENT
Craig C. Chesser(1) 10/5/01 11,666 $0.13 $2.38 $0.13 23 Months
10/5/01 8,334 $0.13 $5.11 $0.13 28 Months
10/5/01 13,334 $0.13 $8.56 $0.13 36 Months
10/5/01 25,000 $0.13 $14.50 $0.13 46 Months
Michael A. Hultberg(1) 10/5/01 75,000 $0.13 $14.75 $0.13 37 Months
Robert C. Lewis(1) 10/5/01 32,000 $0.13 $2.38 $0.13 23 Months
10/5/01 38,000 $0.13 $4.77 $0.13 30 Months
10/5/01 25,000 $0.13 $8.56 $0.13 36 Months
(1) Subject to certain conditions, including such executive's continued
employment with us through January 5, 2002, the exercise price for these
options was repriced to $0.13, the fair market value of the common stock as of
October 5, 2001, the date of repricing.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The following table and notes thereto set forth certain information, as
of March 7, 2002 (except as noted otherwise), regarding beneficial ownership
of the shares of our common stock by (1) each person who is known to us to be
the beneficial owner of more than 5% of the outstanding shares of our common
stock, (2) each of our named executive officers under the Summary Compensation
Table under the heading "Executive Compensation," (3) each director and
nominee for director, and (4) all executive officers and directors of the
Company as a group. Unless otherwise indicated, the stockholders listed
possess sole voting and investment power with respect to the shares indicated
as owned by them.
NAME AND ADDRESS POSITION NUMBER OF SHARES OF PERCENTAGE
COMMON STOCK OF CLASS
BENEFICIALLY OWNED (1)
Glenn S. Meyers Chairman and Chief Executive Officer 1,000,000 1.5%(2)
Craig C. Chesser Senior Vice President Finance and Treasurer 75,000 *(3)
Michael A. Hultberg Senior Vice President and Controller 50,000 *(2)
Robert C. Lewis Senior Vice President, General Counsel and 95,000 *(2)
Secretary
Jeffrey M. Killeen Director 75,000 *(2)
William Stasior Director 75,000 *(2)
Andrew D. Africk Director 41,568,301 44.1%(4)
c/o Rare Medium Group, Inc.
44 W. 18th Street, 6th Floor
New York, New York 10011
Marc J. Rowan Director 41,568,301 44.1%(5)
c/o Rare Medium Group, Inc.
44 W. 18th Street, 6th Floor
New York, New York 10011
Michael S. Gross Director 41,568,301 44.1%(6)
c/o Rare Medium Group, Inc.
44 W. 18th Street, 6th Floor
New York, New York 10011
Apollo Investment Fund IV, 41,518,301 44.1%(7)
L.P.
Two Manhattanville Road
Purchase, New York 10577
All executive officers, 43,038,300 44.9%(8)
directors and nominees as a
group (9 persons)
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership has been determined pursuant to Rule 13d-3 under
the Exchange Act.
(2) Represents options to purchase shares of Common Stock that are
currently exercisable, but does not include options that become exercisable
upon a change of control of the Company.
(3) Includes options to purchase 58,334 shares of Common Stock that are
currently exercisable, but does not include options that become exercisable
upon a change of control of the Company.
(4) Includes an aggregate of (i) 12,709,499 shares of Common Stock
acquired through the exercise of Series 1-A warrants and (ii) 28,808,801
shares of Common Stock issuable to Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P. and AIF IV/RRRR LLC (collectively, the "Apollo
Stockholders") upon conversion of the Series A Preferred Stock and exercise of
the Series 1-A warrants and the Series 2-A warrants owned by them. Mr. Africk
is a principal of Apollo Advisors IV, L.P, which together with an affiliated
investment manager, serves as the manager of each of the Apollo Stockholders.
Mr. Africk disclaims beneficial ownership of such shares. Includes options to
purchase 50,000 shares of Common Stock that are currently exercisable, but
does not include options that become exercisable upon a change of control of
the Company.
(5) Includes an aggregate of (i) 12,709,499 shares of Common Stock
acquired through the exercise of Series 1-A warrants and (ii) 28,808,801
shares of Common Stock issuable to the Apollo Stockholders upon conversion of
the Series A Preferred Stock and exercise of the Series 1-A warrants and the
Series 2-A warrants owned by them. Mr. Rowan is a principal of Apollo Advisors
IV, L.P, which together with an affiliated investment manager, serves as the
manager of each of the Apollo Stockholders. Mr. Rowan disclaims beneficial
ownership of such shares. Includes options to purchase 50,000 shares of Common
Stock that are currently exercisable, but does not include options that become
exercisable upon a change of control of the Company.
(6) Includes an aggregate of (i) 12,709,499 shares of Common Stock
acquired through the exercise of Series 1-A warrants and (ii) 28,808,801
shares of Common Stock issuable to the Apollo Stockholders upon conversion of
the Series A Preferred Stock and exercise of the Series 1-A warrants and the
Series 2-A warrants owned by them. Mr. Gross is a principal of Apollo Advisors
IV, L.P, which together with an affiliated investment manager, serves as the
manager of each of the Apollo Stockholders. Mr. Gross disclaims beneficial
ownership of such shares. Includes options to purchase 50,000 shares of Common
Stock that are currently exercisable, but does not include options that become
exercisable upon a change of control of the Company.
(7) Represents the aggregate of (i) 12,709,499 shares of Common Stock
acquired through the exercise of Series 1-A warrants and (ii) 28,808,801
shares of Common Stock issuable upon conversion of the aggregate of 1,053,259
shares of the Company's Series A Preferred Stock and the exercise of an
aggregate of 111,089 Series 1-A warrants and 12,262,542 Series 2-A warrants
held by the Apollo Stockholders. Assuming conversion of all the Series A
Preferred Stock and the exercise of all the Series 1-A warrants and Series 2-A
warrants held by the Apollo Stockholders, such 41,518,301 shares of Common
Stock would consist of 31,796,475 shares of Common Stock beneficially owned by
Apollo Investment Fund IV, L.P., 1,705,211 shares of Common Stock beneficially
owned by Apollo Overseas Partners IV, L.P. and 8,016,614 shares of Common
Stock beneficially owned by AIF IV/ RRRR LLC. The holders of the Company's
Series A Preferred Stock are only entitled to an aggregate of 9,750,000 votes
with respect to the Series A Preferred Stock as of March 7, 2002, or 9.26
votes per share of Series A Preferred Stock. Messrs. Africk, Rowan and Gross,
directors of the Company and associated with Apollo Advisors IV, L.P.,
disclaim beneficial ownership of the shares held by the Apollo Stockholders.
(8) Messrs. Africk, Rowan and Gross, directors of the Company and
associated with Apollo Advisors IV, L.P., disclaim beneficial ownership of
shares held by the Apollo Stockholders. See footnote numbers 4, 5 and 6 above.
Includes options to purchase an aggregate of 1,478,334 shares of Common Stock
that are currently exercisable, but does not include options that become
exercisable upon a change of control of the Company.
Item 13. Certain Relationships and Related Transactions.
APOLLO SECURITIES PURCHASE AND CONVERSION
On June 4, 1999, we issued and sold to the Apollo Stockholders, for an
aggregate purchase price of $87.0 million, 126,000 shares of series A
preferred stock, 126,000 Series 1-A Warrants, 1,916,994 Series 2-A Warrants,
744,000 shares of series B convertible preferred stock, 744,000 Series 1-B
warrants and 10,345,548 Series 2-B warrants. The Series A convertible
preferred stock and Series B convertible preferred stock accrue dividends at
an annual rate of 7.5% through June 30, 2002 and 4.65% thereafter. For the
first three years, dividends are payable in additional shares of Series A
securities. During the next two years, beginning in September 2002, dividends
are payable, at the option of the holder, in additional shares of Series A
securities or in cash. Dividends paid thereafter are payable in cash. The
Series A and Series B convertible preferred stock are subject to mandatory
redemption on June 30, 2012.
Under the terms of the Apollo investment, at the 1999 annual meeting of
stockholders held on August 19, 1999, the holders of common stock approved
the conversion of all of the series B convertible preferred stock, Series 1-B
warrants and Series 2-B warrants, including the additional series B
securities that had been issued as dividends, into like amounts of series A
preferred stock, Series 1-A warrants and Series 2-A warrants, respectively.
Pursuant to the approval, all series B convertible preferred stock, Series
1-B warrants and Series 2-B warrants were converted into series A preferred
stock, Series 1-A warrants and Series 2-A warrants, respectively. The series
A securities are convertible into or exercisable for voting common stock
whereas the series B securities were convertible into or exercisable for
non-voting common stock.
Prior to discontinuing the operations of Rare Medium, Inc. at the end
of the third quarter of 2001, from time to time, our Rare Medium, Inc.
subsidiary provided Internet related professional advisory and consultative
services in the ordinary course of business and on terms believed to be
comparable to those obtainable by third parties to portfolio companies in
which Apollo have an investment or in which they have considered investing.
EMPLOYMENT AGREEMENTS
For a description of the employment agreements between Rare Medium
Group and certain of our executive officers, please see the descriptions
above in Item 11. Executive Compensation under the heading "Employment
Contracts and Change in Control Arrangements."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of certain documents filed as a part of
this report:
(1) Financial Statements of the Registrant.
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 2000 and
2001.
(iii) Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001.
(iv) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1999, 2000 and
2001.
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001.
(vi) Notes to Consolidated Financial Statements.
(vii) Schedule II--Valuation and Qualifying Accounts.
All other schedules specified in Item 8 or Item 14(d) of Form 10-K are
omitted because they are not applicable or not required, or because the
required information is included in the Financial Statements or notes thereto.
(b) Reports on Form 8-K. The following Current Reports on Form 8-K were
filed with the Securities and Exchange Commission during the quarterly period
ending December 31, 2001:
On October 5, 2001, we filed a report on Form 8-K announcing the
termination of our proposed merger with Motient Corporation.
On October 19, 2001, we filed a report on Form 8-K announcing our
agreement to invest in the Mobile Satellite Ventures joint venture
and the repayment by Motient Corporation of approximately $26.2
million, including accrued interest, of our $50.0 million aggregate
principal amount of exchangeable notes through the delivery of five
million shares of XM Satellite Radio common stock.
On December 3, 2001, we filed a report on Form 8-K announcing our
purchase of a $50 million joint venture interest in Mobile Satellite
Ventures, LP in the form of a convertible note with a principal
amount of $50.0 million.
(c) The following sets forth those exhibits filed pursuant to Item 601
of Regulation S-K.
Exhibit
Number Description
------ -----------
2.1 -- Master Agreement, dated November 17, 1997, by and among ICC
Technologies, Inc., ICC Investment, L.P., ICC Desiccant
Technologies, Inc., and Engelhard Corporation, Engelhard DT
Inc. and Engelhard/ICC was filed as Exhibit "B" to ICC
Technologies, Inc.'s Definitive Proxy Statement dated February
3, 1998, for the Special Meeting of Stockholders held on
February 23, 1998, and is hereby incorporated herein by
reference.
2.2 -- Contribution Agreement, dated as of November 17, 1997, between
Engelhard/ICC and Fresh Air Solutions, L.P. was filed as
Exhibit "C" to ICC Technologies, Inc.'s Definitive Proxy
Statement dated February 3, 1998, for the Special Meeting of
the Stockholders held on February 23, 1998, and is hereby
incorporated herein by reference.
2.3 -- E/ICC Purchase and Sale Agreement, dated as of November 17,
1997, by and among ICC Investment, L.P., ICC Desiccant
Technologies, Inc. and Engelhard DT, Inc., was filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, and is hereby incorporated
herein by reference.
2.4 -- Merger Agreement and Plan of Reorganization, dated as of April
8, 1998, by and among ICC Technologies, Inc., RareMedium
Acquisition Corp., Rare Medium, Inc. and the Founding
Stockholders named therein ("Rare Medium Merger Agreement")
was filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated April 15, 1998 and is hereby incorporated
herein by reference.
2.5 -- Agreement and Plan of Merger, dated as of August 13, 1998, by
and among ICC Technologies, Inc., Rare Medium, Inc., I/O 360,
Inc. and the I/O 360 Stockholders named therein was filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K dated
August 13, 1998 and is hereby incorporated herein by
reference.
2.6 -- Agreement and Plan of Merger, dated as of August 13, 1998 by
and among ICC Technologies, Inc., Rare Medium, Inc.,
DigitalFacades Corporation and the DigitalFacades Stockholders
named therein was filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated August 13, 1998 and is hereby
incorporated herein by reference.
2.7 -- Purchase and Sale Agreement Relating to Partnership Interests
in Fresh Air Solutions, L.P. by and between ICC Desiccant
Technologies, Inc. and Wilshap Investments, LLC dated as of
October 14, 1998 was filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated October 14, 1998 and is
hereby incorporated herein by reference.
3.1 -- Restated Certificate of Incorporation of Rare Medium Group,
Inc., was filed as Exhibit 3.1 to the Company's Form 10-K for
the year ended December 31, 1999, and is hereby incorporated
herein by reference.
3.2 -- Amended and Restated By-Laws of Rare Medium Group, Inc., was
filed as Exhibit 3.2 to the Company's Form 10-K for the year
ended December 31, 1999, and is hereby incorporated herein by
reference.
10.1 -- Form of Secured Promissory Note of Rare Medium, Inc. ("Rare
Medium Note") in the principal amount of $22 million issued in
connection with the acquisition of Rare Medium, Inc., which
was filed as Exhibit C-1 to the Rare Medium Merger Agreement,
which was filed as Exhibit 2.1 to the Company's Form 8-K dated
April 15, 1998, and is hereby incorporated herein by
reference.
10.2 -- Form of Security Agreement between Rare Medium, Inc. and
former stockholders of Rare Medium, Inc. in connection with
the acquisition of Rare Medium, Inc., was filed as Exhibit D
to the Rare Medium Merger Agreement, which was filed as
Exhibit 2.1 to the Company's Form 8-K dated April 15, 1998,
and is hereby incorporated herein by reference.
10.3 -- Form of Stock Pledge Agreement between ICC Technologies, Inc.
and the former stockholders of Rare Medium, Inc., in
connection with the acquisition of Rare Medium, Inc., was
filed as Exhibit E to the Rare Medium Merger Agreement, which
was filed as Exhibit 2.1 to the Company's Form 8-K dated April
15, 1998, and is hereby incorporated herein by reference.
10.4 -- Form of Non-Founder Agreement between the Company and certain
former stockholders of Rare Medium, Inc. in connection with
the acquisition of Rare Medium, Inc., was filed as Exhibit M
to the Rare Medium Merger Agreement, which was filed as
Exhibit 2.1 to the Company's Form 8-K dated April 15, 1998,
and is hereby incorporated herein by reference.
10.5 -- Form of Guaranty by ICC Technologies, Inc. of the Rare Medium
Note, which was filed as Exhibit N to the Rare Medium Merger
Agreement, which was filed as Exhibit 2.1 to the Company's
Form 8-K dated April 15, 1998, and is hereby incorporated
herein by reference.
10.6 -- Employment Agreement between the Company and Glenn S. Meyers,
dated April 14, 1998, which was filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by
reference.
10.7 -- Lease dated September 12, 1997 between Forty Four Eighteen
Joint Venture and Rare Medium, Inc. re: entire sixth floor,
44-8 West 18th Street thru to 47-53 West 17th Street,
Manhattan, New York, New York, which was filed as Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by
reference.
10.8 -- Lease dated February 11, 1998 by and between B & G Bailey
Living Trust u/t/d March 25, 1975 and Steaven Jones and
DigitalFacades Corporation re: 4081 Redwood Avenue, 1st Floor,
Los Angeles, California, which was filed as Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by
reference.
10.9 -- The Company's Incentive Stock Option Plan, as amended, which
was filed as Exhibit 4(g) to the Company's Registration
Statement on Form S-8, No. 33-85636, filed on October 26,
1994, and is hereby incorporated herein by reference.
10.10 -- The Company's Nonqualified Stock Option Plan as amended and
restated, which was filed as Exhibit C to the Company's
Definitive Proxy Statement dated November 18, 1994, for
Stockholders Meeting held December 15, 1994, and is hereby
incorporated herein by reference.
10.11 -- 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.
10.12 -- 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.
10.13 -- Fresh Air Solutions, L.P. Limited Partnership Agreement, dated
February, 1998, between ICC Desiccant Technologies, Inc., as
the sole general partner and a limited partner, and Engelhard
DT, Inc., a limited partner, which was filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, and is hereby incorporated herein by
reference.
10.14 -- Admission of Partner/Amendment of Partnership Agreement dated
October 14, 1998 between ICC Desiccant Technologies, Inc.,
Wilshap Investments, L.L.C., Engelhard DT, Inc. and Fresh Air
Solutions, L.P., which was filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and is hereby incorporated herein by
reference.
10.15 -- Form of Exchange Agreement, dated as of December 31, 1998, by
and between ICC Technologies, Inc. and each of certain
beneficial holders of the Rare Medium, Inc., Secured
Promissory Note, dated April 15, 1998, which was filed as
Exhibit 10.1 to the Company's Form 8-K dated December 31,
1998, and is hereby incorporated herein by reference.
10.16 -- Securities Purchase Agreement, dated as of January 28, 1999,
by and among ICC Technologies, Inc. and Capital Ventures
International ("CVI Securities Purchase Agreement") and
Exhibits thereto, which were filed as Exhibit 10.1 to the
Company's Form 8-K dated January 28, 1999, and are hereby
incorporated herein by reference.
10.17 -- Form of Convertible Term Debenture, dated as of January 28,
1999, which was filed as Exhibit A to the CVI Securities
Purchase Agreement, which was filed as Exhibit 10.1 to the
Company's Form 8-K dated January 28, 1999, and is hereby
incorporated herein by reference.
10.18 -- Form of Stock Purchase Warrant of ICC Technologies, Inc.,
dated as of January 28, 1999, which was filed as Exhibit B to
the CVI Securities Purchase Agreement, which was filed as
Exhibit 10.1 to the Company's Form 8-K dated January 28, 1999,
and is hereby incorporated herein by reference.
10.19 -- Form of Registration Rights Agreement, dated as of January 28,
1999, which was filed as Exhibit C to the CVI Securities
Purchase Agreement, which was filed as Exhibit 10.1 to the
Company's Form 8-K dated January 28, 1999, and is hereby
incorporated herein by reference.
10.20 -- Agreement and Plan of Merger, dated as of March 5, 1999, among
Rare Medium, Inc., ICC Technologies, Inc., Rare Medium Texas
I, Inc., Big Hand, Inc., and The Stockholders of Big Hand,
Inc., which was filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and
is hereby incorporated herein by reference.
10.21 -- The Company's Amended and Restated Equity Plan for
Directors, which was filed as Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998, and is hereby incorporated herein by reference.
10.22 -- Amended and Restated Securities Purchase Agreement, dated as
of June 4, 1999, among Rare Medium Group, Inc., Apollo
Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P.
and AIF/RRRR LLC, which was filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on June 21, 1999,
and is hereby incorporated herein by reference.
10.23 -- Form of Series 1-A Warrant of Rare Medium Group, Inc., which
was filed as Exhibit 4.3 to the Company's Current Report on
Form 8-K filed on June 21, 1999, and is hereby incorporated
herein by reference.
10.24 -- Form of Series 2-A Warrant of Rare Medium Group, Inc., which
was filed as Exhibit 4.5 to the Company's Current Report on
Form 8-K filed on June 21, 1999, and is hereby incorporated
herein by reference.
10.25 -- Pledge, Escrow and Disbursement Agreement, dated as of June 4,
1999, among Rare Medium Group, Inc., Apollo Investment Fund
IV, L.P., and The Chase Manhattan Bank, which was filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K filed
on June 21, 1999, and is hereby incorporated herein by
reference.
10.26 -- Form of Purchase Agreement, dated January 14, 2000, between
the Company and each of the purchasers in the private
placement, which was filed as Exhibit 4.1 to the Company's
Form S-3 filed on February 11, 2000, and is hereby
incorporated herein by reference.
10.27 -- Form of Stock Option Agreement, dated April 15, 1998, by and
between ICC Technologies, Inc. and Glenn S. Meyers, which was
filed as Exhibit 4(e) to the Company's Form S-8 filed on April
23, 1999, and is hereby incorporated herein by reference.
10.28 -- The Company's Amended and Restated 1998 Long-Term Incentive
Plan, which was filed as Exhibit 4(d) to the Company's Form
S-8 filed on November 3, 2000, and is hereby incorporated
herein by reference.
10.29 -- Note Purchase Agreement, dated as of April 2, 2001, between
the Company and Motient Corporation.
10.30 -- Amended and Restated Investment Agreement, dated as of October
12, 2001, by and among Motient Corporation, Mobile Satellite
Ventures LLC, TMI Communications and Company, Limited
Partnership, MSV Investors, LLC and the other investors named
therein, which was filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated December 3, 2001 and is
incorporated herein by reference.
10.31 -- Form of Stockholders' Agreement of Mobile Satellite Ventures
GP Inc. , which was filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K dated December 3, 2001 and is
incorporated herein by reference.
10.32 -- Form of Limited Partnership Agreement of Mobile Satellite
Ventures LP. , which was filed as Exhibit 99.3 to the
Company's Current Report on Form 8-K dated December 3, 2001
and is incorporated herein by reference.
10.33 -- Form of Convertible Note of Mobile Satellite Ventures LP in
the principal amount of $50 million, issued to MSV Investors,
LLC, which was filed as Exhibit 99.4 to the Company's Current
Report on Form 8-K dated December 3, 2001 and is incorporated
herein by reference.
10.34 -- Amendment to Employment Agreement, dated as of February 15,
2001, between Rare Medium Group, Inc. and Craig C. Chesser,
which was filed as exhibit 10.1 to the Company's Form 10-Q for
-the period ended March 31, 2001 and is hereby incorporated by
reference.
10.35 -- Amendment to Employment Agreement, dated as of February 15,
2001, between Rare Medium Group, Inc. and Michael A. Hultberg,
which was filed as exhibit 10.2 to the Company's Form 10-Q for
the period ended March 31, 2001 and is hereby incorporated by
reference.
10.36 -- Amendment to Employment Agreement, dated as of February 15,
2001, between Rare Medium Group, Inc. and Robert C. Lewis,
which was filed as exhibit 10.3 to the Company's Form 10-Q for
the period ended March 31, 2001 and is hereby incorporated by
reference.
21 -- Subsidiaries of the Company are Rare Medium, Inc., a New York
corporation; Carlyle Media Group Limited, a United Kingdom
corporation; Notus Communications, Inc., a Georgia
corporation; Old Cardco, Inc., a New York corporation;
liveuniverse.com Inc., a Delaware corporation; and MSV
Investors Holdings, Inc., a Delaware corporation.
23.1 -- Consent of KPMG LLP, Independent Auditors.
23.2 -- Independent Auditors' Report on Schedule.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Rare Medium Group, Inc.:
We have audited the accompanying consolidated balance sheets of Rare
Medium Group, Inc. and subsidiaries as of December 31, 2000 and 2001 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 2001. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rare
Medium Group, Inc. and subsidiaries as of December 31, 2000 and 2001 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
New York, New York
March 15, 2002
RARE MEDIUM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(in thousands except share data)
2000 2001
---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $113,018 $7,061
Short-term investments 44,465 9,746
---------------- ----------------
Total cash, cash equivalents and short-term investments 157,483 16,807
Accounts receivable, net of allowance for doubtful accounts of $3,241 and $650 21,952 572
Work in process 5,426 --
Investment in XM Satellite Radio -- 91,800
Prepaid expenses and other current assets 5,402 936
---------------- ----------------
Total current assets 190,263 110,115
Property and equipment, net 28,740 169
Note receivable from the Mobile Satellite Venture, L.P. -- 50,486
Notes receivable from Motient Corporation, net of $26,957 reserve -- --
Investments in affiliates 48,016 2,600
Goodwill and intangibles, net 49,061 --
Other assets 1,411 346
---------------- ----------------
Total assets $317,491 $163,716
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $10,740 $5,299
Accrued liabilities 16,876 9,428
Deferred revenue 3,778 --
Other current liabilities -- 10,030
---------------- ----------------
Total current liabilities 31,394 24,757
Other noncurrent liabilities 9,367 --
---------------- ----------------
Total liabilities 40,761 24,757
---------------- ----------------
Series A Convertible Preferred Stock, $.01 par value, net of unamortized 47,621 59,558
Discount of $50,162 and $45,768, respectively
---------------- ----------------
Minority interest -- 10,097
---------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000 shares; issued
977,838 shares as Series A Convertible Preferred Stock at December 31,
2000 and 1,053,259 shares at December 31, 2001 -- --
Common stock, $.01 par value. Authorized 200,000,000 shares; issued and
outstanding 63,676,074 shares at December 31, 2000 and 65,324,966 shares at
December 31, 2001 637 653
Additional paid-in capital 528,958 529,955
Accumulated other comprehensive income (loss) (1,127) 60,336
Accumulated deficit (299,188) (521,469)
Treasury stock, at cost, 66,227 shares (171) (171)
---------------- ----------------
Total stockholders' equity 229,109 69,304
---------------- ----------------
Total liabilities and stockholders' equity $317,491 $163,716
================ ================
See accompanying notes to consolidated financial statements.
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(in thousands except share data)
1999 2000 2001
-------------- ------------- -------------
Revenues $1,569 $8,284 $1,906
Cost of revenues 1,019 6,102 1,337
-------------- ------------- --------------
Gross profit 550 2,182 569
Expenses:
Sales and marketing 267 14,224 1,257
General and administrative 14,551 44,536 18,858
Depreciation and amortization 1,848 8,187 3,028
Restructuring charges -- -- 1,071
-------------- ------------- --------------
Total expenses 16,666 66,947 24,214
-------------- ------------- --------------
Loss from operations (16,116) (64,765) (23,645)
Interest (expense) income, net (1,479) 10,182 9,189
Loss on investments in affiliates (1,469) (11,102) (54,633)
Minority interest -- -- (97)
Other income (expense), net 200 (205) (22,239)
-------------- ------------- --------------
Loss before discontinued operations (18,864) (65,890) (91,425)
Discontinued operations:
Loss from discontinued operations (30,606) (62,532) (116,046)
Loss from wind-down of discontinued operations -- -- (2,873)
-------------- ------------- --------------
Loss from discontinued operations (30,606) (62,532) (118,919)
-------------- ------------- --------------
Net loss (49,470) (128,422) (210,344)
Deemed dividend attributable to issuance of convertible
preferred stock (29,879) -- --
Cumulative dividends and accretion of convertible preferred
stock to liquidation value (13,895) (22,718) (11,937)
-------------- ------------- --------------
Net loss attributable to common stockholders $ (93,244) $ (151,140) $ (222,281)
============== ============= ==============
Basic and diluted loss per share:
Continuing operations $ (1.71) $(1.66) $(1.62)
Discontinued operations (0.84) (1.17) (1.87)
-------------- ------------- --------------
Net loss per share $ (2.55) $(2.83) $(3.49)
============== ============= ==============
Basic weighted average common shares outstanding 36,625,457 53,488,951 63,740,209
============== ============= ==============
See accompanying notes to consolidated financial statements.
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(in thousands)
1999 2000 2001
--------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (49,470) $(128,422) $(210,344)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss from discontinued operations 30,606 62,532 118,919
Depreciation and amortization 1,848 8,187 3,028
Loss on investments in affiliates 1,469 11,102 54,633
Common stock and stock options issued for services rendered 30 -- 1,208
Net loss on notes receivable from Motient Corporation -- -- 21,613
Non-cash restructuring charges -- -- 689
Non-cash compensation charges -- -- 233
Non-cash interest expense 2,630 -- --
Changes in assets and liabilities, net of acquisitions and sale
of businesses:
Accounts receivable (248) (1,061) 278
Work in process 190 62 --
Prepaid expenses and other assets (1,327) (324) (2,799)
Deferred revenue (2) 883 665
Accounts payable, accrued and other liabilities 68 5,969 (3,487)
--------------- -------------- --------------
Net cash used in continuing operations (14,206) (41,072) (15,364)
Net cash used in discontinued operations (17,825) (24,794) (29,496)
--------------- -------------- --------------
Net cash used in operating activities (32,031) (65,866) (44,860)
Cash flows from investing activities:
Cash paid for investments in affiliates (27,076) (27,563) (6,199)
Cash received for sale of investment in affiliates -- -- 3,799
Purchases of property and equipment, net (1,164) (2,652) (95)
Purchases of notes receivable -- -- (100,000)
Cash paid for acquisitions, net of cash acquired and acquisition costs (3,379) (76) --
Purchases of short-term investments -- (41,329) (79,813)
Sales of short-term investments -- -- 111,845
--------------- -------------- --------------
Net cash used in continuing operations (31,619) (71,620) (70,463)
Net cash used in discontinued operations (8,273) (24,159) (656)
--------------- -------------- --------------
Net cash used in investing activities (39,892) (95,779) (71,119)
Cash flows from financing activities:
Proceeds from contibutions to a consolidated subsidiary -- -- 10,000
Proceeds from issuance of convertible debenture 6,000 -- --
Proceeds from issuance of convertible preferred stock, net of costs 82,998 -- --
Proceeds from issuance of common stock, net of costs -- 240,923 --
Proceeds from issuance of common stock in connection with the
exercise of warrants and options 11,792 6,115 22
Repayments of borrowings, net (1,245) (915) --
--------------- -------------- --------------
Net cash provided by financing activities 99,545 246,123 10,022
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 27,622 84,478 (105,957)
Cash and cash equivalents, beginning of period 918 28,540 113,018
--------------- -------------- --------------
Cash and cash equivalents, end of period $28,540 $113,018 $ 7,061
=============== ============== ==============
Supplemental disclosure of cash flow information:
Interest paid $609 $-- $--
=============== ============== ==============
Income taxes paid $355 $-- $--
=============== ============== ==============
See accompanying notes to consolidated financial statements.
RARE MEDIUM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(in thousands except share data)
Accumulated
Additional Other
Preferred Common Stock Paid-In Comprehensive
Stock ($.01 par value) Capital Income
--------- ---------------- ------- ------------
Balance, January 1, 1999 $ -- $ 307 $ 84,720 $ --
Comprehensive loss:
Net loss -- -- -- --
Other comprehensive income:
Net unrealized gain arising during period -- -- -- 937
Total comprehensive loss
Issuance of 4,977,923 shares of common stock in
connection with acquired businesses -- 50 47,918 --
Issuance of 3,054,362 shares of common stock for
conversion of debt and accrued interest -- 30 17,109 --
Issuance of 2,489 shares of common stock for
services rendered -- -- 30 --
Issuance of 4,161,755 shares of common stock
through exercise of stock options and warrants -- 42 11,750 --
Value of warrants issued in connection with the
Series A preferred stock -- -- 53,118 --
Intrinsic value of beneficial conversion feature of
Series A preferred stock and pay-in-kind -- -- 37,429 --
Deemed dividends and accretion of preferred stock -- -- -- --
--------- --------- --------- ---------
Balance, December 31, 1999 -- 429 252,074 937
Comprehensive loss:
Net loss -- -- -- --
Other comprehensive loss:
Net unrealized loss arising during period -- -- -- (1,871)
Net foreign exchange loss arising during period -- -- -- (193)
Total comprehensive loss
Issuance of 862,721 shares of common stock in
connection with acquired businesses -- 9 16,730 --
Issuance of 2,500,000 shares of common stock in
private placement -- 25 65,690 --
Issuance of 3,000,000 shares of common stock in
public offering -- 30 175,178 --
Issuance of 53,160 shares of common stock for
for conversion of debt -- 1 1,993 --
Issuance of 14,366,836 shares of common stock
through exercise of stock options and warrants -- 143 5,972 --
Forgiveness of note receivable from shareholder -- -- -- --
Intrinsic value of beneficial conversion feature of
Series A preferred stock and pay-in-kind dividends -- -- 11,321 --
Deemed dividends and accretion of preferred stock -- -- -- --
--------- --------- --------- ---------
Balance, December 31, 2000 -- 637 528,958 (1,127)
Comprehensive loss:
Net loss -- -- -- --
Other comprehensive loss:
Net unrealized gain arising during period -- -- -- 61,240
Net foreign exchange gain arising during period -- -- -- 223
Total comprehensive loss
Retirement of 43,945 shares of common stock in
connection with acquired businesses -- (1) (528) --
Issuance of 419,982 shares of common stock and 80,000
stock options in connection with acquired businesses -- 4 61 --
Issuance of 21,666 shares of common stock
through exercise of stock options and warrants -- -- 36 --
Issuance of 1,250,000 shares of common stock and
47,000 stock options for services rendered -- 13 1,195 --
Non-cash compensation charge for option repricing -- -- 233 --
Deemed dividends and accretion of preferred stock -- -- -- --
--------- --------- --------- ---------
Balance, December 31, 2001 $-- $653 $529,955 $60,336
========= ========= ========= =========
Note
Receivable Treasury Total
From Accumulated Stock Stockholders'
Officer Deficit at Cost Equity
---------- ----------- ------- -------------
Balance, January 1, 1999 $ (230) $ (54,804) $ (171) $ 29,822
Comprehensive loss:
Net loss -- (49,470) -- (49,470)
Other comprehensive income:
Net unrealized gain arising during period -- -- -- 937
-------------
Total comprehensive loss (48,533)
Issuance of 4,977,923 shares of common stock in
connection with acquired businesses -- -- -- 47,968
Issuance of 3,054,362 shares of common stock for
conversion of debt and accrued interest -- -- -- 17,139
Issuance of 2,489 shares of common stock for
services rendered -- -- -- 30
Issuance of 4,161,755 shares of common stock
through exercise of stock options and warrants -- -- -- 11,792
Value of warrants issued in connection with the
Series A preferred stock -- -- -- 53,118
Intrinsic value of beneficial conversion feature of
Series A preferred stock and pay-in-kind -- -- -- 37,429
Deemed dividends and accretion of preferred stock -- (43,774) -- (43,774)
--------- --------- --------- ---------
Balance, December 31, 1999 (230) (148,048) (171) 104,991
Comprehensive loss:
Net loss -- (128,422) -- (128,422)
Other comprehensive loss:
Net unrealized loss arising during period -- -- -- (1,871)
Net foreign exchange loss arising during period -- -- -- (193)
---------
Total comprehensive loss (130,486)
Issuance of 862,721 shares of common stock in
connection with acquired businesses -- -- -- 16,739
Issuance of 2,500,000 shares of common stock in
private placement -- -- -- 65,715
Issuance of 3,000,000 shares of common stock in
public offering -- -- -- 175,208
Issuance of 53,160 shares of common stock for
for conversion of debt -- -- -- 1,994
Issuance of 14,366,836 shares of common stock
through exercise of stock options and warrants -- -- -- 6,115
Forgiveness of note receivable from shareholder 230 -- -- 230
Intrinsic value of beneficial conversion feature of
Series A preferred stock and pay-in-kind dividends -- -- -- 11,321
Deemed dividends and accretion of preferred stock -- (22,718) -- (22,718)
--------- --------- --------- ---------
Balance, December 31, 2000 -- (299,188) (171) 229,109
Comprehensive loss:
Net loss -- (210,344) -- (210,344)
Other comprehensive loss:
Net unrealized gain arising during period -- -- -- 61,240
Net foreign exchange gain arising during period -- -- -- 223
---------
Total comprehensive loss (148,881)
Retirement of 43,945 shares of common stock in
connection with acquired businesses -- -- -- (529)
Issuance of 419,982 shares of common stock and 80,000
stock options in connection with acquired businesses -- -- -- 65
Issuance of 21,666 shares of common stock
through exercise of stock options and warrants -- -- -- 36
Issuance of 1,250,000 shares of common stock and
47,000 stock options for services rendered -- -- -- 1,208
Non-cash compensation charge for option repricing -- -- -- 233
Deemed dividends and accretion of preferred stock -- (11,937) -- (11,937)
--------- ----------- --------- ---------
Balance, December 31, 2001 $ -- $ (521,469) $(171) $69,304
========= =========== ========= =========
See accompanying notes to consolidated financial statements.
RARE MEDIUM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Description of Business and Basis of Presentation
Rare Medium Group, Inc. (the "Company") conducts its business primarily
through its subsidiaries. From 1998 through the third quarter of 2001, its
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
which caused many companies to reduce spending on Internet-focused business
solutions, 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 5).
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, in the past, the Company has
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. Additionally, the Company sold
a majority of its equity interest in the operations of three of its
Start-up Companies: ChangeMusic Network ("ChangeMusic") and ePrize in April
2001 and Regards.com in December 2001 (see Note 8(b)). Currently, the
Company is no longer actively seeking new start-up opportunities or venture
investments, nor is it managing or operating any Start-up Companies.
As a result of the decision to discontinue the operations of Rare
Medium, Inc. and LiveMarket, the operating results reported in our statements
of operations as continuing operations include the consolidated results of the
Company, its 80% owned MSV Investors, LLC subsidiary ("MSV Investors
Subsidiary"), and its Start-up Companies, up to their respective dates of
sale or shutdown. The results of Rare Medium, Inc. and LiveMarket are
reflected as discontinued operations.
In November 2001, through its MSV Investors Subsidiary, the Company
became a participant in the Mobile Satellite Venture, L.P. joint venture
("MSV Joint Venture"), a joint venture that 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 expects to become an
increasingly active participant in the MSV Joint Venture and has designated
three members of the 12-member board of directors of the MSV Joint
Venture's corporate general partner.
In addition to winding down Rare Medium, Inc., the Company's current
operations consist of actively managing its interest in the MSV Joint
Venture. The Company's principal assets consist of its interest in the MSV
Joint Venture, five million shares of XM Satellite Radio, Inc. ("XM
Satellite Radio") common stock, promissory notes from Motient with a
principal amount of $26.2 million (see Notes 3 and 17), its remaining
investments in affiliates, and cash, cash equivalents and short-term
investments.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. As of
December 31, 2001, Rare Medium, Inc. has cash equivalents in the amount of
$1.3 million supporting letters of credit issued for certain real estate
leases (see Note 17).
(c) Short-Term Investments
The Company classifies investments in short-term debt securities as held
to maturity. These investments are diversified among high credit quality
securities in accordance with the Company's investment policy. The Company has
both the intent and ability to hold these securities to maturity. The cost of
these securities is adjusted for amortization of premiums and accretion of
discounts to maturity over the contractual life of the security. Such
amortization and accretion are included in interest income.
The Company classifies its investment in XM Satellite Radio common stock
as an available-for-sale, marketable security and reports such investment at
fair value with net unrealized gains and losses recorded in stockholders'
equity. Gains and losses will be recognized in our statements of operations
when realized. At December 31, 2001, the reported value of XM Satellite Radio
in our balance sheet was approximately $91.8 million, resulting in an
unrealized gain of approximately $60.3 million.
(d) Property and Equipment
The Company uses the straight-line method of depreciation. The estimated
useful lives of property and equipment are as follows:
Years
Computer equipment and software...................... 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.
(e) Goodwill and Intangibles
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, was amortized on a straight-line basis over the
expected period to be benefited, which was typically three years. The
agreements pursuant to which the Company acquired certain companies (see Note
8(a)) include provisions that could require the Company to issue additional
shares if certain performance targets are met. Accumulated amortization
amounted to $36.5 million, $77.3 million and nil at December 31, 1999, 2000
and 2001, respectively. In connection with discontinuation of the operations
of Rare Medium, Inc. and LiveMarket (see Note 5), and with the sale or
shutdown of all the Start-up Companies (see Note 8(b)), all remaining
goodwill balances were written off in 2001.
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 undiscounted 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 exceeds 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.
(f) Revenue Recognition
Advertising revenues derived from the delivery of advertising
impressions are recognized in the period the impressions are delivered,
provided the collection of the resulting receivable is reasonably assured.
Advertising revenues from ChangeMusic publications were recognized at
the time the related publications were sent to the subscriber or were
available at newsstands. Subscription revenue was deferred and recognized as
income over the subscription period. Revenues related to newsstand magazine
sales were recognized at the time that the publications were available at the
newsstands, net of estimated returns.
Revenues from the Internet services business, which was one of our
discontinued operations, were recognized using the percentage-of-completion
method for fixed price contracts and as time was incurred for time and
materials contracts, provided the collection of the resulting receivable was
reasonably assured. Unbilled receivables, representing time and costs incurred
on projects in process in excess of amounts billed, were recorded as work in
process in the accompanying balance sheets. Deferred revenue represents
amounts billed in excess of costs incurred and were recorded as liabilities.
To the extent costs incurred and anticipated costs to complete projects in
progress exceed anticipated billings, a loss was recognized in the period such
determination was made for the excess.
(g) Investments in Affiliates
The Company accounts for its investments in affiliates in which it owns
less than 20% of the voting stock and does not possess significant influence
over the operations of the investee, under the cost method of accounting. The
Company accounts for those investments where the Company owns greater than 20%
of the voting stock and possesses significant influence under the equity
method.
(h) 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.
(i) Stock Option Plans
The Company accounts for its stock option plan in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which allows entities to continue
to apply the provisions of Accounting Principles Board ("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
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 Opinion No. 25 and provide
the pro forma disclosure required by SFAS No. 123 (see Note 14).
(j) 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.
(k) Net Loss Per Share
Basic earnings per share ("EPS") is computed by dividing net income or
net loss attributable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise or conversion of securities into common stock. Net
loss and weighted average shares outstanding used for computing diluted loss
per common share were the same as that used for computing basic loss per
common share.
For the purposes of computing EPS from continuing operations, the
Company had potentially dilutive common stock equivalents of 6,380,103,
5,846,723 and 83,726 for the years ended December 31, 1999, 2000 and 2001,
respectively, made up of stock options. In addition, the Company had
potentially dilutive common stock equivalents of 18,924,862, 23,742,077 and
nil related to the Series A convertible preferred stock, Series 1-A and Series
2-A warrants and other common stock warrants for the years ended December 31,
1999, 2000 and 2001, respectively. 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.
(l) Fair Value of Financial Instruments
The fair value of cash and cash equivalents, short-term investments,
accounts receivables and the investment in XM Satellite Radio common stock
approximate book value. The fair value of the note receivable from the MSV
Joint Venture approximates book value based on the equity value of the MSV
Joint Venture's recent funding transactions assuming conversion of such note.
The Company also holds promissory notes from Motient with a principal amount
of $26.2 million. As a result of uncertainty with respect to the ultimate
collection on the Motient notes, the Company recognized a reserve for the
entire amount of these notes (see Notes 3 and 17).
(m) Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, short-term
investments, investment in XM Satellite Radio common stock, and note
receivable from the MSV Joint Venture. Cash, cash equivalents and short-term
investments consist of deposits, money market funds, and commercial paper
placed with various high credit quality financial institutions.
At December 31, 2001, the reported value of the Company's investment in
XM Satellite Radio was approximately $91.8 million, or $18.36 per share,
resulting in an unrealized gain of approximately $60.3 million. Changes in the
market price of XM Satellite Radio stock could cause fluctuations in the
Company's earnings and financial position.
The note receivable by the MSV Investors Subsidiary from the MSV Joint
Venture is convertible into approximately 30.8% of the equity interests in the
joint venture (see Note 2). The Company holds an 80% interest in the MSV
Investors Subsidiary.
(n) Internal-Use Software
The Company accounts for internal-use software under the American
Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company expenses costs incurred in the preliminary project
stage and, thereafter, capitalizes costs incurred in developing or obtaining
internal-use software. Certain costs, such as maintenance and training, are
expensed as incurred.
(o) Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS No. 141"). SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS No. 141 did not have a
material effect on the Company's results of operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective January 1, 2002. SFAS No. 142
eliminates the current requirement to amortize goodwill and
indefinite-lived intangible assets and replaces the amortization with an
impairment test which must be performed at least annually. For intangible
assets with definite useful lives, SFAS 142 requires amortization over
their respective expected useful lives to their estimated residual values
and review for impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS No. 121"). Additionally, SFAS No. 142 requires that a
transitional goodwill impairment test be completed six months from the date
of adoption. The adoption of SFAS No. 142 is not expected to have a
material effect on the Company's results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective January 1, 2003. SFAS No. 143
addresses the financial accounting and reporting for obligations and
retirement costs related to the retirement of tangible long-lived assets. The
adoption of SFAS No. 143 is not expected to have a material effect on the
Company's results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective January 1,
2002. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting
provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. The adoption of SFAS No. 144 is
not expected to have a material effect on the Company's results of
operations.
(p) Reclassifications
Certain reclassifications, primarily related to discontinued operations
(see Note 5), have been made to the prior years' financial statements to
conform to the current year's presentation.
(2) Investment in the MSV Joint Venture
On November 26, 2001, through its MSV Investors Subsidiary, the Company
purchased a $50.0 million interest in the MSV Joint Venture in the form of a
convertible note with a principal amount of $50.0 million (the "MSV Note").
Immediately prior to the purchase of the convertible note, the Company
contributed $40.0 million to its MSV Investors Subsidiary and unrelated third
parties contributed $10.0 million. The MSV 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 its MSV Investors Subsidiary into equity interests
in the MSV Joint Venture. The MSV Note automatically converts into equity
interests upon the MSV Joint Venture obtaining certain approvals from the FCC
and its Canadian equivalent, Industry Canada. Upon conversion, the MSV
Investors Subsidiary would own 30.8% of the equity interests in the MSV Joint
Venture. However, in the event that the MSV Joint Venture receives approval
from the FCC by March 31, 2003 with regard to its plans for a next-generation
satellite system complemented by ancillary terrestrial base stations, the
Other MSV Investors are obligated to invest an additional $50.0 million in
the MSV Joint Venture and, thereafter, the MSV Investors Subsidiary would own
approximately 23.6% of the equity interests in the MSV Joint Venture.
The $10.0 million received from unaffiliated persons as an investment
into the MSV Investors Subsidiary is reflected in the accompanying
consolidated financial statements as minority interest.
(3) Notes Receivable from Motient
On April 2, 2001, the Company agreed to purchase from Motient 12.5%
secured promissory notes (the "Motient Notes"), issuable in two tranches, each
in the principal amount of $25.0 million. The Motient Notes were
collateralized by five million shares of XM Satellite Radio common stock owned
by Motient. The first tranche was purchased on April 4, 2001, and the second
tranche was purchased on July 16, 2001. The principal of and accrued interest
on the Motient Notes were payable on October 1, 2001 in either cash, shares of
XM Satellite Radio, or any combination thereof at Motient's option, as set
forth in the agreement. At the option of the Company, the Motient Notes may
have been exchanged for a number of XM Satellite Radio shares based on a
formula, as set forth in the agreement.
On October 1, 2001, and again on October 8, 2001, the Company
extended the maturity date of the Motient Notes. On October 12, 2001, in
accordance with the terms of the Motient Notes, the Company received five
million shares of XM Satellite Radio as payment for $26.2 million of the
Motient Notes and accrued interest. The maturity date for the remaining
balance of the Motient Notes in the principal amount of approximately $26.2
million, and interest thereon, was extended for 60 days. On January 10,
2002, Motient and its subsidiaries filed for protection under Chapter 11 of
the United States Bankruptcy Code. As part of its filing, Motient indicated
that it may challenge the Company's right to the $26.2 million outstanding
principal balance and accrued interest thereon. Motient may also initiate
litigation directly against the Company to challenge the delivery of the
shares of XM Satellite Radio common stock by Motient to the Company as
partial repayment of the aggregate $50.0 million principal amount of the
Motient Notes. As a result of uncertainty with respect to the ultimate
collection on the Motient Notes, a reserve was recognized for the entire
amount of these notes. This loss of approximately $26.9 million was
partially offset by a gain of $5.3 million that resulted from the
difference between the value of the XM Satellite Radio common stock
received in connection with partial repayment of the Motient Notes in
accordance with their terms and the value of the XM Satellite Radio common
stock using its closing price on the date of the partial repayment. The
results of these transactions are reflected in other income (expense), net
on the accompanying consolidated statements of operations (see Note 17).
(4) Investments in Affiliates
The following is a summary of the carrying value of investments held by
the Company at December 31 (in thousands):
2000 2001
------------- -------------
Cost investments $37,501 $2,600
Marketable securities 7,791 --
Equity investments 2,724 --
------------- -------------
$48,016 $2,600
============= =============
For the year ended December 31, 1999, the Company recognized a loss on
investment in affiliates of $1.5 million consisting of $1.1 million for its
proportionate share of affiliates' operating losses and $0.4 million for the
amortization of its net excess investment over its equity in each affiliate's
net assets for those affiliates accounted for under the equity method. For the
year ended December 31, 2000, the Company recognized a loss on investment in
affiliates of $11.1 million consisting of $5.4 million for the impairment to
the carrying value of certain affiliates accounted for under the cost method
and $3.3 million for its proportionate share of affiliates' operating losses
and $2.4 million for the amortization of its net excess investment over its
equity in each affiliate's net assets for those affiliates accounted for under
the equity method. For the year ended December 31, 2001, the Company
recognized a loss on investment in affiliates of $54.6 million consisting of
$43.8 million for the impairment to the carrying value of certain affiliates
accounted for under the cost method, $3.6 million for the realized loss on the
sale of publicly traded securities, $0.5 million for its proportionate share
of affiliates' operating losses and $2.2 million for amortization of its net
excess investment over its equity in each affiliate's net assets for those
affiliates accounted for under the equity method, and $4.5 million related to
the sale or shutdown of its Start-up Companies.
During the years ended December 31, 1999, 2000 and 2001, the Company's
discontinued subsidiary Rare Medium, Inc. recognized revenue of approximately
$3.5 million, $11.9 million and $4.5 million for services provided to
affiliates which is included in the loss from discontinued operations.
(5) Discontinued Operations
At the end of the third quarter of 2001, a decision to discontinue the
operations of Rare Medium, Inc. and the LiveMarket subsidiary was made in
light of their performance and prospects. The wind-down of these businesses is
expected to be completed during 2002. In connection with the discontinuance of
these businesses, the Company recorded a charge of $35.9 million related to
severance and benefits resulting from headcount reductions, an accrual for
estimated losses of $2.9 million during the wind-down period and the write-off
of unamortized goodwill and property and equipment, net of expected proceeds.
As of December 31, 2001, the remaining assets, including cash, accounts
receivables, property and equipment and other assets, and liabilities,
including accounts payable, restructuring and other accrued expenses and other
current liabilities, amounting to approximately $3.6 million and $19.8
million, respectively.
The discontinuance of these businesses represents the disposal of a
business segment under Accounting Principles Board Opinion No. 30.
Accordingly, the results of these operations have been classified as
discontinued operations, and prior period results have been reclassified. For
the years ended December 31, 1999, 2000 and 2001, revenue from these
discontinued operations amounted to $36.9 million, $117.9 million and $26.9
million, respectively.
(6) Restructuring Charges
During 2001, the Company recognized restructuring charges of
approximately $56.7 million, primarily related to its Internet services
business, consisting of $30.8 million for facilities and the disposition of
property and equipment, $19.0 million for the impairment of unamortized
goodwill, $3.2 million for severance and benefits related to headcount
reductions and $3.7 million for other office shutdown costs. Initially, these
restructuring charges were aimed at aligning Rare Medium, Inc.'s cost
structure with changing market conditions and decreased demand for its
services. Additional charges were incurred as a result of the discontinuance
of the operations of the Rare Medium, Inc. and LiveMarket subsidiaries. During
2001, head count reductions, attrition and sale of the LiveMarket business and
portions of the Internet services business reduced the number of employees in
these businesses by approximately 760. Of the $56.7 million in restructuring
charges, $55.6 million is reflected in the loss from discontinued operations.
The total cash outlay and non-cash charges for the restructuring
activities are approximately $13.0 million and $43.7 million, respectively.
As of December 31, 2001, approximately $8.4 million of cash was used, $3.7
million is expected to be used in 2002, and the remaining cash outlay of
approximately $0.9 million, primarily related to the present value of the net
future minimum lease payments for certain real estate lease obligations, is
expected to be used over the next six years. Certain assumptions were made in
estimating the restructuring charges, including, but not limited to, sublease
income expected to be derived from Rare Medium, Inc.'s facilities. If Rare
Medium, Inc. is able to negotiate more favorable subleases or reach
settlement with its landlords, a benefit to results of operations could be
realized. If future net lease costs exceed estimates, additional expense
would be recognized in future periods.
Restructuring activities during the year ended December 31, 2001 were as
follows (in thousands):
Restructuring Amount Balance
Charges Utilized December 31, 2001
------------- -------- -----------------
Facilities and property and equipment $30,845 $27,320 $3,525
Goodwill 19,001 19,001 --
Severance and benefits 3,161 3,161 --
Other office shutdown costs 3,740 2,695 1,045
---------------- --------------- ---------------
Total $56,747 $52,177 $4,570
================ =============== ===============
(7) Merger with Motient
On May 14, 2001, the Company entered into an agreement to merge with a
subsidiary of Motient. By a letter agreement dated October 1, 2001, Motient
and the Company terminated the planned merger. As a result of the termination,
neither the Company nor Motient shall have any obligation to the other party,
except for repayment by Motient to the Company of amounts outstanding under
the Motient Notes (see Note 3).
(8) Business Transactions
(a) Acquisitions
During 1999 and 2000, the Company acquired 100% of the following
Internet services businesses, which were merged into the Company's Rare
Medium, Inc. subsidiary. The Company has accounted for these transactions
under the purchase method of accounting. The portion of the aggregate purchase
prices, including acquisition costs, that exceeded the fair value of the net
assets acquired was allocated to goodwill and, until the decision was made to
discontinue the operations of Rare Medium, Inc., was amortized using the
straight line method over three years. The results of operations for these
acquisitions have been included in the accompanying statements of operations
as discontinued operations since the respective dates of acquisition and all
remaining amounts of goodwill were written off (see Note 5).
Date of Number of Purchase Gross
Acquisition Acquisition Shares Issued Price Goodwill
----------- ----------- ------------- -------- --------
(In thousands)
1999
Hype!, Inc. March 1999 270,992 $1,219 $1,102
FS3, Inc. April 1999 768,975 $3,460 $3,496
Big Hand, Inc. April 1999 1,460,603 $6,573 $6,447
Struthers Martin, Inc. May 1999 406,092 $6,000 $4,518
Globallink Communications, Inc. June 1999 445,470 $5,511 $5,634
Fire Engine Red, Inc. July 1999 333,333 $4,000 $4,088
Atension, Inc. August 1999 160,450 $1,415 $1,432
Evit Caretni Interactive, Inc. December 1999 256,824 $8,328 $9,053
Carlyle Media Group Limited December 1999 60,153 $2,230 $3,639
2000
Friedland Jacobs Communications, Inc. June 2000 800,745 $14,794 $14,776
In connection with certain acquisitions, the former shareholders have
agreed to indemnify the Company for any losses resulting from a breach of,
among other things, their respective representations, warranties and
covenants. To secure the indemnification obligations of these shareholders
thereunder, 149,762 shares of the Company's common stock delivered to these
shareholders, included as part of the consideration, remain in escrow at
December 31, 2001, and the liability of these shareholders under such
indemnification obligations is expressly limited to the value of such shares
held in escrow. During the year ended December 31, 2000, the Company issued
5,399 shares of its common stock as additional consideration for acquisitions
made during 1999. During the year ended December 31, 2001, the Company issued
419,982 shares of its common stock and 80,000 stock options as additional
consideration for an acquisition made during 1999 and retired 43,945 shares of
its common stock as a reduction of consideration for acquisitions made during
1999 and 2000.
In November 1999, the Company acquired 25% of the common shares, on a
fully diluted basis, of College Media, Inc. ("CMJ"). Total consideration
amounted to approximately $4.9 million representing $1.0 million in cash and
180,860 shares of the Company's common stock. At such time, the Company also
agreed to merge its 96% owned subsidiary, Changemusic.com with CMJ to form
ChangeMusic Network, Inc. Additionally, the Company acquired 1,000 shares of
Series A Convertible Preferred Stock, par value $0.01 per share of
ChangeMusic ("ChangeMusic Preferred Stock") and a warrant to purchase up to
an additional 1,000 shares of ChangeMusic Preferred Stock at a price of
$8,400 per share. The consideration price for the ChangeMusic Preferred Stock
and warrant was $7.0 million in cash. As a result of the Company owning
approximately 62% of the common stock outstanding of ChangeMusic, 74%
assuming the conversion of the ChangeMusic Preferred Stock and exercise of
the warrant, the statements of financial position and the results of
operations (from November 1999), have been consolidated through the date of
sale of ChangeMusic (see Note 8(b)). Total goodwill resulting from these
transactions representing (a) the cash and common stock of the Company, (b)
the contribution of the Company's interest in ChangeMusic and (c) the net
liabilities of CMJ and acquisition costs, amounted to $10.1 million. The
Company has accounted for this transaction under the purchase method of
accounting. Goodwill was being amortized using the straight-line method over
three years.
Pro Forma Financial Information (unaudited)
The following unaudited pro forma information is presented as if the
Company had completed the above 2000 acquisitions as of January 1, 1999. The
pro forma information is not necessarily indicative of what the results of
operations would have been had the acquisitions taken place at those dates or
of the future results of operations.
1999 2000
------------ -----------
(in thousands)
Loss from discontinued operations $(34,158) $(64,195)
============ ===========
Net loss $(53,023) $(130,084)
============ ===========
Net loss attributable to common stockholders
- basic and diluted $(2.59) $(2.84)
============ ===========
Also during 1999, the Company completed the acquisition of four other
Start-up Companies. The combined consideration consisted of cash and 634,171
shares of common stock amounting to approximately $2.2 million and $5.4
million, respectively. The Company has accounted for these transactions under
the purchase method of accounting. Amounts allocated to intangible assets
including goodwill was approximately $8.2 million and, through the dates of
sale or shutdown of the respective businesses, are being amortized over three
years. The results of these acquisitions have been included in the
accompanying statements of operations since the respective dates of
acquisition. The pro forma effects on the Company's statements of operations
are not material.
In January 2000, the Company completed the acquisition of Notus
Communication, Inc. ("Notus"), a privately held Internet communications
company based in Atlanta that provided business to business Internet unified
messaging technology solutions. In connection with this acquisition, the
Company issued 56,577 shares of its common stock, valued at approximately $1.7
million, and an approximate 12% interest in its majority owned subsidiary
iFace.com, Inc. The Company's effective ownership in Notus, which was renamed
NoticeNow.com, Inc., was 85.5%. The Company accounted for this transaction
under the purchase method of accounting. The aggregate purchase price,
including acquisition costs, exceeded the fair value of the net assets
acquired by approximately $2.0 million. This amount was allocated to goodwill
and until the shutdown of Notus in the second quarter of 2001 was being
amortized using the straight-line method over three years. Included in the
accompanying statements of operations are the results of NoticeNow.com since
the date of acquisition. The pro forma effects on the Company's statements of
operations are not material.
(b) Sale of Businesses
In April 2001, the Company sold a majority of its equity interest in
two of its Start-up Companies: ChangeMusic and ePrize. The Company received
total aggregate consideration of $1.4 million, consisting of cash and a
promissory note with a principal amount of approximately $0.5 million. The
Company retained a 15% equity interest in ChangeMusic and a 5% equity
interest in ePrize. During 2001, the Company recognized a loss of
approximately $2.5 million relating to the sale of ChangeMusic and a gain of
approximately $1.5 million relating to the sale of ePrize. In December 2001,
the Company sold the assets of Regards.com. The Company received
consideration of approximately $0.1 million of cash. The Company recognized a
nominal gain relating to this transaction.
(9) Short-Term Investments
The following is a summary of the amortized cost, which approximates
fair value, of securities held to maturity at December 31 (in thousands):
2000 2001
------------- -------------
Government agencies obligations $18,999 $9,298
United States corporate debt obligations 21,923 --
Certificates of deposit 3,543 448
------------- -------------
$44,465 $9,746
============= =============
(10) Property and Equipment
Property and equipment consists of the following at December 31 (in
thousands):
2000 2001
----------- ----------
Computer equipment and software $30,168 $321
Furniture and fixtures 4,937 55
Leasehold improvements 6,053 --
----------- ----------
41,158 376
Less accumulated depreciation and amortization (12,418) (207)
----------- ----------
Property and equipment, net $28,740 $169
=========== ==========
(11) Accrued Liabilities
Accrued liabilities consists of the following at December 31 (in
thousands):
2000 2001
------------- ------------
Accrued compensation $4,015 $537
Accrued professional fees 2,746 1,707
Accrued restructuring charges -- 4,570
Other accrued liabilities 10,115 2,614
------------- ------------
$16,876 $9,428
============= ============
(12) Stockholders' Equity
Common Stock Transactions
In 1999 and 2000, the Company issued 4,977,923 and 862,721 shares,
respectively, of common stock as consideration for the purchase of Internet
services business and start-up acquisitions. The fair value of the common
stock was determined based on the average trading price of the Company's
common stock at the time of the respective acquisitions.
In 1999 and 2000, the Company issued 1,431,756 shares and 53,160 shares,
respectively, of common stock to certain beneficial holders of the note held
by the former shareholders of Rare Medium, Inc. in exchange for the principal
amount of the note and accrued interest. Additionally, 34,144 shares of common
stock were issued with respect to the interest payment made in April 1999. In
1999, $1.5 million of non-cash interest expense was recognized to the extent
that the fair value of the stock on the date of conversion exceeded the
conversion price.
Pursuant to the terms of a Securities Purchase Agreement, dated as of
January 28, 1999, the Company agreed to sell, in two tranches, 8% Convertible
Term Debentures of the Company in the aggregate principal amount of $6.0
million (the "Convertible Debentures") and five year warrants to purchase an
aggregate of 693,642 shares of common stock at an exercise price of $5.27 per
share, subject to reset (the "Warrants"). The first tranche of the transaction
closed effective January 28, 1999, at which time the Company sold the
Convertible Debentures in the aggregate principal amount of $3.5 million and
Warrants to purchase 404,625 shares of common stock. In 1999, $1.1 million of
non-cash interest expense was recognized representing the accretion of the
discount resulting from the Convertible Debentures' beneficial conversion
feature. On June 4, 1999, in association with the issuance of the redeemable
preferred stock (see Note 13), the Company sold the remaining $2.5 million of
Convertible Debentures and Warrants. The Convertible Debentures and Warrants
were then immediately converted into 1,588,462 shares of common stock.
On January 14, 2000, the Company sold 2,500,000 shares of its common
stock for gross proceeds of $70.1 million (net proceeds of $65.7 million) in a
private transaction to a group of mutual funds managed by Putnam Investments
and Franklin Resources, Inc. On April 18, 2000, the Company filed a
registration statement with the SEC to register the resale of such shares as
required by the purchase agreement executed in connection with such private
transaction.
On March 29, 2000, the Company sold 3,000,000 shares of its common stock
for gross proceeds of $186.0 million (net proceeds of $175.2 million) in a
public offering underwritten by Credit Suisse First Boston Corporation,
Deutsche Bank Securities, Inc. and FleetBoston Robertson Stephens, Inc.
On August 22, 2000, the Company issued 12,709,499 shares of common stock
to holders of the Company's Series 1-A Warrants as a result of a cashless
exercise of all Series 1-A Warrants outstanding at that time. The effective
exercise price at the time of exercise was $0.01 per share (see Note 13). The
Company withheld 9,986 shares of common stock as payment of the aggregate
exercise price.
On November 19, 2001, the Company entered into a settlement agreement
with its former public relations firm in order to resolve a dispute concerning
the Company's alleged failure to deliver options covering a number of shares
of the Company's stock that were allegedly owed relating to past services
rendered which allegedly resulted in damages of $12.8 million to the public
relations firm. Pursuant to the settlement agreement, the Company, among other
things, issued 1,250,000 shares of unregistered common stock to the firm and
an option to purchase an additional 47,000 unregistered shares of common
stock. The fair value of this consideration approximated $1.2 million.
(13) Redeemable Preferred Stock
On June 4, 1999, the Company issued and sold to Apollo Investment Fund
IV, LP, Apollo Overseas Partners IV, LP and AIF IV/RRRR LLC (collectively,
"Apollo"), for an aggregate purchase price of $87.0 million, 126,000 shares of
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"), 126,000 Series 1-A Warrants (the "Series 1-A Warrants"), 1,916,994
Series 2-A Warrants (the "Series 2-A Warrants"), 744,000 shares of the
Company's Series B Preferred Stock (the "Series B Preferred Stock"), 744,000
Series 1-B Warrants (the "Series 1-B Warrants") and 10,345,548 Series 2-B
Warrants (the "Series 2-B Warrants").
Under the terms of the securities purchase agreement with Apollo, at the
Company's 1999 Annual Meeting of its stockholders held on August 19, 1999, the
holders of common stock approved the conversion (the "Apollo Conversion") of
all of the Series B Preferred Stock, Series 1-B Warrants and Series 2-B
Warrants, including such additional Series B Securities that have been issued
as dividends, into like amounts of Series A Preferred Stock, Series 1-A
Warrants and Series 2-A Warrants, respectively. Pursuant to the approval, all
Series B preferred stock and related warrants were converted into Series A
preferred stock and warrants. The Series A securities are convertible into or
exercisable for voting common stock whereas the Series B securities were
convertible into or exercisable for non-voting common stock.
The Series A Preferred Stock are subject to mandatory and optional
redemption. On June 30, 2012, the Company will be required to redeem all
Series A Preferred Stock plus any accrued and unpaid dividends. At the option
of the Company, the Series A Preferred Stock can be redeemed after June 30,
2002 provided that the trading price of the Company's common stock for each of
the preceding 30 trading days is greater than $12.00 per share, or after June
30, 2004 at a price of 103% of the face value of the Series A Preferred Stock
plus any accrued and unpaid dividends. In the event of a change of control, as
defined, at the option of the holders of the majority of the then outstanding
shares of the Series A Preferred Stock, the Company is required to redeem all
or any number of such holders' shares of Series A Preferred Stock plus any
accrued and unpaid dividends. The Series A Preferred Stock are convertible
into common stock at a conversion price of $7.00, subject to adjustment under
certain anti-dilution provisions as defined.
The preferred cumulative quarterly dividends are based on a rate of 7.5%
per annum for the first three years and 4.65% thereafter. For the first three
years, dividends are payable in additional shares of Series A securities.
During the next two years, beginning in September 2002, dividends are payable,
at the option of the holder, in additional shares of Series A securities or in
cash. Dividends paid thereafter are payable in cash.
Each Series 1-A warrant is exercisable for 13.5 shares of Company common
stock and each Series 2-A warrant is exercisable for one share of Company
common stock. The Series 1-A and Series 2-A warrants are exercisable at any
time and expire ten years from the date issued. The exercise price of the
Series 1-A warrants is dependent on the trading price of the Company's common
stock. The exercise price ranges from $0.01, if the trading price is equal to
or greater than $7.00, to $4.20 if the trading price is equal to or less than
$4.00; the exercise price of the Series 2-A warrants is $7.00. These exercise
prices and the number of shares purchasable by each warrant are subject to
adjustment under certain anti-dilution provisions as defined. The holders of
the Series 1-A and Series 2-A warrants have the option to pay the exercise
price of the warrant in cash, Company common stock previously held, or
instructing the Company to withhold a number of Company shares with an
aggregate fair value equal to the aggregate exercise price.
As of December 31, 2001, assuming that affiliates of Apollo convert all
their shares of Series A convertible preferred stock and exercise all their
Series 1-A and Series 2-A warrants, they would own approximately 44.1% of the
Company's outstanding common stock.
The Company ascribed value to the Series A securities based on their
relative fair value. As such, $29.9 million has been allocated to Series A
Preferred Stock and the remaining $57.1 million has been allocated to the
related Series 1-A and Series 2-A warrants. This transaction has been
accounted for in accordance with FASB Emerging Issues Task Force 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features."
As a result of the holders' ability to convert immediately, $29.9 million was
reflected in 1999 as a dividend in determining the net loss attributable to
common stockholders. Additional dividends have been recorded, representing
the accrual of the annual 7.5% pay-in-kind dividend and the accretion of the
carrying value up to the face redemption over 13 years.
(14) 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
has reserved a total of 28,600,000 shares of authorized common stock for
issuance under the following plans: the Long Term Incentive Plan, Nonqualified
Stock Option Plan and Equity Plan for Directors. The number of options to be
granted and the option prices are determined by the Compensation Committee of
the Board of Directors in accordance with the terms of the plans. Options
generally expire five to ten years after the date of grant.
During 1998, the Board of Directors approved the 1998 Long-Term
Incentive Plan, ("Stock Incentive Plan") under which "non-qualified" stock
options ("NQSOs") to acquire shares of common stock may be granted to
non-employee directors and consultants of the Company, and "incentive" stock
options ("ISOs") 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
23,000,000 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 the
NQSO is granted if the Board of Directors so determines. An ISO may not be
granted to a "ten percent stockholder" (as such term is defined in section
422A of the Internal Revenue Code) unless the exercise price is at least 110%
of the fair market value of the common stock and the term of the option may
not exceed five years from the date of grant. Common stock subject to a
restricted stock purchase or a bonus agreement is transferable only as
provided in such agreement. The maximum term of each stock option granted to
persons other than ten percent stockholders is ten years from the date of
grant.
Under the Nonqualified Stock Option Plan, which provides for the
issuance of up to 5,100,000 shares, the option price as determined by the
Compensation Committee may be greater or less than the fair market value of
the common stock as of the date of the grant, and the options are generally
exercisable for three to five years subsequent to the grant date. The
Nonqualified Stock Option Plan expired on July 18, 2000, and thereafter, no
new options can be granted under the plan.
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.
In the third quarter of 2000, employee holders of stock options with
exercise prices at or above $30.00 per share were allowed to exchange either
all or 50% of their existing stock options for an agreement by the Company to
issue new options at a date in excess of six months thereafter. The Company's
obligation to issue new stock options was contingent on each participant's
continued full-time employment with the Company through such period. On March
12, 2001, the Company issued 1,426,313 stock options at an exercise price of
$1.66, the fair market value of the underlying common stock on the date of
issuance of the new options, to those employees who had elected to participate
under this agreement. These transactions did not result in the recognition of
compensation expense.
On October 5, 2001, the compensation committee of the Company's board of
directors determined that the outstanding options held by certain executive
officers and employees were exercisable at prices that were significantly
above prevailing market prices for our common stock. Accordingly, the
compensation committee approved a repricing of the exercise prices of options
to purchase an aggregate of 328,334 shares of common stock to $0.13 per share,
the fair market value at the date of the repricing. On December 21, 2001, the
compensation committee approved an additional repricing of the exercise prices
of options to purchase an aggregate of 400,000 shares of common stock held by
non-management directors to $0.60 per share, the fair market value at the date
of the repricing. The Company recorded a non-cash compensation charge during
the year ended December 31, 2001 of approximately $0.2 million as a result of
these two actions.
The per share weighted average fair value of stock options granted
during 1999, 2000 and 2001 was $6.57, $18.52 and $0.81, 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 4.7% to 6.5% in 1999,
5.8% to 6.5% in 2000 and 2.5% to 5.3% in 2001, (2) an expected life of five
years in 1999, four years in 2000 and five years in 2001, (3) volatility of
approximately 96.3% in 1999, 139% in 2000 and 162% in 2001, 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, other than the $0.2 million
relating to the option repricing discussed above, 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 adjusted to the pro forma amounts indicated below (in thousands except
share data):
1999 2000 2001
-------------- ------------- --------------
Net loss:
As reported $49,470 $128,422 $210,344
Pro forma $63,927 $178,318 $187,626
Net loss attributable to common stockholders:
As reported $2.55 $2.83 $3.49
Pro forma $2.94 $3.76 $3.13
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 various option plans is shown below:
Weighted
Average
Exercise Number of
Prices Shares
-------------- --------------
Outstanding at January 1, 1999 $2.61 7,802,172
Granted 11.37 9,705,999
Forfeited 4.26 (597,324)
Exercised 2.89 (3,237,955)
--------------
Outstanding at December 31, 1999 8.80 13,672,892
Granted 26.35 11,699,549
Forfeited 30.90 (7,399,282)
Exercised 3.93 (1,581,666)
--------------
Outstanding at December 31, 2000 11.82 16,391,493
Granted 1.61 3,023,147
Forfeited 12.35 (14,898,026)
Exercised 1.66 (21,666)
--------------
Outstanding at December 31, 2001 $ 3.25 4,494,948
==============
The following table summarizes weighted-average option price information:
Range of Exercise Prices Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at December Remaining Exercise at December Exercise
31, 2001 Life Price 31, 2001 Price
---------- --------- -------- ----------- --------
$0.13 - $0.66 1,075,334 2.69 $0.46 592,002 $0.39
$1.66 - $2.38 1,800,666 5.62 2.35 1,263,999 2.33
$2.50 - $3.84 299,142 2.45 3.32 299,142 3.32
$4.77 - $5.11 997,098 7.00 5.10 997,098 5.10
$5.38 - $42.25 322,708 5.56 12.00 309,375 11.88
-------------- -----------
4,494,948 5.01 $3.25 3,461,616 $3.74
============== ===========
(15) Income Taxes
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the years ended December 31, 2000 and 2001 is
principally due to the Company incurring net operating losses for which no tax
benefit was recorded.
For Federal income tax purposes, the Company has unused net operating
loss carryforwards ("NOL") of approximately $210.0 million expiring in 2008
through 2022, including various foreign subsidiaries, and a capital loss of
approximately $15.0 million. As a result of various recent equity
transactions, management believes the Company experienced at least one
"ownership change" as defined by Section 382 of the Internal Revenue Code in
1999. Accordingly, the utilization of its net operating loss carryforwards
would be subject to an annual limitation in offsetting future taxable income.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at December 31 are as follows (in
thousands):
2000 2001
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $52,562 $85,610
Alternative minimum tax carryforwards 355 355
Impairment loss on investments in affiliates -- 19,950
Reserve for Motient Notes -- 10,230
Other assets 5,977 570
Other accrued expenses 1,659 2,117
------------- -------------
Total gross deferred tax assets 60,553 118,832
Less valuation allowance (60,553) (95,918)
------------- -------------
Total deferred tax assets -- 22,914
Deferred tax liability:
Unrealized gain on marketable securities -- 22,914
------------- -------------
Total deferred tax liability -- 22,914
------------- -------------
Net deferred tax assets $-- $--
============= =============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning in making these assessments.
Due to the Company's operating losses, there is uncertainty surrounding
whether the Company will ultimately realize its deferred tax assets.
Accordingly, these assets have been fully reserved. During 2000 and 2001, the
valuation allowance increased by approximately $32.9 million and $35.4
million, respectively. Of the total valuation allowance of $95.9 million,
subsequently recognized tax benefits, if any, in the amount of $6.5 million
will be applied directly to contributed capital. This amount relates to the
tax effect of employee stock option deductions included in the Company's net
operating loss carryforward.
(16) Related Party Transactions
In July 1997, the Company loaned $230,467 to its then Chairman 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 matured in five
years. Such note bore interest equal to the prime rate, with such rate
adjusted to the current prime rate at each anniversary date. The note was
forgiven during 2000.
(17) Contingencies and Commitments
Motient Notes
On January 10, 2002, Motient and its subsidiaries filed for
protection under Chapter 11 of the United States Bankruptcy Code. As part
of its filing, Motient indicated that it may challenge the Company's right
to the $26.2 million outstanding principal balance and accrued interest
thereon. Motient may also initiate litigation directly against the Company
to challenge the delivery of the shares of XM Satellite Radio common stock
by Motient to the Company as partial repayment of the aggregate $50.0
million principal amount of the Motient Notes. Negotiations with Motient
and its creditors committee are ongoing. As a result of uncertainty with
respect to the ultimate collection on the Motient Notes, the Company
recognized a reserve for the entire amount of these notes. Should the
Company's negotiations be successful and there is a recovery, any
adjustments to the reserve would be reflected as income in the accompanying
consolidated statements of operations.
Leases
The Company has non-cancelable leases, primarily related to the rental
of Rare Medium, Inc.'s facilities, which is one of the Company's discontinued
operating subsidiaries. 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, 2001 (in thousands):
Year Ending December 31:
2002 $3,213
2003 2,909
2004 2,752
2005 1,719
2006 189
Thereafter 189
--------------
Total minimum lease payments $10,971
==============
Included in the total commitment of $11.0 million is $2.7 million, net
of secured letters of credit, which is guaranteed by the Company. Excluded
from total commitments are $6.8 million relating to leases that have been
assigned and require no future payments by the Company or its subsidiaries
unless there is a default by the party to which the respective lease has been
assigned.
Total rent expense under operating leases amounted to $7.1 million and
$3.1 million for 2000 and 2001, respectively. Rare Medium, Inc. is holding
funds in certificates of deposit which are maintained under agreements to
assure future credit availability relating to these leases. As of December 31,
2001, these restricted funds amounted to $1.3 million which is included in
cash and cash equivalents.
Employment Agreements
The Company is a party to employment agreement with the Chief Executive
Officer of the Company. The agreement term is from April 15, 1998 to April 15,
2003 and calls for a minimum base salary of $250,000 per year with annual
increases of his base salary of not less than 4% per year. The minimum salary
commitment for this agreement during its entire term is $1.4 million.
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. During 1999, the agreement was amended and restated
to affect a ceiling of $150.0 million on revenues of the Company for
determining the incentive compensation. In addition, the amended and restated
agreement provides that, in the event gross revenues exceed such revenue
ceiling, the Compensation Committee of the Board of Directors will establish
an incentive program for this officer that will appropriately incentive him.
Incentive compensation approximated $650,000, $1.5 million and nil, in 1999,
2000 and 2001, respectively. In 1998, 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.
The Company is party to employment agreements with its other executive
officers. Under these agreements, if, after 90 days following a change in
control of the Company, the executive terminates his employment, the executive
is entitled to receive severance compensation and benefits in a lump sum
payment consisting of one year of his current salary and the right to exercise
all vested stock options and unvested stock options which become exercisable
upon a change of control through the option expiration date for such options.
Strategic Alliance
In 2000, Rare Medium, Inc. entered into a strategic alliance
agreement, as amended, with a software company (the "Partner") to assist in
the training of personnel and development and delivery by Rare Medium, Inc.
of solutions built utilizing the Partner's technology. Under the terms of
the alliance, the Partner was to provide Rare Medium, Inc. with refundable
advances of approximately $17.1 million, on an interest free basis, to be
paid to Rare Medium, Inc. over the term of the two-year agreement, subject
to Rare Medium, Inc.'s compliance with certain requirements set forth in
the agreement. The amount and timing of the repayment of the advances were
adjustable based on Rare Medium, Inc.'s achievement of certain milestones
in accordance with the terms of the agreement. The Partner and Rare Medium,
Inc. have a dispute as to whether certain milestones have been achieved.
Efforts at renegotiating the payment schedule and milestones were not
successful. In July 2001, Rare Medium, Inc. received a notice of
arbitration from the Partner seeking the return of the approximately $8.6
million, plus interest, that had been advanced by the Partner, who has
asserted that the agreement has terminated. These advances are included in
other current liabilities in the accompanying consolidated balance sheets.
Rare Medium, Inc. is contesting the Partner's claims. There can be no
assurance that Rare Medium, Inc. will be successful in contesting this
action and that accelerated repayment, along with attorney's fees and
interest, will not be required.
Litigation
The Company is aware of a number of purported class action lawsuits that
have been filed by the holders of the Company's common stock in the Court of
Chancery of the State of Delaware which challenged the plan of merger with
Motient Corporation that was terminated on October 1, 2001 (see Note 8). All
of the complaints name the Company and members of the Company's board of
directors as defendants. Most of the complaints name the holders of the
Company's preferred stock, and certain of their affiliates, as defendants, and
some of the complaints name Motient as a defendant. On June 22, 2001, the
Delaware court entered an order to consolidate all of the Delaware lawsuits
for all purposes into a single purported class action, In re Rare Medium
Group, Inc. Shareholders Litigation, C.A. No. 18879-NC. On August 7, 2001, a
Consolidated Amended Class Action Complaint was filed in Delaware Chancery
Court. The Delaware Chancery Court has not yet certified the consolidated
lawsuit as a class action. The lawsuit alleges that the defendants breached
duties allegedly owed to the holders of the Company's common stock in
connection with the merger agreement and sought to stop the merger and/or
obtain monetary damages. On October 19, 2001, the Company filed a motion to
dismiss the Consolidated Amended Class Action Complaint on a variety of
grounds, including mootness. Settlement negotiations are underway. If
unsuccessful, the Company intends to continue to vigorously contest this
lawsuit.
A purported class action was filed in New York, titled Brickell Partners
v. Rare Medium Group, Inc., et al., N.Y.S. Index No. 01602694, in the New York
State Supreme Court, making similar allegations to the Consolidated Amended
Class Action Complaint in Delaware. The complaint was dismissed on February
21, 2002.
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, tortuous
interference with contractual relations, tortuous 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 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.
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) tortuous interference
with contract; and, (3) tortuous interference with prospective business
advantage. The amended complaint seeks an unspecified amount of actual
damages, punitive damages, interest, and costs. Defendants moved to dismiss
the amended complaint on December 27, 2001, and briefing has been completed.
The Company intends to dispute this matter vigorously.
On July 23, 2001, plaintiff Microsoft Corporation filed suit against
Rare Medium, Inc. in the United States District Court for the Western District
of Washington, CO1-1130P. The plaintiff alleges breach of contract in
connection with a consulting agreement and an alliance agreement entered
between the parties seeking $2.3 million in damages, interest and attorney's
fees. Rare Medium, Inc. plans to defend the matter vigorously.
On November 19, 2001, five of the Company's shareholders filed a
complaint in the United States District Court for the Southern District of New
York against the Company, Dovitz v. Rare Medium Group, Inc. et al., No. 01
Civ. 10196, certain of its subsidiaries and certain of their current and
former officers and/or directors. 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. The Company intends to dispute this matter
vigorously.
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.
RARE MEDIUM GROUP, INC.
Schedule II - Valuation and Qualifying Accounts
Additions Additions
Balance at Charged to Charged
Beginning Costs and to Other Balance at
Deductions - Descriptions of Year Expenses Accounts Deductions End of Year
------------------------- ---------- ---------- -------- ---------- -----------
Reserves and allowances deducted asset accounts:
Allowances for uncollectible accounts receivable
Year ended December 31, 1999 $82,445 $544,747 -- $(82,445) $544,747
Year ended December 31, 2000 $544,747 $2,830,960 -- $(134,225) $3,241,482
Year ended December 31, 2001 $3,241,482 $5,583,324 -- ($8,174,845) $649,961
Allowances for uncollectible notes receivable
Year ended December 31, 1999 $375,000 $(200,000) -- -- $175,000
Year ended December 31, 2000 $175,000 -- -- $(175,000) --
Year ended December 31, 2001 -- $26,956,853 -- -- $26,956,853
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.
RARE MEDIUM GROUP, INC.
Date: March 19, 2002 By: /s/ GLENN S. MEYERS
----------------------------
Name: Glenn S. Meyers
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
/s/ GLENN S. MEYERS Chairman of the Board and Chief March 19, 2002
---------------------
Glenn S. Meyers Executive Officer
/s/ ANDREW D. AFRICK Director March 15, 2002
---------------------
Andrew D. Africk
/s/ MICHAEL GROSS Director March 15, 2002
---------------------
Michael Gross
/s/ JEFFREY KILLEEN Director March 14, 2002
---------------------
Jeffrey Killeen
Director
---------------------
Marc J. Rowan
/s/ WILLIAM STASIOR Director March 14, 2002
---------------------
William Stasior
/s/ CRAIG C. CHESSER Senior Vice President and Treasurer March 19, 2002
---------------------
Craig C. Chesser (Principal Financial Officer)
/s/ MICHAEL A. HULTBERG Senior Vice President and Controller March 19, 2002
---------------------
Michael A. Hultberg (Principal Accounting Officer)
Exhibit 10.29
NOTE PURCHASE AGREEMENT
dated as of
April 2, 2001
between
Motient Corporation
and
Rare Medium Group, Inc.
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT is dated as of April 2, 2001 between
Motient Corporation, a Delaware corporation, and Rare Medium Group, Inc., a
Delaware corporation.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"Affiliate" means, as to any Person, any other Person which, directly
or indirectly, is in control of, is controlled by, or is under common control
with, such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person,
whether through the ownership of voting securities, by contract or otherwise.
Without limitation, any director, executive officer or beneficial owner of 25%
or more of the equity of a Person shall, for the purposes of this Agreement,
be deemed to control the other Person.
"Bloomberg" means Bloomberg Financial Markets (or a comparable
reporting service of national reputation selected by the Company if Bloomberg
Financial Markets is not then reporting closing bid prices of such security).
"Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in New York City are authorized by law to close.
"Capital Lease Obligations" means all monetary obligations of a
Person under any leasing or similar arrangement which, in accordance with
GAAP, is classified as a capital lease.
"Cash Equivalents" means:
(a) securities issued or fully guaranteed or insured by the United
States Government or any agency thereof and backed by the full faith and
credit of the United States having maturities of not more than twelve months
from the date of acquisition;
(b) certificates of deposit, time deposits, Eurodollar time deposits,
or banker's acceptances having in each case a tenor of not more than six
months, issued by any U.S. commercial bank having combined capital and surplus
of not less than $500,000,000 whose short term securities are rated both A-1
or higher by Standard & Poor's Corporation and P-1 or higher by Moody's
Investors Services, Inc.;
(c) commercial paper of an issuer rated either at least A-1 by
Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. and/or P-1 by
Moody's Investors Service Inc. and in either case having a tenor of not more
than three months;
(d) repurchase agreements fully collateralized by securities issued
by United States Government agencies; and
(e) money market mutual funds invested in the instruments permitted
by clauses (a), (b), (c) and (d) above.
"CERCLA" has the meaning specified in the definition "Environmental
Laws".
"Change In Control" means (i) any person or group of persons (within
the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as
amended) (other than any Shareholder Guarantor, Purchaser, AT&T Wireless
Services, Inc. or Motorola, Inc.) shall have beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission
under said Act) of more than 25% of the outstanding capital stock of the
Company, (ii) during any period of 24 consecutive calendar months, individuals
who were directors of the Company on the first day of such period shall cease
to constitute a majority of the board of directors of the Company (ignoring
for this purpose replacements of stockholder-designated directors by successor
directors designated by the same stockholder or group of stockholders) or
(iii) the Company shall cease to own all of the outstanding capital stock of
Motient Holdings Inc., or (iv) any Shareholder Guarantor, AT&T Wireless
Services, Inc. or Motorola Inc. or any of their respective Affiliates shall
have beneficial ownership of a number of shares of the outstanding capital
stock of the Company equal to 105% or more of the number of shares of capital
stock of the Company beneficially owned by such Person or any of such Person's
Affiliates on the date hereof (as adjusted to give effect to any stock split,
combination, reorganization, recapitalization, stock dividend,
reclassification, stock distribution, merger, consolidation, customary
antidilution adjustment to the exercise price or conversion price of any
options, warrants, convertible securities or similar purchase or exchange
rights issued by the Company that are required to be made pursuant to the
terms of such instruments as originally issued, or similar event or
transaction). For purposes of calculating the number of shares of capital
stock of the Company owned by a Person or such Person's Affiliates as of the
date hereof pursuant to clause (iv) of this definition, such Person shall be
deemed to own the maximum total number of shares of capital stock of the
Company issuable upon the conversion, exchange or exercise of the Company
Convertible Securities beneficially owned by such Person or such Person's
Affiliates as of the date hereof, whether or not the same are immediately
convertible, exchangeable or exercisable.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
"Collateral" means all property with respect to which Liens are
created or purported to be created pursuant to the Pledge Agreement and the
Second Pledge Agreement, if any.
"Commitment Period"shall mean the period commencing on the day after
the Initial Closing Date and expiring on the date that is ten (10) Business
Days prior to the Maturity Date.
"Communications Asset" means a terrestrial or satellite antenna,
licensed site, base station, communications ground segment, network operations
center or other telecommunications facility (other than a satellite).
"Company" means Motient Corporation, a Delaware corporation, and its
successors.
"Company Convertible Securities" means warrants, rights, options and
other securities to subscribe for or purchase shares of the capital stock of
the Company, and other securities convertible into or exchangeable for capital
stock of the Company.
"Company Group" means the Company and its Consolidated Subsidiaries.
"Consolidated Subsidiary" means at any date and with respect to any
Person, any Subsidiary or other entity the accounts of which would be
consolidated with those of such Person in its consolidated financial
statements if such statements were prepared as of such date.
"Contingent Obligation" means, as applied to any Person, any direct
or indirect liability of that Person with respect to any Indebtedness, lease,
dividend, letter of credit or other obligation (the "primary obligations") of
another Person (the "primary obligor"), including, without limitation, any
obligation of that Person, whether or not contingent, (a) to purchase,
repurchase or otherwise acquire such primary obligations or any property
constituting direct or indirect security therefor, or (b) to advance or
provide funds (i) for the payment or discharge of any such primary obligation,
or (ii) to maintain working capital or equity capital of the primary obligor
or otherwise to maintain the net worth or solvency or any balance sheet item,
level of income or financial condition of the primary obligor, or (c) to
purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation, or (d) otherwise
to assure or hold harmless the holder of any such primary obligation against
loss in respect thereof, or (e) to purchase or otherwise acquire, or otherwise
to assure a creditor against loss in respect of any Indebtedness. For purposes
of this definition, the amount of any Contingent Obligation shall be deemed to
be an amount equal to the maximum reasonably anticipated liability in respect
thereof.
"Contractual Obligation" means, as to any Person, any provision of
any security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or agreement
to which such Person is a party or by which it or any of its property is
bound.
"Controlled Group" means the Company and all Persons (whether or not
incorporated) under common control or treated as a single employer with the
Company or any of its Subsidiaries pursuant to Section 414(b), (c), (m) or (o)
of the Code.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Disclosure Schedule" means the Disclosure Schedule of even date
herewith attached hereto and hereby made part of this Agreement.
"Dollars" means United States dollars.
"Environmental Claim" means all claims, however asserted, by any
Governmental Authority or other Person alleging potential liability or
responsibility for violation of any Environmental Law or for injury to the
environment or threat to public health, personal injury (including sickness,
disease or death), property damage, natural resources damage, or otherwise
alleging liability or responsibility for damages (punitive or otherwise),
cleanup, removal, remedial or response costs, restitution, civil or criminal
penalties, injunctive relief, or other type of relief, resulting from or based
upon (a) the presence, placement, discharge, emission or release (including
intentional and unintentional, negligent and non-negligent, sudden or
non-sudden, accidental or non-accidental placements, spills, leaks,
discharges, emissions or releases) of any Hazardous Material at, in or from
property, whether or not owned by the Company, or (b) any other circumstances
forming the basis of any violation, or alleged violation, of any Environmental
Law.
"Environmental Laws" means all applicable federal, state, local and
foreign laws, statutes, common law duties, judicial decisions, rules,
regulations, ordinances, judgments and codes, together with all administrative
orders, requests, licenses, authorizations and permits of, and agreements
with, any Governmental Authorities, in each case relating to the environment,
health and safety or to emissions, discharges or releases, or the manufacture,
distribution, use, treatment, storage, disposal, transport or handling, of
pollutants, contaminants, wastes or toxic or hazardous substances; including,
as they may be amended from time to time, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air
Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal
Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances
Control Act and the Emergency Planning and the Community Right-to-Know Act of
1986.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Event" means (a) a Reportable Event with respect to a
Qualified Plan or a Multiemployer Plan; (b) a withdrawal by any member of the
Controlled Group from a Qualified Plan subject to Section 4063 of ERISA during
a plan year in which it was a substantial employer (as defined in Section
4001(a)(2) of ERISA); (c) a complete or partial withdrawal by any member of
the Controlled Group from a Multiemployer Plan; (d) the filing of a notice of
intent to terminate, the treatment of a plan amendment as a termination under
Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC
to terminate a Qualified Plan or Multiemployer Plan subject to Title IV of
ERISA; (e) a failure to make required contributions to a Qualified Plan or
Multiemployer Plan; (f) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Qualified Plan or
Multiemployer Plan; (g) the imposition of any liability under Title IV of
ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon any member of the Controlled Group; (h) an application for a
funding waiver or any extension of any amortization period pursuant to Section
412 of the Code with respect to any Qualified Plan; or (i) any member of the
Controlled Group engages in or otherwise becomes liable for a non-exempt
prohibited transaction.
"Event of Default" has the meaning set forth in Section 7.01.
"FCC" means the Federal Communications Commission or any successor
thereto.
"FCC Licenses" means the currently effective licenses identified in
the Company's public filings with the Securities and Exchange Commission,
together with each other material FCC license hereafter obtained by the
Company or any Subsidiary of the Company.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such other entity as may be in
general use by significant segments of the U.S. accounting profession, which
are applicable to the circumstances as of the date of determination.
"Government Approvals" means any authorizations, consents, approvals,
licenses (including FCC licenses), leases, rulings, permits, tariffs, rates,
certifications, exemptions, filings or registrations by or with any
Governmental Authority required to be obtained or held by the Company.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Hazardous Materials" means all those substances which are regulated
by, or which may form the basis of liability under, any Environmental Law,
including all substances identified under any Environmental Law as a
pollutant, contaminant, waste, solid waste, hazardous material, hazardous
substance or toxic substance, including petroleum or any petroleum derived
substance or byproduct.
"High-yield Subsidiaries" means Motient Holdings Inc., a Delaware
corporation, and its Subsidiaries.
"Holdings Guaranty" means the guarantee by the Company of the
obligations of Motient Holdings Inc. under the Indenture, as provided in
Article 12 of the Indenture.
"Indebtedness" of any Person means without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of capital assets; (c) all
reimbursement obligations with respect to surety bonds, letters of credit,
bankers' acceptances and similar instruments (in each case, whether or not
matured), excluding performance bonds, letters of credit and similar
undertakings in the ordinary course of business of the Company, to the extent
that such undertakings do not secure an obligation for borrowed money or the
deferred purchase price of a capital asset; (d) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, excluding performance bonds, letters of credit and similar
undertakings in the ordinary course of business of the Company, to the extent
that such undertakings do not secure an obligation for borrowed money or the
deferred purchase price of a capital asset; (e) all indebtedness created or
arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to property acquired by the
Person (even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property); (f) all Capital Lease Obligations; (g) all net obligations with
respect to Rate Contracts; (h) sale-leaseback financings; (i) all Contingent
Obligations; and (j) all Indebtedness referred to in paragraphs (a) through
(i) above secured by any Lien upon or in property (including accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness and (k) to the extent
not otherwise included in (a) through (i) above, the guarantee by such Person
of any indebtedness referred to in paragraphs (a) through (i) above of any
other Person. For purposes of this definition, (y) any Indebtedness of the
Company to a Subsidiary of the Company and (z) any Indebtedness of a
Subsidiary of the Company to or from the Company or another Subsidiary of the
Company shall be excluded.
"Indemnitee" has the meaning set forth in Section 9.03(b).
"Indenture" means the Indenture, dated as of March 31, 1998, among
Motient Holdings Inc. (formerly, AMSC Acquisition Company, Inc.), the
guarantors named therein and State Street Bank and Trust Company as trustee.
"Initial Closing Date" shall mean the Business Day after the
satisfaction or waiver of the conditions applicable to the Initial Closing set
forth in Section 3.01 or at such other place, time or date as shall be
mutually agreed upon by the Company and the Purchaser.
"Investment" means any investment in any Person, whether by means of
share purchase, capital contribution, loan, Contingent Obligation, time
deposit or otherwise (but not including any demand deposit).
"Investment Documents" means this Agreement, the Pledge Agreement,
the Second Pledge Agreement, if any, the Notes and all agreements, instruments
and documents executed and delivered in connection herewith and therewith,
each as amended, supplemented, waived or otherwise modified from time to time.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
assignment, charge or deposit arrangement, encumbrance, lien (statutory or
other) or preference, priority or other security interest or preferential
arrangement of any kind or nature whatsoever (including, without limitation,
those created by, arising under or evidenced by any conditional sale or other
title retention agreement, the interest of a lessor under a Capital Lease
Obligation, any financing lease having substantially the same economic effect
as any of the foregoing, or the filing of any financing statement naming the
owner of the asset to which such lien relates as debtor, under the UCC or any
comparable law) and any contingent or other agreement to provide any of the
foregoing.
"Material Adverse Effect" means a material adverse change in, or a
material adverse effect upon, any of (a) the operations, business, properties,
condition (financial or otherwise) of the Company Group taken as a whole; (b)
the ability or prospective ability of the Company or any of its Subsidiaries
to perform under any Investment Document or any material Contractual
Obligation; (c) the legality, validity, binding effect or enforceability of
any Investment Document or (d) the perfection or priority of any Lien granted
to the Purchaser under the Pledge Agreement.
"Maturity Date" means the date that is 180 days after the Initial
Closing Date or if such date is not a Business Day, the next Business Day, or
such later date as may be determined by application of the proviso to the "XM
Share Price" definition; provided that, with respect to any portion of the
principal amount of any Note to be prepaid in accordance with Section 2.06,
"Maturity Date" means, unless the context otherwise requires, the scheduled
date of such prepayment of such portion of such principal amount as set forth
in the applicable prepayment notice.
"MSV Asset Sale Agreement" means the Amended and Restated Asset Sale
Agreement, dated January 8, 2001, between Motient Services Inc. and Mobile
Satellite Ventures LLC as the same may be amended, supplemented, restated or
otherwise modified from time to time, in each case, in a manner which would
not be reasonably expected to reduce the combined value of the Company's
interests in Mobile Satellite Ventures LLC and Motient Services Inc.
"Multiemployer Plan" means a "multiemployer plan" (within the meaning
of Section 4001(a)(3) of ERISA) to which any member of the Controlled Group
makes, is making, or is obligated to make contributions or has made, or been
obligated to make, contributions.
"Note" means either the Tranche A Note or the Tranche B Note, and
"Notes" means both the Tranche A Note and the Tranche B Note, as the context
may require, each of which shall be in the form of Exhibit A hereto.
"Notice of Lien" means any "notice of lien" or similar document
intended to be filed or recorded with any court, registry, recorder's office,
central filing office or Governmental Authority for the purpose of evidencing,
creating, perfecting or preserving the priority of a Lien securing obligations
owing to a Governmental Authority.
"Notice of Purchase" has the meaning set forth in Section 2.01(b).
"Obligations" means the Notes and other Indebtedness, advances,
debts, liabilities, and obligations, owing by the Company to the Purchaser or
any other Person required to be indemnified under any Investment Document, of
any kind or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, arising under this Agreement, under any other
Investment Document, whether or not for the payment of money, whether arising
by reason of an extension of credit, loan, guaranty, indemnification or in any
other manner, whether direct or indirect (including those acquired by
assignment), absolute or contingent, due or to become due, now existing or
hereafter arising and however acquired.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" has the meaning set forth in Section 6.06.
"Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which any member of the Controlled Group sponsors or maintains or to
which any member of the Controlled Group makes or is obligated to make
contributions and includes any Multiemployer Plan or Qualified Plan.
"Pledge Agreement" means the Pledge Agreement of even date herewith
between Company and the Purchaser.
"Principal Subsidiary" means at any time any Subsidiary of the
Company, except Subsidiaries which at such time have been designated by the
Company (by notice to the Purchaser, which may be amended from time to time)
as nonmaterial and which, if aggregated and considered as a single subsidiary,
would not meet the definition of a "significant subsidiary" contained as of
the date hereof in Regulation S-X of the Securities and Exchange Commission.
"Purchaser" means Rare Medium Group, Inc., a Delaware corporation,
and its successors and permitted assigns.
"Qualified Plan" means a pension plan (as defined in Section 3(2) of
ERISA) intended to be tax-qualified under Section 401(a) of the Code and which
any member of the Controlled Group sponsors, maintains, or to which it makes
or is obligated to make contributions or has made contributions at any time
during the immediately preceding period covering at least five (5) plan years,
but excluding any Multiemployer Plan.
"Rate Contracts" means interest rate and currency swap agreements,
cap, floor and collar agreements, interest rate insurance, currency spot and
forward contracts and other agreements or arrangements designed to provide
protection against fluctuations in interest or currency exchange rates;
provided that such agreements or arrangements are documented under master
netting agreements.
"Reportable Event" means any of the events set forth in Section 4043
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section
4062(e) of ERISA.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person
or any of its property or to which the Person or any of its property is
subject; in any case, non-compliance with which by the Company or any of its
Subsidiaries could reasonably be expected to have a Material Adverse Effect.
"Responsible Officer" means, with respect to any Person, the Chief
Executive Officer, the President or a duly authorized Senior Vice President or
Vice President or, with respect to financial matters, the Chief Financial
Officer or the Treasurer, of such Person.
"Revolving Credit Agreement" means the Credit Agreement dated as of
March 31, 1998, among the Company, Motient Holdings Inc., the agents and the
other lenders party thereto, as in effect on the date hereof, without giving
effect to any amendment, supplement, restatement or other modification thereto
or waiver thereunder effected without the prior written consent of the
Purchaser (which consent shall not be unreasonably withheld, conditioned or
delayed).
"Shareholder Guarantors" means Hughes Electronics Corporation, a
Delaware corporation, Singapore Telecommunications Ltd., a corporation
organized under the laws of Singapore and Baron Capital Partners, L.P., a
Delaware limited partnership.
"Senior Notes" means the 12 1/4% Senior Notes due 2008 of Motient
Holdings Inc.
"Subsidiary" means, as to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
"Subordinated Indebtedness" means Indebtedness of the Company that is
subordinate in right of payment to the Notes at least to the same extent that
the Holdings Guaranty is subordinate to "Senior Indebtedness" as provided in
the Indenture.
"Term Credit Agreement" means the Term Credit Agreement dated as of
March 31, 1998, among the Company, the agents and the other lenders party
thereto, as in effect on the date hereof, without giving effect to any
amendment, supplement, restatement or other modification thereto or waiver
thereunder effected without the prior written consent of the Purchaser (which
consent shall not be unreasonably withheld, conditioned or delayed).
"Tranche A Note" shall have the meaning set forth in Section 2.01.
"Tranche B Note" shall have the meaning set forth in Section 2.01.
"Transferee Subsidiary" means a Subsidiary of the Company to which
there is transferred, directly or indirectly, any property, assets or
securities of the Company or any other Subsidiary of the Company, other than
solely property, assets or securities of a High-yield Subsidiary.
"UCC" means the Uniform Commercial Code as in effect in any
jurisdiction.
"Unfunded Pension Liabilities" means the excess of a Plan's accrued
benefits, as defined in Section 3(23) of ERISA, over the current value of that
Plan's assets, as defined in Section 3(26) of ERISA.
"United States" means the United States of America, including the
States and the District of Columbia, but excluding its territories and
possessions.
"Vendor Financing Indebtedness" means Indebtedness incurred by a
member of the Company Group the proceeds of which are utilized solely to
acquire ground-based Communications Assets.
"Volume Weighted Average Price" means, for any security as of any
date, the volume weighted average prices of such security (as reported in
Bloomberg) or, if no sale price is reported for such security by Bloomberg,
the average of the per share bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Volume Weighted Average Price cannot be calculated for such security on such
date on any of the foregoing bases, the Volume Weighted Average Price of such
security on such date shall be the fair market value as reasonably determined
by an investment banking firm selected by the Purchaser and reasonably
acceptable to the Company, with the costs of such appraisal to be borne by the
Company.
"Withdrawal Liabilities" means, as of any determination date, the
aggregate amount of the liabilities, if any, pursuant to Section 4201 of ERISA
if the Controlled Group made a complete withdrawal from all Multiemployer
Plans and any increase in contributions pursuant to Section 4243 of ERISA.
"XM" means XM Satellite Radio Holdings, Inc., a Delaware corporation.
"XM Shares" means shares of Class A Common Stock and Class B Common
Stock, par value $.01 per share, of XM.
"XM Stock Payment Valuation" means 95% of the XM Share Price.
"XM Share Maximum" means (A) if the Second Closing shall not have
occurred, 3,000,000 or (B) if the Second Closing shall have occurred,
5,000,000, in each case as appropriately adjusted to give effect to any stock
split, combination, reorganization, recapitalization, stock dividend,
reclassification, stock distribution, merger, consolidation or similar event
or transaction.
"XM Share Price" means, as of any date, the average of the Volume
Weighted Average Price, as reported by Bloomberg, of the XM Shares for the ten
(10) consecutive trading days ending on the trading day immediately preceding
such determination date; provided that in the event that there is a material
adverse event regarding XM or its operations that is publicly reported during
such measurement period (either through a press release or through a filing
with the Securities and Exchange Commission) the "XM Share Price" will instead
be measured by the ten (10) consecutive trading days immediately following the
date on which the release or report is made.
SECTION 1.02. Other Defined Terms; Accounting. Certain other defined
terms used in this Agreement are defined in the text of the Agreement and
shall have the meanings given such terms therein. Unless otherwise specified
herein, all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required
to be delivered hereunder shall be prepared in accordance with GAAP as in
effect from time to time, applied on a basis consistent (except for changes
concurred in by the Company's independent public accountants) with the most
recent audited consolidated or combined financial statements of the Company
and its Consolidated Subsidiaries, delivered to the Purchaser.
ARTICLE 2
TERMS OF THE NOTES
SECTION 2.01. Purchase and Sale. (a) The Purchaser agrees, subject to
the terms and conditions set forth herein, to purchase from the Company for
the sum of $25,000,000 and Company agrees to issue and sell to the Purchaser,
on the Initial Closing Date, a promissory note in the original principal
amount of $25,000,000 (the "Tranche A Note"), subject to the satisfaction or
waiver of the conditions precedent specified in Section 3.01 hereof and in
accordance with the procedures specified in this Article 2.
(b) During the Commitment Period, the Company may elect upon prior
written notice to the Purchaser as provided herein, to issue and sell to the
Purchaser and the Purchaser agrees, subject to the terms and conditions set
forth herein, to purchase from the Company, on the Second Closing Date, for an
amount equal to the lesser of (i) $25,000,000 and (ii) the excess, if any, of
(A) the XM Share Price as of the Second Closing Date multiplied by 5,000,000
over (B) $25,000,000 (the "Tranche B Amount"), a second promissory note in the
original principal amount equal to the Tranche B Amount (the "Tranche B
Note"), subject to the satisfaction or waiver of the conditions precedent
specified in Section 3.02 hereof and in accordance with the procedures
specified in this Article 2. The Company shall give the Purchaser irrevocable
telephonic notice, confirmed immediately in writing (a "Notice of Purchase")
during the Commitment Period of its intent to issue and sell the Tranche B
Note, specifying (i) the proposed date of the Second Closing, which date shall
be a Business Day that is at least 10 Business Days after the date that the
Notice of Purchase was delivered to the Purchaser.
(c) The closing of the purchase and sale of the Tranche A Note (the
"Initial Closing") shall take place at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, Four Times Square, New York, NY 10036 at 10:00 a.m. (New
York City time) on the Initial Closing Date.
(d) If the Company elects to issue and sell to the Purchaser the
Tranche B Note pursuant to Section 2.01(b), the closing of the purchase and
sale of the Tranche B Note (the "Second Closing") shall take place at the
offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, NY 10036 at 10:00 a.m. (New York City time) on the date that is the
later of (y) the date specified in the Notice of Purchase or (z) the date that
is 2 Business Days after the satisfaction or waiver of the conditions
applicable to the Second Closing set forth in Section 3.02 (other than those
conditions that by their nature are to be satisfied at the Second Closing) or
at such other place, time or date as shall be mutually agreed upon by the
Company and the Purchaser (the "Second Closing Date").
SECTION 2.02. Payment. Subject to the conditions set forth in Article 3, not
later than 12:00 Noon (New York City time) on each of the Initial Closing Date
and the Second Closing Date, the Purchaser shall pay the full purchase price
for the Tranche A Note or the Tranche B Note, as the case may be (after
deducting the amounts referred to in the following sentence), in Federal or
other funds immediately available in New York City, to the Company by wire
transfer of immediately available funds to an account specified by the
Company. The amount to be paid on the Initial Closing Date and the Second
Closing Date shall be equal to the purchase price for the Tranche A Note or
the Tranche B Note, as the case may be, less (i) the Tranche A Funding Fee and
the Tranche B Funding Fee, respectively, and (ii) an estimate of the amount of
unreimbursed out-of-pocket expenses referred to in Section 9.03. On each of
the Initial Closing Date and the Second Closing Date, the Company shall
deliver to the Purchaser the documents, certificates and other items required
to be delivered to the Purchaser pursuant to Sections 3.01 and 3.02, as the
case may be.
SECTION 2.03. Notes. Each Note shall be payable to the order of the
Purchaser and be in the form attached hereto as Exhibit A.
SECTION 2.04. Maturity of Notes. Any Notes outstanding on the
Maturity Date (together with accrued interest thereon) shall be due and
payable on such date.
SECTION 2.05. Interest; Funding Fees. (a) The Notes shall bear
interest on the outstanding principal amount thereof, for each day from the
principal amount of the date such Note is issued until it becomes due, at a
rate per annum of 12.5%. Interest shall be computed on the basis of a year of
360 days and 12 thirty day months, and paid for the actual number of days
elapsed (including the first day but excluding the last day). Any overdue
principal of or interest on any Note shall bear interest, payable on demand,
for each day until paid at a rate per annum of 14%.
(b) In addition to the interest which the Company shall pay as set
forth above, the Company shall pay to the Purchaser, as compensation for the
purchase of the Notes, (i) a funding fee of $500,000 on the Initial Closing
Date (the "Tranche A Funding Fee") and (ii) a funding fee equal to 0.02
multiplied by the principal amount of the Tranche B Note on the Second Closing
Date, if any (the "Tranche B Funding Fee").
SECTION 2.06. Optional Prepayments. The Company may, upon at least 15
days notice to the Purchaser, prepay any Note in whole at any time, or from
time to time in part in amounts aggregating $5,000,000 or any larger multiples
of $1,000,000, by paying the principal amount to be prepaid together with
accrued interest thereon to the date of prepayment, subject to the Purchaser's
right to effect an Optional Exchange, in accordance with Section 2.09, at any
time prior to the close of business on the day immediately preceding the date
of prepayment. The date of such prepayment shall be referred to herein as the
"Prepayment Date".
SECTION 2.07. General Provisions as to Payments. (a) In the sole
discretion of the Company, subject to the Purchaser's right to effect an
Optional Exchange, in accordance with Section 2.09, at any time prior to the
close of business on the day immediately preceding the Prepayment Date, the
Company may pay the principal of and interest on the Notes on the Maturity
Date (or on a Prepayment Date) in (i) cash, (ii) XM Shares or (iii) any
combination thereof; provided, that the Company shall not have the right to
make any such payment in the form of XM Shares to the extent that such payment
would otherwise require a filing under the HSR Act (as defined below) unless
and until the applicable waiting period under such Act has expired or
terminated. To the extent that any XM Shares are delivered to the Purchaser as
payment of principal and interest under this Agreement, the number of XM
Shares so delivered shall be equal to the aggregate amount of principal and
interest to be paid through such delivery of XM Shares divided by the XM Stock
Payment Valuation, using the XM Share Price calculated as of the Maturity
Date, or the Prepayment Date, as the case may be.
(b) The Company shall, on or prior to the date which is 15 days prior
to the Maturity Date or any Prepayment Date, deliver a notice to the Purchaser
at the address or facsimile number of the Purchaser referred to in Section
9.01. Such notice shall state the relative portions of the repayment amount to
be paid in cash and XM Shares.
(c) The Company shall make any cash payment of principal of and
interest on the Notes not later than 12:00 Noon (New York City time) on the
date when due, in Federal or other funds immediately available in New York
City, to the Purchaser at its address referred to in Section 9.01. Whenever
any payment of principal of, or interest on the Notes shall be due on a day
which is not a Business Day, the date for payment thereof shall be extended to
the next succeeding Business Day. If the date for any payment of principal is
extended by operation of law or otherwise, interest thereon shall be payable
for such extended time.
(d) On the Maturity Date or any Prepayment Date, if the Company
elects to pay all or part of the principal of and interest on the Notes in XM
Shares, the Company shall deliver to XM, irrevocable instructions (i) to
convert into Class A Common Stock that number of XM Shares to be paid as
principal and interest as of such date and to register such shares in such
names as the Purchaser shall designate, and (ii) return to the Purchaser as
Collateral (as defined in the Pledge Agreement) a stock certificate
representing that number of shares of Class B Common Stock equal to the
excess, if any, of (a) the number of shares of Class A Common Stock delivered
to Purchaser or its designee as payment on such dates over (b) the number of
shares of Class B Common Stock represented by the stock certificate
surrendered to pay such amounts. If such instructions are delivered on the
Maturity Date or the Prepayment Date, as the case may be, such principal and
interest shall be deemed to have been paid on such Maturity Date or Prepayment
Date, as the case may be. Company shall thereafter use commercially reasonable
efforts to cause XM to deliver certificates representing such shares to the
Purchaser as soon as possible thereafter.
SECTION 2.08. Extension of Maturity Date. If the Company wishes to extend the
Maturity Date then in effect, the Company shall give written notice to the
Purchaser not less than 30 days prior to the Maturity Date then in effect,
whereupon the Purchaser will use its reasonable efforts to respond to such
request in writing, whether affirmatively or negatively, as it may elect in
its sole discretion, within 15 days after it receives such notice from the
Company. If the Company receives an affirmative response in writing from the
Purchaser within such 15 day period, then the Maturity Date shall be extended
for 30 days (but in no event later than November 20, 2001). If the Purchaser
does not reply to such request than the Purchaser shall be deemed to have
responded negatively.
SECTION 2.09. Exchange Rights.
(a) The following terms shall have the following meanings for
purposes of this Section 2.09:
(i) "Exchanged Amount" means the amount of the principal of
and interest on the Notes elected by the Purchaser to be exchanged pursuant to
this Section 2.09; provided that the Exchanged Amount cannot be less than
$100,000 and thereafter must be in multiples of at least $100,000; provided
further that if the Purchaser elects to exchange a Note in its entirety, then
the Exchange Amount shall be the entire amount of the outstanding principal
and accrued but unpaid interest on such Note as of the Exchange Date.
(ii) "Exchange Date" means the date specified in the Notice
of Exchange, or if no date is specified therein, the Business Day following
the date that the Notice of Exchange is faxed or otherwise delivered to the
Company; provided, however, that the Exchange Date shall be no sooner than 1
Business Day after the date of delivery (by facsimile or otherwise) of the
Notice of Exchange and any Notice of Exchange delivered to the Company on a
day which is not a Business Day shall be deemed delivered as of the next
following Business Day.
(iii) "Exchange Price" means (i) with respect to the Tranche
A Note, $10.41 and (ii) with respect to the Tranche B Note, an amount equal to
the XM Share Price as of the Second Closing Date multiplied by 1.5.
(b) Exchange at the Option of the Purchaser. Subject to the
limitations set forth in Section 2.09(o), the Purchaser may, at any time and
from time to time prior to the Maturity Date, exchange (an "Optional
Exchange") all or a portion of the principal of and/or accrued interest on the
Notes into a number of XM Shares equal to the number determined by dividing
the Exchanged Amount by the Exchange Price; provided, that with respect to any
Note or portion thereof for which a prepayment notice has been delivered to
the Purchaser in accordance with Section 2.06, such exchange right shall
terminate on the Business Day immediately preceding the Prepayment Date;
provided, further, that such exchange right shall not be exercisable prior to
June 30, 2001 unless the Company elects to prepay all or any portion of any
Note in accordance with Section 2.06, in which case such exchange right shall
be exercisable at any time following the giving of an optional prepayment
notice in accordance with Section 2.06 and prior to the close of business on
the day immediately preceding the Prepayment Date.
(c) Mechanics of Exchange. In order to effect an Optional Exchange,
the Purchaser shall fax (or otherwise deliver) a copy of the fully executed
Notice of Exchange substantially in the form of Exhibit B (the "Notice of
Exchange") to the Company. Simultaneously with or prior to the delivery of
such Notice of Exchange, the Purchaser shall provide telephonic notice to the
Company of its delivery of such Notice of Exchange. Upon receipt by the
Company of a facsimile copy of a Notice of Exchange from the Purchaser, the
Company shall promptly send, via facsimile, a confirmation to the Purchaser
stating that the Notice of Exchange has been received. Promptly following the
faxing (or other delivery) of the Notice of Exchange, the Purchaser shall
surrender or cause to be surrendered to the Company, the Note, along with a
copy of the Notice of Exchange.
(d) Company's Obligations Upon Exchange. Subject to Section 2.09(o),
upon the delivery of a Notice of Exchange, the Company shall, as soon as
practicable but in any event no later than the later of (a) the Exchange Date
and (b) the date of surrender of the applicable Note(s) (the "Delivery
Period"), deliver (x) to XM, irrevocable instructions, in form reasonably
acceptable to the Purchaser, to convert into Class A Common Stock and to
register in such names as Purchaser shall designate, that number of XM Shares
deliverable upon such Optional Exchange along with the assets and securities
contemplated by Section 2.09(k) and (y) to the Purchaser, a new Note in the
same form as the exchanged Note representing the balance of the principal
amount hereof not being exchanged, if any.
(e) Taxes. The issuance of certificates for XM Shares upon the
exchange of any Note shall be made without charge to the Purchaser or for any
tax in respect of the issuance of such certificates, and such certificates
shall be issued in the respective names of, or in such names as may be
directed by, the holder or holders of the converted Note; provided, however,
that in the event that certificates for XM Shares are to be issued in a name
other than the name of the holder of the Note exchanged, such Note, when
surrendered for exchange, shall be accompanied by an instrument of transfer,
in form satisfactory to the Company, duly executed by the registered holder
thereof or his duly authorized attorney; and provided, further, that the
Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the holder of the exchanged Note, and the Company
shall not be required to issue or deliver such certificates unless or until
the person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid or is not applicable.
(f) No Fractional Shares. No fractional XM Shares are to be delivered
upon the exchange of a Note, but the Company shall instead round up to the
next whole number the number of XM Shares to be delivered upon such exchange.
(g) HSR. Prior to any exchange pursuant to this Section 2.09 and any
payment of principal and interest in XM Shares pursuant to Section 2.07, the
Purchaser and the Company shall cooperate in good faith (A) to determine if a
filing is required under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 or any successor law, and regulations and rules issued pursuant to that
Act or any successor law (the "HSR Act") in connection with such exchange or
payment. The Purchaser shall and the Company shall, or if the Company is not
the ultimate parent entity of XM, then the Company shall use its commercially
reasonable efforts to cause the ultimate parent entity to, make the required
filings under the HSR Act as promptly as practicable after a determination is
made that such a filing is necessary. The Company shall, or if the Company is
not the ultimate parent entity of XM then the Company shall use its
commercially reasonable efforts to cause the ultimate parent entity to take
all actions reasonably requested by the Purchaser to cause the early
termination of any applicable waiting period under the HSR Act.
Notwithstanding anything in this Agreement to the contrary, if the Purchaser
determines that filings under the HSR Act are required, the Company shall not
be obligated to deliver any XM Shares pursuant to this Section 2.09 to the
extent, but only to the extent, that such delivery would require such filing,
until the date that is 2 Business Days following the expiration or termination
of any applicable waiting period under the HSR Act, but the Company shall
remain obligated to deliver the maximum number of XM shares as would not
require expiration or termination of a waiting period under the HSR Act. The
Company shall pay all filing fees and other costs and expenses in connection
with any such required filings under the HSR Act. As used in this paragraph,
the term "ultimate parent entity" shall have the meaning given such term in
the regulations promulgated under the HSR Act.
(h) Reclassifications, Reorganizations, Consolidations or Mergers. In
the event of any capital reorganization of XM, any reclassification of the
stock of XM (other than a change in par value or from par value to no par
value or from no par value to par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or any consolidation or
merger of XM with or into another entity (where XM is not the surviving
corporation or where there is a change in, exchange or conversion of, or
distribution with respect to, the XM Shares), the Notes shall after such
reorganization, reclassification, consolidation, or merger be exchangeable for
the kind and number of shares of stock or other securities or property of XM
or of the successor entity resulting from such consolidation or surviving such
merger, if any, to which the holder of the number of XM Shares deliverable
(immediately prior to the time of such reorganization, reclassification,
consolidation or merger) upon exchange of the Notes would have been entitled
upon such reorganization, reclassification, consolidation or merger. The
provisions of this clause shall similarly apply to successive reorganizations,
reclassifications, consolidations, or mergers.
(i) Subdivision or Combinations of XM Shares. If XM at any time or
from time to time after the Initial Closing Date subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) the outstanding XM Shares into a greater number of shares, then,
after the date of record for effecting such subdivision, the Exchange Price in
effect immediately prior to such subdivision shall be proportionately reduced.
If XM at any time or from time to time after the Initial Closing Date combines
(by reverse stock split, recapitalization, reorganization, reclassification or
otherwise) the outstanding XM Shares into a smaller number of shares, then,
after the date of record for effecting such combination, the Exchange Price in
effect immediately prior to such combination shall be proportionately
increased.
(j) Certain Issuances of XM Common Stock. If XM shall, at any time or
from time to time after the Initial Closing Date, issue, or pursuant to
Section 2.09(k) is deemed to have issued, any XM Shares without consideration
or for consideration per share less than the closing per share price of XM
Shares on the NASDAQ on the trading day immediately preceding the date of such
issuance or deemed issuance (the "Closing Price"), then such Exchange Price
shall forthwith be lowered to a price equal to the price obtained by
multiplying:
(a) the Exchange Price in effect immediately prior to the issuance,
or deemed issuance, of such XM Shares; by
(b) a fraction of which (x) the denominator shall be the number of XM
Shares outstanding on a fully-diluted basis immediately after such issuance
and (y) the numerator shall be the sum of (i) the number of XM Shares
outstanding on a fully-diluted basis immediately prior to such issuance and
(ii) the number of additional XM Shares which the aggregate consideration for
the number of XM Shares so issued, or deemed issued, would purchase at the
Closing Price.
For purposes of this Section 2.09, "fully diluted basis" shall be
determined in accordance with the treasury stock method of computing fully
diluted earnings per share in accordance with GAAP.
(k) For purposes of determining the adjusted Exchange Price under
Section 2.09(j), the following provisions shall be applicable:
(i) Issuance of Rights or Options. If XM in any manner
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase XM Shares, or other securities
convertible into or exchangeable for XM Shares ("Convertible Securities")
(such warrants, rights and options to purchase XM Shares or Convertible
Securities are hereinafter referred to as "Options"), and the price per share
for which XM Shares are issuable upon the exercise of such Options is less
than the Closing Price in effect on the date of issuance or grant of such
Options, then the maximum total number of XM Shares that are issuable upon the
exercise of all such Options shall, as of the date of the issuance or grant of
such Options, be deemed to be outstanding and to have been issued by XM for
such price per share. For purposes of the preceding sentence, the "price per
share for which XM Shares are issuable upon the exercise of such Options" is
determined by dividing (i) the total amount, if any, received or receivable by
XM as consideration for the issuance or granting of all such Options, plus the
minimum aggregate amount of additional consideration, if any, payable to XM
upon the exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the minimum aggregate
amount of additional consideration payable upon the conversion or exchange
thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of XM Shares issuable upon the
exercise of all such Options (assuming full conversion of Convertible
Securities, if applicable). No further adjustment to the Exchange Price shall
be made upon the actual issuance of such XM Shares upon the exercise of such
Options or upon the conversion or exchange of Convertible Securities issuable
upon exercise of such Options.
(ii) Issuance of Convertible Securities. If XM in any manner
issues or sells any Convertible Securities, whether or not immediately
convertible (other than where such Convertible Securities are issuable upon
the exercise of Options for which an adjustment was made pursuant to Section
2.09(k)(i)) and the price per share for which XM Shares are issuable upon such
conversion is less than the Closing Price in effect on the date of issuance of
such Convertible Securities, then the maximum total number of XM Shares
issuable upon the conversion of all such Convertible Securities shall, as of
the date of the issuance of such Convertible Securities, be deemed to be
outstanding and to have been issued by XM for such price per share. For the
purposes of the preceding sentence, the "price per share for which XM Shares
are issuable upon such conversion or exchange" is determined by dividing (i)
the total amount, if any, received or receivable by XM as consideration for
the issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to XM upon the
conversion thereof at the time such Convertible Securities first become
convertible, by (ii) the maximum total number of XM Shares issuable upon the
conversion of all such Convertible Securities. No further adjustment to the
Exchange Price shall be made upon the actual issuance of such XM Shares upon
conversion or exchange of such Convertible Securities, and if any such
issuance or sale of such Convertible Securities is made upon exercise of any
Options for which adjustments of the Exchange Price had been or are to be made
pursuant to other provisions of this Section 2.09, no further adjustment of
the Exchange Price shall be made by reason of such issuance or sale.
(iii) Change in Option Price or Conversion Rate. If there is
a change at any time in (i) the amount of additional consideration payable to
XM upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to XM upon the conversion of any Convertible
Securities; or (iii) the rate at which any Convertible Securities are
convertible into XM Shares (other than under or by reason of customary
provisions designed to protect against dilution), the Exchange Price in effect
at the time of such change shall be readjusted to the Exchange Price which
would have been in effect at such time if such Options or Convertible
Securities still outstanding had provided for such changed additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of XM Shares
issuable upon exercise of any Option or upon conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to convert or exchange such Convertible Securities shall have
expired or terminated, the Exchange Price then in effect shall be readjusted
to the Exchange Price which would have been in effect at the time of such
expiration or termination if such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of XM Shares issued upon exercise or
conversion thereof), had never been issued.
(v) Calculation of Consideration Received. If any XM Shares,
Options or Convertible Securities are issued for cash, the consideration
received therefor for purposes of this Section 2.09 shall be the amount
received by XM therefor before deduction of commissions, underwriting
discounts or allowances or other expenses paid or incurred by XM in connection
with such issuance. In case any XM Shares, Options or Convertible Securities
are issued for a consideration part or all of which shall be other than cash,
the amount of the consideration other than cash received by XM shall be the
fair market value of such consideration. The fair market value of any
consideration other than cash or publicly traded securities shall be
determined in good faith by the mutual agreement of the Company and the
Purchaser. If the Company and the Purchaser are unable to reach such agreement
within a reasonable period, the fair market value of such consideration shall
be determined by an independent investment bank or a "Big Five" independent
public accounting firm, in either case of nationally recognized standing in
the valuation of businesses similar to the business of XM, which shall be
mutually acceptable to the Company and the Purchaser. The determination of
such investment bank or public accounting firm shall be final and binding upon
the Company and the Purchaser.
(vi) Exceptions to Adjustment of Exchange Price. No
adjustment to the Exchange Price shall be made (i) upon the grant or
conversion or exercise of any Options or Convertible Securities issued and
outstanding, or committed to be issued, as of the date hereof; (ii) upon the
grant or conversion or exercise of any capital stock, Options or Convertible
Securities which may be issued or granted after the date hereof under any
stock option, stock incentive or other employee benefit plan of XM in effect
as of the date hereof or which becomes effective after the date hereof, so
long as such stock option, stock incentive or other employee benefit plan is
approved by the board of directors of XM; (iii) upon issuance of XM Shares,
Options or Convertible Securities in a firm commitment underwritten public
offering other than any pro rata offering to existing stockholders of XM or
any Subsidiary of XM; (iv) upon the issuance or grant of any capital stock,
Options, or Convertible Securities to financial institutions, financial
syndicates or lessors in connection with bona fide commercial credit
arrangements, equipment financings, or similar transactions for primarily
other than equity financing purposes; (v) upon the issuance or grant of any
capital stock, Options, or Convertible Securities in connection with a
strategic alliance, partnership or similar commercial arrangement; (vi) upon
the issuance or grant of any capital stock, Options, or Convertible Securities
in connection with an acquisition of another Person by XM by merger or
purchase of all or substantially all of the capital stock of such Person or
purchase of all or substantially all of the assets of such Person; (vii)
customary antidilution adjustments to the exercise price or conversion price
of any Options or Convertible Securities issued by XM and outstanding as of
the date hereof that are required to be made pursuant to the terms of such
instruments as originally issued; (viii) issuance of capital stock, Options or
Convertible Securities in transactions in which the Purchaser is offered the
opportunity to participate on substantially similar terms; and (ix) any
issuance of capital stock, Options or Convertible Securities which the
Purchaser is entitled to receive under section 2.09(l) on exchange of the
Notes.
(l) Distribution of Assets. If after the Initial Closing Date, XM
shall declare or make any dividend or other distribution of its assets
(including cash) or securities issued by it or any other person to the holders
of XM Shares, then, in connection with any full or partial exchange of a Note
after the date of such Note but prior to the Maturity Date, the Purchaser
shall be entitled to receive the amount of such assets or securities which, if
such exchange had been made immediately prior to the record date for such
dividend or distribution, would have been payable to the Purchaser in respect
of the XM Shares which it would have received in such exchange. If XM
distributes as a dividend or otherwise to the holders of XM Shares Options or
Convertible Securities and such Options or Convertible Securities are not
exercisable for a period of at least 30 consecutive days following the
Maturity Date, then upon demand by the Purchaser and delivery of the exercise
price therefor by the Purchaser to the Company, the Company shall exercise
such Options or Convertible Securities, or any portion thereof requested by
the Purchaser, and, upon the full or partial exchange of the Notes pursuant to
this Section 2.09, the Company shall deliver to the Purchaser the property
received upon the exercise of such Options or Convertible Securities
attributable to the Options or Convertible Securities received by the Company
in respect of the number of XM Shares delivered to the Purchaser in such
exchange; provided, that if any such Options or Convertible Securities are not
transferable by holders of XM Shares that receive such Options or Convertible
Securities, the Company shall, upon the request of the Purchaser and the
receipt from the Purchaser of the exercise price therefor, exercise such
Options or Convertible Securities and (to the extent that it is legally able
to do so) deliver to the Purchaser the property received upon the exercise of
such Options or Convertible Securities which is attributable to the Options or
Convertible Securities received by the Company in respect of the number of XM
Shares transferred to the Purchaser pursuant to this Section 2.09 (and to the
extent that it is not legally able to do so, hold the same and cooperate
reasonably with the Purchaser (at the Purchaser's expense) to remove any legal
limitations on such transfer). If, as of the Maturity Date, the Purchaser has
delivered to the Company the exercise price to exercise Options or Convertible
Securities pursuant to the immediately preceding sentence and the number of
Options or Convertible Securities so exercised exceeds the number attributable
to the number of XM Shares received by the Purchaser in full or partial
exchange of the Notes, the Company shall deliver to the Purchaser, at the
Company's election, either (i) the amount of the exercise price delivered by
Purchaser to the Company and used to exercise Options or Convertible
Securities not attributable to XM Shares delivered to the Purchaser in full or
partial exchange of the Notes or (ii) any consideration received by the
Company upon any such exercise of such Options or Convertible Securities and
not already delivered to the Purchaser, or, if such consideration may not
legally be transferred by the Company, an agreement by the Company to transfer
such consideration once the Purchaser removes any legal limitations on such
transfer.
(m) Notice of Adjustment. Within 20 Business Days after the
occurrence of any event which requires any adjustment of the Exchange Price or
any other event described in subsections (h), (i), (j), (k) or (l) above, the
Company shall give written notice thereof to the Purchaser. Such notice shall
describe such event in reasonable detail and shall state the Exchange Price
resulting from such adjustment and shall set forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. Such
calculation shall be certified by a Responsible Officer of the Company.
(n) No Further Interest. If the Purchaser exchanges a Note in its
entirety pursuant to this Section 2.09, then such Note shall be deemed to be
paid in full and no further interest shall accrue thereunder.
(o) XM Share Limitations. If at any time, the sum of (i) the
aggregate number of XM Shares paid to, exchanged with or otherwise transferred
to the holders of the Notes pursuant to the Notes, and (ii) the number of XM
Shares on which the lien created by the Pledge Agreement has been foreclosed,
exceeds the XM Share Maximum, the Purchaser shall have no further rights to
exchange all or any portion of the Notes for XM Shares pursuant to this
Section 2.09, and in lieu of such transfer of XM Shares to the Purchaser, the
Company shall, on such date as the XM Shares are required to be transferred in
exchange for the Notes, pay to the Purchaser an amount in cash equal to the
principal amount of and accrued interest on the balance of the Notes not so
exchanged due to such XM Share Maximum.
(p) Minimum Adjustment of Exchange Price. No adjustment of the
Exchange Price shall be made in an amount of less than 1% of the Exchange
Price in effect at the time such adjustment is otherwise required to be made,
but any such lesser adjustment shall be carried forward and shall be made at
the time and together with the next subsequent adjustment which, together with
any adjustments so carried forward, shall amount to not less than 1% of such
Exchange Price.
SECTION 2.10. XM Shareholders Agreement; Registration Rights. (a)
With respect to any XM Shares received by the Purchaser from the Company, the
Purchaser hereby agrees (i) that the Purchaser is bound to the terms of that
certain letter entitled Lock-Up Agreement dated February 28, 2001 from Company
to Bear, Stearns & Co., Inc., and (ii) to execute a joinder agreement to
become a party to that certain Amended and Restated Shareholders Agreement,
dated August 8, 2000, among XM, the Company and the other parties thereto.
(b) With respect to any XM Shares transferred to the Purchaser from
the Company pursuant to this Agreement, the Company hereby transfers the
registration rights of the Company associated with such XM Shares (other than
its demand registration rights) to the Purchaser to the full extent permitted
under the Registration Rights Agreement, dated August 8, 2000, among XM, the
Company and the other parties named therein (the "XM Registration Agreement").
In addition, if the Purchaser receives at least 3 million XM Shares (as such
number shall be appropriately adjusted for the events and transactions
referred to in the definition of "XM Share Maximum") upon prepayment, exercise
of its exchange rights or otherwise pursuant to this Agreement, and there is
not in effect on the 180th day following delivery to the Purchaser of the
3,000,000th share referred to above an effective registration statement under
the Securities Act of 1933 which permits the public resale of all such XM
Shares by the Purchaser, then the Company shall thereupon transfer to the
Purchaser one of its "demand" registration rights under Section 2.1(f) of the
XM Registration Agreement. The Company shall not transfer, encumber or
exercise such demand registration right prior to the earlier of (x) the
transfer to the Purchaser of such demand registration rights or (y) such time
that all Obligations in respect of the Notes shall have been satisfied in full
and less than 3 million XM Shares shall have been delivered in connection
therewith (upon repayment, exercise of Optional Exchanges or otherwise).
SECTION 2.11. Right to Participate. (a) So long as any Note is
outstanding, the Company shall not (x) issue, sell or exchange, agree or offer
to issue, sell or exchange, or reserve or set aside for issuance, sale or
exchange, grant any option to purchase, issue any security convertible into or
exchangeable or exercisable for or otherwise dispose of, any shares of capital
stock of the Company or XM or any security or other right that represents the
right to acquire or receive, directly or indirectly, any capital stock of the
Company or XM or (y) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of any capital stock of the Company or XM, whether any such transaction
described in (x) or (y) above is to be settled by delivery of capital stock or
such other securities or other rights, in cash or otherwise ("Offered
Securities"), unless in each such case the Company shall have first complied
with this Section 2.11. The Company shall deliver to the Purchaser a written
notice of any proposed or intended issuance, sale or exchange of Offered
Securities (the "Offer"), which Offer shall (i) identify and describe the
Offered Securities, (ii) describe the price and other terms upon which they
are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged and (iii) include an offer to issue
and sell to or exchange with the Purchaser the Offered Securities upon
identical terms or upon terms more favorable to the Purchaser than the terms
of the proposed sale, issuance or exchange of the Offered Securities.
(b) To accept an Offer, in whole or in part, the Purchaser must
deliver a written notice to the Company within 15 days following receipt of
the Offer, stating that the Purchaser accepts the Offer (the "Notice of
Acceptance"). In such an event, the Company and the Purchaser shall
consummate the purchase and sale of the Offered Securities on the terms and
conditions set forth in the Offer.
(c) The Company shall have 60 days from the expiration of the period
set forth in Section 2.11(b) above to issue, sell or exchange the Offered
Securities if the Purchaser has not given a Notice of Acceptance within the
time period set forth in Section 2.11(b) (the "Refused Securities"), but only
upon terms and conditions that are not more favorable, in the aggregate, to
the acquiring person or persons or less favorable to the Company than those
set forth in the Offer.
(d)Any Offered Securities not acquired by the Purchaser or other
persons in accordance with this Section 2.11 above may not be issued, sold or
exchanged until they are again offered to the Purchaser under the procedures
specified in this Section 2.11.
(e) The term "Offered Securities" shall not include (in all cases as
adjusted for stock dividends, stock splits, recapitalizations and similar
events): (i) the grant or conversion or exercise of any options, warrants,
convertible securities or other similar purchase or exchange rights issued and
outstanding, or committed to be issued, as of the date of this Agreement; (ii)
the grant or conversion or exercise of any options, warrants, convertible
securities or other similar purchase or exchange rights which may be issued or
granted after the date of this Agreement under any stock option, stock
incentive or other employee benefit plan of the Company in effect as of the
date of this Agreement or which becomes effective after the date of this
Agreement, so long as such stock option, stock incentive or other employee
benefit plan is approved by the Board of Directors of the Company; and (iii)
customary antidilution adjustments to the exercise or conversion price of any
options, warrants, convertible securities or other similar purchase or
exchange rights issued by the Company and described in clauses (i) or (ii)
that are required to be made pursuant to the terms of such instruments as
originally issued.
ARTICLE 3
CONDITIONS
SECTION 3.01. Initial Closing. The Initial Closing hereunder shall
occur upon satisfaction of the following conditions:
(a) All representations and warranties made by the Company in this
Agreement or in the Pledge Agreement or otherwise made in writing in
connection herewith or therewith shall be true and correct on and as of the
Initial Closing Date with the same force and effect as though such
representations and warranties had been made at and as of the Initial Closing
Date. All of the agreements, terms, covenants and conditions required by this
Agreement to be complied with and performed by the Company shall have been
complied with and performed.
(b) No material adverse change shall have occurred in the business,
operations, properties or condition (financial or otherwise) of the Company,
and no other event shall have occurred which creates a possibility of
materially adversely affecting the ability of the Company to perform and
comply with all terms, conditions and agreements to be performed or complied
with by the Company under this Agreement or the Pledge Agreement or the
transactions contemplated hereby and thereby. No actions, suits, claims,
arbitrations, litigation, or proceedings or investigations before or by any
arbitrator or Governmental Authority shall have been instituted or threatened
to restrain, prohibit, invalidate or otherwise affect the transactions
contemplated by this Agreement.
(c) All approvals, licenses, authorizations, consents, filings and
registrations of or with all Governmental Authorities and other Persons which
shall be necessary in connection with the execution, delivery, performance and
validity of this Agreement, the Tranche A Note and the Pledge Agreement, and
the transactions contemplated hereby and thereby shall have been obtained,
shall be in form and substance reasonably satisfactory to the Purchaser and
counsel to the Purchaser, shall have been delivered to the Purchaser and shall
be in full force and effect at and as of the Initial Closing Date.
(d) the Company shall have obtained all consents, releases and
approvals necessary to enter into the Pledge Agreement in the form of Exhibit
C (the "Pledge Agreement") including all consents, releases and approvals
necessary to remove all Liens from 3,000,000 XM Shares held by the Company;
all such consents, releases and approvals (including releases addressed to and
for the benefit of the Purchaser) shall be in form and substance satisfactory
to the Purchaser and its counsel; and
(e) the Company shall have delivered the following to the Purchaser:
(i) a certificate of a Responsible Officer of the Company
certifying as to the Company's compliance with the conditions set forth in
clauses (a), (b) and (c) of this Section 3.01;
(ii) a duly executed Tranche A Note dated as of the Initial
Closing Date complying with the provisions of Section 2.03;
(iii) the Pledge Agreement duly executed by the Company;
(iv) certificate(s) representing 3,000,000 XM Shares along
with duly executed blank stock powers and an irrevocable letter to XM in the
form attached hereto as Exhibit D;
(v) an opinion of (A) Hogan & Hartson, L.L.P., counsel to
the Company, substantially in the form of Exhibit E hereto and (B) an opinion
of Randy S. Segal, general counsel of the Company, substantially in the form
of Exhibit F hereto;
(vi) UCC termination statements duly executed by all
applicable Persons for filing in all applicable jurisdictions as may be
necessary to terminate any effective UCC financing statements disclosed in
such search (other than any such financing statements in respect of Permitted
Liens;
(vii) UCC financing statements, duly executed by the Company
with respect to the Collateral, for filing in all jurisdictions as may be
necessary or, in the opinion of Purchaser, desirable to perfect the security
interests created in such Collateral pursuant to the Pledge Agreement under
the UCC;
(viii) a copy of the financial statements of the Company
referred to in Section 4.10(a), certified by a Responsible Officer of the
Company; and
(ix) all other documents the Purchaser may reasonably
request relating to the existence of the Company (including, without
limitation, a certificate of good standing of the Company), any of the
Company's Subsidiaries, the corporate authority for and the validity of this
Agreement, the Notes, the Pledge Agreement and any other matters relevant
hereto, all in form and substance reasonably satisfactory to the Purchaser.
SECTION 3.02. Second Closing. The Second Closing hereunder shall
occur upon satisfaction of the following conditions:
(a) the Initial Closing shall have occurred;
(b) the Purchaser shall have received a Notice of Purchase;
(c) all representations and warranties made by the Company in this
Agreement or in the Pledge Agreement and Second Pledge Agreement or otherwise
made in writing in connection herewith or therewith shall be true and correct
(without giving effect to any limitation as to "materiality" or "Material
Adverse Effect" set forth therein) on and as of the Second Closing Date with
the same force and effect as though such representations and warranties had
been made at and as of the Second Closing Date, except where the failure of
such representations and warranties to be true and correct (without giving
effect to any limitation as to "materiality" or "Material Adverse Effect" set
forth therein) would not, individually or in the aggregate, have a Material
Adverse Effect. All of the agreements, terms, covenants and conditions
required by this Agreement to be complied with and performed by the Company
shall have been complied with and performed;
(d) no material adverse change shall have occurred in the business,
operations, properties or condition (financial or otherwise) of the Company,
and no other event shall have occurred which creates a possibility of
materially adversely affecting the ability of the Company to perform and
comply with all terms, conditions and agreements to be performed or complied
with by the Company under this Agreement or the Pledge Agreement or the
transactions contemplated hereby and thereby. No actions, suits, claims,
arbitrations, litigation, or proceedings or investigations before or by any
arbitrator or Governmental Authority shall have been instituted or threatened
to restrain, prohibit, invalidate or otherwise affect the transactions
contemplated by this Agreement;
(e) all approvals, licenses, authorizations, consents, filings and
registrations of or with all Governmental Authorities and other Persons which
shall be necessary in connection with the execution, delivery, performance and
validity of this Agreement, the Notes and the Pledge Agreement, and the
transactions contemplated hereby and thereby shall have been obtained, shall
be in form and substance reasonably satisfactory to the Purchaser and counsel
to the Purchaser, shall have been delivered to the Purchaser and shall be in
full force and effect at and as of the Second Closing Date;
(f) the Company shall have obtained all consents, releases and
approvals (including releases addressed to and for the benefit of the
Purchaser) necessary to remove all Liens from an additional 2,000,000 XM
Shares held by the Company and to enter into a second pledge agreement in the
form of Exhibit C hereto (the "Second Pledge Agreement") with respect to such
shares; all such consents, approvals and releases shall be in form and
substance satisfactory to the Purchaser and its counsel;
(g) the Pledge Agreement shall be in full force and effect;
(h) no Default or Event of Default shall have occurred and be
continuing on the Second Closing Date;
(i) the Purchaser shall have received an opinion of (A) Hogan &
Hartson, L.L.P., counsel to the Company, substantially in the form of Exhibit
E hereto and (B) an opinion of Randy S. Segal, general counsel of the Company,
substantially in the form of Exhibit F hereto;
(j) the Purchaser shall have received the Notice of Purchase as
required by Section 2.01(b) hereof; and
(k) the Company shall have delivered the following to the Purchaser:
(i) a certificate of a Responsible Officer of the Company
certifying as to the Company's compliance with the conditions set forth in
clauses (c), (d) and (e) of this Section 3.02;
(ii) the Second Pledge Agreement duly executed by the
Company;
(iii) UCC Financing statements, duly executed by the Company
with respect to the Collateral, for filing in all jurisdictions as may be
necessary or, in the opinion of the Purchaser, desirable to perfect the
security interest in such Collateral pursuant to the Second Pledge Agreement;
(iv) a duly executed Tranche B Note dated as of the Second
Closing Date complying with the provisions of Section 2.03;
(v) certificate(s) representing 2,000,000 XM Shares along
with duly executed blank stock powers; and
(iv) all other documents the Purchaser may reasonably
request relating to the existence of the Company, any of the Company's
Subsidiaries, the corporate authority for and the validity of this Agreement,
the Notes, the Pledge Agreement or any other matters relevant hereto, all in
form and substance reasonably satisfactory to the Purchaser; and
(l) the Purchaser shall have consented in writing to the consummation
of the Second Closing.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants to the Purchaser, as of the date
of this Agreement and the Initial Closing Date, that, except as set forth in
the section (if any) of the Disclosure Schedule corresponding to the Section
heading below:
SECTION 4.01. Corporate Existence and Power. Each of the Company and
its Principal Subsidiaries (a) is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation; (b) has the power and authority and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted; (c) is duly qualified as a foreign corporation,
licensed and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification; and (d) is in compliance with all Requirements of
Law except, in the case of clauses (c) and (d), where the failure to be so
qualified or in compliance could not reasonably be expected to have a Material
Adverse Effect.
SECTION 4.02. Corporate Authorization; No Contravention. The
execution, delivery and performance by each of the Company and its
Subsidiaries of any Investment Document to which it is a party have been duly
authorized by all necessary corporate action and do not and will not: (a)
contravene the terms of such Person's certificate of incorporation, bylaws or
other organizational document; (b) upon receipt of the consents, releases and
approvals described in Section 3.02(f) on or prior to the Second Closing Date,
if the Second Closing were to occur, conflict with or result in any breach or
contravention of, or the creation of any Lien under, any indenture, agreement,
lease, instrument, Contractual Obligation, injunction, order, decree or
undertaking to which such Person is a party; or (c) violate any Requirement of
Law.
SECTION 4.03. Government Approvals. All material Government Approvals
heretofore required to be obtained have been duly obtained, were validly
issued, are in full force and effect, are not subject to appeal and are held
in the name of, or for the benefit of, the appropriate Persons. There is no
proceeding pending or, to the best knowledge of the Company, threatened
against the Company or any of its Subsidiaries, or any property of the Company
or any of its Subsidiaries, which seeks, or may reasonably be expected, to
rescind, terminate, materially adversely modify or suspend any of the FCC
Licenses. There has not occurred any event that would make unlikely the
delivery or issuance as anticipated of, and when and as needed all such
Government Approvals. No such Government Approval already obtained is subject
to any restriction, condition, limitation or other provision that would have a
Material Adverse Effect. The information set forth in each application
submitted by the Company or any of its Subsidiaries in connection with each
such Government Approval is accurate and complete in all material respects
taken as a whole, except for statements or omissions which could not
reasonably be expected to affect adversely the validity of such Government
Approvals. No other material consent, approval or authorization of, or
declaration or filing with, any other Person is required in connection with
the execution, delivery, performance, validity or enforceability of this
Agreement or any other Investment Document.
SECTION 4.04. Binding Effect. This Agreement and each other
Investment Document to which the Company or any of its Subsidiaries is a party
constitute the legal, valid and binding obligations of such Person,
enforceable against such Person in accordance with their respective terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
or similar laws affecting the enforcement of creditors' rights generally or by
equitable principles relating to enforceability.
SECTION 4.05. Litigation. Except for matters arising after the date
hereof which could not reasonably be expected to have a Material Adverse
Effect, there are no actions, suits, proceedings, claims or disputes pending,
or to the best knowledge of the Company, threatened or contemplated at law, in
equity, in arbitration or before any Governmental Authority, against the
Company or any of its Subsidiaries or any of their respective properties
which: (a) purport to affect or pertain to this Agreement, or any Investment
Document, or any of the transactions contemplated hereby or thereby; or (b) if
determined adversely to the Company or any of its Subsidiaries, could have a
Material Adverse Effect. No injunction, writ, temporary restraining order or
any order of any nature has been issued by any court or other Governmental
Authority purporting to enjoin or restrain the execution, delivery and
performance of this Agreement or any other Investment Document, or directing
that the transactions provided for herein or therein not be consummated as
herein or therein provided.
SECTION 4.06. No Default. Upon receipt of the consents, releases and
approvals described in Section 3.02(f) on or prior to the Second Closing Date,
if the Second Closing were to occur, no Default or Event of Default exists or
would result from the incurring of Obligations by the Company or any of its
Subsidiaries under any Investment Document. Neither the Company nor any of its
Subsidiaries is in default under or with respect to any Contractual Obligation
in any respect which, individually or together with all such defaults, could
have a Material Adverse Effect.
SECTION 4.07. ERISA Compliance. (a) Section 4.07 of the Disclosure
Schedule lists all Plans maintained or sponsored by the Company or to which
either of them is obligated to contribute, and separately identifies Plans
intended to be Qualified Plans and Multiemployer Plans. All written
descriptions thereof provided to the Purchaser are true and complete in all
material respects. Each Plan is in compliance in all material respects with
the applicable provisions of ERISA, the Code and other Federal or state law,
including all requirements under the Code or ERISA for filing reports (which
are true and correct in all material respects as of the date filed), and
benefits have been paid in accordance with the provisions of the Plan. Each
Qualified Plan has been determined by the IRS to qualify under Section 401 of
the Code, and to the best knowledge of the Company nothing has occurred which
would cause the loss of such qualification.
(b) There is no outstanding liability under Title IV of ERISA with
respect to any Plan maintained or sponsored by any member of the Controlled
Group (as to which the Company is or may be liable), nor with respect to any
Plan to which any member of the Controlled Group contributes or is obligated
to contribute (wherein the Company is or may be liable). No Plan maintained or
sponsored by the Company provides medical or other welfare benefits or extends
coverage relating to such benefits beyond the date of a participant's
termination of employment with the Company, except to the extent required by
Section 4980B of the Code and at the sole expense of the participant or the
beneficiary of the participant to the fullest extent permissible under such
Section of the Code. The Company has complied in all material respects with
the notice and continuation coverage requirements of Section 4980B of the
Code.
(c) No ERISA Event has occurred or is reasonably expected to occur
with respect to any Plan maintained or sponsored by the Company or to which
the Company is obligated to contribute. There are no pending or, to the best
knowledge of the Company, threatened claims, actions or lawsuits, other than
routine claims for benefits in the usual and ordinary course, asserted or
instituted against (i) any Plan maintained or sponsored by the Company or its
assets, (ii) any member of the Controlled Group with respect to any Qualified
Plan of the Company, or (iii) any fiduciary with respect to any Plan for which
the Company may be directly or indirectly liable, through indemnification
obligations or otherwise. The Company has not incurred and does not reasonably
expect to incur (i) any liability (and no event has occurred which, with the
giving of notice under Section 4219 of ERISA, would result in such liability)
under Section 4201 of ERISA with respect to a Multiemployer Plan or (ii) any
liability under Title IV of ERISA (other than premiums due and not delinquent
under Section 4007 of ERISA) with respect to a Plan. The Company has not
transferred any Unfunded Pension Liability outside of the Controlled Group or
otherwise engaged in a transaction that could be subject to Section 4069 or
4212(c) of ERISA.
(d) The Company has not engaged, directly or indirectly, in a
non-exempt prohibited transaction (as defined in Section 4975 of the Code or
Section 406 of ERISA) in connection with any Plan, which transaction could
have a Material Adverse Effect.
SECTION 4.08. Title to Property. Each of the Company and its
Subsidiaries has good record and marketable title in fee simple to or valid
leasehold interests in all real property used in its business, except for such
defects in title as could not, individually or in the aggregate, have a
Material Adverse Effect. Such real property is free and clear of all Liens or
rights of others, except Permitted Liens.
SECTION 4.09. Taxes. Each of the Company and its Subsidiaries has
filed all Federal and other material tax returns and reports required to be
filed and have paid all Federal and other material taxes, assessments, fees
and other governmental charges levied or imposed upon them or their
properties, income or assets otherwise due and payable except those which are
being contested in good faith by appropriate proceedings and for which
adequate reserves have been provided in accordance with GAAP and no Notice of
Lien has been filed or recorded. There is no proposed tax assessment against
the Company or any of its Subsidiaries which would, if the assessment were
made, have a Material Adverse Effect.
SECTION 4.10. Financial Condition.
(a) The audited consolidated statements of financial position of the
Company and its Subsidiaries as of December 31, 1999, and the related
consolidated statements of loss, stockholders' equity and cash flows for the
fiscal year ended on that date and the unaudited consolidated financial
statements of the Company and its Subsidiaries as of December 31, 2000
included in the draft dated March 23, 2001 of the Company's Annual Report on
Form 10-K delivered to the Purchaser: (i) were prepared in accordance with
GAAP consistently applied throughout the periods covered thereby, except as
otherwise expressly noted therein, (ii) fairly present, in all material
respects, the financial condition of the Company and its Subsidiaries as of
the date thereof and results of operations for the period covered thereby and
(iii) show all material Indebtedness and other liabilities, direct or
contingent, of the Company and its consolidated Subsidiaries as of the date
thereof (including liabilities for taxes and material commitments); except
with respect to (i) and (ii), that the Company's independent auditors have
advised the Company that they intend to include a "going concern"
qualification in the opinion of the auditors to be included with the financial
statements to be included in the Company's Annual Report on Form 10-K. The
unaudited consolidated balance sheet of the Company as of February 28, 2001,
attached hereto as Section 4.10(a) of the Disclosure Schedule, reflects all
liabilities of the Company and its Subsidiaries as of such date in accordance
with GAAP consistently applied throughout the period covered thereby.
(b) Since December 31, 2000, there has been no Material Adverse
Effect and since February 28, 2001, there has been no material increase in the
liabilities of the Company and its Subsidiaries.
SECTION 4.11. Environmental Matters. The operations of the Company
and each of its Subsidiaries comply in all material respects with all
Environmental Laws. The Company and each of its Subsidiaries have obtained all
licenses, permits, authorizations and registrations required under any
Environmental Law ("Environmental Permits") necessary for its operations to
comply in all material respects with Environmental Laws, and all such
Environmental Permits are in full force and effect, and the Company and each
of its Subsidiaries are in material compliance with all terms and conditions
of such Environmental Permits. None of the Company, any of its Subsidiaries or
any of their present or, to the knowledge of the Company, past property or
operations is subject to any outstanding written order from or agreement with
any Governmental Authority or other Person, nor subject to any judicial or
administrative proceeding, respecting any Environmental Law, Environmental
Claim or Hazardous Material. There are no conditions or circumstances which
may give rise to any Environmental Claim arising from the operations of the
Company or its Subsidiaries, including Environmental Claims associated with
any operations of the Company or its Subsidiaries, with a potential liability
in excess of $5,000,000 in the aggregate. Without limiting the generality of
the foregoing, the Company and its Subsidiaries have met all notification
requirements under Title III of the Superfund Amendments and Reauthorization
Act of 1986 or any other Environmental Law.
SECTION 4.12. Regulated Entities. None of the Company, any Person
controlling the Company, or any Subsidiary thereof, is (a) an "Investment
Company" within the meaning of the Investment Company Act of 1940; or (b)
subject to regulation under the Public Utility Holding Company Act of 1935,
the Federal Power Act, the Interstate Commerce Act, any state public utilities
code or any other Federal or state statute or regulation limiting its ability
to incur Indebtedness.
SECTION 4.13. Subsidiaries. As of the Closing Date, except as
disclosed in Company's reports filed with the Securities and Exchange
Commission since January 1, 2000 (the "SEC Reports"), the Company does not
have any Subsidiaries and has no equity investments in any other corporation
or entity.
SECTION 4.14. Insurance. The properties of the Company and its
Subsidiaries are insured with financially sound and reputable insurance
companies, in such amounts, with such deductibles and covering such risks as
is customarily carried on by companies engaged in similar businesses and
owning similar properties in localities where the Company or such Subsidiary
operates.
SECTION 4.15. Business. The Company and its Subsidiaries have not
conducted any business other than as described in the SEC Reports. Neither the
business nor the properties of the Company and its Subsidiaries are or have
been affected by any fire, explosion, accident, strike, lockout or other labor
dispute, drought, storm, hail, earthquake, embargo, act of God or of the
public enemy or other casualty (whether or not covered by insurance) which has
had a Material Adverse Effect.
SECTION 4.16. Collateral; Property. All contracts and all property
now owned by the Company are held by it free and clear of all Liens other than
Permitted Liens. The Company has good, marketable and valid title in and to
all of the Collateral now owned by it, in each case free and clear of all
Liens other than Permitted Liens.
SECTION 4.17. Pledge Agreement. The Pledge Agreement creates in favor
of the Purchaser, for the benefit of the Purchaser, legal, valid and
enforceable Liens on or in all of the Collateral to the extent provided in the
Pledge Agreement. All filings, recordations, registrations and other actions
necessary to perfect such Liens have been duly effected, and, to the extent
that such Liens may legally be given and be effective and enforceable, each
Lien created by the Pledge Agreement constitutes a perfected Lien on or in all
right, title, estate and interest of the Company in the Collateral covered
thereby, prior and superior to all other Liens except Permitted Liens arising
by operation of law, and all necessary and appropriate consents to the
creation and perfection of such Liens have been obtained.
SECTION 4.18. Use of Proceeds. The proceeds to be received by the
Company upon the issuance and sale of the Notes shall be used by the Company
for working capital, to pay the fees and expenses contemplated by this
Agreement and 25% of the net proceeds from the sale of the Notes shall be used
to pay down debt under the Term Credit Agreement. The Company shall not use
any portion of the proceeds of any Notes for the purpose of purchasing or
carrying any "margin stock" (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) or for any other purpose in violation
of any applicable statute or regulation, or of the terms and conditions of
this Agreement.
SECTION 4.19. Disclosure. The information (including, without
limitation, the information in the SEC Reports) furnished in writing at or
prior to the Initial Closing Date by the Company to the Purchaser in
connection with this Agreement and the transactions contemplated hereby is
true, complete and accurate in every material respect or based on reasonable
estimates on the date as of which such information is stated or certified and
is not incomplete by omitting to state any material fact necessary to make
such information (taken as a whole) not misleading in light of the
circumstances under which such information was made. There is no fact known to
the Company on the date as of which this representation and warranty is made
or the Initial Closing Date that has not been disclosed in writing to the
Purchaser which could reasonably be expected to have a Material Adverse
Effect.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser represents and warrants that:
SECTION 5.01. Corporate Existence and Power. The Purchaser (a) is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation; and (b) is in compliance with
all Requirements of Law except, in the case of clause (b) where the failure to
be so qualified or in compliance could not reasonably be expected to have a
Material Adverse Effect.
SECTION 5.02. Corporate Authorization; No Contravention. The
execution, delivery and performance by the Purchaser of any Investment
Document to which it is a party have been duly authorized by all necessary
corporate action and do not and will not: (a) contravene the terms of the
Purchaser's certificate of incorporation or bylaws; (b) conflict with or
result in any breach or contravention of, or the creation of any Lien under,
any indenture, agreement, lease, instrument, Contractual Obligation,
injunction, order, decree or undertaking to which the Purchaser is a party; or
(c) violate any Requirement of Law.
SECTION 5.03. Government Approvals. All material Government Approvals
required for the execution, delivery and performance by the Purchaser of the
Investment Documents have been duly obtained, were validly issued, are in full
force and effect, are not subject to appeal and are held in the name of, or
for the benefit of, the appropriate Persons. No other material consent,
approval or authorization of, or declaration or filing with, any other Person
is required to be made or obtained by the Purchaser in connection with the
execution, delivery or performance by the Purchaser of this Agreement, the
validity or enforceability as to the Purchaser of this Agreement or any other
Investment Document.
SECTION 5.04. Binding Effect. This Agreement and each other
Investment Document to which the Purchaser is a party constitute the legal,
valid and binding obligations of the Purchaser, enforceable against the
Purchaser in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, or similar laws affecting
the enforcement of creditors' rights generally or by equitable principles
relating to enforceability.
SECTION 5.05. Investment Company. The Purchaser is not an Investment
Company, as such term is defined in the Investment Company Act of 1940, as
amended.
SECTION 5.06. Availability of Funds. The Purchaser has sufficient
funds to purchase the Notes pursuant to this Agreement.
SECTION 5.07. Acquisition for Investment. The Purchaser is acquiring
the Notes and, upon exchange of the Notes, the XM Shares (collectively, the
"Securities") for its own account, for investment and not with a view to, or
for sale in connection with, the distribution thereof in a manner which would
violate the Securities Act of 1933, as amended (the "Securities Act").
SECTION 5.08. Accredited Investor Status. The Purchaser is an
"accredited investor," as that term is as defined in Rule 501(a) of Regulation
D under the Securities Act. The Purchaser has sufficient knowledge and
experience in financial and business matters so as to be capable of evaluating
the merits and risks of its investment in the Securities and is capable of
bearing the economic risks of such investment. The Purchaser understands that
its investment in the Securities involves a significant degree of risk.
SECTION 5.09. Information. The Purchaser and its advisors have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Purchaser or its advisors. The Purchaser and
its advisors have been afforded the opportunity to ask questions of the
Company's management concerning the Company and the Securities.
SECTION 5.10. Government Review. The Purchaser understands that no
Governmental Entity has passed upon or made any recommendation or endorsement
of the Securities.
SECTION 5.11. Sale or Transfer. The Purchaser understands that (i)
except as provided in Section 2.10(b) hereof, the sale or re-sale of the XM
Shares has not been and is not being registered under the Securities Act or
any applicable state securities laws, and the XM Shares may not be sold or
otherwise transferred unless (A) the XM Shares are sold or transferred
pursuant to an effective registration statement under the Securities Act, or
(B) sold or otherwise transferred in a transaction exempt from such
registration requirements, in which case, if requested by XM, the Purchaser
shall have delivered to XM an opinion of counsel (which opinion shall be in
form, substance and scope customary for opinions of counsel in comparable
transactions) reasonably satisfactory to the XM to the effect that the XM
Shares to be sold or transferred may be sold or transferred without
registration under the Securities Act (provided that such legal opinion need
not be delivered to XM in connection with any sale pursuant to Rule 144); (ii)
any sale of such XM Shares made in reliance on Rule 144 may be made only in
accordance with the terms of such Rule and further, if such Rule is not
applicable, any sale of such XM Shares under circumstances in which the seller
(or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with another exemption under the Securities Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
Person is under any obligation to register such XM Shares under the Securities
Act or any state securities laws or to comply with the terms and conditions of
any exemption thereunder (other than pursuant to Section 2.10(b) hereof). (b)
The Purchaser understands that (i) the sale or re-sale of the Notes has not
been and is not being registered under the Securities Act or any applicable
state securities laws, and the Notes may not be sold or otherwise transferred
except in a transaction not requiring registration under, or not subject to,
Section 5 of the Securities Act; and (ii) neither the Company nor any other
Person is under any obligation to register the Notes under the Securities Act
or any state securities laws or to comply with the terms and conditions of any
exemption thereunder.
SECTION 5.12. Residency. The Purchaser maintains its principal
executive offices in the State of New York.
ARTICLE 6
COVENANTS
The Company agrees that, so long as the Purchaser has any Commitment
hereunder or any amount payable hereunder or under any Note remains unpaid:
SECTION 6.01. Conduct of Business; Preservation of Corporate
Existence. The Company shall, and shall cause each of its Subsidiaries: (a) to
engage in business of the same general type as now conducted by the Company
and its Subsidiaries (including Motient Communications Inc. and Motient
Services Inc.); (b) to preserve and maintain in full force and effect its
corporate existence and good standing under the laws of its State or
jurisdiction of incorporation; (c) to preserve and maintain in full force and
effect all rights, privileges, qualifications, permits, licenses and
franchises necessary or desirable in the normal conduct of its business; (d)
to use its reasonable efforts, in the ordinary course and consistent with past
practice, to preserve its business organization and preserve the goodwill and
business of the customers, suppliers and others having business relations with
it; and (e) to preserve or renew all of its registered trademarks, trade names
and service marks, the non-preservation of which could have a Material Adverse
Effect.; provided that the Company may transfer the assets of Motient
Services, and take the actions incidental thereto, in each case as required by
the MSV Asset Sale Agreement.
SECTION 6.02. Maintenance of Property. The Company shall maintain,
and shall cause each of its Principal Subsidiaries and Subsidiaries,
respectively, to maintain, and preserve all its property which is used or
useful in its business in good working order and condition, ordinary wear and
tear excepted.
SECTION 6.03. Compliance with Laws. The Company shall comply, and
shall cause each of its Subsidiaries to comply, in all material respects with
all Requirements of Law of any Governmental Authority having jurisdiction over
it or its business (including the Federal Fair Labor Standards Act and ERISA),
except such as may be contested in good faith or as to which a bona fide
dispute may exist.
SECTION 6.04. Pledge Agreement and Second Pledge Agreement. The
Company shall at all times ensure that (i) the Pledge Agreement and, if
applicable, the Second Pledge Agreement, creates in favor of the Purchaser, as
the secured party thereunder, legal, valid and enforceable Liens on or in all
Collateral covered thereby; (ii) all filings, recordations, registrations and
other actions necessary or desirable to perfect the Liens created or purported
to be created by the Pledge Agreement and, if applicable, the Second Pledge
Agreement, have been duly effected; (iii) each Lien created by the Pledge
Agreement and, if applicable, the Second Pledge Agreement, constitutes a
perfected Lien on or in all right, title, estate and interest of the Company,
as applicable, in the Collateral, prior and superior to all Liens other than
Permitted Liens arising by operation of law; and (iv) all necessary and
appropriate consents to the creation and perfection of the Liens created or
purported to be created by the Pledge Agreement and, if applicable, the Second
Pledge Agreement, have been obtained.
SECTION 6.05. Government Approvals. The Company shall, and shall
cause each of its Subsidiaries to, comply with the terms of and maintain in
full force and effect all material FCC Licenses, and all amendments thereto,
and shall, and shall cause each of its Subsidiaries to, obtain, maintain and
comply with the terms of all other Government Approvals which are necessary
under applicable laws and regulations in connection with the Company's or such
Subsidiary's business. No such Government Approval shall be subject to any
restriction, condition, limitation or other provision that would have a
Material Adverse Effect.
SECTION 6.06. Limitation on Liens. The Company shall not, and shall
not permit any other member of the Company Group to, directly or indirectly,
make, create, incur, assume or suffer to exist any Lien upon or with respect
to any part of its property or assets, whether now owned or hereafter
acquired, or offer or agree to do so, other than the following ("Permitted
Liens"):
(a) any Lien securing Indebtedness identified in Schedule 6.06
hereto;
(b) any Lien in favor of the Purchaser created under any Investment
Document;
(c) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, unless the same
are being contested in good faith by appropriate proceedings and adequate
reserves in accordance with GAAP are maintained, provided that no Notice of
Lien has been filed or recorded;
(d) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of business
which do not secure Indebtedness and are not delinquent or remain payable
without penalty;
(e) Liens (other than any Lien imposed by ERISA) on the property of
any member of the Company Group incurred, or pledges or deposits required, in
connection with workmen's compensation, unemployment insurance and other
social security legislation;
(f) Liens on the property of any member of the Company Group securing
(i) the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, and (ii) obligations on surety and appeal
bonds, and (iii) other obligations of a like nature incurred in the ordinary
course of business which do not secure Indebtedness, provided that all such
Liens in the aggregate could not cause a Material Adverse Effect;
(g) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the businesses of the Company Group;
(h) Liens on any asset which is the subject of a capital lease
securing Indebtedness incurred or assumed for the purpose of financing all or
any part of the cost of acquiring such asset, provided that (x) such Lien
attaches concurrently with or within 30 days after the acquisition thereof,
and (y) the sum of the aggregate principal amount of such Indebtedness secured
by such Liens shall not exceed $15,000,000;
(i) Liens on contract rights under subscriber equipment leases sold,
pledged or otherwise transferred pursuant to any bona fide financing of such
leases; and
(j) Liens to secure Vendor Financing Indebtedness permitted by
Section 6.08(j) provided that such Liens cover only the assets acquired with
such Vendor Financing Indebtedness.
SECTION 6.07. Disposition of Assets, Consolidations and Mergers. The
Company shall not, and shall not permit any Subsidiary to, directly or
indirectly, (i) sell, assign, lease, convey, transfer or otherwise dispose of
(whether in one or a series of transactions) any of its assets, business or
property (including accounts and notes receivable (with or without recourse),
equipment sale-leaseback transactions or the Company's interest in Mobile
Satellite Ventures LLC (but not, for the avoidance of doubt, any dilution of
such interest arising out of additional capital contributions by others to
Mobile Satellite Ventures LLC)) or (ii) merge or consolidate with any other
Person, or enter into any agreement to do any of the foregoing described in
clauses (i) or (ii) except for the following; provided that immediately after
giving effect to any of the following, no Default or Event of Default would
exist:
(a) sales, transfers, or other dispositions of inventory, or used,
worn-out or surplus property, or property of no further use to the Company and
its Subsidiaries, all in the ordinary course of business;
(b) sales, transfers, or other dispositions of equipment in the
ordinary course of business to the extent that such equipment is exchanged for
credit against the purchase price of similar replacement equipment or the
proceeds of such sale are reasonably promptly applied to the purchase price of
such replacement equipment;
(c) sales, transfers, or other dispositions of communications
services, capacity or equipment pursuant to the customer contracts providing
for the sale of communications services, capacity or equipment in the ordinary
course of business;
(d) sales, transfers or other dispositions pursuant to bona fide
sale-leaseback financings in which the lease gives rise solely to Capital
Lease Obligations; provided, however, that any such sales, transfers or other
dispositions are not permitted with any assets of the communications network;
and provided further that the aggregate amount of all liabilities in respect
of all such Capital Lease Obligations arising out of bona fide sale-leaseback
transactions, as determined in accordance with GAAP, shall not exceed
$5,000,000 at any one time outstanding;
(e) sales, transfers, or other dispositions of assets in the ordinary
course of business having a fair market value not exceeding $500,000 per item
or $1,000,000 in the aggregate in any fiscal year (excluding sales, transfers
and dispositions theretofore approved in accordance with the terms hereof in
such fiscal year);
(f) sales, transfers or other dispositions of contract rights under
subscriber equipment leases pursuant to any bona fide financing of such
leases;
(g) non-exclusive licenses of technology and other intangible assets,
excluding spectrum licenses;
(h) sales of mobile earth terminals and related equipment, and other
inventory;
(i) any Subsidiary of the Company may merge, consolidate or combine
with or into, or transfer (for no consideration) assets to the Company;
provided that the Company shall be the continuing or surviving corporation;
and provided, further, that no High-yield Subsidiary shall merge, consolidate
or combine with or into the Company or any Subsidiary that is not a High-yield
Subsidiary.
(j) any High-yield Subsidiary may sell, lease, transfer or otherwise
dispose of any or all of its assets (upon voluntary liquidation or otherwise),
to another High-yield Subsidiary; and
(l) the sale of assets by Motient Services Inc. to Mobile Satellite
Ventures LLC as required by and in accordance with the MSV Asset Sale
Agreement.
SECTION 6.08. Investments. Neither the Company nor any other member
of the Company Group will make or acquire any Investment in any Person other
than:
(a) Investments in Persons which are Subsidiaries on the date hereof;
provided, that the aggregate amount of all Investments made in High-yield
Subsidiaries shall not exceed the outstanding principal amount of the Tranche
A Note and, if applicable, after the Second Closing, the sum of outstanding
principal amounts of the Notes;
(b) Investments in Mobile Satellite Ventures LLC;
(c) Cash Equivalents; and
(d) any Investment not otherwise permitted by the foregoing clauses
of this Section if, immediately after such Investment is made or acquired, the
aggregate net book value of all Investments permitted by this clause (d) does
not exceed $10,000,000.
SECTION 6.09. Transactions with Affiliates. Except where such
Affiliate is a member of the Company Group other than a High-yield Subsidiary,
the Company will not, and will not permit any Subsidiary to, directly or
indirectly, (i) pay any funds to or for the account of any Affiliate, (ii)
make any investment in any Affiliate (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any
Indebtedness, or otherwise), (iii) lease, sell, transfer or otherwise dispose
of any assets, tangible or intangible, to any Affiliate, or (iv) except in the
ordinary course of business consistent with past practice, participate in, or
effect, any other transaction with any Affiliate, except in each case on an
arm's-length basis on terms at least as favorable to the Company or such
Subsidiary as could have been obtained from a third party that was not an
Affiliate or as otherwise expressly approved in writing by the Purchaser and
except that the Company may make Investments in High-yield Subsidiaries that
are permitted by clause (a) of Section 6.08.
SECTION 6.10. Restricted Payments. The Company will not declare or
make any dividend payment or other distribution of assets, properties, cash,
rights, obligations or securities on account of any shares of any class of its
capital stock or purchase, redeem or otherwise acquire for value (or permit
any member of the Company Group to do so) any shares of its capital stock or
any warrants, rights or options to acquire such shares, now or hereafter
outstanding.
SECTION 6.11. Limitation on Indebtedness. The Company shall not, and
shall not permit any Subsidiary (other than Mobile Satellite Ventures LLC and
subsidiaries of Mobile Satellite Ventures LLC) to, create, incur, assume,
guaranty, suffer to exist, or otherwise become or remain directly or
indirectly liable with respect to, any Indebtedness, except for:
(a) accounts payable to trade creditors for goods and services and
current operating liabilities (not the result of the borrowing of money)
incurred in the ordinary course of the Company's or the Subsidiary's business,
as the case may be, in accordance with customary terms and paid within the
specified time, unless contested in good faith by appropriate proceedings and
reserved for in accordance with GAAP;
(b) income taxes payable and deferred taxes;
(c) accrued expenses and deferred income;
(d) Indebtedness under the Senior Notes in an aggregate principal
amount not to exceed $335,000,000 and Contingent Obligations of the Company
and of Motient Holdings Inc.'s Subsidiaries in respect thereof (such
Contingent Obligations of the Company to be subordinated to the same extent
that the Holdings Guaranty is subordinate in right of payment to the Notes as
acknowledged in Section 9.10);
(e) Indebtedness under the Term Credit Agreement and the Revolving
Credit Agreement;
(f) Contingent Obligations incurred in connection with any lease
financing of mobile equipment used in Company's business, not exceeding
$10,000,000 in the aggregate in principal amount;
(g) Indebtedness outstanding on the date hereof and identified on the
financial statements of the Company referred to in Section 4.10(a);
(h) Indebtedness incurred to finance in-orbit insurance in an
aggregate amount outstanding at any time not to exceed $6,000,000;
(i) Vendor Financing Indebtedness in an aggregate amount outstanding
at any time not to exceed $10,000,000;
(j) any other Indebtedness incurred after the date hereof; provided
that the aggregate outstanding principal amount of all such Indebtedness shall
not at any time exceed $15,000,000; and
(k) Indebtedness represented by Rate Contracts.
SECTION 6.12. Additional Limitation on Indebtedness of the Company
and Transferee Subsidiaries. Company shall not, and shall not permit any
Transferee Subsidiary to, create, incur, assume, guaranty, suffer to exist or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except for:
(a) Indebtedness permitted by clause (g) of Section 6.11;
(b) Subordinated Indebtedness;
(c) Indebtedness incurred under financing commitments with Motorola
Inc. in accordance with the terms of such commitments in effect on the date
hereof; provided that the aggregate amount of Indebtedness permitted to be
incurred by this clause (c) shall not exceed $20,000,000;
(d) Indebtedness under the Revolving Credit Agreement in an aggregate
amount outstanding at any time not to exceed $78,000,000; and
(e) Indebtedness permitted by clause (i) of Section 6.11.
SECTION 6.08. Amending Conversion Provisions. The Company shall not vote any
of its XM Shares in favor of a proposal to amend, alter, repeal or otherwise
modify, or consent to the amendment, alteration, repeal or other modification
of, or waive any right or obligation under, any provision of (a) the Amended
and Restated Shareholders Agreement, dated as of August 8, 2000, by and among
XM, the Company and other parties named therein, or (b) the Certificate of
Incorporation of XM, in each case relating to the conversion of Class B Common
Stock of XM into Class A Common Stock of XM.
ARTICLE 7
DEFAULTS
SECTION 7.01. Events of Default. If one or more of the following
events ("Events of Default") shall have occurred and be continuing:
(a) the Company shall fail to pay any principal of any Note when due
or any interest, any fees or any other amount payable hereunder within two
Business Days of the date when due;
(b) the Company shall fail to observe or perform any covenant
contained in Article 6;
(c) the Company shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a)
or (b) above) for 20 days after notice thereof has been given to the Company
by the Purchaser;
(d) any representation, warranty, certification or statement made by
the Company or a Subsidiary of the Company in this Agreement or any other
Investment Document or in any certificate, financial statement or other
document delivered pursuant to this Agreement shall prove to have been
incorrect in any material respect when made (or deemed made);
(e) the Company or any Subsidiary of the Company shall fail to make
any payment in respect of (x) any obligation under the Term Credit Agreement
or the Revolving Credit Agreement or (y) any other Indebtedness or Contingent
Obligation having an aggregate principal and face amount of more than
$5,000,000, in each case when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) and such failure continues
after the applicable grace period or notice period, if any, specified in the
document relating thereto;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Indebtedness or Contingent Obligation (x)
under the Term Credit Agreement or the Revolving Credit Agreement or (y) any
other Indebtedness or Contingent Obligation of the Company or any Subsidiary
of the Company having an aggregate principal or face amount of more than
$5,000,000 or enables (or, with the giving of notice or lapse of time or both,
would enable) the holder of any such Indebtedness or Contingent Obligation or
any Person acting on such holder's behalf to accelerate the maturity thereof;
(g) the Company or any Principal Subsidiary shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent to
any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any corporate
action to authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced
against the Company or any Principal Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for
a period of 60 days; or an order for relief shall be entered against the
Company or any Principal Subsidiary under the federal bankruptcy laws as now
or hereafter in effect;
(i) (1) any member of the Controlled Group shall fail to pay when
due, after the expiration of any applicable grace period, any installment
payment with respect to its withdrawal liability under a Multiemployer Plan;
(2) any member of the Controlled Group shall fail to satisfy its contribution
requirements under Section 412(c)(11) of the Code, whether or not it has
sought a waiver under Section 412(d) of the Code; (3) in the case of an ERISA
Event involving the withdrawal from a Plan of a "substantial employer" (as
defined in Section 4001(a)(2) or Section 4062(e) of ERISA), the withdrawing
employer's proportionate share of that Plan's Unfunded Pension Liabilities is
more than $5,000,000 or 10% of its net worth, if greater; (4) in the case of
an ERISA Event involving the complete or partial withdrawal from a
Multiemployer Plan, the withdrawing employer has incurred a withdrawal
liability in an aggregate amount exceeding $5,000,000 or 10% of its net worth,
if greater; (5) in the case of an ERISA Event not described in clause (3) or
(4), the Unfunded Pension Liabilities of the relevant Plan or Plans exceed
$5,000,000 or 10% of its net worth, if greater; (6) a Plan that is intended to
be qualified under Section 401(a) of the Code shall lose its qualification,
and the loss can reasonably be expected to impose on any member of the
Controlled Group liability (for additional taxes, to Plan participants, or
otherwise) in the aggregate amount of $5,000,000 or 10% of its net worth, if
greater or more; (7) the commencement or increase of contributions to, the
adoption of, or the amendment of a Plan by, any member of the Controlled Group
shall result in a net increase in unfunded liabilities to the Company or an
ERISA Affiliate in excess of $5,000,000 or 10% of net worth, if greater; or
(8) the occurrence of any combination of events listed in clauses (3) through
(7) that involves a net increase in aggregate Unfunded Pension Liabilities and
unfunded liabilities in excess of $5,000,000 or 10% of its net worth, if
greater;
(j) one or more final judgments, orders or decrees shall be entered
against the Company or any member of the Company Group involving in the
aggregate a liability (not fully covered by insurance and as to which the
insurer has not acknowledged liability) more than an amount equal to the
greater of (i) $5,000,000 and (ii) 10% of the Company's net worth, and the
same shall remain unvacated, undischarged, unstayed or unbonded pending appeal
for a period of 60 days after the entry thereof; or
(k) any non-monetary judgment, order or decree shall be rendered
against the Company or any of its Subsidiaries which could reasonably be
expected to have a Material Adverse Effect, and enforcement proceedings shall
have been commenced by any Person upon such judgment or order which shall
remain unstayed for any period of 10 consecutive days or more; or
(l) (i) any provision of the Pledge Agreement or the Second Pledge
Agreement shall for any reason cease to be valid and binding on or enforceable
against the Company, if the effect thereof may materially deprive the
Purchaser of the benefits of the Collateral covered thereby, or the Company
shall so state in writing or bring an action to limit its obligations or
liabilities thereunder;
(ii) the Pledge Agreement or the Second Pledge Agreement
shall for any reason (other than pursuant to, or contemplated by, the terms
thereof) cease to create a valid security interest in the Collateral purported
to be covered thereby or such security interest shall for any reason cease to
be a perfected and (except for Permitted Liens arising by operation of law)
first priority security interest; (iii) any of the outstanding Obligations of
the Company hereunder shall not be Secured Obligations (as defined in the
Pledge Agreement); or (iv) there shall occur an event of loss which, together
with all other events of loss since the date hereof, results in a reduction in
the value (as determined in the reasonable opinion of the Purchaser) of the
Collateral of $2,500,000 net of any cash proceeds received by the Company in
respect of such event or events of loss; or
(m) the FCC or any other Governmental Authority shall revoke or fail
to renew any material FCC License or any other material license, permit or
franchise of the Company or any of its Subsidiaries; the Company or any
Subsidiary shall for any reason lose any material FCC License or any other
material license, permit or franchise; or the Company or any Subsidiary shall
suffer the imposition of any restraining order, escrow, suspension or impound
of funds in connection with any proceeding (judicial or administrative) with
respect to any material FCC License or any other material license, permit or
franchise;
(n) there shall occur and be continuing a Material Adverse Effect; or
(o) there shall occur a Change in Control;
then, and in every such event, the Purchaser may (i) by notice to the Company
terminate the commitment to purchase the Tranche B Note and such commitment
shall thereupon terminate, and (ii) by notice to the Company declare the Notes
(together with accrued interest thereon) to be, and the Notes shall thereupon
become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company;
provided that in the case of any of the Events of Default specified in clause
(g) or (h) above with respect to the Company, without any notice to the
Company or any other act by the Company or any other person, the commitment to
purchase the Tranche B Note shall thereupon terminate and the Notes (together
with accrued interest thereon) shall become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company.
SECTION 7.02. Notice of Default. The Company shall give notice to the
Purchaser promptly upon becoming aware of any Event of Default.
ARTICLE 8
TAXES
SECTION 8.01. Taxes. (a) For the purposes of this Section 8.01 , the
following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by
the Company, as the case may be, pursuant to this Agreement or under any Note,
and all liabilities with respect thereto, excluding (i) in the case of the
Purchaser, taxes imposed on its income, and franchise or similar taxes imposed
on it, by a jurisdiction under the laws of which the Purchaser is organized or
in which its principal executive office is located and (ii) any United States
withholding tax imposed on such payments but only to the extent that the
Purchaser is subject to United States withholding tax at the time the
Purchaser first becomes a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary taxes
and any other excise or property taxes, or similar charges or levies, which
arise from any payment made pursuant to this Agreement or under any Note or
from the execution or delivery of, or otherwise with respect to, this
Agreement or any Note.
(b) Any and all payments by the Company to or for the account of the
Purchaser hereunder or under any Note shall be made without deduction for any
Taxes or Other Taxes; provided that, if the Company shall be required by law
to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable
shall be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
Section) the Purchaser (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made, (ii) the Company
shall make such deductions, (iii) the Company shall pay the full amount
deducted to the relevant taxation authority or other authority in accordance
with applicable law and (iv) the Company shall furnish to the Purchaser, at
its address referred to in Section 9.01 , the original or a certified copy of
a receipt evidencing payment thereof.
(c) The Company agrees to indemnify the Purchaser for the full amount
of Taxes or Other Taxes (including, without limitation, any Taxes or Other
Taxes imposed or asserted by any jurisdiction on amounts payable under this
Section) paid by the Purchaser and any liability (including penalties,
interest and expenses, other than those resulting from any act or failure to
act by the Purchaser) arising therefrom or with respect thereto. This
indemnification shall be paid within 15 days after the Purchaser makes demand
therefor.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, facsimile
transmission or similar writing) and shall be given to such party at its
address or facsimile number set forth on the signature pages hereof. Each such
notice, request or other communication shall be effective (i) if given by
facsimile transmission, when transmitted to the facsimile number specified in
this Section and confirmation of receipt is received, (ii) if given by mail,
72 hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section; provided that notices
to the Purchaser under Article 2 or Article 9 shall not be effective until
received.
SECTION 9.02. No Waivers. No failure or delay by Purchaser in
exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The Company shall pay
(i) out-of-pocket expenses of the Purchaser, including reasonable fees and
disbursements of counsel for the Purchaser, in connection with the
preparation, negotiation and administration of this Agreement, any waiver or
consent hereunder or any amendment hereof or any Default or alleged Default
hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket
expenses incurred by the Purchaser, including (without duplication) the
reasonable fees and disbursements of outside counsel, in connection with such
Event of Default and collection, bankruptcy, insolvency and other enforcement
proceedings resulting therefrom; provided, that the Company shall not be
required to reimburse the Purchaser for more than $50,000 in legal fees and
expenses in connection with the preparation and negotiation of this Agreement.
(b) The Company agrees to indemnify the Purchaser, its respective
affiliates and the respective directors, officers, agents and employees of the
foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and
against any and all liabilities, losses, damages, costs and expenses of any
kind, including, without limitation, the reasonable fees and disbursements of
counsel, which may be incurred by such Indemnitee in connection with any
investigative, administrative or judicial proceeding (whether or not such
Indemnitee shall be designated a party thereto) brought or threatened relating
to or arising out of this Agreement or any actual or proposed use of proceeds
of Notes hereunder; provided that no Indemnitee shall have the right to be
indemnified hereunder for such Indemnitee's own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.
SECTION 9.04. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Company and the Purchaser.
SECTION 9.05. Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Company may not
assign or otherwise transfer any of its rights under this Agreement without
the prior written consent of the Purchaser.
SECTION 9.06. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. The Company hereby submits to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement or the transactions contemplated hereby. The Company irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum.
SECTION 9.07. Counterparts; Integration; Effectiveness. This
Agreement may be signed in any number of counterparts, each of which shall be
an original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
SECTION 9.08. Waiver of Jury Trial. EACH OF THE COMPANY AND THE
PURCHASER HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.09. Confidentiality. The Purchaser agrees to take normal
and reasonable precautions and exercise due care to maintain the
confidentiality of all non-public information provided to it by the Company or
any of its Subsidiaries in connection with this Agreement or any other
Investment Document and neither it nor any of its Affiliates shall use any
such information for any purpose or in any manner other than pursuant to the
terms contemplated by this Agreement, except to the extent such information
(a) was or becomes generally available to the public other than as a result of
a disclosure by the Purchaser, or (b) was or becomes available on a
non-confidential basis from a source other than the Company, provided that
such source is not bound by a confidentiality agreement with the Company known
to the Purchaser; provided, further, that the Purchaser may disclose such
information (A) at the request of any regulatory authority or in connection
with an examination of the Purchaser by any such authority; (B) pursuant to
subpoena or other court process; (C) when required to do so in accordance with
the provisions of any applicable law; (D) at the express direction of any
other agency of any State of the United States of America or of any other
jurisdiction in which the Purchaser conducts its business; and (E) to the
Purchaser's independent auditors and legal counsel. Neither party will issue a
press release disclosing matters with respect to this Agreement or the
transactions contemplated hereby without giving the other a reasonable
opportunity to review and comment thereon.
SECTION 9.10. Senior Indebtedness; Subsidiary Guaranties. The parties
hereto agree that the Notes and all Obligations in respect thereof constitute
"Senior Indebtedness" of the Company within the meaning of the Indenture and,
accordingly, shall rank pari passu with all other unsubordinated Indebtedness
of the Company and that the Obligations of the Company with respect to the
Holdings Guaranty is subordinated in right of payment, to the extent and in
the manner provided in the Indenture, to the prior payment in full of all
Obligations in respect of the Notes. The Company will cause each domestic
Subsidiary of the Company which becomes a Subsidiary after the date of this
Agreement to guaranty the Notes pursuant to a guaranty agreement in form and
substance reasonably satisfactory to the Purchaser; provided that the
foregoing shall not apply to the High-yield Subsidiaries.
SECTION 9.11. No Short Sales. During any Short Sale Prohibition
Period, the Purchaser shall comply, and shall cause its Subsidiaries to
comply, with Section 16(c) of the Securities Exchange Act of 1934, as amended,
with respect to transactions in the capital stock of XM to the same extent as
if Section 16(c) of the Securities Exchange Act of 1934, as amended, applied
by its terms to the Purchaser and its Subsidiaries. For purposes of this
Section 9.11, a "Short Sale Prohibition Period" means:
(a) in connection with any payment to the Purchaser in XM Shares
pursuant to Section 2.07 hereof, each period of time commencing on the later
of (i) the date of the Purchaser's receipt of the notice described in Section
2.07(b) and (ii) the date that is 10 consecutive trading days prior to the
trading day immediately preceding the Maturity Date or date of prepayment
referred to in such notice, and ending on the Maturity Date or date of
prepayment, as the case may be; and
(b) in connection with the Second Closing, the period of time
commencing on the later of (i) the date of the Purchaser's receipt of the
Notice of Purchase pursuant to Section 2.01(b) hereof and (ii) the date that
is 10 consecutive trading days prior to the trading day immediately prior to
the Second Closing Date, and (ii) ending on the Second Closing Date.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and
year first above written.
MOTIENT CORPORATION
By: /s/ Walter V. Purnell, Jr.
Name: Walter V. Purnell, Jr.
Title: President and Chief Executive Officer
Address: 10802 Parkridge Boulevard
Reston, VA 20191
Attention: General Counsel
Facsimile: 703-758-6134
RARE MEDIUM GROUP, INC.
By: /s/ Glenn S. Meyers
Name: Glenn S. Meyers
Title: Chairman and Chief Executive Officer
Address: 565 Fifth Avenue, 29th Floor
New York, NY 10017
Attention: General Counsel
Facsimile: 212-856-9122
LIST OF EXHIBITS
EXHIBIT A - FORM OF NOTE
EXHIBIT B - FORM OF NOTICE OF EXCHANGE
EXHIBIT C - FORM OF PLEDGE AGREEMENT
EXHIBIT D - FORM OF IRREVOCABLE LETTER
EXHIBIT E - FORM OF HOGAN & HARTSON L.L.P. OPINION
EXHIBIT F - FORM OF RANDY S. SEGAL, ESQ. OPINION
DISCLOSURE SCHEDULE
EXHIBIT A
FORM OF NOTES
THIS NOTE AND THE SHARES OF CLASS A COMMON STOCK OF XM SATELLITE RADIO
HOLDINGS, INC. ("XM SHARES") THAT MAY BE RECEIVED UPON THE PAYMENT OR EXCHANGE
OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS. EXCEPT AS OTHERWISE
SET FORTH HEREIN OR IN THE NOTE PURCHASE AGREEMENT, DATED AS OF APRIL 2, 2001
(THE "NOTE PURCHASE AGREEMENT"), BETWEEN THE CORPORATION AND THE PURCHASER
PARTY THERETO, NEITHER THIS NOTE NOR ANY XM SHARES MAY BE SOLD, PLEDGED,
TRANSFERRED, ASSIGNED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT OR SUCH LAWS OR IN A
TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION REQUIREMENTS IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE NOTE PURCHASE AGREEMENT. A
COPY OF THE NOTE PURCHASE AGREEMENT IS AVAILABLE UPON REQUEST TO THE SECRETARY
OF THE CORPORATION FOR INSPECTION AT THE OFFICES OF THE CORPORATION.
TERM NOTE
New York, New York
[DATE]
For value received, MOTIENT CORPORATION, a Delaware corporation (the
"Company"), promises to pay to the order of RARE MEDIUM GROUP, INC. or its
assigns (the "Purchaser"), the principal sum of $___________[Insert
$25,0000,000 for the Tranche A Note][Insert principal amount of the Tranche B
Note as determined pursuant to Section 2.01(b) of the Note Purchase Agreement
for the Tranche B Note] to the Company pursuant to the Note Purchase Agreement
referred to below on the Maturity Date provided for in the Note Purchase
Agreement. The Company promises to pay interest on the unpaid principal amount
of such Note on the dates and at the rate or rates provided for in the Note
Purchase Agreement referred to below. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or
other immediately available funds at the office of Purchaser, at 565 Fifth
Avenue, New York, NY 10017.
This note is one of the Notes referred to in the Note Purchase
Agreement dated as of April 2, 2001 between Motient Corporation and Rare
Medium Group, Inc. (as the same may be amended from time to time, the "Note
Purchase Agreement"). Terms defined in the Note Purchase Agreement are used
herein with the same meanings. Reference is made to the Note Purchase
Agreement for provisions for the prepayment hereof and the acceleration of the
maturity hereof.
MOTIENT CORPORATION
By
----------------------------
Name:
Title:
Exhibit B
form of notice of exchange
NOTICE OF EXCHANGE
The undersigned hereby irrevocably elects to exchange (the "Exchange")
$__________ of the principal amount of the [Tranche A Note/Tranche B Note]
dated ________, 2001 (the "Note"), plus all accrued and unpaid interest on
such principal amount (i.e., $_________) for shares of Common Stock of XM
Satellite Radio Holdings, Inc. as of the date written below according to the
conditions set forth in the Note Purchase Agreement dated April 2, 2001
between Motient Corporation and Rare Medium Group, Inc. If securities are to
be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto. No fee will be
charged to the holder of the Note for any exchange except as provided herein
or in the Note Purchase Agreement.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities deliverable to the undersigned upon exchange of
the Note shall be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption
from registration under the Act.
In the event of partial exercise, please reissue an appropriate Note for the
principal balance which shall not have been converted.
Exchange Date:
---------------------
Applicable Exchange
Price:
-----------------------------
Number of Shares
to be Issued:
----------------------
[HOLDER OF NOTE BEING EXCHANGED]
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
ACKNOWLEDGED AND AGREED:
MOTIENT CORPORATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------ Date:_____________________
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Rare Medium Group, Inc.:
We consent to incorporation by reference in the registration statements
Nos. 33-37036, 33-37037, 33-85634, 33-83636, 33-89122, 33-89124, 333-76957
and 333-49290 on Form S-8 of our report dated March 15, 2002 relating to
the consolidated balance sheets of Rare Medium Group, Inc. and subsidiaries
as of December 31, 2000 and 2001, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 2001, and the related
financial statement schedule, which reports appear in the December 31, 2001
annual report on Form 10-K of Rare Medium Group, Inc.
New York, New York /s/ KPMG LLP
March 19, 2002
Exhibit 23.2
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders of Rare Medium Group, Inc.:
Under date of March 15, 2002, we reported on the consolidated balance
sheets of Rare Medium Group, Inc. as of December 31, 2000 and 2001, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2001, which are included in the annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule 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 audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
New York, New York /s/ KPMG LLP
March 15, 2002