SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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THE SECURITIES EXCHANGE ACT OF 1934
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by Rule 14a-6(e)(2))
/X/ DEFINITIVE PROXY STATEMENT
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/ / Soliciting Material Under Rule 14a-12
RARE MEDIUM GROUP, INC.
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(Name of Registrant as Specified In Its Charter)
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RARE MEDIUM GROUP, INC.
44 WEST 18TH STREET, 6TH FLOOR
NEW YORK, NEW YORK 10011
May 29, 2002
Dear Rare Medium stockholders:
On behalf of your board of directors and your management, I cordially invite
you to attend a special meeting of stockholders. The special meeting will take
place at 10:00 a.m., local time, in the Concorde Room, 3rd floor, at the Dylan
Hotel, 52 East 41st Street, New York, New York 10017, on July 11, 2002.
At the special meeting you will be asked to consider and approve three
proposals as described in the enclosed proxy statement:
1. To consider and vote upon a proposal to adopt an amendment to our
Restated Certificate of Incorporation to effect a one for ten reverse
stock split.
2. To consider and vote upon a proposal to authorize the potential issuance
of up to 91,381,315 shares of our common stock (which includes 38,765,848
shares of non-voting common stock purchased by the Apollo Stockholders in
the advance purchase), in connection with a rights offering in which
holders of record of our common stock, warrants and preferred stock as of
the close of business on May 16, 2002, will receive, at no charge, one
non-transferable subscription right for each share of common stock owned
(or, in the case of the preferred stock and warrants, one right for each
share of common stock into which the preferred stock and warrants were
convertible or exercisable) as of May 16, 2002, entitling the holder of
each right to purchase one share of common stock (or in the case of
rights distributed to Apollo Investment Fund IV, L.P., Apollo Overseas
Partners IV, L.P., AIF IV/RRRR LLC and their affiliates, otherwise
referred to as the Apollo Stockholders, non-voting common stock) for
$0.201 per share.
3. To consider and vote upon a proposal to authorize the exchange, from
time to time, of our non-voting common stock held by the Apollo
Stockholders for our voting common stock, on a one for one basis, under
the circumstances described in the enclosed proxy statement.
4. To transact such other business as properly may come before the special
meeting or any adjournment or postponement of the meeting.
If both the reverse stock split and the share issuance proposals are
approved at the special meeting, it is expected that the reverse stock split
will be effected promptly following the closing of the rights offering.
Accordingly, there will be no adjustment to the subscription price in the rights
offering as a result of the reverse stock split.
The reverse stock split is being proposed in an effort to increase the per
share trading price of our common stock. An increased per share price is
intended to help:
- ensure that our common stock will satisfy the minimum $1 average closing
bid price requirement for listing on the Nasdaq National Market; and
- make our common stock more attractive to institutional and other
investors.
If the reverse stock split is not approved by stockholders, then it is
likely that we will not satisfy the requirements for continued listing on the
Nasdaq National Market.
The rights offering, which is being made in connection with an agreement to
settle our outstanding class action litigation, is being proposed in an attempt
to raise additional equity capital. The proceeds from the sale of additional
stock in the rights offering will be used to supplement our cash resources, to
satisfy our ongoing cash requirements, including general and administrative
expenses, and to take advantage of business opportunities, including maintaining
or increasing our stake in the Mobile
Satellite Ventures, or MSV, joint venture. If the rights offering is not
approved, there can be no assurance that we will have sufficient cash resources
to meet these requirements and take advantage of business opportunities.
The Apollo Stockholders have purchased in advance 38,765,848 shares of our
non-voting common stock, which equals the number of shares of voting common
stock that the Apollo Stockholders would otherwise have been entitled to
purchase in the Rights Offering, after giving effect to the cancellation of some
warrants in connection with the litigation settlement. Accordingly, irrespective
of whether any other stockholders subscribe for shares of our common stock in
the rights offering, we will have raised approximately $7.8 million from the
advance purchase by the Apollo Stockholders. Assuming the rights offering is
fully subscribed, our proceeds will be approximately $18.4 million.
Our board of directors has unanimously determined to recommend to our
stockholders approval of all three proposals.
We have included for your convenience a summary of certain questions and
answers about the special meeting, the reverse stock split, the share issuance
and exchange of non-voting common stock proposals beginning on page 1 of the
enclosed proxy statement.
If you have any questions prior to the special meeting or need further
assistance, please call our information agent, Morrow & Co., at (877) 807-8896.
Banks and brokerage firms please call (800) 654-2468.
Our rights offering prospectus is also being mailed to you.
Thank you for your cooperation and continued support and interest in Rare
Medium.
Very truly yours,
Glenn S. Meyers
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SHARES OF OUR COMMON STOCK OR ANY OTHER SECURITIES, INCLUDING
THE SUBSCRIPTION RIGHTS OR ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
OF THE SUBSCRIPTION RIGHTS. OFFERS AND SALES OF THE SUBSCRIPTION RIGHTS OR
THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE SUBSCRIPTION RIGHTS
ARE BEING MADE ONLY BY MEANS OF THE PROSPECTUS, ON THE TERMS AND CONDITIONS
DESCRIBED IN THE PROSPECTUS WHICH IS ALSO BEING DELIVERED TO STOCKHOLDERS.
The vote of each and every stockholder is most important to us.
Please complete, sign, date and return your proxy.
This proxy statement is dated May 29, 2002,
and is first being mailed to Rare Medium stockholders on or about May 29, 2002.
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RARE MEDIUM GROUP, INC.
44 WEST 18TH STREET, 6TH FLOOR
NEW YORK, NEW YORK 10011
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 11, 2002
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TO THE HOLDERS OF COMMON STOCK AND PREFERRED STOCK OF RARE MEDIUM GROUP, INC., A
DELAWARE CORPORATION:
Please take notice that a special meeting of stockholders of Rare Medium
will be held in the Concorde Room, 3rd Floor, at the Dylan Hotel, 52 East
41st Street, New York, New York 10017, on July 11, 2002, at 10:00 a.m., local
time, for the following purposes, all as more fully described in the attached
proxy statement:
1. To consider and vote upon a proposal to adopt an amendment to our
Restated Certificate of Incorporation to effect a one for ten reverse
stock split;
2. To consider and vote upon a proposal to authorize the potential issuance
of up to 91,381,315 shares of our common stock (which includes 38,765,848
shares of non-voting common stock purchased by the Apollo Stockholders in
the advance purchase), in connection with a rights offering in which
holders of record of our common stock, warrants and preferred stock as of
the close of business on May 16, 2002, will receive, at no charge, one
non-transferable subscription right for each share of common stock owned
(or, in the case of the preferred stock and warrants, one right for each
share of common stock into which the preferred stock and warrants were
convertible or exercisable) as of May 16, 2002, entitling the holder of
each right to purchase one share of common stock (or, in the case of
rights distributed to the Apollo Stockholders, non-voting common stock)
for $0.201 per share;
3. To consider and vote upon a proposal to authorize the exchange, from
time to time, of our non-voting common stock held by the Apollo
Stockholders for our voting common stock, on a one for one basis, under
the circumstances described in the enclosed proxy statement; and
4. To transact such other business as properly may come before the special
meeting or any adjournment or postponement of the meeting.
Stockholders are urged to read carefully the enclosed proxy statement for
additional information concerning the matters to be considered at this special
meeting. The board of directors has fixed the close of business on May 16, 2002
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the special meeting or any postponement or adjournment thereof.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING OF STOCKHOLDERS.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE RESPECTFULLY
URGE YOU TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD. A
SELF ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE
IN PERSON, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
By Order of the Board of Directors,
/s/ ROBERT C. LEWIS
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Robert C. Lewis
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
New York, New York
May 29, 2002
IMPORTANT
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY MAIL YOUR PROXY CARD.
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING............. 1
PROPOSAL 1 AMEND OUR RESTATED CERTIFICATE OF INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT OF OUR VOTING AND
NON-VOTING COMMON STOCK................................... 5
PROPOSAL 2 APPROVE THE ISSUANCE OF COMMON STOCK UPON
EXERCISE OF THE RIGHTS DISTRIBUTED IN THE RIGHTS
OFFERING.................................................. 12
PROPOSAL 3 AUTHORIZE THE EXCHANGE, FROM TIME TO TIME, BY THE
APOLLO STOCKHOLDERS OF SHARES OF NON-VOTING COMMON STOCK
FOR SHARES OF VOTING COMMON STOCK......................... 25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 27
FORWARD LOOKING STATEMENTS.................................. 29
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 29
OTHER BUSINESS.............................................. 29
STOCKHOLDER PROPOSALS....................................... 30
ADDITIONAL INFORMATION...................................... 30
ANNEX A--Certificate of Amendment to the Restated
Certificate of Incorporation.............................. A-1
ANNEX B--Opinion of Houlihan Lokey Howard & Zukin........... B-1
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
UNLESS OTHERWISE INDICATED OR THE CONTEXT REQUIRES, ALL SHARE NUMBERS, SHARE
PRICES AND PER SHARE AMOUNTS IN THIS PROXY STATEMENT DO NOT GIVE EFFECT TO THE
REVERSE STOCK SPLIT
WHEN AND WHERE IS THE SPECIAL MEETING?
The special meeting will be held on July 11, 2002, beginning at 10:00 a.m.,
local time, in the Concorde Room, 3rd Floor, at the Dylan Hotel, 52 East 41st
Street, New York, New York 10017.
WHAT IS THE PURPOSE OF THE SPECIAL MEETING?
At the special meeting, we will ask you to consider and approve an amendment
of our Restated Certificate of Incorporation to effect a one for ten reverse
stock split, the share issuance in connection with a rights offering, a proposal
to permit the exchange of shares of non-voting common stock for voting common
stock, on a one for one basis, under the circumstances described in this proxy
statement and such other matters as may come before the special meeting,
including the approval of any adjournment or postponement of the meeting.
WHY DID I RECEIVE THIS PROXY STATEMENT?
We sent you this proxy statement and the enclosed proxy card because our
board of directors is soliciting your proxy to vote at the special meeting of
stockholders.
This proxy statement summarizes the information you need to know to vote on
an informed basis at the special meeting; however, you do not need to attend the
special meeting to vote your shares (see "How Do I Vote?"). We began sending
this proxy statement, the attached notice of special meeting and the enclosed
proxy card on or about May 29, 2002, to all stockholders entitled to vote.
WHO IS ENTITLED TO VOTE?
If our records show that you are a common stockholder or a preferred
stockholder as of the close of business on May 16, 2002, which is referred to as
the record date, you are entitled to receive notice of the special meeting and
to vote the shares of common stock or preferred stock that you held on the
record date. The common stockholders and the preferred stockholders will vote
together as a single class on each matter presented at the special meeting.
HOW MANY SHARES OF STOCK ARE OUTSTANDING?
On May 16, 2002, the record date, there were 65,324,966 shares of our voting
common stock. In addition to this voting common stock, there were 38,765,848
shares of our non-voting common stock and 1,073,007 shares of preferred stock
outstanding, all of which are owned by the Apollo Stockholders.
HOW MANY VOTES DO THE COMMON STOCKHOLDERS HAVE?
Each share of existing common stock that you own entitles you to one vote
for each matter to be voted upon. Accordingly, the holders of common stock as of
the record date are entitled to an aggregate of 65,324,966 votes.
HOW MANY VOTES DO THE PREFERRED STOCKHOLDERS HAVE?
The holders of preferred stock are entitled to an aggregate of 9,750,000
votes or 9.09 votes per share of preferred stock. However, all of our preferred
stock is held by the Apollo Stockholders who, including their voting common
stock and non-voting common stock holdings, beneficially own 36.2% of our
outstanding voting power, in the aggregate, have agreed to limit their voting
power to 29.9%.
CAN I ATTEND THE SPECIAL MEETING?
If you owned common stock or preferred stock on the record date, May 16,
2002, you can attend the special meeting. You should be prepared to present
photo identification for admittance. In addition, if your shares are held in the
name of your broker, bank or other nominee, you must bring an account statement
or letter from the nominee indicating that you are the beneficial owner of the
shares on the record date.
IF I PLAN TO ATTEND THE SPECIAL MEETING, SHOULD I STILL VOTE BY PROXY?
Whether you plan to attend the special meeting or not, we urge you to vote
by proxy. Returning the proxy card will not affect your right to attend the
special meeting and vote.
HOW DO I VOTE?
- If you hold your shares in your own name as a holder of record, you may
instruct the proxy holders named in the enclosed proxy card how to vote
your shares of common stock or shares of preferred stock by signing,
dating and mailing the proxy card in the postage-paid envelope that has
been provided to you. If you are a registered stockholder and attend the
special meeting, you may deliver your completed proxy card in person.
- If your shares are held by a broker, bank or other nominee (i.e., in
"street name"), you will receive instructions from your nominee which you
must follow in order to have your shares voted by proxy by the nominee.
"Street name" stockholders who wish to vote at the meeting will need to
obtain a proxy form from the broker, bank or other nominee that holds
their shares of record.
CAN I REVOKE MY PROXY?
Any stockholder who executes and returns a proxy or voting instructions to a
nominee may revoke such proxy or instructions at any time before it is voted at
the special meeting by:
(1) filing with the Secretary of Rare Medium Group, at 44 West 18th Street,
6th Floor, New York, New York 10011, written notice of revocation bearing
a later date than the proxy; or
(2) filing a duly executed proxy bearing a later date; or
(3) appearing in person and voting by ballot at the special meeting.
Any stockholder of record as of the record date attending the special
meeting may vote in person whether or not a proxy has been previously given, but
the presence (without further action) of a stockholder at the special meeting
will not constitute revocation of a previously given proxy.
WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD OR VOTER INSTRUCTION FORM?
If your shares are registered differently and are in more than one account,
you will receive more than one proxy card or voter instruction form, each of
which will indicate the number of shares you are entitled to vote on that
particular card or form. Sign and return all proxy cards or voter instruction
forms to ensure that all your shares are voted.
AM I ENTITLED TO APPRAISAL RIGHTS?
No. You will have no right under Delaware law to seek appraisal of the value
of your shares in connection with any of the matters being voted upon.
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HOW DOES THE BOARD OF DIRECTORS RECOMMEND I VOTE ON THE PROPOSALS?
The Board of Directors unanimously recommends that you vote in favor of all
of the proposals.
WHAT CONSTITUTES A QUORUM AND WHY IS IT NECESSARY?
In order to carry on the business of the special meeting, we must have a
quorum. The holders of a majority of the total number of votes of our capital
stock, present in person or represented by proxy, will constitute a quorum for
the transaction of business at the special meeting. Abstentions and broker
non-votes will count for quorum purposes. If you submit a properly executed
proxy card or voter instruction form, even if you abstain from voting, you will
be considered part of the quorum.
WHAT IS A BROKER NON-VOTE?
A broker non-vote occurs with respect to any proposal when a broker holds
your shares in its name and is not permitted to vote on that proposal without
instruction from the beneficial owner of the shares and no instruction is given.
WHAT VOTE IS REQUIRED FOR APPROVAL OF THE PROPOSALS?
Approval and adoption of the amendment to the Restated Certificate of
Incorporation to effect a one for ten reverse stock split requires the
affirmative vote of the holders of a majority of the total number of votes of
our capital stock outstanding. Abstentions from voting and broker non-votes, if
any, will have the same effect as votes against the adoption of the amendment.
Approval of the issuance of the shares of our common stock in connection
with the rights offering requires the affirmative vote of the holders of a
majority of the total votes cast on the proposal at the special meeting.
Abstentions and broker non-votes, if any, will not be counted as "votes cast"
and therefore will have no effect on the outcome of this proposal.
Approval of the proposal to permit the exchange of shares of non-voting
common stock for shares of common stock requires the affirmative vote of the
holders of a majority of the total votes cast on the proposal at the special
meeting. Abstentions and broker non-votes, if any, will not be counted as "votes
cast" and therefore will have no effect on the outcome of this proposal.
As of May 22, 2002, our directors, executive officers and affiliates had the
right to vote 17,470,436 shares of our common stock and all of the shares of our
preferred stock (with 9,750,000 votes). As described below, an affiliate of the
Apollo Stockholders conducted a tender offer, which expired on May 10, 2002, in
which it acquired 4,744,271 shares of our common stock at a price of $0.28 per
share. The Apollo Stockholders have agreed that all tendered shares which would
otherwise entitle them and their affiliates to cast more than 29.9% of our
voting power will be voted pro-rata with all votes cast by holders of common
stock. Those shares represent, in the aggregate, approximately 36.2% of all
votes entitled to vote at the special meeting, subject to the pro-rata voting
agreement. The Apollo Stockholders, who hold 17,453,770 shares of our common
stock and all of the shares at our preferred stock (with 9,750,000 votes), have
indicated that they will vote, or cause to be voted, all of these shares in
favor of each of the proposals.
WILL OTHER MATTERS BE VOTED ON AT THE SPECIAL MEETING?
We are not aware of any other matters to be presented at the special meeting
other than those described in this proxy statement. If any other matters not
described in the proxy statement are properly presented at the meeting, proxies
will be voted in accordance with the best judgment of the proxy holders.
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WHAT ARE THE COSTS OF SOLICITING THESE PROXIES AND WHO PAYS THEM?
All expenses of soliciting proxies, including clerical work, printing and
postage, will be paid by us. Our directors, officers and other employees may
solicit proxies in person, by mail, by telephone, by facsimile, through the
Internet or by other means of communication, but such persons will not be
specifically compensated for such services. We will reimburse American Stock
Transfer & Trust Company for forwarding proxy materials to beneficial owners and
serving as inspectors of election. We have retained Morrow & Co. to assist us in
the solicitation of proxies and expect to pay Morrow & Co. a fee of
approximately $16,000. The total estimated cost for this solicitation is
approximately $105,000.
WHAT OTHER INFORMATION SHOULD I REVIEW BEFORE VOTING?
For your review, our rights offering prospectus is also being mailed to you.
For your further review, a copy of:
- Our Quarterly Report on Form 10-Q for the period ended March 31, 2002;
- Our Registration Statement on Form S-3 for the rights offering, filed with
the Securities and Exchange Commission concurrently with the filing of
this proxy statement;
- Our Annual Report on Form 10-K for the year ended December 31, 2001;
- Our Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 4, 2002, May 13, 2002 and May 17, 2002;
- Our Definitive Proxy Statement for the Annual Meeting of Stockholders held
on March 28, 2002; and
- Our Definitive Proxy Statement for the Annual Meeting of Stockholders held
on August 19, 1999, which includes a description of our capital stock and
the terms of the Apollo Stockholders' original investment;
may be obtained without charge by writing to the Secretary of Rare Medium, at 44
West 18th Street, 6th Floor, New York, New York 10011. The registration
statement on Form S-3, including the attached exhibits, contains additional
information.
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") in addition to the
registration statement on Form S-3 for the rights offering. You may read and
copy this information at public reference facilities maintained by the SEC.
You may also obtain copies of this information by mail at prescribed rates
from the Public Reference Room of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission also maintains a website that
contains reports, proxy statements and other information about issuers, like us,
who file electronically with the Securities and Exchange Commission. The
Internet address of that site is www.sec.gov.
4
PROPOSAL 1
AMEND OUR RESTATED CERTIFICATE OF INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT OF
OUR VOTING AND NON-VOTING COMMON STOCK
UNLESS OTHERWISE INDICATED OR THE CONTEXT REQUIRES, ALL SHARE NUMBERS,
SHARE PRICES AND PER SHARE AMOUNTS IN THIS PROXY STATEMENT DO NOT GIVE
EFFECT TO THE REVERSE STOCK SPLIT
REVERSE STOCK SPLIT
You are being asked to vote upon a proposal to amend our Restated
Certificate of Incorporation to effect a reverse stock split of the shares of
our voting and non-voting common stock at a ratio of one share of common stock
or non-voting common stock, as the case may be, for every ten shares of common
stock or non-voting common stock, as the case may be, issued and outstanding.
The form of the proposed amendment is attached to this proxy statement as Annex
A. Unless the context requires otherwise, the term "common stock" as used in
this proxy statement includes both our voting common stock and non-voting common
stock.
If the reverse stock split is approved by our stockholders, each ten shares
of our common stock or non-voting common stock issued and outstanding on the
effective date of the reverse stock split will be automatically combined into
and become one share of our common stock and one share of non-voting common
stock, respectively. To avoid the existence of fractional shares of our voting
and non-voting common stock, stockholders who would otherwise be entitled to
receive fractional shares of our common stock as a result of the reverse stock
split will receive a cash payment in lieu thereof. The par value of our voting
and non-voting common stock will remain at $0.01 per share. See "Effects of the
Reverse Stock Split" on page 7 below.
As of May 22, 2002, we had 104,117,481 shares of common stock issued and
outstanding, of which 38,765,848 are shares of non-voting common stock. Based on
the number of shares of our voting and non-voting common stock currently issued
and outstanding, immediately following the completion of the reverse stock
split, we would have 10,411,748 shares of our voting and non-voting common stock
combined issued and outstanding (without giving effect to the elimination of any
fractional shares). The actual number of shares outstanding will depend on the
number of shares issued pursuant to the rights offering.
The effective date of the reverse stock split, if approved, will be the date
on which the amendment is filed with the Secretary of State of the State of
Delaware, which is anticipated to be promptly following the date of the special
meeting, but in no event prior to the closing of the rights offering if the
share issuance proposed is approved at the special meeting.
If both the reverse stock split and the share issuance proposals are
approved at the special meeting, it is expected that the reverse stock split
will be effected promptly following the closing of the rights offering.
Accordingly, there will be no adjustment to the subscription price for the
rights offering as a result of the reverse stock split.
If, at any time prior to the effective date of the reverse stock split, the
board of directors, in its sole discretion, determines that the reverse stock
split is no longer in our best interests and the best interests of our
stockholders, the reverse stock split may be abandoned at any time before,
during or after the special meeting and prior to its effectiveness, without
further action by our stockholders. Approval of the proposed amendment effecting
the reverse stock split requires the affirmative vote of the holders of a
majority of the total number of votes of our capital stock outstanding.
5
REASONS FOR THE REVERSE STOCK SPLIT
On March 24, 2002, our board of directors adopted a resolution approving an
amendment to our Restated Certificate of Incorporation that would effect the
reverse stock split and directing that the amendment be submitted for
consideration by our stockholders at the special meeting. The board of directors
also unanimously recommended that our stockholders approve the amendment.
The primary purpose for effecting the reverse stock split is to increase the
per share trading price of our common stock so as to:
- minimize the possibility that our common stock will be delisted from the
Nasdaq National Market;
- avoid the adverse consequences that could result from delisting, including
a loss of investor interest and the occurrence of an event of
non-compliance under the provisions of our preferred stock; and
- encourage greater interest in our common stock by the financial community
and the investing public.
On May 28, 2002, the closing price per share of our common stock on the
Nasdaq National Market was $0.24.
As of May 22, 2002, we had 65,351,633 shares of our voting common stock
issued and outstanding and 38,765,848 shares of our non-voting common stock
issued and outstanding. We also have outstanding stock options exercisable for
4,381,823 shares of our common stock, warrants to purchase an aggregate of
14,028,851 shares of our common stock, and preferred stock which is currently
convertible into 15,328,671 shares of common stock. Assuming approval of the
Stipulation of Settlement in the case of In re Rare Medium Group, Inc.
Shareholder Litigation, C.A. No. 18879 NC, referred to in this proxy statement
as the Stipulation of Settlement, the number of shares of common stock issuable
upon exercise of the warrants will be reduced to 11,276,399.
Nasdaq rules require that, as a condition of the continued listing of a
company's shares on the Nasdaq National Market, a company must satisfy certain
listing requirements, including a requirement that a company maintain an average
closing bid price for a listed security of at least $1.00.
By letter dated February 14, 2002, Nasdaq notified us that if at any time
prior to May 15, 2002 the closing 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 closing bid price requirement. On May 16, 2002, we received
a letter from Nasdaq indicating that we failed for comply with the minimun
closing bid price requirement for continued listing. On May 17, 2002, we filed a
request for a hearing to review Nasdaq's determination. Our request is based
upon our proposed one for ten reverse stock split. Our common stock will
continue to trade on the Nasdaq National Market pending the outcome of the
hearing. There is no assurance that we would be successful in appealing any
determination by Nasdaq to delist the common stock.
If the reverse stock split is not approved by our stockholders, then it is
likely, absent a significant upward movement in the trading price of our common
stock, that we will not satisfy the requirements for continued listing on the
Nasdaq National Market or initial listing on either the New York Stock Exchange
or the American Stock Exchange. If our Nasdaq listing cannot be maintained,
stockholders may experience a greater difficulty in trading shares of our common
stock. This lack of liquidity may also make it more difficult for us to raise
capital.
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
preferred stock held by the Apollo
6
Stockholders. If we are unable to obtain a waiver of this event of
non-compliance, the Apollo Stockholders would be entitled to elect a majority of
the members of our board of directors which would provide them with the ability
to control our management and policies.
Our board of directors also believes that the reverse stock split will
encourage greater interest in our common stock by the investment community. The
board of directors believes that the current market price of our common stock
has impaired its acceptability to institutional investors, professional
investors and other members of the investing public. Many institutional and
other investors look upon stocks trading at low prices as unduly speculative in
nature and, as a matter of policy, avoid investment in such stocks. Further,
various brokerage house policies and practices tend to discourage individual
brokers from dealing in low priced stocks.
Our board of directors believes that the reduction in the number of
outstanding shares of our common stock caused by the reverse stock split should,
absent other factors, increase the per share market price of our common stock,
although not necessarily on a proportional basis, so as to satisfy the Nasdaq
National Market criteria at least in the near term. However, some investors may
view the reverse stock split negatively since it reduces the number of shares
available in the public market. In addition, other reasons such as our financial
results, market conditions, the market perception of our business and other
factors may adversely affect the market price of our common stock. As a result,
there can be no assurance that the reverse stock split, if completed, will
result in the benefits described above, or that the market price of our common
stock will not decline in the future.
Pursuant to the terms of the Stipulation of Settlement and intending to
provide additional liquidity to our common stockholders, and, thereby to provide
near-term price support for the market price of the common stock in light of our
recent announcement of the proposed one for ten reverse stock split, an
affiliate of the Apollo Stockholders commenced a tender offer in which it
acquired 4,744,271 shares of our common stock. The tender offer, which expired
on May 10, 2002, was at a price of $0.28 per share.
In addition to satisfying the minimum average closing bid price requirement,
we would also need to continue to satisfy all other applicable Nasdaq listing
criteria. Therefore, we cannot assure you that we will be successful in meeting
these and other listing criteria of Nasdaq or that, in the event that our common
stock is delisted from the Nasdaq National Market, we will be successful in
maintaining the listing of the common stock on the Nasdaq SmallCap Market or
obtaining an initial listing on any other stock exchange.
EFFECTS OF THE REVERSE STOCK SPLIT
GENERAL
If the amendment to our Restated Certificate of Incorporation is approved by
our stockholders and we determine to effect the reverse stock split, the
principal effect will be to decrease the number of outstanding shares of our
voting and non-voting common stock. As a result of the reverse stock split, ten
shares of our common stock or non-voting common stock, as the case may be,
immediately prior to the effectiveness of the reverse stock split would become
one share of our common stock or non-voting common stock, as the case may be,
after the effectiveness of the reverse stock split. Our common stock is
currently registered under the Exchange Act, and we are subject to the periodic
reporting and other requirements of the Exchange Act. The reverse stock split
will not affect the registration of our common stock under the Exchange Act or
the listing of our common stock on the Nasdaq National Market. Following the
reverse stock split, our common stock will continue to be listed on the Nasdaq
National Market under the symbol "RRRR", subject to our continued satisfaction
of the Nasdaq listing requirements.
7
Proportionate voting rights and other rights of the holders of our voting
and non-voting common stock will not be affected by the reverse stock split,
other than as a result of the elimination of fractional shares as described
below. For example, a holder of 2.0% of the voting power of the outstanding
shares of our common stock immediately prior to the effective date of the
reverse stock split will generally continue to hold 2.0% of the voting power of
the outstanding shares of our common stock after the reverse stock split. The
number of stockholders of record will not be affected by the reverse stock
split.
Although the reverse stock split would not, by itself, affect our assets or
prospects, the reverse stock split could result in a decrease in our aggregate
market capitalization due to a decrease in the market price of our common stock
following the effective date. As mentioned above, an affiliate of the Apollo
Stockholders conducted a tender offer in order to provide near-term price
support following the announcement of the proposed reverse stock split. Also, if
approved and implemented, the reverse stock split may result in some
stockholders owning "odd lots" of less than 100 shares of our common stock. Odd
lot shares may be more difficult to sell, and brokerage commissions and other
costs of transactions in odd lots are generally somewhat higher than the costs
of transactions in "round lots" of even multiples of 100 shares. The board of
directors believes, however, that these potential effects are outweighed by the
benefits of the reverse stock split.
EFFECT ON STOCK OPTION PLANS
As of May 22, 2002, we had outstanding stock options to purchase a total of
4,381,823 shares of our common stock. If the reverse stock split is approved and
effected, the compensation committee of our board of directors has determined
that the terms of the options would be equitably adjusted such that there would
be a total of 438,182 shares of our common stock issuable upon exercise of the
options (10% of the number of shares of our common stock previously issuable
upon exercise). In addition, the exercise price per share for each option would
be increased to 10 times the previous exercise price. The aggregate exercise
price would remain the same. In addition, the number of shares of our common
stock which remain available for issuance under our option plans will be reduced
by the same ratio as the reverse stock split.
EFFECT ON SERIES 1-A AND SERIES 2-A WARRANTS
As of May 22, 2002, we had outstanding Series 1-A and 2-A Warrants
exercisable for an aggregate of 14,028,851 shares of our common stock excluding
the cancellation of some warrants in connection with litigation settlement. The
warrants include provisions for adjustments of the number of shares issuable
following a reverse stock split, as well as the exercise price thereof. If the
reverse stock split is effected, the terms of the warrants would be equitably
adjusted such that the number of shares issuable upon exercise of the
outstanding warrants would be reduced to 1,402,885 shares of our common stock
(10% of the number of shares of our common stock previously issuable upon
exercise). In addition, the exercise price per share would be increased to 10
times the previous exercise price. The aggregate exercise price would remain the
same.
EFFECT ON PREFERRED STOCK
As of May 22, 2002, we had outstanding 1,073,007 shares of preferred stock
currently convertible at a conversion price of $7.00 per share into an aggregate
of 15,328,671 shares of our common stock. The terms of the preferred stock
include provisions for proportionately increasing the conversion price, thereby
proportionately reducing the number of shares issuable upon conversion following
a reverse stock split. If the reverse stock split is effected, the $7.00 per
share conversion price per share would increase 10 times to $70.00, thereby
reducing the number of shares issuable upon conversion to 1,532,867, or 10% of
the number of shares of our common stock previously issuable upon conversion of
the preferred stock.
8
EFFECT ON AUTHORIZED SHARES
As of May 22, 2002, our authorized capital stock consisted of
(i) 200,000,000 shares of voting common stock; (ii) 100,000,000 shares of
non-voting common stock; and (iii) 10,000,000 shares of preferred stock, of
which 2,000,000 shares are designated Series A preferred stock and 8,000,000
shares are undesignated as to series. The one for ten reverse stock split will
not affect the number of our authorized shares of capital stock; accordingly,
the number of authorized but unissued shares of voting common stock and
non-voting common stock will increase following the reverse stock split. This
may be construed as having an anti-takeover effect to the extent it would permit
the issuance of shares to purchasers who might oppose a hostile takeover bid or
oppose any efforts to amend or repeal certain provisions of our Restated
Certificate of Incorporation or Amended and Restated By-Laws. We have no current
plans to issue any of the additional authorized but unissued shares of our
common stock that will become available as a result of the reverse stock split
and the corresponding amendment to our Restated Certificate of Incorporation.
REDUCTION IN STATED CAPITAL
Pursuant to the reverse stock split, the par value of our voting and
non-voting common stock will remain $.01 per share. As a result of the one for
ten reverse stock split, on the effective date of the reverse stock split, the
stated capital on our balance sheet attributable to our voting and non-voting
common stock will be reduced to one-tenth of its present amount, and the
additional paid-in capital account shall be credited with the amount by which
the stated capital is reduced. Our stockholders' equity, in the aggregate, will
remain unchanged.
FRACTIONAL SHARES
We do not currently intend to issue fractional shares in connection with the
reverse stock split. Therefore, no certificates representing fractional shares
are currently expected to be issued. Stockholders who otherwise would be
entitled to receive fractional shares because the number of shares of the voting
and non-voting common stock they hold before the reverse stock split is not
evenly divisible by ten will be entitled, upon surrender to our transfer agent
of certificates representing such shares, to cash payments (without interest) in
lieu of the fractional shares. The amount of cash to be paid in lieu of issuing
fractional shares of our voting and non-voting common stock will be the fair
market value of the fractional shares as determined in good faith by our board
of directors. The ownership of a fractional interest will not give the holder
any voting, dividend or other rights, except to receive the cash payment.
Stockholders should be aware that, under the escheat laws of various
jurisdictions, sums due for fractional interests that are not timely claimed
after the effective date may be required to be paid to the designated agent for
each such jurisdiction, unless correspondence has been received by us or our
transfer agent concerning ownership of such funds within the time permitted in
such jurisdiction. Thereafter, stockholders otherwise entitled to receive such
funds will have to seek to obtain them directly from the state to which they
were paid.
EXCHANGE OF STOCK CERTIFICATES
If the proposal to implement the reverse stock split is adopted,
stockholders will be required to exchange their stock certificates for new
certificates representing the number of shares of our voting and non-voting
common stock resulting from the reverse stock split. Stockholders of record on
the effective date will be furnished the necessary materials and instructions
for the surrender and exchange of share certificates at the appropriate time by
American Stock Transfer & Trust Company, our transfer agent. Stockholders will
not have to pay a transfer fee or other fee in connection with the exchange of
certificates. As soon as practicable after the effective date, the transfer
agent will send a letter of
9
transmittal to each stockholder advising such holder of the procedure for
surrendering certificates representing the number of shares of our voting and
non-voting common stock prior to the reverse stock split ("Old Stock
Certificates") in exchange for new certificates representing the number of
shares of our voting and non-voting common stock resulting from the reverse
stock split ("New Stock Certificates").
YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES NOW. YOU SHOULD SEND THEM ONLY AFTER
YOU RECEIVE THE LETTER OF TRANSMITTAL FROM OUR TRANSFER AGENT.
As soon as practicable after the surrender to the transfer agent of any Old
Stock Certificate, together with a duly executed letter of transmittal and any
other documents the transfer agent may specify, the transfer agent will deliver
to the person in whose name such Old Stock Certificate had been issued a New
Stock Certificate registered in the name of such person. Each New Stock
Certificate will continue to bear legends, if any, restricting the transfer of
such shares that were borne by the surrendered Old Stock Certificates held prior
to the reverse stock split.
Until surrendered as contemplated herein, each Old Stock Certificate shall
be deemed at and after the effective date of the reverse stock split to
represent the number of full shares of our common stock or non-voting common
stock, as the case may be, resulting from the reverse stock split and the right
to receive cash for the fair value of any fractional shares. Until they have
surrendered their Old Stock Certificates for exchange, stockholders will not be
entitled to receive any dividends or other distributions that may be declared
and payable to holders of record.
Any stockholder whose Old Stock Certificate has been lost, destroyed or
stolen will be entitled to a New Stock Certificate after complying with the
requirements that we and the transfer agent customarily apply in connection with
lost, stolen or destroyed certificates.
No service charges, brokerage commissions or transfer taxes shall be payable
by any holder of any Old Stock Certificate, except that if any New Stock
Certificates are to be issued in a name other than that in which the Old Stock
Certificates are registered, it will be a condition of such issuance that
(1) the person requesting such issuance must pay to us any transfer taxes
payable by reason thereof (or prior to transfer of such certificate, if any) or
establish to our satisfaction that such taxes have been paid or are not payable,
(2) the transfer complies with all applicable federal and state securities laws,
and (3) the surrendered certificate is properly endorsed and otherwise in proper
form for transfer.
NO APPRAISAL RIGHTS
Stockholders have no rights under Delaware law or our Restated Certificate
of Incorporation or our Amended and Restated Bylaws to exercise dissenters'
rights of appraisal with respect to the reverse stock split.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following discussion is a summary of certain federal income tax
consequences of the reverse stock split to us and to holders of common stock
that hold such stock as a capital asset for federal income tax purposes. This
discussion is based on laws, regulations, rulings and decisions in effect on the
date hereof, all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This discussion applies only to
holders that are U.S. persons and does not address all aspects of federal income
taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Internal Revenue Code, including, without limitation, holders of preferred
stock or warrants, holders who are dealers in securities or foreign currency,
foreign persons, insurance companies, tax-exempt organizations, banks, financial
institutions, broker-dealers, holders who hold common stock as part of a hedge,
straddle,
10
conversion or other risk reduction transaction, or who acquired our common stock
pursuant to the exercise of compensatory stock options or otherwise as
compensation.
We have not sought, and will not seek, an opinion of counsel or a ruling
from the Internal Revenue Service regarding the federal income tax consequences
of the reverse stock split. The following summary does not address the tax
consequences of the reverse stock split under foreign, state, or local tax laws.
ACCORDINGLY, EACH HOLDER OF COMMON STOCK SHOULD CONSULT ITS TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO SUCH
HOLDER.
The federal income tax consequences for a holder of common stock pursuant to
the reverse stock split will be as follows:
1. the holder should not recognize any gain or loss for federal income tax
purposes (except for cash, if any, received in lieu of a fractional share of
common stock);
2. the holder's aggregate tax basis of the common stock received pursuant to
the reverse stock split, including any fractional share of the common stock
not actually received, should be equal to the aggregate tax basis of such
holder's common stock surrendered in exchange therefor;
3. the holder's holding period for the common stock received pursuant to the
reverse stock split should include such holder's holding period for the
common stock surrendered in exchange therefor;
4. cash payments received by the holder for a fractional share of common stock
generally should be treated as if such fractional share had been issued
pursuant to the reverse stock split and then redeemed by us, and such holder
generally should recognize capital gain or loss with respect to such
payment, measured by the difference between the amount of cash received and
such holder's tax basis in such fractional share; and
5. we should not recognize gain or loss as a result of the reverse stock split.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has carefully considered Proposal 1, the reverse
stock split proposal, and unanimously recommends that stockholders vote for the
approval of Proposal 1.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL 1.
11
PROPOSAL 2
APPROVE THE ISSUANCE OF COMMON STOCK
UPON EXERCISE OF THE RIGHTS DISTRIBUTED
IN THE RIGHTS OFFERING
UNLESS OTHERWISE INDICATED OR THE CONTEXT REQUIRES, ALL SHARE NUMBERS, SHARE
PRICES AND PER SHARE AMOUNTS IN THIS PROXY STATEMENT DO NOT GIVE EFFECT TO THE
REVERSE STOCK SPLIT
RIGHTS OFFERING
You are being asked to vote upon a proposal to approve the potential
issuance of up to 91,381,315 shares of our common stock (which includes
38,765,848 shares of non-voting common stock purchased by the Apollo
Stockholders in the advance purchase) in connection with the rights offering.
The rights offering is being made in connection with an agreement to settle our
outstanding class action litigation. Approval of the proposed share issuance
requires the affirmative vote of the holders of a majority of the total votes
cast at the special meeting.
In the rights offering, we will distribute to each holder of record of our
common stock, warrants and preferred stock as of the close of business on May
16, 2002, at no charge, one non-transferable subscription right for each share
of common stock they own (or, in the case of the preferred stock and warrants,
one right for each share of our common stock into which the preferred stock and
warrants is convertible or exercisable). The subscription rights will be
evidenced by non-transferable rights certificates. Each subscription right
carries with it a basic subscription privilege and an over-subscription
privilege. The basic subscription privilege of each right entitles you to
purchase one share of our common stock (or, in the case of rights distributed to
the Apollo Stockholders, non-voting common stock) at the subscription price of
$0.201 per share. The over-subscription privilege of each right entitles you, if
you fully exercise your basic subscription privilege, to subscribe for
additional shares of our common stock at the same subscription price per share.
The offering period is presently set to expire at 5:00 p.m., New York City time,
on July 16, 2002, unless extended.
The Apollo Stockholders own or control all of our outstanding preferred
stock and warrants. Prior to our announcement of the rights offering, we and the
Apollo Stockholders entered into a Stipulation of Settlement relating to the
putative class action suit, In Re Rare Medium Group, Inc. Shareholders
Litigation, C.A. No. 18879-NC, brought by holders of our common stock
challenging our previously proposed plan of merger with Motient Corporation. In
connection with the Stipulation of Settlement, we and the Apollo Stockholders
entered into an Investment Agreement dated April 2, 2002. Under the Investment
Agreement, and in connection with the Stipulation of Settlement, the Apollo
Stockholders purchased in advance 38,765,848 shares of our non-voting common
stock. This purchase equals the number of shares that the Apollo Stockholders
would otherwise have been entitled to purchase in the rights offering, based on
the number of securities held by them as of March 24, 2002, but after giving
effect to the cancellation of some warrants in connection with the litigation
settlement. The Apollo Stockholders paid $0.201 per share for an aggregate
purchase price of $7,791,935. The Investment Agreement adjusted the per share
advance purchase price paid by the Apollo Stockholders to equal the per share
subscription price for the rights offering. The Investment Agreement also
generally provides for the commencement of the rights offering and the one for
ten reverse stock split. The description of the Investment Agreement contained
herein is qualified in its entirety by the text of the Investment Agreement
which is an exhibit to the registration statement on Form S-3 for the rights
offering which is also being mailed to you.
The rights offering is conditioned on stockholder approval and will be
terminated if stockholder approval is not obtained. If, at any time prior to the
closing date of the rights offering, the board of directors, in its sole
discretion, determines that the rights offering and the related share issuance
are no
12
longer in our best interests and the best interests of our stockholders, the
rights offering and the related share issuance may be abandoned at any time
before, during or after the special meeting and prior to the closing of the
rights offering, without further action by our stockholders.
In the event that the rights offering is not consummated by June 30, 2003 or
is not approved by our stockholders at the special meeting, a committee
consisting of all of our independent directors desiring to serve on such
committee may elect to rescind the advance purchase made by the Apollo
Stockholders. If the committee of independent directors decides that the advance
purchase should be rescinded, then we will return the $7,791,935 received from
the Apollo Stockholders plus interest accrued at the prime rate and cancel the
38,765,848 shares of non-voting common stock issued to the Apollo Stockholders.
In such event, the Apollo Stockholders' beneficial ownership of our outstanding
common stock will remain at approximately 26.7%.
The subscription price of the rights offering should not be considered an
indication of the actual value of us or of a share of our common stock. In
accordance with the Investment Agreement, the subscription price was set at 85%
of the market price of the common stock immediately prior to the commencement of
the rights offering. The subscription price does not necessarily bear any
relationship to our book value, past operations, cash flows, losses, financial
condition or any other established criteria for value. After the date of this
proxy statement, our common stock may trade at prices above or below the
offering price and no change will be made to the cash subscription price of the
rights offering solely by reason of changes in the trading price of our common
stock prior to the closing of the rights offering.
REASONS FOR THE RIGHTS OFFERING
At a meeting held on March 24, 2002, the board of directors discussed and
authorized, subject to the approval of the Stipulation of Settlement by counsel
to the plaintiffs in our pending stockholder class action litigation:
- the Investment Agreement under which the Apollo Stockholders purchased
38,765,848 shares of non-voting common stock in advance of the rights
offering;
- the Stipulation of Settlement with the Apollo Stockholders and the
plaintiffs in our pending stockholder class action litigation in which the
parties agreed to settle all outstanding claims relating to that lawsuit;
and
- the commencement of the rights offering in connection with the execution
of the Investment Agreement and the Stipulation of Settlement.
The primary purpose for authorizing the rights offering, which is being made
in connection with the Stipulation of Settlement, was to assist us in raising
capital in a cost-effective manner to be available to satisfy potential and
expected cash needs, including future investment opportunities relating to the
MSV joint venture. The closing of the rights offering is subject to stockholder
approval. If the rights offering is canceled, any funds we have received will be
promptly refunded without interest.
In reaching its conclusion, the board of directors considered a number of
factors, including:
- our potential needs for cash relative to our cash resources as of
December 31, 2001 of $16.8 million, to satisfy anticipated obligations,
and to take advantage of business opportunities, including opportunities
which may become available to maintain or possibly increase our
proportionate interest in the MSV joint venture and further our and MSV's
business interests in light of the winding down of our Internet
professional services business;
- the potential to raise up to $18.4 million through a rights offering
(including the advance purchase by the Apollo Stockholders of $7,791,935),
assuming all rights are subscribed for, with a minimum of transaction
costs;
13
- the opportunity that a rights offering allows all of our stockholders on
the record date to participate and acquire additional shares of common
stock at a discount to the market price;
- the concerns of the board of directors as to other financing alternatives,
in light of:
- the perception of the board of directors as to the difficulties in
raising equity capital or debt in light of the current state of the
capital markets and our business; and
- the belief of the board of directors that it is not an appropriate time
to sell assets to raise cash;
- the subscription price relative to the common stock's historical and
recent trading price and pricing policies customary for transactions of
this type;
- the opinion of Houlihan Lokey Howard & Zukin as to the fairness, from a
financial point of view, to our public stockholders of the rights
offering, the advance purchase, the reverse stock split and other related
transactions, but excluding the tender offer;
- the Apollo Stockholders' willingness to subscribe in advance for the
equivalent of 38,765,848 rights, which ensured that a minimum of
$7,791,935 would be raised;
- the willingness of the Apollo Stockholders to modify certain of their
rights under their original investment agreements, including:
- to consent to our grant of over-subscription rights to all
stockholders;
- to consent to the rights offering;
- to cancel, subject to final court approval of the Stipulation of
Settlement, 20% of the warrants;
- to accept non-voting stock both in the advance purchase and in their
over-subscription, which limits the impact of the rights offering on
the voting power of the Apollo Stockholders and may permit us to raise
more capital than if the Apollo Stockholders were to receive voting
stock subject to their contractual requirements not to acquire shares
with the right to cast more than 50% of the voting power of our capital
stock;
- to elect, subject to final court approval of the Stipulation of
Settlement, to receive dividends in the form of additional shares of
preferred stock for two years, in lieu of receiving cash dividends; and
- to limit anti-dilution adjustments to only those rights exercised by
persons other than the Apollo Stockholders;
- the potential impact of the rights offering on relative voting and
ownership interests of our stockholders as described under "Effects of
Rights Offering on Preferred Stock and Warrants" on page 19;
- the fact that the terms of the rights offering were reviewed by, and
negotiated with, counsel to the plaintiffs in the pending stockholder
class action lawsuit against us, an unaffiliated third party, as part of
an agreed upon settlement to such litigation contained in the Stipulation
of Settlement;
- the fact that, while the Apollo Stockholders may increase their percentage
ownership as a result of the rights offering, the Apollo Stockholders, as
a result of their agreeing to receive non-voting common stock, will not,
as a result of the rights offering, increase their voting rights; and
- the potential tax consequences of the rights offering.
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OPINION OF FINANCIAL ADVISOR--HOULIHAN LOKEY HOWARD & ZUKIN
We retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc. to render
an opinion to our board of directors, as to the fairness, from a financial point
of view, of the rights offering, the advance purchase taken together with the
modification of the Apollo Stockholders' existing contractual rights and the
rights offering, the reverse stock split and other related transactions, but
excluding the tender offer, to our public stockholders. At the March 24, 2002
meeting of our board of directors, Houlihan Lokey presented its analysis as
described below and delivered its written opinion to the effect that, as of such
date and based on the matters described in the opinion, the rights offering, the
advance purchase taken together with the modification of the Apollo
Stockholders' existing contractual rights and the rights offering, the reverse
stock split and other related transactions, but excluding the tender offer, are
fair, from a financial point of view, to our public stockholders.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following summarizes the material methodologies utilized by Houlihan Lokey in
supporting its fairness opinion. The summary does not purport to be a complete
statement of the analyses and procedures applied, the judgments made or the
conclusion reached by Houlihan Lokey or a complete description of its
presentation. Houlihan Lokey believes, and so advised our board of directors,
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
factors and analyses, could create an incomplete view of the process underlying
its analyses and opinions. Houlihan Lokey did not attempt to assign specific
weights to particular analyses.
Houlihan Lokey's opinion and analyses were only one of many factors
considered by our board of directors in its evaluation of the rights offering
and reverse stock split and should not be viewed as determinative of the views
of our board of directors or management with respect to the transactions.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION IS ATTACHED HERETO AS ANNEX B.
THE SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH OPINION. OUR PUBLIC STOCKHOLDERS ARE URGED TO READ THE OPINION
CAREFULLY IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE
FACTORS CONSIDERED AND THE ASSUMPTIONS MADE BY HOULIHAN LOKEY.
Houlihan Lokey's opinion to our board of directors addresses only the
fairness, from a financial point of view, of the rights offering, the advance
purchase taken together with the modification of the Apollo Stockholders'
existing contractual rights and the rights offering, the reverse stock split and
other related transactions, but excluding the tender offer, to our public
stockholders, and does not constitute a recommendation to the stockholders as to
how they should vote at the special meeting. The terms of the rights offering,
the advance purchase and the reverse stock split were arrived at by our board of
directors in light of the negotiations among us, the Apollo Stockholders and the
plaintiff-stockholders in our recent litigation. Houlihan Lokey was not asked to
and did not recommend the purchase price for the rights offering nor was it
asked to express an opinion nor did it opine as to the fairness of the tender
offer by the Apollo Stockholders to our public stockholders.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
- reviewed our annual report on Form 10-K for the fiscal year ended
December 31, 2001;
- held discussions with certain members of our senior management to discuss
our operations, financial condition, future prospects and projected
operations and performance;
- reviewed certain of our plans and forecasts;
- reviewed forecasts prepared by the MSV joint venture's management with
respect to the MSV joint venture for the year ended December 31, 2002;
15
- reviewed the historical market prices and trading volume for our publicly
traded common stock as compared to selected comparable companies;
- reviewed the note purchase agreement dated April 2, 2001 between Motient
Corporation and us regarding certain loans payable to us;
- reviewed the bankruptcy disclosure statement filed by Motient Corporation
dated February 27, 2002;
- reviewed a draft of the Investment Agreement that sets forth the terms of
the rights offering and reverse stock split, among other transactions;
- reviewed a draft of the Stipulation of Settlement;
- reviewed our organizational documents and the June 1999 securities
purchase agreement, as amended, between us and the Apollo Stockholders;
- reviewed certain other publicly available financial data for certain
companies that Houlihan Lokey deemed comparable to us; and
- conducted such other studies, analyses and inquiries as Houlihan Lokey has
deemed appropriate.
In preparing its opinion, Houlihan Lokey relied upon and assumed, without
independent verification, that the financial forecasts and projections provided
to it were reasonably prepared and reflect the best currently available
estimates of the future financial results and condition of us and the MSV joint
venture, and that there has been no material change in the assets, financial
condition, business or prospects of us and the MSV joint venture since the date
of the most recent financial statements made available to it.
Houlihan Lokey did not independently verify the accuracy and completeness of
the information supplied to it with respect to us or the MSV joint venture and
did not assume any responsibility with respect to them. Houlihan Lokey has not
made any physical inspection or independent appraisal of any of the properties
or assets of us or the MSV joint venture. Houlihan Lokey's opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by Houlihan Lokey at the date of its opinion and
presentation to our board of directors.
In assessing the financial fairness of the rights offering and reverse stock
split, Houlihan Lokey:
- reviewed our financial situation prior to the rights offering, the advance
purchase and the proposed reverse stock split;
- analyzed the terms of the rights offering and of the reverse stock split;
- reviewed similar rights offerings announced from January 1994 to
January 2002;
- considered certain financing alternatives to the rights offering;
- reviewed and analyzed other recent reverse stock splits and the subsequent
performance of the securities; and
- reviewed and analyzed recent delistings of publicly traded companies.
The following is a summary of the material analyses performed by Houlihan
Lokey in connection with rendering its opinion.
16
FAIRNESS ANALYSIS OF THE RIGHTS OFFERING
As part of its analysis of the rights offering, Houlihan Lokey reviewed
certain rights offerings announced between January 1994 to January 2002.
Houlihan Lokey reviewed 75 comparable transactions.
With respect to the discount to the market price for shares of the
securities offered in the comparable rights offerings, Houlihan Lokey observed a
median discount of 9.8% and a mean discount of 12.2% and an overall range among
the 75 rights offerings from a discount of 68.3% to a premium of 30.9% to the
market price of the securities offered.
Among the 75 rights offerings reviewed, Houlihan Lokey identified 20 rights
offerings in which the rights offered were not transferable. For these
offerings, Houlihan Lokey observed a median discount of 3.2% and a mean discount
of 8.8% with an overall range from a discount of 68.3% to a premium of 30.9% to
the market price of the securities offered.
In assessing the fairness of the rights offering to our public stockholders,
from a financial point of view, Houlihan Lokey concluded that the terms of our
rights offering are consistent with the terms of the comparable rights offerings
reviewed. Houlihan Lokey compared the 15% discount to market of our rights
offering with the mean and median discounts observed in the comparable rights
offerings reviewed. The 15% discount to market exceeds the mean and median
discounts observed in both the comparable rights offerings generally and the
comparable rights offerings with non-transferable rights, but the 15% discount
to market falls within the overall ranges observed.
Houlihan Lokey also considered financing alternatives to the rights offering
as of the date of its analysis. Given our financial condition and current
capital markets conditions, Houlihan Lokey determined that it is unlikely that
we would be able to access new third-party equity or debt financing. The sale of
our holdings in XM Satellite Radio common stock is another financing
alternative, but such sale would require our willingness to forgo any possible
gain as a result of any success of XM Satellite Radio and the consent of the
Apollo Stockholders. Houlihan Lokey concluded that our rights offering,
therefore, would be a cost-effective method to raise capital for our working
capital needs and to take advantage of future growth opportunities.
FAIRNESS ANALYSIS OF THE REVERSE STOCK SPLIT
As part of its analysis of the reverse stock split, Houlihan Lokey reviewed
383 reverse stock splits announced between January 2001 to March 2002. The
market capitalization of the companies reviewed ranged from less than
$1 million to $500 million. Houlihan Lokey determined in its analysis that such
transactions resulted in a temporary decline in share value for those companies
effecting a reverse stock split. The average percentage change in price over the
90-day period following a reverse stock split ranged from an increase of 20.9%
to a decrease of 50.6%.
Houlihan Lokey also analyzed 344 companies that have been delisted in the
12 months preceding the date of its analysis. Houlihan Lokey observed a mean and
median decline in share value for the 30, 60 and 90 days following each
company's delisting of 14.5% and 19.3%, 20.7% and 26.8%, and 26.1% and 39.8%,
respectively.
In assessing the fairness of the reverse stock split to our public
stockholders, from a financial point of view, Houlihan Lokey considered the
temporary declines in share value observed in the comparable reverse stock
splits as compared to the observed declines in share value for companies that
delisted. Given this comparison, Houlihan Lokey determined that the benefits in
meeting market listing requirements in order to not be delisted outweighed the
risk of potentially reducing our share value as a result of the reverse stock
split.
17
CONCLUSION
After consideration of the factors and analyses outlined above, it is
Houlihan Lokey's opinion that the rights offering, the advance purchase taken
together with the modification of the Apollo Stockholders' existing contractual
rights and the rights offering, the reverse stock split and other related
transactions, but excluding the tender offer, are fair to our public
stockholders, from a financial point of view.
Houlihan Lokey is a nationally recognized investment-banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. We selected Houlihan Lokey because of its experience and expertise in
performing valuation and fairness analyses. Houlihan Lokey does not beneficially
own nor has it ever beneficially owned any interest in us. Furthermore, Houlihan
Lokey has no agreement or understanding to provide additional services to us
beyond the scope of this fairness opinion.
Houlihan Lokey does not make a market in our publicly traded securities.
Although not in the present transactions, Houlihan Lokey is engaged, from time
to time, to provide financial advice to a variety of public and private entities
and persons. Houlihan Lokey has previously rendered certain services to the
Apollo Stockholders and Motient Corporation, among others.
We have agreed to pay Houlihan Lokey a fee of $200,000 plus its reasonable
out-of-pocket expenses incurred in connection with the rendering of this
fairness opinion, including Houlihan Lokey's reasonable expenses of legal
counsel. No portion of the fee was contingent upon approval or completion of the
transactions discussed in this proxy statement, including the rights offering
and the reverse stock split. We have further agreed to indemnify Houlihan Lokey
against certain liabilities and expenses related to or arising in connection
with the rendering of its services in connection with this opinion, including
liabilities under the federal securities laws.
POTENTIAL USE OF PROCEEDS FROM THE RIGHTS OFFERING
Based on the advance purchase by the Apollo Stockholders prior to the
announcement of the rights offering, we have already received approximately
$7.8 million in proceeds. If no other stockholders exercise their subscription
rights, including the Apollo Stockholders, then no additional funds will be
raised. If, however, the rights offering is fully subscribed, our proceeds from
the rights offering, including the advance purchase will be $18.4 million.
The net proceeds from the rights offering will be used to supplement our
cash resources, to satisfy our ongoing cash requirements, including general and
administrative expenses, and to take advantage of business opportunities,
including maintaining or increasing the Company's stake in the MSV joint
venture.
OVER-SUBSCRIPTION RIGHTS
In addition to the basic subscription privilege, each subscription right
grants an over-subscription privilege to purchase additional shares of common
stock that are not purchased by other stockholders pursuant to their basic
subscription privileges. You are entitled to exercise your over-subscription
privilege only if you exercise your basic subscription rights in full.
If the number of shares remaining after the exercise of all basic
subscription privileges is not sufficient to satisfy all requests for shares
pursuant to over-subscription privileges, you will be allocated additional
shares pro-rata (subject to elimination of fractional shares), based on the
number of shares you purchased through the basic subscription privilege in
proportion to the total number of shares that
18
you and other over-subscribing stockholders purchased through the basic
subscription privilege. However, if your pro-rata allocation exceeds the number
of shares you requested on your subscription certificate, then you will receive
only the number of shares that you requested, and the remaining shares from your
pro-rata allocation will be divided among other stockholders exercising their
over-subscription privileges. For purposes of the over-subscription privilege,
the Apollo Stockholders have agreed to limit their over-subscription pro-rata
participation by assuming their basic subscription right is limited to
12,709,499 shares of common stock regardless of the amount of shares into which
the preferred stock and warrants they hold are actually convertible.
EFFECTS OF RIGHTS OFFERING ON PREFERRED STOCK AND WARRANTS
ANTI-DILUTION ADJUSTMENTS
- Under the terms of the preferred stock, the conversion price of the
preferred stock is to be adjusted if, among other things, we issue rights
to subscribe for our common stock at a price below the conversion price of
the preferred stock in effect at the time of issuance of the rights. The
calculation of the antidilution adjustment is described in our Definitive
Proxy Statement for the Annual Meeting of Stockholders held on August 19,
1999. However, we have agreed with the Apollo Stockholders that the
conversion price will be adjusted in connection with the rights offering
only to the extent that shares of our common stock are actually issued in
the rights offering excluding the shares of our non-voting stock acquired
by the Apollo Stockholders in the advance purchase or pursuant to their
over-subscription privilege. This will result in a smaller downward
adjustment to the conversion price than a calculation methodology that
includes all common stock issued in connection with the rights offering.
At the time of issuance of the rights in the rights offering, the
conversion price of the preferred stock is expected to continue to be
$7.00 per share and, accordingly, an aggregate of 15,328,671 shares of
common stock would be issuable upon conversion of the 1,073,007 shares of
preferred stock that have a stated value of $107,300,700, or $100 per
share. For illustrative purposes only, assuming that all stockholders
exercise their basic subscription privilege in full, the conversion price
of the preferred stock would be reduced to $4.12 per share, thereby
increasing the number of shares of our common stock issuable upon
conversion of all of the outstanding shares of preferred stock from
15,328,671 to 26,014,368. The actual adjustment will depend on the number
of rights exercised.
- Under the terms of the Series 1-A and 2-A Warrants, the exercise price of
these warrants and the number of shares of common stock purchasable under
such warrants is to be adjusted if, among other things, we issue rights to
subscribe for our common stock at a price below the exercise price in
effect at the time of issuance of the rights. However, we have agreed with
the holders of the Series 1-A and 2-A Warrants that the exercise price and
the number of shares of common stock purchasable under such warrants will
be adjusted in connection with the rights offering only to the extent that
shares of our common stock are actually issued in the rights offering
excluding the shares of our non-voting stock acquired by the Apollo
Stockholders in the advance purchase or pursuant to their
over-subscription privilege. This will result in a smaller downward
adjustment to the conversion price than a calculation methodology that
includes all common stock issued in connection with the rights offering.
At the time of issuance of the rights in the rights offering, the exercise
price of the Series 1-A Warrants is expected to continue to be $4.20 per
share and the exercise price of the Series 2-A Warrants is expected to
continue to be $7.00 per share. For illustrative purposes only, assuming
that all stockholders exercise their basic subscription privilege in full
and assuming the cancellation of some warrants in connection with the
litigation settlement, the exercise price of the Series 1-A Warrants would
be reduced to $2.51 per share, thereby increasing the number of shares
issuable upon exercise of all of the Series 1-A Warrants from 1,466,368 to
2,454,853 and the exercise price of the Series 2-A Warrants would be
reduced to $4.12 per share, thereby increasing the number of shares
issuable
19
upon exercise of all of the Series 2-A Warrants from 9,810,031 to
16,648,659. The actual adjustment will depend on the number of rights
exercised. The aggregate exercise price will remain unchanged.
RIGHTS DISTRIBUTABLE IN RESPECT OF PREFERRED STOCK AND WARRANTS
- The Apollo Stockholders have, pursuant to their original investment
documents, the right to receive subscription rights in respect of the
common stock underlying their preferred stock and warrants, as if they had
converted the preferred stock and exercised the warrants in full. The
Apollo Stockholders would not need to actually convert the preferred stock
or exercise the warrants in order to receive and exercise these rights.
These rights would be in addition to the rights the Apollo Stockholders
will receive in respect of the shares of our common stock that they own.
As part of the advance purchase, the Apollo Stockholders will be deemed to
have exercised their basic subscription rights by their advance purchase
of 38,765,848 shares of our non-voting common stock and have agreed not to
exercise the rights they receive in the rights offering and to hold the
rights until they expire, except that the Apollo Stockholders may exercise
their over-subscription privilege. Of the 38,765,848 shares of non-voting
common stock acquired in the advance purchase, 26,056,349 represent
subscription rights in respect of the common stock underlying the
preferred stock and 80% of the warrants as of March 24, 2002. The
remaining 12,709,499 shares of non-voting common stock represent
subscription rights in respect of shares of common stock held by the
Apollo Stockholders at the time of their advance purchase.
OVER-SUBSCRIPTION RIGHTS
- Because of the advance purchase, the Apollo Stockholders have agreed not
to exercise any basic subscription privilege received in the offering. For
purposes of the over-subscription privilege, the Apollo Stockholders have
agreed to limit their over-subscription pro-rata participation by assuming
their basic subscription right is limited to 12,709,499 shares of common
stock regardless of the amount of shares into which the preferred stock
and warrants they hold are actually convertible. The Apollo Stockholders
have waived the rights that they have under their original investment
documents to subscribe for all unsubscribed rights and have consented to
our grant of over-subscription rights to all stockholders.
Even though the rights will be offered on a one for one basis to each holder
of our common stock, due to the anti-dilution adjustments and the participation
rights of the preferred stock and the Series 1-A and 2-A Warrants, the
percentage of common stock owned by stockholders, other than the Apollo
Stockholders, will decrease. This will be the case even if you exercise the
rights you will receive in full. Under their original investment documents, the
Apollo Stockholders have the right to subscribe for all unsubscribed rights in
any of our rights offerings.
Set forth below, for illustrative purposes only, are three scenarios which
indicate the effect the rights offering and related share issuance could have on
the amount of cash we raise and the Apollo Stockholders' relative voting and
economic interest. As of the date of this proxy statement, the Apollo
Stockholders control 36.2% of the voting power of our outstanding capital stock,
subject to the pro-rata voting agreement, and own 54.0% of our outstanding
common stock (63.4% on a fully diluted basis assuming all of their preferred
stock and warrants are converted and exercised in full).
SCENARIO A -- All subscription rights are subscribed for by the stockholders
to whom the subscription rights were issued with the exception of rights issued
to the Apollo Stockholders with respect to shares acquired by their affiliate in
the tender offer and the Apollo Stockholders do not exercise their
over-subscription privilege.
20
SCENARIO B -- Through their advance purchase of our non-voting common stock,
the Apollo Stockholders are the only stockholders to exercise subscription
rights, but do not exercise their over-subscription rights.
SCENARIO C -- The Apollo Stockholders are the only stockholders to exercise
subscription rights and, through their over-subscription privilege, the Apollo
Stockholders acquire all of the shares offered.
APOLLO STOCKHOLDERS'
ECONOMIC OWNERSHIP
PERCENTAGE
--------------------------
APOLLO APOLLO AT
TOTAL RIGHTS STOCKHOLDERS' STOCKHOLDERS' MAXIMUM
SCENARIO OFFERED EXERCISE CASH RAISED VOTING %(A) UNDILUTED(B) DILUTION(C)
-------- ------------ ------------- ----------- ------------- ------------ -----------
A...................... 91,381,315 38,765,848 $17,414,046 22.1% 37.0% 51.4%
B...................... 91,381,315 38,765,848 $ 7,791,935 36.2% 54.0% 63.4%
C...................... 91,381,315 91,381,315 $18,367,644 36.2% 69.4% 73.9%
------------------------
(a) Pursuant to the terms of the Investment Agreement governing the advance
purchase and subject to stockholder approval, the Apollo Stockholders may
exchange their non-voting common stock for common stock in order to maintain
their voting percentage at 29.9%, as limited by the Investment Agreement.
(b) Does not give effect to conversion of the preferred stock or exercise of the
warrants or outstanding stock options.
(c) Assumes conversion and exercise in full of the preferred stock and the
warrants but does not give effect to the exercise of outstanding stock
options.
CONSENT RIGHTS
Pursuant to the terms of their original investment, we need the consent of
the Apollo Stockholders to, among other things, commence the rights offering. We
have obtained their consent, subject to the stockholders' approval of the share
issuance.
MODIFICATION OF THE TERMS OF APOLLO STOCKHOLDERS' ORIGINAL INVESTMENT
As described in the Investment Agreement and the Stipulation of Settlement,
we and the Apollo Stockholders have agreed:
- that the Apollo Stockholders will vote all of their shares in favor of the
rights offering, the reverse stock split and the proposal, described
below, regarding the potential exchange of the non-voting common stock for
common stock under specified limited conditions; except that the shares of
common stock acquired in the tender offer will be voted pro-rata with all
other votes cast on those issues by holders of voting common stock;
- that, in connection with the rights offering, the Apollo Stockholders will
waive anti-dilution rights in their preferred stock and warrants with
respect to the non-voting common stock acquired by the Apollo Stockholders
in the advance purchase or their over-subscription privilege in the rights
offering;
- that the Apollo Stockholders' existing registration rights will be
modified to cover the additional shares of common stock and non-voting
stock that were acquired pursuant to the tender offer and the advance
purchase and that they may acquire pursuant to the over-subscription
privilege in the rights offering;
- that, subject to stockholder approval, the Apollo Stockholders may
exchange the non-voting common stock for common stock in connection with
any transfer of the shares to a non-affiliate,
21
in an amount not to exceed 10% of our voting power, and such transferee,
to the Apollo Stockholders' knowledge, will not, as a result of the
transfer, hold more than 15% of our voting power;
- that, subject to stockholder approval, the Apollo Stockholders may also
exchange the non-voting common stock for common stock to the extent they
will hold, after giving effect to such exchange, less than 29.9% of our
voting power;
- that so long as any tendered shares are held by them or any of their
affiliates, the Apollo Stockholders will cause all such shares, which
would otherwise entitle the Apollo Stockholders and their affiliates,
collectively, to cast more than 29.9% of the voting power of our capital
stock, to be voted pro-rata with all other votes cast by holders of voting
common stock;
- subject to final court approval of the Stipulation of Settlement, that 20%
of the warrants held as of March 24, 2002 by the Apollo Stockholders to
acquire shares of common stock will be cancelled;
- subject to final court approval of the Stipulation of Settlement, that the
Apollo Stockholders will elect to receive dividends on their shares of
preferred stock in the form of additional shares of preferred stock, in
lieu of cash dividends, for any dividend payment date occurring after
June 30, 2002 and on or prior to June 30, 2004; and
- subject to final court approval of the Stipulation of Settlement, that the
Apollo Stockholders will agree to vote for two independent directors to
our board of directors for the next five years.
In the Stipulation of Settlement, we agreed to pay $100,000 in cash and
issue shares of common stock with a value of $1,000,000 (3,571,428 shares based
on the tender offer price of $0.28 per share), as plaintiffs' counsels' fees and
expenses, subject to court approval.
EFFECT ON STOCK OPTION PLANS
As of May 22, 2002, there were outstanding options to purchase 4,381,823
shares of common stock issued or committed to be issued pursuant to stock
options granted by Rare Medium and our predecessors. Mr. Glenn S. Meyers, our
chairman and chief executive officer, waived his right to receive subscription
rights in the rights offering to which he was entitled under his employment
agreement on account of his options. Other than Mr. Meyers' options, none of the
outstanding options have antidilution or other provisions of adjustment which
will be triggered by the rights offering. Each outstanding and unexercised
option will remain unchanged and will be exercisable, subject to divesting, if
any, for the same number of shares of common stock and at the same exercise
price as before the rights offering.
SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Assuming we issue all of the shares of common stock offered in the rights
offering, including the shares of non-voting common stock sold in the advance
purchase, 156,732,948 shares of common stock combined will be issued and
outstanding, at least 38,765,848 of which will be non-voting shares. If every
subscription right were exercised, this would represent a 140% increase in the
number of outstanding shares of common stock.
Even though the rights will be offered on a one for one basis to each holder
of our common stock, due to the anti-dilution adjustments and the participation
rights of the preferred stock and the Series 1-A and 2-A Warrants, the
percentage of common stock owned by stockholders, other than the Apollo
Stockholders, will decrease. This will be the case even if you exercise the
rights you will receive in full.
22
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE RIGHTS OFFERING
The following discussion is a summary of certain federal income tax
consequences of the rights offering to holders of common stock that hold such
stock as a capital asset for federal income tax purposes. This discussion is
based on laws, regulations, rulings and decisions in effect on the date hereof,
all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. This discussion applies only to holders that are U.S.
persons and does not address all aspects of federal income taxation that may be
relevant to holders in light of their particular circumstances or to holders who
may be subject to special tax treatment under the Internal Revenue Code,
including, without limitation, holders of preferred stock or warrants, holders
who are dealers in securities or foreign currency, foreign persons, insurance
companies, tax-exempt organizations, banks, financial institutions,
broker-dealers, holders who hold common stock as part of a hedge, straddle,
conversion or other risk reduction transaction, or who acquired common stock
pursuant to the exercise of compensatory stock options or otherwise as
compensation.
We have not sought, and will not seek, an opinion of counsel or a ruling
from the Internal Revenue Service regarding the federal income tax consequences
of the rights offering or the related share issuance. The following summary does
not address the tax consequences of the rights offering or the related share
issuance under foreign, state, or local tax laws. ACCORDINGLY, EACH HOLDER OF
COMMON STOCK SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED SHARE ISSUANCE TO SUCH
HOLDER.
The federal income tax consequences for a holder of common stock on a
receipt of subscription rights under the rights offering should be as follows:
1. A holder should not recognize taxable income for federal income tax purposes
in connection with the receipt of subscription rights in the rights
offering.
2. Except as provided in the following sentence, the tax basis of the
subscription rights received by a holder in the rights offering should be
zero. If either (i) the fair market value of the subscription rights on the
date such subscription rights are distributed is equal to at least 15% of
the fair market value on such date of the common stock with respect to which
the subscription rights are received or (ii) the holder elects, in its
federal income tax return for the taxable year in which the subscription
rights are received, to allocate part of the tax basis of such common stock
to the subscription rights, then upon exercise or transfer of the
subscription rights, the holder's tax basis in the common stock should be
allocated between the common stock and the subscription rights in proportion
to their respective fair market values on the date the subscription rights
are distributed. A holder's holding period for the subscription rights
received in the rights offering should include the holder's holding period
for the common stock with respect to which the subscription rights were
received.
3. A holder which allows the subscription rights received in the rights
offering to expire should not recognize any gain or loss, and the tax basis
of the common stock owned by such holder with respect to which such
subscription rights were distributed should be equal to the tax basis of
such common stock immediately before the receipt of the subscription rights
in the rights offering.
4. A holder should not recognize any gain or loss upon the exercise of the
subscription rights received in the rights offering. The tax basis of the
common stock acquired through exercise of the subscription rights should
equal the sum of the subscription price for the common stock and the
holder's tax basis, if any, in the rights as described above. The holding
period for the common stock acquired through exercise of the subscription
rights should begin on the date the subscription rights are exercised.
23
OTHER MATTERS
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SHARES OF OUR COMMON STOCK OR ANY OTHER SECURITIES, INCLUDING THE
SUBSCRIPTION RIGHTS OR ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE
SUBSCRIPTION RIGHTS. OFFERS AND SALES OF THE SUBSCRIPTION RIGHTS OR THE SHARES
OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE SUBSCRIPTION RIGHTS ARE BEING MADE
ONLY BY MEANS OF THE PROSPECTUS, ON THE TERMS AND CONDITIONS DESCRIBED IN THE
PROSPECTUS WHICH IS ALSO BEING DELIVERED TO STOCKHOLDERS.
NO APPRAISAL RIGHTS
Stockholders have no rights under Delaware law or our Restated Certificate
of Incorporation or our Amended and Restated Bylaws to exercise dissenters'
rights of appraisal with respect to the rights offering or the share issuance.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has carefully considered Proposal 2, the share
issuance proposal, and unanimously recommends that stockholders vote for the
approval of Proposal 2.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL 2.
24
PROPOSAL 3
AUTHORIZE THE EXCHANGE, FROM TIME TO TIME, BY THE APOLLO STOCKHOLDERS OF
SHARES OF NON-VOTING COMMON STOCK FOR SHARES OF VOTING COMMON STOCK
UNLESS OTHERWISE INDICATED OR THE CONTEXT REQUIRES, ALL SHARE NUMBERS,
SHARE PRICES AND PER SHARE AMOUNTS IN THIS PROXY STATEMENT DO NOT GIVE
EFFECT TO THE REVERSE STOCK SPLIT
EXCHANGE RIGHT
You are being asked to vote upon a proposal to authorize the exchange, from
time to time, by the Apollo Stockholders of the shares of non-voting common
stock received by them in the advance purchase or upon the exercise of their
over-subscription privilege in the rights offering, for shares of voting common
stock under the circumstances set forth in the Investment Agreement. Approval of
this proposal requires the affirmative vote of the holders of a majority of the
total votes cast at the special meeting.
Pursuant to the terms of the Investment Agreement and subject to stockholder
approval at the special meeting, the Apollo Stockholders would be permitted to
exchange their shares of non-voting common stock for shares of voting common
stock only in the following two circumstances:
- as part of a transfer of the Apollo Stockholders' holdings to a person not
affiliated with the Apollo Stockholders, in an amount not to exceed 10% of
our voting power, and such transferee, to the knowledge of the Apollo
Stockholders, will not, as a result of the transfer, hold more than 15% of
our voting power.
- at any time, so long as the voting power of the Apollo Stockholders, after
giving effect to any such exchange, does not exceed 29.9% of the
outstanding voting power which is the percentage of the outstanding voting
power which the Apollo Stockholders were entitled to cast prior to the
advance purchase.
Stockholder approval is being sought in accordance with the rules of the
Nasdaq National Market since the total number of shares of voting common stock
which may be issued upon the exchange of all non-voting common stock issued to
the Apollo Stockholders could equal or exceed 20% of either the voting power or
the number of shares of voting common stock outstanding prior to the advance
purchase.
REASONS FOR THE EXCHANGE RIGHT
The terms of the exchange rights were arrived at in negotiations between us
and the Apollo Stockholders in connection with their agreement to accept
non-voting common stock and make the advance purchase.
The purpose of our issuing non-voting common stock to the Apollo
Stockholders, together with the exchange rights described above, was to enhance
our ability to raise capital through the rights offering without adversely
affecting the voting rights of our other stockholders, while, at the same time,
not adversely affecting the current voting rights of the Apollo Stockholders or
the economic value of the shares received by them. Similarly, the exchange
rights were designed to facilitate the elimination over time of a separate class
of non-voting common stock and to do so in a manner which does not adversely
affect our other stockholders.
By the terms of their original investment agreement, the Apollo Stockholder
were contractually limited not to acquire more than 50% of our voting power.
Accordingly, had we not issued non-voting common stock, the Apollo Stockholders
would have been constrained in the amount of shares that they could acquire in
the rights offering, which would have limited the amount of capital that we
could raise. In particular, the advance purchase of the non-voting common stock
ensured that the rights offering would raise a minimum of $7,791,935.
25
The board of directors believes that the exchange rights are fair and
reasonable since the Apollo Stockholders paid the same price for the non-voting
common stock as other stockholders will be paying for voting common stock and
the exchange rights, by their terms, may not be exercised if they will serve to
either:
- increase the voting power of the Apollo Stockholders, or
- assist the transfer of voting control by the Apollo Stockholders to a
third party.
The exchange rights achieve these objectives by providing a mechanism for
the exchange of non-voting common stock for voting common stock, while limiting
the ability of the Apollo Stockholders to do so to those situations in which,
following the exchange:
- the Apollo Stockholders would not, as a result of the exchange, be
entitled to cast more than 29.9% of the outstanding voting power, which
was the voting power of the Apollo Stockholders prior to the advance
purchase; or
- the recipient of the voting common stock issued in the exchange, if other
than the Apollo Stockholders, would not receive from the Apollo
Stockholders stock representing more than 10% of our outstanding voting
power or be entitled to cast, taking into account any other stock held by
the recipient, more than 15% of our outstanding voting power.
In light of the foregoing, our board of directors has approved the exchange
rights and determined to recommend that stockholders vote in favor of Proposal
3.
NO APPRAISAL RIGHTS
Stockholders have no rights under Delaware law or our Restated Certificate
of Incorporation or our Amended and Restated Bylaws to exercise dissenters'
rights of appraisal with respect to this proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has carefully considered Proposal 3 and unanimously
recommends that stockholders vote for the approval of Proposal 3.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL 3.
26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
UNLESS OTHERWISE INDICATED OR THE CONTEXT REQUIRES, ALL SHARE NUMBERS, SHARE
PRICES AND PER SHARE AMOUNTS IN THIS PROXY STATEMENT DO NOT GIVE EFFECT TO THE
REVERSE STOCK SPLIT
The following table and notes thereto set forth certain information, as of
May 22, 2002 (except as noted otherwise), regarding beneficial ownership of the
shares of our common stock by (i) each person who is known to us to be the
beneficial owner of more than 5% of the outstanding shares of our common stock,
(ii) each of our executive officers, (iii) each of our directors, and (iv) all
of our executive officers and directors 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.
NUMBER OF
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS POSITION OWNED(1) OF CLASS
---------------- ------------------------------- -------------- -----------
Glenn S. Meyers................ Chairman and Chief Executive 1,100,000 1.0%(2)
Officer
Craig C. Chesser............... Senior Vice President Finance 75,000 *(3)
and Treasurer
Michael A. Hultberg............ Senior Vice President and 50,000 *(2)
Controller
Robert C. Lewis................ Senior Vice President, General 95,000 *(2)
Counsel and Secretary
Jeffrey M. Killeen............. Director 75,000 *(2)
William Stasior................ Director 75,000 *(2)
Andrew D. Africk .............. Director 85,652,140 64.1%(4)(9)
c/o Rare Medium Group, Inc.
44 West 18th Street, 6th
Floor
New York, New York 10011
Marc J. Rowan ................. Director 85,652,140 64.1%(5)(9)
c/o Rare Medium Group, Inc.
44 West 18th Street, 6th
Floor
New York, New York 10011
Michael S. Gross .............. Director 85,627,140 64.1%(6)(9)
c/o Rare Medium Group, Inc.
44 West 18th Street, 6th
Floor
New York, New York 10011
Apollo Investment Fund IV, L.P. 85,577,140 64.1%(7)(9)
Two Manhattanville Road
Purchase, New York 10577
All executive officers, 87,247,140 64.6%(8)(9)
directors
and nominees as a group
(9 persons)
--------------------------
* Represents beneficial ownership of less than 1%.
27
(1) Beneficial ownership has been determined pursuant to Rule 13d-3 under the
Exchange Act. Includes our outstanding shares of non-voting common stock.
(2) Represents options to purchase shares of our common stock that are currently
exercisable, but does not include options that become exercisable upon a
change of control of us.
(3) Includes options to purchase 58,334 shares of our common stock that are
currently exercisable.
(4) Includes an aggregate of (i) 12,709,499 shares of our common stock acquired
through the exercise of Series 1-A Warrants, (ii) 4,744,271 shares of our
common stock acquired through the tender offer, (iii) 38,765,848 shares of
our nonvoting common stock acquired in lieu of exercise of rights issuable
to the Apollo Stockholders pursuant to the rights offering and
(iv) 29,357,522 shares of our common stock issuable to the Apollo
Stockholders upon conversion of the 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 75,000 shares of our common stock that are
currently exercisable, but does not include options that become exercisable
upon a change of control of us.
(5) Includes an aggregate of (i) 12,709,499 shares of our common stock acquired
through the exercise of Series 1-A Warrants, (ii) 4,744,271 shares of our
common stock acquired through the tender offer, (iii) 38,765,848 shares of
our nonvoting common stock acquired in lieu of exercise of rights issuable
to the Apollo Stockholders pursuant to the rights offering and
(iv) 29,357,522 shares of our common stock issuable to the Apollo
Stockholders upon conversion of the 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 75,000 shares of our common stock that are
currently exercisable, but does not include options that become exercisable
upon a change of control of us.
(6) Includes an aggregate of (i) 12,709,499 shares of our common stock acquired
through the exercise of Series 1-A Warrants, (ii) 4,744,271 shares of our
common stock acquired through the tender offer, (iii) 38,765,848 shares of
our nonvoting common stock acquired in lieu of exercise of rights issuable
to the Apollo Stockholders pursuant to the rights offering and
(iv) 29,357,522 shares of our common stock issuable to the Apollo
Stockholders upon conversion of the 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 our common stock that are
currently exercisable, but does not include options that become exercisable
upon a change of control of us.
(7) Represents the aggregate of (i) 12,709,499 shares of our common stock
acquired through the exercise of Series 1-A Warrants, (ii) 4,744,271 shares
of our common stock acquired through the tender offer, (iii) 38,765,848
shares of our nonvoting common stock acquired in lieu of exercise of rights
issuable to the Apollo Stockholders pursuant to the rights offering and
(iv) 29,357,522 shares of our common stock issuable upon conversion of the
aggregate of 1,073,007 shares of our preferred stock and the exercise of an
aggregate of 130,838 Series 1-A Warrants and 12,262,542 Series 2-A Warrants
held by the Apollo Stockholders. The holders of our preferred stock are only
entitled to an aggregate of 9,750,000 votes with respect to the preferred
stock as of May 22, 2002, or 9.09 votes per share of preferred stock.
However, the Apollo Stockholders have agreed that so long as any tendered
shares are held by them or any of their affiliates, the Apollo Stockholders
and their affiliates will cause all such shares held by them, which would
otherwise entitle the Apollo Stockholders and their affiliates,
collectively, to cast more than 29.9% of voting power of our outstanding
capital stock, to be voted pro-rata with all other votes cast by holders of
common stock. Messrs. Africk, Rowan and Gross, our directors 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, our directors 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 1,586,667 shares of our common stock that are
currently exercisable, but does not include options that become exercisable
upon a change of control of us.
(9) Subject to final court approval of the Stipulation of Settlement, warrants
held by the Apollo Stockholders to acquire 2,752,452 shares of our common
stock will be cancelled.
28
FORWARD LOOKING STATEMENTS
This document includes certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the consummation of the proposed transactions described
above. These statements are based on management's current expectations and are
subject to uncertainty and changes in circumstances. Actual results may differ
materially from these expectations due to changes in global economic conditions,
competition, regulatory approvals necessary for the MSV joint venture to develop
a business combining satellite operations with terrestrial base stations and the
liquidity of XM Satellite Radio common stock. Important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements include but are not limited to those contained under
the Risk Factors section of our annual report on Form 10-K and our rights
offering prospectus. We assume no obligation to update these forward-looking
statements to reflect actual results, changes in risks, uncertainties or
assumptions underlying or affecting such statements or for prospective events
that may have a retroactive effect.
Our rights offering prospectus is also being mailed to you.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" information that we file with them, which means that we can disclose
important information to you by referring you to those documents. Specifically,
we are incorporating by reference the documents listed below:
- Our Quarterly Report on Form 10-Q for the period ended March 31, 2002.
- Our Registration Statement on Form S-3 for the rights offering, filed with
the Securities and Exchange Commission concurrently with the filing of
this proxy statement;
- Our Annual Report on Form 10-K for the year ended December 31, 2001;
- Our Current Reports on Form 8-K filed with the Securities and Exchange
Commission on April 4, 2002, May 13, 2002 and May 17, 2002;
- Our Definitive Proxy Statement for the Annual Meeting of Stockholders held
on March 28, 2002; and
- Our Definitive Proxy Statement for the Annual Meeting of Stockholders held
on August 19, 1999, which includes a description of our capital stock and
the terms of the Apollo Stockholders' original investment.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Robert C. Lewis, Esq.
Senior Vice President,
General Counsel and Secretary
Rare Medium Group, Inc.
44 West 18th Street, 6th Floor
New York, NY 10011
Telephone: (646) 638-9700
OTHER BUSINESS
Our board of directors knows of no business other than the matters set forth
herein which will be presented at the special meeting. Inasmuch as matters not
known at this time may come before the meeting, the enclosed proxy confers
discretionary authority with respect to such matters as may
29
properly come before the meeting and it is the intention of the persons named in
the proxy to vote in accordance with their judgment on such matters.
A representative of KPMG LLP is expected to be available at the special
meeting to respond to appropriate questions and will be given the opportunity to
make a statement if he or she so desires.
STOCKHOLDER PROPOSALS
We expect that the date of the 2002 annual meeting of stockholders will
change by more than 30 days from the date of the 2001 annual meeting. At such
time as we set a date for the 2002 annual meeting of stockholders, we will
announce the date by which stockholders who wish to submit proposals pursuant to
Rule 14a-8 under the Exchange Act for inclusion in the proxy statement for our
2002 annual meeting of stockholders must submit the same to our Secretary at our
principal executive office, 44 West 18th Street, 6th Floor, New York, NY 10011.
In order for a shareholder proposal at the 2002 annual meeting submitted outside
of Rule 14a-8 to be considered "timely" within the meaning of Rule 14a-4(c)
under the Exchange Act, such proposal must be received by us within a reasonable
time before we mail our proxy materials.
ADDITIONAL INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy these reports, proxy statements and other
information at the Securities and Exchange Commission public reference rooms.
You can request copies of these documents by writing to the Securities and
Exchange Commission and paying a fee for the copying costs. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for more information about
the operation of the public reference rooms. Our Securities and Exchange
Commission filings are also available at the Securities and Exchange
Commission's website at "www.sec.gov." In addition, you can read and copy our
Securities and Exchange Commission filings at the office of the National
Association of Securities Dealers, Inc. at 1735 K Street, Washington, DC 20006.
IMPORTANT
MAIL YOUR SIGNED PROXY CARD
Please complete, sign, date and mail the enclosed Proxy Card.
By Order of the Board of Directors,
/s/ ROBERT C. LEWIS
---------------------------------------------
Robert C. Lewis
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
May 29, 2002
New York, New York
30
ANNEX A
CERTIFICATE OF AMENDMENT TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
RARE MEDIUM GROUP, INC.
Rare Medium Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the "Company")
does hereby certify:
FIRST: By requisite vote of the Board of Directors of the Company,
resolutions were adopted setting forth a proposed amendment to the Restated
Certificate of Incorporation of the Company, declaring such amendment to be
advisable and directing that the proposed amendment be submitted to the
stockholders for their approval.
SECOND: The following amendment to the Restated Certificate of
Incorporation was approved in accordance with Section 242 of the General
Corporation Law of the State of Delaware.
1. The Restated Certificate of Incorporation is hereby amended by inserting
the following new paragraph to the end of Article FOURTH thereof, which new
paragraph shall read as follows:
"Upon the filing and effectiveness (the "Effective Time") pursuant to
the General Corporation Law of the State of Delaware of the Certificate of
Amendment to the Restated Certificate of Incorporation that amended the
Restated Certificate of Incorporation by adding this paragraph hereto, each
ten (10) shares of the Common Stock and the Non-Voting Common Stock issued
and outstanding immediately prior to the Effective Time shall automatically
be combined into one (1) validly issued, fully paid and non-assessable share
of the Common Stock and Non-Voting Common Stock, respectively, without any
action by the holder thereof, subject to the treatment of fractional
interests as described below. Stockholders who, immediately prior to the
Effective Time, own a number of shares of Common Stock or Non-Voting Common
Stock, as the case may be, which is not evenly divisible by ten (10) shall,
with respect to such fractional interest, be entitled to receive cash from
the Company in lieu of fractional shares of Common Stock or Non-Voting
Common Stock, as the case may be, equal to such fraction of a share of
Common Stock or Non-Voting Common Stock, as the case may be, multiplied by
the fair market value of a share of Common Stock or Non-Voting Common Stock,
as the case may be, as determined in good faith by the Board of Directors.
Each certificate that prior to such combination represented shares of Common
Stock or Non-Voting Common Stock, as the case may be ("Old Certificates"),
shall thereafter represent that number of shares of Common Stock or
Non-Voting Common Stock, as the case may be, into which the shares of Common
Stock or Non-Voting Common Stock, as the case may be, represented by the Old
Certificate shall have been combined (and, if applicable, the right to
receive cash in lieu of fractional shares); provided that each person
holding of record an Old Certificate shall receive, upon surrender of such
Old Certificate, a new certificate or certificates evidencing and
representing the number of shares of Common Stock or Non-Voting Common
Stock, as the case may be (and, if applicable, cash in lieu of fractional
shares), to which such person is entitled under the foregoing combination."
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to
be executed this day of , 2002.
RARE MEDIUM GROUP, INC.
By:
-----------------------------------------
Name: Glenn S. Meyers
Title: Chairman and Chief
Executive Officer
A-1
ANNEX B
HOULIHAN LOKEY HOWARD & ZUKIN
FINANCIAL ADVISORS
March 24, 2002
To The Board of Directors
Rare Medium Group, Inc.
Dear Directors:
We understand that Rare Medium Group, Inc. ("Rare Medium" or the "Company") is
considering a rights offering (the "Rights Offering") pursuant to which it would
distribute one subscription right for the purchase of one share of common stock
to each common and preferred stockholder and to each warrant holder for each
share of common stock of the Company owned (or, in the case of the preferred
stock and warrants, one right for each share of underlying common stock) and
that the Company's preferred stockholders would purchase in advance any shares
otherwise purchasable by them in the Rights Offering. Such advance purchase
shares, however, shall be shares of nonvoting common stock exchangeable for
common stock upon certain conditions.
It is our further understanding that subject to the Settlement Agreement (as
defined hereunder) becoming final, certain warrants held by the Company's
preferred stockholders would be cancelled, and that following the completion of
the Rights Offering, the Company will effect a one for ten reverse stock split
(the "Reverse Stock Split"). Simultaneously with the announcement of the Rights
Offering and Reverse Stock Split, the Company will announce the Company's
preferred stockholders' agreement to commence, promptly thereafter, an offer to
purchase up to a maximum number of shares of common stock such that its voting
percentage, after taking into account all shares presently held and all shares
acquired in the tender, would not exceed 49.9% of all votes entitled to be cast
(the "Tender Offer"). The Rights Offering, the Reverse Stock Split and the
related transactions, but specifically excluding the Tender Offer (as to which
no opinion herein will be expressed), all as described in an agreement between
the Company and the preferred stockholders (the "Investment Agreement"), are
referred to herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it. We have disclosed to you that we have
previously performed investment banking and/or valuation services on behalf of
the preferred stockholders, although we have not acted on their behalf in
connection with the Transaction or the Tender Offer.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed Rare Medium's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001;
2. held discussions with certain members of the senior management of the
Company to discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
3. reviewed certain plans and forecasts of the Company;
B-1
4. reviewed forecasts prepared by Mobile Satellite Ventures LP's management
with respect to Mobile Satellite Ventures LP for the year ended
December 31, 2002;
5. reviewed the historical market prices and trading volume for the Company's
publicly traded common stock as compared to selected comparable companies;
6. reviewed the April 2, 2001 Note Purchase Agreement between Motient
Corporation ("Motient") and Rare Medium Group, Inc. regarding the Tranche A
and B loans payable to the Company;
7. reviewed the Bankruptcy Disclosure Statement filed by Motient Corporation
dated February 27, 2002;
8. reviewed a draft of the Investment Agreement that sets forth the terms of
the proposed Transaction;
9. reviewed a draft of the Stipulation of Settlement, C.A. No. 18879 NC (the
"Settlement Agreement");
10. reviewed the organizational documents of Rare Medium and the Securities
Purchase Agreement as amended between Rare Medium and the holders of Rare
Medium's Series A Preferred Stock;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company; and
12. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company and Mobile Satellite Ventures LP, and that
there has been no material change in the assets, financial condition, business
or prospects of the Company or Mobile Satellite Ventures LP since the date of
the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company or Mobile Satellite
Ventures LP and do not assume any responsibility with respect to it. We have not
made any physical inspection or independent appraisal of any of the properties
or assets of the Company or Mobile Satellite Ventures LP. Our opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Transaction is fair to the public stockholders of the Company from a financial
point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
B-2
- Please Detach and Mail in the Envelope Provided -
------------------------------------------------------------------------------
RARE MEDIUM GROUP, INC.
44 W. 18TH STREET, 6TH FLOOR, NEW YORK, NEW YORK 10011
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING ON MARCH 28, 2002
The undersigned hereby appoints Glenn S. Meyers, Chairman and Chief Executive
Officer of Rare Medium Group, Inc. and Robert C. Lewis, Senior Vice President,
General Counsel and Secretary of Rare Medium Group, Inc., and each of them, with
full power of substitution, proxies to represent the undersigned at the annual
meeting of stockholders of Rare Medium Group, Inc. to be held at 8:00 a.m.,
local time, on March 28, 2002, at the Greenville Room, Hotel du Pont, 11th and
Market Streets, Wilmington, Delaware 19801, and at any adjournment or
postponement thereof and thereat to vote all of the shares of stock which the
undersigned would be entitled to vote, with all the powers the undersigned would
possess if personally present.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF RARE MEDIUM
GROUP, INC. UNLESS OTHERWISE SPECIFIED IN THE BOXES PROVIDED ON THE REVERSE
SIDE, THIS PROXY WILL BE A VOTE FOR THE DIRECTOR NOMINEE IN PROPOSAL 1 AND
FOR PROPOSAL 2, AND IN THE DISCRETION OF THE ABOVE NAMED PERSONS AS TO ANY
OTHER MATTER THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
(CONTINUED AND TO BE DATED AND SIGNED ON OTHER SIDE)
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
RARE MEDIUM GROUP, INC.
MARCH 28, 2002
COMMON STOCK
- Please Detach and Mail in the Envelope Provided -
------------------------------------------------------------------------------
/X/ Please mark
your votes as
in this example
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEES AND EACH
OF THE PROPOSALS LISTED BELOW.
WITHHOLD
FOR AUTHORITY
1. Election of Director /_/ /_/ Nominee: Jeffery Killeen
FOR AGAINST ABSTAIN
2. The ratification of the appointment of /_/ /_/ /_/
KPMG LLP as the independent auditors
of the Company for the year ended
December 31, 2001.
3. In the discretion of persons named above, to act upon such other business
as may properly come before the annual meeting or any adjournment or
postponement thereof.
THE PROXY HOLDERS WILL VOTE THE SHARES REPRESENTED BY THIS PROXY IN THE
MANNER INDICATED ON THE REVERSE SIDE HEREOF UNLESS A CONTRARY DIRECTION IS
INDICATED, THE PROXY HOLDERS WILL VOTE SUCH SHARES "FOR" THE DIRECTOR NOMINEE
ON PROPOSAL 1 AND "FOR" PROPOSAL 2 SET FORTH ABOVE. IF ANY FUTHER MATTERS
PROPERLY COME BEFORE THE ANNUAL MEETING, IT IS THE INTENTION OF THE PERSONS
NAMED ABOVE TO VOTE SUCH PROXIES IN ACCORDANCE WITH THEIR BEST JUDGMENT.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
Signature: ____________________ Signature: ___________________ Date: ___, 2002
NOTE: In case of joint owners, each joint owner must sign. If signing for a
corporation or partnership or an agent, attorney or fiduciary, indicate the
capacity in which you are signing.