As Filed With the Securities and Exchange Commission on February 12, 2001
Registration Statement No. 333-53316
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RATEXCHANGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-2936371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7370
(Primary Standard Industrial
Classification Code Number)
185 Berry Street, Suite 3515
San Francisco, California 94107
(415) 371-9800
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
D. Jonathan Merriman
President and Chief Executive Officer
RateXchange Corporation
185 Berry Street, Suite 3515
San Francisco, California 94107
(415) 371-9800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
George P. Barsness
Hogan & Hartson L.L.P.
555 Thirteenth St., N.W.
Washington, D.C. 20004
(202) 637-5600
Approximate date of commencement of proposed sale to the public: From time to
time after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. | X |
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. | |
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered (1) Registered (2) Per Unit Offering Price Fee (6)
------------------------- -------------- ---------------- ------------------ ------------
Common Stock, $.0001 par value 4,319,532 $9.59(3) $41,424,311.88(3) $10,936
117,630 $6.00(4) $ 705,780 (4) $ 186
497,000 $2.00(5) $ 994,000 (5) $ 248.50
(1) This registration statement covers the resale by certain selling
stockholders of up to an aggregate of 4,934,162 shares of common stock,
$.0001 par value, of RateXchange Corporation, 1,919,119 shares of which were
previously acquired by the selling stockholders and 3,015,043 shares of
which may be acquired by such selling stockholders upon exercise of
presently outstanding warrants and/or options to purchase common stock.
(2) In the event of a stock split, stock dividend or similar transaction
involving our common stock, to prevent dilution, the number of shares
registered will be automatically increased to cover the additional shares in
accordance with Rule 416(a) under the Securities Act of 1933, as amended.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the bid and asked price of
the Company's securities of the same class on the OTC Bulletin Board as of
May 9, 2000.
(4) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the closing price of the Company's
securities of the same class as reported by the American Stock Exchange as
of July 19, 2000.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low prices of
the Company's securities of the same class as reported by the American Stock
Exchange as of December 28, 2000.
(6) The registration fee was paid as follows: $10,936 in May 2000 for the
registration of 4,319,532 shares, $186 in July 2000 for the registration of
117,630 shares and $248.50 in January 2001 for the registration of 497,000
shares.
This registration statement constitutes a combined prospectus as such term
is used in Rule 429 under the Securities Act of 1933, as amended. The earlier
filed registration statement to which this registration statement relates in
Registration No. 333-37004.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
Prospectus
185 Berry Street, Suite 3515
San Francisco, California 94107
(415) 371-9800
RATEXCHANGE
CORPORATION
4,934,162 SHARES OF COMMON STOCK
With this prospectus, the selling stockholders identified in this prospectus
are offering up to 4,934,162 shares of our common stock.
The selling stockholders may sell these shares through public or private
transactions, at prevailing market prices or at privately negotiated prices. The
selling stockholders will receive all of the net proceeds from the sale of the
shares offered with this prospectus. The selling stockholders will pay all
underwriting discounts and selling commissions, if any, applicable to the sale
of those shares. We will not receive any proceeds from the sale of the shares.
Before purchasing any of the shares, you should consider very carefully the
information presented under the caption "Risk Factors" beginning on page 3 of
this prospectus.
Our common stock is traded on the American Stock Exchange under the symbol
"RTX." On February 2, 2000, the closing price for our common stock on the
American Stock Exchange was $2.90.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February 13, 2001.
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information and
financial statements and notes appearing elsewhere in this prospectus. You
should carefully consider, among other things, the matters set forth in "Risk
Factors."
The Company
We operate a trading system, the RateXchange Trading System, that allows
market participants to trade bandwidth. We provide global trading solutions to
telecommunications companies, energy marketers and merchants, financial
institutions and commodity traders, with our advanced technological system
providing users with an efficient, centralized marketplace to bring buyers and
sellers together. Through the development of marketplaces for financial
instruments related to telecommunications products, we are bringing risk
management tools and practices to the communications industry. We provide
participants on our trading system with access to a secure infrastructure for
facilitating the delivery of traded bandwidth over any platform. By providing
market participants with an advanced trading system, financial products and an
independent physical delivery mechanism, we are enabling the creation of a
liquid bandwidth trading market.
We were incorporated in Delaware in 1987. Our principal executive offices
are located at 185 Berry Street, Suite 3515, San Francisco, California 94107,
and our telephone number is (415) 371-9800.
The Offering
Common stock offered by RateXchange Corporation.......................... 0 shares
Common stock offered by the selling stockholders......................... 4,934,162 shares
Common stock to be outstanding after this offering....................... 17,783,174 shares (1)
Use of proceeds.......................................................... We will not receive any proceeds from the sale
of common stock by the selling stockholders
American Stock Exchange symbol........................................... RTX
The foregoing information is based upon shares of common stock outstanding
as of February 2, 2001. The common stock offered by the selling stockholders
includes 1,919,119 shares that were previously acquired by the selling
stockholders and 3,015,043 shares that may be acquired by the selling
stockholders upon exercise of presently outstanding warrants and/or options to
purchase common stock. Except as otherwise noted, the shares outstanding on
February 2, 2001 do not include shares issuable upon exercise of any additional
outstanding stock options and warrants.
We are registering the shares offered hereby to satisfy various obligations
to the selling stockholders to register their resale of our common stock.
------------
(1) Assuming outstanding warrants and options are not exercised.
2
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our securities. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. As a result,
the trading price of our securities could decline, and you may lose all or part
of the money you paid to buy our securities.
As a development stage company with a limited operating history in a new and
rapidly changing industry, it is difficult to evaluate our business and
prospects.
We are a development stage company. Our activities to date have concentrated
primarily on planning and developing our electronic trading system for trading
bandwidth and other telecommunications products. In September 2000, we began
operating the RateXchange Trading System for trading bandwidth. Accordingly, we
have a limited operating history on which to base an evaluation of our business
and prospects. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
online commerce. There can be no assurance that we will be successful in
addressing these risks, and our failure to do so could have a material adverse
effect on our business and results of operations.
Our success depends on our ability to secure participation in the RateXchange
Trading System and the development of a neutral marketplace where participants
can transact trades.
The success of the RateXchange Trading System depends in part upon the
creation of a network of physically interconnected users. To facilitate the
creation of such a network we have deployed switching capacity in nine major
metropolitan areas in the United States and one in London, England. While we
have identified target users, we cannot assure you that we will be able to
secure their participation in the RateXchange Trading System. There is a risk
that we may not be able to enter into sufficient contractual arrangements on
favorable terms with such participants.
We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
At September 30, 2000, our accumulated deficit since inception was
$49,943,702, including $27,926,732 related to stock grants and warrants. For the
first nine months of 2000, we incurred a net loss of $37,279,048, including
$23,582,015 related to stock grants and warrants. We have incurred a net loss in
each year of our existence, and have financed our development stage operations
primarily through sales of equity securities. We have recorded nominal revenues
from operations. We expect to incur net losses for the foreseeable future. We
may never achieve or sustain significant revenues or profitability on a
quarterly or annual basis.
If the RateXchange Trading System does not achieve commercial acceptance, our
results will suffer.
We expect to rely largely on a single revenue source, made up of fees and
commissions from transactions facilitated on the RateXchange Trading System and
related consulting services, for the foreseeable future. Online trading of
telecommunications bandwidth and minutes currently has only limited market
acceptance. As a result, our future ability to gain commercial acceptance of the
RateXchange Trading System is critical to our success. Any failure to
successfully gain commercial acceptance of the RateXchange Trading System would
not only have a material adverse effect on our business and results of operation
but also on our ability to seek additional revenue opportunities.
We depend on the efforts of the Amerex Bandwith, Ltd. brokers who execute trades
on our trading system to generate revenues for us.
In September 2000, we entered into a strategic alliance with Amerex
Bandwith, Ltd., a leading energy and power broker. Under our agreement with
Amerex, Amerex brokers execute trades for the sale or purchase of
telecommunications capacity, Internet protocol products and/or other
telecommunications-related products on our trading system, and we share with
Amerex the revenues generated by these trades. As a result, we depend on the
efforts of the Amerex brokers who execute those trades to generate revenues for
us. There can be no assurance that these brokers will be successful in expanding
our business.
We may need additional capital in the future and it may not be available on
acceptable terms.
3
We may need additional working capital for enhancement of the RateXchange
Trading System, software development, marketing and general and administrative
costs and to fund losses before achieving profitability. We may need to raise
additional funds through additional equity and/or debt financing to meet our
capital requirements. We will need to raise additional funds if we have
underestimated our capital needs or if we incur unexpected expenses. We cannot
assure you that such financings will be available in amounts or on terms needed
to meet our requirements, or at all. Further, our lack of tangible assets to
pledge could prevent us from establishing a source of financing. The inability
to raise all needed funding would adversely affect our ability to successfully
implement the objectives of our business plan.
We may not be able to compete successfully against current and future
competitors.
The market for online bandwidth and minutes trading services is new, rapidly
evolving and highly competitive, as are the online commerce and
business-to-business markets generally. We expect competition in this market to
intensify in the future. Several of the existing online exchanges, such as
E-Speed, Intercontinental Exchange and Altra currently operate online
marketplaces in commodities and have large established customer bases. These
companies may start bandwidth trading marketplaces. Our ability to compete with
them will depend largely upon our ability to capture market share by obtaining
sufficient participants for the RateXchange Trading System.
In addition, we compete with companies who trade, broker or otherwise assist
in the buying and selling of telecommunications bandwidth and minutes.
Therefore, we currently or potentially compete with a variety of other
companies, including lead-generation services and traditional offline brokers.
Many companies, such as Band-X, the GTX, Arbinet, and Asia Capacity Exchange,
offer services to buyers and sellers of bandwidth and other telecommunications
products. The increased use and acceptance of any other method of facilitating
the buying and selling of excess telecommunications bandwidth and minutes may
adversely impact the commercial viability of the RateXchange Trading System.
Large telecommunications companies have the ability and resources to compete
in the online bandwidth and minutes trading services market if they choose to do
so, including launching their own online exchanges or other trading services.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. In addition, a number of these competitors may combine or form strategic
partnerships. As a result, our competitors may be able to offer, or bring to
market earlier, products and services that are superior to our own in terms of
features, quality, pricing or other factors. Our failure to compete successfully
with any of these companies could have a material adverse effect on our business
and results of operations.
Increased pressure created by any present or future competitors, or by our
competitors collectively, could have a material adverse effect on our business
and results of operations. Increased competition may result in reduced
commissions and loss of market share. Further, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on our business and results of operations. There can be
no assurance that we will be able to compete successfully against current and
future competitors. In addition, new technologies and the expansion of existing
technologies may increase the competitive pressures on us.
We may become subject to regulation by the Commodity Futures Trading Commission
depending on the types of products and services we eventually introduce.
4
We have developed an electronic trading system for trading futures
contracts, options on futures contracts and swaps for the purchase or sale of
bandwidth and other telecommunications products. Futures contracts and options
on futures contracts are within the jurisdiction of the CFTC. Presently, the
Commodity Exchange Act provides that futures contracts may be entered into only
on a board of trade that has been designated by the CFTC as a contract market.
The CFTC has never determined whether some or all swap agreements are futures or
options contracts subject to regulation under the Commodity Exchange Act and the
CFTC's regulations. The CFTC has, however, issued a policy statement stating
that most swap transactions are not appropriately regulated as futures or
options contracts under the Commodity Exchange Act or the CFTC's regulations.
The CFTC has also issued rules exempting swap agreements from most provisions of
the Commodity Exchange Act and the CFTC's regulations provided certain
conditions were met. The exemptive rules do not permit swaps to be traded on
traditional exchanges. Both the CFTC's policy statement, which is limited in its
application to cash-settled swaps, and the CFTC's exemptive rules do not permit
swaps to be cleared and impose other restrictions on swaps. As a result, under
the currently statutory and regulatory scheme applicable to swaps, should we
elect in the future to list for trading or clear swap agreements, we may need to
request an exemption from the CFTC to do so. The CFTC is under no obligation to
reach a decision within a certain period or to grant an exemption.
Legislation that would make sweeping changes to the Commodity Exchange Act
is presently awaiting Presidential approval. If the legislation becomes law, it
may remove some of the regulatory requirements applicable to our providing
trading and/or clearing services for futures contracts, options on futures
contracts and swaps involving telecommunications products. Even if the
legislation does become law, some of the services we may provide could still be
subject to CFTC regulation. We are unable to predict at this time, however,
whether the legislation, if enacted, would have a material effect on our ability
to offer trading and/or clearing services for futures contracts and options on
futures contracts involving telecommunications products.
We are dependent on the continued growth of online commerce and the acceptance
by users of the Internet as a means for trading excess bandwidth and minutes.
Our future revenues and profits are substantially dependent upon the
widespread acceptance and use of the Internet and online services as an
effective medium of commerce by businesses. Rapid growth in the use of and
interest in the Internet and online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of businesses or customers will adopt, and continue to
use, the Internet and online services as a medium of commerce.
Demand and market acceptance for recently introduced services and products
over the Internet are subject to a high level of uncertainty. We will rely on
customers who have historically used traditional offline means of commerce to
buy and sell excess telecommunications bandwidth and minutes. For us to be
successful, these customers must accept and utilize novel ways of conducting
business and exchanging information over the Internet.
Critical issues concerning the commercial use of the Internet, such as ease
of access, security, reliability, cost and quality of service, remain unresolved
and may affect the growth of Internet use or the attractiveness of conducting
commerce online. In addition, the Internet and online services may not be
accepted as a viable commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. To
the extent that the Internet and online services continue to experience
significant growth, there can be no assurance that the infrastructure of the
Internet and online services will prove adequate to support increased user
demands. In addition, the Internet or online services could lose their viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet or online service activity.
Changes in or insufficient availability of telecommunications services to
support the Internet or online services could also result in slower response
times and adversely affect usage of the Internet and online services generally
and our services in particular. If use of the Internet and online services does
not continue to grow or grows more slowly than expected, if the infrastructure
for the Internet and online services does not effectively support growth that
may occur, or if the Internet and online services do not become a viable
commercial marketplace, we would be materially and adversely affected.
We face online commerce security risks.
5
We rely on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information, such as bank account or credit
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of the algorithms used by us to
protect transaction data. Any compromise of our security could have a material
adverse effect on our reputation and us. A party who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations. We may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. To the extent that our activities or
those of third party contractors involve the storage and transmission of
proprietary information, such as bank account or credit information, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability which could have a material adverse effect on
our business and results of operations.
Our operating results could be impaired if we are or become subject to
burdensome governmental regulation of online commerce.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
including online companies. However, due to the increasing popularity and use of
the Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online services
covering issues such as:
o User privacy;
o Pricing;
o Content;
o Intellectual property;
o Distribution; and
o Characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the growth
of the Internet or other online services, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business, or
otherwise have an adverse effect on our business and results of operations.
Moreover, the applicability of existing law to the Internet and other online
services governing issues such as property ownership, sales and other taxes and
personal privacy to the Internet and other online services is uncertain and may
take years to resolve.
We plan to facilitate transactions between numerous customers residing in
various states and foreign countries, and such jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in each such
state and foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our business
and results of operations.
We may face liability for information retrieved from our portal.
Due to the fact that material may be downloaded from our portal and
subsequently distributed to others, there is a potential that claims may be made
against us for negligence, copyright or trademark infringement or other theories
based on the nature and content of such material. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify us for all liability that may be imposed. Any costs or
imposition of liability that is not covered by insurance or in excess of
insurance coverage could have a material adverse effect on our business and
results of operations.
We are at risk of capacity constraints and face system development risks.
The satisfactory performance, reliability and availability of the
RateXchange Trading System is critical to our reputation and our ability to
attract and retain users and maintain adequate customer service levels. Our
revenues depend on the number of users of our trading system and the volume of
trading that is facilitated. Any system interruptions that result in the
unavailability of our portal or reduced performance of the RateXchange Trading
System could reduce the volume of bandwidth traded and the attractiveness of our
portal as a means for such trading.
6
There may be a significant need to upgrade the capacity of our portal and
the RateXchange Trading System in order to handle thousands of simultaneous
users and transactions. Our inability to add additional software and hardware or
to develop and upgrade further our existing technology, transaction-processing
systems or physical infrastructure to accommodate increased traffic on the
RateXchange Trading System or increased trading volume through our online
trading or transaction-processing systems may cause unanticipated system
disruptions, slower response times, degradation in levels of customer service
and impaired quality and speed of trade processing, any of which could have a
material adverse effect on our business and results of operations.
Our business and operations would suffer in the event of system failures.
Our success, in particular our ability to successfully facilitate bandwidth
trades and provide high-quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunication failures,
break-ins, earthquake and similar events. Despite the implementation of network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and fulfill customer orders.
If we do not respond effectively to technological change, our service could
become obsolete and our business will suffer.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of the RateXchange Trading System.
The Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render our
existing RateXchange Trading System, proprietary technology and systems
obsolete. Our success will depend, in part, on our ability to license leading
technologies useful in our business, enhance our existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of our prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of the RateXchange Trading System and other proprietary
technology entails significant technical and business risks. There can be no
assurance that we will successfully use new technologies effectively or adapt
the RateXchange Trading System and proprietary technology to user requirements
or emerging industry standards. Our failure to adapt in a timely manner for
technical, legal, financial or other reasons, to changing market conditions or
customer requirements, could have a material adverse effect on our business and
results of operations.
If we do not effectively manage growth, our ability to provide trading services
will suffer.
To manage the expected growth of our operations and personnel, we will be
required to improve existing, and implement new, transaction-processing,
operational and financial systems, procedures and controls, and to expand, train
and manage a growing employee base. Further, we will be required to maintain and
expand our relationships with various hardware and software vendors, Internet
and other online service providers and other third parties necessary to our
business. If we are unable to manage growth effectively, we will be materially
adversely affected.
We need to hire and retain qualified personnel to sustain our business.
We are currently managed by a small number of key management and operating
personnel. We do not maintain "key man" insurance on any employee. Our future
success depends, in part, on the continued service of our key executive,
management and technical personnel, many of whom have only recently been hired,
and our ability to attract highly skilled employees. If any key officer or
employee were unable or unwilling to continue in his or her present position,
our business could be harmed. From time to time we have experienced, and we
expect to continue to experience, difficulty in hiring and retaining highly
skilled employees. Competition for employees in our industry is intense,
particularly in the San Francisco Bay area where we are located. If we are
unable to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future, that may have a material adverse effect on
our business and results of operations.
Our success is dependent on our ability to protect our intellectual property.
7
Our performance and ability to compete is dependent to a significant degree
on our proprietary technology, including, but not limited to the design of the
RateXchange Trading System and physical delivery hubs. We regard our copyrighted
material, software design, trade secrets and similar intellectual property as
critical to our success, and we rely on trademark and copyright laws, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary rights. We
cannot assure you that we will be able to secure significant protection for any
of our intellectual property. It is possible that our competitors or others will
adopt product or service names similar to our marks, thereby inhibiting our
ability to build brand identity and possibly leading to customer confusion.
We generally have entered into agreements containing confidentiality and
non-disclosure provisions with our employees and consultants who have limited
access to and distribution of our software, documentation and other proprietary
information. We cannot assure you that the steps we take will prevent
misappropriation of our technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we have taken, it
might be possible for a third party to copy or otherwise obtain and use our
software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford us little or no
effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret protection may
not be available in every country where our services are made available online.
In the future, we may also need to file lawsuits to enforce our intellectual
property rights, protect our trade secrets and determine the validity and scope
of the proprietary rights of others. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on our business and results of
operations.
We may not be able to secure licenses for technology from third parties on
commercially reasonable terms.
We rely on a variety of software and hardware technologies that we license
from third parties, including our database and Internet server software,
components of our online trading software and transaction-processing software
which is used in the RateXchange Trading System to perform key functions. We
cannot assure you that these third party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of our ability to
maintain or obtain upgrades to any of these technology licenses could result in
delays in completing any proprietary software enhancements and new developments
until equivalent technology could be identified, licensed or developed and
integrated. Any such delays could have a material adverse effect on our business
and results of operations.
The volatility of our securities prices may increase.
The market price of our common stock has in the past been, and may in the
future continue to be, volatile. A variety of events may cause the market price
of our common stock to fluctuate significantly, including:
o Quarter to quarter variations in operating results;
o Adverse news announcements;
o The introduction of new products and services;
o Market conditions in the telecommunications industry in general,
Internet-based services and e-commerce; and
o General market conditions.
In addition, the stock market in recent years has experienced significant
price and volume fluctuations that have particularly affected the market prices
of equity securities of many companies in our business and that often have been
unrelated to the operating performance of such companies. These market
fluctuations have adversely impacted the price of our common stock and may do so
in the future.
Any exercise of outstanding options and warrants will dilute then-existing
stockholders' percentage of ownership of our common stock.
8
We have a significant number of outstanding options and warrants. The
exercise of all of the outstanding options and warrants would dilute the
then-existing stockholders' percentage ownership of our common stock. Any sales
resulting from the exercise of options and warrants in the public market could
adversely affect prevailing market prices for our common stock. Moreover, our
ability to obtain additional equity capital could be adversely affected since
the holders of outstanding options and warrants may exercise their options and
warrants at a time when we would also wish to enter the market to obtain capital
on terms more favorable than those provided by the options. We lack control over
the timing of any exercise or the number of shares issued or sold if exercises
occur.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address numerous
matters, including the following:
o Trends we believe may affect our business, financial condition or
results of operations;
o Factors that determine demand for our products;
o Advantages we believe will help us compete effectively; and
o Our strategies concerning the expansion of our operations.
In some cases you can identify forward-looking statements by terminology we
use, including "believes," "anticipates," "expects," "estimates," "may,"
"should," "could," "plans," "predicts," "potential," "continue" or similar
terms.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. The forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results to be materially different from any future results expressed or implied
by the forward-looking statements. These factors include those listed under
"Risk Factors" and elsewhere in this prospectus. All forward-looking statements
contained in this prospectus are expressly qualified in their entirety by this
cautionary notice.
USE OF PROCEEDS
We will not receive any proceeds from the sale of any shares offered by this
prospectus. We may, however, receive proceeds when the selling stockholders pay
to exercise their warrants and/or options. Selling stockholders are not
obligated to exercise their warrants or options, and there can be no assurance
that they will choose to exercise all or any of these warrants or options. Our
gross proceeds, assuming all warrants and options are exercised for cash, would
be $33,471,342. However, we are unable to predict the exact amount of cash we
will receive upon exercise of the warrants because some warrants have a cashless
exercise provision, which allows the holder to pay for the warrant by reducing
the number of shares received upon exercise. We will use any proceeds we receive
for the exercise of warrants and options to augment our working capital for
general corporate purposes.
SELLING STOCKHOLDERS
The table below lists the selling stockholders and other information
regarding the beneficial ownership of our common stock by each of the selling
stockholders. This prospectus relates to a total of 4,934,162 shares of common
stock, 3,015,043 of which are not currently outstanding but may be acquired by
the selling stockholders upon exercise of outstanding options and/or warrants
held by individual stockholders. The first column provides the name of each
selling stockholder and describes the stockholder's position, office or other
material relationship with us, if any, as well as any other material
relationship the stockholder has had within the past three years with us, our
predecessors or any affiliate of ours. The second column lists the number of
shares of common stock beneficially owned by each selling stockholder on
February 2, 2001. The selling stockholders are offering only the shares of
common stock indicated in the third column. The fourth and fifth columns assume
the selling stockholders dispose of all the shares offered by this prospectus
and that the selling stockholders do not acquire any additional stock.
9
We are registering the shares for resale by the selling stockholders in
accordance with registration rights granted or offered to some of the selling
stockholders. We will pay the registration and filing fees, printing expenses,
listing fees, blue-sky fees, if any, and fees and disbursements of our counsel,
but the selling stockholders will pay any underwriting discounts, selling
commissions and similar expenses relating to the sale of the shares. In
addition, we have agreed to indemnify some of the selling stockholders, as well
as certain affiliated parties, against specific liabilities, including
liabilities under the Securities Act of 1933, as amended, in connection with
this offering. Those selling stockholders we have agreed to indemnify have
agreed to indemnify us and our directors and officers, as well as any person
that controls us, against specific liabilities, including liabilities under the
Securities Act.
The information provided in the table below has been obtained from the
selling stockholders. To our knowledge, the selling stockholders have sole
voting and investment power with respect to these securities, except as
otherwise indicated in the first column. The selling stockholders may sell all,
some or none of their shares in this offering.
10
Shares
Maximum Beneficially Owned
Shares Number of after Offering
Beneficially Shares to be (assuming all Percentage of Common
Name of Selling Stockholder and Material Owned Prior Sold in shares offered are Stock Beneficially
Relationship, if any, with RateXchange to Offering Offering actually sold) Owned after Offering
-------------------------------------- ----------- -------- -------------- --------------------
ACDC Bookfront & Co. 82,300 82,300 0 *
(AIM Equity Funds, Inc. on behalf of its
portfolio, AIM Capital Development Fund)
Altar Rock Fund, LP 836 836 0 *
American Masters Fund (Hilspen Series) 2,800 2,800 0 *
Apodaca Investment Offshore Ltd. 25,000 25,000 0 *
Apodaca Investment Partners, L.P. 16,667 16,667 0 *
Arzumanov, Valeriy 2,083 2,083 0 *
Bald Eagle Fund, Ltd. 750 750 0 *
Band and Co., Nominee for Firstar 20,833 20,833 0 *
Barr, Alison A. 18,750 18,750 0 *
Betje Partners, LP 24,125 24,125 0 *
Bi Coastal Consulting Corp. 25,000 25,000 0 *
Cannell, Carlo J. 33,750 33,750 0 *
Cohanzick Partners, LP 4,167 4,167 0 *
Cole, Douglas 868,151 100,000 768,151 3.77%
Consultant and Former Director and
Executive Officer of RateXchange
Corporation
Columbia Avenue Advisors 25,000 25,000 0 *
Counterpoint Master L.L.C. 237,500 237,500 0 *
Andrew Brown shares voting and
disposition power over the securities
held by this stockholder and offered
pursuant to this prospectus
Cypress VI Partners 12,500 12,500 0 *
Leonard Eber, as Managing Partner for
the Eber Family Living Trust and the
Eber Family Trusts Numbered One through
Four, shares voting and disposition power
over the securities held by this
stockholder and offered pursuant to this
prospectus
Donaghy Sales, Inc. 23,000 21,000 2,000 *
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
Edward O. Thorp & Associates, L.P. 4,167 4,167 0 *
Elbaz, Elliott S. 6,250 6,250 0 *
Ellis, Ian P. 6,250 6,250 0 *
First Security Van Kasper 459,020 459,020 0 *
Placement Agent for RateXchange I, Inc.
January 2, 2000 Bridge Loan;
Co-Underwriter for RateXchange
Corporation March 2000 Private
Placement; D. Jonathan Merriman, Former
Senior Managing Director of First
Security Van Kasper, is a Director and
President and Chief Executive Officer of
RateXchange Corporation
Five Points Fund, L.P. 75,000 75,000 0 *
Five Points Offshore Fund, Ltd. 50,000 50,000 0 *
Forsythe McArthur Associates, Inc. 69,500 69,500 0 *
Lessor of RateXchange
Gerard, Klauer, Mattison & Co., Inc. 3,975 3,975 0 *
Placement Agent for RateXchange I,
Inc. January 2, 2000 Bridge Loan
Germanotta, Joe 2,852 2,852 0 *
Former Consultant to RateXchange
Gilston Corporation, Ltd. 20,833 20,833 0 *
Golby, Wesley 4,500 4,500 0 *
Grange, Richard C. 84,404 84,404 0 *
Former Director of predecessor of
RateXchange I, Inc.
Gruber Family Foundation 3,806 3,806 0 *
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
Gruber-McBaine International 46,094 46,094 8,500 *
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
11
Grunewald, Brad K. 73,601 73,601 0 *
Guarantee & Trust Company TTEE FBO, 12,500 12,500 0 *
Paul Dwork Sep IRA
Hare & Co. 651653 (Hamilton College) 17,351 17,351 0 *
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
Hare & Co. 705286 (L-3 Communications Corp.) 7,784 5,784 2,000 *
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
Hart, Patti S. and Milledge A. 4,167 4,167 0 *
Hicks, Ian and Anna 15,000 5,000 10,000 *
Hilspen Capital Partners 4,350 4,350 0 *
Hilspen Capital Partners, II 24,750 24,750 0 *
Intercoastal Financial Services Corp. 100,000 100,000 0 *
Interra Ventures 45,000 45,000 0 *
Irvine Capital Partners, II LP 25,000 25,000 0 *
Kalia, Paul 33,417 33,417 0 *
The Kaufmann Fund 20,833 20,833 0 *
Kensington Partners, L.P. 3,229 3,229 0 *
Kensington Partners II, L.P. 188 188 0 *
Khadar, Mohammad 4,167 4,167 0 *
Kingdon Associates 12,500 12,500 0 *
Kingdon Family Partnership, L.P. 3,125 3,125 0 *
Kingdon Partners 7,197 7,197 0 *
Lagunitas Partners, L.P. 238,882 225,882 13,000 *
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
Liberty-Stein Roe Small Company Growth 12,500 12,500 0 *
Fund
Maroon Bells Capital Partners 531,375 531,375 0 2.90%
Significant Stockholder and Party to
Financial Advisory Agreement with
RateXchange Corporation
Mayfield, Ross 230,738 16,675 214,063 1.04%
Former Executive Officer of RateXchange
Corporation
Mehra, Raj 417 417 0 *
Metzman, Mitch A. 12,500 12,500 0 *
MJE Partners 2,083 2,083 0 *
M. Kingdon Offshore, N.V. 59,792 59,792 0 *
Mooney, Edward 576,667 100,000 476,667 2.34%
Former Executive Officer and Director
of RateXchange Corporation, Currently a
consultant to RateXchange; Party to
Severance Agreement with RateXchange
New-Day Investment Partnership, L.P. 12,500 12,500 0 *
North Olmsted Partners, LP 4,167 4,167 0 *
Omni Resources, LLC 12,500 12,500 0 *
Ozada, Erinch R. 6,250 6,250 0 *
Pequot Scout Fund, L.P. 83,334 83,334 0 *
Pequot Capital Management, Inc., as
investment advisor to this stockholder,
shares voting and disposition power
over the securities held by this
stockholder and offered pursuant to this
prospectus
Phaeton, B.V.I. 49,625 49,625 0 *
Phoenix Partners, L.P. 51,250 51,250 0 *
Pilgrim Baxter Hybrid Partners I, L.P. 37,500 37,500 0 *
Pilgrim Baxter & Assoc., Ltd., as
investment advisor to this stockholder,
shares voting and disposition power
over the securities held by this
stockholder and offered pursuant to this
prospectus
Pilgrim Baxter Hybrid Partners II, L.P. 4,167 4,167 0 *
Pilgrim Baxter & Assoc., Ltd., as
investment advisor to this stockholder,
shares voting and disposition power
over the securities held by this
stockholder and offered pursuant to this
prospectus
Poe, Fred W. 25,000 25,000 0 *
Prism Partners I, L.P. 75,000 52,500 22,500 *
Prism Partners II Offshore Fund 75,000 15,000 60,000 *
Prism Partners Offshore Fund 75,000 7,500 67,500 *
12
Quantum Partners LDC 166,667 166,667 0 *
Soros Fund Management LLC, as Principal
Investment Manager to this
stockholder, shares voting and
disposition power over the securities
held by this stockholder and offered
pursuant to this prospectus
Raptor Global Portfolio Ltd. 186,665 186,665 0 *
Rawitser, Michael 12,500 12,500 0 *
Retirement Plan of Space Systems/Loral Inc. 5,784 5,784 0 *
- Kane & Co. P51455
Gruber & McBain Capital Management
L.L.C. shares voting and disposition
power over the securities held by this
stockholder and offered pursuant to this
prospectus
Rice, Philip 27,500 12,500 15,000 *
Executive Officer of RateXchange
Corporation
Robb, Larry F. 215,625 93,750 121,875 *
Rogers, Malcolm 808,000 43,000 765,000 3.75%
Significant Stockholder
Janet L. Rogers shares voting and
disposition power over the securities
held by this stockholder and offered
pursuant to this prospectus
Scheele, Michael J. 381,313 121,313 260,000 1.27%
Consultant to RateXchange Corporation
Schottenfeld Associates, LP 20,833 20,833 0 *
Schow Family Trust 119,250 119,250 0 *
Sidana, Annupreet 11,250 11,250 0 *
Smith, Raymond M.; IRA Rollover
Custodian 31,250 31,250 0 *
Special Situations Cayman Fund, L.P. 27,083 27,083 0 *
Special Situations Fund III, L.P. 91,667 91,667 0 *
Special Situations Private Equity Fund, L.P. 27,083 27,083 0 *
Special Situations Technology Fund, L.P. 20,833 20,833 0 *
Spirit Fund, Ltd. 8,333 8,333 0 *
Stein Roe Variable Investment Trust Small 37,500 37,500 0 *
Company Growth, Var Series
Suyama, Roger, Pacific Century 12,500 12,500 0 *
Swindells, Theodore 839,969 45,000 794,969 4.47%
Talisman Capital Opportunity Fund 225,000 225,000 0 *
The Timken Living Trust U/A/D 9/14/99 20,833 20,833 0 *
Tirman Family Limited Partnership 6,250 6,250 0 *
Geoffrey Tirman, General Partner of
Tirman Family Limited Partnership, shares
voting and disposition power over the
securities held by this stockholder and
offered pursuant to this prospectus
Tonga Partners, LP 10,417 10,417 0 *
Cannell Capital Management shares
voting and disposition power over the
securities held by this stockholder and
offered pursuant to this prospectus
Trinity Fund, Ltd. 33,333 33,333 0 *
Ultimate Markets, Inc. 350,000 175,000 175,000 *
VICD Bipod & Co. 1,033 1,033 0 *
(AIM Variable Insurance Funds, Inc. on
behalf of its portfolio, AIM Capital
Development Fund)
Warren, Robin 13,342 13,342 0 *
Wescott, Jr, Paul A. 82,250 6,250 76,000 *
Former Executive Officer of RateXchange
Corporation
Wheeler, William 12,333 12,333 0 *
Whelan, Sean 25,805 25,805 0 *
Founder and Former President of
RateXchange I, Inc., a subsidiary of
RateXchange Corporation
Windy Hill Investments NAMI, LLC 12,500 12,500 0 *
WPG Institutional Networking Fund, L.P. 1,250 1,250 0 *
WPG Institutional Software Fund, L.P. 18,859 18,859 0 *
WPG Networking Fund, L.P. 10,304 10,304 0 *
WPG Raytheon Networking Fund, L.P. 29,696 29,696 0 *
WPG Raytheon Software Fund, L.P. 14,371 14,371 0 *
WPG Software Fund, L.P. 8,437 8,437 0 *
----------
* The shares represent less than 1% of the outstanding shares of common stock.
13
PLAN OF DISTRIBUTION
The selling stockholders, or, subject to applicable law, their pledgees,
donees, distributees, transferees or other successors in interest, may sell all
or portions of the shares from time to time while the registration statement of
which this prospectus is a part remains effective. The selling stockholders may
sell shares in public transactions, on or off the American Stock Exchange or any
exchange with which we register or in private transactions. The selling
stockholders may sell the shares at any price and in different types of
transactions including, but not limited to, one or any combination of the
following:
o Ordinary brokers transactions and transactions in which the broker
solicits purchasers;
o Transactions involving cross or block trades or otherwise;
o Purchases by brokers, dealers or underwriters as principals and resale
by such purchasers for their own accounts pursuant to this prospectus;
o "At the market" to or through market makers or into an existing market
for the common stock;
o In other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents; or
o In privately negotiated transactions.
Selling stockholders may also sell shares pursuant to Rule 144 of the Securities
Act if available.
Sales of the shares at less than market prices may depress the market price
of our common stock. Moreover, generally the selling stockholders are not
restricted as to the number of shares, which may be sold at any one time, and it
is possible that a significant number of shares could be sold at the same time.
In effecting sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate in the resales. The
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, and in connection with those transactions, the
broker-dealers or other financial institutions may engage in short sales of the
shares. The selling stockholders may also sell shares short and deliver the
shares to close out such short positions. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions that require delivery to the broker-dealers or other financial
institutions of the shares, which the broker-dealers or other financial
institutions may resell pursuant to this prospectus.
14
Broker-dealers may agree with the selling stockholders to sell a specified
number of shares at a stipulated price per share and, to the extent the
broker-dealers are unable to do so acting as agents for the selling
stockholders, to purchase as principals any unsold shares at the price required
to fulfill the broker-dealers' commitments to the selling stockholders.
Broker-dealers who acquire shares as principals may thereafter resell such
shares from time to time in transactions, which may involve block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above, in the over-the-counter market or otherwise at prices
and on terms prevailing at the time of the sale, at prices then related to the
then-current market price or in negotiated transactions and, in connection with
such resales, may pay to or receive from the purchasers of such shares
commissions as described above. The selling stockholders may also pledge the
shares to broker-dealers or other financial institutions, and upon a default,
the broker-dealers or other financial institutions may affect sales of the
pledged shares pursuant to this prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the selling stockholders or
purchasers in amounts to be negotiated in connection with the sale. The selling
stockholders and any participating brokers or dealers may be deemed
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any such commission, discount or concession may be deemed
underwriting compensation.
Information as to whether any underwriter that the selling stockholders may
select, or any other broker-dealers, are acting as principals or agents for the
selling stockholders, the compensation to be received by any underwriters that
the selling stockholders may select or by any broker-dealers acting as
principals or agents for the selling stockholders, and the compensation to be
paid to other broker-dealers, in the event the compensation of such other
broker-dealers is in excess of usual and customary commissions, will, to the
extent required, be set forth in a supplement to this prospectus. Any
broker-dealers participating in any distribution of the shares may be required
to deliver a copy of this prospectus, including a prospectus supplement, if any,
to any person who purchases any of the shares from or through such
broker-dealers.
During any time that the selling stockholders are engaged in a distribution
of the shares, the selling stockholders will be required to comply with the
Securities Exchange Act of 1934, as amended. With certain exceptions, the
Exchange Act precludes the selling stockholders, any affiliated purchasers and
any broker-dealers or other persons who participate in such distribution from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase any security that is the subject of the distribution until the entire
distribution is complete. The Exchange Act also prohibits any bids or purchases
made in order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the marketability
of the common stock.
To comply with some state securities laws, the shares may be sold only
through registered or licensed brokers or dealers. The shares may not be sold in
some states unless the seller meets the applicable state notice and filing
requirements.
DESCRIPTION OF CAPITAL STOCK
Authorized Shares
Our authorized capital stock consists of 300,000,000 common shares, $.0001
par value per share, and 60,000,000 shares of preferred stock. On February 2,
2001, 17,783,174 shares of our common stock and no shares of our preferred stock
were issued and outstanding.
Common Stock
Holders of our common stock are entitled to receive dividends, when, and as,
declared by our board of directors out of funds available therefore. Any such
dividends may be paid in cash, property or shares of the common stock. The
outstanding shares of common stock are validly issued, fully paid and
non-assessable.
Each holder of our common stock is entitled to one vote per share on all
matters submitted to the vote of stockholders, including the election of
directors. Holders of common stock do not have cumulative voting rights. The
absence of cumulative voting means that the holders of more than 50% of the
shares voting for the election of directors can elect all directors if they so
choose.
15
Holders of our common stock have no preemptive or conversion rights, no
redemption or sinking fund provisions and are not liable to further call or
assessment.
Holders of our common stock are entitled to share ratably in any assets
available for distribution to holders of our equity securities upon liquidation
of our company, subject to distribution of the preferential amount, if any, to
be distributed to any holders of preferred stock.
Preferred Stock
Our certificate of incorporation authorizes our board, without any vote or
action by the holders of common stock, to issue preferred stock from time to
time in one or more series. Our board is authorized to determine the number of
shares and to fix the powers, designations, preferences and relative,
participating, optional or other special rights of any series of preferred
stock. Issuances of our preferred stock, if convertible into common stock, would
be subject to the applicable rules of the AMEX or other organizations on which
our stock is then quoted or listed. Depending on the terms of preferred stock
established by our board of directors, any or all series of preferred stock
could have preference over our common stock with respect to dividends and other
distributions and upon our liquidation. If any shares of preferred stock are
issued with voting powers, or if additional shares of common stock are issued,
the voting power of the outstanding common stock would be diluted.
We believe that the availability of preferred stock will provide increased
flexibility to facilitate possible future financings and acquisitions and to
meet other corporate needs that might arise.
Transfer Agent and Registrar
OTC Stock Transfer, Inc. is the transfer agent and registrar for our common
stock.
BUSINESS
Overview
We operate a trading system, the RateXchange Trading System, which allows
market participants to trade bandwidth. We provide global trading solutions to
telecommunications companies, energy marketers and merchants, financial
institutions and commodity traders, with our advanced technological system
providing users with an efficient, centralized marketplace to bring buyers and
sellers together. Through the development of marketplaces for financial
instruments related to telecommunications products, we are bringing risk
management tools and practices to the communications industry. We provide
participants on our trading system with access to a secure infrastructure for
facilitating the delivery of traded bandwidth over any platform. By providing
market participants with an advanced trading system, financial products and an
independent physical delivery mechanism, we are enabling the creation of a
liquid bandwidth trading market.
Business Model
We expect to generate revenues by providing trading services to energy
merchants, telecommunications companies, service providers, financial
institutions and commodity traders. We also expect to derive revenues from
bandwidth and risk management consulting services through our RateXlabs
Technology Consulting, through CustomAuctions and other web-enabled transaction
services, and as a result of our investment in independent delivery hubs for
physical delivery of contracts traded on the electronic trading system.
RateXchange Trading System
Our software powers the only neutral, online trading system that allows
companies to buy, sell and deliver standard wholesale bandwidth capacity
globally. The trading system is similar to trading platforms that dominate
on-line natural gas and electricity commodity trading. The trading system was
developed in conjunction with leading energy, utility and telecommunications
companies. The RateXchange Trading System enables bandwidth traders to
pre-approve and manage counterparty credit. Before trading on the RateXchange
Trading System, a company would check and pre-approve credit for a large number
of potential counterparties. It would then enter the credit information in a
credit matrix on the system that would limit its exposure to a particular
counterparty to the pre-approved amount.
16
Trades executed on the RateXchange Trading System can be delivered using our
delivery hubs, other pooling points, or bilateral interconnection. Market
participants are now able to trade a larger number of routes regardless of the
presence of RateXchange delivery hubs. Trading will utilize the Master Bandwidth
Purchase and Sale Agreement, based on the Bandwidth Trading Organization master
agreement, but will support the trading of other standardized contracts. As the
bandwidth trading market matures, we expect market participants will eventually
adopt a standardized contract similar to what has occurred in other commodities.
In the meantime, we provide the flexibility that market participants need.
The RateXchange Trading System contains features common in the leading
electronic systems in other commodities markets. The RateXchange Trading System
serves as a platform for bandwidth trading, but the system can also be used to
trade other products. We have developed extensive intellectual property with
regard to our trading system that may be applied to other telecommunications
products and other trading markets.
The RateXchange Trading System offers the following features to the market:
Dynamic Counter-Party Credit Management System
We employ a counter-party credit management system that allows market
participants to select, pre-approve and set credit limits for particular
counter-parties. We have applied for a patent for this business process.
Real-Time Capability
The RateXchange Trading System software employs technology that makes our
electronic trading system one of the fastest in the industry, providing traders
on our system with updated information in real-time. We believe we have
developed significant intellectual property regarding trading bandwidth and
other telecommunications products in real-time.
Delivery Hubs
We have established delivery hubs in neutral co-location facilities
connecting major domestic and international bandwidth routes. We believe this
investment will help to accelerate development of a viable, liquid market for
bandwidth traded as a commodity as these pooling points allow for physical
delivery of traded contracts. Our delivery hub architecture and strategic
technology partners provide us with a secure, scalable, high quality delivery
infrastructure connecting buyers' and sellers' networks. Delivery hub equipment
currently is engineered to support bandwidth trades at the OC-12, OC-3, DS-3 and
DS-1 levels domestically and at the STM-4, STM-1, E-3 and E-1 levels
internationally.
Interconnection to independent delivery hubs produces a number of benefits
to market participants, including:
o Quality of service monitoring;
o Reduces interconnection time;
o Reduces interconnection costs;
o Enables carriers to quickly connect their traded bandwidth circuits;
o Allows equal access to market data for service demand and pricing; and
o Facilitates risk and yield management practices, including efficient
trading of bandwidth assets.
We presently offer traders access to ten delivery hubs in service with two
additional hubs scheduled to be in service by the end of 2000. These hubs
provide market participants with the ability to trade and deliver bandwidth on
66 of the most liquid bandwidth routes in the world. Market participants that
interconnect to our delivery hubs are charged an installation fee and a monthly
port fee depending on the size of the connection. We will also charge additional
fees to provision traded bandwidth and to channelize connected bandwidth. These
fees, while providing a revenue stream to us, still greatly reduce a market
participant's cost of interconnection.
We have an agreement with one of the largest energy merchants and marketing
firms in which it will buy and deliver a circuit over two of our delivery hubs
in the first quarter of 2001. We have agreed to work jointly with this firm to
refine the already developed tagging (work flow) process and software and
quality of service monitoring that has already been put
17
in place by SAIC and us. Upon successful completion of this testing process, we
anticipate that this energy merchant will more extensively utilize our delivery
hubs for buying and selling of bandwidth.
Bandwidth Consulting--RateXlabs
RateXlabs provides independent economic research and confidential risk
management consulting regarding bandwidth trading. RateXlabs currently provides
bandwidth consulting services to two Fortune 100 companies.
CustomAuctions
CustomAuctions, launched in March 2000, was developed to facilitate the
trading of products with specific product, geographic or financial requirements
that are not traded on the RateXchange Trading System. CustomAuction service
benefits include:
o Provision of specialized products to a large and pre-qualified market;
o Significant reduction in time and cost of the transaction;
o "Book-building" process to assure matching of supply/demand to contract
and market design; and
o Market and contract design to assure optimal price discovery in auction
events.
Other Revenue Sources
As our business evolves and our online trading community grows, we expect to
derive revenues from the operation of other related markets, such as financial
and derivative contracts related to bandwidth, internet access, wireless
spectrum and satellite bandwidth. We believe that the intellectual property
associated with our trading system may also have applications in other trading
markets and online exchanges.
Products and Markets
In the quarter ended September 30, 2000, we began generating revenue from:
o Transaction fees on trades executed through our trading system,
typically generated as commissions paid by both the buyer and the
seller upon each trade; and
o Consulting fees earned by RateXlabs, our bandwidth trading consulting
division, providing independent economic research and confidential risk
management education.
In addition to these revenue sources, we anticipate generating revenue in
the future from:
o Service fees for RateXchange CustomAuctions paid by the offeror for
holding an auction event;
o Installation fees and monthly port fees for utilization of our delivery
hubs; and
o Membership fees that entitle members to trading privileges and
web-based, marketplace information services.
Bandwidth Trading Overview
According to the Hoover's "Telecommunications Industry Summary," annual
global spending on telecom services is currently $726 billion and is expected to
grow to $1 trillion by 2001. Technology and deregulation continue to transform
the telecommunications market from a closed industry made up of localized
monopolies to an increasingly competitive marketplace. Formerly state-owned
carriers must both defend their own markets and pursue opportunities abroad to
remain competitive. New and legacy carriers are taking advantage of rapid
advances in technology to build networks with drastically lower costs of
operation. The number of carriers licensed to trade international voice traffic
in the U.S. alone has doubled in each of the past three years to well over
1,200.
Traditionally, the telecommunications market has been fragmented and
inefficient, with non-standard pricing and high interconnection and switching
costs between carriers. As a result of market inefficiency:
o Bandwidth trades are currently conducted bilaterally with imperfect
market data and no central marketplace;
18
o Establishing and managing multiple bilateral relationships to conduct
bandwidth trades results in redundant costs, marked by fulfillment
cycles that average 60-90 days;
o As many as nine out of 10 transactions fail because of market changes,
financial, contractual and quality issues and delivery delays; and
o Significant price and volume exposure results in operational risks and
costs for carriers of all sizes.
Carriers are expected to continue to aggressively use partnerships and
outsource agreements to penetrate new markets and alleviate congestion in their
current networks. These are the market factors behind the rapidly growing spot
and forward markets in bandwidth. However, despite advances in hardware and
software technologies and increasing network interconnection, the
telecommunications bandwidth market remains inefficient due to static business
processes that continue to be utilized by carriers of all sizes. In response, we
have created an electronic trading system and a streamlined delivery mechanism.
By offering a trading platform that effectively brings buyers and sellers
together and a single standardized contract and marketplace, we believe we can
provide significant economic value to both parties through:
o Time Savings. We provide instantaneous access to bandwidth prices, thus
facilitating information flow and transaction timing.
o Cost Savings. The most readily quantifiable benefit to both purchasers
and sellers of bandwidth is reduced costs from trading on an exchange.
Specifically, cost reductions can be achieved by eliminating
unnecessary costs and solving inefficiencies associated with existing
buying processes among telecommunications carriers.
o Scalability. Historically as a result of market inefficiencies,
existing buying and selling practices have lacked scalability and have
been unable to meet the growth in demand for bandwidth trading.
Conversely, our online marketplace significantly reduces timing and
costs of effecting trades and subsequently offers virtually unlimited
scalability.
o Network Optimization. By providing the communications industry with an
alternative sales channel, we enable service providers to optimize the
value of their network assets.
o Strategic Risk Management. As a source of pricing information, we
provide market participants the information needed to manage the risk
associated with fluctuations in supply and demand.
The entrance of the leading energy companies into the communications
industry expands the total market opportunity presented by bandwidth trading.
The same companies that played a significant role in the development of actively
traded energy and power commodity markets are playing a significant role in the
development of the bandwidth market. The leading energy companies are at various
stages of entering the bandwidth trading market. Enron, El Paso Energy and
Williams are actively trading bandwidth today. Other companies such as Aquila,
Reliant and Dynegy have made public announcements regarding their plans to trade
bandwidth and are expected to enter the market soon.
Bandwidth as a Commodity
Our long-term success is dependent, in part, on the continued development of
bandwidth as a tradeable commodity. In order for an active, liquid bandwidth
market to develop, the following characteristics need to be present:
Standardized Product
The development of a commodity market requires a standard product so that
participants from different industries can trade the same product. Bandwidth as
traded on our electronic trading system is defined as the physical means of
sending data over lines. The bandwidth traded is a unit of capacity (capacity)
through which voice or data can be transmitted between two points (city pair)
with predetermined quality of service levels (quality). With capacity, city pair
and quality predetermined, the physical circuit is a standardized product.
Physical circuits are the basic building block underlying all telecommunications
products. All types of communications from voice to Internet Protocol flow over
physical circuits.
Our electronic trading system supports the trading of this standardized
product and is capable of supporting the trading of other standardized products
as new markets develop. We believe the flexibility and scalability of our
electronic trading system provides us an advantage in the development of
additional trading markets.
19
Standardized Contract
The development of a liquid commodity market requires the adoption of a
standardized contract. A standardized contract allows market participants to
complete transactions quickly by eliminating the need to prepare and negotiate
definitive documentation for each transaction. The standardized contract needs
to have standardized terms and conditions that define quality of service, allow
for orderly resolution of disputes and have remedies in place for failure to
perform. A group of industry participants, including RateXchange and several
energy/utility and telecommunications companies, have formed the Bandwidth
Trading Organization and are working toward the development of an industry-wide
standardized contract. The contract is called the Master Bandwidth Purchase and
Sale Agreement.
We have adopted the Master Bandwidth Purchase and Sale Agreement as the
default agreement for trading on the RateXchange Trading System, but the system
also supports any number of different contracts. Eventually, the market will
decide what the standardized contract is. Until the market coalesces around a
standardized contract, we provide a platform that supports the trading of any
contract.
In November 2000, we entered into contracts with eight carriers, including
Tier 1 carriers headquartered in Asia, Europe and North America.
Interconnection
Market participants need a cost-effective and efficient way to make or take
delivery of traded bandwidth. The development of efficient interconnection
facilities should reduce the cost of bandwidth trading. If market participants
were interconnected before trading the cost associated with each trade would be
reduced to the cost of connecting and testing the circuit. This is in contrast
to the present situation where the interconnection and testing of circuits is
one of the most costly and time-consuming stages of the wholesale sales process.
In order to accelerate development of a liquid market for bandwidth, during
2000 we are establishing twelve "delivery hubs" in major metropolitan areas in
order to provide the interconnection necessary to facilitate a physical delivery
of traded contracts. We believe other companies such as Enron and LighTrade are
also deploying pooling points to facilitate interconnection. The deployment of
delivery hubs by RateXchange and other companies reduces the cost and the amount
of time required for bandwidth trading.
We have an agreement with one of the top energy merchants and marketing
firms in which it will buy and deliver a circuit over two of our delivery hubs
in the first quarter of 2001. We have agreed to work jointly with this firm to
refine the already developed tagging (work flow) process and software and
quality of service monitoring that has already been put in place by SAIC and us.
Upon successful completion of this testing process, we anticipate that this
energy merchant will more extensively utilize our delivery hubs for buying and
selling of bandwidth.
Need For Price Transparency and Risk Management
The communications industry has a strong need for price transparency and
risk management tools, such as efficient trading of bandwidth assets. The rapid
decline in bandwidth pricing, along with the creation of applications that use a
lot of bandwidth, has created uncertainty for users and suppliers of bandwidth.
A liquid, commodity market for bandwidth would provide both buyers and sellers
the information needed to make sound decisions. The aggregation of buyers and
sellers in the market will lead to a forward price for bandwidth. This forward
pricing could be used when making purchasing decisions or when considering
laying or lighting fiber optic cable.
The aggregation of buyers, sellers and transaction data on RateXchange's
Trading System has provided the information needed to bring risk management
tools and practices to the communications industry. We believe we have, and will
continue to play, a leadership role in the emergence and validation of bandwidth
as a tradable commodity.
20
Competitive Conditions
Products, services and geographic location define the competitive conditions
for online bandwidth trading. At this stage in the telecommunications trading
industry's development, we believe that being the first company to establish an
electronic trading system for trading bandwidth is significant. Because
participation in an electronic trading system may require physical connection to
one of the system's interconnection locations, once a carrier is connected, the
cost of moving operations to a new system would be significant. In addition,
building a critical mass of connected carriers creates a network effect, with
each new connection enhancing the value of the service to all customers and
raising the barrier to competition. For these reasons, we are focused on
attracting large numbers of users to our electronic trading system and in
connecting significant numbers of carriers and other traders of bandwidth to our
delivery hubs.
We believe we are well positioned to compete effectively in the bandwidth
trading market for three reasons:
o Neutrality - We believe that some of our competitors intend to take
positions in their own systems or exchanges as market makers. This will
generate initial liquidity, but carrier reactions have been negative as
these companies are perceived as competing with their own exchange
customers.
o First-mover advantage - We believe that we are one of the first
bandwidth electronic trading systems established in the United States
and among the first in the world. We also believe that we are currently
one of the only United States electronic trading systems that provides:
o A neutral bandwidth electronic trading system with no other lines
of business;
o Delivery hubs domestically and internationally; and
o A bid/ask market for bandwidth trading.
o Industry experience - Our management team's knowledge of key industry
participants in the core market and expertise in telephony, energy and
financial markets adds credibility and reduces time to market.
Competitors
The market for online bandwidth and minutes trading services is new, rapidly
evolving and highly competitive, as are the online commerce and
business-to-business markets generally. We expect competition in this market to
intensify in the future. Several of the existing online exchanges, such as
E-Speed, Intercontinental Exchange and Altra currently operate online
marketplaces in commodities and have large established customer bases. These
companies may start bandwidth trading marketplaces. Our ability to compete with
them will depend largely upon our ability to capture market share by obtaining
sufficient participants for our electronic trading system.
In addition, we compete with companies who trade, broker or otherwise assist
in the buying and selling of telecommunications bandwidth and minutes.
Therefore, we currently or potentially compete with a variety of other
companies, including lead-generation services and traditional offline brokers.
Many companies, such as Band-X, the GTX, Arbinet, and Asia Capacity Exchange,
offer services to buyers and sellers of bandwidth and other telecommunications
products. The increased use and acceptance of any other method of facilitating
the buying and selling of excess telecommunications bandwidth and minutes may
adversely impact the commercial viability of our electronic trading system.
Target Customers
The market for domestic and international bandwidth includes dominant major
Tier 1 carriers, such as AT&T, WorldCom, NTT, Deutsche Telecom, Pangea, KDD and
Teleglobe , as well as wholesale-only carriers, resellers, brokers, energy and
utility companies and large multinational corporations. Customer interviews,
surveys and a review of the industry press indicate:
o Customers have significant frustrations with the current process;
o Customers see benefits to trading with us;
o Customers have indicated willingness to interconnect with us and are
willing to pay for our services; and
o In addition to carriers, large corporate users of bandwidth and telecom
products may become direct users to purchase selected bandwidth on a
domestic or international city-to-city basis.
21
Intellectual Property
We have applied for several trademarks covering specific businesses and
products offered on our Internet web site. We have also registered copyrights
for the RateXchange trading system web page designs. Patent applications are
pending for several processes of the RateXchange electronic trading system. We
do not have any franchises.
General Development of Business
During the fourth quarter of 2000, we made certain additions to our
management team to reflect our focus on trading bandwidth and telecommunications
products among a wide range of market participants.
On October 5, 2000, D. Jonathan Merriman, formally Managing Director and
Head of the Equity Capital Markets Group at First Security Van Kasper, was named
as our President and Chief Executive Officer. On October 20, 2000, Steven Town,
co-Chief Executive Officer of Amerex, was elected to our Board of Directors. On
November 27, 2000, Dean Barr, the Global Chief Investment Officer of Deutche
Asset Management, was elected to our Board of Directors.
On September 17, 2000, we announced that we had launched our new RateXchange
Trading System, and the formalization of our strategic alliance with Amerex. The
combination of the RateXchange Trading System with Amerex's brokering experience
and market relationships is expected to help create a liquid bandwidth trading
market. This electronic trading system should enable market participants of all
sizes to participate in the rapidly evolving bandwidth market. The RateXchange
Trading System is similar to trading platforms that have been successful in
on-line natural gas and electricity commodity trading. The RateXchange Trading
System enables bandwidth traders to pre-approve and manage counterparty credit.
Trades executed over the RateXchange Trading System can be delivered using our
delivery hubs, other pooling points or bilateral connections. Market
participants are now able to trade a larger number of routes regardless of the
presence of our delivery hubs. Trading on the RateXchange Trading System
supports the master bandwidth purchase and sale agreement based on the bandwidth
trading organization master agreement and also supports the trading of other
standardized contracts.
Amerex has successfully completed several bandwidth trades since May 2000
and is currently quoting over 60 city-pair bandwidth markets using the Bandwidth
Trading Organization master agreement. Amerex is a leading energy and power
broker. Under our agreement with Amerex, Amerex brokers will execute trades for
the sales or purchase of telecommunications capacity, Internet protocol products
and/or other telecommunications-related products over our RateXchange trading
system and we will share in the revenues generated by the RateXchange trading
system. In connection with this agreement, we issued to Amerex five warrants for
an aggregate of 2,300,000 shares of our common stock. One warrant for 300,000
shares with an exercise price of $4.47 per share, is currently exercisable by
Amerex. The remaining four warrants, each for 500,000 shares and with exercise
prices of $4.47 per share, $4.70 per share, $4.92 per share and $5.37 per share,
will become exercisable upon the earlier of September 17, 2005 or Amerex
executing a minimum of $1,000,000, $1,000,000, $3,000,000 and $5,000,000, of
value of transactions over the RateXchange Trading System.
On September 15, 2000, RateXchange announced that our RateXlabs division had
established a bandwidth trading consulting practice. Two Fortune 100 companies
have engaged RateXlabs to provide the expertise needed to develop a competitive
advantage in the emerging bandwidth trading industry. RateXlabs provides
independent economic research and risk management consulting regarding bandwidth
trading.
On August 23, 2000, we completed a Trans-Pacific bandwidth trade. The trade
of capacity between Hong Kong and Los Angeles is the first Trans-Pacific trade
completed by us.
On August 16, 2000, RateXchange and Amerex announced the signing of a letter
of intent to form a strategic alliance to accelerate the trading of bandwidth
products. The partnership will promote the use of our neutral RateXchange
trading system as a vehicle for building liquidity in bandwidth trading.
On August 7, 2000, we completed the beta trial of the RateXchange trading
system, a new market service for bandwidth trading designed with the assistance
of several of our customers.
On July 31, 2000, we announced we would expand the deployment of our neutral
delivery hubs under an agreement with TeleCity UK Limited, a leading European
carrier-independent Internet infrastructure service provider.
22
On July 24, 2000, we announced that six of the 12 delivery hubs we expect to
deploy this year are fully operational for immediate delivery of one-month spot
and one-year forward contracts on 15 different city-pair routes. As of September
30, 2000, eight delivery hubs were fully operational.
On July 17, 2000, we announced that we had appointed a telecommunications
industry consultant, Gordon (Don) Hutchins, Jr., to our board of directors.
On July 10, 2000, we announced we had received an American Stock Exchange
listing. Our common stock commenced trading on the AMEX under the new symbol RTX
on July 10, 2000.
Since March 2000, we have focused on the business of creating an electronic
marketplace for telecommunication products. In March 2000 we closed a $32.8
million private placement, netting $30.1 million after expenses. These funds
should be sufficient to cover our operations and working capital requirements
for the next twelve months. On May 5, 2000, we changed our name to RateXchange
Corporation to more accurately reflect our new business focus.
On July 6, 1999, we acquired 100% of the outstanding stock of Rate Exchange,
Inc., a Colorado corporation, through a merger of Rate Exchange, Inc. into
RateXchange I, Inc., our wholly owned Delaware subsidiary. The Delaware
subsidiary was the surviving entity. We paid 574,998 shares of common stock and
$450,000 in a note that was due one year from the date of closing. This note is
now fully paid.
In 1999, we changed our name to NetAmerica.com Corporation. Shortly
thereafter, we incorporated Telenisus Corporation, a Delaware corporation, as
one of our wholly owned subsidiaries. Telenisus is a development stage company
that is seeking to become a single source provider of secure and reliable
Internet-based business-to-business services to corporate customers, carriers,
Internet service providers and marketers of telecommunications services. Through
acquisitions and internal business development, Telenisus seeks to develop a
full suite of Internet and data network management tools that will enable
customers to increase productivity, to reduce costs and to access a wide range
of Internet, e-commerce, security and communication applications from a one-stop
network service delivery provider.
In November 1999, Telenisus announced the closing of its first independent
private placement financing. The common stock issued in this financing, together
with stock issued in a Telenisus-subsidiary acquisition, reduced our percentage
ownership interest in Telenisus to less than 10%. Telenisus used the proceeds of
the financing to expand its management team and to accelerate development of its
four service families: virtual private networks, managed firewall/security
services, Web site and application hosting and e-commerce. Telenisus is focused
on delivering its business Internet solutions to large and mid-sized corporate
customers. Because of subsequent financings, our ownership in Telenisus is
currently below 5%. Our investment is carried at cost on the balance sheet.
In September 1998, in connection with our strategy to acquire and
consolidate Internet service providers, we also entered into an agreement with
NetAmerica, Inc., a Washington corporation, under which we agreed to purchase
the outstanding stock of Net America, Inc. Net America, Inc. subsequently agreed
to be renamed A1 Internet, Inc. and agreed to assign and transfer to us all of
its right, title and interest in the name "Net America." We determined in March
1999 that it was not in our best interest to complete the purchase of A1
Internet's stock after A1 Internet acknowledged that some representations made
to us were inaccurate. Consequently, on March 16, 1999, we entered into an
agreement with A1 Internet to abandon the stock purchase.
On September 30, 1998, we acquired PolarCap, Inc. As a result of this
acquisition, PolarCap became our wholly owned subsidiary. PolarCap is a
California corporation that was organized in April 1997 for the purpose of
investing in and developing rights to a variety of software technologies related
to multimedia, development tools and applications technologies.
We were originally incorporated as Venture World, Ltd. on May 6, 1987, under
the laws of the State of Delaware, for the purpose of developing or acquiring
general business opportunities. We had no material operations from 1992 to 1998.
23
Research and Development
We conduct on-going research in the areas of commoditization of
telecommunications bandwidth in evolving pricing models for bandwidth and other
telecommunications products and services, and we are developing future products
and services based on this research. During 2000, we estimate that we have spent
approximately $400,000 to commission proprietary university-based and private
sector research in these areas. During 1999, we estimate that we spent
approximately $100,000 to commission proprietary university-based and private
sector research in these areas. Before 1999, we did not have any significant
expenditures for research and development.
Employees
As of February 2, 2001, our subsidiaries and we employed approximately 35
people. We believe our relations with our employees are good. Our employees are
not subject to any collective bargaining agreements.
PROPERTIES
Our principal facility is located at 185 Berry Street, Suite 3515, San
Francisco, California. We hold a lease on this facility. We believe that this
property is suitable for our immediate needs. However, we may expand our
facilities or relocate in the future.
LEGAL PROCEEDINGS
On February 3, 2000, we filed a lawsuit against Wavve Telecommunications,
Inc. in the San Francisco County Superior Court (Case No. 309608). Other
defendants named in the lawsuit include Robert W. Ingraham, Gran Columbia
Resources, Inc. (aka Wavve Telecommunications, Inc.) and Does One through Fifty.
In July 2000 the case was transferred to Sacramento County Superior Court. The
lawsuit involves claims for breach of contract, promissory estoppel, fraud and
deceit, intentional interference with a contract and prospective economic
advantage, and unfair and unlawful business practices. We are seeking in excess
of $1 million in compensatory damages, exemplary damages, interest and
attorneys' fees. The parties have completed the pleading stages and are
currently engaged in discovery. No trial date has been set.
On February 24, 2000, Concentric Network Corporation filed a lawsuit against
NetAmerica, Inc., aka A1 Internet, Inc., and us in the Superior Court of
California for the County of Santa Clara (CV 784335). The lawsuit involves
claims for breach of contract and common counts based on A1 Internet's
nonperformance in a services agreement between A1 Internet and Concentric.
Concentric is asking for compensatory damages of at least $167,794, restitution,
costs and attorneys' fees. The matter is currently pending in the Superior Court
and will soon proceed to arbitration. No arbitration date has been set.
From time to time, we are a party to various legal proceedings incidental to
our business. Other than the proceedings mentioned above, none of these
proceedings is material to the conduct of our business, operations or financial
condition.
24
MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our common stock trades on the American Stock Exchange under the symbol
"RTX." The closing price of our common stock on February 2, 2001 was $2.90 per
share. Before July 10, 2000, our stock traded on the OTC Bulletin Board. The
following table sets forth the range of the high and low sales prices per share
of our common stock for the fiscal quarters indicated, as reported by the
American Stock Exchange or OTC, as applicable. Before December 18, 1998, there
was no public trading market for our common stock.
High Low
--------- ----------
2001
First Quarter $ 2 11/16 $ 1 7/8
(through February 1, 2001)
2000
Fourth Quarter $ 4 1/8 $ 1 1/4
Third Quarter 6 3/8 3
Second Quarter 22 1/8 5 3/16
First Quarter 43 1/4 5 5/8
1999
Fourth Quarter $ 8 7/8 $ 3 3/4
Third Quarter 6 3/4 4 3/8
Second Quarter 7 1/4 5 1/2
First Quarter 6 7/8 4 1/2
Approximate Number of Equity Security Holders
On February 2, 2001, there were 316 stockholders of record of our common
stock. Because brokers and other institutions on behalf of stockholders hold
many of such shares, we are unable to estimate the total number of stockholders
represented by these record holders.
Dividends
We have never paid dividends on our common stock. We intend for the
foreseeable future to continue the policy of retaining our earnings to finance
the development and growth of our business.
25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and our consolidated financial statements and related
notes included elsewhere in this prospectus.
STATEMENTS OF OPERATIONS DATA
Nine Months
Ended Year Ended December 31,
Sept. 30, --------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------- ------------ ------------- ------------- ------------- ------------
(unaudited) (As restated) (As restated)
Revenue $ 57,255 $ -- $ -- $ -- $ -- $ --
Net Loss $(37,279,048) $ (9,298,789) $(3,144,522) $ (200) $ (1,961) $ (2,561)
Basic and Diluted
loss per share $ (2.28) $ (0.72) $ (1.92) $ -- $ -- $ --
Weighted average
number of common
stock: 16,334,695 12,863,020 1,636,919 200,000 200,000 200,000
BALANCE SHEET DATA
As of As of December 31,
Sept. 30, --------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- ----------- ------------ ------------ ------------ -------------
(unaudited) (As restated) (As restated)
Total assets $20,503,277 $ 3,043,885 $ 830,154 $ -- $ -- $ 211
Long-term debt, less $ -- $ -- $ -- $ -- $ -- $ --
current portion
Stockholders' equity $18,391,869 $ 318,829 $ 700,654 $ (200) $(1,300) $(5,689)
SUPPLEMENTARY FINANCIAL INFORMATION
For the For the For the For the For the For the
quarter ended quarter ended quarter ended quarter ended quarter ended quarter ended
September 30, June 30, March 31, December 31, September 30, June 30,
2000 2000 2000 1999 1999 1999
------------- ------------- -------------- -------------- -------------- --------------
(As restated) (As restated) (As restated)
(unaudited)
Revenue $ 52,755 $ 5,000 $ -- $ -- $ -- $ --
Net Loss $(17,857,390) $ (8,346,587) $(11,075,071) $(4,186,311) $(1,237,025) $(1,391,109)
Per Share Net Loss
Basic $ (1.03) $ (0.49) $ (0.75) $ (0.28) $ (0.10) $ (0.12)
Diluted $ (1.03) $ (0.49) $ (0.75) $ (0.28) $ (0.10) $ (0.12)
26
For the For the quarter For the quarter For the quarter For the
quarter ended ended ended ended quarter ended
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
------------- ---------------- ---------------- ---------------- -------------
(As restated) (As restated)
(unaudited)
Revenue $ -- $ -- $ -- $ -- $ --
Net Loss $ (2,599,966) $(3,136,385) $ (8,137) $ -- $ --
Per Share Net Loss
Basic $ (0.27) $ (1.92) $ -- $ -- $ --
Diluted $ (0.27) $ (1.92) $ -- $ -- $ --
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
Nine Months Ended September 30, Year Ended December 31,
------------------------------- --------------------------------------------------
2000 1999 1999 1998 1997
----------- --------------- --------------- --------------- ----------
(unaudited) (As restated) (As restated) (As restated)
$ 57,255 -- -- -- --
Revenue
Expenses
(including
selling, general
and administrative) $ 34,235,283 $ 5,312,169 $ 9,431,212 $ 3,135,963 $ 200
------------ ----------- ----------- ----------- ------
Net loss $(37,279,048) $(5,228,100) $(9,298,789) $(3,144,522) $ (200)
============ =========== =========== =========== ======
Results of Operations
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999
Revenue
We generated revenue of $57,255 during the first nine months of 2000 from
consulting, trading commissions and banner ads. We did not generate any revenue
in the comparable period of 1999.
Expenses
Our total expenses were $34,235,283 in the first nine months of 2000
compared to $5,312,169 in the comparable period of 1999. The increase was
primarily due to non-cash expenses associated with option grants and warrants.
The major components of our expenses for the first nine months of 2000 were:
Non-cash Expenses
o $9,128,000 in expenses associated with below market stock option grants
to employees;
o $7,368,000 associated with the warrants issued or to be issued in
conjunction with the strategic alliance established with Amerex; and
o $3,561,000 for options granted to service providers;
Cash Expenses
o $3,880,000 in payroll costs;
o $2,584,000 in outside services;
o $1,140,000 in marketing costs; and
o $2,454,000 in delivery equipment costs.
Interest Income
Interest income for the first nine months of 2000 was $604,561 compared to
$94,590 for the same period in 1999. The increase in interest income is due to
interest earned on the net proceeds from our March 2000 private placement.
Interest and other expense
Interest and other expenses include non-cash charges related to:
28
o $1,723,000 in stock and warrants to buy stock in settlement of a
dispute; and
o $1,801,775 fair value adjustment classified as interest expense
associated with conversion of our bridge notes into stock and warrants.
Net Loss
During the first nine months of 2000, we incurred a net loss of $37,279,048
compared to a net loss of $5,228,100 during the same period in 1999. The major
components of the net loss comprised non cash expenses for stock options and
warrants to purchase company stock of $23,582,015 for the first nine months of
2000 and expenditures associated with developing the business of $13,697,033 for
the first nine months of 2000. Because we are developing a unique electronic
trading system, we anticipate that we will continue to incur operating losses
and cash flow deficiencies for the foreseeable future.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Revenue
We did not generate any operating revenues in 1999.
Expenses
Our total expenses for 1999 increased substantially compared to 1998 because
we did not begin operations until September 30, 1998. As a result, during 1998
we incurred expenses for three months of that year compared to a full year of
expenses for 1999. Incurred expenses relate to finding and funding a development
stage enterprise. We investigated many potential acquisition targets and
succeeded in creating one entity, Telenisus Corporation, and acquiring another
entity, RateXchange I, Inc.
We funded Telenisus Corporation only to the extent of original
capitalization of $75,000. Any further funding of Telenisus was completed on its
own and did not affect our operations.
RateXchange I, Inc. is now our only operating subsidiary and it relies on
our financing activities for its operations.
Total expenses for 1999 were $9,431,212, of which the principal components
were:
o $3,158,415 of common stock, warrants or op]tions to purchase our common
stock issued in exchange for various services;
o $2,034,893 for legal, accounting, consulting and other operational
expenses related to business development;
o $1,507,408 expensed in the purchase of the outstanding common stock of
RateXchange;
o $1,325,106 for payroll and payroll taxes;
o $501,839 for office and other administrative expenses;
o $413,681 due to write-off of advances to A1 Internet, Inc.; and
o $342,762 for travel.
Total expenses for 1998 related to operations since September 30, 1998 and
included our activity and that of our subsidiary PolarCap Inc. See "Year Ended
December 31, 1998 Compared to Year Ended December 31, 1997" below.
Interest Income
The only income we generated during 1999 and 1998 was interest income on our
subscription receivables. Interest income for 1999 was $151,496 compared to
$2,214 for 1998. The increase in interest income is attributable to the amount
of subscription receivables carried during 1999 compared to 1998. Most of the
receivables have been collected and interest income from this source will be
substantially less in future periods.
Net Loss
Net loss totaled $9,298,789 for 1999 compared to $3,144,522 for 1998,
reflecting the greater expenses in 1999 compared to 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
29
Revenue
We did not generate any operating revenues in 1998.
Expenses
Total expenses for 1998 were $3,135,963, of which the principal components
were:
o $2,020,376 of common stock or warrants to purchase common stock of the
Company issued in exchange for various services;
o $885,000 due to write off of advances to A1 Internet, Inc.; and
o $89,710 expensed in the purchase of the outstanding common stock of
PolarCap, Inc.
Total expenses for 1997 were $200 for miscellaneous expenses.
Interest Income
The only income we recorded in 1998 was interest of $2,214 on subscriptions
receivable. There was no interest income for 1997.
Net Loss
Net loss totaled $3,144,522 in 1998 compared to $200 for 1997, reflecting
the greater expenses in 1998 compared to 1997.
Liquidity and Capital Resources
We have financed our operations to date primarily through the sale of equity
securities. We have been unprofitable since inception and we have incurred net
losses in each year.
We had working capital of $17,378,239 at September 30, 2000 compared to
negative working capital of $48,367 on December 31, 1999. At December 31, 1999,
we had common stock subscription receivables in the amount of $1,590,319, which
were paid off in the first quarter of 2000. In March 2000 we closed a $32.8
million private placement, netting $30.1 million after expenses. These funds
should be sufficient to cover our operations and working capital requirements
for the next twelve months. Nevertheless, we may be forced to seek additional
financing sooner than expected.
Our operating activities used $13,821,658 during the first nine months of
2000 due primarily to our:
o Increased marketing and development;
o Expansion of our executive management team;
o Increased professional services and consulting costs;
o Development of our trading platform;
o Deployment of our delivery hubs; o Software licenses; and
o Office expansion.
Our operating activities used $2,966,768 during the year ended December 31,
1999 due primarily to:
o Increased business development activities;
o Expansion of our executive management team;
o Acquisitions and integration of acquisitions;
o Identification and analysis of prospective acquisition candidates; and
30
o Legal, accounting and professional expenses.
Our investing activities used $14,717,462 during the first nine months of
2000, due primarily to investing the proceeds from our March 2000 private
placement.
Financing activities generated $32,926,569 during the first nine months of
2000. Financing activities during the nine months ended September 30, 2000
consisted primarily of proceeds from sales of our common stock. Between February
and March 2000, we sold to accredited investors a total of 2,733,329 shares of
our restricted common shares at a subscription price of $12.00 per share plus
warrants to purchase 1,366,673 shares of our common stock at an exercise price
of $14.40 per share. After deducting the expenses related to the offering, we
received $30,135,000. The proceeds of the sales of common stock were used in
part to accelerate deployment of our delivery hubs, expand our online
marketplace for telecommunications products and enhance our geographic reach and
product line.
Financing activities generated $3,991,991 during the year ended December 31,
1999, consisting primarily of proceeds from sales of common stock. The proceeds
of the sales of common stock were and will be used for acquisitions, business
development, equipment purchases and for general working capital. The various
sales of common stock are as follows:
o Between November 1998 and March 1999, we sold a total of 1,864,688
shares of our restricted common shares to accredited investors. The
shares were sold at an effective subscription price of $1.07 per share.
After deducting the expenses related to the private placement, we
received $1,745,000 in cash, of which approximately $1,631,188 was
advanced to A1 Internet as working capital and for debt repayment.
o In January 1999, we sold 916,574 shares of common stock to certain
related parties at a price of $.10 per share in exchange for notes
receivable. The board has placed restrictions on this stock so that the
stock cannot be sold, traded, assigned, transferred or pledged until
the company reaches $10,000,000 in gross revenues on a one year time
period. In March 1999, we sold 3,112,500 additional common shares as
part of the above private placement offering at an effective price per
share of $1.07 for notes. As of December 31, 1999, we collected a total
of approximately $1,924,126 from note repayments from both the January
and March private placements.
o In the second quarter of 1999, we sold 515,188 shares of stock for
$1.60 per share in a second private placement and received net proceeds
of $628,272.
In March 2000, we executed a Master Lease Line Commitment Agreement, which
has a minimum term of either 36 or 48 months depending upon the type of
equipment we lease. Pursuant to this agreement, we are entitled to lease
equipment that has a cost or sale price, which, in the aggregate, does not
exceed $10,000,000. Our periodic lease payments are determined by multiplying
the cost or sale price of the equipment leased by a lease rate factor of either
.03277 or .02633, depending upon the type of equipment. We are also responsible
for all taxes, shipping, transportation, installation, services and other
expenses related to the equipment we lease pursuant to the agreement.
We are executing an overall business plan that may require additional
capital for, among other uses:
o Development of additional products and services;
o Expansion into new domestic and international markets; and
o Potential acquisitions.
Furthermore, our funding of working capital and current and future operating
losses will require additional capital investment. We do not currently possess a
bank source of financing and we have had nominal revenues.
Our business and operations have not been materially affected by inflation
during the periods for which financial information is presented.
Recent Accounting Pronouncements
New Accounting Standard: In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative contracts and for hedging activities. FAS No. 133, as
extended by FAS No. 137, is effective for fiscal years beginning after June 15,
2000 and is currently not applicable to us because we do not enter into hedging
or derivative transactions.
31
Outlook
We are a development stage company in an early stage of development and we
are subject to all the risks inherent in the establishment of a new business
enterprise. To address these risks, we must:
o Establish market acceptance for our electronic trading system and other
products and services;
o Continue to retain, attract and motivate qualified personnel;
o Effectively manage our capital to support the expenses of developing
and marketing new products and services;
o Implement and successfully execute our business and marketing strategy;
o Respond to competitive developments and market conditions in the global
telecommunications industry; and
o Continue to develop and upgrade the RateXchange trading system.
Forward-Looking Statements
This section, and other sections of this prospectus, include certain
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, including, among others, those statements preceded by, following or
including the words "believe," "expect," "intend," "anticipate" or similar
expressions. These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Our actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating such forward-looking statements include:
o Changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the market;
o Our ability to raise sufficient capital to meet operating requirements;
o Various competitive factors that may prevent us from competing
successfully in the marketplace;
o Changes in external competitive market factors which might impact
trends in our results of operations; and
o Other risks described under "Risk Factors."
In light of these risks and uncertainties, there can be no assurance that
the events contemplated by the forward-looking statements contained in this
prospectus will in fact occur.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risks for changes in interest rates relate primarily
to investments in debt securities issued by U.S. government agencies and
corporate debt securities. We place our investments with high credit quality
issuers and, by policy, limit the amount of the credit exposure to any one
issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with less than three months to maturity are considered to be cash
equivalents. Investments with maturities between three and twelve months are
considered to be short-term investments. Investments with maturities in excess
of twelve months are considered to be long-term investments. We do not expect
any material loss with respect to our investment portfolio.
MANAGEMENT
The following sets forth certain information regarding our directors and
executive officers as of December 28, 2000.
Name Age Position
-------------------- --------- ---------------------------------------
D. Jonathan Merriman 40 President and Chief Executive Officer
Donald H. Sledge 60 Chairman of the Board of Directors
Dean S. Barr 40 Director
Gordon Hutchins, Jr. 51 Director
Ronald E. Spears 51 Director
32
Steven W. Town 40 Director
Christopher J. Vizas 50 Director
D. Jonathan Merriman, 40, has served as our Chief Executive Officer and
President since October 2000. He has served as a Director since February 2000.
In June 1998, Mr. Merriman became Managing Director and Head of the Equity
Capital Markets Group and member of the Board of Directors at First Security Van
Kasper. In this capacity, he oversaw the Research, Institutional Sales, Equity
Trading, Syndicate and Derivatives Trading departments. He is currently on the
Boards of Directors of Leading Brands, Inc., Fiberstars, Inc., SSE Telecom, Inc.
and the Internet Venture Fund, LLC. From June 1997, Mr. Merriman served as
Managing Director and head of Capital Markets at The Seidler Companies in Los
Angeles, where he also served on the firm's Board of Directors. Before Seidler,
Mr. Merriman was Director of Equities for Dabney/Resnick/Imperial, LLC. In 1989,
Mr. Merriman co-founded the hedge fund company Curhan, Merriman Capital
Management, Inc., which managed money for high net worth individuals and
corporations. Before Curhan, Merriman Capital Management, Inc., he worked in the
Risk Arbitrage Department at Bear Stearns & Co. as a trader/analyst. He has
completed coursework at New York University's Graduate School of Business. Mr.
Merriman received his Batchelor of Arts in Psychology from Dartmouth College.
Donald H. Sledge, 60, serves as our Chairman of the Board. Mr. Sledge
previously served as Chairman and Chief Executive Officer from February 2000
until October 2000. He has been a director since September 1999 and from
September 1999 until February of 2000 he served as President, Chief Executive
Officer and Chairman of our subsidiary RateXchange I. Mr. Sledge is currently a
general partner in Fremont Communications, a venture capital fund, based in San
Francisco. From 1996 to September 1999, Mr. Sledge was president and Chief
Executive Officer of TeleHub Communications Corporation, a next generation
ATM-based telecommunications company. From 1994 to 1995, Mr. Sledge served as
President and Chief Operating Officer of WCT, a $160-million long distance
telephone company that was one of Fortune Magazine's 25 fastest growing public
companies before it was acquired by Frontier Corporation. From 1993 to 1994, Mr.
Sledge was head of operations for New T&T, a Hong Kong-based start-up.He was
Chairman and Chief Executive Officer of New Zealand Telecom International from
1991 to 1993 and a member of the executive board of TCNZ, where he led
privatization and public offerings and served as managing director of New
Zealand's largest operating telephone company, Telecom Auckland Ltd. One of the
subsidiaries of Telehub Communications, Telehub Network Services Corporation,
filed for bankruptcy several months after Mr. Sledge resigned from Telehub. Mr.
Sledge also served as president and Chief Executive Officer of Pacific Telesis
International. Since November 1997, Mr. Sledge also has served on the Board of
Directors of eGlobe, Inc., a voice-based applications services provider. Mr.
Sledge holds a Masters of Business Administration and Batchelor of Arts degree
in industrial management from Texas Technological University.
Dean S. Barr, 40, has served as one of our directors since November 2000.
Mr. Barr is currently the Global Chief Investment Officer of Deutsche Asset
Management, a position he has held since 1999. In this role, Mr. Barr is
responsible for $600 billion in investment assets worldwide for Deutsche Bank.
Before joining Deutsche Bank, Mr. Barr served as Global Chief Investment Officer
of Active Strategies and Global Director of Research at State Street Global
Advisors where he was responsible for $120 billion in active investment assets.
Mr. Barr co-founded and served from 1988 to 1997 as Chief Executive Officer of
Advanced Investment Technology , a quantitative asset manager with $1 billion in
assets under management, until State Street Global Advisors purchased Advanced
Investment Technology. Mr. Barr began his career in 1984 at Goldman Sachs where
he worked on early trading applications for computer program trading. Mr. Barr
received his undergraduate degree from Cornell University and received his
Masters in Business Administration from New York University.
Gordon "Don" Hutchins, Jr., 51, has served as one of our directors since
June 2000. Since January 1996, Mr. Hutchins has served as a director of Star
Telecommunications, Inc., an international long distance carrier. Mr. Hutchins
is president and Chief Executive Officer of GH Associates, Inc., a McLean,
Virginia-based management consulting firm. The firm advises domestic and foreign
telecommunications companies regarding competitive long distance, local access,
and wireless services, with particular emphasis in the areas of strategic
planning, marketing, finance, mergers and acquisitions and regulatory affairs.
Before founding GH Associates in 1989, Mr. Hutchins served as President and
Chief Executive Officer of Institutional Communications Company, a competitive
local exchange carrier in
33
Washington, D.C., as senior vice president - sales and marketing of WilTel (now
WorldCom), and as president and Chief Executive Officer of LDX NET, an intercity
fiber optic network headquartered in St. Louis, Missouri. Mr. Hutchins is also a
former board member of the Telecommunications Resellers Association and a
founder of its predecessor organization, the Telecommunications Marketing
Association. Mr. Hutchins received his Bachelor of Science degree in electrical
engineering from the University of Massachusetts and his Masters of Business
Administration from University of Dallas.
Ronald E. Spears has served as one of our directors since March 2000.
Throughout his 20-year career, he has managed telecommunications and
professional service start-ups, as well as established long distance
powerhouses. Since June 2000, Mr. Spears has led the formulation and
implementation of corporate-wide development related to strategic planning,
marketing and communications, business alliances as Vaultus', formerly
MobileLogic, President and Chief Executive Officer. Mr. Spears joined Vaultus
after serving as the President and Chief Executive Officer of CMGI Solutions, an
enterprise focused Internet solutions provider from April 1999 to May 2000.
Before joining CMGI Solutions, Mr. Spears served as president and COO of e.spire
Communications, one of the nation's fastest growing integrated communications
providers, from February 1998 to April 1999 where he managed day-to-day business
operations and saw significant growth in revenue and market share. From June
1995 to January 1998 he was corporate vice president at Citizens Utilities,
managing that company's independent telephone company operations in 13 states.
He also served as President of MCI WorldCom, Inc.'s Midwest Division from 1984
to 1990. A pioneer of the competitive long distance industry, Mr. Spears began
his career in telecommunications as a manager of AT&T Longlines in 1978,
following eight years as an officer in the U.S. Army. He is a graduate of the
United Military Academy at West Point and also holds a Master's Degree in Public
Service from Western Kentucky University.
Steven W. Town, 40, has served as one of our directors since October 2000.
Mr. Town currently serves as Co-Chief Executive Officer of the Amerex Natural
Gas, Amerex Power and Amerex Bandwidth, Ltd. Mr. Town began his commodities
career in 1987 in the retail futures industry prior to joining the Amerex Group
of Companies. He began the Amerex futures and forwards brokerage group in
natural gas in 1990, in Washington D.C., and moved this unit of Amerex to
Houston in 1992. During Mr. Town's tenure as Co-Chief Executive Officer, the
Amerex companies have become the leading brokerage organizations in their
respective industries. Amerex currently provides energy, power and bandwidth
brokerage services to many of the energy companies. Mr. Town is a graduate of
Oklahoma State University.
Christopher Vizas, 50, has served as one of our directors since February
2000. He is the Chairman and Chief Executive Officer of eGlobe, Inc. Mr. Vizas
was elected Chairman of eGlobe's Board of Directors in November 1997. Mr. Vizas
served as eGlobe's acting Chief Executive Officer from November 1997 to December
1997, when he became eGlobe's Chief Executive Officer. Before joining eGlobe,
Mr. Vizas was a co-founder of, and since Ocober 1995, served as Chief Executive
Officer of Quo Vadis International, an investment and financial advisory firm.
Before forming Quo Vadis International, he was Chief Executive Officer of
Millennium Capital Development, a merchant banking firm, and of its predecessor
Kouri Telecommunication & Technology from 1994 to 1995. Before joining Kouri Mr.
Vizas shared in the founding and development of a series of technology
companies, including Orion Network Sstems, Inc. of which he was a founder and a
principal executive. From April 1987 to 1992, Mr. Vizas served as Vice Chairman
of Orion, an international satellite communications company, and served as a
Director from 1982 until 1992. Before pursuing his business interests, Mr. Vizas
held various positions in the United States Government, serving in the White
House Office of Telecommunications Policy, as Special Counsel to the U.S.
Privacy Commission and on the staff of the U.S. House of Representatives. Mr.
Vizas is a graduate of Yale University.
34
OTHER KEY EMPLOYEES
Nick Cioll, 42, is our Senior Vice President of Trading Operations. We hired
Mr. Cioll in 1999. Mr. Cioll brings to us a broad range of experience, including
business-to-business E-commerce, and trading and commodities expertise from the
electricity, energy, chemicals and metals industries. He was the Chief Financial
Officer of an affiliate of Freeport McMoRan from 1993 to 1995. From 1998 to
1999, Mr. Cioll was the Vice President of Marketing and Business Development for
Automated Power Exchange, a leading business-to-business exchange in
electricity. From 1988 to 1990, Mr. Cioll was the commodities manager at Kaiser
Aluminum. Mr. Cioll has a Batchelor of Science degree in economics, a Masters in
Business Administration and a Master of Science degree in finance equivalency,
and is a licensed certified public accountant.
Terry Ginn, 55, is our Senior Vice President of Software Engineering. Since
1999, Mr. Ginn has led the Software Engineering and Development department,
developing the architecture and the platform on which the electronic trading
system will operate. As the Director of SRI International from 1993 to 1999, Mr.
Ginn was responsible for planning, marketing, program management, operations and
personnel management. While working at Hughes Aircraft Company from 1990 to
1993, Mr. Ginn directed the research and developement department. From 1977 to
1990 Mr. Ginn performed initial systems requirements analysis and design using
object-oriented techniques, and he developed software processes and procedures
at Lockheed Sanders. Mr. Ginn holds a Batchelor of Science and Master of Science
degree in mathematics from the University of Kentucky.
Stephen E. Kanaval, 43, has served as our Senior Vice President of
Derivatives since 2000. Before joining us, Mr. Kanaval served as Senior Vice
President of Equity Capital Markets Group at First Security Van Kasper from 1999
to 2000. In this capacity, he oversaw the Listed and OTC trading departments,
and was responsible for capital commitment for the firm. He was on the merger
committee for the Wells Fargo merger, and directed the expansion of the trading
floor. Mr. Kanaval previously was director of Market Neutral trading for Husic
Capital from 1997 to 1998 where he worked on a team managing $300 million in
assets within the firm. Before Husic, Mr. Kanaval was Founder, President and
Chief Executive Officer of Chicago Arbitrage Group from 1988 to 1998, a
derivatives trading firm in Chicago specializing in developing trading strategy
and execution for institutions and high net worth clients. He was on the
original Futures Task Force at Morgan Stanley from 1984 to 1987 and was floor
manager for Index Arbitrage Trading for Morgan Stanley at the Chicago Mercantile
Exchange. He also was a market maker at the Chicago Mercantile Exchange on and
off for two decades. Mr. Kanaval attended Franklin University School of Business
in Columbus Ohio.
Russell Matulich, 37, is our Senior Vice President of Sales Origination. We
hired Mr. Matulich in 1999. As the vice president of global sales and marketing
for WorldPort Communications from 1998 until 1999, Mr. Matulich managed a global
sales force that targeted carriers, high-end corporate accounts and internet
service providers, primarily in Europe. From 1997 to 1998 Mr. Matulich held the
position of Vice President of Carrier Sales at Frontier Telecommunications. Mr.
Matulich is a sales and marketing executive with over 15 years of experience in
the development, implementation and management of innovative and highly
successful sales and marketing programs for both start-up venture and
world-leading telecommunications corporations competing in international
markets.
35
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation paid
for services rendered during the last three completed fiscal years to the
individual who served as our chief executive officer in 1999 and to our other
executive officers whose total salary and bonus for 1999 exceeded $100,000.
Information is also presented for three current and former executive officers of
our subsidiary, RateXchange I, Inc., who we appointed executive officers of our
company in February 2000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Awards
Annual Compensation ----------------------
---------------------------------------
Securities Underlying
Name and Principal Position Year Salary Bonus Options
--------------------------- --------- ------------- ----------- ----------------------
Gordon Reichard, Jr. (1)
President and
Chief Executive Officer 1999 $0 $0 0
1998 n/a n/a n/a
1997 n/a n/a n/a
Douglas Cole (2)
Chairman and Chief Executive Officer 1999 $126,000 $125,000 100,000
1998 n/a n/a n/a
1997 n/a n/a n/a
Edward Mooney (3)
Executive Vice President, Secretary
and Treasurer 1999 $90,000 $125,000 100,000
1998 n/a n/a n/a
1997 n/a n/a n/a
Donald Sledge (4)
Chairman and Chief Executive Officer 1999 $94,653 $75,000 100,000
1998 n/a n/a n/a
1997 n/a n/a n/a
Ross Mayfield (5)
President 1999 $87,619 $0 100,000
1998 n/a n/a n/a
1997 n/a n/a n/a
Paul Wescott (6)
Chief Operating Officer 1999 $64,230 $0 150,000
1998 n/a n/a n/a
1997 n/a n/a n/a
-------------
(1) Mr. Reichard was hired as an officer in April 1999 and resigned in September 1999.
(2) Mr. Cole was hired as an officer on April 1, 1999 and resigned in February
2000. Mr. Cole's annual salary was $168,000, plus a bonus, under his
employment agreement. Mr. Cole's bonus of $125,000 accrued at year-end.
However, the bonus was not paid to Mr. Cole until 2000.
(3) Mr. Mooney was hired as an officer on April 1, 1999 and resigned as
Executive Vice President in February 2000 and as Secretary and Treasurer in
March 2000. Mr. Mooney's annual salary was $120,000, plus a bonus, under his
employment agreement. Mr. Mooney's bonus of $125,000 accrued at year-end.
However, the bonus was not paid to Mr. Mooney until 2000.
(4) Mr. Sledge was hired on September 15, 1999 as one of our directors and as
the Chairman and Chief Executive Officer of RateXchange I, Inc., one of our
subsidiaries. Mr. Sledge was appointed our Chairman and Chief Executive
Officer in February 2000 and currently serves as Chairman of our Board of
Directors. Mr. Sledge's annual salary with our company was $300,000, plus a
bonus, under his employment agreement. Mr. Sledge also received
approximately $1,000 each month for car allowance and approximately $1,000
each month for payment of whole life insurance premiums.
36
(5) Mr. Mayfield was hired as an executive officer of RateXchange I, Inc., one
of our subsidiaries, in July 1999. While employed at RateXchange I, Mr.
Mayfield served, at various times during 1999, as Vice President of Sales
and Marketing, Chief Operating Officer and President. Mr. Mayfield's annual
salary at RateXchange I during 1999 was $165,000, plus a bonus, under his
employment agreement. We appointed Mr. Mayfield as our President in February
2000. Mr. Mayfield's employment with RateXchange and its subsidiaries was
terminated effective August 15, 2000.
(6) Mr. Wescott was hired as an executive officer of RateXchange I, Inc., one of
our subsidiaries, in September 1999. While employed at RateXchange I, Mr.
Wescott served, at various times during 1999, as an Executive Vice
President, Chief Operating Officer and Vice President of Business
Development. Mr. Wescott's annual salary at RateXchange I during 1999 was
$165,000, plus bonuses, under his employment agreement. We appointed Mr.
Wescott our Chief Operating Officer in February 2000. Mr. Wescott's
employment with RateXchange and its subsidiaries was terminated effective
October 1, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted during
fiscal year 1999 to the named executive officers. No stock appreciation rights
were granted in 1999.
Individual Grants
----------------------------------------------------------
Number of Percent of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock Price
Underlying Granted to Exercise or Appreciation for Option Term
Options Employees in Base Price Per Expiration
Name Granted 1999 Share(1) Date 5% ($) 10% ($)
------------------- ---------- -------------- -------------- -------------- ----------------------------------
Gordon Reichard, Jr. 250,000 8.20% $ 1.60 1/2004 $ 110,520 $ 244,204
Douglas Cole 100,000 3.28% $ 1.60 1/2004 $ 44,205 $ 97,682
Edward Mooney 100,000 3.28% $ 1.60 1/2004 $ 44,205 $ 97,682
Donald Sledge 100,000 3.28% $ 2.75 10/2004 $ 75,977 $ 167,890
Ross Mayfield 40,000 1.31% $ 2.50 7/2004 $ 27,628 $ 61,051
60,000 1.97% $ 2.75 7/2004 $ 45,586 $ 100,734
Paul Wescott 150,000 4.92% $ 2.75 9/2004 $ 113,966 $ 251,835
---------------
(1) The exercise prices of the options included in this table reflect the
board's bona fide estimation of market value of the shares on the various
grant dates.
FEBRUARY 2000 OPTION GRANTS TO THE NAMED EXECUTIVE OFFICERS
On February 24, 2000, the following non-qualified, non-plan options were
granted to our named executive officers. Each of the shares of common stock
underlying the options granted has an exercise price of $7.00.
o Douglas Cole was granted an option to purchase 100,000 shares of common
stock for his services as a director. Mr. Cole's options are fully
vested.
o Edward Mooney was granted an option to purchase 100,000 shares of
common stock for his services as a consultant. Fifty percent of Mr.
Mooney's options vested immediately and the remainder will vest on
February 24, 2001.
o Donald Sledge was granted an option to purchase 1,500,000 shares of
common stock for his services as our Chairman and Chief Executive
Officer. Five hundred thousand of Mr. Sledge's options vested
immediately, 300,000 vested on January 1, 2001 and 300,000 will vest on
January 1, 2002. Four hundred thousand of the options vested when our
common stock traded for ten consecutive days above $20.00 in the spring
of 2000.
o Ross Mayfield was granted 300,000 options for his services as executive
officer. Seventy-five thousand of Mr. Mayfield's options vested
immediately, another 75,000 options vested on May 28, 2000 and the
remainder of Mr. Mayfield's options will vest on February 15, 2001.
37
o Paul Wescott was granted 250,000 options for his services as our Chief
Operating Officer. Sixty-two thousand five hundred of Mr. Wescott's
options vested immediately, an additional 62,500 options will vest on
February 24, 2001 and beginning March 24, 2001 continuing through
September 24, 2001, 1/36 of his remaining options will vest per month,
with the remainder being cancelled.
38
SECURITIES UNDERLYING UNEXERCISED OPTIONS AT FISCAL YEAR END
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each of the named
executive officers concerning the number of securities underlying unexercised
options at the end of fiscal year 1999 and the 1999 fiscal year-end value of all
unexercised in-the-money options held by such individuals. No options were
exercised by any named executive officer in fiscal year 1999.
Number of Securities
Underlying Value of Unexercised
Unexercised Options(#) In-the-Money Options($)(1)
----------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------- ----------------------------- ----------------------------
Gordon Reichard, Jr. 250,000 0 $1,100,000 0
Douglas Cole 100,000 0 $ 440,000 0
Edward Mooney 100,000 0 $ 440,000 0
Donald Sledge 100,000 0 $ 325,000 0
Ross Mayfield 0 100,000 0 $ 335,000
Paul Wescott 37,500 112,500 $ 121,875 $ 365,625
------------------
(1) Market values of underlying securities at exercise or year-end minus the
exercise price.
Compensation of Directors
Our directors may receive stock option grants for service on our board of
directors. Messrs. Cole and Mooney each received options to purchase 100,000
shares of our common stock in January 1999 at an exercise price of $1.60 per
share for their services as board members. Douglas Glen, who resigned as a
director in March 2000, received options to purchase 175,000 shares of our
common stock in April 1999 at an exercise price of $1.60 per share for his
service as a board member. For their services on the board, Mr. Sledge and John
Dixon, who resigned as a director in February 2000, each received options to
purchase 100,000 shares of our common stock in October 1999 at an exercise price
of $2.75 per share. Our non-employee directors receive $500 for each board
meeting attended in person and $100 for each board meeting attended
telephonically, plus out-of-pocket expenses. There is no separate compensation
for committee meeting attendance.
EMPLOYMENT AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
Effective April 1, 1999, we entered into employment agreements with each of
Messrs. Cole and Mooney. Mr. Cole's employment agreement provided for an annual
base salary of $168,000, an annual incentive bonus of up to 100% of Mr. Cole's
base salary, option rights and other employee benefits. Under this agreement,
Mr. Cole's employment could be terminated for cause or upon death, and all of
our obligations to pay compensation and provide benefits would thereafter cease.
Mr. Cole's employment also could be terminated without cause if we paid Mr.
Cole's base salary for 180 days following termination.
Mr. Mooney's employment agreement provided for an annual base salary of
$120,000, an annual incentive bonus of up to 100% of Mr. Mooney's base salary,
option rights and other employee benefits. Under this agreement, Mr. Mooney's
employment could be terminated for cause or upon death, and all of our
obligations to pay compensation and provide benefits would thereafter cease. Mr.
Mooney's employment also could be terminated without cause if we paid Mr.
Mooney's base salary for 180 days following termination.
As part of our restructuring to focus on the business of RateXchange I,
Inc., Mr. Cole agreed to resign his position as an executive officer, effective
February 2000. Mr. Mooney resigned his positions as a director and an executive
officer in February 2000. In March 2000, Mr. Mooney resigned as Secretary and
Treasurer. Under severance agreements Messrs. Cole and Mooney executed with us,
Mr. Cole and Mr. Mooney will receive six-months' severance pay.
In February 2000, we appointed Donald Sledge our Chairman and Chief
Executive Officer, Ross Mayfield our President and Paul Wescott our Chief
Operating Officer. Previously these individuals were officers of RateXchange I
since the fourth quarter of 1999. In March 2000, we appointed Philip Rice our
Executive Vice President and Chief Financial Officer. In connection with these
appointments, we entered into separate employment agreements with Messrs.
Sledge, Rice, Mayfield and Wescott.
39
Mr. Sledge's employment agreement provided for him to serve as President and
Chief Executive Officer of RateXchange I with an annual base salary of $300,000,
an annual incentive bonus of up to 50% of base salary, a 10% interest in
RateXchange I, Inc., an expense reimbursement and other employee benefits. Under
this agreement, Mr. Sledge's employment may be terminated for cause or upon
death or disability so long as we pay all compensation owed as of the date of
termination. Mr. Sledge's employment may be terminated without cause if we pay
him severance pay equal to one year's annual salary and a bonus payment of
$150,000. In October 2000, Mr. Sledge resigned as Chief Executive Officer, but
continues to serve as Chairman.
Mr. Rice's employment agreement provided for an annual base salary of
$200,000, an annual incentive bonus of up to 50% of his base salary, option
rights and other employee benefits. Under this agreement, Mr. Rice's employment
could be terminated for cause, or upon death or disability, and all of our
obligations to pay compensation and provide benefits would thereafter cease. Mr.
Rice's employment also could be terminated without cause if we paid to Mr. Rice
his base salary for twelve months following termination, as well as a lump sum
payment of $100,000, and provided Mr. Rice other specified benefits.
Mr. Mayfield's employment agreement provided for an annual base salary of
$165,000, an annual incentive bonus of up to 50% of Mr. Mayfield's base salary,
option rights and other employee benefits. Under this agreement, Mr. Mayfield's
employment could be terminated for cause or upon death or disability, and all of
our obligations to pay compensation and provide benefits would thereafter cease.
Mr. Mayfield's employment also could be terminated without cause if we paid Mr.
Mayfield's base salary for twelve months following termination, as well as a
lump sum payment of $100,000, and provided Mr. Mayfield other specified
benefits.
Mr. Wescott's employment agreement provided for an annual base salary of
$200,000, an annual incentive bonus of up to 50% of his base salary, option
rights and other employee benefits. Under this agreement, Mr. Wescott's
employment could be terminated for cause, or upon death or disability, and all
of our obligations to pay compensation and provide benefits would thereafter
cease. Mr. Wescott's employment also could be terminated without cause if we
paid to Mr. Wescott his base salary for twelve months following termination, as
well as a lump sum payment of $100,000, and provided Mr. Wescott other specified
benefits.
Effective August 15, 2000, Mr. Mayfield's employment was terminated. Under a
separation agreement entered into with Mr. Mayfield, he received or is entitled
to receive:
o His annual salary through February 15, 2001;
o Lump sum payments of $50,000 on August 18, 2000 and $82,250 on February
15, 2001;
o Accelerated vesting of a total of 93,750 stock options previously
granted to him, together with an extension for two years from August
15, 2000 within which to exercise the options; and
o Full benefits for Mr. Mayfield and his family through February 15,
2001.
Effective October 1, 2000, Mr. Wescott's employment was terminated. Under a
separation agreement entered into with Mr. Wescott, he received or is entitled
to receive:
o His annual salary through March 31, 2001;
o Lump sum payments of $75,000 on October 2, 2000, $25,000 on January 2,
2001, $100,000 on April 1, 2001, and $50,000 on April 2, 2001; and
o Accelerated vesting of a total of 173,956 stock options held by him,
together with an extension for two years following October 1, 2000
within which to exercise 137,500 of the options and a 90-day exercise
period beginning on October 1, 2001 to exercise 36,456 of the options.
Effective October 5, 2000, Mr. Sledge was named our Chairman and Mr.
Merriman was named our President and Chief Executive Officer. Effective on that
date, Mr. Sledge's employment agreement was amended to reflect his change in
status from President and Chief Executive Officer to Chairman. As Chairman, Mr.
Sledge was employed on a part-time basis to render executive, policy and other
management services to us of the type customarily performed by persons serving
in such capacity. Under the amendment to his employment agreement, Mr. Sledge's
annual salary was reduced to $120,000 per year and any entitlement to a
guaranteed bonus for 2000 or for any future year was eliminated.
Effective January 21, 2001, Mr. Rice resigned.
40
In connection with Mr. Merriman's appointment as our new President and Chief
Executive Officer, we entered into an employment agreement with Mr. Merriman. We
subsequently amended that agreement, effective December 11, 2000. Mr. Merriman's
amended employment agreement, which has a term of three years, provides for a
decrease in his annual base salary from $300,000 to $100,000, subject to
increase at our discretion. Mr. Merriman has the ability to earn an additional
$200,000, should the Company secure additional financing. The amended agreement
also includes a $200,000 bonus payable on January 2, 2001, expense reimbursement
and other employee benefits. Under his employment agreement, Mr. Merriman has
been awarded ten-year stock options, which will be incentive options to the
extent permissible under Section 422 of the Internal Revenue Code of 1986, as
amended, to purchase a total of 2,000,000 shares of our common stock at an
exercise price of $3.19 per share, as follows:
o Options to purchase 500,000 shares vesting on October 5, 2000;
o Options to purchase 500,000 shares vesting on January 1, 2005, subject
to acceleration of vesting upon the completion of a financing for $15
million and further subject, in either case, to continued employment on
such date;
o Options to purchase 250,000 shares vesting on October 5, 2001, subject
to continued employment on that date;
o Options to purchase 250,000 shares vesting on October 5, 2002, subject
to continued employment on that date;
o Options to purchase 250,000 shares vesting on January 1, 2007, subject
to acceleration of vesting immediately following the first quarter of
positive earnings before interest, taxes, depreciation and amortization
after January 2001 and further subject, in either case, to continued
employment on such date; and
o Options to purchase 250,000 shares vesting on January 1, 2006, subject
to acceleration of vesting immediately after the common stock has
traded on AMEX at a price of $7.00 per share or more for 30 consecutive
trading days, subject, in either case, to continued employment on such
date.
The vesting of the stock options will accelerate, and Mr. Merriman will
additionally be entitled to receive a payment of $1.0 million from RateXchange,
upon:
o A sale of all or substantially all of our assets;
o A merger of our company with another entity where we are not the
surviving entity or where our stockholders immediately prior to the
merger own less than 50% of our voting stock following the merger; or
o A change in the membership of the board of directors such that
individuals who, as of October 5, 2000, constitute our board of
directors cease for any reason to constitute at least a majority of the
board of directors; provided that any individual becoming a director
subsequent to October 5, 2000 whose election, or nomination for
election by our stockholders, was approved by a vote of at least a
majority of the directors then comprising the incumbent board shall be
considered as though the individual were a member of the incumbent
board, but excluding, for this purpose, any individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors
or other actual or threatened solicitation of proxies or consents by or
on behalf of a person other than our board of directors.
Under Mr. Merriman's employment agreement, Mr. Merriman's employment may be
terminated for cause or upon death or disability so long as we pay all
compensation owed as of the date of termination. Mr. Merriman's employment
agreement may be terminated by us without cause if we pay to Mr. Merriman his
base salary for twelve months following termination, any bonus that had been
earned but not paid at the time of termination and all other benefits and
compensation he would have been entitled to receive under the agreement had his
employment not been terminated. All stock options granted to him under his
employment also would immediately vest. Mr. Merriman would be entitled to
receive the same payments and acceleration of the vesting of his options if he
were to terminate his employment for "good reason," as that term is defined in
his employment agreement.
41
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before creating the compensation committee during 1999, members of our board
of directors performed all functions currently delegated to the compensation
committee. During 1999, the following directors served as compensation committee
members: Douglas Cole, John Dixon and Douglas Glen. Currently, our compensation
committee is composed of Jonathan Merriman, Ronald Spears and Gordon Hutchins,
Jr. John Dixon, Douglas Glen and Douglas Cole resigned from the compensation
committee in 2000 when they resigned from our board of directors.
Douglas Cole
In addition to his membership on our board of directors and as a member of
the compensation committee, until February 2000, Mr. Cole was our President and
Chief Executive Officer. Furthermore, in 1999, Mr. Cole served as chief
executive officer of PolarCap, Inc., our wholly owned subsidiary and a director
of RateXchange I, Inc., another subsidiary.
Mr. Cole is acting chief executive officer and a director of Fulcrum
International, Inc. Mr. Glen, one of our former compensation committee members,
was also a director of Fulcrum and has served on its compensation committee or
board equivalent.
Mr. Cole was promisor on two notes held by us for the purchase of shares of
our common stock in the principal amounts of $22,257.40 and $125,000 and dated
January 2, 1999, and December 18, 1998, respectively. Interest on each note was
6.5 % APR, and, together with any unpaid principal on the notes, was due on
January 2, 2001, and December 18, 2000, respectively. The greatest aggregate
amount outstanding on the notes during 1999 was approximately $23,703 and
$133,000, respectively, on December 31, 1999. In February 2000, Mr. Cole fully
satisfied his obligations under the January 2, 1999 note; however, because Mr.
Cole paid the entire principal amount owed under this note early at our request,
we agreed to waive unpaid accrued interest in the approximate amount of $1,500.
In March 2000, Mr. Cole paid the December 18, 1998 note in full, including all
accrued interest.
John Dixon
During 1999, John Dixon was a member of our compensation committee; however,
he has never been an officer or employee of RateXchange or its subsidiaries. Mr.
Dixon resigned as a director in February 2000.
Douglas Glen
During 1999, Douglas Glen was a member of our compensation committee;
however, he has never been an officer or employee of RateXchange or its
subsidiaries. Mr. Glen is a director of Fulcrum International, Inc. and has
served on that company's compensation committee or board equivalent. Mr. Cole,
one of our former compensation committee members, is the acting chief executive
officer and a director of Fulcrum. Mr. Glen resigned as one of our directors in
March 2000.
Edward Mooney
Mr. Mooney, who participated in Board deliberations regarding executive
officer compensation, also served as our Executive Vice President, Secretary and
Treasurer during 1999. Mr. Mooney resigned as both Executive Vice President and
director in February 2000 and resigned as Secretary and Treasurer in March 2000.
In addition, during 1999 Mr. Mooney served as a director and as secretary of
RateXchange I, Inc., and as a director of Telenisus Corporation, one of our
former subsidiaries. Currently, he is a consultant to Maroon Bells Capital, LLC,
a merchant banking firm that is a party to a consulting agreement with us.
42
On December 15, 1998, we entered into an advisory agreement with Maroon
Bells Capital Partners, Inc. for 18 months with an automatic 12-month renewal.
In February 2000 we extended the term of this agreement until January 2001.
Under the advisory agreement, Maroon Bells provides us with specified advisory
and business development services in exchange for a monthly advisory fee. In
addition, Maroon Bells will be paid a success fee upon the completion of certain
merger and acquisition and business development activities on our behalf. The
cost of the Maroon Bells consulting agreement to us during 1999 was $120,000 in
advisory fees, $315,800 in success fees for financings and acquisitions and
warrants to purchase 250,000 of our shares at $2.75 per share. We anticipate
paying to Maroon Bells at least $120,000 in advisory fees and at least $150,000
in structuring and financing success fees during 2000.
Mr. Mooney was promisor on a note held by us for the purchase of 400,000
shares of our common stock in the amount of $87,520 and dated December 18, 1998.
The note was secured and accrued interest at a rate of 6.5% APR, with principal
and interest due in two years on December 18, 2000. The largest aggregate amount
owed by Mr. Mooney during 1999 was approximately $93,550 on December 31, 1999
and during 1998 was approximately $87,710 on December 31, 1998. In February
2000, Mr. Mooney paid the note in full, including all accrued interest.
Donald Sledge
As a board member, Mr. Sledge participated in board deliberations regarding
executive officer compensation. Mr. Sledge was appointed our Chief Executive
Officer in February 2000 and also served as Chief Executive Officer of
RateXchange I, Inc. during 1999. Mr. Sledge's son is also an employee of
RateXchange I, Inc., earning a base salary of approximately $70,000 annually.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
our common stock as of February 8, 2001, by (a) each person who is known by us
to own beneficially more than five percent of our outstanding common stock, (b)
each of our directors, (c) each of the named executive officers and (d) all
directors and executive officers as a group.
Name of Beneficial Owner Common Stock Beneficially Owned Percentage (1)
------------------------ ------------------------------- --------------
Dean S. Barr (2) 83,750 *
Douglas Cole (3) 660,074 3.58%
Gordon Hutchins, Jr. (4) 66,667 *
Ross Mayfield (5) 416,675 2.29%
D. Jonathan Merriman (6) 1,126,000 5.95%
Edward Mooney (7) 577,000 3.14%
Gordon Reichard, Jr. (8) 250,000 1.39%
Philip Rice (9) 32,500 *
Donald H. Sledge (10) 1,305,000 6.84%
Ronald E. Spears (11) 100,000 *
Steven W. Town (12) 50,000 *
Christopher Vizas (13) 100,000 *
Paul Wescott (14) 186,458 1.03%
All directors and executive officers as a group (15) 4,954,124 21.79%
-------------
* Less than one percent.
43
(1) Applicable percentage ownership is based on 17,783,174 shares of common
stock outstanding as of February 8, 2001. Pursuant to the rules of the
Securities and Exchange Commission, shares shown as "beneficially" owned
include all shares of which the persons listed have the right to acquire
beneficial ownership within 60 days of February 8, 2001, including (a)
shares subject to options, warrants or any other right exercisable within
60 days of February 8, 2001, even if these shares are not currently
outstanding, (b) shares attainable through conversion of other securities,
even if these shares are not currently outstanding, (c) shares that may be
obtained under the power to revoke a trust, discretionary account or
similar arrangement and (d) shares that may be obtained pursuant to the
automatic termination of a trust, discretionary account or similar
arrangement. This information is not necessarily indicative of beneficial
ownership for any other purpose. Our directors and executive officers have
sole voting and investment power over the shares of common stock held in
their names, except as noted in the following footnotes.
(2) Includes 27,500 shares and 6,250 warrants (exercisable at $5.00) held by
members of Mr. Barr's family. Includes 50,000 currently exercisable
options to purchase common stock at $1.56.
(3) Includes 37,500 shares held by members of Mr. Cole's family. Includes
currently exercisable options to purchase 100,000 shares of common stock
at $1.60 per share, and 100,000 shares of common stock at $7.00 per share.
Mr. Cole resigned as our Chief Executive Officer in February 2000 and as a
director in June 2000.
(4) Includes Mr. Hutchins currently exercisable options to purchase 66,667
shares of common stock at $5.69 per share. Mr. Hutchins also holds options
to purchase 33,333 shares of common stock that are not currently
exercisable.
(5) Includes Mr. Mayfield's currently exercisable options to purchase 40,000
shares of common stock at $2.50 per share, 60,000 shares of common stock
at $2.75 per share, and 300,000 shares of common stock at $7.00 per share.
(6) Includes Mr. Merriman's currently exercisable options to purchase 100,000
shares of common stock at $7.00 per share and 500,000 shares of common
stock at $3.19 per share. Mr. Merriman also holds options to purchase
1,500,000 shares of common stock that are not currently exercisable.
(7) Includes Mr. Mooney's currently exercisable options to purchase 100,000
shares of common stock at $160 per share and 100,000 shares of common
stock at $7.00 per share.
(8) Includes Mr. Reichard's currently exercisable options to purchase 250,000
shares of common stock at $1.60 per share.
(9) Includes Mr. Rice's currently exercisable warrant to purchase 4,167 shares
of common stock at $14.40 per share.
(10) Includes Mr. Sledge's currently exercisable options to purchase 100,000
shares of common stock at $2.75 per share and 1,200,000 shares of common
stock at $7.00 per share. Mr. Sledge holds additional options to purchase
300,000 shares of common stock that are not currently exercisable.
(11) Includes Mr. Spears' currently exercisable options to purchase 100,000
shares of common stock at $7.00 per share.
(12) Includes Mr. Town's currently exercisable options to purchase 50,000
shares of common stock at $2.87 per share. Mr. Town also holds option to
purchase 50,000 shares of common stock that are not currently exercisable.
(13) Includes Mr. Vizas' currently exercisable options to purchase 100,000
shares of common stock at $7.00 per share.
(14) Includes Mr. Wescott's currently exercisable options to purchase 112,500
shares of common stock at $2.75 per share, 67,708 shares of common stock
at $7.00 per share and a currently exercisable warrant to purchase 2,083
shares of common stock at $14.40 per share. Mr. Wescott also holds options
to purchase an additional 31,248 shares of common stock that are not
currently exercisable.
44
(15) The total for directors and executive officers as a group includes
1,387,149 shares of common stock, 3,496,875 shares subject to outstanding
stock options that are currently exercisable, and 62,500 shares subject to
outstanding warrants that are currently exercisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of a transaction agreed to in October 1998, our board of directors
authorized the issuance to Theodore Swindells, Douglas Cole and another
unrelated party a total of 666,574 shares of our common stock in exchange for a
total of $66,657 in secured notes dated January 2, 1999. Our board of directors
has placed restrictions on this stock so that the stock cannot be sold, traded,
assigned, transferred or pledged until we reach $10,000,000 in gross revenues in
a one-year period. Mr. Cole was one of our directors and executive officers.
Interest on the notes was 6.5% APR and, together with any unpaid principal on
the notes, was due on January 2, 2001. The greatest aggregate amount outstanding
on the notes during 1999 was $70,990, on December 31, 1999. In February 2000,
the parties fully satisfied their obligations under the January 2, 1999 notes.
Because Messrs. Swindells and Cole paid the entire principal amount owed under
these notes early at our request, we agreed to waive unpaid accrued interest in
the approximate amount of $4,700. During 1999, 1998 and 1997, the Company, in
its periodic reports filed with the Securities Exchange Commission, listed Mr.
Swindells' beneficial ownership to be in excess of 5%.
Maroon Bells has a consulting agreement with us, which includes a monthly
retainer of $10,000, and can earn cash or stock for successfully assisting us in
obtaining financing. Theodore Swindells is a principal of Maroon Bells. Edward
Mooney, a former director and executive officer of ours, is now a consultant to
Maroon Bells. Mr. Mooney's interest in the consulting agreement is limited to
his interest in Maroon Bells as a consultant to that company. Mr. Mooney is not
a stockholder of Maroon Bells.
In March 1999, we sold 525,000 shares of our common stock to Theodore
Swindells in exchange for a note in the amount of $560,000 and bearing interest
at a rate of 6.5% APR, due in March 2001. Mr. Swindells' obligation under this
note was fully satisfied in February 2000. Because Mr. Swindells paid the entire
principal amount owed under the note more than one year early, we agreed to
waive all interest accrued in the amount of approximately $25,000. In
conjunction with a private offering of our securities in February 2000, we paid
the investment banking firm First Security Van Kasper a commission consisting of
7% of the aggregate proceeds of the offering and warrants to purchase shares of
our common stock in an amount equal to 7% of the common stock purchased by
investors at an exercise price of $12.00 per share and 7% of the warrants
purchased by investors at an exercise price of $14.40 per share. Mr. Merriman, a
member of our board of directors since February 2000 and our President and Chief
Executive Officer since October 2000, is a director of First Security Van
Kasper. He previously was managing director and head of First Security Van
Kasper's Equity Capital Markets Group.
In February 2000, RateXchange I, Inc. closed a $2,000,000 convertible note
offering. The notes offered were convertible into RateXchange I, Inc. common
stock at a price per share to be determined in an anticipated subsequent
financing of RateXchange I, Inc. As a result of our new business strategy, we
offered to such note holders the right to convert their notes into our common
stock at an exchange rate of $5.00 per share. In addition, we agreed to issue
such holders an aggregate of 500,000 warrants to purchase common stock at $5.00
per share. As of December 13, 2000, note holders have elected to convert
$1,975,000 of the notes.
Under the offer to convert the RateXchange I, Inc. notes into our common
stock and warrants to purchase our common stock, First Security Van Kasper,
Venture Fund I elected to convert its $525,000 note into 105,000 shares of
common stock, as well as accepted a warrant to purchase an additional 131,250
shares at $5.00 per share. In addition, we issued to First Security Van Kasper a
warrant to purchase 40,770 shares of our common stock at $5.00 per share to
compensate First Security Van Kasper for its services as placement agent during
the RateXchange I, Inc. convertible note offering.
Under the offer to convert the RateXchange I, Inc. notes into our common
stock and warrants to purchase our common stock, Theodore Swindells elected to
convert his $100,000 note into 20,000 shares of our common stock, as well as
accepted a warrant to purchase an additional 25,000 shares at $5.00 per share.
For a description of other transactions involving our directors and us, see
the transactions presented under the caption "Compensation Committee Interlocks
and Insider Participation."
45
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we have filed with the
Securities and Exchange Commission to register 4,934,162 shares of our common
stock. This prospectus does not include all of the information contained in the
registration statement and the exhibits to the registration statement. For
further information about the shares, and us you should read the registration
statement and the exhibits to the registration statement. Statements contained
in this prospectus concerning documents we have filed with the SEC as exhibits
to the registration statement or otherwise are not necessarily complete and, in
each instance, you should refer to the actual filed document.
We have not authorized anyone to provide you with any information that is
different from the information contained in this prospectus. The selling
stockholders are offering to sell and seeking offers to buy the shares only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of the sale of any shares.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and special reports and proxy
statements and other information with the SEC. Our SEC filings are available to
the public over the Internet at the SEC's web site at http://www.sec.gov. You
may also read and copy any document we file at the SEC's Public Reference Room
at 450 Fifth Street, Mail Stop 1-2, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for additional information on the public reference
rooms.
LEGAL MATTERS
The validity of 497,000 of the shares of common stock offered hereby by the
selling stockholders has been passed upon for us by Hogan & Hartson L.L.P.,
Washington, D.C. The validity of the balance of the shares of common stock
offered hereby by the selling stockholders has been passed upon for us by Snell
& Wilmer L.L.P., Salt Lake City, Utah.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 1998 and
for the years then ended included in this document have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report with
respect thereto, and are included in this document in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The statements of operations and cash flows for the year ended December 31,
1997 has been audited by Crouch, Bierwolf & Chisholm, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
46
INDEX TO FINANCIAL STATEMENTS
Financial Statements of RateXchange Corporation
Reports of Independent Auditors......................................................................... F-2
Consolidated Balance Sheet as of December 31, 1999 and December 31, 1998................................ F-4
Consolidated Statement of Operations for the years ended December 31, 1999, December 31, 1998,
And December 31, 1997................................................................................... F-5
Consolidated Statement of Stockholders' Equity for the period December 31, 1996 to December 31, 1999.... F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1999, December 31, 1998,
And December 31, 1997................................................................................... F-8
Notes to Consolidated Financial Statements.............................................................. F-9
Unaudited Consolidated Balance Sheet as of September 30, 2000........................................... F-23
Unaudited Consolidated Statement of Operations for the nine months ended September 30, 2000 and 1999.... F-24
Unaudited Consolidated Statement of Cash Flows for the nine months ended
September 30, 2000 and 1999............................................................................. F-25
Notes to Unaudited Consolidated Financial Statements.................................................... F-26
F-1
Report of Independent Public Accountants
To the Board of Directors and Stockholders of RateXchange Corporation and
Subsidiaries
We have audited the accompanying consolidated balance sheets of RateXchange
Corporation and Subsidiaries (a Delaware corporation) (a development stage
company) as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998 (1999 and 1998 restated - see Note 3) and for
the period from September 30, 1998 (beginning of development stage) to December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The Company's consolidated
statement of operations, stockholders' equity and cash flows for the year ended
December 31, 1997 were audited by other auditors whose report dated February 29,
2000, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RateXchange Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and cash flows from the years ended December 31,
1999 and 1998 and for the period from September 30, 1998 (beginning of
development stage) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
San Francisco, California
November 9, 2000
F-2
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders of RateXchange Corporation and
Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of RateXchange Corporation (previously named
NetAmerica.com Corporation) (a Delaware corporation) (a development stage
company) for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted an audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows from the year ended December 31, 1997 for RateXchange Corporation
(previously named NetAmerica.com Corporation), in conformity with generally
accepted accounting principles.
Crouch, Bierwolf & Chisholm
February 29, 2000
Salt Lake City, Utah
F-3
RATEXCHANGE CORPORATION (A Development Stage Company)
Consolidated Balance Sheet
ASSETS December 31,
-----------------------------
1999 1998
(As restated) (As restated)
--------------- -------------
Current assets
Cash and cash equivalents $ 536,615 $ 528,516
Interest receivable 150,608 1,638
Prepaid expenses 11,647 --
Notes receivable on sales of common stock 1,590,319 300,000
Short term investments 387,500 --
------------ -----------
Total current assets 2,676,689 830,154
Property and equipment (net of accumulated depreciation of $18,677) 188,891 --
Other assets
Investment in affiliate 75,000 --
Deposits 103,305 --
------------ -----------
Total assets $ 3,043,885 $ 830,154
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,840,056 $ 129,500
Short term debt 885,000 --
------------ -----------
Total current liabilities 2,725,056 129,500
Stockholders' equity
Common stock, $.0001 par value; 300,000,000 shares
authorized; issued and outstanding: 14,087,425 shares
And 7,243,023 shares in 1999 and 1998 1,409 724
Additional paid in capital 13,225,824 4,065,795
Retained deficit (12,664,654) (3,365,865)
Accumulated other comprehensive loss (243,750) --
------------ -----------
Total stockholders' equity 318,829 700,654
------------ -----------
Total liabilities and stockholders' equity $ 3,043,885 $ 830,154
============ ===========
See notes to financial statements.
F-4
RATEXCHANGE CORPORATION (A Development Stage Company)
Consolidated Statement of Operations
Beginning of
Development
Stage
For the Year For the Year (September 30,
ended ended For the Year 1998) though
December 31, December 31, ended December 31,
1999 1998 December 31, 1999
(As restated) (As restated) 1997 (As restated)
------------ ------------- ------------ -------------
REVENUE $ -- $ -- $ -- $ --
EXPENSES
Selling, general and administrative 7,491,447 2,161,253 200 9,652,700
(includes non-cash expenses of $3,158,415
in 1999 and $2,020,376 in 1998)
Write off advances to potential investee 413,681 885,000 -- 1,298,681
Depreciation and amortization 18,676 -- -- 18,676
Purchase of subsidiaries 1,507,408 89,710 -- 1,597,118
----------- ----------- --------- ------------
Total expenses 9,431,212 3,135,963 200 12,567,175
Other Income (Expenses)
Interest income 151,496 2,214 -- 153,710
Interest expense (19,073) (10,773) -- (29,846)
----------- ----------- --------- ------------
Loss before taxes (9,298,789) (3,144,522) (200) (12,443,311)
Income tax provision (benefit) -- -- -- --
----------- ----------- --------- ------------
Net loss $(9,298,789) $(3,144,522) $ (200) $(12,443,311)
=========== =========== ========= ============
Basic and diluted net loss per share $ (0.72) $ (1.92) --
Weighted average number
of common shares 12,863,020 1,636,919 200,000
=========== =========== =========
See notes to financial statements.
F-5
RATEXCHANGE CORPORATION (A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Number Accumulated
of Shares other
of compre- Compre-
Common Par Paid-In Retained hensive hensive
stock Value Capital Deficit loss loss
-------- ------ ----------- ----------- ------------ ---------
Balance at December 31, 1996 200,000 $ 20 $ 219,823 $ (221,143) -- --
Contribution by officer/directors -- -- 1,300 -- -- --
Comprehensive and net loss -- -- -- (200) -- $ (200)
-------- ------ ----------- ----------- ----- -----------
Balance, December 31, 1997 200,000 20 221,123 (221,343) -- --
Shares issued for services at $.001 1,000,000 100 900 -- -- --
Shares issued for acquisition at $.001 2,400,000 240 2,160 -- -- --
Shares issued for conversion of
debt at $.34 1,399,773 140 1,492,998 -- -- --
Shares issued for services at $1.00 87,000 9 92,794 -- -- --
Shares issued for cash at $1.07 1,106,250 110 1,179,890 -- -- --
Less: Offering costs -- -- (118,000) -- -- --
Shares issued for notes receivable
At an average price of $0.29 1,050,000 105 1,119,930 -- -- --
Warrants issued at $2.00 per share
(Note 11) -- -- 74,000 -- -- --
Comprehensive and net
loss (As restated) -- -- -- (3,144,522) -- $(3,144,522)
-------- ------ ----------- ----------- ----- -----------
Balance, December 31, 7,243,023 724 4,065,795 (3,365,865) -- --
1998 (As restated)
Options/Warrants issued from $.05
To $2.75 per share (Note 11) -- -- 1,448,441 -- -- --
Shares issued for cash and notes
At $0.10 per share (Note 8) 916,574 92 977,618 -- -- --
Shares issued for cost
reimbursement at $0.10 per share
(Note 8) 322,500 32 343,979 -- -- --
Shares issued for cash and notes
At $1.07 per share (note 8) 3,870,938 387 4,047,713 -- -- --
F-6
RATEXCHANGE CORPORATION (A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Number of Accumulated
shares of other Compre-
Common Par Paid-In Retained compre- hensive
Stock Value Capital Deficit hensive loss loss
---------------- ------------ --------------- ------------------ ---------------- ------------
Shares issued for conversion 193,186 19 206,898 -- --
of A1 Internet debt at $1.07
(Note 7 & Note 8)
Shares issued for services at
$1.07 per share (Note 8) 268,500 27 287,206 -- --
Shares issued for note
conversion at $1.00 per share
(Note 8) 30,000 3 31,998 -- --
Shares issued for services at
$1.07 per share (Note 8) 30,000 3 31,998 -- --
Shares issued for cash at
$1.60 per share (net) (Note 515,188 52 628,220 -- --
8)
Shares issued for services at
$1.60 per share (Note 8) 122,518 12 196,017 -- --
Shares issued to acquire
outstandinq shares of
RateXchange at $1.60 per
share (Note 6 & Note 8) 574,998 58 919,942 -- --
Comprehensive loss:
Net loss (As restated) (9,298,789) $(9,298,789)
Other comprehensive
loss:
Change in unrealized
loss on securities (243,750) (243,750)
-----------
Comprehensive loss $(9,542,539)
---------------- ------------ --------------- ------------------ ---------------- ===========
Balance, December 31,
1999 (As restated) $ 14,087,425 $ 1,409 $ 13,225,824 $ (12,664,654) $ (243,750)
================ ============ =============== ================== ================
See notes to financial statements.
F-7
RATEXCHANGE CORPORATION (A Development Stage Company)
Consolidated Statement of Cash Flows
Beginning of
the
Development
Stage
For the Year For the Year September 30,
Ended Ended For the 1998 to
December 31, December 31, Year Ended December 31,
1999 1998 December 1999
(As restated) (As restated) 31, 1997 (As restated)
----------- ----------- ------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(9,298,789) $(3,144,522) $ (200) $(12,443,311)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 18,676 -- -- 18,676
Write off advances to potential investee 206,898 -- -- 206,898
Common stock issued for services/expenses 1,672,954 1,946,376 -- 3,619,330
Warrants for purchase of common stock issued for
Services 1,485,461 74,000 -- 1,559,461
Purchase of outstanding shares of RateXchange 1,507,408 -- -- 1,507,408
Increase in interest receivable and prepaid
Expenses (160,617) (1,638) -- (162,255)
Increase (decrease) in accounts payable and
accrued expenses 1,601,241 129,300 (1,100) 1,730,541
----------- ----------- ------- -----------
TOTAL (2,966,768) (996,484) (1,300) (3,963,253)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of equipment (207,568) -- -- (207,568)
Security deposits (103,305) -- -- (103,305)
Advances to A-1 Internet (631,251) -- -- (631,251)
Investment in Telenisus Corporation (75,000) -- -- (75,000)
----------- ----------- ------- -----------
TOTAL (1,017,124) -- -- (1,017,124)
CASH FLOWS FROM FINANCING ACTIVITIES
Loans and other debt 410,000 -- -- 410,000
Proceeds from common stock sales 3,581,991 1,525,000 1,300 5,106,991
----------- ----------- ------- -----------
TOTAL 3,991,991 1,525,000 1,300 5,516,991
----------- ----------- ------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 8,099 528,516 -- 536,615
CASH and CASH EQUIVALENTS BEGINNING OF YEAR 528,516 -- -- --
----------- ----------- ------- -----------
CASH and CASH EQUIVALENTS END OF YEAR $ 536,615 $ 528,516 $ -- $ 536,615
=========== =========== ======= ===========
Supplementary cash flow information
Cash paid for:
Interest -- -- -- --
Taxes -- -- -- --
Stock issuances for:
Services and expenses $ 3,158,415 $ 2,020,376 -- $ 5,178,791
Purchase of outstanding shares of RateXchange $ 920,000 -- -- $ 920,000
Commission on stock sales $ 196,029 -- -- $ 196,029
A1 Internet settlement $ 206,898 -- -- $ 206,898
See notes to financial statements.
F-8
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 1 Background and History
RateXchange Corporation (the Company) is a consolidated group of companies
including the parent corporation, RateXchange Corporation and its
subsidiaries, RateXchange I, Inc. and PolarCap, Inc. (PolarCap).
RateXchange Corporation (formerly Netamerica.com Corporation and formerly
Venture World, Ltd.) is a Delaware corporation organized on May 6, 1987 for
the purpose of seeking out and developing any general business opportunity.
RateXchange I, a Delaware corporation organized in June 1999, is in the
business of business-to-business e-commerce seeking to develop new exchange
services for the telecommunications market.
PolarCap is a California corporation organized on April 7, 1997 for the
purpose of investing in and developing rights to a variety of software
technologies related to multimedia, development tools and application
technologies. PolarCap is in the process of being liquidated.
The Company is in its planning stages for its eventual day to day business
and has not generated any revenues from its planned operations. The Company
is defined as a development stage company in accordance with Financial
Accounting Standard No. 7. The Company had no operations or business before
September 30, 1998. Cumulative results of operations since the start of the
development stage, September 30, 1998, when the Company purchased PolarCap,
have been reported separately.
From inception, the Company has been primarily engaged in organizational
activities, including designing and developing its portal, recruiting
personnel, establishing office facilities, raising capital and developing a
marketing plan. The Company began revenue generation activities in 1999 but
no revenue has been generated as of December 31, 1999. Accordingly, the
Company is classified as a development stage company. Successful completion
of the Company's development program and, ultimately, the attainment of
profitable operations is dependent upon future events, including obtaining
adequate financing to fulfill its development activities, increasing its
customer base, implementing and successfully executing its business and
marketing strategy and hiring and retaining quality personnel. Negative
developments in any of these conditions could have a material adverse effect
on the Company's business, financial condition and results of operations.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of RateXchange
Corporation and its subsidiaries. Collectively, these entities are referred
to as the Company. All significant intercompany transactions and accounts
have been eliminated.
Cash, and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
F-9
Investments
The Company classifies its debt and marketable equity securities into one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities that the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as
available-for-sale. Available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized gains
and losses, net of the related tax effect, on available-for-sale securities
are reported as a separate component of other comprehensive income in
shareholders' equity until realized. Premiums and discounts are amortized or
accreted over the life of the related investment security as an adjustment
to yield using the effective interest method. Dividend and interest income
are recognized when earned. Realized gains and losses for securities are
included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
Management determines the appropriate classification of investments at the
time of purchase and reevaluates such determination at each balance sheet
date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included in stockholders' equity. These securities are
reported as short-term investments on the consolidated balance sheet.
Realized gains and losses and declines in value of securities judged to be
other than temporary are included in other income, net. Interest and
dividends on all securities are included in other income, net.
Nonmonetary Transactions
Nonmonetary transactions are transactions for which no cash was exchanged
and for which shares of common stock or options or warrants to purchase
common stock were exchanged for goods and services. These transactions are
recorded at the fair market value of the equity instruments issued at the
time of the transaction and reported in the statement of operations as
services are rendered.
Loss Per Share and Weighted Average Shares Outstanding
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Options and warrants on shares
of common stock were not included in computing diluted loss per share
because their effects were antidilutive (2,990,000 options and 625,000
warrants).
Deposits
The Company issued a letter of credit as security in connection with an
operating lease of its office. This letter of credit is secured by a
certificate of deposit in the amount of $103,305.
Comprehensive loss
Comprehensive loss includes the net loss reported on the statement of
operations and changes in the fair value of investments classified as
available for sale, which is reported as a component of stockholders'
equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
results of operations. Actual results could differ from those estimates.
Note 3 Restatement of Previously Reported Results
As part of the Company's overall strategy, the Company decided to retain a
national accounting firm. In July 2000, the Company selected Arthur
Andersen, LLP as its independent auditors. As a result of the Company's
review, certain adjustments were determined necessary to the Company's
previously reported financial results for the years ended December 31, 1998
and 1999. These adjustments relate to the valuation of common stock issued
in exchange for services received, conversion of bridge financing and
arrangement of financing, and other miscellaneous adjustments to the timing
of the recognition of certain expenses. Management has made all adjustments
considered necessary for the restated financial statements to be fairly
presented.
F-10
The following statements of operation and balance sheets reconcile
previously reported and restated information.
RateXchange Corporation Reconciliation of Statement of Operations Year ended December 31, 1999
Improper Adjustment
valuation To offset to record
assigned to write off or
RateXchange shares, of advances reclassify
Corporation options and Purchase of with market expenses in
as warrants outstanding value of the RateXchange
previously issued for shares of shares appropriate Corporation as
reported services Polarcap received period restated
------------ ------------ ----------- ----------- ----------- -----------
REVENUE $ -- $ -- $ -- $ -- $ -- $ --
EXPENSES
Selling, general & administrative 5,048,614 2,426,440 3,727 6,050 6,616 7,491,447
Write off advances to potential
Investee 863,750 (450,069) 413,681
Depreciation and amortization 25,093 (14,952) 8,535 18,676
Purchase of subsidiaries 1,537,300 (29,892) 1,507,408
------------ ----------- -------- ---------- -------- -----------
Total expenses 7,474,757 2,426,440 (41,117) (444,019) 15,151 9,431,212
OTHER INCOME (Expenses)
Interest income 151,276 220 151,496
Interest expense (13,019) (6,054) (19,073)
Other income 220 (220) --
Loss allocated to minority
interest 7,000 (7,000) --
------------ ----------- -------- ---------- -------- -----------
Loss before taxes (7,329,280) (2,426,440) 41,117 444,019 (28,205) (9,298,789)
Income tax provision -- -- -- -- -- --
------------ ----------- -------- ---------- -------- -----------
NET LOSS $ (7,329,280) $(2,426,440) $ 41,117 $ 444,019 $(28,205) $(9,298,789)
============ =========== ======== ========== ======== ===========
Basic and diluted net loss per
share $ (0.57) $ (0.72)
============ ===========
Weighted average number of shares 12,863,020 12,863,020
============ ===========
F-11
RateXchange Corporation Reconciliation of Statement of Operations Year ended December 31, 1998
Improper
valuation
assigned to Adjustment
RateXchange shares, to record
Corporation options and Purchase of expenses in
as warrants outstanding the RateXchange
previously issued for shares of appropriate Corporation as
reported services Polarcap period restated
----------- ----------- -------- -------- -----------
REVENUE $ -- $ -- $ -- $ -- $ --
Expenses
Selling, General & Administrative 174,176 1,918,277 68,800 2,161,253
Write off advances to potential
investee 885,000 885,000
Depreciation and Amortization 4,363 (3,738) (625) --
Purchase of subsidiary 44,855 44,855 89,710
----------- ----------- -------- -------- -----------
Total Expenses 1,108,394 1,918,277 41,117 68,175 3,135,963
OTHER INCOME (Expenses)
Interest income 2,214 2,214
Interest expense (10,773) (10,773)
----------- ----------- -------- -------- -----------
Loss before taxes (1,116,953) (1,918,277) (41,117) (68,175) (3,144,522)
----------- ----------- -------- -------- -----------
Income tax provision -- -- -- -- --
----------- ----------- -------- -------- -----------
NET LOSS $(1,116,953) $(1,918,277) $(41,117) $(68,175) $(3,144,522)
=========== =========== ======== ======== ===========
Basic and diluted net loss per $ (0.68) $ (1.92)
=========== ===========
share
Weighted average number of shares 1,636,919 1,636,919
=========== ===========
F-12
Balance Sheet Reconciliation As of December 31, 1999
Improper To offset Adjustments
valuation write off of to
RateXchange assigned to advances expenditures
Corporation shares, options Purchase of with market and funds
as and warrants outstanding value of received in RateXchange
originally Adjustments issued for shares of shares the appropriate Corporation
reported made in 1998 services Polarcap received period as restated
------------ ---------------------------- ----------- ----------- -------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 451,615 $ 85,000 $ 536,615
Interest receivable 150,608 150,608
Prepaid expenses 5,814 5,833 11,647
Short term investments $ 387,500 387,500
Note receivable on sales
of common stock 1,787,531 (197,212) 1,590,319
----------- ----------- ---------- ------- ---------- --------- ------------
Total current assets 2,395,568 -- -- -- 190,288 90,833 2,676,689
Property & equipment (Net) 175,349 $ (6,875) 20,417 188,891
Other assets
Investment in affiliate 75,000 75,000
Goodwill (41,117) $41,117 --
Deposits 103,305 103,305
----------- ----------- ---------- ------- ---------- --------- ------------
Total assets $ 2,749,222 $ (47,992) $ -- $41,117 $ 190,288 $ 111,250 $ 3,043,885
=========== =========== ========== ======= ========== ========= ============
Current liabilities
Accounts payable and
accrued expenses $ 1,639,301 $ 61,300 $ 139,455 $ 1,840,056
Accrued taxes 85,000 (85,000) --
Short term debt 800,000 85,000 885,000
----------- ----------- ---------- ------- ---------- --------- ------------
Total current liabilities 2,524,301 61,300 -- -- -- 139,455 2,725,056
Stockholders' equity
Common stock 1,409 1,409
Additional paid in capital 8,891,088 1,918,277 $2,426,440 (9,981) 13,225,824
Accumulated other
comprehensive loss (243,750) (243,750)
Retained deficit (8,667,576) (2,027,569) (2,426,440) $41,117 444,019 (28,205) (12,664,654)
----------- ----------- ---------- ------- ---------- --------- ------------
Total stockholders' equity 224,921 (109,292) -- 41,117 190,288 (28,205) 318,829
----------- ----------- ---------- ------- ---------- --------- ------------
Total liabilities and
stockholders' equity $ 2,749,222 $ (47,992) $ -- $41,117 $ 190,288 $ 111,250 $ 3,043,885
=========== =========== ========== ======= ========== ========= ============
F-13
Balance Sheet Reconciliation As of December 31, 1998
Improper
valuation
assigned to Adjustment
RateXchange shares, to record
Corporation options and Purchase of expenditures
as warrants outstanding in the RateXchange
originally issued for shares of appropriate Corporation
reported services Polarcap period as restated
----------- ----------- -------- -------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 528,516 $ 528,516
Interest receivable 1,638 1,638
Prepaid expenses
Note receivable on sales of common
stock 300,000 300,000
----------- ----------- -------- -------- -----------
Total current assets 830,154 830,154
Property & equipment (Net) 6,875 $ (6,875)
Other assets
Investment in affiliate
Goodwill 41,117 $(41,117)
Deposits
----------- ----------- -------- -------- -----------
Total assets $ 878,146 -- $(41,117) $ (6,875) $ 830,154
=========== =========== ======== ======== ===========
Current liabilities
Accounts payable and accrued expenses $ 68,200 $ 61,300 $ 129,500
----------- ----------- -------- -------- -----------
Total current liabilities 68,200 61,300 129,500
Stockholders' equity
Common Stock 724 724
Additional paid in capital 2,147,518 $ 1,918,277 4,065,795
Retained deficit (1,338,296) (1,918,277) (41,117) (68,175) (3,365,865)
Accumulated other comprehensive loss
Notes receivable on sale of common stock -- --
----------- ----------- -------- -------- -----------
Total stockholders' equity 809,946 -- (41,117) (68,175) 700,654
----------- ----------- -------- -------- -----------
Total liabilities and stockholders'
Equity $ 878,146 $ -- $(41,117) $ (6,875) $ 830,154
=========== =========== ======== ======== ===========
The following describes the nature of the reconciling items:
The valuation assigned to shares issued for services -
These adjustments represent the effect of shares, options and warrants that
were issued in various transactions in exchange for services and were
originally recorded at values below the then fair value of the Company's
stock.
Purchase of outstanding shares of Polarcap -
In the previously reported financial statements the Company incorrectly
recorded its purchase of the outstanding shares of Polarcap in 1998 using
purchase accounting. Accordingly, the Company recorded goodwill of $89,710
that was previously amortized and fully written off in 1999. The purchase of
the outstanding shares of Polarcap should have been reflected as an
acquisition of assets with the excess consideration charged to expense
immediately. This adjustment records the excess consideration of $41,117
charged to expense.
Net the writeoff of advances against the value of shares received -
To compensate the Company for the write off of advances to A-1 Internet, in
September 1999, the Company received common stock in Halo Corporation with a
fair value of $631,250. At December 31, 1999 the value of this investment
was $387,500. The Company improperly wrote down the carrying value of the
investment.
Adjustments to record expenses in the appropriate period -
F-14
These adjustments relate to miscellaneous accruals that were not reflected
in the appropriate period.
Note 4 Income Taxes
As of December 31, 1999, the Company had a federal net operating loss
carryforward of $9,293,259 which will expire in the years 2007 through 2020
for state and federal purposes. This net operating loss carryforward has not
been reflected in the financial statements as the likelihood of future tax
benefit from such operating loss carryforwards is remote. Accordingly, the
potential tax benefits of the net operating loss carryforwards, estimated
based upon current tax rates at December 31, 1999, have been offset by a
valuation allowance in the same amount.
Significant components of the company's deferred tax assets and liabilities
are as follows
December 31,
--------------------------
1999 1998
------------- ------------
Deferred tax assets:
Net operating loss carryforward $ 3,773,063 $ 1,314,334
Options and warrants for services 603,097 74,000
Start up cost carryforward 1,726,967
Unrealized loss on securities 98,861
----------- -----------
Gross deferred tax assets 6,161,988 1,388,334
Valuation allowance (6,161,988) (1,388,334)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The net change in the valuation allowance for the year ended December 31,
1999 and 1998 was an increase of $4,773,654 and $3,279,693.
Note 5 Property and Equipment
The Company capitalizes purchases of long-lived assets that are expected to
give benefit to the Company over the life of the asset. The Company also
capitalizes improvements and costs that increase the value of or extend the
life of the asset.
Capitalized assets are depreciated over the estimated useful lives of the
assets (5 years for furniture and fixtures, 3 years for computer equipment)
on a straight-line basis.
Property and Equipment consists of the following:
December 31,
--------------------
1999 1998
---------- ---------
Furniture and fixtures $ 10,520 $ --
Computer equipment and software 197,047 --
-------- ----
207,567 --
Less: Accumulated depreciation (18,676) --
-------- ----
$188,891 $ --
======== ====
Depreciation expense for 1999 is $18,676.
Note 6 Acquisition of Subsidiary
On September 30, 1998, the Company purchased all of the outstanding stock of
PolarCap, Inc. for 2,400,000 shares of stock. At September 30, 1998 Polarcap
had negative net worth of $87,310. The value of the stock was issued at
$.001, for a cost of $2,400 in 1998. The Company expensed $89,710
representing the excess of consideration given in shares issued and
liabilities assumed for the assets of Polarcap.
F-15
In the third quarter of 1999, the Company purchased all the outstanding
common stock of Rate Exchange, Inc., a Colorado corporation, seeking to
develop new exchange services for the telecommunications market. The Company
paid 574,998 in shares of common stock and $450,000 in a note for a total
cost of $1,395,000 ($920,000 in stock and $450,000 in a note plus out of
pocket expenses of $25,000). Under the terms of the transaction two of the
owners/employees of RateXchange became employees of the company responsible
for exploring the development of the business. On the date of purchase,
RateXchange had negative net worth of $112,408. The Company expensed a total
of $1,507,408 representing the excess of consideration given in shares and
notes issued and liabilities assumed for the assets of RateXchange.
Note 7 Advances to Potential Investee
On September 30, 1998 the Company negotiated, and later terminated by mutual
agreement, a purchase of 100% of the ownership of NetAmerica, Inc.,
subsequently renamed A1 Internet, Inc., an Internet services provider
company based in Seattle, Washington. Between the time the Company agreed to
purchase (September 30, 1998), which was never consummated, and the time the
termination agreement was reached (March 1999), the Company advanced
$1,738,769 ($1,531,871 in cash and $206,898 in stock) the cash portion of
which was eventually written off as bad debt. After the March agreement was
reached, A1 Internet agreed to repay certain of the costs incurred prior to
the termination. As part of its plan to repay the costs, A1 Internet
informed the Company that it had entered into an agreement with another
potential acquiror, Halo Holdings of Nevada, Inc., to sell substantially all
of its assets in exchange for shares of common stock and assumption of
certain liabilities, including A1 Internet's obligations to the Company. In
September 1999, after further negotiations, the Company agreed with A1
Internet to the following settlement:
o The Company retained certain rights to the name "NetAmerica;"
o A1 Internet transferred to the Company its interest in 100,000 shares
of Halo restricted stock;
o The Company agreed to pay $85,000 of past due payroll taxes of A1
Internet from 1998; and
o All further obligations of the Company to issue stock or options to A1
Internet were canceled.
Note 8 Common Stock Transactions
In general all stock transactions conducted during the period for which no
cash was exchanged and for which shares of stock were exchanged for assets
or goods and services were recorded at fair market value. A number of shares
as indicated below were issued at below market values. The Company recorded
expense related to these issues of $1,519,047 in 1999 and $2,007,203 in
1998.
Common stock transactions during 1999 are as follows:
During the fourth quarter of 1998, the board of directors approved several
stock transactions that were not completed and issued until 1999:
o 916,574 shares of stock issued for $91,657 in notes to related parties.
($0.10) (January). The board has placed restrictions on this stock so
that the stock cannot be sold, traded, assigned, transferred or pledged
until the Company reaches $10,000,000 in gross revenues in a one year
time period.
o 322,500 shares issued for cost reimbursements of $32,250 ($.10 per
share) (January).
The remaining stock issuances were approved and issued in 1999:
o 758,438 shares of stock were issued for $728,100 (Net of $80,900
commissions). ($1.07) (February).
o 3,112,500 shares of stock issued for $3,320,000 in notes to related
parties and other investors. ($1.07) (March).
o 268,500 shares of stock issued for $287,233 of legal and consulting
services. ($1.07) (March).
o 193,186 shares of stock issued for $206,898 of debt to creditors of A1
Internet. ($1.07, average) (March and May).
o 30,000 shares of stock issued instead of a $30,000 outstanding note
payable. ($1.00) (March).
o 30,000 shares for services rendered of $32,000. ($1.07) (March).
F-16
o 515,188 shares of stock issued for $1.60 per share, or a total of
$628,272. (Net of $196,029 in commission paid in stock of 122,518
shares - see below) (May and June).
o 122,518 shares issued for commissions on private placement at $1.60 per
share. ($1.60 per share) (June).
o 574,998 shares of stock issued for $1.60 per share for Rate Exchange,
Inc. (July).
Note 9 Subscriptions Receivable/Note Receivable-Related Party
In January 1999, the Company sold 916,574 shares in exchange for $91,657 in
notes payable to a related party and other investors at a price of $.10 per
share. (See Note 8 for restrictions placed on stock).
In March 1999, the Company sold 3,112,500 shares to a related party and
other investors in exchange for $3,320,000 in notes payable at a price of
$1.07 per share.
Of the total subscriptions receivable/note receivable issued during the year
of $3,411,657 and $300,000 issued in 1998, $1,924,126 was collected.
Interest is being assessed at 6.5% and accrued interest on the subscription
receivable was $150,608 at December 31, 1999. The Company has determined
that 197,212 of the remaining receivables are uncollectible and has written
off these receivables.
Subsequent to year end, the board of directors of the Company waived the
interest on the purchase of 3,112,500 shares when the notes were collected
in full by February 25, 2000 (originally due by March 31, 2001).
Note 10 Commitments and Contingencies
Future annual minimum lease payments under noncancelable operating leases as
of December 31, 1999 were:
Year
------------
2000 $ 195,900
2001 200,112
2002 204,336
---------
$ 600,348
=========
Rent expense totaled $42,077 in 1999.
The Company is also involved in the following legal matter as follows:
Gregory K. Martin v. NetAmerica., Inc. et al. In the spring of 1999, Gregory
K. Martin, a former officer of both NetAmerica (Seattle)(NAI) and the
Company, brought suit against the Company and others in the Superior Court
of Washington (Civil Action No. 99-2-09171-OSEA). The suit related to, among
other things, Mr. Martin's claims for compensation, reimbursement for
business expenses, certain insurance benefits, payment of certain other
obligations guaranteed by Mr. Martin (or reimbursement of payments made by
him as guarantor), payment of certain tax and other obligations of a company
referred to as SRG/Quantum that were purportedly assumed by NAI and the
Company, issuance of options to purchase stock of the Company and other
remedies relating to the terminated acquisition and other transactions. The
suit was conditionally settled by an agreement dated May 22, 1999 among NAI
(referred to therein as "A1"), the Company and Mr. Martin (with William
Fritts undertaking certain limited obligations). Pursuant to that agreement,
Mr. Martin took a voluntary non-suit, i.e., dismissed his suit without
prejudice. Mr. Martin may have the ability to attempt to void the settlement
pursuant to noncompliance on the part of NAI to their part of the
settlement. As of December 31, 1999, the Company has fulfilled all of its
current obligations under the settlement agreement.
Note 11 Options/Warrants for Purchase of Common Stock
Stock Option Plans - Shareholders approved the 1999 RateXchange Corporation
Stock Option Plan during 1999 (1999 Plan). There are 3,000,000 options
available under the plan that may be granted to employees, officers,
directors and consultants. The option plan allows grantees to acquire shares
of the Companys' common stock at a purchase price generally equal to the
fair market value on the date of grant. Options generally expire five years
from date of grant.
F-17
Separate from the 1999 Plan the Company has also issued warrants that
generally expire five years from the date of grant.
A summary of warrant and option activity follows:
Warrants: 1999 1998
----------------------------- -------------------------------- ---------------------------------
Number of Weighted average Number of Weighted average
shares exercise price shares exercise price
------------- ------------------ ------------- -------------------
Outstanding at beginning of
year 100,000 $ 2.00 -- $ --
Granted 525,000 1.69 100,000 2.00
Exercised -- -- -- --
Canceled -- -- -- --
------- ----- ------ ------
Outstanding at end of year 625,000 1.74 100,000 2.00
======= ====== ======= ======
Exercisable at end of year 625,000 1.74 100,000 2.00
======= ====== ======= ======
Options: 1999 1998
----------------------------- -------------------------------- ---------------------------------
Number of Weighted average Number of Weighted average
shares exercise price shares exercise price
------------- ------------------ ------------- -------------------
Outstanding at beginning of
year -- $ -- -- $--
Granted 3,050,000 2.24 -- --
Exercised -- -- -- --
Canceled 60,000 2.50 -- --
--------- ------ -- ---
Outstanding at end of year 2,990,000 2.23 -- --
========= ====== === ===
Exercisable at end of year 1,287,500 1.96 -- --
========= ====== === ===
As permitted by Financial Accounting Standard No.123 "Accounting for
Stock-Based Compensation," the Company has elected to account for its stock
option plan under APB No.25 "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost has been recognized for these plans when
options were issued with exercise prices equal to or greater than the fair
market value of the Company's stock on the date of grant.
Had compensation cost for the stock option plan been determined based on the
fair value at the grant date consistent with FAS No.123, the Company's net
earnings and earnings per share are estimated as follows:
1999 1998
------------- ------------
Net loss
As reported $ (9,298,789) $(3,144,522)
Pro Forma $(11,085,439) $(3,144,522)
Net loss per share (basic and diluted)
As reported (0.72) (1.92)
Pro forma (0.86) (1.92)
The weighted average fair value of options and warrants granted in 1999 was
$0.73 and $1.04. The weighted average fair value of warrants granted in 1998
was $0.74. Each option grant was valued at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
1999
Risk-free interest rate 5.7%
Dividend yield 0%
Volatility 100%
Average expected term (years) 2
Options and warrants issued to third party service providers under the 1999
plan or by resolution of the Board of Directors as of December 31, 1999
were:
F-18
Outstanding Exercisable
----------------------------------- ----------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Warrant/ Exercise Contractual Warrants/ Exercise
exercise prices Options Price Life (years) Options Price
------------------------ --------------------- ------------ ------------- -------------
$ .05 - $ .99 275,000 $ .10 4.06 275,000 $ 0.10
$1.00 - $1.99 530,000 $ 1.55 4.17 325,000 $ 1.52
$2.00 - $2.75 850,000 $ 2.64 4.62 650,000 $ 2.61
--------- ---------
1,655,000 1,250,000
========= =========
Employee stock options outstanding and exercisable under the 1999 plan as of
December 31, 1999 were:
Outstanding Exercisable
----------------------------------- ----------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Warrant/ Exercise Contractual Warrants/ Exercise
exercise prices Options Price Life (years) Options Price
------------------------ --------------------- ------------ ------------- -------------
$ .05 - $ .99 -- -- -- -- --
$1.00 - $1.99 -- -- -- -- --
$2.00 - $2.75 1,960,000 $ 2.38 4.65 662,500 $ 2.10
--------- ---------
1,960,000 662,500
========= =========
Certain options and warrants were issued during 1999 for less than fair
market value or for services rendered by non-employees for which the Company
recognized related expense of $2,327,350.
Note 12 Short Term Debt
The Company issued a note for $450,000 for the purchase of Rate Exchange,
Inc (Note 6). The note carried an interest rate of 6%. The note was paid in
January 2000.
During December 1999, RateXchange I Inc received $435,000 in short-term
loans in connection with a $2,000,000 bridge loan agreement reached with
various investors. The remaining $1,565,000 was received in January and
February 2000. The $2 million of bridge loans were used as interim financing
of RateXchange I Inc. activities. The loans bore interest at 10% and were to
mature six months from the completion of the funding of the loan (completed
February 2000). The notes were convertible into RateXchange I, Inc. common
stock at a price per share to be determined in an anticipated subsequent
financing of RateXchange I. Purchasers of the notes also received warrants
to purchase RateXchange I common stock at $2.40 per share, subject to
adjustment.
Subsequent to December 31,1999, as a result of the company's new business
strategy, the company offered to the investors in the $2 million bridge loan
the right to convert their notes into RateXchange Corporation common stock
at an exchange rate of $5.00 per share. In addition, the Company agreed to
issue such holders an aggregate of 500,000 warrants to purchase common stock
at $5.00 per share. Any note holders who declined this offer were entitled
to rescind their original investment and receive their principal back in
full, including accrued interest. As a result of this offer all notes,
except $25,000, were converted to new shares of RateXchange Corporation
common stock.
Note 13 Investment in Affiliate
During 1999, the Company created a wholly owned subsidiary, Telenisus
Corporation, a Delaware corporation, for the purpose of providing internet
services to small to mid-sized corporations and telecommunications service
providers. The Company funded the initial capital of Telenisus of $75,000.
It subsequently loaned Telenisus additional funds to start operations.
Telenisus has funded operations from its own equity and debt financing and
has paid back the Company all loans except for the initial capitalization of
$75,000. As of December 31, 1999, as a result of Telenisus' sale of
additional shares to new investors, the Company's interest in Telenisus had
dropped to less than 5% ownership and the Company is recording its
investment in Telenisus at cost.
F-19
Note 14 Related Party Transactions
During 1998, the Company entered into a consulting contract with a major
shareholder that pays a monthly consulting fee plus an incentive bonus for
1) any successful acquisition of business enterprises, or 2) successful
capital funding of a least $5,000,000 in 1998 or 1999. The incentive awards
are $250,000 in cash, warrants to purchase 250,000 shares of common stock at
$1.00, and a mergers and acquisition fee for any acquisition during 1998 or
1999. At December 31, 1999, the Company accrued $315,800 in cash incentives
relating to completed financing and mergers and acquisitions fee based on
the value of the RateXchange acquisition.
Note 15 Minority Interest
During 1999, the Company issued 10% of the outstanding shares of its
subsidiary, RateXchange to the chief executive officer of RateXchange as an
incentive for employment. The shares were issued at fair value based upon
the value of RateXchange at the time of its acquisition.
Note 16 Subsequent Events
In March 2000, the Company completed a private placement in which it sold
2,733,329 shares of restricted common stock at a subscription price of $12
per share plus warrants to purchase 1,366,673 shares of its common stock at
an exercise price of $14.40 per share. The warrants are immediately
exercisable and expire in three years. After deducting $2,665,000 for costs
associated with the offering, the Company received $30,135,000.
In 1999, RateXchange entered into a term sheet agreement with a vendor to
provide specialized consulting and computer programming to assist in
RateXchange's business plans and operations in the business-to-business
e-commerce niche it was developing. The term sheet was never finalized into
a formal agreement, but some services were provided, and certain cash
payments were made for the services that were rendered. The term sheet also
provided for the vendor to receive a stock position in RateXchange of up to
10% for certain services. In early 2000 the Company began discussions with
the vendor concerning the 10% stock position in RateXchange because the
formal agreement was never completed and the contemplated services were not
fully provided. The ultimate outcome of these discussions was uncertain at
that time. In August 2000, the Company reached an agreement for settlement
of the dispute with the vendor, whereby the Company issued 175,000 shares,
175,000 warrants and $100,000 in cash. The total value of the settlement of
$1.8 million is recorded in the Company's 2000 financial statements.
In February 2000, RateXchange I Inc. closed a $2,000,000 convertible note
offering. The notes were convertible into RateXchange I Inc. common stock at
a price per share to be determined in an anticipated subsequent financing of
RateXchange I. Purchasers of the notes also received warrants to purchase
RateXchange I common stock at $2.40 per share, subject to adjustment. As a
result of the company's new business strategy the subsequent financing of
RateXchange I did not occur. Accordingly, the Company offered to the note
holders the right to convert their notes into RateXchange Corporation common
stock at an exchange rate of $5.00 per share. In addition, the Company
agreed to issue to such holders an aggregate of 500,000 warrants to purchase
common stock at $5.00 per share. All RateXchange I notes and warrants have
been converted into shares except one note for $25,000.
Shareholders authorized the 1999 Stock Option Plan during 1999. Shareholders
authorized the 2000 Stock Option Plan on April 20, 2000. There are options
to purchase 8,000,000 shares authorized for issuance under both plans. On
February 24, 2000, the Board authorized additional options to purchase
4,290,000 shares outside of either plan. Total options granted to employees
during the first quarter of 2000 for less than fair market value were
3,940,000 for which the Company is recognizing related compensation expense,
over the option vesting periods, for the fair value of the stock on the date
of grant, which was $12, and the strike price of the options, which is $7.
In 2000, the Company has also granted options to purchase 275,000 common
shares to non-employee consultants for which the Company has recorded
related expense of $2,131,250.
In October 2000, the Board of Directors approved and issued 2 million
options to the Company's new Chief Executive Officer. These options were
granted with a strike price equal to the fair value of the Company's stock
on the date of grant and vest over various periods.
F-20
On September 17, 2000, the Company entered into an alliance agreement with
Amerex Bandwidth, Ltd. Under this agreement, Amerex brokers will execute
trades for the sales or purchase of Internet protocol products,
telecommunications capacity and/or other telecommunications-related products
over the Company's electronic trading system and the company will share in
the revenues generated by the electronic trading system. In connection with
this agreement, the company issued to Amerex five warrants for an aggregate
of 2,300,000 shares of our common stock. One warrant for 300,000 shares with
an exercise price of $4.47 per share is currently exercisable by Amerex. The
remaining four warrants each for 500,000 shares and with exercise prices of
$4.47 per share, $4.70 per share, $4.92 per share and $5.37 per share, will
become exercisable upon the earlier of September 17, 2005 or Amerex
executing a minimum of $1,000,000, $3,000,000, $5,000,000 and $10,000,000,
in value of transactions over the company's online electronic trading
system.
F-21
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30,
2000 December 31,
(unaudited) 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 4,924,064 $ 536,615
Accounts receivable 57,255 --
Investments 14,010,049 387,500
Interest receivable 301,165 150,608
Prepaid expenses 197,114 11,647
Notes receivable on stock sales -- 1,590,319
------------ ------------
Total current assets 19,489,647 2,676,689
Property and equipment (net of accumulated depreciation of $182,939 in
2000 and $18,677 in 1999) 693,365 188,891
Other assets
Investment in affiliate 75,000 75,000
Deposits 245,265 103,305
------------ ------------
Total assets $ 20,503,277 $ 3,043,885
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 2,086,408 $ 1,840,056
Short term debt 25,000 885,000
------------ ------------
Total current liabilities 2,111,408 2,725,056
Stockholders' equity
Preferred Stock, 60,000,000 shares authorized; none outstanding -- --
Common stock, $.0001 par value; 300,000,000 shares authorized; issued
and outstanding; 17,764,304 shares and 14,087,425 shares 1,777 1,409
Additional paid in capital 69,129,399 13,225,824
Accumulated deficit (49,943,702) (12,664,654)
Notes receivable on stock sales (433,890) --
Accumulated other comprehensive loss (361,715) (243,750)
------------ ------------
Total stockholders' equity 18,391,869 318,829
------------ ------------
Total liabilities and stockholders' equity $ 20,503,277 $ 3,043,885
============ ============
See notes to financial statements.
F-22
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
Beginning of
Development
Stage
(September
30,1998)
through
Nine Months ended September 30, September 30,
------------------------------- -------------
2000 1999 2000
--------------- -------------- -------------
REVENUE
Trading and consulting $ 57,255 $ -- $ 57,255
EXPENSES
Selling, general and
Administrative
(Includes non-cash
expenses of $20,057,365
and $2,539,315) 5,173,829 43,723,721 34,071,021
Write off advances to potential
Investee -- 114,938 1,298,681
Depreciation and amortization 164,262 23,402 182,938
Cost of acquiring subsidiary -- -- 1,597,118
------------ ------------ ------------
Total Expenses 34,235,283 5,312,169 46,802,458
Other Income (Expense)
Interest income 604,561 94,590 758,271
Interest expense
(Includes non-cash expenses
of $1,801,775 and $0) (1,882,706) (10,521) (1,912,552)
Other expenses (net)
(Includes non-cash expenses
of $1,722,875 and $0)
(1,822,875) -- (1,822,875)
------------ ------------ ------------
Loss before taxes (37,279,048) (5,228,100) (49,722,359)
Income tax provision (benefit) -- -- --
------------ ------------ ------------
NET LOSS $(37,279,048) $ (5,228,100) $(49,722,359)
============ ============ ============
Basic and diluted net loss per
Share $ (2.28) $ (0.46)
Weighted average number of
shares of common stock 16,334,695 11,326,388
See notes to financial statements.
F-23
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
Beginning of
Development
Stage
(September 30,
For the Nine Months ended 1998) through
September 30, September 30,
------------------------------- ----------------
2000 1999 2000
-------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(37,279,048) $ (5,228,100) $(49,722,359)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 164,262 23,402 182,938
Write off advances to potential investees -- 114,938 206,898
Stock options granted to employees below
fair market value 9,127,572 -- 9,127,572
Stock options - termination adjustments 941,564 -- 941,564
Stock options and warrants granted to
service providers and strategic
Partners 11,711,104 1,339,500 13,270,565
Warrants issued in relation to bridge financing 1,801,775 -- 1,801,775
Cost of acquiring subsidiary -- -- 1,507,408
Stock for services/expenses -- 1,199,815 3,619,330
Increase in deposits (141,960) -- (245,265)
Increase in accounts receivable and other assets (393,279) (357,478) (555,534)
Increase (decrease) in accounts payable and
accrued expenses 246,352 753,322 1,976,893
------------ ------------ ------------
TOTAL (13,821,658) (2,154,601) (17,888,215)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short term investments (26,099,845) -- (26,099,845)
Sale of short term investments 12,484,257 -- 12,484,257
Payment for purchase of equipment (667,984) (482,319) (875,552)
Investment in Telenisus Corporation -- -- (75,000)
Loan to employee stock purchase program (433,890) -- (433,890)
Purchase of Halo stock -- -- (631,251)
------------ ------------ ------------
TOTAL (14,717,462) (482,319) (15,631,281)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans and other debt (net) 1,200,000 350,000 1,610,000
Net proceeds from stock sales 30,136,250 1,913,088 35,243,241
Proceeds from note receivable 1,590,319 -- 1,590,319
------------ ------------ ------------
TOTAL 32,926,569 2,263,088 38,443,560
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,387,448 (373,832) 4,924,064
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 536,615 528,516
------------ ------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 4,924,064 $ 154,684 $ 4,924,064
============ ============ ============
See notes to financial statements
F-24
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM FINANCIAL STATEMENTS AND BACKGROUND AND HISTORY
The interim financial statements presented herein are unaudited and have
been prepared in accordance with the instructions for interim financial
statements. These statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1999.
The accompanying financial statements have not been audited. The results of
operations and cash flows for the nine months ended September 30, 2000 may
not be indicative of the results that may be expected for the year ending
December 31, 2000.
RateXchange Corporation (the Company) is a consolidated group of companies
including the parent corporation, RateXchange Corporation (RateXchange
Corp.), and its subsidiaries, RateXchange I, Inc. and PolarCap, Inc.
(PolarCap). PolarCap is in the process of being liquidated.
RateXchange Corp. (formerly NetAmerica.com Corporation) is a Delaware
corporation organized on May 6, 1987 for the purpose of seeking out and
developing any general business opportunity. In May 2000, we changed our
name to RateXchange Corporation to reflect the focusing of our efforts on
the business of creating an electronic marketplace for telecommunications
products. The Company's operating subsidiary RateXchange I, Inc., a Delaware
corporation organized in June 1999, has developed proprietary trading
software to support its electronic trading system for bandwidth and other
telecommunications products.
The Company has generated nominal revenues from its planned operations. The
Company is defined as a development stage company in accordance with
Financial Accounting Standard No. 7. The Company had no operations or
business before September 30, 1998. Cumulative results of operations since
the start of the development stage, September 30, 1998, when the Company
purchased PolarCap, have been reported separately.
From inception, the Company has been primarily engaged in organizational
activities, including designing and developing its portal, recruiting
personnel, establishing office facilities, raising capital, developing
infrastructure and developing a marketing plan. The Company began revenue
generation activities in 1999 but nominal revenue has been generated as of
September 30, 2000. Accordingly, the Company is classified as a development
stage company. Successful completion of the Company's development program
and, ultimately, the attainment of profitable operations is dependent upon
future events, including increasing its customer base, implementing and
successfully executing its business and marketing strategy and hiring and
retaining quality personnel. Negative developments in any of these
conditions could have a material adverse effect on the Company's business,
financial condition and results of operations.
NOTE 2 CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
We consider all highly liquid investment securities with maturities from
date of purchase of three months or less to be cash equivalents. Short-term
investments consist of debt securities with maturities between three months
and twelve months.
Management determines the appropriate classification of investments at the
time of purchase and reevaluates such determination at each balance sheet
date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included in stockholders' equity. At September 30, 2000, the
Company's investment in short term securities had an unamortized cost of
$14,371,764. Realized gains and losses and declines in value of securities
judged to be other than temporary are included in other income, net.
Interest and dividends on all securities are included in other income, net.
F-25
NOTE 3 PRIVATE PLACEMENT
In March 2000, the Company completed a private placement in which it sold
2,733,329 shares of restricted common stock at a subscription price of $12
per share plus warrants to purchase 1,366,673 shares of its common stock at
an exercise price of $14.40 per share. The warrants are immediately
exercisable and expire in three years. After deducting $2,665,000 for costs
associated with the offering the Company received $30,135,000. The Company
has used a portion of the proceeds of this offering to implement its
business strategy for creating an online marketplace and exchange where
market participants can buy and sell bandwidth and trade bandwidth
contracts.
NOTE 4 REVENUE RECOGNITION
The Company recognizes trading revenue once a trade is consummated and the
earnings process is complete. Consulting and advertising revenue is
recognized as the related services are performed.
NOTE 5 LOSS PER SHARE AND AVERAGE SHARES OUTSTANDING
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Options and warrants on shares
of common stock were not included in computing diluted loss per share
because their effects were antidilutive (8,087,500 options and 5,450,043
warrants).
NOTE 6 COMMITMENTS AND CONTINGENCIES
In 1999, RateXchange entered into a term sheet agreement with a vendor to
provide specialized consulting and computer programming to assist in
RateXchange's business plans and operations in the e-commerce niche it was
developing. The term sheet was never finalized into a formal agreement, but
some services were provided, and certain cash payments were made for the
services that were rendered. The term sheet also provided for the vendor to
receive a stock position in RateXchange of up to 10% for certain services.
In early 2000 the Company began discussions with the vendor concerning the
10% stock position in RateXchange because the formal agreement was never
completed and the contemplated services were not fully provided. The
ultimate outcome of these discussions was uncertain at that time. In August
2000, the Company reached an agreement for settlement of the dispute with
the vendor, whereby the Company issued 175,000 shares, 175,000 warrants and
$100,000 in cash. The total market value of the settlement of $1,822,875
million is recorded in the Company's statement of operations for the nine
months ended September 30, 2000.
The Company is involved in the following lawsuit:
On February 24, 2000, Concentric Network Corporation filed a lawsuit against
NetAmerica, Inc., aka A1 Internet, Inc., and the Company in the Superior
Court of California for the County of Santa Clara (CV 784335). The lawsuit
involves claims for breach of contract and common counts based on A1
Internet's nonperformance in a service agreement between A1 Internet and
Concentric related to the Company's former operations during 1999.
Concentric is asking for compensatory damages of at least $167,794,
restitution, costs and attorney fees. The matter is currently pending in
Superior Court and will soon proceed to arbitration. The Company has fully
reserved for this contingency.
NOTE 7 OPTIONS AND WARRANTS FOR PURCHASE OF COMMON STOCK
Shareholders authorized the 1999 Stock Option Plan during 1999. Shareholders
authorized the 2000 Stock Option Plan on April 20, 2000. There are options
to purchase 8,000,000 shares authorized for issuance under both plans. On
February 24, 2000, the Board authorized additional options to purchase
4,290,000 shares outside of either plan. Total options granted to employees
during the first quarter for less than fair market value were 3,940,000 for
which the Company recognized related compensation expense of $8,481,424 for
the first nine months of 2000.
The company also granted options to non-employee consultants totaling
275,000 for which the company recorded related expense of $2,287,250 and
$156,000 for the nine months and third quarter ended September 30, 2000.
F-26
On September 17, 2000, the Company entered into an alliance agreement with
Amerex Bandwidth, Ltd. Under this agreement, Amerex brokers will execute
trades for the sales or purchase of telecommunications capacity, Internet
protocol products and/or other telecommunications-related products over the
Company's electronic trading system and we will share in the revenues
generated by the electronic trading system. In connection with this
agreement, we issued to Amerex five warrants for an aggregate of 2,300,000
shares of our common stock. One warrant for 300,000 shares with an exercise
price of $4.47 per share is currently exercisable by Amerex. The remaining
four warrants each for 500,000 shares and with exercise prices of $4.47 per
share, $4.70 per share, $4.92 per share and $5.37 per share, will become
exercisable upon the earlier of September 17, 2005 or Amerex executing a
minimum of $1,000,000, $1,000,000, $3,000,000 and $5,000,000, in value of
transactions over our online electronic trading system.
NOTE 8 SHORT TERM DEBT
In February 2000, RateXchange I Inc. closed a $2,000,000 convertible note
offering. The notes were convertible into RateXchange I, Inc. common stock
at a price per share to be determined in an anticipated subsequent financing
of RateXchange I. Purchasers of the notes also received warrants to purchase
RateXchange I common stock at $2.40 per share, subject to adjustment. As a
result of our new business strategy the subsequent financing of RateXchange
I did not occur. Accordingly, we offered to the note holders the right to
convert their notes into RateXchange Corporation common stock at an exchange
rate of $5.00 per share. In addition, we agreed to issue to such holders an
aggregate of 500,000 warrants to purchase common stock at $5.00 per share or
pay back principal plus accrued interest. All RateXchange I notes and
warrants have been converted into RateXchange Corporation common shares
except for one note for $25,000.
NOTE 9 COMPREHENSIVE LOSS
The comprehensive loss for the first nine months of 2000 and 1999 was:
Nine Months Ended
September 30
--------------------------
2000 1999
------------ -----------
Net loss $(37,279,048) $(5,228,100)
Other Comprehensive Income:
Unrealized gains (losses) on investments (117,965) --
------------ -----------
Comprehensive loss $(37,397,013) $(5,228,100)
============ ===========
F-27
====================================================================================================================================
We have not authorized any dealer, salesperson or other person
to give any information or represent anything not contained in
this prospectus. You must not rely on any unauthorized
information. This prospectus does not offer to sell or buy any
shares in any jurisdiction where it is unlawful. The information
in this prospectus is current only as of its date.
TABLE OF CONTENTS 4,934,162 Shares
Page of Common Stock
----
PROSPECTUS SUMMARY............................................2
RISK FACTORS..................................................3
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS...................................................9
USE OF PROCEEDS...............................................9
SELLING STOCKHOLDERS..........................................9
PLAN OF DISTRIBUTION.........................................14 RateXchange Corporation
DESCRIPTION OF CAPITAL STOCK.................................15
BUSINESS.....................................................16
PROPERTIES...................................................24
LEGAL PROCEEDINGS............................................24
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED ------------------
STOCKHOLDER MATTERS.........................................25
SELECTED CONSOLIDATED FINANCIAL DATA.........................26 PROSPECTUS
SUPPLEMENTARY FINANCIAL INFORMATION..........................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................28
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................32
MANAGEMENT...................................................32
EXECUTIVE COMPENSATION.......................................36
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION..42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..............................................43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............45
ABOUT THIS PROSPECTUS........................................46
WHERE YOU CAN FIND MORE INFORMATION..........................46
LEGAL MATTERS................................................46
EXPERTS......................................................46
====================================================================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by us in
connection with the sale of securities being registered. All amounts are
estimated except the SEC registration fee.
SEC registration fee......... $ 11,371
Legal fees and expenses...... $ 75,000
Printing fee................. $ 5,000
Accounting fees and expenses. $ 5,000
Transfer agent fees and $ 200
expenses.....................
Miscellaneous................ $ 1,500
--------
Total........................ $ 98,071
Item 14. Indemnification of Directors and Officers
Delaware General Corporation Law Section 145 provides for indemnification of
directors and officers in terms sufficiently broad to permit such
indemnification, under certain circumstances, for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
In addition, Delaware law provides that a corporation may purchase and maintain
insurance on behalf of an officer or director against liability incurred by the
officer or director as an officer or director.
Our Certificate of Incorporation and Bylaws require that we indemnify our
directors and officers to the fullest extent allowed under Delaware law. Our
Bylaws also provide that we may purchase and maintain insurance on behalf of our
officers and directors against any liability asserted against them as officers
and directors. Currently, we carry directors and officers liability insurance,
which may insure against officer or director liability arising under the
Securities Act.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
UNREGISTERED EQUITY SECURITIES SOLD WITHIN THE PAST THREE YEARS
o In September 1998, we exchanged 2,400,000 shares of our common stock,
valued at $2,400, for all outstanding shares of PolarCap, Inc. We
issued these shares to accredited investors in reliance upon Section
4(2) of the Securities Act.
o In October 1998, we exchanged 1,000,000 shares of our common stock,
valued at $1,000, for services provided by several employees and/or
consultants who were also accredited investors. We issued these shares
in reliance upon Section 4(2) of the Securities Act if 1933, as
amended.
o From September through December 1998, we issued 1,399,773 shares of our
common stock to various accredited investors in exchange for $474,699
in notes previously issued by us and held by these investors. We issued
these shares in reliance upon Section 4(2) of the Securities Act.
o In December 1998, we exchanged 87,000 shares of our common stock,
valued at $87,000, for services provided by employees and/or
consultants who were also accredited investors. We issued these shares
in reliance upon Section 4(2) of the Securities Act.
o In December 1998, we issued 1,050,000 shares of our common stock to
various related parties in exchange for $300,000 in notes previously
issued by us and held by these parties. Because these related parties
were accredited investors, we issued these shares in reliance upon
Section 4(2) of the Securities Act.
o In January 1999, we issued to certain related parties 916,574 shares of
our common stock for $91,657 in notes. We issued the shares to
accredited investors in reliance upon Section 4(2) of the Securities
Act.
o In January 1999, we issued to certain service providers 322,500 shares
of our common stock for cost reimbursement. The costs were valued at
$32,250. We issued the shares to accredited investors in reliance upon
Section 4(2) of the Securities Act.
II-1
o In a private placement conducted between November 1998 and March 1999,
we issued to certain private placement investors and related parties a
total of 758,438 shares of our common stock for cash and 3,112,500
shares of common stock for notes at an effective purchase price of
$1.07 per share ($4,048,100 net). We issued the shares to accredited
investors in reliance upon Section 4(2) of the Securities Act.
o In March 1999, we issued to certain services providers 268,500 shares
of our common stock for services. The services were valued at $287,233.
We issued the shares to accredited investors in reliance upon Section
4(2) of the Securities Act.
o Between March and May 1999, we issued to A1 Internet, Inc. creditors
193,186 shares of our common stock to settle and discharge obligations
owed by A1 Internet to creditors. These obligations totaled $216,879.
We issued the shares to accredited investors in reliance upon Section
4(2) of the Securities Act.
o In March 1999, we issued to certain service providers 30,000 shares of
our common stock for services valued at $32,000. We issued the shares
to accredited investors in reliance upon Section 4(2) of the Securities
Act.
o In March 1999, we issued to certain services providers 30,000 shares of
our common stock for $30,000 in notes. We issued the shares to
accredited investors in reliance upon Section 4(2) of the Securities
Act.
o In a private placement conducted between May and June 1999, we issued
to certain private placement investors a total of 515,188 shares of our
common stock for cash at a price of $1.60 per share ($628,272 net). We
issued an additional 122,518 shares (valued at $196,029) of our common
stock as commissions in this private placement. We issued the shares to
accredited investors in reliance upon Section 4(2) of the Securities
Act.
o On July 6, 1999, we issued 574,998 shares ($920,000 aggregate) of our
common stock to the stockholders of Rate Exchange I, Inc. to acquire
all of the outstanding stock of Rate Exchange, Inc. We issued the
shares to accredited investors in reliance upon Section 4(2) of the
Securities Act.
o Between December 1998 and November 1999, we granted to our employees,
officers, directors, consultants and advisors a total of 2,990,000
options and 625,000 warrants to purchase shares of our common stock at
exercise prices ranging from $.05 to $2.75. We issued the securities in
reliance upon Rule 506 of Regulation D and Section 4(2) of the
Securities Act.
o In February 2000, we issued 198,898 shares of our restricted common
stock to certain warrant holders upon such warrant holders' cashless
exercise of certain of our warrants. We issued the shares to accredited
investors in reliance upon Section 4(2) of the Securities Act.
o In February 2000, we granted to our employees, officers, directors,
consultants and advisors options to purchase 4,215,000 shares of our
restricted common stock at an exercise price of $7.00 per share. The
options are exercisable pursuant to a vesting schedule and they expire
on February 24, 2005. We issued the securities in reliance upon Rule
506 of Regulation D and Section 4(2) of the Securities Act.
o Between February and March 2000, we sold to certain private placement
investors 2,733,329 shares of our restricted common stock at a price of
$12.00 per share plus warrants to purchase 1,366,673 shares of our
common stock at an exercise price of $14.40 per share. The warrants are
immediately exercisable and expire in three years. After deducting
$2,665,000 for expenses related to the offering, we received
$30,135,000. We issued the securities to accredited investors in
reliance upon Rule 506 of Regulation D of the Securities Act.
o Between February and March 2000, we issued to various service providers
additional warrants to purchase 804,620 shares of our common stock in
exchange for services. The exercise prices of the warrants range from
$5.00 to $14.40 per share and the warrants expire between 2003 and
2005. We issued the securities to accredited investors in reliance upon
Rule 506 of Regulation D and Section 4(2) of the Securities Act.
o In April 2000, we issued 116,522 shares of our restricted common stock
to certain warrant holders upon such warrant holders' cashless exercise
of certain of our warrants. We issued the shares to accredited
investors in reliance upon Section 4(2) of the Securities Act.
o In July 2000, some of our subsidiary's bridge note holders converted
their bridge notes into 275,000 shares of our restricted common stock
at an exchange rate of $5.00 per share plus warrants to purchase
343,750 shares of our restricted common stock at an exercise price of
$5.00 per share. All of the bridge note holders were accredited
investors. We converted the notes in reliance upon Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
o In August 2000, we issued 175,000 shares of our common stock plus
warrants to purchase 175,000 shares of common stock at an exercise
price of $5.00 per share to a single accredited investor in settlement
of a claim. We issued the shares and warrant in reliance upon Section
4(2) of the Securities Act.
II-2
o In September and October 2000, holders of the balance of our
subsidiary's bridge notes converted their notes into a total of 120,000
shares of our restricted common stock at an exchange rate of $5.00 per
share plus warrants to purchase a total of 150,000 shares of our
restricted common stock at an exercise price of $5.00 per share. All of
the bridge note holders were accredited investors. We converted these
notes in reliance upon Section 4(2) of the Securities Act.
Item 16. Exhibits
(a) The following exhibits are filed herewith:
3.1 Certificate of Incorporation, as amended (incorporated herein by
reference to Exhibit 3.1 to RateXchange's Registration Statement on
Form S-1 (Reg. No. 333-37004)).
3.2 Amended and Restated Bylaws, as amended.
5.1 Opinion of Hogan & Hartson L.L.P.
5.2 Opinion of Snell & Wilmer L.L.P. (incorporated by reference to Exhibit
5.1 to RateXchange's Registration Statement on Form S-1 (Reg. No.
333-37004)).
10.1 Agreement and Plan of Merger between RateXchange and Rate Exchange,
Inc. dated June 1, 1999 (incorporated herein by reference to Exhibit
10.1 to RateXchange's Form 10-Q for the quarter ended September 30,
1999).
10.2 Acquisition Agreement between RateXchange and PolarCap, Inc.
(incorporated herein by reference to Exhibit 2.01 to RateXchange's Form
8-K/A filed on October 8, 1998).
10.3+ Employment Agreement between RateXchange and Edward Mooney dated April
1, 1999 (incorporated by reference to Exhibit 10.3 to RateXchange's
Form 10-Q for the quarter ended September 30, 1999).
10.4 Promissory Note of Edward Mooney dated December 18, 1998 (incorporated
by reference to Exhibit 10.4 to RateXchange's Form 10-K/A for the year
ended December 31, 1999).
10.5+* Form of Severance Agreement between RateXchange and Edward Mooney.
10.6+ Employment Agreement between RateXchange and Douglas Cole dated April
1, 1999 (incorporated by reference to Exhibit 10.4 to RateXchange's
Form 10-Q for the quarter ended September 30, 1999).
10.7+* Form of Severance Agreement between RateXchange and Douglas Cole.
10.8+* Employment Agreement between RateXchange I, Inc. and Donald H. Sledge
dated September 15, 1999.
10.9+ Amendment No. 1 to Employment Agreement of Donald H. Sledge dated
October 5, 2000.
10.10+ Employment Agreement between RateXchange and Ross Mayfield dated July
2, 1999 (incorporated by reference to Exhibit 10.10 to RateXchange's
Form 10-K/A for the year ended December 31, 1999).
10.11+ Separation Agreement between RateXchange and Ross Mayfield dated August
18, 2000 (incorporated by reference to Exhibit 10.3 to RateXchange's
Form 10-Q for the quarter ended September 30, 2000).
10.12+ Employment Agreement between RateXchange and Paul Wescott dated July 5,
2000 (incorporated by reference to Exhibit 10.4 to RateXchange's Form
10-Q for the quarter ended September 30, 2000).
10.13+ Separation Agreement between RateXchange and Paul Wescott dated August
28, 2000 (incorporated by reference to Exhibit 10.5 to RateXchange's
Form 10-Q for the quarter ended September 30, 2000).
II-3
10.14+* Employment Agreement between RateXchange and Philip Rice dated February
29, 2000.
10.15+* Employment Agreement between RateXchange and D. Jonathan Merriman dated
October 5, 2000.
10.16+ 1998 Employee/Consultant Stock Compensation Plan (incorporated herein
by reference to Exhibit 10.1 to RateXchange's Registration Statement on
Form S-8 (Reg. No. 333-65729)).
10.17+ 1999 Stock Option Plan (incorporated herein by reference to Exhibit 4.1
to RateXchange's Registration Statement on Form S-8 (Reg. No.
333-43776)).
10.18+ Form of Non-Qualified, Non-Plan Stock Option Agreement dated February
24, 2000 between RateXchange and Phillip Rice, Nick Cioll, Paul
Wescott, Ross Mayfield, Russ Matulich, Terry Ginn, Donald Sledge,
Christopher Vizas, Douglas Cole, Ronald Spears and Jonathan Merriman
(incorporated by reference to Exhibit 4.2 to RateXchange's Registration
Statement on Forms S-8 (Reg. No. 333-43776).
10.19+* Schedule of non-plan option grants made under Non-Qualified, Non-Plan
Stock Option Agreements to directors and executive officers.
10.20+* 2000 Stock Option Plan, as amended.
10.21 Advisory Agreement between RateXchange and Maroon Bells Capital
Partners, Inc. dated December 15, 1998 (incorporated by reference to
Exhibit 10.12 to RateXchange's Form 10-K/A for the year ended December
31, 1999).
10.22 Promissory Note of Theodore Swindells dated March 30, 1999
(incorporated by reference to Exhibit 10.13 to RateXchange's Form
10-K/A for the year ended December 31, 1999).
10.23 Term Sheet dated July 23, 1999 between RateXchange I, Inc. and Ultimate
Markets, Inc. (incorporated by reference to Exhibit 10.14 to
RateXchange's Form 10-K/A for the year ended December 30, 1999)
10.24 Settlement Agreement and Full General Mutual Release by and between
RateXchange and Ultimate Markets, Inc., dated August 28, 2000
(incorporated by reference to Exhibit 10.6 to RateXchange's Form 10-Q
for the quarter ended September 30, 2000).
10.25 Master Equipment Lease Agreement dated March 16, 2000 (incorporated by
reference to Exhibit 10.6 to RateXchange's Registration Statement on
Form S-1 (Reg. No. 333-37004)).
10.26*/**Agreement between RateXchange and Amerex Bandwidth, Ltd. Dated
September 17, 2000, including Warrants.
10.27* Multi Site Colocation Commitment Agreement by and between RateXchange
and COLO.com dated February 17, 2000.
10.28* Co-location License by and between RateXchange and Switch & Data
Facilities Company dated March 1, 2000.
10.29 Facilities Management Agreement between RateXchange and Telecity UK
Limited dated July 11, 2000 (incorporated by reference to Exhibit 10.2
to RateXchange's Form 10-Q for the quarter ended September 30, 2000).
10.30*/**Master Agreement between RateXchange and Science Applications
International Corporation dated February 2, 2000.
21.1 List of Subsidiaries of RateXchange (incorporated herein by reference
to Exhibit 21.1 to RateXchange's Registration Statement on Form S-1
(Reg. No. 333-37004)).
II-4
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Crouch, Beirwolf & Chisholm.
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.4 Consent of Snell & Wilmer L.L.P.
24.1* Power of Attorney.
+ Represents management contract or compensatory plan or arrangement.
* Previously filed.
** Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit has been filed separately with
the Secretary of the Securities and Exchange Commission without such
redaction pursuant to our Application Requesting Confidential Treatment
under Rule 406 of the Securities Act.
(b) Not applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-5
Signatures
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California on the 12th day of February, 2001.
RATEXCHANGE CORPORATION
By: /s/ D. Jonathan Merriman
---------------------------
D. Jonathan Merriman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 has been signed by the following persons in the capacities indicated
below, on the 12th day of February, 2001.
Signature Title
/s/ D. Jonathan Merriman President, Chief Executive Officer and Director
------------------------------------ (principal executive officer)
D. Jonathan Merriman
* Senior Vice President, Finance and Chief Accounting
------------------------------------ Officer (principal financial and accounting officer)
Michael I. Cairns
* Chairman
------------------------------------
Donald H. Sledge
* Director
------------------------------------
Dean S. Barr
* Director
------------------------------------
Gordon Hutchins, Jr.
* Director
------------------------------------
Ronald E. Spears
Director
------------------------------------
Steven W. Town
Director
------------------------------------
Christopher J. Vizas
* By Attorney-in-Fact
/s/ D. Jonathan Merriman
------------------------------------
D. Jonathan Merriman
II-6
Exhibit No. Exhibit Description
----------- -------------------
3.1 Certificate of Incorporation, as amended (incorporated herein by
reference to Exhibit 3.1 to RateXchange's Registration Statement on
Form S-1 (Reg. No. 333-37004)).
3.2 Amended and Restated Bylaws, as amended.
5.1 Opinion of Hogan & Hartson L.L.P.
5.2 Opinion of Snell & Wilmer L.L.P. (incorporated by reference to Exhibit
5.1 to RateXchange's Registration Statement on Form S-1 (Reg. No.
333-37004)).
10.1 Agreement and Plan of Merger between RateXchange and Rate Exchange,
Inc. dated June 1, 1999 (incorporated herein by reference to Exhibit
10.1 to RateXchange's Form 10-Q for the quarter ended September 30,
1999).
10.2 Acquisition Agreement between RateXchange and PolarCap, Inc.
(incorporated herein by reference to Exhibit 2.01 to RateXchange's Form
8-K/A filed on October 8, 1998).
10.3+ Employment Agreement between RateXchange and Edward Mooney dated April
1, 1999 (incorporated by reference to Exhibit 10.3 to RateXchange's
Form 10-Q for the quarter ended September 30, 1999).
10.4 Promissory Note of Edward Mooney dated December 18, 1998 (incorporated
by reference to Exhibit 10.4 to RateXchange's Form 10-K/A for the year
ended December 31, 1999).
10.5+* Form of Severance Agreement between RateXchange and Edward Mooney.
10.6+ Employment Agreement between RateXchange and Douglas Cole dated April
1, 1999 (incorporated by reference to Exhibit 10.4 to RateXchange's
Form 10-Q for the quarter ended September 30, 1999).
10.7+* Form of Severance Agreement between RateXchange and Douglas Cole.
10.8+* Employment Agreement between RateXchange I, Inc. and Donald H. Sledge
dated September 15, 1999.
10.9+ Amendment No. 1 to Employment Agreement of Donald H. Sledge dated
October 5, 2000.
10.10+ Employment Agreement between RateXchange and Ross Mayfield dated July
2, 1999 (incorporated by reference to Exhibit 10.10 to RateXchange's
Form 10-K/A for the year ended December 31, 1999).
10.11+ Separation Agreement between RateXchange and Ross Mayfield dated August
18, 2000 (incorporated by reference to Exhibit 10.3 to RateXchange's
Form 10-Q for the quarter ended September 30, 2000).
10.12+ Employment Agreement between RateXchange and Paul Wescott dated July 5,
2000 (incorporated by reference to Exhibit 10.4 to RateXchange's Form
10-Q for the quarter ended September 30, 2000).
10.13+ Separation Agreement between RateXchange and Paul Wescott dated August
28, 2000 (incorporated by reference to Exhibit 10.5 to RateXchange's
Form 10-Q for the quarter ended September 30, 2000).
10.14+* Employment Agreement between RateXchange and Philip Rice dated February
29, 2000.
10.15+* Employment Agreement between RateXchange and D. Jonathan Merriman dated
October 5, 2000.
II-7
10.16+ 1998 Employee/Consultant Stock Compensation Plan (incorporated herein
by reference to Exhibit 10.1 to RateXchange's Registration Statement on
Form S-8 (Reg. No. 333-65729)).
10.17+ 1999 Stock Option Plan (incorporated herein by reference to Exhibit 4.1
to RateXchange's Registration Statement on Form S-8 (Reg. No.
333-43776)).
10.18+ Form of Non-Qualified, Non-Plan Stock Option Agreement dated February
24, 2000 between RateXchange and Phillip Rice, Nick Cioll, Paul
Wescott, Ross Mayfield, Russ Matulich, Terry Ginn, Donald Sledge,
Christopher Vizas, Douglas Cole, Ronald Spears and Jonathan Merriman
(incorporated by reference to Exhibit 4.2 to RateXchange's Registration
Statement on Forms S-8 (Reg. No. 333-43776).
10.19+* Schedule of non-plan option grants made under Non-Qualified, Non-Plan
Stock Option Agreements to directors and executive officers.
10.20+* 2000 Stock Option Plan, as amended.
10.21 Advisory Agreement between RateXchange and Maroon Bells Capital
Partners, Inc. dated December 15, 1998 (incorporated by reference to
Exhibit 10.12 to RateXchange's Form 10-K/A for the year ended December
31, 1999).
10.22 Promissory Note of Theodore Swindells dated March 30, 1999
(incorporated by reference to Exhibit 10.13 to RateXchange's Form
10-K/A for the year ended December 31, 1999).
10.23 Term Sheet dated July 23, 1999 between RateXchange I, Inc. and Ultimate
Markets, Inc. (incorporated by reference to Exhibit 10.14 to
RateXchange's Form 10-K/A for the year ended December 30, 1999)
10.24 Settlement Agreement and Full General Mutual Release by and between
RateXchange and Ultimate Markets, Inc., dated August 28, 2000
(incorporated by reference to Exhibit 10.6 to RateXchange's Form 10-Q
for the quarter ended September 30, 2000).
10.25 Master Equipment Lease Agreement dated March 16, 2000 (incorporated by
reference to Exhibit 10.6 to RateXchange's Registration Statement on
Form S-1 (Reg. No. 333-37004)).
10.26*/**Agreement between RateXchange and Amerex Bandwidth, Ltd. Dated
September 17, 2000, including Warrants.
10.27* Multi Site Colocation Commitment Agreement by and between RateXchange
and COLO.com dated February 17, 2000.
10.28* Co-location License by and between RateXchange and Switch & Data
Facilities Company dated March 1, 2000.
10.29 Facilities Management Agreement between RateXchange and Telecity UK
Limited dated July 11, 2000 (incorporated by reference to Exhibit 10.2
to RateXchange's Form 10-Q for the quarter ended September 30, 2000).
10.30*/**Master Agreement between RateXchange and Science Applications
International Corporation dated February 2, 2000.
21.1 List of Subsidiaries of RateXchange (incorporated herein by reference
to Exhibit 21.1 to RateXchange's Registration Statement on Form S-1
(Reg. No. 333-37004)).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Crouch, Beirwolf & Chisholm.
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.4 Consent of Snell & Wilmer L.L.P.
24.1* Power of Attorney.
--------
+ Represents management contract or compensatory plan or arrangement.
* Previously filed.
** Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit has been filed separately
with the Secretary of the Securities and Exchange Commission without
such redaction pursuant to our Application Requesting Confidential
Treatment under Rule 406 of the Securities Act.
II-8