Back to GetFilings.com
DRAFT 3 (4/12/01)
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____________ to ____________
Commission File Number 33-19139-NY
-------------
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.)
185 Berry Street, Suite 3515
San Francisco, CA 94107
(Address of Principal Executive Offices) (Zip Code)
(415) 371-9800
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the registrant as of April 5, 2001 was approximately
$27,000,000.
The registrant had issued and outstanding 17,783,000 shares of its
common stock on April 5, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the annual
shareholders' meeting to be held on May 31, 2001 are incorporated by reference
into Part III of this Form 10-K.
================================================================================
RATEXCHANGE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
PART I
ITEM 1. BUSINESS.........................................................................3
ITEM 2. PROPERTIES......................................................................14
ITEM 3. LEGAL PROCEEDINGS...............................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ..........15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................28
CONSOLIDATED BALANCE SHEET......................................................30
CONSOLIDATED STATEMENT OF OPERATIONS............................................31
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY..................................32
CONSOLIDATED STATEMENT OF CASH FLOWS............................................35
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .........................................................48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.................................48
ITEM 11. EXECUTIVE COMPENSATION..........................................................51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES......................................................................51
2
PART I
ITEM 1. BUSINESS
Forward-Looking Statements and Associated Risks
This Outlook section, and other sections of this document, 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 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; and
o Changes in external competitive market factors, which might impact
trends in our results of operations.
In light of these risks and uncertainties, there can be no assurance
that the events contemplated by the forward-looking statements contained in this
Form 10-K will in fact occur.
OVERVIEW
We provide trading, consulting and information solutions enabling
market participants to maximize their assets. These trading solutions allow
network providers, energy merchants, financial institutions and commodity
managers engaged on the RateXchange Trading System (RTS) and RateXchange Futures
System (RFS) the ability to trade bandwidth and futures globally. Our consulting
solutions practice provides asset valuation tools, risk management strategies
and analytics. The information solutions group provides pricing information,
market research and industry background. We are a trading solutions company
enabling the creation of liquid marketplaces for bandwidth and other
telecommunications products.
BUSINESS MODEL
We expect to generate revenues by providing (1) trading solutions, (2)
consulting services and (3) information services to network providers, energy
merchants, financial institutions and asset managers. These three core service
offerings provide interdependent capabilities that allow participants to obtain
key market and pricing information in order to employ commodity management tools
and risk management strategies, which we believe will result in trading
activity.
Trading Services
RateXchange Trading System
Proprietary RateXchange trading software powers the trading system,
designed with input from energy merchants, telecommunication companies,
commodity traders and brokers. The RateXchange Trading System "RTS" is analogous
to trading platforms that dominate on-line natural gas and electricity commodity
trading. The RateXchange Trading System will enable market participants to buy
and sell fiber optic, Internet and satellite bandwidth capacity globally.
3
Our software employs push technology and incorporates the advanced
Java, Oracle, Sun and encryption technologies making it one of the fastest
trading systems in the industry. The RateXchange Trading System serves as a
platform for bandwidth trading and will be enhanced to trade other products such
as IP transit, IP transport and satellite bandwidth. The Company believes it has
developed intellectual property with regard to its trading system, including
certain patentable processes and innovations.
Trades executed on the RateXchange Trading System can be delivered
between any two city-pairs globally. Market participants can trade any number of
city pairs. As the bandwidth trading market matures, participants will likely
adopt a standardized contract as evidenced by what has happened in other
commodities. Trading will utilize the Master Bandwidth Purchase and Sale
Agreement (MBPSA) - made available by the Bandwidth Trading Organization (BTO) -
as well as other supplier and buyer contracts.
Addressable Markets
The RateXchange Trading System currently supports three distinct
bandwidth markets:
Fiber Optic Bandwidth: The largest markets in order of annual revenues
are North America, Europe (including Trans-Atlantic), Asia (including
Trans-Pacific) and Latin America. Fiber optic bandwidth includes both dark and
lit fiber that circumnavigates the world under the earth (terrestrial) as well
as under the ocean (sub-sea). Estimates for the addressable market of bandwidth
trading range from $250 billion to $450 billion by 2005 (CIBC, Salomon Smith
Barney). The transaction velocity is expected to range from 3 to 5 times this
number because of the ability to trade in and out of positions.
We believe that a liquid bandwidth trading market will begin almost
simultaneously in North America and Europe. Advances in technology, such as
Dense Wave Division Multiplexing, increase the amount of bandwidth by adding
colors to the bandwidth spectrum.
IP Access/Transport: The total Internet access and transport market is
estimated to be approximately $10.5 billion currently and expected to grow to
over $200 billion in 2004. We recently signed an agreement with TeleCity, a
leading managed services provider in Europe to jointly launch an IP access
product in the first half of 2001. Our IP access product will offer improvements
over other products in the marketplace that only provide short-term contracts.
Our IP access product will provide buyers with short-term contracts for Internet
access and allow for third-party verification of quality of service. The
third-party verification, which will be provided by TeleCity, is expected to be
of significant value to both the buyers and the sellers. Buyers will now have
independent verification of any interconnected ISP backbone provider's network
performance. Until now, only the backbone provider could give this information
to its customer, and only after-the-fact. Suppliers are seeking ways to
differentiate themselves from their competitors and we expect our IP access
product to create an environment where the information published by TeleCity has
more credibility than that provided by a supplier, due to TeleCity's neutrality.
We are also working in conjunction with a select group of energy
marketing firms, telecommunications providers, local loop providers, and Science
Applications International Corporation (SAIC) to complete the launch of a
trading product for IP transport. We expect this product to include the city
pair bandwidth product combined with a local loop solution that enables buying,
selling, and trading to be done on short intervals with short lead times. This
product will also offer capacity utilization monitoring and near real-time
provisioning on circuits that will enable buyers such as Internet service
providers and CLECs to more closely match their IP bandwidth needs with the size
of their circuits, thus potentially allowing them to materially reduce their
network costs. This value proposition is effectively a just-in-time buying
alternative that will allow purchased bandwidth to be more closely matched to
traffic load demands of these buyers.
Satellite Bandwidth: The total satellite bandwidth market is estimated
to be approximately $10 billion currently and expected to grow to over $150
billion in 2004. We have recently forged an alliance with The London Satellite
Exchange, the first on-line exchange for the satellite industry as a way to gain
access to the satellite bandwidth trading market. We are linking our trading
system with The London Satellite Exchange's, allowing users immediate access to
satellite and fiber optic bandwidth capacity and pricing information. This
alliance diversifies both companies' product offerings by allowing their users
to package total bandwidth requirements.
4
OffXchange Trading
In addition to trading directly over the RateXchange Trading System,
RateXchange, in a partnership agreement with Amerex, also executes many
transactions using traditional voice brokerage. We believe that voice brokerage
is critical to establishing liquidity in early markets such as bandwidth. Amerex
is the world's largest over-the-counter energy broker, providing customers with
voice and electronic brokerage services, market liquidity, price discovery, and
data services around the globe. These voice transactions are part of a
comprehensive approach that RateXchange and Amerex have jointly developed that
involves assisting those customers who are not fully utilizing the RateXchange
Trading System to execute transactions and help them move toward full
participation in the RateXchange Trading System. This approach allows
RateXchange and Amerex to engage customers who are unfamiliar with electronic
trading and engage them on the RateXchange Trading System on a step-by-step
basis. We believe that once involved in this manner, market participants will
become increasingly comfortable trading directly on the RateXchange Trading
System.
RateXchange Futures System
RateXchange is planning to develop futures and options markets for
bandwidth. In order to provide these services for our clients, we are currently
investigating opportunities to develop these markets. The Company recently
appointed Patrick Arbor to the Board of Directors. Mr. Arbor is a longtime
member of the Chicago Board of Trade (CBOT), the world's oldest derivatives
exchange, serving as the organization's Chairman from 1992 to 1998.
Additionally, RateXchange recently acquired Xpit.com, which provides a front-end
execution and risk management platform for traders, account managers and
intermediaries active in the managed futures industry. This platform is now
referred to as the RateXchange Futures System (RFS). This acquisition positions
RateXchange as a leading provider of derivative trading solutions and commodity
risk management and is expected to provide the Company with an immediate revenue
stream. A description of the business is provided below.
We recently expanded our trading service offerings by announcing our
acquisition of Xpit.com ("Xpit"), a privately held company based in Boise,
Idaho. The acquisition provides us with a trading and risk management system for
the derivatives market - which we have named the RateXchange Futures System
(RFS) - further allowing customers to manage their commodity risk, and broadens
our target market to include brokerages, institutional fund managers and
financial institutions worldwide. The RFS seeks to become the dominant
electronic platform for the execution of futures and options on futures
transactions worldwide.
Xpit has developed this proprietary, browser-based, web-enabled
software system in order to serve the needs of three types of customers:
1) Traders-enables them to execute futures and option
transactions on all listed futures contracts worldwide on
both electronic and non-electronic exchanges, inexpensively,
rapidly, accurately and anonymously with a minimum of human
intervention,
2) Institutional managers - allows them to oversee multiple
internal trading accounts to monitor activity and exposure
on an account by account or consolidated basis in real-time,
3) Intermediaries - enables them to monitor margin requirements
and credit exposure in real-time and reduce error risk.
The system has been designed to replace or improve existing industry
practices in order processing, data handling, regulatory compliance, risk
management and account monitoring that are expensive, slow, labor-intensive, and
prone to error. Xpit is expanding its multi-lingual capability and developing
technology for the delivery of real-time quotes, research, and other relevant
information to its users. The Company believes that its competitive
5
advantages include the trading platform's user-interface, functionality,
automation, and analytical/risk management tools.
Xpit was co-founded in 1999 by five futures industry professionals,
including three principals of Sawtooth Investment Management, a limited
liability company specializing in arbitrage (low risk) and limited risk
investment strategies in government debt, foreign currencies and related
derivative securities. Prior to establishing Sawtooth, Michael Boren, President
and COO of Xpit, was co-owner and co-founder of Summit Management, an
introducing broker and broker/dealer that was sold to Refco, Inc. David Boren,
Chief Technology Officer, was previously at Goldman Sachs, where he helped
establish the swaps and derivatives trading group. Douglas Bates, Chief
Marketing Officer, was also previously at Goldman Sachs, where he served in
institutional sales and sales management positions in derivative securities.
Messrs. Boren have both joined the Board of Directors of RateXchange.
Xpit has recently completed successful real-time beta testing of the
platform and has approximately 200 accounts. We plan to fully market the RFS
trading platform during the second quarter of 2001, through a combination of
trade shows, advertising, direct sales, and relationship sales through strategic
partners.
The two broad categories of futures traders - hedgers and speculators -
can be broken down into institutional and retail accounts. The Company has
recently begun directing its marketing efforts toward institutional accounts -
corporations, banks, investment banks, partnerships and fund managers - and
large intermediaries, including Introducing Brokers (IBs), Futures Commission
Merchants (FCMs), and Floor Brokers (FBs). Xpit has identified 800 institutional
accounts and 550 intermediaries (500 IBs and 50 FCMs) as its immediate target
market.
Potential strategic partnerships with intermediaries will play a key
role in Xpit's ability to penetrate the market. To this end the Company has
recently closed a significant licensing agreement with Refco Group Ltd., LLC,
the parent of Refco, Inc., the largest independent FCM. Through this private
label process, Refco, Inc's customer will be able to utilize the RFS.
RateXchange is paid a flat per contract transaction fee on the volume traded on
the system.
With respect to competition, there are a number of other companies that
offer on-line placement of futures orders. Most of these are small IBs catering
to retail customers. A few FCMs cater to retail customers and a few are
developing systems for institutional customers. Finally, several companies are
in the business of providing on-line access to electronic exchanges for FCMs and
professional traders. The systems developed by small IBs have limited
functionality, minimal or nonexistent risk controls, and are not capable of
handling institutional-type business. These systems are an alternative to
telephone contact, not a new futures brokerage paradigm. There is very little
competition for the business of IBs who do not have the ability or desire to
create their own on-line order entry system. The only institutional order entry
systems currently in place are being used by a select group of institutional
traders. The investment banks that own these systems have shown no interest in
competing for retail, IB or small institutional business. The most notable
competition for the RFS comes from a few companies that market systems that
provide access to fully electronic futures markets. The significant players in
this area are Interactive Brokers, PATSystems and Trading Technologies. Each of
these firms has developed a system that offers direct access to several fully
electronic futures exchanges such as Eurex, LIFFE or GLOBEX. These are credible
systems. In fact, Xpit routes some orders to one or more of these systems for
execution. None of these companies provides access to open outcry markets
however, and their products lack the comprehensiveness of the RFS. The broad
futures brokerage experience of Xpit's principals gives the Company an advantage
in development and implementation of a superior electronic futures broker. Only
Xpit offers a platform comparable to the available electronic stock brokerage
products.
In addition to the trading system and associated software, hardware,
vendor relationships and prospective customer lists, RateXchange will augment
its software engineering team by employing eight software engineers and
programmers in Boise, Idaho.
Xpit is a member of the National Futures Association, a self-regulating
body. RateXchange has complied and will continue to comply with any and all
applicable regulations and standards for processing futures and derivative
transactions.
6
RateXchange will operate the futures and derivative trading system
within a wholly-owned operating subsidiary named Xpit Corp. The Company believes
that the futures trading experience and relationships that Xpit brings to
RateXchange will further position it as a leading provider of derivative trading
solutions for asset and commodity managers of all types, including bandwidth.
Application for Derivatives Transaction Execution Facility (DTEF) Status
The Commodity Futures Modernization Act of 2000 (CFMA) became effective
on December 21, 2000. The CFMA amends the Commodity Exchange Act (CEA) and
related sections of other statutes. The CFMA created several new categories of
trading facilities, including derivatives transaction execution facilities
(DTEF). In order to be recognized as a DTEF, a market must; (1) have adequate
means to deter trading abuses; (2) establish and enforce trading procedures and
(3) establish and enforce rules regarding the financial integrity of
transactions and intermediaries for the protection of customer funds.
Recognition as a DTEF allows a trading facility to list futures and derivatives
contracts for trading.
RateXchange intends to file an application for recognition as a DTEF.
Over the past year, we have developed our trading systems and operations in
order to provide an efficient marketplace for our customers. We expect that this
work will result in recognition as a DTEF. Upon approval as a DTEF, we will
develop and market bandwidth futures and options contracts that will bring risk
management tools and practices to the telecommunications industry. The contracts
traded on the DTEF will enable market participants to hedge risk, protect
against price volatility and leverage their assets.
Partnerships with Leading Exchanges
We are exploring partnerships with the world's leading commodity
exchanges. Through these proposed partnerships, RateXchange and a commodity
exchange would jointly develop and market futures instruments based on
telecommunications products. RateXchange would supply domain expertise and
market the contract to industry participants and RateXchange customers. The
exchange would provide futures product development expertise, market the futures
contracts to exchange members, commodity traders and financial institutions, and
list the contract for trading. We expect the establishment of a bandwidth
futures market to spur the development of the underlying spot market and create
arbitrage opportunities. As major investment banks and commodity traders enter,
we expect the bandwidth trading market to become increasingly liquid.
Consulting Services
In the context of declining bandwidth prices and current financial
pressures on the telecommunications market, there has been increasing emphasis
on the monetization of bandwidth assets. Institutions within the financial
community have become aware of the opportunities presented by the developing
bandwidth market and are actively seeking to educate and position themselves.
Furthermore, network providers are aware of the need to effectively manage risk
in the face of volatile market conditions. Based on our management team and
professional staff drawn from the financial services, energy, commodity and
telecommunications industries, we are qualified to provide a wide range of
consulting services to existing and prospective market participants. Our
consulting practice assists customers with risk management services, asset
valuation tools, asset disposition programs, pricing strategy as well as
customized price analytics. These consulting services are a critical part of
moving the market to liquidity and establishing RateXchange as a solution for
its clients.
Risk Management Group
RateXchange recently formed RMG Partners Corp. (RMG), a wholly owned
Delaware subsidiary consisting of six individuals hired to provide risk
management solutions through the use of derivative trading strategies. RMG
designs solutions to manage financial risk for a variety of clients including
corporations, money managers, and hedge funds. The management team at RMG has
extensive experience in structuring fixed income and equity derivative products.
As part of RateXchange's consulting services, the RMG team will not
only add top line revenue from its existing clients, but will serve as expert
resources in risk management, logistics, and structured financial solutions
7
that RateXchange can draw upon internally for the trading and derivatives work
involved with our various trading services and products.
RMG's specialty is financial engineering. By utilizing derivative
instruments, RMG offers customized investment products and trade ideas. The
following list identifies a few basic strategies that have been executed for
clients of the RMG team:
o Arbitrage Trades
o Covered Call-Write Option Strategies
o Fund Redemption Strategies
o Directional Exposure with Defined Risk/Reward Profiles
o Variable Rate Prepay Forwards
o Structured Notes
Once an optimal solution has been designed, RMG will assist the client
with the execution for the trade. RMG is paid a structuring fee contingent on
the completion of the transaction.
The team at RMG is headed up by Dr. Sanjay H. Lillaney, Ph.D in Finance
and MBA from Rutgers, who has extensive experience in structuring and
customizing specialized investment products across different asset classes and
markets. In addition, Mark S. Burger, BS from Berkeley, has a broad risk
management background, with nearly 20 years experience in money management for
pension funds and individuals.
RMG Partners Corp. will apply for its broker-dealership license with
the NASD. Dr. Lillaney is the CEO of RMG Partners. We expect the RMG team to
contribute significantly to the development of derivative products and risk
management strategies related to the bandwidth market as well.
RateXlabs
Through RateXlabs, our research and education unit, we provide market
entry, commodity and risk management consulting, as well as price analytics to
network providers and financial institutions.
Commodity/Risk Management
Current volatile energy prices provide strong evidence that companies
should consider utilizing risk management tools. We currently provide hedging,
trading and analytical expertise that will help bandwidth trading customers
manage the risk associated with bandwidth price volatility. Our areas of
expertise include:
o Hedging, as well as price and risk management
o Asset valuation
o Purchase and liquidation provisioning
o Structured swaps and derivative products
Analytics
With increasing liquidity and resulting price discovery in the
bandwidth market, buyers and sellers are able to identify and build forward
price curves. The Company's RateXlabs unit provides pricing strategy and
develops analytical tools, such as custom-made indices, that enable customers to
make more effective decisions with respect to their bandwidth assets. RateXlabs
has presented its work on bandwidth pricing strategy and other analytical
information to numerous current and potential market participants.
Information Services
In order for telecommunications companies, energy merchants and
financial institutions to effectively manage risk, their bandwidth trading desks
need to establish a centralized point of market, pricing and demand information.
We believe that increased information will drive trading activity and liquidity
in the bandwidth
8
market, which in turn will create greater price discovery and more valuable
market information. Our information services group offers our customers pricing
information, current market research, and comprehensive industry news and
commentary to assist them in their network deployment, pricing and trading
decisions. We can offer these services through private label information feeds
from RateXchange or as co-branded links to media/research and financial news
organizations.
Pricing Information
We make available a series of price-related information to corporate
decision makers, financial analysts and market participants. This information
provides data to news agencies and participants, tracks historical prices on the
most liquid bandwidth routes, such as New York-London and New York-Los Angeles,
and provides global indicators, as well as trending tools.
Market Research
The Company's RateXlabs unit makes available a number of industry
whitepapers and provides market research to customers and potential market
entrants. Topics include decision analysis, risk and yield management, bandwidth
pricing strategy, bandwidth derivative pricing models, and benefits of the
exchange model. This research is utilized by traders, analysts, investment
bankers and corporate decision makers.
Industry News/Market Commentary
We provide access to the latest news related to the telecommunications,
energy, and commodity markets and offer updated market commentary from various
members of our professional staff. This enables our customers to stay abreast of
the latest market developments, pricing trends and supply and demand patterns.
BANDWIDTH TRADING OVERVIEW
According to the Hoover's "Telecommunications Industry Summary," annual
global spending on telecom services 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;
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:
9
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, with most having completed or
about to complete multiple trades.
BANDWIDTH AS A COMMODITY
Our long-term success depends, 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 standardized 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.
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.
10
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 December 2000, we entered into contracts with eight carriers,
including Tier 1 carriers headquartered in Asia, Europe and North America. Since
December, an additional twenty contracts have been signed by market
participants.
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.
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 a trading system for transacting in multiple types of bandwidth is
significant.
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 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:
|X| A neutral bandwidth trading system;
|X| 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 the RateXchange Trading System.
11
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, 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 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; 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.
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 trading system. We do not have
any franchises.
GENERAL DEVELOPMENT OF BUSINESS
During the fourth quarter of 2000 and first quarter of 2001, 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, formerly 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 Deutsche Asset Management, was elected to our Board of Directors. On February
12, 2001, Patrick Arbor, former Chairman of the Chicago Board of Trade was
elected to our Board of Directors. On February 20, 2001, E. Russell Braziel, CEO
of Netrana, LLC and former Chairman of Altra Energy Technologies, Inc. was
elected to our Board of Directors.
On April 9, 2001, we announced the formation of RMG Partners, Corp., a
wholly owned subsidiary, created to provide market-based solutions through the
use of derivative trading strategies. To provide these services, we hired a
group of six employees who formerly served as a transaction structuring and
execution team at Wells Fargo Van Kasper, Inc.
On March 21, 2001, we signed an agreement with TeleCity, a European
managed services provider, marking the launch of our Internet access brokering
service, "IP Access". This new product offering will allow ISPs, carriers, other
service providers and major enterprises to purchase quality-assured Internet
access bandwidth from major backbone ISPs. TeleCity is building and will manage
the physical exchange facilities upon which the RateXchange Trading System (RTS)
will operate. The service will be launched initially in London and expanded to
other TeleCity locations later in the year.
On March 12, 2001, we announced the acquisition of Xpit.com ("Xpit"), a
privately held company that seeks to become the dominant electronic platform for
the execution of futures and options on futures transactions worldwide. Xpit has
developed a web-enabled, high-speed trading and risk management system that
provides
12
traders, brokers and financial institutions the ability to both execute and
clear listed futures contracts on a global basis. The product provides us with a
front-end trading platform that serves as its entry point into the derivatives
trading markets. Xpit will operate as a wholly-owned subsidiary of RateXchange
Corp., and the trading system will be referred to as the RateXchange Futures
System (RFS).
On January 10, 2001, RateXchange and The London Satellite Exchange
announced the first global alliance that provides bandwidth users the ability to
fill both satellite and fiber optic bandwidth requirements at the same time.
This alliance diversifies both companies' product offerings by allowing users to
package total bandwidth requirements. The London Satellite Exchange operates an
on-line exchange for the satellite industry.
On September 17, 2000, we announced that we had launched our new
RateXchange Trading System (RTS), 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 RTS 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. Trading on the RTS 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 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 RTS. In connection with this
agreement, we issued to Amerex five warrants for an aggregate of 2,300,000
shares of our common stock. Two warrants, one for 300,000 shares and one for
500,000 shares, with exercise prices of $4.47 and $4.70 per share, are currently
exercisable by Amerex. The remaining three warrants, each for 500,000 shares and
with exercise prices of $4.92 per share, $5.14 per share and $5.37 per share,
will become exercisable upon the earlier of September 17, 2005 or Amerex
executing a cumulative minimum of $2,000,000, $5,000,000 and $10,000,000, of
value of transactions over the RateXchange Trading System.
On September 15, 2000, we 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 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. 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.
13
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 the lower of cost or market 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.
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 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
RateXchange and its subsidiaries employed thirty-seven (37) persons at
December 31, 2000.
ITEM 2. PROPERTIES
Not applicable.
14
ITEM 3. LEGAL PROCEEDINGS
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, 2000, the Company has
fulfilled all of its current obligations under the settlement agreement.
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 in 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 and Concentric. 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 recorded an accrual for the estimated amount
of this contingency.
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 electronic trading business
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
February 2000, the Company entered into 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. In August 2000,
the Company reached an agreement for settlement of the dispute with the vendor,
whereby the Company issued 175,000 shares of common stock, 175,000 warrants and
$100,000 in cash. The market value of the settlement was $1.8 million.
Additionally, from time to time, we are involved in ordinary routine
litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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 following table sets forth the range of the high and low sales prices
per share of our common stock for the fiscal quarters indicated. Prior to
December 18, 1998, there was no known public trading in our common stock.
15
HIGH LOW
------- -------
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
1998
- ----
Fourth Quarter $ 5 3/8 $4 1/2
Third Quarter N/A N/A
Second Quarter N/A N/A
First Quarter N/A N/A
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 14, 2001, there were 305 shareholders of record of our common
stock.
DIVIDENDS
We do not presently pay dividends on our common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Year 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Revenue $ 91,000 $ -- $ -- $ -- $ --
Net loss (44,729,000) (9,299,000) (3,145,000) (200) (2,000)
Basic and diluted loss per share (2.69) (0.72) (1.92) -- --
Weighted average number of
common shares: 16,633,611 12,863,020 1,636,919 200,000 200,000
At End of Year
Total assets $ 16,264,000 $ 3,044,000 $ 830,000 $ -- $ --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussions should be read in conjunction with our
consolidated financial statements contained under Item 8 of this report.
16
RESULTS OF OPERATIONS
The following table summarizes our results of operations:
Year Ended Year Ended Year Ended
Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998
------------- ------------- -------------
Revenue $ 91,000 -- --
Expenses $ 42,192,000 $ 9,431,000 $ 3,136,000
Interest income $ 1,017,000 $ 151,000 $ 2,000
Net loss $(44,729,000) $ (9,299,000) $ (3,145,000)
2000 vs. 1999
Revenue
We generated revenue of $91,000 during 2000 from consulting, trading
commissions and banner advertising. We generated no revenue in 1999.
Expenses
Our total expenses were $42,192,000 in 2000 compared to $9,431,000 in
1999. The increase was primarily due to business and infrastructure development
associated with executing our business plan. The major components of our
expenses in 2000 and 1999 were:
Non-cash Expenses
o $10,391,000 in 2000 associated with below market stock option
grants to employees, there were no such expenses in 1999;
o $7,368,000 in 2000 associated with the warrants issued or to be
issued in conjunction with the strategic alliance established with
Amerex, there were no such expenses in 1999;
o $1,507,000 in 1999 for stock and notes payable expensed in the
purchase of RateXchange I, Inc., there were no such expenses in
2000;
o $4,302,000 in 2000 for options and warrants to purchase common
stock granted to service providers compared to $3,158,000 of
common stock, warrants and options to purchase common stock issued
to service providers in 1999;
o $1,047,000 in 2000 for option revaluation related to terminated
employees, there were no such expenses in 1999.
Cash Expenses
o $5,319,000 in 2000 compared to $1,325,000 in 1999 for payroll
costs. The increase was due to an increased number of employees;
and $519,125 associated with severance.
o $6,194,000 in outside services in 2000 compared to $2,035,000 in
1999. The increase was primarily due to increased business
development and marketing activity;
o $3,970,000 in delivery equipment costs in 2000, there were no such
expenses in 1999.
17
Interest Income
Interest income for 2000 was $1,017,000 compared to $151,000 for 1999.
The increase in interest income is due to interest earned on investment
securities acquired with the proceeds from the private placement.
Interest and other expense
Interest and other expenses were $3,646,000 in 2000 compared to $19,000
in 1999. The 2000 expenses include non-cash charges related to:
o $1,723,000 in stock and warrants to buy stock issued in settlement
of a dispute;
o $1,658,000 fair value adjustment classified as interest expense
associated with conversion of our bridge notes into stock and
warrants.
Net Loss
During 2000, we incurred losses of $44,729,000 compared to losses of
$9,299,000 in 1999. The major components of the net loss comprised non-cash
expenses of $26,489,000 for stock options and warrants to purchase company stock
and cash expenditures associated with developing the business of $19,349,000
compared to non-cash expenses of $4,665,000 in 1999 and cash expenses associated
with developing the business of $4,785,000. 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.
1999 vs. 1998
Revenue
We generated no revenues in 1999 or 1998.
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 primarily 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.
Total expenses for 1999 were $9,431,212 compared to $3,136,000 in 1998
of which the principal components were:
Non-cash Expenses
o $3,158,000 in 1999 compared to $2,020,000 in 1998 for common
stock, warrants or options to purchase common stock of the Company
issued in exchange for various services. The increase was due
primarily to increased business development activity and our
purchase of RateXchange I, Inc.
o $1,507,000 expensed in the purchase of the outstanding common
stock of RateXchange in 1999 and $90,000 expensed in the purchase
of the outstanding common stock of PolarCap, Inc. in 1998.
Cash Expenses
o $2,035,000 for outside services related primarily to business
development, there were no such expenses in 1998;
18
o $1,325,000 for payroll costs, there were no such expenses in 1998;
and
o $414,000 in 1999 and $885,000 in 1998 to write-off advances to A1
Internet, Inc.
Total expenses for 1998 related to operations commencing September 30,
1998 and included the activity of RateXchange Corporation and its subsidiary
PolarCap Inc.
Interest Income
The only income we generated during 1999 and 1998 was interest income
on our subscription receivables. Interest income for 1999 was $151,000 compared
to $2,000 for 1998. The increase in interest income is attributable to the
amount of subscription receivables carried during 1999 compared to 1998. All of
these receivables have been collected.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through the sale of
equity securities. We have been unprofitable since inception , have incurred net
losses in each year, and to date, we have generated only nominal revenues.
We had working capital of $12,001,000 at December 31, 2000 compared to
negative working capital of $48,000 on December 31, 1999. At December 31, 1999,
we had common stock subscription receivables in the amount of $1,590,000, which
were due and payable in 2001, but which were collected in 2000. In March 2000,
we closed a $32.8 million private placement, netting $30.1 million after
expenses. In April, 2001, the Company received an irrevocable commitment from
two investors to acquire $9.0 million of newly issued common shares of the
Company. The sale of shares will settle on or before July 10, 2001. These funds
should be sufficient to cover our operations and working capital requirements
for the next twelve months. We are taking the following steps to achieve
profitability:
o We are pursuing additional revenue generating opportunities;
o We have exited the delivery hub business and are exploring
potential sales to operators of delivery hubs whereby they would
operate and own our equipment;
o We are reducing our personnel costs; and
o We are reducing our marketing and public relations costs.
In addition, we have substantially completed the development of the RateXchange
Trading System and do not anticipate significant expenditures related to it.
Nevertheless, we may need to seek additional financing sooner than expected in
order to accelerate market penetration through mergers, acquisitions or
additional strategic relationships.
Our operating activities used cash of $17,160,000 during 2000 due
primarily to:
o Increased marketing and development activity;
o Increased number of employees and expansion of our executive
management team; and
o Development of our delivery hub infrastructure.
Our investing activities used cash of $13,644,000 during 2000, due
primarily to investing the proceeds from the private placement.
In March 2000, we executed a Master Lease Line Commitment Agreement,
which has a minimum term of either 36 to 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. To date, this
19
facility has been utilized by the Company to lease equipment needed to operate
the delivery hubs. Equipment with a cost of $4,912,000 is currently leased under
this facility. Our periodic lease payments are determined by multiplying the
cost or sale price of the equipment leased by a lease rate factor of either
0.03277 or 0.02633, 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.
Financing activities generated $32,800,000 during 2000 and consisted
primarily of proceeds from sales of common stock. Between February and March
2000, we sold to accredited investors a total of 2,733,329 shares of our
restricted common shares plus warrants to purchase 1,366,673 shares of our
common stock at an exercise price of $14.40 per share. The shares were sold at a
subscription price of $12.00 per share. After deducting the expenses related to
the offering, we received $30,135,000. The proceeds of the sales of common stock
are being used to expand our online marketplace for telecommunications products
and enhance our geographic reach and product line.
We are executing an overall business plan that may require additional
capital for among other uses:
o Expansion into new domestic and international markets;
o Development of additional products and services; and
o Acquisitions.
Furthermore, our funding of working capital and current and future
operating losses may 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.
OUTLOOK
We provide trading, consulting and information solutions enabling
market participants to maximize their assets. These trading solutions allow
network providers, energy merchants, financial institutions and commodity
managers engaged on the RateXchange Trading System (RTS) and RateXchange Futures
System (RFS) the ability to trade bandwidth and futures globally. Our consulting
solutions practice provides asset valuation tools, risk management strategies
and analytics. The information solutions group provides pricing information,
market research and industry background. We are a trading solutions company
enabling the creation of liquid marketplaces for bandwidth and other
telecommunications products.
We are a development stage company 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 communications industry; and
o Continue to develop and upgrade our trading system.
The foregoing contains forward-looking statements that involve risks
and uncertainties, including but not limited to changes in our business
strategy, our inability to raise sufficient capital, general market trends and
conditions, and other risks detailed below in "Factors That May Affect Future
Results." Actual results may vary materially from any future results expressed
or implied by the forward-looking statements.
20
BRIDGE LOAN
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, Inc.. Purchasers of the notes also received warrants to purchase
RateXchange I, Inc. common stock at $2.40 per share, subject to adjustment.
In 2000, 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 issued such holders an
aggregate of 493,750 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 into 395,000
shares of RateXchange Corporation common stock.
OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK
Shareholders authorized the 1999 Stock Option Plan during 1999.
Shareholders authorized the 2000 Stock Option Plan in April 2000. There are
options to purchase 8,000,000 shares authorized for issuance under both plans.
In February 2000, the Board authorized additional options to purchase 4,290,000
shares outside of either plan. During the first quarter of 2000, the Company
granted 3,940,000 options to employees for less than fair market value for which
the Company is recognizing related compensation expense over the option vesting
periods. The compensation expense is computed based on the difference between
the fair value of the stock on the date of grant, which was $12, and the strike
price of the options, which is $7.
The Company has also granted options and warrants to non-employee
consultants totaling 874,620 for which the Company recorded related expense of
$4,302,000 in 2000.
In September 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.
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 proceeds were used to expand our
online marketplace for telecommunications products, enhance our geographic reach
and product line and accelerate deployment of our delivery hubs.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a highly competitive and rapidly changing market that
involves a number of risks. While we are optimistic about our long-term
prospects, the following discussion highlights some risks and uncertainties that
should be considered in evaluating our growth outlook.
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.
21
We are a development stage company. Our activities to date have
concentrated primarily on planning and developing our 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.
We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
At December 31, 2000, our accumulated deficit since inception was
$57,172,000, including $33,553,000 related to stock grants, options and
warrants. For 2000, we incurred a net loss of $44,729,000, including $26,489,000
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 and RateXchange Futures System do not achieve
commercial acceptance, our results will suffer.
We expect to rely largely on fees and commissions from transactions
facilitated on the RateXchange Trading System, RateXchange Futures System and
related consulting services, for the foreseeable future. Online trading of
telecommunications bandwidth and minutes currently has only limited market
acceptance, as does online trading of futures contracts. As a result, our future
ability to gain commercial acceptance of the RateXchange Trading System and
RateXchange Futures System is critical to our success. Any failure to
successfully gain commercial acceptance of the RateXchange Trading System and
RateXchange Futures System would not only have a material adverse effect on our
business and operating results, but also on our ability to seek additional
revenue opportunities.
We depend on the efforts of the Amerex Bandwidth, 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
Bandwidth, 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.
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.
22
The market for online bandwidth, minutes and derivatives 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, 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 and energy 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 operating results. 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 operating results. 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.
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
23
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.
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.
24
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.
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 operating results.
Our business and operations would suffer in the event of system failures.
Our success, in particular our ability to successfully facilitate
bandwidth and derivative 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.
25
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 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. 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.
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. 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
operating results.
26
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. If we lose our ability to
maintain or obtain upgrades to any of these technology licenses it may 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 operating results.
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT TERM INVESTMENTS
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 an original issue of 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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in this report:
o Report of Independent Public Accountants.
o Consolidated Balance Sheet as of December 31, 2000 and December
31, 1999
o Consolidated Statement of Operations for the years ended December
31, 2000, December 31, 1999, and December 31, 1998
o Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2000, December 31, 1999 and December 31, 1998
o Consolidated Statement of Cash Flows for the years ended December
31, 2000, December 31, 1999, and December 31, 1998
o Notes to Consolidated Financial Statements
Schedules other than those listed above are omitted because of the
absence of conditions under which they are required or because the required
information is presented in the financial statements or notes thereto.
28
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 (a Delaware corporation) (a development stage company) and
Subsidiaries as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 2000, and for the period from September
30, 1998 (beginning of development stage) to December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 financial statements referred to above present fairly, in
all material respects, the financial position of RateXchange Corporation and
Subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the three years in the period ended December
31, 2000 and for the period from September 30, 1998 (beginning of development
stage) to December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
San Francisco, California
February 1, 2001 (except with respect to the matters
discussed in Note 18, as to which
the date is April 11, 2001).
29
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
ASSETS December 31,
------------------------------
2000 1999
------------ ------------
Current assets
Cash and cash equivalents $ 2,115,152 $ 536,615
Accounts receivable (net of an allowance for doubtful
accounts of $4,960) 41,170 --
Investment securities available for sale 12,124,635 387,500
Interest receivable 204,755 150,608
Prepaid expenses 116,360 11,647
Notes receivable on sales of common stock -- 1,590,319
------------ ------------
Total current assets 14,602,072 2,676,689
Property and equipment (net of accumulated depreciation of 1,401,888 188,891
$240,791 and $18,676 in 2000 and 1999)
Other assets
Investment in affiliate 75,000 75,000
Deposits 184,856 103,305
------------ ------------
Total assets $ 16,263,816 $ 3,043,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,600,870 $ 1,840,056
Short term debt -- 885,000
------------ ------------
Total current liabilities 2,600,870 2,725,056
Stockholders' equity
Preferred stock, 60,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.0001 par value; 300,000,000 shares
authorized; issued and outstanding: 17,783,204 shares
and 14,087,425 shares in 2000 and 1999 1,778 1,409
Additional paid-in capital 72,132,890 13,225,824
Accumulated deficit (57,393,548) (12,664,654)
Notes receivable on sales of common stock (363,661) --
Accumulated other comprehensive loss
(714,513) (243,750)
------------ ------------
Total stockholders' equity 13,662,946 318,829
------------ ------------
Total liabilities and stockholders' equity $ 16,263,816 $ 3,043,885
============ ============
See notes to financial statements.
30
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
Beginning of
Development
Stage
For the Year For the Year For the Year (September 30,
ended ended ended 1998) through
December 31, December 31, December 31, December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
REVENUE
Trading and Consulting $ 91,223 $ -- $ -- $ 91,223
EXPENSES
Selling, general and administrative
(includes non-cash expenses of
$23,107,832 in 2000, $3,158,415 in 1999
and $2,020,376 in 1998) 41,969,950 7,491,447 2,161,253 51,622,650
Write off advances to potential investee -- 413,681 885,000 1,298,681
Depreciation and amortization 222,115 18,676 -- 240,791
Purchase of subsidiaries (non-cash) -- 1,507,408 89,710 1,597,118
------------ ------------ ------------ ------------
Total expenses 42,192,065 9,431,212 3,135,963 54,759,240
OTHER INCOME (EXPENSES)
Interest income 1,017,482 151,496 2,214 1,171,192
Interest expense (includes non-cash
expenses of $1,657,988 in 2000) (1,822,659) (19,073) (10,773) (1,852,505)
Settlement of disputes
(includes non-cash expenses of $1,722,875
in 2000) (1,822,875) -- -- (1,822,875)
------------ ------------ ------------ ------------
Loss before taxes (44,728,894) (9,298,789) (3,144,522) (57,172,205)
Income tax provision (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss $(44,728,894) $ (9,298,789) $ (3,144,522) $(57,172,205)
============ ============ ============ ============
Basic and diluted net loss per share $ (2.69) $ (0.72) $ (1.92)
Weighted average number
of common shares 16,633,611 12,863,020 1,636,919
============ ============ ============
See notes to financial statements.
31
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Number Notes
of receivable
Shares on sales Accumulated
of Additional of other
Common Par Paid-In Accumulated common comprehensive Comprehensive
stock Value Capital Deficit stock loss loss
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 - - 74,000 - - - -
Comprehensive and
net loss - - - (3,144,522) - - $(3,144,522)
---------- ------- ----------- ------------- ---------- ----------- ------------
Balance,
December 31, 7,243,023 $724 $4,065,795 $(3,365,865) - - -
1998
Options/Warrants
issued from $.05
to $2.75 per
share - - 1,448,441 - - - -
Shares issued for
cash and notes at
$0.10 per share 916,574 92 977,618 - - - -
Shares issued for
cost
reimbursement at
$0.10 per share 322,500 32 343,979 - - - -
Shares issued for
cash and notes at
$1.07 per share 3,870,938 387 4,047,713 - - - -
32
Shares issued for
conversion of A1
Internet debt at
$1.07 per share 193,186 19 206,898 - - - -
Shares issued for
services at $1.07
per share 268,500 27 287,206 - - - -
Shares issued for
note conversion
at $1.00 per share 30,000 3 31,998 - - - -
Shares issued for
services at $1.07
per share 30,000 3 31,998 - - - -
Shares issued for
cash at $1.60 per
share (net) 515,188 52 628,220 - - - -
Shares issued for
services at
$1.60 per share 122,518 12 196,017 - - - -
Shares issued to
acquire
outstanding
shares of
RateXchange at
$1.60 per
share 574,998 58 919,942 - - - -
Comprehensive
loss:
Net loss - - - (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 14,087,425 $1,409 $13,225,824 $(12,664,654) - $(243,750) -
Exercise of
warrants and
options from
$0.05 to $2.00 340,450 34 1,216 - - - -
Shares and
warrants issued
in connection
with financing at
between $5.00 and
$14.40, net of
offering costs 3,128,329 313 33,839,873 - - - -
Options issued to
employees,
Directors, and
consultants below
market value on
date of grant - - 12,522,671 - - -
Shares and
warrants issued
in settlement of
a dispute at $5.88 227,000 22 2,028,372 - - - -
33
Option
revaluations for
terminated
employees - - 1,046,458 - - - -
Warrants issued
in connection
with Amerex
transaction - - 7,368,000 - - - -
Warrants issued
for services - - 2,170,704 - - - -
Shares sold to
employees for
notes pursuant to
a stock purchase
loan program 102,712 10 487,183 - (487,193) - -
Repurchase of
Shares for Stock
program (80,000) (8) (433,881) - - - -
Repurchase of
shares from
employees under
stock purchase
loan program (22,712) (2) (123,530) - 123,532 - -
Comprehensive
loss:
Net loss - - - (44,728,894) - - $(44,728,894)
Other
comprehensive
loss:
Change in
unrealized loss
on securities - - - - - (470,763) (470,763)
------------
Comprehensive loss - - - - - - $(45,199,657)
---------- ------- ----------- ------------- ---------- ----------- ============
Balance,
December 31,
2000) 17,783,204 $1,778 $72,132,890 $(57,393,548) ($363,661) $(714,513)
========== ======= =========== ============= ========== ==========
See notes to financial statements.
34
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
Beginning of
the
Development
Stage
For the Year For the Year For the Year September 30,
Ended Ended Ended 1998 to
December 31, December 31, December 31, December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(44,728,894) $ (9,298,789) $ (3,144,522) $(57,172,205)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 222,115 18,676 -- 240,791
Write off advances to potential investee -- 206,898 -- 206,898
Stock options and warrants granted to service
providers and strategic partners 13,770,883 1,672,954 1,946,376 17,390,213
Stock options granted to employees below
fair market value 10,391,432 -- -- 10,391,432
Stock options - termination adjustment 1,046,458 -- -- 1,046,458
Warrants issued in relation to bridge financing 1,657,988 -- -- 1,657,988
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 security deposits (81,551) (103,305) -- (184,856)
Decrease in interest receivable and other
advances (200,030) (160,617) (1,638) (362,285)
Increase in accounts payable and accrued expenses 760,814 1,601,241 129,300 2,491,355
------------ ------------ ------------ ------------
Net cash used in operating activities (17,160,785) (3,070,073) (996,484) (21,227,342)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of equipment (1,435,112) (207,568) -- (1,642,680)
Purchase of Halo Stock -- (631,251) -- (631,251)
Purchase of investments available for sale (32,975,313) -- -- (32,975,313)
Sale of investments available for sale 20,767,415 -- -- 20,767,415
Investment in Telenisus Corporation -- (75,000) -- (75,000)
------------ ------------ ------------ ------------
Net cash used in investing activities (13,643,010) (913,819) -- (14,556,829)
CASH FLOWS FROM FINANCING ACTIVITIES
Loans and other debt 1,090,000 410,000 -- 1,500,000
Proceeds from common stock sales (net) 30,135,902 3,581,991 1,525,000 35,242,893
Proceeds from notes receivable 1,590,319 -- -- 1,590,319
Loan to employee stock purchase program (433,889) -- -- (433,889)
------------ ------------ ------------ ------------
Net cash provided by financing activities 32,382,332 3,991,991 1,525,000 37,899,323
------------ ------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,578,537 8,099 528,516 2,115,152
CASH and CASH EQUIVALENTS BEGINNING OF YEAR 536,615 528,516 -- --
------------ ------------ ------------ ------------
CASH and CASH EQUIVALENTS END OF YEAR $ 2,115,152 $ 536,615 $ 528,516 $ 2,115,152
============ ============ ============ ============
Supplementary cash flow information
Cash paid for:
Interest $ 164,671 -- -- --
Taxes -- -- -- --
Stock issuances for:
Settlement of bridge loan $ 1,975,000 -- -- $ 1,975,000
Purchase of outstanding shares of RateXchange $ -- $ 920,000 -- 920,000
Commission on stock sales $ -- $ 196,029 -- 196,029
See notes to financial statements.
35
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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. 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 trading system for bandwidth and other
telecommunications products.
RateXchange I, Inc., a Delaware corporation organized in June 1999,
is in the business of operating a trading system that allows market
participants to trade bandwidth.
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 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
website, recruiting personnel, establishing office facilities,
raising capital and developing infrastructure and a marketing plan.
The Company began revenue generating activities in 1999, but nominal
revenue has been generated through December 31, 2000. Accordingly,
the Company is classified as a development stage company. Successful
completion of the Company's development activities 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 and cash
equivalents.
36
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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. 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 interest
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.
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.
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
(10,582,772 options and 5,472,043 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
several certificates of deposit totaling $153,856.
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 accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported
amounts of assets and liabilities. Actual results could differ from
those estimates.
37
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
New Accounting Standards
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"), as
amended by FAS 137 and 138, establishes accounting and reporting
standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or as a liability measured at
its fair value. The Company is required to adopt the provisions of
this new standard effective with its 2001 fiscal year. The Company
does not currently use any derivative instruments or engage in
hedging activities, and therefore management does not believe the
adoption of the new statement will have a significant effect on
consolidated results of operations or the consolidated financial
position of the Company.
NOTE 3 INVESTMENT SECURITIES AVAILABLE FOR SALE
The carrying amount and estimated fair value of debt securities at
December 31, 2000 are shown below. During the year ended December
31, 2000, the Company collected $766,501 in interest.
2000
Amortized Gross Gross Estimated Fair
Cost Unrealized Unrealized Value
Gains Loss
----------- ----------- ----------- -----------
US Government agencies $ 4,628,382 $ 5,057 $ -- $ 4,633,439
Corporate bonds 7,452,920 21,161 -- 7,474,081
Corporate stocks 757,846 -- (740,731) 17,115
----------- ----------- ----------- -----------
Available for sale $12,839,148 $ 26,218 $ (740,731) $12,124,635
=========== =========== =========== ===========
1999
Estimated
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Loss
----------- ----------- --------------- --------
Corporate stocks $ 631,250 $ -- $ (243,750) $387,500
=========== =========== =============== ========
All investments in debt securities have maturity dates prior to
December 31, 2001.
NOTE 4 INCOME TAXES
As of December 31, 2000, the Company had a federal net operating loss
carryforward of $13,321,866, which will expire in the years 2007
through 2021 for state and federal purposes. This net operating loss
carryforward has not been reflected in the financial statements, as
the likelihood of realizing a 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, 2000, have been offset by a valuation
allowance in the same amount.
38
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
Significant components of the Company's deferred tax assets are as
follows:
December 31,
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 5,450,910 $ 3,773,063
Options and warrants for services 10,948,508 603,097
Start up cost carryforward 8,265,212 1,726,967
Unrealized loss on securities 290,092 98,861
------------ ------------
Gross deferred tax assets 24,954,614 6,201,988
Valuation allowance (24,954,614) (6,201,988)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The net change in the valuation allowance for the year ended December
31, 2000 and 1999 was an increase of $18,752,626 and $4,813,654.
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 and software) on a straight-line basis.
Property and Equipment consists of the following:
December 31,
2000 1999
----------- -----------
Furniture and fixtures $ 38,097 $ 10,520
Computer equipment and software 1,604,582 197,047
----------- -----------
1,642,679 207,567
Less: Accumulated depreciation (240,791) (18,676)
----------- -----------
$ 1,401,888 $ 188,891
=========== ===========
Depreciation expense for 2000, 1999, and 1998 was $222,115 and
$18,676, and $0.
NOTE 6 ACQUISITION OF SUBSIDIARY
In 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.
39
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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 total purchase price 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.
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 paid $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 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.
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
1999 of $3,411,657 and $300,000 issued in 1998, $1,924,126 was
collected prior to December 31, 1999. Interest was assessed at 6.5%
and accrued interest on the subscription receivable was $150,608 at
December 31, 1999. The Company determined that $197,212 of the
receivables were un-collectible and the Company wrote them off. The
remaining receivables were collected in 2000.
In 2000, the Board of Directors of the Company waived the interest
due (approximately $132,240) 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 9 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.
40
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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. During 1999, as a result of
Telenisus' sale of additional shares to new investors, the Company's
interest in Telenisus had dropped to less than 10% ownership and the
Company is recording its investment in Telenisus at the lower of cost
or market value.
NOTE 10 SHORT TERM DEBT
The Company issued a note for $450,000 for the 1999 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, Inc. Purchasers of the notes
also received warrants to purchase RateXchange I, Inc. common stock
at $2.40 per share, subject to adjustment.
In 2000, 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 issued such holders an aggregate of 493,750 warrants to
purchase RateXchange Corporation 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 into 395,000 shares of RateXchange
Corporation common stock.
NOTE 11 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. In 2000, 1999 and 1998, a number of options and shares
as indicated below were issued at below market values. The Company
recorded expense related to these issues of $10,391,431 in 2000,
$1,519,047 in 1999 and $2,007,203 in 1998.
Commn stock transactions during 2000 were as follows:
o 315,450 shares of stock issued for the cashless exercise of
325,000 warrants at $.05 and $2 per share. (January and April).
o 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 $2,665,00 for costs
associated with the offering, the Company received $30,135,000.
o 227,000 shares were issued at $5.88 to settle third party claims.
(August)
o 395,000 shares were issued to convert $2,103,000 of debt
principal and interest to equity at $5 per share. 493,750
warrants with a fair value of $1,602,000 were also issued in the
conversion.
(August)
41
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
o 25,000 shares issued for exercise of an option at $.05 per share.
(August)
o 80,000 shares repurchased and subsequently issued to employees
under stock program. See Note 15 for details. (July - December)
Common stock transactions during 1999 were 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 $31,998. ($1.07) (March).
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 12 COMMITMENTS AND CONTINGENCIES
In connection with the Company's business activities, it has entered
into various leases for office space and related office equipment,
including computers. In addition, the Company has entered into
various operating leases associated with its delivery hubs, including
various telecommunications routing equipment and other
infrastructure.
42
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
Future annual minimum lease payments related to equipment and office
space under noncancelable operating leases as of December 31, 2000
were:
Year
----
2001 $2,236,273
2002 2,218,834
2003 1,815,766
2004 1,158,933
2005 173,600
----------
$7,603,406
==========
Rent expense totaled $2,023,641.62 in 2000, $42,000 and $0 in 1999
and 1998.
The Company is also involved in the following legal matters 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, 2000, the Company has fulfilled all of
its current obligations under the settlement agreement.
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 in 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 and Concentric. 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 recorded an accrual
for the estimated amount of this contingency.
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 entered into 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. In August 2000, the Company reached an agreement for
settlement of the dispute with the vendor, whereby the Company issued
175,000 shares of common
43
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
stock, 175,000 warrants and $100,000 in cash. The total market value
of the settlement of $1.8 million is recorded in the Company's
statement of operations for the year-ended December 31, 2000.
NOTE 13 AGREEMENT WITH AMEREX
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 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 with a fair market value of $7,368,000. Two
warrants, one for 300,000 shares and one for 500,000 shares, with
exercise prices of $4.47 and $4.70 per share, are currently
exercisable by Amerex. The remaining three warrants each for 500,000
shares and with exercise prices of $4.92 per share, $5.14 per share
and $5.37 per share, will become exercisable upon the earlier of
September 17, 2005 or Amerex executing a cumulative minimum of
$2,000,000, $5,000,000 and $10,000,000, in value of transactions over
our online electronic trading system.
NOTE 14 OPTIONS/WARRANTS FOR PURCHASE OF COMMON STOCK
Stock Option Plans - 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 difference between the fair
value of the stock on the date of grant, which was $12, and the
strike price of the options, which is $7.
The Company has also granted options and warrants to non-employee
consultants totaling 874,620 for which the Company has recorded
related expense of $4,302,000 in 2000.
In September 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.
Separate from the 2000 and 1999 Plan the Company has also issued
warrants that generally expire five years from the date of grant.
44
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
A summary of option and warrant activity follows:
Options: 2000 1999
-------------------------------- -------------------------------
Number of Weighted average Number of Weighted average
shares exercise price shares exercise price
------------- ----------------- ------------ -----------------
Outstanding at beginning of year 2,990,000 $ 2.23 - $ -
Granted 8,516,900 5.47 3,050,000 2.24
Exercised 25,000 0.05 - -
Canceled 899,128 4.84 60,000 2.50
------------- ----------------- ----------- -----------------
Outstanding at end of year 10,582,772 4.62 2,990,000 2.23
============= ================= ============ =================
Exercisable at end of year 4,819,767 4.12 1,287,500 1.96
============= ================= ============ =================
Warrants: 2000 1999
-------------------------------- -------------------------------
Number of Weighted average Number of Weighted average
shares exercise price shares exercise price
------------- ----------------- ------------ -----------------
Outstanding at beginning of year 625,000 $ 1.74 100,000 $ 2.00
Granted 5,172,043 8.74 525,000 1.69
Exercised 325,000 0.80 - -
Canceled - - - -
------------- ----------------- ------------ -----------------
Outstanding at end of year 5,472,043 8.41 625,000 1.74
============= ================= ============ =================
Exercisable at end of year 3,955,043 9.67 625,000 1.74
============= ================= ============ =================
As permitted by Financial Accounting Standard 123 "Accounting for
Stock-Based Compensation," (FAS 123) 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 FAS 123, the Company's net earnings and earnings per share
would have been:
2000 1999 1998
-------------- -------------- -------------
Net loss
As reported $ (44,728,894) $ (9,298,789) $ (3,144,522)
Pro Forma $ (56,341,485) $ (10,275,351) $ (3,144,522)
Net loss per share (basic and diluted)
As reported $ (2.69) $ (0.72) $ (1.92)
Pro forma $ (3.39) $ (0.80) $ (1.92)
============== ============== =============
The weighted average fair value of options and warrants granted in
2000 was $2.94 and $4.35. The weighted average fair value of options
and warrants granted in 1999 was $0.73 and $1.04. The weighted
45
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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:
2000 1999
------------ -----------
Risk-free interest rate 6.23% 5.7%
Dividend yield 0% 0%
Volatility 100% 100%
Average expected term (years) 2 2
============ ============
Summary of the outstanding options and warrants issued to third party
service providers and to employees as of December 31, 2000 were as
follows:
Outstanding Exercisable
------------------------------------------------- -----------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Rante of exercise Warrants/ Exercise Contractual Warrants/ Exercise
prices Options Price Life (years) Options Price
--------------------- -------------- -------------- ------------- ------------- ------------
Third Parties
$0.05 - $4.00 1,337,000 $ 2.18 3.54 1,182,500 $ 2.15
$4.01 - $8.00 3,291,870 $ 5.14 4.78 1,665,828 $ 4.99
$8.01 - $11.00 - $ - - - $ -
$11.01 - $14.40 2,123,173 $ 14.18 3.95 2,123,173 $ 14.18
-------------- -------------
Third Parties 6,752,043 4,971,501
Employees
$1.56 - $3.00 2,509,233 $ 2.25 5.22 1,517,476 $ 2.16
$3.01 - $4.50 2,100,000 $ 3.23 9.77 500,000 $ 3.19
$4.51 - $5.50 - $ - - - $ -
$5.51 - $7.00 4,693,539 $ 6.72 9.21 1,785,833 $ 6.87
-------------- -------------
Employees 9,302,772 3,803,309
-------------- -------------
Total 16,054,815 8,774,810
============== =============
NOTE 15 OTHER EMPLOYEE STOCK PLANS
In addition to the Stock Option Plans previously discussed, in 2000,
the Company implemented an Employee Stock Purchase Loan Program,
under this Program, employees are eligible to purchase, subject to
specified limits, common shares of the Company in exchange for a note
payable to the Company. The face amount of this note receivable is
non-recourse while interest payments, at a fixed 9%, are recourse to
the employee. During the year, the Company purchased 80,000 of its
common shares and immediately
46
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
sold them to employees under this Program for notes receivable
totaling $487,193 with maturity dates two years from date of issue.
During the year, the Company acquired 22,712 shares from certain
employees in satisfaction of notes receivable totaling $123,532 and
subsequently sold these shares to other employees at the then current
market price totaling $53,302.
NOTE 16 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 at 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. During
1999, the Company recorded $315,800 in cash incentives relating to
completed financing and merger's and acquisitions fee based on the
value of the RateXchange acquisition. During 2000, the Company
recorded $259,266 in connection with financing activities and
securing various operating leases.
NOTE 17 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. In 2000, the Company reacquired these shares from the
officer after his departure from the Company.
NOTE 18 SUBSEQUENT EVENTS
On March 12, 2001, the Company completed the acquisition of Xpit.com,
Inc., a privately held Idaho Corporation. The acquisition enables the
Company to offer trading and risk management systems to the futures
industry. Xpit will operate as a wholly-owned subsidiary of
RateXchange. Under the terms of the transaction, the Company has
acquired 100% of the outstanding common shares of Xpit in exchange
for $500,000 in cash; a $500,000 two-year note bearing interest at
7%; 2,000,000 Convertible Preferred Shares with a cumulative dividend
of 6% based on a share price of $2.75 per share; and $4.9 million in
royalty payments tied to the achievement of Xpit's projected revenues
from 2001 through 2003. The Convertible Preferred Shares will convert
on a one-for-one basis into common shares of the Company at the
discretion of the holders.
On April 9, 2001, the Company created a new subsidiary, RMG Partners,
Inc., to provide market based solutions through the use of derivative
trading strategies.
In April, 2001, the Company received an irrevocable commitment from
two investors to acquire $9.0 million of newly issued common shares
of the Company. The sale of shares will settle on or before July 10,
2001.
47
FORM 10-K
PART III
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the corporation are listed below.
Name Age Position
- -------------------- --------- -------------------------------------
D. Jonathan Merriman 40 President and Chief Executive Officer
Patrick Arbor 63 Director
Dean S. Barr 40 Director
David Boren 41 Director
Michael Boren 38 Director
E. Russell Braziel 50 Director
Donald H. Sledge 60 Chairman of the Board of Directors
Ronald E. Spears 51 Director
Steven W. Town 40 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 Bachelor of Arts in Psychology from Dartmouth College.
Patrick Arbor, 63, has served as Director of RateXchange since February
2001. Currently an independent futures trader, Mr. Arbor is a principal of the
trading firm of Shatkin, Arbor, Karlov & Co. He is a longtime member of the
Chicago Board of Trade (CBOT), the world's oldest derivatives exchange, serving
as the organization's Chairman from 1993 to 1999. During that period, Mr. Arbor
also served on the Board of Directors of the National Futures Association. Prior
to that, he served as Vice Chairman of the CBOT for three years and ten years as
a Director. Mr. Arbor's other exchange memberships include the Chicago Board
Options Exchange, the Mid-America Commodity Exchange and the Chicago Stock
Exchange. Mr. Arbor received his undergraduate degree in business and economics
from Loyola University.
Michael Boren, 38, has served as one of our Directors since April 2001.
Mr. Boren is a founder of Xpit and co-owner and co-founder of Sawtooth
Investment Management, a limited liability company specializing in arbitrage
(low risk) and limited risk investment strategies in government debt, foreign
currencies and related derivative securities. Prior to the formation of Xpit in
1999 and Sawtooth in 1995, Mr. Boren was a co-owner and co-founder
48
of Summit Management, which he sold to Refco. Prior to the formation of Summit
in 1992, Mr. Boren was a trader and introducing broker specializing in basis
trades between various futures and cash securities. Prior to acting as an
independent broker, Mr. Boren worked at the Geldermann Group where he developed
options trading strategies and hedging programs for institutional accounts. Mr.
Boren has a B.A. in economics from Brigham Young University.
David Boren, 41, has served as one of our Directors since April 2001.
Mr. Boren is a founder of Xpit and co-owner and co-founder of Sawtooth
Investment Management, a limited liability company specializing in arbitrage
(low risk) and limited risk investment strategies in government debt, foreign
currencies and related derivative securities. Prior to the formation of Xpit in
1999 and Sawtooth in 1995, Mr. Boren was involved in a variety of sophisticated
proprietary trading activities for Goldman Sachs in New York and Tokyo. Mr.
Boren has a B.A. in Economics from Brigham Young University and an M.B.A from
Harvard Business School.
Donald H. Sledge, 60, has served as Chairman of our Board of Directors
since February 2000. He also served as Chief Executive Officer from February
2000 until October 2000. He was a Director from September 1999 to February 2000,
and from September 1999 until February of 2000 he served as President, Chief
Executive Officer and Chairman of our subsidiary RateXchange I, Inc. 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.
E. Russell "Rusty" Braziel, 50, has served as a Director of RateXchange
since February 2001. Mr. Braziel is founder and CEO of Netrana, LLC, a
consulting and software venture that brings innovative market services, software
solutions and liquidity formation methodologies to a broad range of vertical
electronic markets. Previously, in 1996, Mr. Braziel founded Altra Energy
Technologies, a world leader in enterprise-wide business solutions, delivering
electronic trading platforms, transaction management products and integration
services for the energy industry. Under Mr. Braziel's leadership, Altra grew
from a small project team to a company conducting billions in e-commerce each
month. Mr. Braziel serves on various Boards of Directors and advisory boards,
providing insight into the development of a number of B2B exchanges,
professional services firms, and software companies. Mr. Braziel received his
undergraduate degree in finance and his Masters in Business Administration from
Stephen F. Austin University.
Ronald E. Spears, 51, 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
49
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.
OTHER KEY EMPLOYEES
Michael Cairns, 41, is Senior Vice President of Finance and Chief
Accounting Officer for RateXchange. He brings to RateXchange seventeen years of
experience in finance and accounting with an extensive background in the
financial services industry. Mr. Cairns joined RateXchange from Transamerica
Corporation where he worked from 1989 to 2000. While at Transamerica, Mr. Cairns
served as the Corporate Director of Accounting and successfully led many
cross-functional projects, including systems implementations, derivatives
accounting and operations and financial engineering projects. Prior to
Transamerica, Mr. Cairns was an audit manager for Deloitte & Touche from 1987 to
1989 in New York City where he worked primarily on audit and consulting
engagements for financial services companies. Mr. Cairns started his career with
KPMG Peat Marwick in 1983. Mr. Cairns received his B.S. degree from the
University of Hartford, his MBA from the University of California at Berkeley
and he is a CPA.
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 Bachelor 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.
Rob Ford, 41, serves as Chief Operating Officer for Ratexchange. He
brings 18 years of executive and operations experience to the Company. Prior to
joining RateXchange, Mr. Ford was a co-Founder and CEO of Metacat, Inc., a
content management ASP that specializes in enabling supplier catalogs for Global
2000 private exchanges and eMarketplaces. Previously, he was President/COO and
on the founding team of JobDirect.com, a leading resume and job matching service
for university students, now a wholly-owned subsidiary of Korn Ferry
International. Previously, Mr. Ford co-founded and managed an education content
company. Prior to that, he headed up a turnaround and merger as General Manager
of a 65 year-old manufacturing and distribution company. Mr. Ford started his
career as VP of Business Development at Lazar Enterprises, a
technology-consulting firm. He earned his Masters in International Business and
Law from the Fletcher School of Law and Diplomacy at Tufts University and a BA
with high distinction from Dartmouth College.
50
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.
There is no family relationship among any of the foregoing officers or
between any of the foregoing officers and any director of the Corporation.
The information set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement of RateXchange
Corporation dated April 20, 2001 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Director Compensation and
Benefits" and "Executive Compensation and Other Information" in the Proxy
Statement of RateXchange Corporation dated April 20, 2001 is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Principal Stockholders"
and "Stockholdings of Directors and Executive Officers" in the Proxy Statement
of RateXchange Corporation dated April 20, 2001 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Director Compensation and
Benefits," "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" in the Proxy Statement of RateXchange Corporation dated
April 20, 2001 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be used in this report:
1. Financial Statements - Included in Part II, Item 8 of this report:
51
Reports of Independent Public Accountants
Consolidated Balance Sheet as of December 31, 2000 and December 31,
1999
Consolidated Statement of Operations for the years ended December 31,
2000, December 31, 1999, and December 31, 1998
Consolidated Statement of Stockholders' Equity for the period December
31, 1997 to December 31, 2000
Consolidated Statement of Cash Flows for the years ended December 31,
2000, December 31, 1999, and December 31, 1998
Notes to Consolidated Financial Statements for the years ended December
31, 2000, December 31, 1999, and December 31, 1998
2. Financial Statement Schedules - included in Part IV of this report:
The required schedules are omitted because of the absence of conditions
under which they are required or because the required information is
presented in the financial statements or notes thereto.
3. Exhibits
The exhibits filed with this report are listed in the exhibit index on
page 54.
4. Reports on Form 8-K: None
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RATEXCHANGE CORPORATION
April 16, 2001 By: /S/ D. Jonathan Merriman
- -------------- -------------------------------
D. Jonathan Merriman, President,
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/S/ D. Jonathan Merriman President, Chief Executive April 16, 2001
- -------------------------------------------- Officer and Director --------------
D. JONATHAN MERRIMAN
/S/ Michael Cairns Principal Financial and Accounting April 16, 2001
- -------------------------------------------- Officer --------------
MICHAEL CAIRNS
/S/ Patrick Arbor Director April 16, 2001
- -------------------------------------------- --------------
PATRICK ARBOR
/S/ Dean Barr Director April 16, 2001
- -------------------------------------------- --------------
DEAN BARR
Michael Boren Director April 16, 2001
- -------------------------------------------- --------------
MICHAEL BOREN
David Boren Director April 16, 2001
- -------------------------------------------- --------------
DAVID BOREN
/S/ E. Russell Braziel Director April 16, 2001
- -------------------------------------------- --------------
E. RUSSELL BRAZIEL
/S/ Steven Town Director April 14, 2001
- -------------------------------------------- --------------
STEVEN TOWN
/S/ Donald Sledge Chairman of the Board April 16, 2001
- -------------------------------------------- --------------
DONALD SLEDGE
Ronald Spears Director April 16, 2001
- -------------------------------------------- --------------
RONALD SPEARS
53
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
2.1 Acquisition agreement between RateXchange Corporation and Xpit.com
Inc., date March 12, 2001.
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)).
3.3 Amended and Restated Bylaws, as amended. (incorporated by reference to
Exhibit 10.3 to RateXchange's Registration Statement on Form S-1 (Reg.
No. 333-53316)).
10.1+ 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).
10.2 Promissory Note of Edward Mooney dated December 18, 1998 (incorporated
herein by reference to Exhibit 10.4 to RateXchange's Registration
Statement on Form S-1 (Reg. No. 333-53316)).
10.3+ Form of Severance Agreement between RateXchange and Edward
Mooney(incorporated herein by reference to Exhibit 10.5 to
RateXchange's Registration Statement on Form S-1 (Reg. No.
333-53316))..
10.4+ Employment Agreement between RateXchange and Douglas Cole dated April
1, 1999 (incorporated herein by reference to Exhibit 10.6 to
RateXchange's Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.5+ Form of Severance Agreement between RateXchange and Douglas Cole
(incorporated herein by reference to Exhibit 10.7 to RateXchange's
Registration Statement on Form S-1 (Reg. No. 333-53316))..
10.6+ Employment Agreement between RateXchange I, Inc. and Donald H. Sledge
dated September 15, 1999 (incorporated herein by reference to Exhibit
10.8 to RateXchange's Registration
Statement on Form S-1 (Reg. No. 333-53316))..
10.7+ Amendment No. 1 to Employment Agreement of Donald H. Sledge dated
October 5, 2000 (incorporated herein by reference to Exhibit 10.9 to
RateXchange's Registration Statement on Form S-1 (Reg. No.
333-53316)).
54
10.8+ Employment Agreement between RateXchange and Ross Mayfield dated July
2, 1999 (incorporated herein by reference to Exhibit 10.10 to
RateXchange's Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.9+ Separation Agreement between RateXchange and Ross Mayfield dated August
18, 2000 (incorporated herein by reference to Exhibit 10.11 to
RateXchange's Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.10+ Employment Agreement between RateXchange and Paul Wescott dated July 5,
2000 (incorporated herein by reference to Exhibit 10.12 to
RateXchange's Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.11+ Separation Agreement between RateXchange and Paul Wescott dated August
28, 2000 (incorporated herein by reference to Exhibit 10.13 to
RateXchange's Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.12+ Employment Agreement between RateXchange and Philip Rice dated February
29, 2000 (incorporated herein by reference to Exhibit 10.14 to
RateXchange's Registration Statement on Form S-1 (Reg. No.
333-53316))..
10.13+ Employment Agreement between RateXchange and D. Jonathan Merriman dated
October 5, 2000 (incorporated herein by reference to Exhibit 10.15 to
RateXchange's Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.14+ 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)).
10.15+ 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)).
10.16+ 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).
10.17+ Schedule of non-plan option grants made under Non-Qualified, Non-Plan
Stock Option Agreements to directors and executive officers
(incorporated herein by reference to Exhibit 10.19 to RateXchange's
Registration Statement on Form S-1 (Reg. No. 333-53316)).
10.18+ 2000 Stock Option Plan, as amended (incorporated herein by reference to
Exhibit 10.20 to RateXchange's Registration Statement on Form S-1 (Reg.
No. 333-53316)). .
10.19 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).
10.20 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).
55
10.21 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)
10.22 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).
10.23 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)).
10.24* Agreement between RateXchange and Amerex Bandwidth, Ltd. Dated
September 17, 2000, including Warrants.
10.25 Multi Site Colocation Commitment Agreement by and between RateXchange
and COLO.com dated February 17, 2000.
10.26 Co-location License by and between RateXchange and Switch & Data
Facilities Company dated March 1, 2000.
10.27 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).
10.28 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)).
27. Financial Data Schedule
+ Represents management contract or compensatory plan or arrangement.
* 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, which request has been
granted by the Securities Exchange Commission
56