Registration No. 333-37004
Rule 424(b)(3)
Supplement dated August 14, 2000
to prospectus dated July 25, 2000
--------------------------------------------------------------------------------
RATEXCHANGE CORPORATION
QUARTERLY REPORT
FOR QUARTER ENDED
JUNE 30, 2000
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
<CAPTION>
Page
<S> <C>
1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations (unaudited) for the three and six months ended
June 30, 2000and 1999 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
3. Quantitative and Qualitative Disclosures About Market Risk 20
4. Legal Proceedings 21
5. Changes in Securities and Use of Proceeds 21
</TABLE>
Page 2
<PAGE>
<TABLE>
1. Financial Statements
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------------------------------------------------------------------------------------------------------------- ------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,825,453 $ 451,615
Short term investments 15,593,875 --
Interest receivable -- 150,608
Prepaid expenses 244,449 5,814
Note receivable on stock sales -- 1,541,050
------------ ------------
Total Current Assets 24,663,777 2,149,087
Property and equipment (net of accumulated depreciation
of $111,291 and $10,766 in 2000 and 1999) 677,220 175,349
Other assets
Investment in affiliate 75,000 75,000
Deposits 260,700 103,305
------------ ------------
Total assets $ 25,676,697 $ 2,502,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,908,272 $ 1,639,301
Other liabilities 103,000 85,000
Short term debt 2,000,000 800,000
------------ ------------
Total current liabilities 5,011,272 2,524,301
Commitments and Contingencies -- --
Stockholders' equity
Preferred stock, 60,000,000 shares authorized; none outstanding -- --
Common stock, $.0001 par value; 300,000,000 shares
authorized; issued and outstanding; 17,136,174 shares and
14,087,425 shares 1,714 1,409
Additional paid in capital 49,000,879 8,891,088
Retained deficit (28,089,234) (8,667,576)
Notes receivable on stock sales (407,732) (246,481)
Accumulated other comprehensive income 159,798 --
------------ ------------
Total stockholders' equity 20,665,425 (21,560)
------------ ------------
Total liabilities and stockholders' equity $ 25,676,697 $ 2,502,741
============ ============
<FN>
The accompanying notes are an integral part of the financial statements
</FN>
</TABLE>
Page 3
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Beginning of
Development Stage
(September 30, 1998)
Three Months ended June 30, Six Months ended June 30, through June 30,
(unaudited) (unaudited) 2000
2000 1999 2000 1999 (unaudited)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Advertising revenue $ 4,500 $ -- $ 4,500 $ -- $ 4,500
EXPENSES
Selling, general and administrative 5,237,280 571,888 10,093,247 1,532,584 15,054,202
Compensation expense - below
market option grants 1,540,943 -- 7,643,921 -- 7,905,756
Bad debt -- 746,188 -- 746,188 1,748,750
Depreciation and amortization 77,182 5,630 101,279 9,993 130,735
Write down of goodwill -- -- -- -- 1,582,155
------------ ------------ ------------ ------------ ------------
Total Expenses 6,855,405 1,323,706 17,838,447 2,288,765 26,421,598
OTHER INCOME (EXPENSE)
Interest income 305,502 45,219 212,261 50,808 365,751
Interest expense (301,184) -- (301,472) -- (325,264)
Other expenses (net) (1,500,000) -- (1,498,500) -- (1,498,280)
Loss allocated to minority interest -- -- -- -- 7,000
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes (8,346,587) (1,278,487) (19,421,658) (2,237,957) (27,867,891)
Income tax provision (benefit) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $ (8,346,587) $ (1,278,487) $(19,421,658) $ (2,237,957) $(27,867,891)
============ ============ ============ ============ ============
Basic and diluted net loss per
share $ (0.49) $ (0.11) $ (1.23) $ (0.21)
Weighted average number of
shares of common stock 17,133,613 11,962,203 15,817,530 10,602,949
<FN>
The accompanying notes are an integral part of the financial statements
</FN>
</TABLE>
Page 4
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months ended Beginning of Development
June 30, Stage (September 30,
(unaudited) 1998) through June 30,
2000
2000 1999 (unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(19,421,658) $ (2,237,957) $(27,867,891)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 300,525 9,993 329,981
Bad debt -- 746,188 1,748,750
Stock options granted to employees below
fair market value 7,643,921 -- 7,905,756
Stock options granted to service providers 2,131,250 -- 2,131,250
Write off of goodwill -- -- 1,582,155
Stock for services/expenses -- 22,029 702,244
Stock for interest -- -- 10,773
Stock for accounts payable conversion -- -- (30,000)
Increase in deposits (157,395) -- (260,700)
Increase (decrease) in accounts receivable
and other assets (249,278) (1,058,776) (1,325,600)
Increase (decrease) in accounts payable and
accrued expenses 1,286,896 (5,510) 3,126,024
------------ ------------ ------------
TOTAL (8,465,739) (2,524,033) (11,947,258)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short term investments (18,734,934) -- (18,734,934)
Sale of short term investments 3,300,858 -- 3,300,858
Purchase of RateXchange I -- (9,000) (450,000)
Payment for purchase of equipment (602,397) -- (770,717)
Cash purchased by stock acquisition of subsidiary -- -- (78,550)
Advances to affiliates -- -- (721,871)
------------ ------------ ------------
TOTAL (16,036,473) (9,000) (17,455,214)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans and other debt (net) 1,200,000 -- 2,013,000
Net proceeds from stock sales 30,135,000 -- 34,698,875
Proceeds from note receivable 1,541,050 2,659,750 1,516,050
------------ ------------ ------------
TOTAL 32,876,050 2,659,750 38,227,925
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,373,838 126,717 8,825,453
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 451,615 528,516 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 8,825,453 $ 655,233 $ 8,825,453
============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements
</FN>
</TABLE>
Page 5
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM FINANCIAL STATEMENTS AND BACKGROUND AND HISTORY
The interim financial statements presented herein are unaudited and
have been prepared in accordance with the instructions to Form 10-Q.
These statements should be read in conjunction with financial
statements and notes thereto included in our annual report on Form
10-K for the year ended December 31, 1999. The accompanying financial
statements have not been audited. The 1999 financial statements
presented are currently being reaudited by a newly appointed public
accounting firm. Certain adjustments will likely result from the
reaudit. The results of operations and cash flows for the three and
six months ended June 30, 2000 may not be indicative of the results
that may be expected for the year ended December 31, 2000.
RateXchange Corporation or the Company is a consolidated group of
companies including the parent corporation, RateXchange Corporation
(RateXchange Corp.), and its subsidiaries, RateXchange I, Inc. and
PolarCap, Inc. (PolarCap).
RateXchange Corp. (formerly NetAmerica.com Corporation) is a Delaware
corporation organized on May 6, 1987 for the purpose of seeking out
and developing any general business opportunity. In April 2000, we
changed our name to RateXchange Corporation to reflect the focusing
of our efforts on the business of RateXchange I, Inc.
RateXchange I, Inc., a Delaware corporation organized in June 1999,
is in the business of business-to-business e-commerce seeking to
develop new exchange services for the telecommunications market.
The Company is in its planning stages for its eventual day to day
business and has not generated any revenues from its planned
operations. The Company is defined as a development stage company in
accordance with SFAS No. 7. Therefore, all operations since the start
of the development stage, September 30, 1998, when the Company
acquired PolarCap, have been reported.
NOTE 2 CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
We consider all highly liquid investment securities with maturities
from date of purchase of three months or less to be cash equivalents.
Short-term investments consist of debt securities with maturities
between three months and twelve months.
Management determines the appropriate classification of investments
at the time of purchase and reevaluates such determination at each
balance sheet date. To date, all marketable securities have been
classified as available-for-sale and are carried at fair value with
unrealized gains and losses, if any, included in stockholders'
equity. At June 30, 2000, the company's investment in short term
securities had an unamortized cost of $15,434,077. Realized gains and
losses and declines in value of securities judged to be other than
temporary are included in other income, net. Interest and dividends
on all securities are included in other income, net.
NOTE 3 PRIVATE PLACEMENT
In March 2000, the Company completed a private placement in which it
sold 2,733,329 shares of restricted common stock at a subscription
price of $12 per share plus warrants to purchase 1,366,673 shares of
its common stock at an exercise price of $14.40 per share. The
warrants are immediately exercisable and expire in three years. After
deducting $2,665,000 for costs associated with the offering the
Company received $30,135,000.
Page 6
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LOSS PER SHARE AND AVERAGE SHARES OUTSTANDING
Loss per share is computed by dividing the net loss by the weighted
average of the common shares outstanding. Options and warrants on
shares of common stock were not included in computing diluted loss
per share because their effects were antidilutive (8,105,000 options
and 2,386,000 warrants).
NOTE 5 COMMITMENTS AND CONTINGENCIES
In 1999, RateXchange I, Inc. entered into a term sheet agreement with
a vendor to provide specialized consulting and computer programming
to assist in RateXchange I, Inc.'s business plans and operations in
the business-to-business e-commerce niche it was developing. The term
sheet was never finalized into a formal agreement, but some services
were provided, and payments were made for the services that were
rendered. The term sheet provided for the vendor to receive a stock
position in RateXchange I, Inc. of up to 10% for certain services.
The Company has reached a tentative agreement on terms for settlement
of the dispute with the vendor. The parties are presently negotiating
the terms of the final settlement documents. At June 30, the company
has estimated and accrued for the probable loss.
The Company is involved in several lawsuits as follows:
Gregory K. Martin v. NetAmerica, Inc. et al. In the spring of 1999,
Gregory K. Martin, a former officer of both NetAmerica, Inc.
(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,
the Company and Mr. Martin (with William Fritts undertaking certain
limited obligations). Pursuant to that agreement, Mr. Martin filed 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 June 30, 2000, the Company has fulfilled all of its
current obligations under the settlement agreement and contends that
the matter is resolved.
NAI Office Lease. The Company has resolved this lease dispute with
its landlord. No claims against the Company remain.
On February 24, 2000, Concentric Network Corporation filed a lawsuit
against NetAmerica, Inc., aka A1 Internet, Inc., and the Company in
the Superior Court of California for the County of Santa Clara (CV
784335). The lawsuit involves claims for breach of contract and
common counts based on A1 Internet's nonperformance in a service
agreement between A1 Internet and Concentric. Concentric is asking
for compensatory damages of at least $167,794, restitution, costs and
attorney fees. The matter is currently pending in Superior Court and
will soon proceed to arbitration. The Company has fully reserved for
this contingency.
NOTE 6 OPTIONS FOR PURCHASE OF COMMON STOCK
Shareholders authorized the 1999 Stock Option Plan during 1999.
Shareholders authorized the 2000 Stock Option Plan on April 20, 2000.
There are options to purchase 8,000,000 shares authorized for
issuance under both plans. On February 24, 2000, the Board authorized
additional options to purchase 4,290,000 shares outside of either
plan. Total options granted to employees during the first quarter for
less than fair market value were 3,940,000 for which the Company
recognized related compensation expense of $7,643,921 and $1,540,943
for the first six months and second quarter of 2000. In addition,
Page 7
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the company granted options to non-employee consultants totaling
275,000 for which the company recorded related expense of $2,131,250
and $668,145 for the six months and second quarter ended June 30,
2000.
NOTE 7 SHORT TERM DEBT
In January 2000, RateXchange I, Inc. closed a $2,000,000 convertible
note offering (the "Notes"), bearing interest at a stated rate of
10%. 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.
As a result of the Company's new business strategy, the Company
offered to such note holders the right to convert their Notes into
RateXchange Corp. common stock at an exchange rate of $5.00 per
share. In addition, the Company agreed to issue such holders an
aggregate of 500,000 warrants to purchase common stock at $5.00 per
share. Any note holders who decline this offer will be entitled to
rescind their original investment and receive their principal back in
full, including accrued interest. As of June 30, 2000, no conversions
have occurred.
<TABLE>
NOTE 8 COMPREHENSIVE LOSS
The comprehensive loss for the first six months and second quarter of
2000 and 1999 was:
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (8,346,587) $ (1,278,487) $(19,421,658) $ (2,237,957)
Other Comprehensive Income:
Unrealized gains on short
term investments 159,798 -- 159,798 --
------------ ------------ ------------ ------------
Comprehensive loss $ (8,186,789) $ (1,278,487) $(19,261,860) $ (2,237,957)
============ ============ ============ ============
</TABLE>
NOTE 9 GOING CONCERN
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has
had recurring operating losses and is dependent upon financing to
continue operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Management intends to continue funding RateXchange Corp. activities
through additional equity or debt financings according to its
business plan, and emerge profitable sometime in the future.
However, there can be no assurance that management's efforts will be
successful.
Page 8
<PAGE>
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our
Consolidated Financial Statements and the notes thereto presented in "Item 1 -
Financial Statements." The information set forth in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes forward-looking statements that involve risks and uncertainties. Many
factors could cause actual results to differ materially from those contained in
the forward-looking statements below. See "Outlook."
OVERVIEW
We are a pioneer in the development of business-to-business ("B2B")
e-commerce for the telecommunications industry. We are a development stage B2B,
e-commerce company seeking to develop new transaction services for the estimated
$1 trillion international market for telecommunications services. We focus on
developing, operating and maintaining liquid, efficient and automated online
market services to trade bandwidth and other telecommunications products. In
February 2000, we announced the launch of the RateXchange Real-Time Bandwidth
eXchange. In July 2000 we announced we had completed beta testing for a new
market service for bandwidth trading called RateXmatch. RateXmatch uses an
approach to trading similar to that used by the electronic trading platforms
utilized in on-line natural gas and electricity commodity trading. We also
announced the opening of our first six delivery hubs where carriers will
interconnect to the exchange. During 2000, we expect to commence other
revenue-generating services such as RateXchange CustomAuctions for buying and
selling of other telecommunications products and services and to open additional
interconnection delivery hubs.
GENERAL DEVELOPMENT OF BUSINESS
The Company was 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 did not have any material
operations from 1987 to 1998.
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.
In September 1998, in connection with our strategy to acquire and
consolidate Internet Service Providers ("ISPs"), we also entered into an
agreement with NetAmerica, Inc., a Washington corporation, pursuant to 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 certain
representations made to us were inaccurate. Consequently, on March 16, 1999, we
entered into an agreement with A1 Internet to abandon the stock purchase and
settle our differences.
In 1999, we changed the name of the Company 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, ISPs 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.
On or about November 3, 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
Page 9
<PAGE>
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.
On July 6, 1999, we acquired 100% of the outstanding stock of Rate
Exchange, Inc., a Colorado corporation, through a merger 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. On
July 23, 1999, RateXchange I, Inc. entered into an agreement with a consultant
for market development expertise as applied to the telecommunications market. In
exchange for these services, RateXchange I, Inc. agreed to issue up to 10% of
its common stock based on successful completion and delivery of certain
software. As of the date of this report, no shares of RateXchange I, Inc. have
been issued under the consultant agreement and the parties are in discussions
regarding termination of this agreement.
On September 15, 1999, RateXchange I, Inc. and Donald H. Sledge entered
into an employment agreement under which RateXchange I, Inc. agreed to grant Mr.
Sledge an equity position of 10% of RateXchange I, Inc.'s outstanding stock
through a stock purchase right.
RateXchange I, Inc. is a development stage B2B, e-commerce company
seeking to develop new transaction services for the estimated $1 trillion
international market for telecommunications services. RateXchange I, Inc. has
operated an Internet-based lead generation service for trading in long-distance
minutes, telephony minutes and bandwidth since January 1998.
On April 20, 2000, we changed our name to RateXchange Corporation to
focus our efforts on the business of RateXchange I, Inc.
<TABLE>
Results of Operations for Three and Six Months Ended June 30, 2000
The following table summarizes our results of operations for the first
six months and second quarter of 2000, compared to the same periods of 1999.
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------------------------ ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 4,500 -- $ 4,500 --
Expenses (including Selling, $(17,838,447) $ (2,288,765) $ (6,855,405) $ (1,323,706)
General and Administrative)
Net Income (Loss) $(19,421,658) $ (2,237,957) $ (8,346,587) $ (1,278,487)
</TABLE>
Revenue
We generated revenue of $4,500 during the first six months and second
quarter of 2000 from banner ads placed on our internet site. In addition, we
generated interest income on the net proceeds from the $32.8 million private
placement. Interest income for the first six months and second quarter of 2000
was $212,261 and $305,502 compared to $50,808 and $45,219 for the same periods
in 1999. The increase in interest income is due to interest earned on the
proceeds from the private placement.
Expenses
Our total expenses were $17,838,447 and $6,855,405 in the first six
months and second quarter of 2000 compared to $2,288,765 and $1,323,706 in the
comparable periods of 1999. The increase was due primarily to:
o expense recorded on below market option grants;
Page 10
<PAGE>
o increased marketing and development activity; and
o the expansion of our executive management team and the addition of
certain advisors.
Net Income (Loss):
During the first six months and second quarter of 2000, we incurred
losses of $19,421,658 and $8,346,587 compared to losses of $2,237,957 and
$1,278,487 during the same period in 1999. Included in the loss for the six
months and second quarter of 2000 were:
o $7,643,000 and $1,540,000 in expenses associated with below market
stock option grants to employees;
o $2,243,000 and $1,127,000 in payroll costs;
o $1,500,000 in anticipated settlement of a dispute;
o $4,006,000 and $1,961,000 in outside services, including $2,131,000
and $668,000 for options granted to service providers;
o $1,059,000 and $775,000 in marketing costs;
o $711,000 and $420,000 in delivery equipment maintenance costs; and
Because we are in the early growth stage, we anticipate that we will
continue to incur operating losses and cash flow deficiencies for the
foreseeable future.
Liquidity and Capital Resources
We have financed our operations to date primarily through the sale of
equity securities. We have been unprofitable since inception and we have
incurred net losses in each year.
We had working capital of $19,652,505 at June 30, 2000 compared to
negative working capital of $375,214 on December 31, 1999. At December 31, 1999,
we had common stock subscription receivables in the amount of $1,787,531, which
were due and payable in 2001. As of June 30, 2000, $1,541,050 has been paid. In
March 2000 we closed a $32.8 million private placement, netting $30.1 million
after expenses. These funds should be sufficient to cover our operations and
working capital requirements for the next twelve months. Nevertheless, we may be
forced to seek additional financing sooner than expected.
Our operating activities used $8,465,739 during the first six months of
2000 due primarily to our:
o increased marketing and development;
o expansion of our executive management team; and
o increased professional services and consulting costs.
Our investing activities used $16,036,472 during the first six months
of 2000, due primarily to investing the proceeds from the private placement.
Financing activities generated $32,876,050 during the first six months
of 2000. Financing activities during the six months ended June 30, 2000
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.
Page 11
<PAGE>
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 accelerate deployment of
our delivery hubs, expand our online marketplace for telecommunications products
and enhance our geographic reach and product line.
We are executing an overall business plan that requires significant
additional capital for among other uses:
o additional equipment and facilities;
o expansion into new domestic and international markets;
o additional management and personnel;
o development of additional products and services; and
o acquisitions.
Furthermore, our funding of working capital and current and future
operating losses will require additional capital investment. We do not currently
possess a bank source of financing and we have had minimal revenues.
Our business and operations have not been materially affected by
inflation during the periods for which financial information is presented.
Anticipated Increase to Operating Loss
On July 20, 2000, the Company engaged Arthur Andersen as its
independent auditors. Arthur Andersen is going to reaudit the Company's
accounting records for 1997, 1998 and 1999. A preliminary review of the
accounting records indicates that certain transactions in 1999 and 1998
involving common stock issued in exchange for services received, conversion of
bridge financing and arrangement of financing appear to have been recorded at a
price lower than that generally available in the marketplace. As disclosed in
the Company's Annual Report on Form 10-K, the Company determined the value of
these stock transactions. An element of that determination was the consideration
of certain variables such as whether the stock being issued was restricted and,
if so, the level of those restrictions. One such restriction was a requirement
that the stock recipient hold the shares for at least a year before selling
them. Another restriction was that the Company generate $10 million in revenue
over a 12 month period before the restriction on sale is lifted. To date the
Company has not generated any revenue from operations. As a result, some of the
stock was issued at a discount. An issue has arisen, which will be addressed
during the reaudit, as to whether the difference between the price of the shares
and the value that others in the marketplace placed on the shares ought to be
reflected as an expense in the financial statements.
The expense amounts in question involve 7,504,347 shares of common
stock issued for $1,319,506. No determination has been made as of this date
regarding the appropriated valuation of the stock on the date issued due to the
following factors:
o Shares were being issued via a private placement memorandum at an
average price of $1.07;
o Shares trading on the over the counter market traded between $4.50
and $8.88;
o The shares being traded on the over the counter market were limited
in availability and the trading process itself was somewhat
cumbersome; and
o Liquidity in the stock was provided through the private placement
process, versus the over the counter market.
At this time the outcome of the reaudit and the resolution of any other
potential issues that may arise is uncertain.
Outlook
Historically, we have not had any long-term successful business
operations and we are concentrating our efforts in developing a new business
model for business-to-business e-commerce products and services for the
telecommunications sector. We are in an early stage of development and we are
subject to all the risks inherent in the establishment of a new business
enterprise. To address these risks, we must:
o establish market acceptance for our online exchange 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
o continue to develop and upgrade our exchange and delivery hub
technology.
Forward-Looking Statements
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:
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o changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the market;
o our ability to raise sufficient capital to meet operating
requirements;
o various competitive factors that may prevent us from competing
successfully in the marketplace;
o changes in external competitive market factors or in our internal
budgeting process which might impact trends in our results of
operations; and
o other risks described below in "Factors That May Affect Future
Results."
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-Q will in fact occur.
Factors That May Affect Future Results
We have had recurring operating losses and is dependent upon financing to
continue operations.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has had recurring
operating losses and is dependent upon financing to continue operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Management intends to continue funding RateXchange
Corp. activities through additional equity or debt financings according to its
business plan, and emerge profitable sometime in the future. However, there can
be no assurance the management's efforts will be successful.
As a development stage company with a limited operating history in a new and
rapidly changing industry, it is difficult to evaluate our business and
prospects.
We are a development stage company with a limited operating history.
Our activities to date, including the activities of our predecessor, have
concentrated on:
o planning, developing and implementing our online exchange for
trading bandwidth, and other telecommunications products.
o offering a free online lead-generation service in order to build
clientele and educate potential exchange participants about the
benefits of online trading; and
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 such risks, and the failure to do so could
have a material adverse effect on our business and results of operations.
Our success depends on our ability to successfully secure participation in the
exchange and connect participants to our network.
The success of our online exchange is ultimately dependent upon the
creation of a network of physically interconnected users. Prior to trading on
the exchange, users who elect to take delivery over our network must connect to
our network at one of our delivery hubs. We have delivery hub equipment in place
in six cities within the United States. We currently lease this switching
capacity.
The success of our business depends on our ability to attract users to
our online exchange. While we have identified target users, there can be no
assurance that we will be able to secure their participation in the exchange. In
addition, we do not presently have commitments from any of the members of our
free online lead-generation service to participate in the fee-based online
exchange, and therefore, there can be no assurance that any such members will
use the online exchange.
We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
At June 30, 2000, our accumulated deficit since inception was
$(28,089,234). For the first six months and second quarter of 2000, we incurred
net losses of $(19,421,658) and $(8,346,587). We have incurred a net loss in
each year of our existence, and have financed our operations primarily through
sales of equity securities. Our expense levels are high and our revenues
insignificant. 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 in the future.
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If our online exchange does not achieve commercial acceptance, our results will
suffer.
We will rely primarily on a single source (fees and commissions from
transactions facilitated on the online exchange) for our revenues for the
foreseeable future. Online trading of telecommunications bandwidth and minutes
currently has only a limited market acceptance. As a result, our future ability
to gain commercial acceptance of our online exchange is critical to our success.
Any failure to successfully gain commercial acceptance of our online exchange
would not only have a material adverse effect on our business and results of
operation but also on our ability to seek additional revenue opportunities.
We may not be able to compete successfully against current and future
competitors.
The market for online bandwidth and minutes trading services is new,
rapidly evolving and very competitive, as are the online commerce and
business-to-business e-commerce markets generally. We expect competition in this
market to intensify in the future. Several of our existing competitors, such as
Band-X, Arbinet and InterXion, currently operate online exchanges and have
established customer bases. Our ability to compete with them will depend largely
upon our ability to capture market share by obtaining sufficient participants
for our online exchange.
In addition, we compete with all 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 established clearinghouses, lead-generation services and
traditional offline brokers. We are aware of established clearinghouses, such as
GRIC, ITXC and AT&T Global Clearinghouse, that aggregate supply and demand and
contract directly with buyers or sellers, rather than facilitate trades. Many
established companies, such as Band-X, Min-X, Asia Capacity Exchange and Cape
Saffron offer lead-generation services which provide opportunities for buyers
and sellers to identify trading opportunities through online listings. Barriers
to entry in the lead-generation category are minimal, as current and new
competitors can launch sites at a relatively low cost. Traditional offline
brokers act as agents for buyers and sellers of bandwidth for a commission and
have the advantage of established industry practices and industry contacts. 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 online exchange.
Large telecommunications companies such as AT&T and MCI Worldcom 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 offering clearinghouse and 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 impact on our business
and results of operations.
Increased pressure created by any present or future competitors, or by
our competitors collectively, could have a material adverse effect on our
business and results of operations. Increased competition may result in reduced
commissions and loss of market share. Further, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on our business and results of operations. There can be
no assurance that we will be able to compete successfully against current and
future competitors. In addition, new technologies and the expansion of existing
technologies may increase the competitive pressures on us.
We may become subject to regulation by the Commodity Futures Trading Commission
depending on the types of products and services we eventually introduce.
We propose to develop an online exchange for trading spot and forward
contracts for the purchase or sale of bandwidth and other telecommunications
products. Spot contracts for the near term delivery of a commodity are not
subject to regulation by the Commodity Futures Trading Commission ("CFTC").
Forward contracts, which
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impose binding obligations for the deferred delivery of a commodity between
commercial parties, also are excluded from the CFTC's jurisdiction. We currently
intend to operate our online exchange in a manner consistent with existing
regulatory guidance concerning transactions and services that are not subject to
regulation by the CFTC.
The Commodity Exchange Act provides that futures contracts may only be
entered into on an exchange that has been designated by the CFTC as a contract
market. If we elected in the future to provide trading and/or clearing services
for futures contracts and options on futures contracts, we would have to apply
to the CFTC for designation as a contract market. The contract market
designation process is complicated, time consuming, and expensive. We cannot
assure that we could satisfy all of the regulatory requirements applicable to
obtaining designation as a contract market or predict how long the process would
take.
Contract markets must comply on an ongoing basis with numerous
regulatory requirements. Those requirements currently include submitting all
proposed rules and contracts, and proposed changes to existing rules and
contracts, to the CFTC for prior review and approval, implementing and enforcing
disciplinary rules, and submitting reports to the CFTC on, among other things,
trading volume, open contracts, and prices.
The CFTC has never determined whether some or all swap agreements are
futures contracts. Nevertheless, depending on the type of trading and/or
clearing services that we elected in the future to provide for swap agreements,
we may need to request an exemption from the CFTC from the requirement that
futures contracts and options on futures contracts only be traded on a
CFTC-designated contract market. The CFTC is under no obligation to reach a
decision within a certain period or to grant an exemption.
Future regulatory changes also could affect our operations. Pending
regulatory proposals, if they become law, may remove some of the obstacles to
our providing trading and/or clearing services for swap agreements involving
telecommunications products. Some of those proposals still would subject
possible future services to CFTC regulation. We are unable to predict at this
time, however, whether pending regulatory proposals, if enacted, would have an
affect on our ability to offer trading and/or clearing services for swap
agreements, futures contracts and options on futures contracts involving
telecommunications products.
We are dependent on the continued growth of online commerce and the acceptance
by users of the Internet as a means for trading excess bandwidth and minutes.
Our future revenues and profits are substantially dependent upon the
widespread acceptance and use of the Internet and online services as an
effective medium of commerce by businesses. Rapid growth in the use of and
interest in the Internet and online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of businesses or customers will adopt, and continue to
use, the Internet and online services as a medium of commerce.
Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty. We will
rely on customers who have historically used traditional offline means of
commerce to buy and sell excess telecommunications bandwidth and minutes. For us
to be successful, these customers must accept and utilize novel ways of
conducting business and exchanging information over the Internet.
Critical issues concerning the commercial use of the Internet, such as
ease of access, security, reliability, cost and quality of service, remain
unresolved and may affect the growth of Internet use or the attractiveness of
conducting commerce online. In addition, the Internet and online services may
not be accepted as a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. To the extent that the Internet and online services continue to
experience significant growth, there can be no assurance that the infrastructure
of the Internet and online services will prove adequate to support increased
user demands. In addition, the Internet or online services could lose their
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet or online service
activity. Changes in or insufficient availability of telecommunications services
to support the Internet or online services also could result in slower response
times and adversely affect usage of the Internet and online services generally
and us in
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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 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 us and our reputation. 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 e-commerce 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 copyrights;
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 to the Internet and other online
services of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes and personal privacy 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.
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We may face liability for information retrieved from our website.
Due to the fact that material may be downloaded from our website 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 our
online exchange and the related network infrastructure are 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
online exchange and the volume of trading that the exchange facilitates. Any
system interruptions that result in the unavailability of our website or reduced
performance of the online exchange could reduce the volume of bandwidth traded
and the attractiveness of our website as a means for such trading.
As a start-up venture, we may experience system interruptions, which
may continue to occur from time to time. There may be a significant need to
upgrade the capacity of our website 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 network infrastructure to accommodate increased traffic on our online
bandwidth exchange or increased trading volume through our online trading or
transaction-processing systems may cause unanticipated system disruptions,
slower response times, degradation in levels of customer service and impaired
quality and speed of trade processing, any of which could have a material
adverse effect on our business and results of operations.
Our business and operations would suffer in the event of system failures.
Our ability to successfully facilitate bandwidth trades and provide
high-quality customer service, largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. We do not have a formal disaster recovery plan and carry only limited
business interruption insurance to compensate us for losses that may occur.
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. In addition, we rely on online
trading software developed by third parties. Disruptions or failures in the
online trading software systems, or the occurrence of any of the other foregoing
system disruptions, could have a material adverse effect on our business and
results of operations.
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 our online exchange. 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 online
exchange and 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.
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The development of the online exchange 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 our online
exchange 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 retain and hire qualified personnel to sustain our business.
We are currently managed by a small number of key management and
operating personnel. We do not maintain "key man" insurance on any employee. Our
future success depends, in part, on the continued service of our key executive,
management, and technical personnel, many of whom have only recently been hired,
and our ability to attract highly skilled employees. If any key officer or
employee were unable or unwilling to continue in their present positions, our
business could be harmed. From time to time we have experienced, and we expect
to continue to experience, difficulty in hiring and retaining highly skilled
employees. Competition for employees in our industry is intense, particularly in
the San Francisco Bay Area where we are located. If we are unable to retain our
key employees or attract, assimilate or retain other highly qualified employees
in the future, that may have a material adverse effect on our business and
results of operations.
Our success is dependent on our ability to protect our intellectual property.
Our performance and ability to compete is dependent on our proprietary
technology, including, but not limited to the design of our online exchanges and
delivery hubs. We regard our copyrighted material, trade secrets and similar
intellectual property as critical to our success, and we rely on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. There can be no assurance 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 and limited
access to and distribution of our software, documentation and other proprietary
information. There can be no assurance that the steps taken by us will prevent
misappropriation of our technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we have taken, it
might be possible for a third party to copy or otherwise obtain and use our
software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford us little or no
effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret
protection may not be available in every country where our services are made
available online. In the future, we may also need to file lawsuits to enforce
our intellectual property rights, protect our trade secrets, and determine the
validity and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on our business and
results of operations.
We may not be able to secure licenses for technology from third parties on
commercially reasonable terms.
We rely on a variety of software and hardware technologies that we
license from third parties, including our database and Internet server software,
components of our online trading software, and transaction-processing software
which is used in our online exchange to perform key functions. There can be no
assurance that these third party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of our ability to
maintain or obtain upgrades to any of these technology licenses could result in
delays in completing our 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 impact on our business
and results of operations.
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We expect to need additional capital in the future and it may not be available
on acceptable terms.
We anticipate incurring substantial costs in developing, operating and
maintaining the online exchange and in implementing the objectives of our
business plan. We may need significant amounts of working capital for
infrastructure, software development, marketing, personnel, general and
administrative costs, and to fund losses prior to achieving profitability.
We may need to raise additional funds through additional equity and/or
debt financings to meet our capital requirements. We may need to raise
additional funds if we have underestimated our capital needs or if we incur
unexpected expenses. There can be no assurance that such financings will be
available in amounts or on terms acceptable to us, if 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.
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 adverse news announcements;
o the introduction of new products and services;
o market conditions in the telecommunications industry in general,
Internet-based services and B2B e-commerce;
o quarter to quarter variations in operating results; 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 may adversely impact the price of our common stock.
We may be required to issue stock in the future that will dilute the value of
our existing 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 shareholders' percentage ownership of our common stock. Any sales
resulting from 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 will likely exercise the options
and warrants when we would also wish to enter the market to obtain capital on
terms more favorable than those provided by these securities. We lack control
over the timing of any exercise or the number of shares issued or sold if
exercises occur.
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3. 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 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.
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PART II - OTHER INFORMATION
4. Legal Proceedings.
There were no material additions to, or changes in status of, any
ongoing, threatened or pending legal proceedings during the three months ended
June 30, 2000. From time to time, we are a party to various legal proceedings
incidental to our business. None of these proceedings is considered by
management to be material to the conduct of our business, operations or
financial condition.
5. Changes in Securities and Use of Proceeds.
a) Not applicable.
b) Not applicable.
c) In February 2000, we issued 198,898 shares of our restricted common
stock to certain warrant holders upon such warrant holders'
cashless exercise of certain of our warrants. We issued the shares
to accredited investors only in reliance upon Section 4(2) of the
1933 Act.
Between February and March 2000, we sold to certain private
placement investors 2,733,329 shares of our restricted common stock
plus warrants to purchase 1,366,673 shares of our common stock at
an exercise price of $14.40 per share. The warrants are immediately
exercisable and expire in three years. After deducting $2,665,000
for expenses related to the offering, we received $30,135,000. We
issued the shares to accredited investors only in reliance upon
Rule 506 of Regulation D of the 1933 Act.
In April 2000, we issued 116,522 shares of our restricted common
stock to certain warrant holders upon such warrant holders'
cashless exercise of certain of our warrants. We issued the shares
to accredited investors only in reliance upon Section 4(2) of the
1933 Act.
d) Not applicable.
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