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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K/A
(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, 1999
[ ] 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
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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 March 27, 2000 was approximately
$483,945,000.
The registrant had issued and outstanding 17,019,651 shares of its
common stock on March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant's
2000 proxy statement for its annual meeting of shareholders to be held on April
20, 2000.
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RATEXCHANGE CORPORATION
FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 1999
On November 13, 2000, RateXchange Corporation (the "Company") hereby amends its
Annual Report on Form 10-K for the year ended December 31, 1999 to include the
following restated items:
Part II
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 8. Financial Statements and Supplementary Data.
Part IV
Item 14. Exhibits, Financial Schedules, and Reports on Form 8-K.
(a)(3) Exhibits:
27 Financial Data Schedules (EDGAR Version Only)
EXPLANATORY NOTE
RateXchange Corporation (the "Company") has determined to restate its
consolidated financial statements for the years ended December 31, 1999 and 1998
and its condensed quarterly financial statements for periods affected thereby.
This amendment includes in Part II, Item 8 the Company's restated consolidated
financial statements for the years ended December 31, 1999 and 1998, and other
information relating to such restated financial statements, including Selected
Financial Data (Part II, Item 6) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (Part II, Item 7). Information
regarding the effect of the restatement on the Company's financial condition and
results of operations is included in the notes to the financial statements
included in Part II, Item 8 of this amendment. This amendment also amends
Executive Compensation (Part III, Item 11), Exhibits, Financial Schedules, and
Reports on Form 8-K (Part IV, Item 14) and the Index to Exhibits.
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PART II
<TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
For the Year 1999 1998 1997 1996 1995
(As restated) (As restated)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ -- $ --
Net loss (9,298,789) (3,144,522) (200) (1,961) (2,561)
Basic and diluted loss per share (0.72) (1.92)
Weighted average number of common
shares: 12,863,020 1,636,919 200,000 200,000 200,000
At End of Year
Total assets $ 3,043,885 $ 830,154 $ -- $ -- $ 211
Stockholders' equity $ 318,829 $ 700,654 $ (200) $ (1,300) $ (5,689)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of the Company's overall strategy, the Company decided to
retain a national accounting firm. In July 2000, the Company selected Arthur
Andersen, LLP as its independent auditors. As a result of the Company's review,
certain adjustments were determined necessary to the Company's previously
reported financial results for the years ended December 31, 1998 and 1999. See
note 3 to the financial statements for further information concerning the nature
of the adjustments.
The following discussions should be read in conjunction with our
consolidated financial statements contained herein under Item 8 of this report.
Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
(As restated) (As restated)
----------- ----------- -----------
Revenue -- -- --
Expenses $ 9,431,212 $ 3,135,963 $ 200
Interest income $ 151,496 $ 2,214
Net loss $(9,298,789) $(3,144,522) $ (200)
RESULTS OF OPERATIONS
1999 vs. 1998
Revenue
We generated no revenues in 1999.
Expenses
Our total expenses for 1999 increased substantially compared to 1998
because we did not begin operations until September 30, 1998. As a result,
during 1998 we incurred expenses for three months of that year compared to a
full year of expenses for 1999. Incurred expenses relate to finding and funding
a development stage enterprise.
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We investigated many potential acquisition targets and succeeded in creating one
entity, Telenisus Corporation, and acquiring another entity, RateXchange I, Inc.
We funded Telenisus Corporation only to the extent of original
capitalization of $75,000. Any further funding of Telenisus was completed on its
own and did not affect our operations.
RateXchange I, Inc. is now our only operating subsidiary and it relies
on our financing activities for its operations.
Total expenses for 1999 were $9,431,212 of which the principal
components were:
o $3,158,415 of common stock, warrants or options to purchase
common stock of the Company issued in exchange for various
services;
o $2,034,893 for legal, accounting, consulting and other
operational expenses related to business development;
o $1,507,408 expensed in the purchase of the outstanding common
stock of RateXchange;
o $1,325,106 for payroll and payroll taxes;
o $501,839 for office and other administrative expenses;
o $413,681 due to write-off of advances to A1 Internet, Inc.;
and
o $342,762 for travel.
Total expenses for 1998 related to operations since September 30, 1998
and included 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 $151,496 compared
to $2,214 for 1998. The increase in interest income is attributable to the
amount of subscription receivables carried during 1999 compared to 1998. Most of
the receivables have been collected and interest income from this source will be
substantially less in future periods.
1998 vs. 1997
Revenue
We generated no revenues in 1998.
Expenses
Total expenses for 1998 were $3,135,963 of which the principal
components were:
o $2,020,376 of common stock or warrants to purchase common
stock of the Company issued in exchange for various services;
o $885,000 due to write off of advances to A1 Internet, Inc.;
and
o $89,710 expensed in the purchase of the outstanding common
stock of PolarCap, Inc.
Total expenses for 1997 were $200 for miscellaneous expenses.
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Interest Income
The only income we recorded in 1998 was interest of $2,214 on
subscriptions receivable. There was no interest income for 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through the sale of
equity securities. We have been unprofitable since inception and we have
incurred net losses and negative cash flows from operations in each year.
We had negative working capital of $48,367 at December 31, 1999
compared to working capital of $700,654 at December 31, 1998. At December 31,
1999, we had subscription receivables in the amount of $1,590,319 which were
paid off in the first quarter of 2000.
Our operating activities used $2,966,768 during the year ended December
31, 1999 due primarily to:
o increased business development activities;
o expansion of our executive management team;
o acquisitions and integration of acquisitions;
o identification and analysis of prospective acquisition
candidates;
o legal, accounting and professional expenses; and
o other operating expenses.
Our investing activities used $1,017,124 during the year ended December
31, 1999, due primarily to the purchase of equipment and for the identification,
acquisition and integration of acquisition targets.
Financing activities generated $3,991,991 during the year ended
December 31, 1999 consisting primarily of proceeds from sales of common stock.
The proceeds of the sales of common stock were and will be used for
acquisitions, business development, equipment purchases and for general working
capital. The various sales of common stock are as follows:
o Between November 1998 and March 1999, we sold a total of
1,864,688 shares of our restricted common shares to accredited
investors. The shares were sold at an effective subscription
price of $1.07 per share. After deducting the expenses related
to the private placement, we received $1,745,000 in cash, of
which approximately $1,631,188 was advanced to A1 Internet as
working capital and for debt repayment.
o In January 1999, we sold 916,574 shares of common stock to
certain related parties at a price of $.10 per share in
exchange for notes receivable. In March 1999, we sold
3,112,500 additional common shares as part of the above
private placement offering at an effective price per share of
$1.07 for notes. As of December 31, 1999, we collected a total
of approximately $1,924,126 from note repayments from both the
January and March private placements.
o In the second quarter of 1999, we sold 515,188 shares of stock
for $1.60 per share in a second private placement and received
net proceeds of $628,272.
Through our operating subsidiary, RateXchange I, Inc., we are executing
an overall business plan to develop an online marketplace for buying and selling
telecommunication bandwidth and services using our electronic trading system
that may require additional capital for among other uses:
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o expansion into new domestic and international markets;
o development of additional products and services; and
o acquisitions.
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 not had any revenues. Subsequent to year end, we
closed a $32.8 million private placement. We anticipate that these funds will be
sufficient to facilitate our business plan and cover our operating expenses for
the next twelve months.
Our business and operations have not been materially affected by
inflation during the periods for which financial information is presented.
OUTLOOK
RateXchange operates an electronic trading system that allows market
participants to trade bandwidth. The company provides global trading solutions
to telecommunications companies, energy merchants, financial institutions and
commodity traders. RateXchange's advanced technological platform provides users
with an efficient, centralized marketplace that brings buyers and sellers
together. Through the development of marketplaces for financial instruments,
RateXchange is bringing risk management tools and practices to the
communications industry. The company has deployed neutral delivery hubs that
provide a secure infrastructure for facilitating the delivery of traded
bandwidth. By providing market participants with an advanced electronic trading
system, financial products and an independent delivery mechanism, RateXchange is
enabling the creation of a liquid bandwidth trading market.
We are a development stage company in an early stage of development and
we are subject to all the risks inherent in the establishment of a new business
enterprise. To address these risks, we must:
o establish market acceptance for our electronic trading system
and other products and services;
o implement and successfully execute our business and marketing
strategy;
o respond to competitive developments;
o continue to develop and upgrade our electronic trading system;
o continue to attract, retain and motivate qualified personnel;
and
o effectively manage our capital to support the expenses of
developing and marketing new products and services.
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.
SUBSEQUENT EVENTS
Name Change
On February 7, 2000, we announced our intention to change our name to
RateXchange Corporation, subject to shareholder approval, which was effected on
April 20, 2000, and to focus our efforts on the business of RateXchange I.
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Bridge Loan
In February 2000, RateXchange I Inc. closed a $2,000,000 convertible
note offering. The notes were convertible into RateXchange I, Inc. common stock
at a price per share to be determined in an anticipated subsequent financing of
RateXchange I. Purchasers of the notes also received warrants to purchase
RateXchange I common stock at $2.40 per share, subject to adjustment. As a
result of our new business strategy the subsequent financing of RateXchange I
did not occur. Accordingly, we offered to the note holders the right to convert
their notes into RateXchange Corporation common stock at an exchange rate of
$5.00 per share. In addition, we agreed to issue to such holders an aggregate of
500,000 warrants to purchase common stock at $5.00 per share. All RateXchange I
notes and warrants have been converted into shares except one note for $25,000.
Settlement of Dispute
In 1999, RateXchange entered into a term sheet agreement with a vendor
to provide specialized consulting and computer programming to assist in
RateXchange's business plans and operations in the business-to-business
e-commerce niche it was developing. The term sheet was never finalized into a
formal agreement, but some services were provided, and certain cash payments
were made for the services that were rendered. The term sheet also provided for
the vendor to receive a stock position in RateXchange of up to 10% for certain
services. In 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. The
ultimate outcome of these discussions was uncertain at that time. In August
2000, the Company reached an agreement for settlement of the dispute with the
vendor, whereby the Company issued 175,000 shares, 175,000 warrants and $100,000
in cash. The market value of the settlement was $1.8 million.
Options and Warrants to purchase 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 of 2000 for less than fair market value were 3,940,000
for which the Company is recognizing related compensation expense, over the
option vesting periods, for the fair value of the stock on the date of grant,
which was $12, and the strike price of the options, which is $7.
The company has also granted options to non-employee consultants
totaling 275,000 for which the company has recorded related expense of
$2,131,250 in 2000.
In October 2000, the Board of Directors approved and issued 2 million
options to the Company's new Chief Executive Officer. These options were granted
with a strike price equal to the fair value of the Company's stock on the date
of grant and vest over various periods.
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 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.
Strategic Alliance
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
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agreement, we issued to Amerex five warrants for an aggregate of 2,300,000
shares of our common stock. One warrant for 300,000 shares with an exercise
price of $4.47 per share is currently exercisable by Amerex. The remaining four
warrants each for 500,000 shares and with exercise prices of $4.47 per share,
$4.70 per share, $4.92 per share and $5.37 per share, will become exercisable
upon the earlier of September 17, 2005 or Amerex executing a minimum of
$1,000,000, $3,000,000, $5,000,000 and $10,000,000, in value of transactions
over our online electronic trading system
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a highly competitive 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. See "Forward-Looking Statements and Associated
Risks" in Part I of this annual report.
As a development stage company with a limited operating history in a new and
rapidly changing industry, it is difficult to evaluate our business and
prospects.
We are a development stage company. Our activities to date have
concentrated on planning and developing our electronic trading system for
trading bandwidth and other telecommunications products. 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 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 secure participation in our electronic
trading system and the creation of a neutral network where participants can
interconnect.
The success of our online electronic trading system depends upon the
creation of a network of physically interconnected users. To facilitate the
creation of such a network we have deployed leased switching capacity in nine
major metropolitan areas in the United States and one in London, England. There
is a risk that we may not be able to enter into sufficient contractual
arrangements on favorable terms with participants.
We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
At December 31, 1999, our accumulated deficit since inception was
$12,664,654. For the year ended December 31, 1999, we incurred a net loss of
$9,298,789. 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 not recorded any 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 in the
future.
If our electronic trading system does not achieve commercial acceptance, our
results will suffer.
We will rely largely on a single source, made up of fees and
commissions from transactions facilitated on our electronic trading system and
consulting services, for our revenues for the foreseeable future. Online trading
of telecommunications bandwidth and minutes currently has only limited market
acceptance. As a result, our future ability to gain commercial acceptance of our
electronic trading system is critical to our success. Any failure to
successfully gain commercial acceptance of our electronic trading system would
not only have a material adverse effect on our business and results of operation
but also on our ability to seek additional revenue opportunities.
We may need additional capital in the future and it may not be available on
acceptable terms.
We may need additional working capital for additional 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 will need to
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raise additional funds if we have underestimated our capital needs or if we
incur unexpected expenses. We cannot assure you that such financings will be
available in amounts or on terms needed to meet our requirements, or at all.
Further, our lack of tangible assets to pledge could prevent us from
establishing a source of financing. The inability to raise all needed funding
would adversely affect our ability to successfully implement the objectives of
our business plan.
We may not be able to compete successfully against current and future
competitors.
The market for online bandwidth and minutes trading services is new,
rapidly evolving and highly competitive, as are the online commerce and
business-to-business 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 E-Speed currently operate online exchanges and have large
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 electronic trading system.
In addition, we compete with companies who trade, broker or otherwise
assist in the buying and selling of telecommunications bandwidth and minutes.
Therefore, we currently or potentially compete with a variety of other
companies, including lead-generation services and traditional offline brokers.
Many companies, such as Band-X, the GTX, Arbinet, and Asia Capacity Exchange,
offer e-commerce services to buyers and sellers of bandwidth and other
telecommunications products. The increased use and acceptance of any other
method of facilitating the buying and selling of excess telecommunications
bandwidth and minutes may adversely impact the commercial viability of our
electronic trading system.
Large telecommunications companies have the ability and resources to
compete in the online bandwidth and minutes trading services market if they
choose to do so, including launching their own online exchanges or other trading
services. Many of our competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we have. In addition, a number of these competitors may combine or
form strategic partnerships. As a result, our competitors may be able to offer,
or bring to market earlier, products and services that are superior to our own
in terms of features, quality, pricing or other factors. Our failure to compete
successfully with any of these companies could have a material adverse effect on
our business and results of operations.
Increased pressure created by any present or future competitors, or by
our competitors collectively, could have a material adverse effect on our
business and results of operations. Increased competition may result in reduced
commissions and loss of market share. Further, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on our business and results of operations. There can be
no assurance that we will be able to compete successfully against current and
future competitors. In addition, new technologies and the expansion of existing
technologies may increase the competitive pressures on us.
We may become subject to regulation by the Commodity Futures Trading Commission
depending on the types of products and services we eventually introduce.
We propose to develop an electronic trading system 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. Forward contracts, which 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 electronic trading
system 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.
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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 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
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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 to the Internet
and other online services is uncertain and may take years to resolve.
We plan to facilitate transactions between numerous customers residing
in various states and foreign countries, and such jurisdictions may claim that
we are required to qualify to do business as a foreign corporation in each such
state and foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our business
and results of operations.
We may face liability for information retrieved from our 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
electronic trading system 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 trading system and the volume of
trading that is facilitated. Any system interruptions that result in the
unavailability of our website or reduced performance of the electronic trading
system could reduce the volume of bandwidth traded and the attractiveness of our
website as a means for such trading.
11
<PAGE>
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 electronic trading system
or increased trading volume through our online trading or transaction-processing
systems may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service and impaired quality and speed of
trade processing, any of which could have a material adverse effect on our
business and results of operations.
Our business and operations would suffer in the event of system failures.
Our success, in particular our ability to successfully facilitate
bandwidth trades and provide high-quality customer service, largely depends on
the efficient and uninterrupted operation of our computer and communications
hardware systems. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
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 our electronic 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 electronic trading system 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.
The development of the electronic 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
our electronic trading system and proprietary technology to user requirements or
emerging industry standards. Our failure to adapt in a timely manner for
technical, legal, financial or other reasons, to changing market conditions or
customer requirements, could have a material adverse effect on our business and
results of operations.
If we do not effectively manage growth, our ability to provide trading services
will suffer.
To manage the expected growth of our operations and personnel, we will
be required to improve existing and implement new transaction-processing,
operational and financial systems, procedures and controls, and to expand, train
and manage a growing employee base. Further, we will be required to maintain and
expand our relationships with various hardware and software vendors, Internet
and other online service providers and other third parties necessary to our
business. If we are unable to manage growth effectively, we will be materially
adversely affected.
We need to hire and retain qualified personnel to sustain our business.
We are currently managed by a small number of key management and
operating personnel. We do not maintain "key man" insurance on, any employee.
Our future success depends, in part, on the continued service of our key
executive, management, and technical personnel, many of whom have only recently
been hired, and our ability to attract highly skilled employees. If any key
officer or employee were unable or unwilling to continue in 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.
12
<PAGE>
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 our electronic trading system 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. We cannot assure you that
we will be able to secure significant protection for any of our intellectual
property. It is possible that our competitors or others will adopt product or
service names similar to our marks, thereby inhibiting our ability to build
brand identity and possibly leading to customer confusion.
We generally have entered into agreements containing confidentiality
and non-disclosure provisions with our employees and consultants who have
limited access to and distribution of our software, documentation and other
proprietary information. We cannot assure you that the steps we take will
prevent misappropriation of our technology or that agreements entered into for
that purpose will be enforceable. Notwithstanding the precautions we have taken,
it might be possible for a third party to copy or otherwise obtain and use our
software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford us little or no
effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret
protection may not be available in every country where our services are made
available online. In the future, we may also need to file lawsuits to enforce
our intellectual property rights, protect our trade secrets, and determine the
validity and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on our business and
results of operations.
We may not be able to secure licenses for technology from third parties on
commercially reasonable terms.
We rely on a variety of software and hardware technologies that we
license from third parties, including our database and Internet server software,
components of our online trading software, and transaction-processing software
which is used in our electronic trading system to perform key functions. We
cannot assure you that these third party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of our ability to
maintain or obtain upgrades to any of these technology licenses could result in
delays in completing any proprietary software enhancements and new developments
until equivalent technology could be identified, licensed or developed and
integrated. Any such delays could have a material adverse effect on our business
and results of operations.
The volatility of our securities prices may increase.
The market price of our common stock has in the past been, and may in
the future continue to be, volatile. A variety of events may cause the market
price of our common stock to fluctuate significantly, including:
o quarter to quarter variations in operating results;
o adverse news announcements;
o the introduction of new products and services;
o market conditions in the telecommunications industry in
general, Internet-based services and e-commerce; and
o general market conditions.
In addition, the stock market in recent years has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many companies in our business and that
often have been unrelated to the operating performance of such companies. These
market fluctuations may adversely impact the price of our common stock.
13
<PAGE>
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 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 will likely exercise the options 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in Part II of this
report:
o Report of Independent Public Accountants.
o Consolidated Balance Sheet (Restated) as of December 31, 1999
and December 31, 1998
o Consolidated Statement of Operations (Restated) for the years
ended December 31, 1999, December 31, 1998, and December 31,
1997
o Consolidated Statement of Stockholders' Equity (Restated) for
the years ended December 31, 1997, December 31, 1998 and
December 31, 1999
o Consolidated Statement of Cash Flows (Restated) for the years
ended December 31, 1999, December 31, 1998, and December 31,
1997
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.
14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of RateXchange Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of RateXchange
Corporation and Subsidiaries (a Delaware corporation) (a development stage
company) as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998 (1999 and 1998 restated - see Note 3) and for
the period from September 30, 1998 (beginning of development stage) to December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The Company's consolidated
statement of operations, stockholders' equity and cash flows for the year ended
December 31, 1997 were audited by other auditors whose report dated February 29,
2000, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RateXchange Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and cash flows from the years ended December 31,
1999 and 1998 and for the period from September 30, 1998 (beginning of
development stage) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
San Francisco, California
November 9, 2000
15
<PAGE>
INDEPENDENT AUDITORS REPORT
To the
Board of Directors and Stockholders
of RateXchange Corporation and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of RateXchange Corporation (previously named
NetAmerica.com Corporation) (a Delaware corporation) (a development stage
company) for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted an audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows from the year ended December 31, 1997 for RateXchange Corporation
(previously named NetAmerica.com Corporation), in conformity with generally
accepted accounting principles.
Crouch, Bierwolf & Chisholm
February 29, 2000
Salt Lake City, Utah
16
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION
(A Development Stage Company)
<CAPTION>
CONSOLIDATED BALANCE SHEET
ASSETS December 31,
----------------------------
1999 1998
(As restated) (As restated)
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 536,615 $ 528,516
Interest receivable 150,608 1,638
Prepaid expenses 11,647 --
Notes receivable on sales of common stock 1,590,319 300,000
Short term investments 387,500 --
------------ ------------
Total current assets 2,676,689 830,154
Property and equipment (net of accumulated depreciation of $18,677) 188,891 --
Other assets
Investment in affiliate 75,000 --
Deposits 103,305 --
------------ ------------
Total assets $ 3,043,885 $ 830,154
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,840,056 $ 129,500
Short term debt 885,000 --
------------ ------------
Total current liabilities 2,725,056 129,500
Stockholders' equity
Common stock, $.0001 par value; 300,000,000 shares
authorized; issued and outstanding: 14,087,425 shares
and 7,243,023 shares in 1999 and 1998 1,409 724
Additional paid in capital 13,225,824 4,065,795
Retained deficit (12,664,654) (3,365,865)
Accumulated other comprehensive loss (243,750) --
------------ ------------
Total stockholders' equity 318,829 700,654
------------ ------------
Total liabilities and stockholders' equity $ 3,043,885 $ 830,154
============ ============
<FN>
See notes to financial statements.
</FN>
</TABLE>
17
<PAGE>
RATEXCHANGE CORPORATION
(A Development Stage Company)
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Beginning of
Development
Stage
For the Year For the Year For the Year (September 30,
ended ended 1998) though
December 31, ended December December 31, December 31,
1999 31, 1998 1997 1999
(As restated) (As restated) (As restated)
--------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUE $ -- $ -- $ -- $ --
EXPENSES
Selling, general and administrative 7,491,447 2,161,253 200 9,652,700
(includes non-cash expenses of $3,158,415
in 1999 and $2,020,376 in 1998)
Write off advances to potential investee 413,681 885,000 -- 1,298,681
Depreciation and amortization 18,676 -- -- 18,676
Purchase of subsidiaries 1,507,408 89,710 -- 1,597,118
------------ ------------ ------------ ------------
Total expenses 9,431,212 3,135,963 200 12,567,175
OTHER INCOME (EXPENSES)
Interest income 151,496 2,214 -- 153,710
Interest expense (19,073) (10,773) -- (29,846)
------------ ------------ ------------ ------------
Loss before taxes (9,298,789) (3,144,522) (200) (12,443,311)
Income tax provision (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (9,298,789) $ (3,144,522) $ (200) $(12,443,311)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.72) $ (1.92) --
Weighted average number
of common shares 12,863,020 1,636,919 200,000
============ ============ ============
<FN>
See notes to financial statements.
</FN>
</TABLE>
18
<PAGE>
RATEXCHANGE CORPORATION
(A Development Stage Company)
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Number Accumulated
of Shares other
of compre- Compre-
Common Par Paid-In Retained hensive hensive
stock Value Capital Deficit loss loss
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 200,000 $ 20 $ 219,823 $ (221,143) -- --
Contribution by officer/directors -- -- 1,300 -- -- --
Comprehensive and net loss -- -- -- (200) -- (200)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 200,000 20 221,123 (221,343) -- --
Shares issued for services at $.001 1,000,000 100 900 -- -- --
Shares issued for acquisition at $.001 2,400,000 240 2,160 -- -- --
Shares issued for conversion of
debt at $.34 1,399,773 140 1,492,998 -- -- --
Shares issued for services at $1.00 87,000 9 92,794 -- -- --
Shares issued for cash at $1.07 1,106,250 110 1,179,890 -- -- --
Less: Offering costs -- -- (118,000) -- -- --
Shares issued for notes receivable
at an average price of $0.29 1,050,000 105 1,119,930 -- -- --
Warrants issued at $2.00 per share
(Note 11) -- -- 74,000 -- -- --
Comprehensive and net
loss (As restated) -- -- -- (3,144,522) -- (3,144,522)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 7,243,023 724 4,065,795 (3,365,865) -- --
1998 (As restated)
Options/Warrants issued from $.05
to $2.75 per share (Note 11) -- -- 1,448,441 -- -- --
Shares issued for cash and notes
at $0.10 per share (Note 8) 916,574 92 977,618 -- -- --
Shares issued for cost
reimbursement at $0.10 per share
(Note 8) 322,500 32 343,979 -- -- --
Shares issued for cash and notes
at $1.07 per share (note 8) 3,870,938 387 4,047,713 -- -- --
</TABLE>
19
<PAGE>
RATEXCHANGE CORPORATION
(A Development Stage Company)
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Number of Accumulated
shares of other Compre-
Common Par Paid-In Retained compre- hensive
Stock Value Capital Deficit hensive loss loss
------------ -------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued for conversion 193,186 19 206,898 -- --
of A1 Internet debt at $1.07
(Note 7 & Note 8)
Shares issued for services at
$1.07 per share (Note 8) 268,500 27 287,206 -- --
Shares issued for note
conversion at $1.00 per share
(Note 8) 30,000 3 31,998 -- --
Shares issued for services at
$1.07 per share (Note 8) 30,000 3 31,998 -- --
Shares issued for cash at
$1.60 per share (net) (Note 8) 515,188 52 628,220 -- --
Shares issued for services at
$1.60 per share (Note 8) 122,518 12 196,017 -- --
Shares issued to acquire
outstandinq shares of
RateXchange at $1.60 per
share (Note 6 & Note 8) 574,998 58 919,942 -- --
Comprehensive loss:
Net loss (As restated) (9,298,789) $(9,298,789)
Other comprehensive loss:
Change in unrealized
loss on securities (243,750) (243,750)
------------
Comprehensive loss $(9,542,539)
------------ -------- ------------ -------------- ------------ ============
Balance, December 31, $14,087,425 $1,409 $13,225,824 $(12,664,654) $(243,750)
1999 (As restated) ============ ======== ============ ============== ============
<FN>
See notes to financial statements.
</FN>
</TABLE>
20
<PAGE>
RATEXCHANGE CORPORATION
(A Development Stage Company)
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Beginning of
the
Development
Stage
For the Year For the Year September 30,
Ended Ended For the 1998 to
December 31, December 31, Year Ended December 31,
1999 1998 December 1999
(As restated) (As restated) 31, 1997 (As restated)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,298,789) $ (3,144,522) $ (200) $(12,443,311)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 18,676 -- -- 18,676
Write off advances to potential investee 206,898 -- -- 206,898
Common stock issued for services/expenses 1,672,954 1,946,376 -- 3,619,330
Warrants for purchase of common stock issued for
services 1,485,461 74,000 -- 1,559,461
Purchase of outstanding shares of RateXchange 1,507,408 -- -- 1,507,408
Increase in interest receivable and prepaid
expenses (160,617) (1,638) -- (162,255)
Increase (decrease) in accounts payable and
accrued expenses 1,601,241 129,300 (1,100) 1,730,541
------------ ------------ ------------ ------------
TOTAL (2,966,768) (996,484) (1,300) (3,963,253)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of equipment (207,568) -- -- (207,568)
Security deposits (103,305) -- -- (103,305)
Advances to A-1 Internet (631,251) -- -- (631,251)
Investment in Telenisus Corporation (75,000) -- -- (75,000)
------------ ------------ ------------ ------------
TOTAL (1,017,124) -- -- (1,017,124)
CASH FLOWS FROM FINANCING ACTIVITIES
Loans and other debt 410,000 -- -- 410,000
Proceeds from common stock sales 3,581,991 1,525,000 1,300 5,106,991
------------ ------------ ------------ ------------
TOTAL 3,991,991 1,525,000 1,300 5,516,991
------------ ------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 8,099 528,516 -- 536,615
CASH and CASH EQUIVALENTS BEGINNING OF YEAR 528,516 -- -- --
------------ ------------ ------------ ------------
CASH and CASH EQUIVALENTS END OF YEAR $ 536,615 $ 528,516 $ -- $ 536,615
============ ============ ============ ============
Supplementary cash flow information
Cash paid for:
Interest -- -- -- --
Taxes -- -- -- --
Stock issuances for:
Services and expenses $ 3,158,415 $ 2,020,376 -- $ 5,178,791
Purchase of outstanding shares of RateXchange $ 920,000 -- -- $ 920,000
Commission on stock sales $ 196,029 -- -- $ 196,029
A1 Internet settlement $ 206,898 -- -- $ 206,898
<FN>
See notes to financial statements.
</FN>
</TABLE>
21
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 BACKGROUND AND HISTORY
RateXchange Corporation (the Company) is a consolidated group of
companies including the parent corporation, RateXchange Corporation
and its subsidiaries, RateXchange I, Inc. and PolarCap, Inc.
(PolarCap).
RateXchange Corporation (formerly Netamerica.com Corporation and
formerly Venture World, Ltd.) is a Delaware corporation organized on
May 6, 1987 for the purpose of seeking out and developing any general
business opportunity.
RateXchange I, a Delaware corporation organized in June 1999, is in
the business of business-to-business e-commerce seeking to develop
new exchange services for the telecommunications market.
PolarCap is a California corporation organized on April 7, 1997 for
the purpose of investing in and developing rights to a variety of
software technologies related to multimedia, development tools and
application technologies. PolarCap is in the process of being
liquidated.
The Company is in its planning stages for its eventual day to day
business and has not generated any revenues from its planned
operations. The Company is defined as a development stage company in
accordance with Financial Accounting Standard No. 7. The Company had
no operations or business before September 30, 1998. Cumulative
results of operations since the start of the development stage,
September 30, 1998, when the Company purchased PolarCap, have been
reported separately.
From inception, the Company has been primarily engaged in
organizational activities, including designing and developing its
website, recruiting personnel, establishing office facilities,
raising capital and developing a marketing plan. The Company began
revenue generation activities in 1999 but no revenue has been
generated as of December 31, 1999. Accordingly, the Company is
classified as a development stage company. Successful completion of
the Company's development program and, ultimately, the attainment of
profitable operations is dependent upon future events, including
obtaining adequate financing to fulfill its development activities,
increasing its customer base, implementing and successfully executing
its business and marketing strategy and hiring and retaining quality
personnel. Negative developments in any of these conditions could
have a material adverse effect on the Company's business, financial
condition and results of operations.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
RateXchange Corporation and its subsidiaries. Collectively, these
entities are referred to as the Company. All significant intercompany
transactions and accounts have been eliminated.
Cash, and Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
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 which 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
22
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or discounts. Unrealized gains and losses, net of the related tax
effect, on available-for-sale securities are reported as a separate
component of other comprehensive income in shareholders' equity until
realized. Premiums and discounts are amortized or accreted over the
life of the related investment security as an adjustment to yield
using the effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses for securities are
included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Management determines the appropriate classification of investments
at the time of purchase and reevaluates such determination at each
balance sheet date. To date, all marketable securities have been
classified as available-for-sale and are carried at fair value with
unrealized gains and losses, if any, included in stockholders'
equity. These securities are reported as short-term investments on
the consolidated balance sheet. Realized gains and losses and
declines in value of securities judged to be other than temporary are
included in other income, net. Interest and dividends on all
securities are included in other income, net.
Nonmonetary Transactions
Nonmonetary transactions are transactions for which no cash was
exchanged and for which shares of common stock or options or warrants
to purchase common stock were exchanged for goods and services. These
transactions are recorded at the fair market value of the equity
instruments issued at the time of the transaction and reported in the
statement of operations as services are rendered.
Loss Per Share and Weighted Average Shares Outstanding
Basic loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Options and
warrants on shares of common stock were not included in computing
diluted loss per share because their effects were antidilutive
(2,990,000 options and 625,000 warrants).
Deposits
The Company issued a letter of credit as security in connection with
an operating lease of its office. This letter of credit is secured by
a certificate of deposit in the amount of $103,305.
Comprehensive loss
Comprehensive loss includes the net loss reported on the statement of
operations and changes in the fair value of investments classified as
available for sale which is reported as a component of stockholders'
equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and
liabilities and results of operations. Actual results could differ
from those estimates.
NOTE 3 RESTATEMENT OF PREVIOUSLY REPORTED RESULTS
As part of the Company's overall strategy, the Company decided to retain a
national accounting firm. In July 2000, the Company selected Arthur Andersen,
LLP as its independent auditors. As a result of the Company's review, certain
adjustments were determined necessary to the Company's previously reported
financial results for the years ended December 31, 1998 and 1999. These
adjustments relate to the valuation of common stock issued in exchange for
services received, conversion of bridge financing and arrangement of financing,
and other miscellaneous adjustments to the timing of the recognition of certain
expenses. Management has made all adjustments considered necessary for the
restated financial statements to be fairly presented.
The following statements of operation and balance sheets reconcile previously
reported and restated information.
23
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Ratexchange Improper Adjustment
Corporation valuation To offset to record
Reconciliation of Statement of assigned to write off or
Operations Year ended December 31, Ratexchange shares, of advances reclassify
1999 Corporation options and Purchase of with market expenses in
as warrants outstanding value of the Ratexchange
previously issued for shares of shares appropriate Corporation as
reported services Polarcap received period restated
-------------- --------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ -- $ -- $ -- $ -- $ -- $ --
EXPENSES
Selling, general & administrative 5,048,614 2,426,440 3,727 6,050 6,616 7,491,447
Write off advances to potential
investee 863,750 (450,069) 413,681
Depreciation and amortization 25,093 (14,952) 8,535 18,676
Purchase of subsidiaries 1,537,300 (29,892) 1,507,408
------------ ------------ ------------ ------------ ------------ ------------
Total expenses 7,474,757 2,426,440 (41,117) (444,019) 15,151 9,431,212
OTHER INCOME (Expenses)
Interest income 151,276 220 151,496
Interest expense (13,019) (6,054) (19,073)
Other income 220 (220) --
Loss allocated to minority interest 7,000 (7,000) --
------------ ------------ ------------ ------------ ------------ ------------
Loss before taxes (7,329,280) (2,426,440) 41,117 444,019 (28,205) (9,298,789)
Income tax provision -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $ (7,329,280)$ (2,426,440) $ 41,117 $ 444,019 $ (28,205) $ (9,298,789)
============ ============ ============ ============ ============ ============
Basic and diluted net loss per share $ (0.57) $ (0.72)
============ ============
Weighted average number of shares 12,863,020 12,863,020
============ ============
</TABLE>
24
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Ratexchange Corporation Improper
Reconciliation of Statement of Operations valuation
Year ended December 31, 1998 assigned to Adjustment
Ratexchange shares, to record
Corporation options and Purchase of expenses in
as warrants outstanding the Ratexchange
previously issued for shares of appropriate Corporation as
reported services Polarcap period restated
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE $ -- $ -- $ -- $ -- $ --
EXPENSES
Selling, General & Administrative 174,176 1,918,277 68,800 2,161,253
Write off advances to potential investee 885,000 885,000
Depreciation and Amortization 4,363 (3,738) (625) --
Purchase of subsidiary 44,855 44,855 89,710
----------- ----------- ----------- ----------- -----------
Total Expenses 1,108,394 1,918,277 41,117 68,175 3,135,963
OTHER INCOME (Expenses)
Interest income 2,214 2,214
Interest expense (10,773) (10,773)
----------- ----------- ----------- ----------- -----------
Loss before taxes (1,116,953) (1,918,277) (41,117) (68,175) (3,144,522)
----------- ----------- ----------- ----------- -----------
Income tax provision -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS $(1,116,953) $(1,918,277) $ (41,117) $ (68,175) $(3,144,522)
=========== =========== =========== =========== ===========
Basic and diluted net loss per share $ (0.68) $ (1.92)
=========== ===========
Weighted average number of shares 1,636,919 1,636,919
=========== ===========
</TABLE>
25
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Balance Sheet
Reconciliation
As of December 31, 1999 Improper To offset Adjustments
valuation write off of to
Ratexchange assigned to advances expenditures
Corporation shares, options Purchase of with market and funds
as and warrants outstanding value of received in the Ratexchange
originally Adjustments issued for shares of shares appropriate Corporation
reported made in 1998 services Polarcap received period as restated
----------- ------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 451,615 $ 85,000 $ 536,615
Interest receivable 150,608 150,608
Prepaid expenses 5,814 5,833 11,647
Short term investments $ 387,500 387,500
Note receivable on sales
of common stock 1,787,531 (197,212) 1,590,319
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total current assets 2,395,568 -- -- -- 190,288 90,833 2,676,689
Property & equipment (Net) 175,349 $ (6,875) 20,417 188,891
Other assets
Investment in affiliate 75,000 75,000
Goodwill (41,117) $ 41,117 --
Deposits 103,305 103,305
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total assets $ 2,749,222 $ (47,992) $ -- $ 41,117 $ 190,288 $ 111,250 $ 3,043,885
=========== =========== =========== =========== =========== =========== ============
Current liabilities
Accounts payable and
accrued expenses $ 1,639,301 $ 61,300 $ 139,455 $ 1,840,056
Accrued taxes 85,000 (85,000) --
Short term debt 800,000 85,000 885,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total current liabilities 2,524,301 61,300 -- -- -- 139,455 2,725,056
Stockholders' equity
Common stock 1,409 1,409
Additional paid in capital 8,891,088 1,918,277 $ 2,426,440 (9,981) 13,225,824
Accumulated other
comprehensive loss (243,750) (243,750)
Retained deficit (8,667,576) (2,027,569) (2,426,440) $ 41,117 444,019 (28,205) (12,664,654)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total stockholders' equity 224,921 (109,292) -- 41,117 190,288 (28,205) 318,829
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total liabilities and
stockholders' equity $ 2,749,222 $ (47,992) $ -- $ 41,117 $ 190,288 $ 111,250 $ 3,043,885
=========== =========== =========== =========== =========== =========== ============
</TABLE>
26
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Balance Sheet Reconciliation Improper
As of December 31, 1998 valuation
assigned to Adjustment
Ratexchange shares, to record
Corporation options and Purchase of expenditures
as warrants outstanding in the Ratexchange
originally issued for shares of appropriate Corporation
reported services Polarcap period as restated
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 528,516 $ 528,516
Interest receivable 1,638 1,638
Prepaid expenses
Note receivable on sales of common stock 300,000 300,000
----------- ----------- ----------- ----------- -----------
Total current assets 830,154 830,154
Property & equipment (Net) 6,875 $ (6,875)
Other assets
Investment in affiliate
Goodwill 41,117 $ (41,117)
Deposits
----------- ----------- ----------- ----------- -----------
Total assets $ 878,146 -- $ (41,117) $ (6,875) $ 830,154
=========== =========== =========== =========== ===========
Current liabilities
Accounts payable and accrued expenses $ 68,200 $ 61,300 $ 129,500
----------- ----------- ----------- ----------- -----------
Total current liabilities 68,200 61,300 129,500
Stockholders' equity
Common Stock 724 724
Additional paid in capital 2,147,518 $ 1,918,277 4,065,795
Retained deficit (1,338,296) (1,918,277) (41,117) (68,175) (3,365,865)
Accumulated other comprehensive loss
Notes receivable on sale of common stock -- --
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 809,946 -- (41,117) (68,175) 700,654
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $ 878,146 $ -- $ (41,117) $ (6,875) $ 830,154
=========== =========== =========== =========== ===========
</TABLE>
27
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
The following describes the nature of the reconciling items:
The valuation assigned to shares issued for services -
These adjustments represent the effect of shares, options and warrants
that were issued in various transactions in exchange for services and
were originally recorded at values below the then fair value of the
Company's stock.
Purchase of outstanding shares of Polarcap -
In the previously reported financial statements the Company incorrectly
recorded its purchase of the outstanding shares of Polarcap in 1998
using purchase accounting. Accordingly, the Company recorded goodwill
of $89,710 that was previously amortized and fully written off in 1999.
The purchase of the outstanding shares of Polarcap should have been
reflected as an acquisition of assets with the excess consideration
charged to expense immediately. This adjustment records the excess
consideration of $41,117 charged to expense.
Net the writeoff of advances against the value of shares received -
To compensate the Company for the write off of advances to A-1
Internet, in September 1999, the Company received common stock in Halo
Corporation with a fair value of $631,250. At December 31, 1999 the
value of this investment was $387,500. The Company improperly wrote
down the carrying value of the investment.
Adjustments to record expenses in the appropriate period -
These adjustments relate to miscellaneous accruals that were not
reflected in the appropriate period.
NOTE 4 INCOME TAXES
As of December 31, 1999, the Company had a federal net operating loss
carryforward of $9,293,259 which will expire in the years 2007 through
2020 for state and federal purposes. This net operating loss
carryforward has not been reflected in the financial statements as the
likelihood of future tax benefit from such operating loss carryforwards
is remote. Accordingly, the potential tax benefits of the net operating
loss carryforwards, estimated based upon current tax rates at December
31, 1999, have been offset by a valuation allowance in the same amount.
Significant components of the company's deferred tax assets and
liabilities are as follows
December 31,
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforward $ 3,773,063 $ 1,314,334
Options and warrants for services 603,097 74,000
Start up cost carryforward 1,726,967
Unrealized loss on securities 98,861
----------- -----------
Gross deferred tax assets 6,161,988 1,388,334
Valuation allowance (6,161,988) (1,388,334)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The net change in the valuation allowance for the year ended December
31, 1999 and 1998 was an increase of $4,773,654 and $3,279,693.
28
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 5 PROPERTY AND EQUIPMENT
The Company capitalizes purchases of long-lived assets that are
expected to give benefit to the Company over the life of the asset. The
Company also capitalizes improvements and costs that increase the value
of or extend the life of the asset.
Capitalized assets are depreciated over the estimated useful lives of
the assets (5 years for furniture and fixtures, 3 years for computer
equipment) on a straight line basis.
Property and Equipment consists of the following:
December 31,
1999 1998
--------- --------
Furniture and fixtures $ 10,520 $ --
Computer equipment and software 197,047 --
--------- --------
207,567 --
Less: Accumulated depreciation (18,676) --
--------- --------
$ 188,891 $ --
========= ========
Depreciation expense for 1999 is $18,676.
NOTE 6 ACQUISITION OF SUBSIDIARY
On September 30, 1998, the Company purchased all of the outstanding
stock of PolarCap, Inc. for 2,400,000 shares of stock. At September 30,
1998 Polarcap had negative net worth of $87,310. The value of the stock
was issued at $.001, for a cost of $2,400 in 1998. The Company expensed
$89,710 representing the excess of consideration given in shares issued
and liabilities assumed for the assets of Polarcap.
In the third quarter of 1999, the Company purchased all the outstanding
common stock of Rate Exchange, Inc., a Colorado corporation, seeking to
develop new exchange services for the telecommunications market. The
Company paid 574,998 in shares of common stock and $450,000 in a note
for a total cost of $1,395,000 ($920,000 in stock and $450,000 in a
note plus out of pocket expenses of $25,000). Under the terms of the
transaction two of the owners/employees of RateXchange became employees
of the company responsible for exploring the development of the
business. On the date of purchase, RateXchange had negative net worth
of $112,408. The company expensed a total of $1,507,408 representing
the excess of consideration given in shares and notes issued and
liabilities assumed for the assets of RateXchange.
NOTE 7 ADVANCES TO POTENTIAL INVESTEE
On September 30, 1998 the Company negotiated, and later terminated by
mutual agreement, a purchase of 100% of the ownership of NetAmerica,
Inc., subsequently renamed A1 Internet, Inc., an Internet services
provider company based in Seattle, Washington. Between the time the
Company agreed to purchase (September 30, 1998), which was never
consummated, and the time the termination agreement was reached (March
1999), the Company advanced $1,738,769 ($1,531,871 in cash and $206,898
in stock) the cash portion of which was eventually written off as bad
debt. After the March agreement was reached, A1 Internet agreed to
repay certain of the costs incurred prior to the termination. As part
of its plan to repay the costs, A1 Internet informed the Company that
it had entered into an agreement with another potential acquiror, Halo
Holdings of Nevada, Inc., to sell substantially all of its assets in
exchange for shares of common stock and assumption of certain
liabilities, including A1 Internet's obligations to the Company. In
September 1999, after further negotiations, the Company agreed with A1
Internet to the following settlement:
29
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
o The Company retained certain rights to the name "NetAmerica;"
o A1 Internet transferred to the Company its interest in 100,000
shares of Halo restricted stock;
o The Company agreed to pay $85,000 of past due payroll taxes of A1
Internet from 1998; and
o All further obligations of the Company to issue stock or options
to A1 Internet were canceled.
NOTE 8 COMMON STOCK TRANSACTIONS
In general all stock transactions conducted during the period for which
no cash was exchanged and for which shares of stock were exchanged for
assets or goods and services were recorded at fair market value. A
number of shares as indicated below were issued at below market values.
The Company recorded expense related to these issues of $1,519,047 in
1999 and $2,007,203 in 1998.
Common stock transactions during 1999 are as follows:
During the fourth quarter of 1998, the board of directors approved
several stock transactions that were not completed and issued until
1999:
o 916,574 shares of stock issued for $91,657 in notes to related
parties. ($0.10) (January). The board has placed restrictions on
this stock so that the stock cannot be sold, traded, assigned,
transferred or pledged until the Company reaches $10,000,000 in
gross revenues in a one year time period.
o 322,500 shares issued for cost reimbursements of $32,250 ($.10
per share) (January).
The remaining stock issuances were approved and issued in 1999:
o 758,438 shares of stock were issued for $728,100 (Net of $80,900
commissions). ($1.07) (February).
o 3,112,500 shares of stock issued for $3,320,000 in notes to
related parties and other investors. ($1.07) (March).
o 268,500 shares of stock issued for $287,233 of legal and
consulting services. ($1.07) (March).
o 193,186 shares of stock issued for $206,898 of debt to creditors
of A1 Internet. ($1.07, average) (March and May).
o 30,000 shares of stock issued instead of a $30,000 outstanding
note payable. ($1.00) (March).
o 30,000 shares for services rendered of $32,000. ($1.07) (March).
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).
30
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 9 SUBSCRIPTIONS RECEIVABLE /NOTE RECEIVABLE- RELATED PARTY
In January 1999, the Company sold 916,574 shares in exchange for
$91,657 in notes payable to a related party and other investors at a
price of $.10 per share. (See Note 8 for restrictions placed on stock).
In March 1999, the Company sold 3,112,500 shares to a related party and
other investors in exchange for $3,320,000 in notes payable at a price
of $1.07 per share.
Of the total subscriptions receivable/note receivable issued during the
year of $3,411,657 and $300,000 issued in 1998, $1,924,126 was
collected. Interest is being assessed at 6.5% and accrued interest on
the subscription receivable was $150,608 at December 31, 1999. The
company has determined that 197,212 of the remaining receivables are
uncollectible and has written off these receivables.
Subsequent to year end, the board of directors of the Company waived
the interest on the purchase of 3,112,500 shares when the notes were
collected in full by February 25, 2000 (originally due by March 31,
2001).
NOTE 10 COMMITMENTS AND CONTINGENCIES
Future annual minimum lease payments under noncancelable operating
leases as of December 31, 1999 were:
Year
----
2000 $195,900
2001 200,112
2002 204,336
--------
$600,348
========
Rent expense totaled $42,077 in 1999.
The Company is also involved in the following legal matter as follows:
Gregory K. Martin v. NetAmerica., Inc. et al. In the spring of 1999,
Gregory K. Martin, a former officer of both NetAmerica (Seattle)(NAI)
and the Company, brought suit against the Company and others in the
Superior Court of Washington (Civil Action No. 99-2-09171-OSEA). The
suit related to, among other things, Mr. Martin's claims for
compensation, reimbursement for business expenses, certain insurance
benefits, payment of certain other obligations guaranteed by Mr. Martin
(or reimbursement of payments made by him as guarantor), payment of
certain tax and other obligations of a company referred to as
SRG/Quantum that were purportedly assumed by NAI and the Company,
issuance of options to purchase stock of the Company and other remedies
relating to the terminated acquisition and other transactions. The suit
was conditionally settled by an agreement dated May 22, 1999 among NAI
(referred to therein as "A1"), the Company and Mr. Martin (with William
Fritts undertaking certain limited obligations). Pursuant to that
agreement, Mr. Martin took a voluntary non-suit, i.e. dismissed his
suit without prejudice. Mr. Martin may have the ability to attempt to
void the settlement pursuant to noncompliance on the part of NAI to
their part of the settlement. As of December 31, 1999, the Company has
fulfilled all of its current obligations under the settlement
agreement.
31
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 11 OPTIONS/WARRANTS FOR PURCHASE OF COMMON STOCK
Stock Option Plans - Shareholders approved the 1999 RateXchange
Corporation Stock Option Plan during 1999 (1999 Plan). There are
3,000,000 options available under the plan that may be granted to
employees, officers, directors and consultants. The option plan allows
grantees to acquire shares of the Companys' common stock at a purchase
price generally equal to the fair market value on the date of grant.
Options generally expire five years from date of grant.
Separate from the 1999 Plan the Company has also issued warrants that
generally expire five years from the date of grant.
<TABLE>
A summary of warrant and option activity follows:
<CAPTION>
Warrants: 1999 1998
-------------------------------- --------------------------------
Number of Weighted average Number of Weighted average
shares exercise price shares exercise price
------ -------------- ------ --------------
<S> <C> <C> <C>
Outstanding at beginning of year 100,000 $ 2.00 -- $ --
Granted 525,000 1.69 100,000 2.00
Exercised -- -- -- --
Canceled -- -- -- --
------- -------- ------- --------
Outstanding at end of year 625,000 1.74 100,000 2.00
======= ======== ======= ========
Exercisable at end of year 625,000 1.74 100,000 2.00
======= ======== ======= ========
Options: 1999 1998
-------------------------------- --------------------------------
Number of Weighted average Number of Weighted average
shares exercise price shares exercise price
------ -------------- ------ --------------
Outstanding at beginning of year -- $ -- -- $ --
Granted 3,050,000 2.24 -- --
Exercised -- -- -- --
Canceled 60,000 2.50 -- --
--------- -------- ------- --------
Outstanding at end of year 2,990,000 2.23 -- --
========= ======== ======= ========
Exercisable at end of year 1,287,500 1.96 -- --
========= ======== ======= ========
</TABLE>
As permitted by Financial Accounting Standard No.123 "Accounting for
Stock-Based Compensation," the Company has elected to account for its
stock option plan under APB No.25 "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for
these plans when options were issued with exercise prices equal to or
greater than the fair market value of the Company's stock on the date
of grant.
32
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Had compensation cost for the stock option plan been determined based
on the fair value at the grant date consistent with FAS No.123, the
Company's net earnings and earnings per share are estimated as follows:
1999 1998
-------------- --------------
Net loss
As reported $ (9,298,789) $ (3,144,522)
Pro Forma $ (11,085,439) $ (3,144,522)
Net loss per share (basic and diluted)
As reported (0.72) (1.92)
Pro forma (0.86) (1.92)
============== =============
The weighted average fair value of options and warrants granted in 1999
was $0.73 and $1.04. The weighted average fair value of warrants
granted in 1998 was $0.74. Each option grant was valued at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
1999
--------------
Risk-free interest rate 5.7%
Dividend yield 0%
Volatility 100%
Average expected term (years) 2
==============
<TABLE>
Options and warrants issued to third party service providers under the
1999 plan or by resolution of the Board of Directors as of December 31,
1999 were:
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- -------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Warrant/ Exercise Contractual Warrants/ Exercise
exercise prices Options Price Life (years) Options Price
----------------- ------------ ------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ .05 - $ .99 275,000 $ .10 4.06 275,000 $ 0.10
$1.00 - $1.99 530,000 $ 1.55 4.17 325,000 $ 1.52
$2.00 - $2.75 850,000 $ 2.64 4.62 650,000 $ 2.61
----------------- ------------ ------------- ----------------- ------------ --------------
1,655,000 1,250,000
============ ============
</TABLE>
<TABLE>
Employee stock options outstanding and exercisable under the 1999 plan
as of December 31, 1999 were:
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- -------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Warrant/ Exercise Contractual Warrants/ Exercise
exercise prices Options Price Life (years) Options Price
----------------- ------------ ------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ .05 - $ .99 -- -- -- -- --
$1.00 - $1.99 -- -- -- -- --
$2.00 - $2.75 1,960,000 $ 2.38 4.65 662,500 $ 2.10
----------------- ------------ ------------- ----------------- ------------ --------------
1,960,000 662,500
============ ============
</TABLE>
33
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Certain options and warrants were issued during 1999 for less than fair
market value or for services rendered by non-employees for which the
Company recognized related expense of $2,327,350.
NOTE 12 SHORT TERM DEBT
The Company issued a note for $450,000 for the purchase of Rate
Exchange, Inc (Note 6). The note carried an interest rate of 6%. The
note was paid in January 2000.
During December 1999, RateXchange I Inc received $435,000 in short-term
loans in connection with a $2,000,000 bridge loan agreement reached
with various investors. The remaining $1,565,000 was received in
January and February 2000. The $2 million of bridge loans were used as
interim financing of RateXchange I Inc. activities. The loans bore
interest at 10% and were to mature six months from the completion of
the funding of the loan (completed February 2000). The notes were
convertible into RateXchange I, Inc. common stock at a price per share
to be determined in an anticipated subsequent financing of RateXchange
I. Purchasers of the notes also received warrants to purchase
RateXchange I common stock at $2.40 per share, subject to adjustment.
Subsequent to December 31,1999, as a result of the company's new
business strategy, the company offered to the investors in the $2
million bridge loan the right to convert their notes into RateXchange
Corporation common stock at an exchange rate of $5.00 per share. In
addition, the company agreed to issue such holders an aggregate of
500,000 warrants to purchase common stock at $5.00 per share. Any note
holders who declined this offer were entitled to rescind their original
investment and receive their principal back in full, including accrued
interest. As a result of this offer all notes, except $25,000, were
converted to new shares of RateXchange Corporation common stock.
NOTE 13 INVESTMENT IN AFFILIATE.
During 1999, the Company created a wholly owned subsidiary, Telenisus
Corporation, a Delaware corporation, for the purpose of providing
internet services to small to mid-sized corporations and
telecommunications service providers. The Company funded the initial
capital of Telenisus of $75,000. It subsequently loaned Telenisus
additional funds to start operations. Telenisus has funded operations
from its own equity and debt financing and has paid back the Company
all loans except for the initial capitalization of $75,000. As of
December 31, 1999, as a result of Telenisus' sale of additional shares
to new investors, the Company's interest in Telenisus had dropped to
less than 10% ownership and the Company is recording its investment in
Telenisus at cost.
NOTE 14 RELATED PARTY TRANSACTIONS
During 1998, the Company entered into a consulting contract with a
major shareholder that pays a monthly consulting fee plus an incentive
bonus for 1) any successful acquisition of business enterprises, or 2)
successful capital funding of a least $5,000,000 in 1998 or 1999. The
incentive awards are $250,000 in cash, warrants to purchase 250,000
shares of common stock at $1.00, and a mergers and acquisition fee for
any acquisition during 1998 or 1999. At December 31, 1999, the Company
accrued $315,800 in cash incentives relating to completed financing and
merger's and acquisitions fee based on the value of the RateXchange
acquisition.
NOTE 15 MINORITY INTEREST
During 1999, the Company issued 10% of the outstanding shares of its
subsidiary, RateXchange, to the chief executive officer of RateXchange
as an incentive for employment. The shares were issued at fair value
based upon the value of Ratexchange at the time of its acquisition.
34
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 16 SUBSEQUENT EVENTS
In March 2000, the Company completed a private placement in which it
sold 2,733,329 shares of restricted common stock at a subscription
price of $12 per share plus warrants to purchase 1,366,673 shares of
its common stock at an exercise price of $14.40 per share. The warrants
are immediately exercisable and expire in three years. After deducting
$2,665,000 for costs associated with the offering, the Company received
$30,135,000.
In 1999, RateXchange entered into a term sheet agreement with a vendor
to provide specialized consulting and computer programming to assist in
RateXchange's business plans and operations in the business-to-business
e-commerce niche it was developing. The term sheet was never finalized
into a formal agreement, but some services were provided, and certain
cash payments were made for the services that were rendered. The term
sheet also provided for the vendor to receive a stock position in
RateXchange of up to 10% for certain services. In early 2000 the
Company began discussions with the vendor concerning the 10% stock
position in RateXchange because the formal agreement was never
completed and the contemplated services were not fully provided. The
ultimate outcome of these discussions was uncertain at that time. In
August 2000, the Company reached an agreement for settlement of the
dispute with the vendor, whereby the Company issued 175,000 shares,
175,000 warrants and $100,000 in cash .The total value of the
settlement of $1.8 million is recorded in the Company's 2000 financial
statements.
In February 2000, RateXchange I Inc. closed a $2,000,000 convertible
note offering. The notes were convertible into RateXchange I, Inc.
common stock at a price per share to be determined in an anticipated
subsequent financing of RateXchange I. Purchasers of the notes also
received warrants to purchase RateXchange I common stock at $2.40 per
share, subject to adjustment. As a result of the company's new business
strategy the subsequent financing of RateXchange I did not occur.
Accordingly, the company offered to the note holders the right to
convert their notes into RateXchange Corporation common stock at an
exchange rate of $5.00 per share. In addition, the company agreed to
issue to such holders an aggregate of 500,000 warrants to purchase
common stock at $5.00 per share. All RateXchange I notes and warrants
have been converted into shares except one note for $25,000.
Shareholders authorized the 1999 Stock Option Plan during 1999.
Shareholders authorized the 2000 Stock Option Plan on April 20, 2000.
There are options to purchase 8,000,000 shares authorized for issuance
under both plans. On February 24, 2000, the Board authorized additional
options to purchase 4,290,000 shares outside of either plan. Total
options granted to employees during the first quarter of 2000 for less
than fair market value were 3,940,000 for which the Company is
recognizing related compensation expense, over the option vesting
periods, for the fair value of the stock on the date of grant, which
was $12, and the strike price of the options, which is $7.
In 2000, the company has also granted options to purchase 275,000
common shares to non-employee consultants for which the company has
recorded related expense of $2,131,250.
In October 2000, the Board of Directors approved and issued 2 million
options to the Company's new Chief Executive Officer. These options
were granted with a strike price equal to the fair value of the
Company's stock on the date of grant and vest over various periods.
On September 17, 2000, the Company entered into an alliance agreement
with Amerex Bandwidth, Ltd. Under this agreement, Amerex brokers will
execute trades for the sales or purchase of Internet protocol products,
telecommunications capacity and/or other telecommunications-related
products over the Company's electronic trading system and the company
will share in the revenues generated by the electronic trading system.
In connection with this agreement, the company issued to Amerex five
warrants for an aggregate of 2,300,000 shares of our common stock. One
warrant for 300,000 shares with an exercise price of $4.47 per share is
currently exercisable by Amerex. The remaining four warrants each for
35
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
500,000 shares and with exercise prices of $4.47 per share, $4.70 per
share, $4.92 per share and $5.37 per share, will become exercisable
upon the earlier of September 17, 2005 or Amerex executing a minimum of
$1,000,000, $3,000,000, $5,000,000 and $10,000,000, in value of
transactions over the company's online electronic trading system.
36
<PAGE>
PART III
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
<TABLE>
The following table sets forth information regarding the compensation
paid for services rendered during the last three completed fiscal years to our
Chief Executive Officer and other executive officers, as well as certain
executive officers of our subsidiary, RateXchange I, Inc., who we appointed
executive officers in February 2000, and whose annual salary, bonus and other
compensation exceeded $100,000 in 1999.
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- ------ -------
Name and Principal Restricted Securities
Position Other Annual Stock Underlying LTIP All Other
Year Salary Bonus Compensation Awards Options Payouts Compensation
---- ------ ----- ------------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas Cole (1) 1999 $126,000 $125,000 $0 $0 100,000 $0 $0
Chairman and Chief
Executive Officer 1998 N/A N/A N/A N/A N/A N/A N/A
1997 N/A N/A N/A N/A N/A N/A N/A
Edward Mooney (2) 1999 $90,000 $125,000 $0 $0 100,000 $0 $0
Executive Vice
President, 1998 N/A N/A N/A N/A N/A N/A N/A
Secretary and
Treasurer 1997 N/A N/A N/A N/A N/A N/A N/A
Donald Sledge (3) 1999 $94,653 $75,000 $0 $0 100,000 $0 $0
Chairman and Chief
Executive Officer 1998 N/A N/A N/A N/A N/A N/A N/A
1997 N/A N/A N/A N/A N/A N/A N/A
37
<PAGE>
Ross Mayfield (4) 1999 $87,619 $0 $0 $0 100,000 $0 $0
President
1998 N/A N/A N/A N/A N/A N/A N/A
1997 N/A N/A N/A N/A N/A N/A N/A
Paul Wescott (5) Chief 1999 $64,230 $0 $0 $0 150,000 $0 $0
Operating Officer
1998 N/A N/A N/A N/A N/A N/A N/A
1997 N/A N/A N/A N/A N/A N/A N/A
<FN>
(1) Mr. Cole was hired as an officer on April 1, 1999 and resigned in February
2000. Mr. Cole's annual salary was $168,000 plus a bonus, pursuant to his
employment agreement. Mr. Cole's bonus of $125,000 accrued at year end on
the Company's books; however, the bonus was not paid to Mr. Cole until
2000.
(2) Mr. Mooney was hired as an officer on April 1, 1999 and resigned as
Executive Vice President in February 2000 and as Secretary and Treasurer
in March 2000. Mr. Mooney's annual salary was $120,000 plus a bonus,
pursuant to his employment agreement. Mr. Mooney's bonus of $125,000
accrued at year end on the Company's books; however, the bonus was not
paid to Mr. Mooney until 2000.
(3) Mr. Sledge was hired on September 15, 1999 as one of our directors and as
the Chairman and CEO of RateXchange I, Inc., one of our subsidiaries. Mr.
Sledge was appointed our Chairman and Chief Executive Officer in February
2000. Mr. Sledge's annual salary at RateXchange was $300,000 plus a bonus,
pursuant to his employment agreement. Mr. Sledge also received
approximately $1,000 each month for car allowance and approximately $1,000
each month for payment of whole life insurance premiums.
(4) Mr. Mayfield was hired as an executive officer of RateXchange I, Inc., one
of our subsidiaries, in July 1999. While employed at RateXchange I, Mr.
Mayfield served, at various times during 1999, as Vice President of Sales
and Marketing, Chief Operating Officer and President. Mr. Mayfield's
annual salary at RateXchange I during 1999 was $165,000, plus a bonus,
pursuant to his employment agreement. We appointed Mr. Mayfield as our
President in February 2000.
(5) Mr. Wescott was hired as an executive officer of RateXchange I, Inc., one
of our subsidiaries, in September 1999. While employed at RateXchange I,
Mr. Wescott served, at various times during 1999, as an Executive Vice
President, Chief Operating Officer and Vice President of Business
Development. Mr. Wescott's annual salary at RateXchange I during 1999 was
$165,000, plus bonuses, pursuant to his employment agreement. We appointed
Mr. Wescott our Chief Operating Officer in February 2000.
</FN>
</TABLE>
38
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
The following table sets forth information regarding options granted
during fiscal year 1999 to the named executive officers. No stock appreciation
rights were granted in 1999.
<CAPTION>
Individual Grants
-------------------------------------------------------------
Number of Percent of
Securities Total Options Potential Realizable Value at
Underlying Granted to Exercise or Assumed Annual Rates of Stock Price
Options Employees in Base Price Per Expiration Appreciation for Option Term
Name Granted 1999 Share(1) Date 5% ($) 10% ($)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Douglas Cole 100,000 3.28% $1.60 1/2004 $44,205.05 $97,681.60
Edward Mooney 100,000 3.28% $1.60 1/2004 $44,205.05 $97,681.60
Donald Sledge 100,000 3.28% $2.75 10/2004 $75,977.42 $167,890.25
Ross Mayfield 40,000 1.31% $2.50 7/2004 $27,628.15 $61,051.00
60,000 1.97% $2.75 7/2004 $45,586.45 $100,734.15
Paul Wescott 150,000 4.92% $2.75 9/2004 $113,966.13 $251,835.37
<FN>
(1) The exercise prices of the options included in this table reflect the
board's bona fide estimation of market value of the shares on the various
grant dates. The shares underlying each of these options are restricted
shares. In addition, Company shares are currently traded on the OTC
Bulletin Board, making it difficult to determine the value of restricted
shares of the same class.
</FN>
</TABLE>
39
<PAGE>
SECURITIES UNDERLYING UNEXERCISED OPTIONS AT FISCAL YEAR END
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each of the
named executive officers concerning the number of securities underlying
unexercised options at the end of fiscal year 1999 and the 1999 fiscal year-end
value of all unexercised in-the-money options held by such individuals. No
options were exercised by any named executive officer in fiscal year 1999.
Number of Securities
Underlying Value of Unexercised
Unexercised Options(#) In-the-Money Options($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
--------------
Douglas Cole 100,000 0 $440,000 0
Edward Mooney 100,000 0 $440,000 0
Donald Sledge 100,000 0 $325,000 0
Ross Mayfield 0 100,000 $ 0 335,000
Paul Wescott 37,500 112,500 $121,875 365,625
------------------
(1) Market values of underlying securities at exercise or year-end minus the
exercise price.
COMPENSATION OF DIRECTORS
Directors of the Company may receive stock option grants for service on
the board at the sole discretion of non-interested board members. Messrs. Cole
and Mooney each received options to purchase 100,000 shares of the Company's
common stock in January 1999 at an exercise price of $1.60 per share for their
services as board members. Mr. Glen received options to purchase 175,000 shares
of Company stock in April 1999 at an exercise price of $1.60 per share for his
service as a board member. For their services on the board, Messrs. Sledge and
Dixon each received options to purchase 100,000 shares of Company stock in
October 1999 at an exercise price of $2.75 per share. RateXchange's non-employee
directors receive $500 for each board meeting attended in person and $100 for
each board meeting attended telephonically, plus out-of-pocket expenses. There
is no separate compensation for committee meeting attendance.
EMPLOYMENT AND TERMINATION AGREEMENTS
As part of our restructuring to focus on the business of RateXchange I,
Inc., Mr. Cole agreed to resign his position as an executive officer of the
Company, effective February 2000. Mr. Mooney resigned his positions as a
director and an executive officer in February 2000. In March 2000, Mr. Mooney
resigned as Secretary and Treasurer of the Company. Pursuant to severance
agreements the Company and Messrs. Cole and Mooney executed, Mr. Cole and Mr.
Mooney will continue to provide consulting services to us during our transition
phase. During this phase, Messrs. Cole and Mooney will receive consulting fees
and six-months' severance pay. They may also receive performance bonuses and
health insurance.
Also in February 2000, we appointed Donald Sledge our Chairman and Chief
Executive Officer, Ross Mayfield our President and Paul Wescott our Chief
Operating Officer. In March 2000, we appointed Philip Rice our Executive Vice
President and Chief Financial Officer. We have executed or intend to execute
separate employment agreements with Messrs. Sledge, Rice, Mayfield and Wescott.
40
<PAGE>
Mr. Sledge's employment agreement provides for an annual base salary of
$300,000, an annual incentive bonus of up to 50% of base salary, stock purchase
rights, an expense reimbursement and other employee benefits. Pursuant to this
agreement, Mr. Sledge's employment may be terminated for cause or upon death or
disability so long as we pay all compensation owed as of the date of
termination. Mr. Sledge's employment may be terminated without cause if we pay
(1) severance pay equal to one year's annual salary and (2) a bonus payment of
$150,000.
Mr. Rice's employment agreement provides for an annual base salary of
$200,000, an annual incentive bonus of up to 50% of his base salary, option
rights and other employee benefits. Pursuant to this agreement, Mr. Rice's
employment may be terminated for cause, or upon death or disability, and all of
our obligations to pay compensation and provide benefits shall thereafter cease.
Mr. Rice's employment may be terminated without cause if we pay to Mr. Rice his
base salary for twelve months following termination, as well as a lump sum
payment of $100,000, and provide Mr. Rice certain other benefits.
We intend to enter into an employment agreement with Mr. Mayfield that
provides for an annual base salary of $165,000, an annual incentive bonus of up
to 50% of Mr. Mayfield's base salary, option rights and other employee benefits.
Pursuant to this agreement, Mr. Mayfield's employment may be terminated for
cause or upon death or disability, and all of our obligations to pay
compensation and provide benefits shall thereafter cease. Mr. Mayfield's
employment may be terminated without cause if we pay Mr. Mayfield's base salary
for twelve months following termination, as well as a lump sum payment of
$100,000, and provide Mr. Mayfield certain other benefits.
We intend to enter into an employment agreement with Mr. Wescott that
provides for an annual base salary of $200,000, an annual incentive bonus of up
to 50% of his base salary, option rights and other employee benefits. Pursuant
to this agreement, Mr. Wescott's employment may be terminated for cause, or upon
death or disability, and all of our obligations to pay compensation and provide
benefits shall thereafter cease. Mr. Wescott's employment may be terminated
without cause if we pay to Mr. Wescott his base salary for twelve months
following termination, as well as a lump sum payment of $100,000, and provide
Mr. Wescott certain other benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to creating the Compensation Committee during 1999, members of the
board performed all functions currently delegated to the committee. During 1999,
the following directors served as Compensation Committee members: Douglas Cole,
John Dixon and Douglas Glen. Currently, the Compensation Committee is composed
of Jonathan Merriman, Ronald Spears and Gordon Hutchins, Jr. John Dixon, Douglas
Glen and Douglas Cole resigned from the Committee in 2000 in conjunction with
their resignations from the board.
Douglas Cole
In addition to his membership on the Compensation Committee, until
February 2000 Mr. Cole was our Chief Executive Officer, President and Principal
Financial Accounting Officer. Furthermore, in 1999, Mr. Cole served as Chief
Executive Officer of PolarCap, Inc., our wholly-owned subsidiary and director of
RateXchange I, Inc., another subsidiary.
Mr. Cole is acting Chief Executive Officer and a director of Fulcrum
International, Inc. Mr. Glen, one of our former Compensation Committee members,
was also a director of Fulcrum and has served on its compensation committee or
board equivalent.
Mr. Cole was promisor on two notes held by us for the purchase of Company
shares in the principal amounts of $22,257.40 and $125,000 and dated January 2,
1999, and December 18, 1998, respectively. Interest on both notes was 6 1/2 %
APR, and, together with any unpaid principal on the notes, was due on January 2,
2001, and December 18, 2000, respectively. The greatest aggregate amount
outstanding on the notes during 1999 was approximately $23,703 and $133,000,
respectively, on December 31, 1999. In February 2000, Mr. Cole fully satisfied
his obligations under the January 2, 1999 note; however, because Mr. Cole paid
the entire principal amount owed under this note early at our request, we agreed
to waive unpaid accrued interest in the approximate amount of $1,500. In March
2000, Mr. Cole paid the December 18, 1998 note in full, including all accrued
interest.
41
<PAGE>
John Dixon
During 1999, John Dixon was as a member of the Compensation Committee;
however, he has never been an officer or employee of the Company or its
subsidiaries. Mr. Dixon resigned as a director in February 2000.
Douglas Glen
During 1999, Douglas Glen was a member of the Compensation Committee;
however, he has never been an officer or employee of the Company or its
subsidiaries. Mr. Glen is a director of Fulcrum International, Inc. and has
served on that company's compensation committee or board equivalent. Mr. Cole,
one of our Compensation Committee members, is the acting Chief Executive Officer
and a director of Fulcrum. Mr. Glen resigned as our director in March 2000.
Edward Mooney
Mr. Mooney, who participated in board deliberations regarding executive
officer compensation, also served as our Executive Vice President, Secretary and
Treasurer during 1999. Mr. Mooney resigned as both executive officer and
director in February 2000. In addition, during 1999 Mr. Mooney served as
Director and Secretary of RateXchange I, Inc., one of our subsidiaries, and
Director of Telenisus Corporation, one of our former subsidiaries. Currently, he
is an employee of Maroon Bells Capital Partners, Inc., a merchant investment
banking firm that is a party to a consulting agreement with us.
On December 15, 1998, we entered into an advisory agreement with Maroon
Bells Capital Partners, Inc. for 18 months with an automatic 12 month renewal.
We anticipate renewing the contract until at least January 2001. MBCP is one of
our significant shareholders. Pursuant to the advisory agreement, MBCP provides
certain advisory and business development services in exchange for a monthly
advisory fee. In addition, MBCP will be paid a success fee upon the completion
of certain merger and acquisition and business development activities on our
behalf. The cost of the MBCP consulting agreement to us during 1999 was $120,000
in advisory fees, $315,800 in success fees for financings and acquisitions and
warrants to purchase 250,000 of our shares at $2.75 per share. We anticipate
paying to MBCP at least $120,000 in advisory fees and at least $150,000 in
structuring and financing success fees during 2000.
Mr. Mooney was promisor on a note held by us for the purchase of 400,000
Company shares in the amount of $87,520 and dated December 18, 1998. The note
was secured and accrued interest at a rate of six and one-half percent (6 1/2%)
APR, with principal and interest due in two years on December 18, 2000. The
largest aggregate amount owed by Mr. Mooney during 1999 was approximately
$93,550 on December 31, 1999. In February 2000, Mr. Mooney paid the note in
full, including all accrued interest.
Donald Sledge
As a board member, Mr. Sledge participated in board deliberations
regarding executive officer compensation. Mr. Sledge was appointed our Chief
Executive Officer in February 2000 and also served as Chief Executive Officer of
RateXchange I, Inc. during 1999. Mr. Sledge's son is also an employee of
RateXchange I, Inc., earning a base salary of approximately $70,000 annually.
42
<PAGE>
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:
(a) List of documents filed as part of Form 10-K.
1. Financial Statements:
Reports of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998
Consolidated Statements of Operations for the years ended December 31,
1999, December 31, 1998 and December 31, 1997
Consolidated Statements of Stockholders' Equity for the period December
31, 1996 to December 31, 1999
Consolidated Statements of Cash Flows for the years ended December 31,
1999, December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements for the years ended December
31, 1999, December 31, 1998 and December 31, 1997
2. Financial Statement Schedules:
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 Company hereby files as part of this Form 10-K the exhibits listed
on the Exhibit Index.
(b) Reports on Form 8-K: None.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the exhibits listed
on the Exhibit Index.
(c) Financial Statement Schedules.
Not applicable.
43
<PAGE>
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
November 14, 2000 By: /s/ Philip Rice
------------------------------------------
Philip Rice
Executive Vice President and Chief
Financial Officer
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Description Page No.
----------- -------------------- --------
<S> <C>
3.1 Certificate of Incorporation, as amended (incorporated herein by
reference to Exhibit 3.1 to the Company's Form 10-Q for the
quarter ended September 30, 1999).
3.2 Amended and Restated Bylaws (incorporated herein by reference to
Exhibit 3.2 to RateXchange's Form 10-Q for the quarter ended
September 30, 1999).
10.1 Agreement and Plan of Merger between RateXchange and Rate
Exchange, Inc. dated June 1, 1999, (incorporated herein by
reference to Exhibit 10.1 to RateXchange's Form 10-Q for the
quarter ended September 30, 1999).
10.2 Acquisition Agreement between RateXchange and PolarCap, Inc.
(incorporated herein by reference to Exhibit 2.01 to RateXchange's
Form 8-K/A filed on October 8, 1998).
10.3+ Employment Agreement between RateXchange and Edward Mooney dated
April 1, 1999 (incorporated by reference to Exhibit 10.3 to
RateXchange's Form 10-Q for the quarter ended September 30, 1999).
10.4+ Promissory Note of Edward Mooney dated December 18, 1998.
10.5 + */ Form of Severance Agreement between RateXchange and Edward Mooney.
--
10.6 + Employment Agreement between RateXchange and Douglas Cole dated
April 1, 1999 (incorporated by reference to Exhibit 10.4 to
RateXchange's Form 10-Q for the quarter ended September 30, 1999).
10.7 + */ Form of Severance Agreement between RateXchange and Douglas Cole.
--
10.8 + Employment Agreement between RateXchange I, Inc. and Donald H.
Sledge dated September 15, 1999 (incorporated by reference to
Exhibit 10.5 to RateXchange's Form 10-Q for the quarter ended
September 30, 1999).
10.9 + */ Form of Employment Agreement between RateXchange and each of Paul
-- Wescott and Phillip Rice.
10.10 Employment Agreement between RateXchange and Ross Mayfield dated
July 2, 1999.
10.11 + 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)).
10.12 Advisory Agreement between RateXchange and Maroon Bells Capital
Partners, Inc. dated December 15, 1998.
10.13 Promissory Note of Theodore Swindells dated March 30, 1999.
10.14 Term Sheet dated July 23, 1999 between RateXchange I, Inc. and
Ultimate Markets, Inc.
21.1*/ List of Subsidiaries
--
27.1 Restated Financial Data Schedule (For SEC Use Only)
-------------------------
+ Represents management contract or compensatory plan or arrangement.
* / Previously filed.
--
</TABLE>
45
