SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-19139-NY
RATEXCHANGE CORPORATION
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 11-2936371
------------------------------------------------------------- -----------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer ID Number)
185 Berry Street, Suite 3515, San Francisco, CA 94107
------------------------------------------------------------- -----------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (415) 371-9800
n/a
--------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
18,013,174 shares common stock as of November 8, 2000
(Title of Class)
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1 -
Financial Statements
Consolidated Balance Sheet as of September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statement of Operations (unaudited) for the three and nine months ended
September 30, 2000 and 1999 4
Consolidated Statement of Cash Flows (unaudited) for the nine months ended
September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3 -
Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 2 - Changes in Securities and Use of Proceeds 21
Item 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 22
</TABLE>
Page 2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,924,064 $ 536,615
Accounts receivable 57,255 --
Investments 14,010,049 387,500
Interest receivable 301,165 150,608
Prepaid expenses 197,114 11,647
Notes receivable on stock sales -- 1,590,319
------------ ------------
Total current assets 19,489,647 2,676,689
Property and equipment (net of accumulated depreciation of $182,939 in 2000 and
$18,677 in 1999) 693,365 188,891
Other assets
Investment in affiliate 75,000 75,000
Deposits 245,265 103,305
------------ ------------
Total assets $ 20,503,277 $ 3,043,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,086,408 $ 1,840,056
Short term debt 25,000 885,000
------------ ------------
Total current liabilities 2,111,408 2,725,056
Stockholders' equity
Preferred Stock, 60,000,000 shares authorized; none outstanding -- --
Common stock, $.0001 par value; 300,000,000 shares authorized; issued
and outstanding; 17,764,304 shares and 14,087,425 shares 1,777 1,409
Additional paid in capital 69,129,399 13,225,824
Accumulated deficit (49,943,702) (12,664,654)
Notes receivable on stock sales (433,890) --
Accumulated other comprehensive loss (361,715) (243,750)
------------ ------------
Total stockholders' equity 18,391,869 318,829
------------ ------------
Total liabilities and stockholders' equity $ 20,503,277 $ 3,043,885
============ ============
<FN>
See notes to financial statements
</FN>
</TABLE>
Page 3
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Beginning of
Development
Stage
(September
30,1998)
Three Months ended September 30, Nine Months ended September 30, through
(unaudited) (unaudited) September 30,
------------------------------ ------------------------------ ------------
2000
2000 1999 2000 1999 (unaudited)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Trading and Consulting $ 52,755 $ -- $ 57,255 $ -- $ 57,255
EXPENSES
Selling, general and
administrative
(Includes non-cash
expenses of $9,974,187 and
$334,750 for the three
month periods and
$20,057,365 and $2,539,315
for the nine month periods) 16,333,853 1,888,127 34,071,021 5,173,829 43,723,721
Write off advances to potential
investee -- (631,250) -- 114,938 1,298,681
Depreciation and amortization 62,983 13,409 164,262 23,402 182,938
Cost of acquiring subsidiary -- -- -- -- 1,597,118
------------ ------------ ------------ ------------ ------------
Total Expenses 16,396,836 1,270,286 34,235,283 5,312,169 46,802,458
OTHER INCOME (EXPENSE)
Interest income 392,300 43,782 604,561 94,590 758,271
Interest expense
(Includes non-cash expenses
of $1,801,775 and $0 for the
three month periods and
$1,801,775 and $0 for the
nine month periods) (1,581,234) (10,521) (1,882,706) (10,521) (1,912,552)
Other expenses (net)
(Includes non-cash expenses
of $222,875 and $0 for the
three month periods and
$1,722,875 and $0 for
the nine month periods) (324,375) -- (1,822,875) -- (1,822,875)
------------ ------------ ------------ ------------ ------------
Loss before taxes (17,857,390) (1,237,025) (37,279,048) (5,228,100) (49,722,359)
Income tax provision (benefit) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $(17,857,390) $ (1,237,025) $(37,279,048) $ (5,228,100) $(49,722,359)
============ ============ ============ ============ ============
Basic and diluted net loss per
share $ (1.03) $ (0.10) $ (2.28) $ (0.46)
Weighted average number of
shares of common stock 17,356,043 12,773,266 16,334,695 11,326,388
<FN>
See notes to financial statements
</FN>
</TABLE>
Page 4
<PAGE>
<TABLE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Beginning of
Development
Stage
(September 30,
For the Nine Months ended 1998) through
September 30, September 30,
--------------------------------- -------------
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(37,279,048) $ (5,228,100) $(49,722,359)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 164,262 23,402 182,938
Write off advances to potential investees -- 114,938 206,898
Stock options granted to employees below
fair market value 9,127,572 -- 9,127,572
Stock options - termination adjustments 941,564 -- 941,564
Stock options and warrants granted to
service providers and strategic
partners 11,711,104 1,339,500 13,270,565
Warrants issued in relation to bridge financing 1,801,775 -- 1,801,775
Cost of acquiring subsidiary -- -- 1,507,408
Stock for services/expenses -- 1,199,815 3,619,330
Increase in deposits (141,960) -- (245,265)
Increase in accounts receivable and other assets (393,279) (357,478) (555,534)
Increase (decrease) in accounts payable and
accrued expenses 246,352 753,322 1,976,893
------------ ------------ ------------
TOTAL (13,821,658) (2,154,601) (17,888,215)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short term investments (26,099,845) -- (26,099,845)
Sale of short term investments 12,484,257 -- 12,484,257
Payment for purchase of equipment (667,984) (482,319) (875,552)
Investment in Telenisus Corporation -- -- (75,000)
Loan to employee stock purchase program (433,890) -- (433,890)
Purchase of Halo stock -- -- (631,251)
------------ ------------ ------------
TOTAL (14,717,462) (482,319) (15,631,281)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans and other debt (net) 1,200,000 350,000 1,610,000
Net proceeds from stock sales 30,136,250 1,913,088 35,243,241
Proceeds from note receivable 1,590,319 -- 1,590,319
------------ ------------ ------------
TOTAL 32,926,569 2,263,088 38,443,560
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,387,448 (373,832) 4,924,064
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 536,615 528,516
------------ ------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 4,924,064 $ 154,684 $ 4,924,064
============ ============ ============
<FN>
See notes to financial statements
</FN>
</TABLE>
Page 5
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM FINANCIAL STATEMENTS AND BACKGROUND AND HISTORY
The interim financial statements presented herein are unaudited and
have been prepared in accordance with the instructions to Form 10-Q.
These statements should be read in conjunction with the financial
statements and notes thereto included in our annual report on Form
10-K/A for the year ended December 31, 1999. The accompanying financial
statements have not been audited. The results of operations and cash
flows for the three and nine months ended September 30, 2000 may not be
indicative of the results that may be expected for the year ended
December 31, 2000.
RateXchange Corporation (the Company) is a consolidated group of
companies including the parent corporation, RateXchange Corporation
(RateXchange Corp.), and its subsidiaries, RateXchange I, Inc. and
PolarCap, Inc. (PolarCap). PolarCap is in the process of being
liquidated.
RateXchange Corp. (formerly NetAmerica.com Corporation) is a Delaware
corporation organized on May 6, 1987 for the purpose of seeking out and
developing any general business opportunity. In May 2000, we changed
our name to RateXchange Corporation to reflect the focusing of our
efforts on the business of creating an electronic marketplace for
telecommunications products. The Company's operating subsidiary
RateXchange I, Inc., a Delaware corporation organized in June 1999, has
developed proprietary trading software to support its electronic
trading system for bandwidth and other telecommunications products.
The Company has generated nominal revenues from its planned operations.
The Company is defined as a development stage company in accordance
with Financial Accounting Standard No. 7. The Company had no operations
or business before September 30, 1998. Cumulative results of operations
since the start of the development stage, September 30, 1998, when the
Company purchased PolarCap, have been reported separately.
From inception, the Company has been primarily engaged in
organizational activities, including designing and developing its
website, recruiting personnel, establishing office facilities, raising
capital, developing infrastructure and developing a marketing plan. The
Company began revenue generation activities in 1999 but nominal revenue
has been generated as of September 30, 2000. Accordingly, the Company
is classified as a development stage company. Successful completion of
the Company's development program and, ultimately, the attainment of
profitable operations is dependent upon future events, including
increasing its customer base, implementing and successfully executing
its business and marketing strategy and hiring and retaining quality
personnel. Negative developments in any of these conditions could have
a material adverse effect on the Company's business, financial
condition and results of operations.
NOTE 2 CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
We consider all highly liquid investment securities with maturities
from date of purchase of three months or less to be cash equivalents.
Short-term investments consist of debt securities with maturities
between three months and twelve months.
Management determines the appropriate classification of investments at
the time of purchase and reevaluates such determination at each balance
sheet date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with unrealized gains
and losses, if any, included in stockholders' equity. At September 30,
2000, the company's investment in short term securities had an
unamortized cost of $14,371,764. Realized gains and losses and declines
in value of securities judged to be other than temporary are included
in other income, net. Interest and dividends on all securities are
included in other income, net.
Page 6
<PAGE>
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 PRIVATE PLACEMENT
In March 2000, the Company completed a private placement in which it
sold 2,733,329 shares of restricted common stock at a subscription
price of $12 per share plus warrants to purchase 1,366,673 shares of
its common stock at an exercise price of $14.40 per share. The warrants
are immediately exercisable and expire in three years. After deducting
$2,665,000 for costs associated with the offering the Company received
$30,135,000. The Company has used a portion of the proceeds of this
offering to implement its business strategy for creating an online
marketplace and exchange where market participants can buy and sell
bandwidth and trade bandwidth contracts.
NOTE 4 REVENUE RECOGNITION
The Company recognizes trading revenue once a trade is consummated and
the earnings process is complete. Consulting and advertising revenue is
recognized as the related services are performed.
NOTE 5 LOSS PER SHARE AND AVERAGE SHARES OUTSTANDING
Basic loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Options and
warrants on shares of common stock were not included in computing
diluted loss per share because their effects were antidilutive
(8,087,500 options and 5,450,043 warrants).
NOTE 6 COMMITMENTS AND CONTINGENCIES
In 1999, RateXchange entered into a term sheet agreement with a vendor
to provide specialized consulting and computer programming to assist in
RateXchange's business plans and operations in the e-commerce niche it
was developing. The term sheet was never finalized into a formal
agreement, but some services were provided, and certain cash payments
were made for the services that were rendered. The term sheet also
provided for the vendor to receive a stock position in RateXchange of
up to 10% for certain services. In early 2000 the Company began
discussions with the vendor concerning the 10% stock position in
RateXchange because the formal agreement was never completed and the
contemplated services were not fully provided. The ultimate outcome of
these discussions was uncertain at that time. In August 2000, the
Company reached an agreement for settlement of the dispute with the
vendor, whereby the Company issued 175,000 shares, 175,000 warrants and
$100,000 in cash. The total market value of the settlement of
$1,822,875 million is recorded in the Company's statement of operations
for the nine months ended September 30, 2000.
The Company is involved in the following lawsuit:
On February 24, 2000, Concentric Network Corporation filed a lawsuit
against NetAmerica, Inc., aka A1 Internet, Inc., and the Company in the
Superior Court of California for the County of Santa Clara (CV 784335).
The lawsuit involves claims for breach of contract and common counts
based on A1 Internet's nonperformance in a service agreement between A1
Internet and Concentric related to the Company's former operations
during 1999. Concentric is asking for compensatory damages of at least
$167,794, restitution, costs and attorney fees. The matter is currently
pending in Superior Court and will soon proceed to arbitration. The
Company has fully reserved for this contingency.
NOTE 7 OPTIONS AND WARRANTS FOR PURCHASE OF COMMON STOCK
Shareholders authorized the 1999 Stock Option Plan during 1999.
Shareholders authorized the 2000 Stock Option Plan on April 20, 2000.
There are options to purchase 8,000,000 shares authorized for issuance
under both plans. On February 24, 2000, the Board authorized additional
options to purchase 4,290,000 shares outside of either plan. Total
options granted to employees during the first quarter for less than
fair market value were 3,940,000 for which the Company recognized
related compensation expense of $8,481,424 and $837,503 for the first
nine months and third quarter of 2000.
Page 7
<PAGE>
The company also granted options to non-employee consultants totaling
275,000 for which the company recorded related expense of $2,287,250
and $156,000 for the nine months and third quarter ended September 30,
2000.
On September 17, 2000, the Company entered into an alliance agreement
with Amerex Bandwidth, Ltd. Under this agreement, Amerex brokers will
execute trades for the sales or purchase of telecommunications
capacity, Internet protocol products and/or other
telecommunications-related products over the Company's electronic
trading system and we will share in the revenues generated by the
electronic trading system. In connection with this agreement, we issued
to Amerex five warrants for an aggregate of 2,300,000 shares of our
common stock. One warrant for 300,000 shares with an exercise price of
$4.47 per share is currently exercisable by Amerex. The remaining four
warrants each for 500,000 shares and with exercise prices of $4.47 per
share, $4.70 per share, $4.92 per share and $5.37 per share, will
become exercisable upon the earlier of September 17, 2005 or Amerex
executing a minimum of $1,000,000, $1,000,000, $3,000,000 and
$5,000,000, in value of transactions over our online electronic
trading system.
NOTE 8 SHORT TERM DEBT
In February 2000, RateXchange I Inc. closed a $2,000,000 convertible
note offering. The notes were convertible into RateXchange I, Inc.
common stock at a price per share to be determined in an anticipated
subsequent financing of RateXchange I. Purchasers of the notes also
received warrants to purchase RateXchange I common stock at $2.40 per
share, subject to adjustment. As a result of our new business strategy
the subsequent financing of RateXchange I did not occur. Accordingly,
we offered to the note holders the right to convert their notes into
RateXchange Corporation common stock at an exchange rate of $5.00 per
share. In addition, we agreed to issue to such holders an aggregate of
500,000 warrants to purchase common stock at $5.00 per share or pay
back principal plus accrued interest. All RateXchange I notes and
warrants have been converted into RateXchange Corporation common shares
except for one note for $25,000.
<TABLE>
NOTE 9 COMPREHENSIVE LOSS
The comprehensive loss for the first nine months and third quarter of
2000 and 1999 was:
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(17,857,390) $ (1,237,025) $(37,279,048) $ (5,228,100)
Other Comprehensive Income:
Unrealized gains (losses) on investments (521,513) -- (117,965) --
------------ ------------ ------------ ------------
Comprehensive loss $(18,378,903) $ (1,237,025) $(37,397,013) $ (5,228,100)
============ ============ ============ ============
</TABLE>
Page 8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our
Consolidated Financial Statements and the notes thereto presented in "Item 1 -
Financial Statements." The information set forth in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes forward-looking statements that involve risks and uncertainties. Many
factors could cause actual results to differ materially from those contained in
the forward-looking statements below. See "Outlook."
OVERVIEW
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 innovative 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
seeking to enable the creation of a liquid bandwidth trading market.
Recent Developments
The following events have occurred since September 30, 2000:
On October 6, 2000, RateXchange appointed Jon Merriman as its new President and
Chief Executive Officer. Mr. Merriman, a former Executive Vice President and
Senior Managing Director for securities firm First Security Van Kasper and a
Director of RateXchange, will lead RateXchange's focus on trading operations as
the company continues its efforts to develop a liquid bandwidth trading
marketplace.
On October 23, 2000, RateXchange appointed Eric Handa as Managing Director of
the Asia-Pacific Region, as the company seeks to extend its reach into the
Asia-Pacific market. Prior to joining RateXchange, Mr. Handa was a Regional
Trading Director of Asia Capacity Exchange (ACE-ASIA).
On November 9, 2000, RateXchange announced the appointment of Steven W. Town to
the company's Board of Directors. Mr. Town serves as Co-CEO of Amerex Natural
Gas, Amerex Power and Amerex Bandwidth. Mr. Town began his commodities career in
1987 in the retail futures industry prior to joining the Amerex Group of
Companies. He began the Amerex futures and forwards brokerage group in natural
gas in 1990, in Washington D.C., and moved this unit of Amerex to Houston in
1992. Amerex currently provides energy, power and bandwidth brokerage services
to the leading energy companies.
GENERAL DEVELOPMENT OF BUSINESS
Since March 2000, the company has focused on the business of creating
an electronic marketplace for telecommunication products. In March 2000 we
closed a $32.8 million private placement, netting $30.1 million after expenses.
These funds should be sufficient to cover our operations and working capital
requirements for the next twelve months. On May 5, 2000, we changed our name to
RateXchange Corporation to more accurately reflect our new business focus.
On July 10, 2000, RateXchange announced it had received an American
Stock Exchange (AMEX) listing. The company's common stock commenced trading on
the AMEX under the new symbol RTX on July 10, 2000.
On July 17, 2000, RateXchange announced it had appointed
telecommunications industry consultant, Gordon (Don) Hutchins, Jr., to the
company's board of directors. Hutchins' long-standing relationships and
extensive experience is expected to provide RateXchange with critical insight
into the global telecommunications market.
Page 9
<PAGE>
On July 24, 2000, RateXchange announced that six of the 12 delivery
hubs it will deploy this year are fully operational for immediate delivery of
one-month Spot and one-year Forward contracts on 15 different city-pair routes.
As of September 30, 2000, eight delivery hubs were fully operational.
On July 31, 2000, RateXchange announced it would expand the deployment
of its neutral delivery hubs via an agreement with TeleCity, a leading European
carrier-independent Internet infrastructure service provider.
On August 7, 2000, RateXchange completed the beta trial of
RateXmatch(TM), a new market service for bandwidth trading designed with the
assistance of several RateXchange customers.
On August 16, 2000, RateXchange and Amerex Bandwidth, LTD. announced
the signing of a letter of intent to form a strategic alliance to accelerate the
trading of bandwidth products. The partnership will promote the use of
RateXchange's neutral electronic trading system as a vehicle for building
liquidity in bandwidth trading.
On August 23, 2000, RateXchange completed a Trans-Pacific bandwidth
trade. The trade of capacity between Hong Kong and Los Angeles is the first
Trans-Pacific trade completed by RateXchange.
On September 15, 2000, RateXchange announced that its RateXlabs
division has established a bandwidth trading consulting practice. Two Fortune
100 companies have engaged RateXlabs to provide the expertise needed to develop
a competitive advantage in the emerging bandwidth trading industry. RateXlabs
provides independent economic research and risk management consulting regarding
bandwidth trading. The company believes that these consulting services provide a
useful purpose in educating potential market participants and that these efforts
may lead to future sources of revenue.
On September 17, 2000, the Company announced that it had launched
RateXmatch(TM), RateXchange's new electronic trading system, and the
formalization of its Strategic Alliance with Amerex. The combination of the
RateXmatch(TM) electronic trading system with Amerex's brokering experience and
market relationships will help create a liquid bandwidth trading market. This
electronic trading system will enable market participants of all sizes to
participate in the rapidly evolving bandwidth market. The RateXmatch(TM)
electronic trading system is similar to trading platforms that have been
successful in on-line natural gas and electricity commodity trading.
RateXmatch(TM) enables bandwidth traders to pre-approve and manage counterparty
credit. Trades executed on RateXmatch(TM) can be delivered using RateXchange's
delivery hubs, other pooling points, or bilateral interconnection. Market
participants are now able to trade a larger number of routes regardless of the
presence of RateXchange delivery hubs. Trading on RateXmatch(TM) will utilize
the Master Bandwidth Purchase and Sale Agreement (based on the Bandwidth Trading
Organization Master Agreement) but will support the trading of other
standardized contracts.
Amerex Bandwidth has successfully completed several bandwidth trades
since May and is currently quoting over 60 city-pair bandwidth markets using the
Bandwidth Trading Organization (BTO) Master Agreement. Amerex is a leading
energy and power broker. Under this agreement, Amerex brokers will execute
trades for the sales or purchase of telecommunications capacity, Internet
protocol products and/or other telecommunications-related products over the
Company's electronic trading system and RateXchange will share in the revenues
generated by the electronic trading system. In connection with this agreement,
RateXchange issued to Amerex five warrants for an aggregate of 2,300,000 shares
of the Company's common stock. One warrant for 300,000 shares with an exercise
price of $4.47 per share is currently exercisable by Amerex. The remaining four
warrants each for 500,000 shares and with exercise prices of $4.47 per share,
$4.70 per share, $4.92 per share and $5.37 per share, will become exercisable
upon the earlier of September 17, 2005 or Amerex executing a minimum of
$1,000,000, $1,000,000, $3,000,000 and $5,000,000, in value of transactions
over the Company's online electronic trading system.
Page 10
<PAGE>
<TABLE>
Results of Operations for Three and Nine Months Ended September 30, 2000
The following table summarizes our results of operations for the first
nine months and third quarter of 2000, compared to the same periods of 1999.
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C>
Revenue $ 57,255 -- $ 52,755 --
Expenses (including selling, $(34,235,283) $ (5,312,169) $(16,396,836) $ (1,270,286)
General and administrative)
Net loss $(37,279,048) $ (5,228,100) $(17,857,390) $ (1,237,025)
</TABLE>
Revenue
We generated revenue of $57,255 and $52,755 during the first nine
months and third quarter of 2000 from consulting, trading commissions and banner
ads. We generated no revenue in the comparable periods of 1999.
Expenses
Our total expenses were $34,235,283 and $16,396,836 in the first nine
months and third quarter of 2000 compared to $5,312,169 and $1,270,286 in the
comparable periods of 1999. The major components of our expenses were:
Non-cash Expenses
o $9,128,000 and $1,484,000 in expenses associated with below
market stock option grants to employees;
o $7,368,000 in both periods associated with the warrants issued
or to be issued in conjunction with the strategic alliance
established with Amerex
o $11,711,104 and $9,579,854 for options granted to service
providers;
Cash Expenses
o $3,880,000 and $1,910,000 in payroll costs;
o $2,584,000 and $725,000 in outside services;
o $1,140,000 and $287,000 in marketing costs; and
o $2,454,000 and $1,719,000 in delivery equipment costs.
Interest Income:
Interest income for the first nine months and third quarter of 2000 was
$604,561 and $392,300 compared to $94,590 and $43,782 for the same periods in
1999. The increase in interest income is due to interest earned on the proceeds
from the private placement.
Interest and other expense:
Interest and other expenses include non cash charges related to:
o $1,723,000 in stock and warrants to buy stock in settlement of
a dispute;
o $1,801,775 fair value adjustment classified as interest
expense associated with conversion of our bridge notes into
stock and warrants.
Page 11
<PAGE>
Net Loss:
During the first nine months and third quarter of 2000, we incurred
losses of $37,279,048 and $17,857,390 compared to losses of $5,228,100 and
$1,237,025 during the same period in 1999. The major components of the net loss
comprised non cash expenses for stock options and warrants to purchase company
stock of $23,582,015 and $11,998,837 for the first nine months and third quarter
of 2000 and expenditures associated with developing the business of $13,697,033
and $5,858,553 for the first nine months and third quarter of 2000. Because we
are developing a unique electronic trading system, we anticipate that we will
continue to incur operating losses and cash flow deficiencies for the
foreseeable future.
Liquidity and Capital Resources
We have financed our operations to date primarily through the sale of
equity securities. We have been unprofitable since inception and we have
incurred net losses in each year.
We had working capital of $17,378,239 at September 30, 2000 compared to
negative working capital of $48,367 on December 31, 1999. At December 31, 1999,
we had common stock subscription receivables in the amount of $1,590,319, which
were due and payable in 2001. In March 2000 we closed a $32.8 million private
placement, netting $30.1 million after expenses. These funds should be
sufficient to cover our operations and working capital requirements for the next
twelve months. Nevertheless, we may need to seek additional financing sooner
than expected in order to accelerate market penetration through mergers,
acquisitions or additional strategic relationships.
Our operating activities used $13,821,658 during the first nine months
of 2000 due primarily to our:
o increased marketing and development;
o expansion of our executive management team; and
o increased professional services and consulting costs.
Our investing activities used $14,717,463 during the first nine months
of 2000, due primarily to investing the proceeds from the private placement.
In March 2000, we executed a Master Lease Line Commitment Agreement,
which has a minimum term of either 36 or 48 months depending upon the type of
equipment we lease. Pursuant to this agreement, we are entitled to lease
equipment that has a cost or sale price which, in the aggregate, does not exceed
$10,000,000. Our periodic lease payments are determined by multiplying the cost
or sale price of the equipment leased by a lease rate factor of either .03277 or
.02633, depending upon the type of equipment. We are also responsible for all
taxes, shipping, transportation, installation, services and other expenses
related to the equipment we lease pursuant to the agreement.
Financing activities generated $32,926,570 during the first nine months
of 2000. Financing activities during the nine months ended September 30, 2000
consisted primarily of proceeds from sales of common stock. Between February and
March 2000, we sold to accredited investors a total of 2,733,329 shares of our
restricted common shares plus warrants to purchase 1,366,673 shares of our
common stock at an exercise price of $14.40 per share. The shares were sold at a
subscription price of $12.00 per share. After deducting the expenses related to
the offering, we received $30,135,000. The proceeds of the sales of common stock
are being used to accelerate deployment of our delivery hubs, expand our online
marketplace for telecommunications products and enhance our geographic reach and
product line.
We are executing an overall business plan that requires significant
additional capital for among other uses:
o expansion into new domestic and international markets;
o development of additional products and services; and
o acquisitions.
Furthermore, our funding of working capital and current and future
operating losses may require additional capital investment. We do not currently
possess a bank source of financing and we have had nominal revenues.
Our business and operations have not been materially affected by
inflation during the periods for which financial information is presented.
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Outlook
We are a development stage company in an early stage of development and
we are subject to all the risks inherent in the establishment of a new business
enterprise. To address these risks, we must:
o establish market acceptance for our electronic trading system
and other products and services;
o continue to retain, attract and motivate qualified personnel;
o effectively manage our capital to support the expenses of
developing and marketing new products and services;
o implement and successfully execute our business and marketing
strategy;
o respond to competitive developments and market conditions in
the global telecommunications industry; and
o continue to develop and upgrade our electronic trading system.
Forward-Looking Statements
This Outlook section, and other sections of this document, include
certain "forward-looking statements" within the meaning of that term in Section
27A of the Securities Act of 1933, and Section 21E of the Securities Act of
1934, including, among others, those statements preceded by, following or
including the words "believe," "expect," "intend," "anticipate" or similar
expressions. These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Our actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating such forward-looking statements include:
o changes in our business strategy or an inability to execute
our strategy due to unanticipated changes in the market;
o our ability to raise sufficient capital to meet operating
requirements;
o various competitive factors that may prevent us from competing
successfully in the marketplace;
o changes in external competitive market factors which might
impact trends in our results of operations; and
o other risks described below in "Factors That May Affect Future
Results."
In light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this Form
10-Q will in fact occur.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a highly competitive and rapidly changing market that
involves a number of risks. While we are optimistic about our long-term
prospects, the following discussion highlights some risks and uncertainties that
should be considered in evaluating our growth outlook.
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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 in part
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 September 30, 2000, our accumulated deficit since inception was
$49,722,359, including $ 26,121,330 related to stock grants and warrants. For
the nine months ended September 30, 2000, we incurred a net loss of $37,279,048
including $23,582,015 related to stock grants and warrants. We have incurred a
net loss in each year of our existence, and have financed our development stage
operations primarily through sales of equity securities. We have recorded
nominal revenues from operations. We expect to incur net losses for the
foreseeable future. We may never achieve or sustain significant revenues or
profitability on a quarterly or annual basis in the future.
If our electronic trading system does not achieve commercial acceptance, our
results will suffer.
Initially, 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 software
development, marketing, 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 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 companies such as E-Speed,
Intercontinental Exchange and Altra currently operate online marketplaces in
other commodities and have large established customer bases. These companies may
start bandwidth trading marketplaces. Our ability to compete with them will
depend largely upon our ability to capture market share by obtaining sufficient
participants for our electronic trading system.
In addition, we compete with companies who trade, broker or otherwise
assist in the buying and selling of telecommunications bandwidth and minutes.
Therefore, we currently or potentially compete with a variety of other
companies, including e-commerce 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 to identify trading opportunities through online
listings. 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.
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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.
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.
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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 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;
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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.
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.
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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.
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.
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We generally have entered into agreements containing confidentiality
and non-disclosure provisions with our employees and consultants and 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.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Short Term Investments
Our exposure to market risks for changes in interest rates relate
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. We place our investments with high credit quality
issuers and, by policy, limit the amount of the credit exposure to any one
issuer.
Our general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. All highly
liquid investments with less than three months to maturity are considered to be
cash equivalents. Investments with maturities between three and twelve months
are considered to be short-term investments. Investments with maturities in
excess of twelve months are considered to be long-term investments. We do not
expect any material loss with respect to our investment portfolio.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no material additions to, or changes in status of,
any ongoing, threatened or pending legal proceedings during the three
months ended September 30, 2000. From time to time, we are a party to
various legal proceedings incidental to our business. None of these
proceedings is considered by management to be material to the conduct
of our business, operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds.
a) Not applicable.
b) Not applicable.
c) In July 2000, some of our subsidiary's bridge note holders
converted their bridge notes and related warrants into 275,000
shares of our restricted common stock at an exchange rate of $5.00
per share plus warrants to purchase 343,750 shares of our
restricted common stock at an exercise price of $5.00 per share.
All of these bridge note holders were accredited investors. We
converted these notes and warrants in reliance upon Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
In August 2000, we issued 175,000 shares of our common stock plus
warrants to purchase 175,000 shares of common stock at an exercise
price of $5.00 per share to a single accredited investor in
settlement of a claim. We issued the shares and warrants in
reliance upon Section 4(2) of the Securities Act.
In September and October 2000, holders of all but $25,000 of our
subsidiary's remaining bridge notes converted their notes and
related warrants into a total of 120,000 shares of our restricted
common stock at an exchange rate of $5.00 per share plus warrants
to purchase a total of 150,000 shares of our restricted common
stock at an exercise price of $5.00 per share. All of these bridge
note holders were accredited investors. We converted these notes
and warrants in reliance upon Section 4(2) of the Securities Act.
d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Exhibit Name
----------- ------------
10.1 Alliance agreement between RateXchange Corporation
and Amerex Bandwidth Ltd., dated September 17, 2000
10.2 Facilities Management Agreement between RateXchange
Corporation and Telecity UK Limited dated July 11,
2000
10.3+ Separation Agreement between RateXchange Corporation
and Ross Mayfield dated August 18, 2000
10.4+ Employment Agreement between RateXchange and Paul
Wescott dated July 5, 2000
10.5+ Separation Agreement between RateXchange Corporation
and Paul Wescott dated August 18, 2000
10.6 Settlement Agreement and Full General Mutual Release
by and between RateXchange Corporation and Ultimate
Markets, Inc. dated August 28, 2000
27.1 Financial Data Schedule
b) Reports on Form 8-K
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On July 27, 2000 we filed a Form 8-K announcing that on July 20, 2000,
we engaged Arthur Andersen, L.L.P. as our new independent accountants.
On August 16, 2000, we filed a Form 8-K announcing that we had signed a letter
of intent to form a strategic alliance with Amerex Bandwidth, Ltd.
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SIGNATURES
Pursuant to the requirements 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.
Dated this 14th day of November, 2000.
RATEXCHANGE CORPORATION
By: /s/ Philip Rice
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Philip Rice
Executive Vice President and
Chief Financial Officer
Page 23
