U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31. 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
____________
COMMISSION FILE NO.: 000-30326
VSOURCE, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-3538903
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5740 RALSTON STREET, SUITE 110
VENTURA, CALIFORNIA 93003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 677-6720
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Number of shares of Common Stock, par value $.01, outstanding as of August 29,
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,914,189
Number of shares of Series 1-A Convertible Preferred Stock, par value $.01
outstanding as of August 29, 2000 . . . . . . . . . . . 2,725,232
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . .7
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . .20
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . .21
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. EXHIBITS, REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . .22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
VSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 2000 January 31, 2000
(unaudited)
---------------- ----------------
<S> <C> <C>
Current assets:
Cash in bank $ 643,716 $ 5,124,399
Restricted cash 109,709 82,768
---------------- ----------------
Total Cash 753,425 5,207,167
Accounts receivable 50,000 --
Employee receivables 147,680 109,847
Prepaid expenses 174,005 --
---------------- ----------------
Total current assets 1,125,110 5,317,014
Property and equipment
Fixed assets 590,582 240,208
Less: accumulated depreciation (65,137) (17,708)
---------------- ----------------
Property and equipment, net 525,445 222,500
Other assets 976 881
---------------- ----------------
$ 1,651,531 $ 5,540,395
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $ 633,377 $ 247,472
Accrued liabilities 40,983 100,937
Convertible notes payable 150,000 150,000
Liabilities related to private placement of
preferred stock -- 6,002,500
---------------- ----------------
Total current liabilities 824,360 6,500,909
Shareholders' equity (deficit)
Preferred stock ($0.01 par value, 5,000,000 shares
authorized: 2,725,232 issued and outstanding) 27,252 --
Common stock ($0.01 par value, 50,000,000 shares
authorized: 15,914,189 issued and outstanding) 159,142 158,071
Additional paid-in capital 46,731,057 10,645,934
Deferred compensation (16,538,686) (1,780,817)
Accumulated equity (deficit) (29,372,796) (9,804,904)
Less: Notes receivable from the sale of stock (178,798) (178,798)
---------------- ----------------
Total shareholders' equity (deficit) 827,171 (960,514)
---------------- ----------------
$ 1,651,531 $ 5,540,395
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
July 31, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
Revenue $ 62,500 $ 3,925
Expenses
General and administrative (excluding
$2,695,516 of stock based compensation
for the period ended July 31, 2000) 1,384,923 239,350
Research and development (excluding
1,219,560 of stock based compensation
for the period ended July 31, 2000) 1,671,024 1,120,052
Stock-based compensation 3,915,076 --
------------- -------------
6,971,023 1,359,402
Loss from operations (6,908,523) (1,355,477)
Other income/(expense)
Interest income 17,161 --
Other income 4,019 --
Interest expense (3,698) --
------------- -------------
Loss before income taxes (6,891,041) (1,355,477)
Provision for income taxes -- --
------------- -------------
Net loss $ (6,891,041) $ (1,355,477)
============= =============
Basic loss available to
common stockholders (Note 5) $ (6,891,041) $ (1,355,477)
============= =============
Basic weighted average number of
common shares outstanding: 15,844,809 12,231,402
============= =============
Net loss per share available to common stockholders
Basic $ (0.43) $ (0.11)
============= =============
Diluted $ (0.43) $ (0.11)
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the six months ended
July 31, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
Revenue $ 62,500 $ 7,985
Expenses
General and administrative (excluding
$5,448,406 of stock based compensation
for the period ended July 31, 2000) 2,280,833 576,996
Research and development (excluding
1,821,008 of stock based compensation
for the period ended July 31, 2000) 3,262,330 1,120,052
Stock-based compensation 7,269,414 --
------------- -------------
12,812,577 1,697,048
Loss from operations (12,750,077) (1,689,063)
Other income/(expense)
Interest income 55,560 --
Other income 4,019 --
Interest expense (7,397) --
------------- -------------
Loss before income taxes (12,697,895) (1,689,063)
Provision for income taxes 1,600 --
------------- -------------
Net loss $(12,699,495) $ (1,689,063)
============= =============
Basic loss available to
common stockholders (Note 5) $(19,567,892) $ (1,689,063)
============= =============
Basic weighted average number of
common shares outstanding: 15,826,197 12,231,402
============= =============
Net loss per share available to common stockholders
Basic $ (1.24) $ (0.14)
============= =============
Diluted $ (1.24) $ (0.14)
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
July 31, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,699,495) $ (1,689,063)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 47,869 219,730
Compensation expense for stock option grants 2,447,448 --
Compensation expense for warrant grants 4,657,310 --
Compensation expense for stock issued 164,656 --
Beneficial conversion feature 167,564
Issuance of stock and debt for services, expense
reimbursements and accrued interest -- 471,038
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable (50,000) 3,590
(Increase)/decrease in employee receivables (37,833) --
(Increase)/decrease in prepaid expenses (174,005) 22,500
(Increase)/decrease in other assets (536) --
Increase/(decrease) in accounts payable 385,905 71,266
Increase/(decrease) in deferred revenue -- (2,317)
Increase/(decrease) in accrued expenses (59,954) 9,942
------------- -------------
Net cash used in operating activities (5,318,635) (725,750)
Cash flows from investing activities:
Purchase of capitalized software (94,848) --
Purchase of property and equipment (255,526) (90,959)
Advances to related parties -- (34,570)
------------- -------------
Net cash used in investing activities (350,374) (125,529)
Cash flows from financing activities:
Proceeds from issuance of common stock 321,350 1,199,942
Proceeds from issuance of private placement-preferred stock 893,917 --
Proceeds from borrowings -- 29,700
------------- -------------
Net cash provided by financing activities 1,215,267 1,229,642
------------- -------------
Net (decrease)/increase in cash (4,453,742) 378,363
------------- -------------
Cash at beginning of period 5,207,167 59,937
------------- -------------
Cash at end of period $ 753,425 $ 438,300
============= =============
Supplemental disclosure:
Reclassification of liability to equity $ 6,002,500 $ --
Interest Paid $ - $ --
Income Taxes $ 1,600 $ 1,600
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The interim consolidated financial statements as of July 31, 2000 have been
prepared by Vsource, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC") for interim financial
reporting. These consolidated statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary to present fairly the consolidated balance sheets,
consolidated operating results, and consolidated cash flows for the period
presented in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The consolidated balance sheet at January
31, 2000 has been derived from the audited consolidated financial statements at
that date. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the year ending
January 31, 2001. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with US GAAP have been omitted in
accordance with the rules and regulations of the SEC. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements, and accompanying notes, included in the Company's
Registration Statement on Form 10-SB (formerly Interactive Buyers Network
International, Ltd.) and Annual Report on Form 10-KSB for the fiscal year ended
January 31, 2000 (File No. 000-030326).
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue, expenses and
disclosure of contingent assets and liabilities to prepare these financial
statements in accordance with generally accepted accounting principles.
Accordingly, actual results may differ from those estimates.
LOSS PER SHARE
Basic and diluted loss per share of common stock is computed by dividing
the loss available to common shareholders by the weighted average number of
common shares outstanding during the period shown. Common stock equivalents are
not included in the determination of diluted loss per share, as their inclusion
would be antidilutive. See notes to consolidated financial statements as of
January 31, 2000 and Notes 4 and 5.
2. NOTES RECEIVABLE FROM THE SALE OF STOCK
The Company has unsecured notes receivables from several officers, which
totaled $178,798 as of July 31, 2000. The notes are due on demand and bear
interest at an annual rate of 6%. The notes were granted in connection with the
exercise of 636,100 stock options on May 15, 1999. In addition, the Company also
has issued loans and other advances to employees that totaled $147,680 as of
July 31, 2000.
3. CONVERTIBLE NOTES PAYABLE
In November 1999, the Company issued $150,000 of 10% convertible notes due
December 31, 2000 to certain investors. The notes are convertible into shares
of restricted common stock at a per share price of $2.50. None of these notes
were converted as of July 31, 2000.
The Company allocated a portion of the convertible notes to the embedded
beneficial conversion feature in the convertible notes and credited paid-in
capital. The portion allocated to the beneficial conversion feature was charged
to interest expense at the date of issuance. The amount charged to interest
expense related to convertible notes issued during the six month period ended
July 31, 2000 was $7,397.
- 5 -
<PAGE>
4. SHAREHOLDERS' EQUITY
Common Stock - On July 31, 2000, common stock totaled $159,142. This
reflects the issuance of 107,018 shares of common stock during the six months
ended July 31, 2000, an increase of $1,071 from the value of common stock, $0.01
par value, on January 31, 2000.
Preferred Stock - Effective February 24, 2000, the Company had 5,000,000
shares of preferred stock authorized and had designated 2,900,000 shares of the
preferred stock "Series 1-A Convertible Preferred Stock" of which 2,802,000
shares were issued at a conversion price of $2.50 per share. The Company
allocated all of the net proceeds from the issuance of the preferred stock to an
embedded beneficial conversion feature. The recorded discount resulting from the
allocation was fully amortized through retained earnings at issuance. In the
event of any liquidation or dissolution, either voluntary or involuntary, the
holders of the series 1-A Convertible Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds, to the holders of the Common Stock by reason of their ownership
thereof, a preference amount per share consisting of the sum (A) $2.50 for each
outstanding share of Series 1-A Preferred Stock, and (B) an amount equal to
declared but unpaid dividends on such shares, if any. Each share of Series 1-A
Preferred Stock shall be convertible at any time after the date of issuance of
such shares, into such number of fully paid shares of Common Stock as is
determined by dividing the Original Issue Price by the then applicable
Conversion Price, in effect on the date the certificate evidencing such share is
surrendered for conversion. Under certain circumstances, such as stock splits,
these shares are subject to stated Conversion Price Adjustments. Subsequent to
July 31, 2000, the remaining 2,100,000 shares were designated as "Series 2-A
Convertible Preferred Stock", which will be issued with rights, preferences and
privileges as designated by the board of directors.
Each share of Series 1-A Preferred Stock, subject to the surrendering of
the certificates of the Series 1-A Preferred Stock, shall be automatically
converted into shares of Common Stock at the then effective Conversion Price,
immediately upon closing of a public offering of the Company's Common Stock with
an aggregate gross proceeds of at least $10,000,000 and a per share price of at
least five dollars, or at the election of the holders of a majority of the
outstanding shares of Series 1-A Preferred Stock. The holder of each share of
Series 1-A Preferred Stock shall have the right to that number of votes equal to
the number of shares of common stock issued upon conversion of the Series 1-A
Preferred Stock. (See Note 6 - Subsequent Events for additional information.)
On July 31, 2000, paid-in-capital totaled $46,731,057, an increase of
$36,085,123 from $10,645,934 at January 31, 2000. This primarily reflects the
recording of the issuance of preferred stock of $6,868,397, and the related
beneficial conversion feature and deemed dividend, the recording of $10,896,316
in compensation related to stock options granted to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", the recording of the issuance of common stock of $485,703, and the
recording of $10,966,310 in compensation for marketing, investor relations and
referral services in accordance with the Statement of Financial Accounting
Standards #123, "Accounting for Stock-based Compensation." Stockholders equity
is partially offset by deferred compensation of $16,538,686 as of July 31, 2000.
In conjunction with expenses relating to the issuance of the "Series 1-A
Convertible Preferred Stock", 235,985 warrants were granted at an exercise price
of $6.00 per share and 150,706 warrants were granted at an exercise price of
$2.50 per share.
During the second quarter 120,000 warrants were granted at an exercise
price of $2.00 per share, as compensation for services rendered. Ramin Kamfar,
who subsequently was elected as a director of the Company, is a partner in a
partnership that was awarded 60,000 warrants, of the 120,000 warrants granted,
at an exercise price of $2.00 per share. As of July 31, 2000, 1,376,691
warrants and 1,977,784 options had been granted and were outstanding.
In February 2000, the Company entered into a strategic relationship with
U.S. West, Inc. of Denver, Colorado, pursuant to which the two firms agreed to
make VSN available to U.S. West's business customers. U.S. West (now known as
Qwest Communications) provides telecommunications and related services, wireless
services, high-speed data and Internet services and directory services. U.S.
West also agreed to make a minority equity investment in Vsource. In exchange
for services to be rendered, Vsource granted to U.S. West 600,000 warrants with
a three-year term, at an exercise price of $5.00. The terms of the distribution
- 6 -
<PAGE>
and marketing agreement are automatically renewable each year unless either
party notifies the other of its intent to terminate the agreement, in writing,
sixty calendar days prior to February 14th of the potential renewal year. When
the warrants were granted, the Company's stock was valued at $17.50 per share,
resulting in a charge to the Company of $8,412,000. In the six months ended July
31, 2000, the Company recognized $2,103,000 of this charge as a marketing
expense. The Company plans to recognize the remaining $6,309,000 evenly on a
quarterly basis as a marketing expense until February 14, 2002.
5. BASIC LOSS AVAILABLE TO SHAREHOLDERS
The Company has adopted SFAS No. 128, "Earnings Per Share," which is
effective for financial statements issued after December 15, 1997. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The loss available to common shareholders for the six months ended July 31, 2000
is the net loss for the period, adjusted for deemed dividends of preferred
stock.
The following table illustrates the calculation of basic and diluted
earnings/(loss) per share:
Net loss ($12,699,495)
Less - discount to preferred shareholders ( 6,868,397)
-------------
Basic loss available to common shareholders ($19,567,892)
=============
Weighted average common shares outstanding for dilution purposes do not take
into account the exercise of options or warrants because to do so would be
antidilutive.
6. SUBSEQUENT EVENTS
On August 29, 2000, the Company announced that it had received a commitment
from a unit of Mercantile Capital Group, LLC, Northbrook, Illinois, to invest in
and lead a private placement of Vsource Series 2-A Convertible Preferred Stock.
The Company received $1,450,000 in August 2000, primarily from Vsource
shareholders that had invested in earlier equity offerings. Additional funding
is expected to close during the month of September 2000. Vsource will use the
funds primarily to expand its operations, including capital equipment,
technology and staffing. In addition, the funds will support new product
development to ensure continued leadership in eProcurement technology. A portion
of the funds will also be used to support marketing efforts.
- 7 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and the related notes thereto appearing elsewhere herein.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB and the documents incorporated herein
by reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend," and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth in this Item 2. Particular attention should be paid to
the cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the Company's need for and the
availability of capital resources, the evolving nature of its business model,
the intensely competitive market for business-to-business electronic
procurement, and the risks associated with systems development, management of
growth and business expansion. Except as required by law, the Company
undertakes no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise. Readers, however, should
carefully review the factors set forth in other reports or documents that the
Company files from time to time with the Securities and Exchange Commission
("SEC").
OVERVIEW
The Company creates and markets "pure" Internet-based applications using an
Application Service Provider (ASP) model. An ASP model is best described as
providing the ability on a rental basis for clients to access by an Internet
browser, such as Internet Explorer or Netscape Communicator, computer software
and data that reside on a remote server on the Internet, rather than the user's
computer or a server on the user's local area network. The Company intends to
generate fees by charging a small set-up fee to use its software and then
charging based upon time or transactions, depending upon the situation.
Currently, the Company offers one application, Virtual Source Network (VSN),
which may be used by corporate clients to purchase goods and services via the
Internet.
Currently all financial, technical and marketing resources of the Company
are dedicated to VSN. The Company plans to sell VSN through a direct sales
force, through independent resellers, and through strategic partnerships in
which VSN will be offered to the partner's base of customers. VSN is designed
to be sold initially through a pilot program for on-going transaction fees and
an initial set-up fee of $25,000. During the pilot program, the client is
expected to test the functionality of VSN and determine how much customization
of the system, if any, is required for a full implementation.
During 1997 and early 1998, the Company offered an earlier version of VSN,
which was a software application installed on client computers. The Company has
discontinued the sale and use of this product. The Company's Internet version
of VSN has just recently been made available for use by clients. The Company is
presently hiring a direct sales force and creating relationships with
independent resellers and strategic partners.
The Internet version of VSN is now being used on a trial basis by initial
customers. As a result, the limited operating history makes the prediction of
future operating results very difficult. In particular, the Company believes
that period-to-period comparisons of operating results should not be relied upon
as predictive of future performance. Operating results are expected to vary
significantly from quarter to quarter and are difficult or impossible to
predict. The Company's operating prospects must be considered in relationship
to the risks, expenses and difficulties encountered by any company at an early
stage of development, particularly companies in new and rapidly evolving
markets. The Company may not be successful in addressing such risks and
difficulties. For more information, please refer to "FORWARD LOOKING
STATEMENTS" and "FACTORS THAT MAY AFFECT FUTURE PERFORMANCE."
- 8 -
<PAGE>
RECENT EVENTS
In August 2000, the Company and IBM jointly announced an agreement between
IBM Global Services and Vsource, Inc. for localization services, including
language translations. The Company is a paying client of IBM, which has
developed the training program for VSN users. Clients of the Company retain the
services of IBM in order to train their staffs to use the VSN system. In
addition, IBM and the Company have each agreed informally to make their
respective clients aware of the other firm's services, where it seems
appropriate for the client in question.
In July 2000, the Company signed an agreement with First Data Merchant
Services Corporation ("First Data") wherein First Data will provide certain
electronic payment services to Vsource clients and their vendors through the
Vsource VSN e-Procurement web site.
In June 2000, Vsource, Inc. was the recipient of the Technology Leadership
Award from Frost and Sullivan, being one of only three companies to receive
recognition. Frost and Sullivan is a long established global leader in
international market consulting and training.
In April 2000, the Company signed a letter of intent with NeTune
Corporation of Los Angeles, California, pursuant to which the Company will
provide its electronic purchasing service to companies in the film and
television production industries that use NeTune's satellite based
communications services. NeTune allows film and television companies to perform
a series of electronic services directly from remote production locations by
using two-way satellite communications.
In March 2000, the Company formed a strategic marketing and technical
alliance with Internet Commerce Corp. (ICC) of New York City, New York,
pursuant to which ICC will connect its Internet electronic data interchange
(EDI) network with VSN. The interconnection will allow VSN customers to
exchange purchase-related documents with companies that accept such documents in
the EDI standard. ICC estimates that more than 400,000 companies worldwide have
the ability to accept purchasing-related documents via the EDI standard.
In February 2000, the Company entered into a strategic relationship with
U.S. West, Inc. (now known as Qwest Communications) of Denver, Colorado,
pursuant to which the two firms agreed to make VSN available to U.S. West's
business customers. U.S. West also agreed to take a minority equity stake in
Vsource. VSN is the first component of a comprehensive collection of services
that Qwest Communications said it intends to launch in 2000. Qwest
Communications provides telecommunications and related services, wireless
services, high-speed data and Internet services and directory services
principally to customers in the states of Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming.
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS - THREE MONTHS
ENDED JULY 31, 2000, COMPARED TO THE THREE MONTHS ENDED JULY 31, 1999:
REVENUE
For the three months ended July 31, 2000, revenues were $62,500 compared to
$3,925 in revenues during the three months ended July 31, 1999. This increase
in revenues results from the Company's implementation of the pilot phase of the
revenue generating process for the new Internet version of VSN. The Company has
not begun to generate transaction fees, the anticipated primary source of
revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended July 31, 2000, general and administrative
expenses were $1,384,923 (excluding $2,695,516 of stock-based compensation), up
$1,145,573 or 479%, from $239,350 during the three months ended July 31, 1999.
This increase was caused primarily by increased expenses associated with
marketing, advertising, public relations, and executive staff.
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<PAGE>
RESEARCH AND DEVELOPMENT
For the three months ended July 31, 2000, research and development expenses
were $1,671,024 (excluding $1,219,560 of stock-based compensation), up $550,972
or 49.2%, from $1,120,052 during the three months ended July 31, 1999. This
increase was caused primarily by implementation of a development effort
associated with the Company's Internet version of VSN. These costs included the
use of independent contractors, as well as the addition of technical employees
in the Company's Seattle office. The Company does no work that would be
considered pure research, or basic research.
STOCK BASED COMPENSATION
For the three months ended July 31, 2000, recognition of stock based
compensation was $3,915,076 while there were no expenditures for this area
during the three months ended July 31, 1999. This increase resulted primarily by
the issuance of stock options, warrants and stock for employee related
compensation and in obtaining services for marketing, investor relations and
referral fees.
NET LOSS
For the three months ended July 31, 2000, the net loss was $6,891,041 an
increase of $5,535,564 or 408%, from the net loss of $1,355,477 during the three
months ended July 31, 1999. This increase is a result of significantly
increased marketing and advertising expenses, as well as significantly increased
research and development expense and stock based compensation, as described
above.
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
For the three months ended July 31, 2000, the basic weighted average common
shares outstanding were 15,844,809 up 3,613,407 or 29.5%, from 12,231,402 for
the three months ended July 31, 1999. This increase resulted primarily from the
issuance of 2,210,201 shares upon conversion of convertible notes and accrued
interest, the issuance of 658,100 shares upon exercise of stock options, as well
as the issuance of 757,720 shares in return for cash invested in the Company.
Weighted average common shares outstanding for dilution purposes do not take
into account the exercise of stock options or warrants because to do so would be
anti-dilutive.
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
The basic net loss per common share for the three months ended July 31,
2000 was $0.43 per share, up $0.32 per share from a net loss of $0.11 per share
for the three months ended July 31, 1999. This increase reflects the
$5,535,564 increase in the net loss, partially offset by the increase of
3,613,407 shares in the basic weighted average outstanding common shares.
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS - SIX MONTHS ENDED
JULY 31, 2000, COMPARED TO THE SIX MONTHS ENDED JULY 31, 1999:
REVENUE
For the six months ended July 31, 2000, revenues were $62,500, up $54,515
or 682% compared to $7,985 in revenues during the six months ended July 31,
1999. This increase in revenues results from the Company's implementation of
the pilot phase of the revenue generating process for the new Internet version
of VSN. The Company has not begun to generate transaction fees, the anticipated
primary source of revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
For the six months ended July 31, 2000, general and administrative expenses
were $2,280,833 (excluding $5,448,406 of stock-based compensation), up
$1,703,837, or 295%, from $576,996 during the six months ended July 31, 1999.
This increase was caused primarily by the increase of expenses associated with
marketing, advertising, public relations, and executive staff.
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RESEARCH AND DEVELOPMENT
For the six months ended July 31, 2000, research and development expenses
were $3,262,330 (excluding $1,821,008 of stock-based compensation), up
$2,142,278 or 191% from $1,120,052 during the six months ended July 31, 1999.
This increase was caused primarily by implementation of a development effort
associated with the Company's Internet version of VSN. These costs included the
use of independent contractors, as well as the addition of technical employees
in the Company's Seattle office. The Company does no work that would be
considered pure research, or basic research.
STOCK BASED COMPENSATION
For the six months ended July 31, 2000, recognition of stock based
compensation was $7,269,414 while there were no expenditures for this area
during the six months ended July 31, 1999. This increase was caused by the
issuance of options, warrants and stock primarily for employee related
compensation, and in obtaining services for marketing, investor relations and
referral fees.
NET LOSS
For the six months ended July 31, 2000, the net loss was $12,699,495, an
increase of $11,010,432 or 652%, from the net loss of $1,689,063 during the six
months ended July 31, 1999. This increase is a result of significantly
increased marketing and advertising expenses, as well as significantly increased
research and development expense and stock based compensation, as described
above.
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
For the six months ended July 31, 2000, the basic weighted average common
shares outstanding were 15,826,197, up 3,594,795 or 29.4%, from 12,231,402 for
the six months ended July 31, 1999. This increase resulted primarily from the
issuance of 2,118,269 shares upon conversion of convertible notes and accrued
interest, the issuance of 22,000 shares upon exercise of stock options, as well
as the issuance of 612,344 shares in return for cash invested in the Company.
Weighted average common shares outstanding for dilution purposes do not take
into account the exercise of stock options or warrants because to do so would be
anti-dilutive.
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
The basic net loss per common share for the six months ended July 31, 2000
was $1.24 per share, up $1.10 per share from a net loss of $0.14 per share for
the six months ended July 31, 1999. This increase reflects the $11,010,432
increase in the net loss and the return of equity to preferred stockholders of
$6,868,397, created by the beneficial conversion feature, partially offset by
the increase of 3,594,795 shares in the basic weighted average outstanding
common shares.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION - AT JULY 31, 2000,
COMPARED TO JANUARY 31, 2000:
CASH
On July 31, 2000, cash totaled $753,425, down $4,453,742, or 85.5%, from
$5,207,167 at January 31, 2000. This decrease reflects the funds used for
operations during the six months ended July 31, 2000, net of proceeds from the
sale of preferred stock in private transactions during that period.
ACCOUNTS RECEIVABLE
On July 31, 2000, accounts receivable were $50,000 and on January 31, 2000,
there were no accounts receivable. This reflects that the Company is approaching
the completion of development of its main product, VSN, and has just begun
generating revenues and receivables from the product.
EMPLOYEE RECEIVABLES
On July 31, 2000, employee receivables totaled $147,680, up $37,833, or
34.4% from $109,847 at January 31, 2000. This increase results from advances
to employees, net of partial repayments.
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PREPAID EXPENSES
On July 31, 2000, prepaid expenses totaled $174,005 as compared to no
balance at January 31, 2000. This increase primarily reflects prepaid fees of
$174,005 that will be expensed in the current year.
TOTAL CURRENT ASSETS
On July 31, 2000, total current assets totaled $1,125,110, down $4,191,904,
or 78.8%, from $5,317,014 at January 31, 2000. This decrease reflects the use
of cash to fund operations during the quarter.
FIXED ASSETS
On July 31, 2000, fixed assets totaled $590,582, an increase of $350,374,
or 145.9%, from $240,208 at January 31, 2000. This increase reflects the
addition of equipment and software needed to accommodate the increase in the
development and marketing of VSN.
ACCUMULATED DEPRECIATION
On July 31, 2000, accumulated depreciation totaled $65,137, up $47,429, or
267.8%, from $17,808 at January 31, 2000. This increase reflects the addition
of normal depreciation expense for the six months ended July 31, 2000.
PROPERTY AND EQUIPMENT, NET
On July 31, 2000, property and equipment, net totaled $525,445, up
$302,945, or 136.2%, from $222,500 at January 31, 2000. This increase primarily
reflects the addition of equipment and software needed to accommodate the
increase in the development and marketing of VSN, net of depreciation expense
recorded for the period.
OTHER ASSETS
On July 31, 2000, other assets totaled $976, up $95, or 10.8% from $881 at
January 31, 2000. This increase reflects an additional rental deposit for
additional space, net of normal amortization of organizational expenses for the
six months ended July 31, 2000.
TOTAL ASSETS
On July 31, 2000, total assets were $1,651,531, down $3,888,864, or 70.2%,
from $5,540,395 at January 31, 2000. This change primarily reflects cash used in
research and development costs, and general and administrative expenses
associated with the development and marketing of VSN.
ACCOUNTS PAYABLE
On July 31, 2000, accounts payable were $633,377, up $385,905, or 155.9%,
from $247,472 at January 31, 2000. This change is primarily a result of
increased amounts due independent contractors involved in development of the
Internet version of VSN, and also amounts due for marketing, advertising and
legal expenses.
ACCRUED LIABILITIES
On July 31, 2000, accrued liabilities were $40,983, down $59,954, or 59.4%,
from $100,937 at January 31, 2000. This change resulted primarily from the
decrease in accrued wages and related compensation expenses.
CONVERTIBLE NOTES PAYABLE
On July 31, 2000, convertible notes payable were $150,000, remaining the
same as at January 31, 2000. Interest accrued on this liability is included in
accrued liabilities.
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LIABILITIES RELATED TO THE PRIVATE PLACEMENT OF PREFERRED STOCK
On July 31, 2000, liabilities related to private placement of preferred
stock were zero, as compared to liabilities of $6,002,500 at January 31, 2000.
This is due to the reclassification to equity and issuance of 2,802,000 shares
of Series 1-A Preferred Stock in April 2000. As of January 31, 2000, the Company
had received $6,002,500 in cash associated with the private placement, which it
treated as a liability until the transaction was completed and the preferred
stock was issued.
TOTAL CURRENT LIABILITIES
On July 31, 2000, total current liabilities totaled $824,360, down
$5,676,549, or 87.3%, from $6,500,909 at January 31, 2000. This reduction
reflects the reclassification of liabilities related to the private placement of
preferred stock in the amount of $6,002,500 to equity as preferred stock,
partially offset by the increase in accounts payable of $385,905 and a decrease
in accrued liabilities of $59,954.
PREFERRED STOCK, $0.01 PAR VALUE
On July 31, 2000, preferred stock totaled $27,252 versus no preferred stock
at January 31, 2000. This reflects the issuance of 2,802,000 new preferred
shares less 76,768 shares converted to common shares during this period. All of
the shares were issued in return for cash invested in the Company.
COMMON STOCK, $0.01 PAR VALUE
On July 31, 2000, common stock totaled $159,142. This reflects the issuance
of 107,018 shares of common stock during the six months ended July 31, 2000, up
$1,071 from the value of common stock, $0.01 par value, on January 31, 2000.
ADDITIONAL PAID-IN-CAPITAL
On July 31, 2000, paid-in-capital totaled $46,731,057, up $36,085,123 or
339%, from $10,645,934 at January 31, 2000. This increase reflects the value
(in excess of par) of the new preferred shares issued during the period, of
which 2,725,232 preferred shares were issued in return for cash invested in the
Company, and 107,018 common shares were issued for cash and services. This
primarily reflects the recording of additional paid in capital for common
stockholders' of $6,868,397 related to the beneficial conversion feature of
preferred stock, compensation of $10,896,316 related to stock options granted to
employees in accordance with the Statement of Financial Accounting Standards
#123, accounting for stock-based compensation, and $10,966,310 in compensation
for marketing, investor relations and referral services.
DEFERRED COMPENSATION
On July 31, 2000, deferred compensation was $16,538,686, up $14,757,869, or
828.7% from $ 1,780,817 at January 31, 2000. This change was due to the granting
of stock options to employees as employment incentives and bonuses, and
compensation for marketing, investor relations and referral services.
ACCUMULATED DEFICIT
On July 31, 2000, the accumulated deficit was $29,372,796 up $19,567,892 or
200% from $9,804,904 at January 31, 2000. This change resulted from a net
loss of $12,699,495 during the six months ended July 31, 2000 and the
recognition of a deemed dividend to preferred stockholders of $6,868,397.
NOTES RECEIVABLE FROM THE SALE OF STOCK
On July 31, 2000, notes receivable from the sale of stock totaled $178,798.
This amount is used to offset the balance in stockholders' equity. These notes
are receivable from officers who exercised stock options during a prior period.
The Company's stock option program provides several alternative methods of
paying for shares acquired through exercise of stock options, and one of those
alternatives is to provide a demand note payable to the Company, in the amount
of the purchase.
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TOTAL STOCKHOLDERS' EQUITY/(DEFICIT)
On July 31, 2000, total stockholders' equity was $827,171, up $1,787,685,
or 186.1%, from a deficit of $960,514 at January 31, 2000. This change resulted
primarily from increases in preferred stock and paid-in-capital of $36,085,123
offset by an increase in deferred compensation of $14,757,869, the recognition
of a deemed dividend to preferred stockholders of $6,868,397, and the net loss
of $12,699,495 during the six months ended July 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $62,500 of revenue during the six months ended July 31,
2000, in addition to small amounts of interest income, and certain non-recurring
items. While the Company expects to generate revenue in the future, it is
currently entirely dependent on investor funds. At July 31, 2000, the Company
had cash balances totaling $753,425, primarily as a result of its private
placement of preferred stock during the first quarter of 2000 offset by current
operating activity. The Company is currently expending approximately $800,000
per month of cash and cash equivalents. The Company has received a commitment
from a unit of Mercantile Capital Group, L.L.C. to invest and lead a private
placement of Vsource convertible preferred stock projected to raise up to $11
million of which the Company received $1,450,000 in August 2000. (See Note 6 -
Subsequent Events) With the additional funding, with anticipated revenue from
current clients only and at the current rate of expenditure, management expects
those funds to last through October 2001. Without additional capital or
revenues, and at the current expenditure rate, management expects funds to last
through October 2000.
The Company's principal sources of cash and cash equivalents were derived
from private sales of the Company's equity and debt securities. The main source
of funds for the Company from the date of inception through July 31, 2000, other
than the sale of equity and debt securities, has been from sales of the earlier
software products. $12,500 was derived from such sales made in the six months
ended July 31, 2000.
The Company anticipates client revenues to begin increasing during the
twelve-month period from August 1, 2000 to July 31, 2001. In July 2000, the
Company initiated a private equity offering that is anticipated to complete
funding during the period ending October 31, 2000. There can be no assurances
that the Company will raise funds as anticipated, beyond the $1,450,000
described above, or that the Company will begin generating additional revenue
from clients. If client revenues or the private equity offering do not
materialize on schedule, the Company has a contingent plan of cash conservation
that will allow it to operate through the remaining quarters of the current
year. The Company has not begun to generate transaction fees, the anticipated
primary source of revenue.
The Consolidated Statements of Cash Flows for the six months ended July 31,
2000, and six months ended July 31, 1999 show that net losses were $12,699,495
and $1,689,063, respectively, with the issuance of preferred stock for cash of
$893,917, partially offsetting the cash requirement. A non-cash entry was made
for the period ended July 31, 2000 to recognize the conversion of liabilities
related to the private placement of preferred stock in the amount of $6,002,500
to equity as preferred stock. In addition, a non-cash accounting entry of
$22,026,983 was made to increase additional paid-in capital, with an offsetting
entry of $7,269,414 for compensation expense, and $14,757,869 to deferred
compensation. This did not offset any cash requirement directly or indirectly,
and there was no such cash or other consideration paid as compensation in the
period.
RESEARCH AND DEVELOPMENT FOR THE FISCAL YEAR ENDING JANUARY 31, 2001
During the fiscal year ending January 31, 2001, it is expected that
approximately $6,500,000, excluding stock based compensation, will be spent on
product development. The Company does not expect to expend any resources in
basic research. Additional work is being done to enhance the present system.
Developments will make the system more flexible, and allow additional options
for the user to modify portions of the system to better meet the unique needs of
each particular user's business. Other enhancements will add new capabilities
to the system in the future. No assurance can be given that the Company will
have the resources necessary to conduct this product development.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
RISKS RELATED TO THE COMPANY'S BUSINESS
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NEED FOR ADDITIONAL CAPITAL: The Company has recorded substantial operating
losses and, as of July 31, 2000, has an accumulated deficit of approximately
$29.4 million. If the Company is to sustain its current rate of development and
operating expenditures, it must generate additional capital in the third quarter
of the fiscal year ending January 31, 2001. The Company currently has less than
10 clients under contract. During the second quarter three of these clients
together generated a small amount of revenue from the initial phases of contract
implementation. It is expected that current and newly added clients will
produce significantly increased revenues during the third quarter, primarily
from implementation fees. However, in total, these revenues will not contribute
materially to the Company's immediate capital requirement. In recognition of
this capital need, in July 2000 the Company entered into a preliminary agreement
with a private investment firm wherein that firm would invest in and lead an
equity offering of up to $11 million. Approximately $1.4 million of the
offering was funded in August 2000. The remaining funding is expected to close
in September 2000. (See Note 6 - Subsequent Events for additional information.)
LIMITED OPERATING HISTORY: VSN, the Company's primary service offering,
began operations in October 1996 when the earlier version of VSN, a software
application for personal computers rather than an Internet application, was
successfully installed and used at a private company in southern California. The
Company has had a limited operating history since then, although it did
successfully install the earlier VSN version (personal computer application) for
several clients, and was paid the annual subscription rate then in effect. This
limited history makes an evaluation of the Company's future prospects very
difficult. The new Internet version of VSN is now available for evaluation and
use by customers, but does not yet have any fully operational customers. As
such, because of the limited operational history of VSN, there can be no
assurances that the product will meet the needs of potential customers or that
the product will operate correctly.
RISKS OF EARLY STAGE COMPANY; NEW, RAPIDLY CHANGING MARKET: NEED TO ATTRACT
LARGE CORPORATIONS: The market for Internet applications and services is at an
early stage, and changing rapidly. Internet procurement is a relatively new
market. Its rate of growth and change is unpredictable, as is the nature of
this change. The Company will encounter the risks and difficulties often
encountered by early-stage companies in new and rapidly evolving markets. The
Company's initial success will depend upon attracting several large,
technologically advanced corporations to use VSN, and their favorable results
from this usage. Subsequent success will depend on the Company's ability to
communicate these early successes to the marketplace, thus attracting
significant numbers of other businesses and buying organizations. No assurance
can be given that the Company will be successful in the marketplace, or if
successful, that it will attract significant numbers of clients. There can be
no assurance that an adequate demand for, and usage of, the Company's products
will develop.
COMPLEX IMPLEMENTATION AND INTEGRATION OF VIRTUAL SOURCE NETWORK MAY IMPEDE
MARKET PENETRATION: The installation of VSN, including integration with a
client's systems currently in use, can be a complex, time consuming and
expensive process. While the Company is designing a simplified version for use
by smaller organizations with limited enhancement capabilities and, as a result,
a low cost associated with its implementation, the Company anticipates that its
initial customers will be mid-sized or larger organizations that will require
that VSN undergo substantial customization to meet their needs. These firms
will also likely require that VSN be integrated with existing internal
Enterprise Resource Planning (ERP) and other operational systems. The Company's
management estimates that the installation and integration process may take
anywhere from one month to six weeks or longer in some cases, depending on the
size of the client, the complexity of its operations, the configurations of its
current computer systems, and other systems projects that compete for the time
and attention of the Information Technology departments of the clients.
Management also expects that most integration projects in larger companies will
involve various integrators as outside systems consultants to the client. The
Company's ability to continually enhance the features of VSN, in response to
client's widely differing needs, is yet to be proven. The Company's ability to
develop a simplified version for smaller businesses that is inexpensive to
implement is also unproven. As a result, VSN may not achieve significant market
penetration in the near future, or ever.
LARGE OPERATING LOSSES EXPECTED TO CONTINUE: As discussed above, the
Company has accumulated substantial net losses through July 31, 2000. Since
inception, the Company has not had material revenues, and has recognized only a
small amount of revenue from the Internet version of VSN. The Company expects
to derive the majority of its revenues from VSN fees over the next five years.
In addition, provided that revenues develop more or less as expected, the
Company expects to spend a substantial portion of revenues during the next two
or three years on marketing, sales, technology development, training and
administration. There can be no assurance that the Company will be able to fund
these expenses.
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FAILURE TO ACHIEVE LISTING ON MAJOR STOCK MARKET: In March 2000, the
Company applied for listing on the Nasdaq National Market System. Management
believes that it meets the stated requirements for listing on Nasdaq.
Presently, the Company's stock is traded on the over-the-counter bulletin board
system under the stock symbol, VSRC. While the listing of the Company's stock
does not have a direct effect on the Company's operations, it has an effect on
the perception of the Company amongst potential investors and can have an effect
on the ability of the Company to raise additional funds. It can also impact the
dilution associated with any financing. There can be no assurances that the
Company's application will be accepted by Nasdaq or that the Company will have
its shares listed on a major exchange.
Until the Company's securities are listed on a major exchange, the
securities of the Company are subject to a Securities and Exchange Commission
rule that imposes special sales practice requirements upon broker-dealers who
sell such securities to persons other than established customers or accredited
investors. For purposes of the rule, the phrase "accredited investors" means,
in general terms, institutions with assets in excess of $5,000,000, or
individuals having a net worth in excess of $1,000,000 or having an annual
income that exceeds $200,000 (or that, when combined with a spouse's income,
exceeds $300,000). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
securities of the Company and also may affect the ability of any shareholder to
sell their securities in any market that might develop for the common stock.
EFFECT OF INCREASED OPERATING EXPENSES ON OPERATIONS AND PRICE OF COMMON
STOCK: The Company plans to increase operating expenses to expand its sales and
marketing operations, establish new strategic relationships, fund additional
systems development, and increase its business and technical staff. These
planned expenses will increase operating losses during reporting periods before
significant revenues develop. These increased losses could have a negative
effect on the price of the Company's common stock.
DEPENDENCE ON VIRTUAL SOURCE NETWORK ANTICIPATED REVENUES: The Company
expects that when revenues do develop, substantially all of those revenues will
come from VSN clients. Although VSN fees are believed by management of the
Company to be below those currently charged for leading competitive systems and
services, future reductions in competitive prices could negatively impact the
demand for, or usage of, VSN. These changes may impede VSN's ability to achieve
broad market acceptance, thus negatively impacting the Company's opportunity to
eventually become profitable. There can be no assurance that broad and timely
acceptance of VSN, which is critical to the Company's future success, will be
achieved. Failure to achieve anticipated revenues would have adverse
consequences for the Company.
DEPENDENCE ON ONE PRODUCT: At the present time all of the Company's
resources are being devoted to the development and marketing of VSN. The
Company expects to depend on VSN for substantially all of the Company's revenues
for the foreseeable future. Accordingly, if VSN is not accepted by customers or
potential customers, or does not generate the demand or revenues necessary to
the Company, the Company may face serious or irreparable harm.
DEPENDENCE ON SALES AND MARKETING RELATIONSHIPS FOR GROWTH: Our business
model includes generating sales through our alliance and affiliate programs.
Consequently, the Company will depend, in part, on sales and marketing strategic
relationships for growth. The Company has established and plans to continue to
establish sales and marketing strategic relationships with large organizations
as part of our growth strategy. Such relationships may not contribute to
increased use of the Company's services, help the Company add new clients, or
increase the Company's revenue. The Company may not be able to enter into new
relationships or renew existing relationships on favorable terms, if at all. In
addition, the Company may not be able to recover costs and the expenses
associated with the formation of these programs.
THIRD PARTY IMPLEMENTATION/INTEGRATION OF VIRTUAL SOURCE NETWORK; NEGATIVE
IMPACT UPON REVENUE GOALS IF THIRD PARTIES UNAVAILABLE OR DO NOT PERFORM: The
Company expects to rely, to a large degree, on a number of third parties to
propose and explain VSN to prospective clients, to sell pilot projects to the
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clients, and to integrate VSN with clients' existing systems, and to train users
when VSN is rolled out for general usage. The Company itself is planning to
work with clients and third-parties to implement the pilot projects. The
Company's ability to support its strategic partners, in pursuit of large numbers
of buyers and suppliers, is yet to be proven. If the Company is unable to
establish and maintain effective, long-term relationships with these third
parties, if these third parties are unable to meet the needs and expectations of
VSN clients, or if the Company cannot properly implement pilot projects, the
Company will likely have difficulty achieving its revenue goals.
UNSUCCESSFUL ACQUISITIONS COULD HARM OUR OPERATING RESULTS, BUSINESS AND
GROWTH: The Company may acquire businesses, products and technologies that
complement or augment the Company's existing businesses, services and
technologies. The inability to integrate any newly acquired entities or
technologies effectively could harm the Company's operating results, business
and growth. Integrating any newly acquired businesses or technologies may be
expensive and time consuming. To finance any acquisitions, the Company may need
to raise additional funds through public or private financings. Any equity or
debt financings, if available at all, may be on terms that are not favorable to
the Company and, in the case of equity financings, may result in dilution to the
Company's stockholders. The Company may not be able to operate any acquired
businesses profitably or otherwise implement the Company's business strategy
successfully.
LONG SALES CYCLE FOR LARGE CORPORATE ACCOUNTS COULD CAUSE DELAYS IN REVENUE
GROWTH: The Company's sales cycles for large corporate accounts may take many
months to complete and may vary from contract to contract. Further, the Company
expects that a large number of then Company's clients may be introduced to VSN
through such large accounts. Lengthy sales cycles for large corporate accounts
could cause delays in revenue growth, and result in significant fluctuations in
the Company's quarterly operating results. The length of the sales cycle may
vary depending on a number of factors over which the Company may have little or
no control, including the internal decision-making process of the potential
customer and the level of competition that the Company encounters in its selling
activities. Additionally, since the market for business-to-business e-commerce
is relatively new, the Company believes that it will have to educate many
potential customers about the use and benefits of the Company's products and
services, which can in turn prolong the sales process. The Company has provided
access to VSN on a trial basis for customer evaluation, which again may prolong
the sales process. Sales made through third parties, such as the Company's
alliance partners, can further extend sales cycles.
QUARTERLY RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS; EXPECTATIONS
OF INVESTORS AND ANALYSTS MAY NOT BE MET: The Company expects that its quarterly
operating results will fluctuate significantly due to many factors, many of
which are outside the control of the Company. Such factors include:
. demand for and market acceptance of VSN
. inconsistent growth, if any, of the Company's client base
. loss of key customers or strategic partners
. timing of the recognition of revenue for large contracts
. variations in the dollar volume of transactions effected through VSN
. intense and increased competition
. introductions of new services or enhancements, or changes in pricing
policies, by the Company and it's competitors
. the Company's ability to control costs
. reliable continuity of VSN availability
The Company believes that quarterly revenues, expenses and operating
results are likely to vary significantly in the future, that period-to-period
comparisons of results of operations are not necessarily meaningful and that, as
a result, such comparisons should not be relied upon as indications of future
performance. Due to these and other factors, it is likely that the Company's
operating results will be below market analysts' expectations in some future
quarters, which would cause the market price of the Company's stock to decline.
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COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET; EFFECT ON
MARKET SHARE AND BUSINESS: The market for VSN is very competitive, evolving and
subject to rapid technological change. Intensity of competition is likely to
increase in the future. Increased competition from new competitors is likely to
result in loss of market share, which could negatively impact the Company's
business. Competitors vary in size, and in the scope and breadth of the
products and services offered. VSN will encounter competition from Ariba,
Clarus, Commerce One, GE Information Services, i2 Technologies, Intelisys,
PurchasePro, TRADE'ex Electronic Commerce Systems and other eProcurement
competitors. VSN may also encounter competition from several major enterprise
software developers, such as Oracle, PeopleSoft and SAP who are not presently
considered to be direct competitors, but who have announced intentions to enter
into the market. In addition, because there are relatively low barriers to
entry in this market, additional competition from other established and emerging
companies may develop.
Many current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
the Company, significantly greater name recognition, and a larger installed base
of customers. In addition, many of the competitors have well-established
relationships with the Company's clients and potential clients, and have
extensive knowledge of the industry. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors, or alliances among
competitors, may emerge and rapidly acquire significant market share. Actions
taken by the Company competitors, including price cuts, new product
introductions and enhancements could have material adverse consequences for the
Company. There can be no assurance that the Company will be able to compete
with price cuts, or develop, introduce and market enhancements to its service on
a timely basis to compete successfully in this market.
VIRTUAL SOURCE NETWORK REVENUES EXPECTED FROM A LIMITED NUMBER OF CLIENTS,
MEANING INCREASED POTENTIAL IMPACT OF CUSTOMER LOSS: The Company expects that
VSN revenues, if any, during the current fiscal year will come from a small
number of clients, perhaps as few as 20 or less. The loss of customers or a
change in a client's budget could have a substantial negative impact on the
business of the Company.
VENDORS ARE ESSENTIAL TO SUCCESS OF VIRTUAL SOURCE NETWORK; NEGATIVE IMPACT
OF VENDORS' FAILURE TO JOIN THE NETWORK: In order to operate, VSN requires that
vendors (suppliers) be able to access the network and that client buyers be able
to communicate their requirements electronically to vendors. Currently, vendors
can access VSN even if they have not joined the network, but it is far more
efficient if a vendor does join the network and sets up a catalog online. It is
necessary, furthermore, that a client's key vendors join the network in order to
achieve the full benefits of the system, such as buying from an electronic
catalog. The Company, furthermore, expects that vendors will join VSN upon
invitation from their respective buyers. Network membership is now free for any
vendor. Client buyers operating on VSN make direct requests of their key
vendors that they join. When a large corporation requests that its vendors
adapt to a new purchasing process, and that change is free, the Company believes
that there is a strong incentive for those vendors to make that change to
protect their customer relationships.
To date there has been no significant vendor resistance to joining the new
Internet version of VSN. During 1996 and 1997, however, the Company found
significant vendor resistance to joining the PC version of VSN. Vendors, at the
time, viewed VSN as increasing competitive price pressure. They also saw an
increased possibility of losing customers to lower cost vendors not previously
competing for the business. Additionally, the non-Internet version was more
difficult for vendors to operate.
Since 1997 the Company believes that important changes have occurred in the
procurement environment. Electronic commerce, and the resultant increased
competition, has become more accepted by vendors. It is management's opinion
that most vendors believe that they will eventually be required to do business
electronically, if they have not already started. The Company also believes
that the Internet version of VSN is easier for vendors to use. As a final
incentive, the Company no longer charges subscription fees to vendors. Despite
these changes, there can be no assurance that vendors will not resist
participating in VSN. Should significant new vendor resistance develop, that
could slow adoption of VSN by clients, and negatively impact potential revenues
of the Company.
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ABILITY TO ENHANCE FEATURES AND FUNCTIONALITY OF PRODUCTS; CHANGE IN THE
MARKET: The success of the Company will depend on its ability to tailor VSN to
meet the requirements of its clients, not only as such requirements are
presently known and understood by the Company and its client base, but also as
such requirements evolve. Such requirements may be driven by competitive
products or the changing preferences of the Company's client base. An inability
to offer enhanced products or features that anticipate or meet such requirements
in a timely and efficient manner may result in a loss of sales and revenues and
the obsolescence of the Company's products. There can be no assurance that the
Company can make the changes and enhancements to its products necessary to meet
and satisfy the demands of its clients.
In addition, the rapid technological changes and rapidly changing industry
standards, which have characterized the Internet and companies doing business on
the Internet, may have the effect of rendering the Company, its business model
and products obsolete. Making the adjustments, changes and adaptations
necessary in this market may also require significant expenditures in equipment,
infrastructure and product development. There can be no assurance that the
Company will be able to adapt to such rapid changes.
FAILURE TO MAINTAIN ACCURATE DATABASES: The Company must update and
maintain extensive databases of the products, services and procurement network
transactions for its clients. The Company's computer systems and databases must
allow for expansion as a client's business grows without losing performance.
Database capacity constraints may result in data maintenance and accuracy
problems, which could cause a disruption in service and the Company's ability to
provide accurate information to its clients. These problems may result in a
loss of clients that could severely harm the Company's business.
DEFECTS IN SOFTWARE: VSN is complex software. Software often contains
defects, particularly when first introduced or when new versions are released.
The Company's testing procedures may not discover software defects that affect
new or current services or enhancements until after they are deployed. Such
defects could cause service interruptions, which could damage the Company's
reputation or increase its service costs, cause it to lose revenue, delay market
acceptance or divert development resources, any of which could severely harm the
Company's business.
SYSTEM FAILURES, SERVICE DELAYS AND INTERRUPTIONS: The Company's ability to
provide acceptable levels of customer service largely depends on the efficient
and uninterrupted operation of the Company's computer and communications
hardware and procurement network systems. Any interruptions could severely harm
the Company's business and result in a loss of customers. The Company's
computer and communications systems are located in the state of Washington. The
Company does not maintain a redundant site, although is currently planning to do
so. The Company's systems and operations are vulnerable to damage or
interruption from a variety of sources including human error, sabotage, fire,
flood, earthquake, power loss, telecommunications failure and similar events.
The Company cannot give assurances that it will not experience system failures
in the future. The occurrence of any system failure or similar event could harm
the Company's business dramatically.
NO DISASTER RECOVERY PLAN: The Company does not have a disaster recovery
plan and does not yet have redundant systems at an alternate site to permit the
company to continue to provide services on the event of a failure in its
computer and communications systems. Accordingly, any such failure would cause
severe harm to the Company's business.
SUBSTANTIAL COSTS OF ANY PRODUCT LIABILITY CLAIMS; NO PRODUCT LIABILITY
INSURANCE: Errors, defects or other performance problems with VSN could result
in financial or other damages to our clients. Management believes that the
contractual limits of liability, indemnification provisions and disclaimers of
warranties should minimize the exposure of the Company in the event of a product
liability claim. A product liability claim, however, even if not successful,
would likely be time consuming and costly and could seriously harm the Company.
The Company presently does not maintain product liability insurance. Although
the terms and conditions in VSN user agreements contain disclaimers of any
warranties designed to limit exposure to these claims, existing or future laws,
or unfavorable judicial decisions, could weaken or negate these provisions and
have materially adverse consequences for the Company.
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LEGAL LIABILITY FOR COMMUNICATION ON PROCUREMENT NETWORK: The Company may
be subject to legal claims relating to the content in its procurement network,
or the downloading and distribution of such content. Claims could involve
matters such as fraud, defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content of material. Even if the
Company was ultimately successful in its defense of these claims, any such
litigation is costly and these claims could harm the Company's reputation and
business.
SUCCESS DEPENDS ON KEY PERSONNEL; NO "KEY MAN" LIFE INSURANCE: Future
performance depends on the continued service of key personnel, and the ability
to attract, train, and retain additional technical, marketing, customer support,
and management personnel. The loss of one or more key employees could
negatively impact the Company, and there is no "key man" life insurance in force
at this time. However, the Company does plan to obtain this insurance.
Competition for qualified personnel is intense, and there can be no assurance
that the Company will retain key employees, or attract and retain other needed
personnel.
PROTECTION OF INTELLECTUAL PROPERTY; LACK OF PATENTS; POTENTIAL PIRATING:
The Company's success depends to a large extent on its exclusive technology, and
relies on a combination of contractual provisions, confidentiality procedures,
trade secrets, copyrights and trademark protections. The Company has no patents
at this point, and the Company's technologies may not be patentable. Despite
efforts to protect its exclusive rights, unauthorized parties may attempt to
copy aspects of that technology, or to obtain and use our exclusive information.
Policing unauthorized use of this technology is difficult. While the Company
does not suspect that any of the Company's software has been subject to piracy,
there can be no assurances that such piracy will not occur. Further,
competitors may independently develop similar technology, or duplicate the
Company's services without violating intellectual property rights.
At present, the Company's technologies are owned outright by the Company.
However, the Company may in the future have to license or otherwise obtain
access to intellectual property of third parties in order to remain competitive
in the marketplace.
STRAIN ON LIMITED RESOURCES DUE TO NEED TO MANAGE GROWTH AND EXPANSION: The
Company anticipates a period of significant expansion and growth, which most
likely will place significant strain upon management, employees, systems, and
resources. Because the market is developing rapidly, furthermore, it is
difficult to project the rate of growth, if any. Failure to properly manage
growth and expansion, if and when it occurs, will jeopardize the ability of the
Company sustain its third party and customer relationships. There can be no
assurances that the Company will properly be able to manage growth, especially
if such growth is more rapid than anticipated.
INABILITY TO ACCURATELY PREDICT USAGE RATES AND DIFFICULTY IN ADAPTING
SYSTEMS IN A TIMELY MANNER: Traffic in the Company's procurement network may
increase to the point where the Company must expand and upgrade some of its
transaction processing systems and procurement network hardware and software.
While the Company's systems are scalable and can be expanded, that flexibility
is limited. The Company may not be able to accurately predict the rate of
increase in the usage of its procurement network. This may affect the Company's
timing and ability to expand and upgrade its systems and procurement network
hardware and software capabilities to accommodate increased use of its
procurement network. If the Company does not upgrade its systems and
procurement network hardware and software in a timely fashion, the Company may
experience downgraded service, interruptions or delays that could damage its
business reputation, relationship with clients and its operating results. It
might also be forced to delay bringing additional customers onto the VSN system
until such upgrades are completed
RISKS OF INTERNATIONAL OPERATION: The Company is exploring international
markets and considering the expansion of its operations and marketing efforts to
include international markets. If the Company should elect to expand into such
markets, it would be confronted with risks including:
- increased impact of recessions in economies outside of the United
States
- difficulties staffing and managing foreign operations
- political instability
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- the burdens of compliance with a wide variety of foreign laws and
legal regimes
- unexpected changes in regulatory requirements
- tariffs, export controls and other barriers to trade
- potentially adverse tax consequences
- fluctuations in currency exchange rates
- longer payment cycles and difficulties in collecting accounts
receivables
- seasonal fluctuations in business activity
RISKS RELATED TO THE INTERNET AND ECOMMERCE
YEAR 2000 RISK: Management believes that its internally developed systems
and technology are Year 2000 compliant and has so far had no indications that
its products are not Y2K compliant. Nevertheless, because the Company relies on
information technology supplied by third parties, it is still possible that year
2000 problems may yet surface that could adversely affect the Company, although
none have surfaced to date. Further, the Internet itself could face serious
disruptions arising from Year 2000 problems, although none have surfaced to
date. Many potential VSN clients, furthermore, may have implemented policies
that prohibit or strongly discourage making changes or additions to their
internal computer systems until after the impact of Year 2000 has been assessed.
While the Year 2000 issue has generally been considered resolved, there can be
no assurances that the issue will not impact the rate at which VSN will be
implemented inside client organizations.
VOLATILITY IN STOCK PRICE: The stock market and especially the stock prices
of Internet related companies have been very volatile. This volatility may not
be related to the operating performance of the companies. The broad market
volatility and industry volatility may reduce the price of the Company's stock
without regard to the Company's operating performance. The market price of the
company's stock could significantly decrease at anytime due to this volatility.
The uncertainty that results from such volatility can itself depress the market
price of the company's stock.
SUBSTANTIAL COSTS OF ANY SECURITIES LITIGATION COULD DIVERT LIMITED
RESOURCES OF THE COMPANY: In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. The Company could become a target of similar
securities litigation based upon the volatility of its stock in the marketplace.
Litigation of this type could result in substantial costs and divert
management's attention and resources.
SUBSTANTIAL COSTS OF ANY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS: There
has been a substantial amount of litigation in the software industry and the
Internet industry regarding intellectual property rights. It is possible that
in the future, third parties may claim that the Company's technology may
infringe their intellectual property. Management is not aware of any
infringement or claim of infringement by a third party. It is expected,
however, that software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims as the number of
products and competitors grows and the functionality of products in different
industry segments overlaps. Any claims, with or without merit, could be
time-consuming and result in costly litigation.
DEPENDENCE UPON, AND RISKS RELATED TO, THE INTERNET: The use of VSN and
other ASP-based products depends on the increased acceptance and use of the
Internet as a medium of commerce and communication. While management believes
that acceptance and use of the Internet will continue to increase at very rapid
rates, there can be no assurances that such increase will continue to develop,
or that use of the Internet as a means of conducting business will continue or
increase. If growth in the use of the Internet does not continue, clients may
not adopt or use these new Internet technologies at the rates or for the
purposes management has assumed. This could, in turn, adversely impact the
Company and the results of its business operations. Further, even if acceptance
and use of the Internet does increase rapidly, but the technology underlying the
Internet and other necessary technology and related infrastructure does not
effectively support that growth, the Company's future would be negatively
impacted.
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POTENTIAL BREACHES OF THE COMPANY'S SECURITY SYSTEMS: A significant barrier
to electronic commerce and communications is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of the Company's security
systems or those of other web sites to protect the Company's exclusive
information. If any well-publicized compromises of security were to occur, it
could have the effect of substantially reducing the use of the web for commerce
and communications. Anyone who circumvents the Company's security measures
could misappropriate its exclusive information or cause interruptions in
services or operations. The Internet is a public network, and data is sent over
this network from many sources. In the past, computer viruses, software
programs that disable or impair computers, have been distributed and have
rapidly spread over the Internet. Computer viruses could theoretically be
introduced into the Company's systems, or those of our clients or vendors, which
could disrupt VSN or another ASP-based product offered by the Company, or make
it inaccessible to clients or vendors. Although language in its user agreement
places responsibility with users to protect VSN from such threats, the Company
may be required to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems caused by
breaches. To the extent that the Company's activities may involve the storage
and transmission of exclusive information, such as credit card numbers, security
breaches could expose the Company to a risk of loss or litigation and possible
liability. Despite provisions to the contrary in its user agreements, the
Company's security measures may be inadequate to prevent security breaches, and
the Company's business could be seriously impacted if they are not prevented.
GOVERNMENT REGULATION: As Internet commerce continues to grow, the risk
that federal, state or foreign agencies will adopt regulations covering issues
such as user privacy, pricing, content and quality of products and services,
increases. It is possible that legislation could expose companies involved in
electronic commerce to liability, which could limit the growth of electronic
commerce generally. Legislation could dampen the growth in Internet usage and
decrease its acceptance as a communications and commercial medium. If enacted,
these laws, rules or regulations could limit the market for the Company's
services.
One or more states, furthermore, may seek to impose sales tax collection
obligations on out-of-state companies like the Company that engage in or
facilitate electronic commerce throughout numerous states. These proposals, if
adopted, could substantially impair the growth of electronic commerce and could
adversely affect the Company's opportunity to derive financial benefit from
these activities.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are currently no legal proceedings involving the Company, and none
threatened. However, because of the rapidly changing environment surrounding the
Internet, and the rapid pace with which new businesses enter or attempt to enter
Internet related businesses, it is possible that disagreements will develop
regarding business names, relationships, markets, technologies, and other
subjects. Any future disagreement could lead to legal action.
Item 2. CHANGES IN SECURITIES
During the period December 1, 1999 to February 24, 2000, the Company sold
2,802,000 shares of Series 1-A Convertible Preferred Stock to 46 accredited
investors for $7,005,000 less offering costs. Each share of preferred stock is
initially convertible into one share of common stock at the election of the
holder, upon an underwritten public offering with aggregate proceeds to the
Company of at least $10 million or upon the election of a majority of the
outstanding shares of preferred stock. No underwriters were used. Offering
costs included transfer agent fees, printing costs, legal fees and commissions
or finders' fees. The offering was a private placement made in accordance with
Regulation D. All of the purchasers were accredited investors. No form of
general solicitation or general advertising was used for any offer or sale. The
investors represented their intention to acquire the shares for investment
purposes only, and not with a view to resale or distribution, and appropriate
restrictive legends were placed on each stock certificate issued pursuant to
this offering.
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In connection with the sales of the Series 1-A Convertible Preferred Stock,
the Company has issued warrants to purchase an aggregate 506,691 shares of
common stock at exercise prices ranging from $2.00 to $6.00 as additional
finder's fees and commissions and for other services in connection with the
offering. No underwriters were used, and no commissions were paid. The
warrants were issued, or will be issued, to seven consultants and as a private
placement exempt from registration under Section 4(2) of the Securities Act.
The warrant holders represented their intention to acquire the warrants for
investment purposes only, and not with a view to resale or distribution, and
appropriate stop transfer instructions and restrictive legends indicating the
transfer restrictions will be placed on each warrant and each stock certificate
when issued. Each investor had ample access to the kind of information from the
Company that a registration statement would include.
In July 2000, the Company approved a stock option plan ("Plan"). The Plan
authorizes the grant of Incentive Stock Options and Nonstatutory Stock Options
covering an aggregate of 795,000 shares of the Company's common stock (subject
to limitations of applicable laws, and adjustment in the event of stock
dividends, stock splits, reverse stock spits and certain other corporate
events.) The Plan expires on July 6, 2010, unless it is sooner terminated or
suspended by the board. The Plan is not subject to any provisions of the
Employee Retirement Income Security act of 1974.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the six months ended
July 31, 2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the six months ended July 31, 2000, the following matters were submitted
to a vote of security holders:
At the annual meeting of shareholders held July 7, 2000, shareholders voted
as follows by proxy or in person:
Of the 18,532,777 shares outstanding and entitled to votes on the
record date for the meeting, 16,668,123 shares were present in person or by
proxy.
The following nominees, being the only nominees, and having each
received over a majority of the eligible votes, were elected as directors
of the Corporation until the next annual meeting or their successors are
duly elected and qualified:
Robert C. McShirley
Samuel E. Bradt
Scott T. Behan
Robert N. Schwartz
Ramin Kamfar
The resolution to reincorporate the Corporation in Delaware was
approved by 10,795,408 votes in favor and 34,812 votes against.
The resolution to ratify the appointment of Grant Thornton LLP as the
Corporation's independent public accountants was approved by 16,573,943
votes in favor and 44,139 votes against.
Item 5. OTHER INFORMATION
RECENT SALE OF UNREGISTERED SECURITIES
During the period November 1999 to July 2000, the Company issued or
committed to issuing warrants to purchase an aggregate of 1,376,691 shares of
common stock at exercise prices which range from $2.00 to $25.00 in exchange for
financial consulting and distribution and marketing services. No underwriters
were used, and no commissions were paid. The warrants were issued or will be
issued as a private placement exempt from registration under Section 4(2) of the
Securities Act. The warrant holders represented their intention to acquire the
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<PAGE>
warrants for investment purposes only, and not with a view to resale or
distribution, and appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each warrant and each
stock certificate when issued. Each warrant holder had ample access to the kind
of information from the Company that a registration statement would include.
AMENDMENT OF THE ARTICLES OF INCORPORATION
On September 7, 2000, the Company filed a Certificate of Designation with
the Nevada Secretary of State designating 2,100,000 shares of preferred stock
Series 2-A Convertible Preferred Stock in anticipation of the closing of a
private placement. The Certificate of Designation sets forth the rights,
preferences and privileges of such shares of preferred stock but does not
otherwise amend the articles of incorporation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Articles of Incorporation. Incorporated herein by reference
from Exhibit 2.1 to Registrant's Registration Statement on
Form 10-SB filed on September 21, 1999 (SEC File No.
000-6563).
3.2 Certificate of Designation. Incorporated herein by this
reference from Exhibit 3.2 to Registrant's Annual Report on
Form 10-KSB for the fiscal year ended January 31, 2000
filed on May 11, 2000 (SEC File No. 000-30326).
3.3 Certificate of Designation.
27.1 Financial Data Schedule (1)
99.1 Vsource, Inc. 2000 Stock Option Plan
(b) REPORTS ON FORM 8-K
None.
--------------------------
(1) This exhibit is being filed electronically in the electronic format
specified by EDGAR.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VSOURCE, INC.
By: /s/ Robert C. McShirley
-----------------------------
Robert C. McShirley
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 14, 2000
By: /s/ Sandford T. Waddell
-----------------------------
Sandford T. Waddell
Chief Financial Officer and Secretary
(Principal Accounting Officer)
Date: September 14, 2000
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EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
3.1 Articles of Incorporation. Incorporated herein by
reference from Exhibit 2.1 to Registrant's Registration
Statement on Form 10-SB filed on September 21, 1999
(SEC File No. 000-6563).
3.2 Certificate of Designation. Incorporated herein by this
reference from Exhibit 3.2 to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended January
31, 2000 filed on May 11, 2000 (SEC File No.
000-30326).
3.3 Certificate of Designation.
27.1 Financial Data Schedule (2)
99.1 Vsource, Inc. 2000 Stock Option Plan
-------------------------
(2) This exhibit is being filed electronically in the electronic format
specified by EDGAR.
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