<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON DECEMBER 29, 2000
REGISTRATION 333-______________
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VSOURCE, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 77-0557617
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5740 RALSTON STREET, SUITE 110
VENTURA, CALIFORNIA 93003
(805) 677-6720
(Address and telephone number of principal executive offices)
5740 RALSTON STREET, SUITE 110
VENTURA, CALIFORNIA 93003
(805) 677-6720
(Address of principal place of business or intended principal place of business)
ROBERT C. MCSHIRLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VSOURCE, INC.
5740 RALSTON STREET, SUITE 110
VENTURA, CALIFORNIA 93003
(805) 677-6720
(Name, address and telephone number of agent for service)
<PAGE>
COPIES TO:
KAREN I. CALHOUN, ESQ.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
650 TOWN CENTER DRIVE, 4TH FLOOR
COSTA MESA, CALIFORNIA 92626-1925
(714) 513-5100
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective and from time to
time thereafter.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
TITLE OF EACH AMOUNT PROPOSED MAXIMUM AMOUNT OF
CLASS OF TO BE REGISTERED MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE OFFERING OFFERING FEE
REGISTERED PRICE PER PRICE (1)
SHARE (1)
--------------------------------------------------------------------------------
Common Stock, 3,006,543 shares (2) $1.72 $5,171,254 $1,365.21
$0.01 par value
--------------------------------------------------------------------------------
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act based upon the average
of the high and low prices reported in the consolidated reporting system as
of December 28, 2000.
(2) Includes (i) the number of shares issued upon conversion of the Series 2-A
Preferred Stock and (ii) 1,334,215 shares issuable upon exercise of certain
purchase warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
state.
PROSPECTUS SUBJECT TO COMPLETION
DATED DECEMBER 29, 2000
VSOURCE, INC.
3,006,543 SHARES COMMON STOCK, $0.01 PAR VALUE
See a discussion of "Risk Factors" associated with this offering on Page 5.
3,006,543 shares of Common Stock, with $0.01 par value, of Vsource, Inc., a
Delaware corporation (the "Company" or "us" or "we"), are being offered for
resale by certain security holders of the Company (the "Registering
Shareholders"). The Shares being registered are issuable upon the conversion of
Series 2-A Convertible Preferred Stock and upon the exercise of warrants to
purchase Common Stock. We will not receive any of the proceeds from the sale of
the Shares offered hereunder by the Registering Shareholders. The offering is
made to fulfill our contractual obligations to the Registering Shareholders to
register certain shares held by the Registering Shareholders.
If this registration statement is not effective on or before January 16, 2001,
we must issue to each holder of Series 2-A Preferred an additional warrant to
purchase Common Stock in an aggregate amount equal to two percent (2%) of the
registrable shares held by such holder for each thirty (30) day period this
registration statement is not effective by January 16, 2001. The additional
warrants would have terms of five (5) years and an exercise price of $6.41 per
share. For example, if this registration statement is not effective until
February 15, 2001, we would issue warrants to purchase an aggregate of 36,358
shares of Common Stock. If this registration statement is not effective until
March 17, 2001, we would issue warrants to purchase an aggregate of 72,715
shares of Common Stock. We will amend this registration statement to add the
Common Stock underlying those warrants to be covered by this registration
statement.
Our Common Stock is listed on the Nasdaq National Market under the symbol
"VSRC." The last reported trade on December 28, 2000 on the Nasdaq National
Market was for $1.84375 per share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
-1-
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
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Page
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<S> <C>
SUMMARY INFORMATION AND RISK FACTORS.................................................. 3
RISK FACTORS.......................................................................... 4
USE OF PROCEEDS....................................................................... 16
SELLING SECURITY HOLDERS.............................................................. 16
PLAN OF DISTRIBUTION.................................................................. 21
LEGAL PROCEEDINGS..................................................................... 22
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.......................... 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 25
DESCRIPTION OF SECURITIES TO BE REGISTERED............................................ 29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES... 30
DESCRIPTION OF THE BUSINESS........................................................... 31
Growth of the Internet and E-commerce............................................ 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 41
PLAN OF OPERATION..................................................................... 51
PROPERTY.............................................................................. 52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 53
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................. 54
EXECUTIVE COMPENSATION................................................................ 55
FINANCIAL STATEMENTS.................................................................. 58
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 85
</TABLE>
-2-
<PAGE>
SUMMARY INFORMATION AND RISK FACTORS
VSOURCE, INC.
3,006,543 SHARES OF COMMON STOCK
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
This Prospectus covers 3,006,543 shares of Common Stock, with $0.01 par
value, of Vsource, Inc. offered for resale by certain security holders of the
Company (the "Registering Shareholders") as described more fully herein. All
references herein to us, Vsource, Inc., the Company or the Registrant may be to
the Company's predecessor due to the Company's reincorporation in Delaware on
November 8, 2000.
This Prospectus covers all of the shares of Common Stock issuable upon the
conversion of the Series 2-A Convertible Preferred Stock (the "Series 2-A
Preferred") issued to the investors listed herein under "Registering
Shareholders" pursuant to an August 28, 2000 and September 18, 2000 private
placement and the exercise of related warrants. In addition, this Prospectus
covers shares of Common Stock issued and issuable upon the exercise of warrants
issued to the consultants and service providers to the Company listed herein
under "Registering Shareholders."
The Shares may be offered by the Registering Shareholders from time to time
in transactions (which may include block transactions) in the Nasdaq National
Market, in negotiated transactions, through a combination of such methods of
sale, or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Registering
Shareholders may effect such transactions by selling the Shares to or through
broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Registering Shareholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agents or to
whom they may sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The Company has
agreed to bear all expenses of registration of the Shares, but all selling and
other expenses incurred by the Registering Shareholders will be borne by the
Registering Shareholders.
The Registering Shareholders and any broker-dealers, agents or underwriters
that participate with the Registering Shareholders in the distribution of the
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended, and the commission paid or any discounts or concessions
allowed to any such persons, and any profits received on the resale of the
Shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Registering Shareholders" and "Plan of
Distribution."
-3-
<PAGE>
The Company is positioning itself to be a leading provider of business-to-
business electronic procurement services (eProcurement). The Company's Virtual
Source Network ("VSN") allows buyers and suppliers to conduct business
transactions on the Internet in an efficient and cost-effective manner. The
Company creates and markets its eProcurement services via a "pure" Internet-
based Application Service Provider ("ASP") model which enables the Company's
clients to access computer software and data that reside on a remote server
rather than the user's own computer or local area network server. The clients
may access the Company's software on a rental basis through an Internet browser
and, therefore, are not required to invest in the ownership of a perpetual right
to use the software, nor do the clients have to procure any hardware to operate
the software application. Using the ASP model, the Company charges an initial
set-up fee to use the software and then charges on a time or transaction basis
for usage of the software depending on the requirements of the individual
client.
The Company's objective is to create the leading pure Internet-based ASP
electronic commerce network platform for the business-to-business customer and
supplier. The Company intends to create the leading virtual marketplace for
business-to-business goods and services, and feels that the ASP technology
provides customers an advantage not presently offered by competitive
eProcurement providers.
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should carefully consider the following risk factors before making an
investment decision concerning the Common Stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this document constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties, and
other factors that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these forward-
looking statements. Although management believes that the expectations reflected
in the forward-looking statements are reasonable, there is no guarantee that
future results, levels of activity, performance or achievements will be
attained. Moreover, neither management nor any other person assumes
responsibility for the accuracy and completeness of these statements.
The Company's business, financial condition and results of operations may
be impacted by a number of factors including, without limitation, the factors
discussed below.
RISKS RELATED TO THE COMPANY'S BUSINESS
Need For Additional Capital
---------------------------
The Company has recorded substantial operating losses and, as of October
31, 2000, has an accumulated deficit of approximately $41.8 million. The Company
received funding of approximately $10.7 million in August and September 2000
related to the issuance of preferred
-4-
<PAGE>
shares. Although these funds will provide operating capital for one year or
more, the Company may require additional funding before it can finance its
operations and growth wholly on internally generated funds.
Anti-Takeover Provisions
------------------------
In connection with the Company's reincorporation in Delaware, the Company
increased the number of shares of common stock authorized for issuance to
100,000,000. The issuance of additional shares of common stock could have the
effect of delaying, deferring or preventing a change in control of the Company,
even if such change in control would be beneficial to the Company's
stockholders.
The terms of certain provisions of the Company's Certificate of
Incorporation and Bylaws may have the effect of discouraging a change in control
of the Company. Such provisions include the requirement that all stockholder
action must be effected at a duly-called annual meeting or special meeting of
the stockholders and the requirement that stockholders follow an advance
notification procedure for stockholder business to be considered at any meeting
of stockholders.
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.
-5-
<PAGE>
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. The
Company anticipates that some of 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 clients' 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 October 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.
Failure to Maintain Listing on Major Stock Market
-------------------------------------------------
Although the Company's common stock began trading on the Nasdaq National
Market System on October 30, 2000, there is no assurance that the Company will
continually achieve the requirements for continued listing on the Nasdaq
National Market System. The Company's common stock is currently trading below
$5.00 per share. If the stock continues to trade below $5.00 per share, the
Company may be the subject of de-listing or transfer to the Nasdaq SmallCap
Market. 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.
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
-6-
<PAGE>
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
----------------------------------------------------------
The Company's business model includes generating sales through its 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 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.
-7-
<PAGE>
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 its competitors
- the Company's ability to control costs
- reliable continuity of VSN availability
-8-
<PAGE>
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.
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 any future market share the Company may achieve, 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.
-9-
<PAGE>
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 VSN network and that client buyers be able to communicate their
requirements electronically to vendors. It is necessary 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.
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.
-10-
<PAGE>
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; New Versions
---------------------------------
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. New versions of VSN may not have
the features or capability originally believed to exist by the Company or could
reveal the lack of such features or capability in earlier versions of VSN. 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.
Incomplete Disaster Recovery Plan
---------------------------------
The Company has developed a disaster recovery plan that is still in the
implementation process. The Company has transferred its Web site operations to a
facility in Seattle, Washington. The Bothell, Washington facility will initially
serve as backup. A second phase of the plan will include a dedicated backup
facility in another state. Until the second phase of the plan is completed,
there are risks of localized Internet failure, which could affect both Seattle
and Bothell. The Company is also in the process of implementing redundancy and
other improvements in its internal network operations. Until these improvements
are completed, there will be greater risks of periodic network disruptions.
-11-
<PAGE>
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 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 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.
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 were 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.
-12-
<PAGE>
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 to sustain its third party and customer relationships. There can be no
assurance 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
- 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
-13-
<PAGE>
RISKS RELATED TO THE INTERNET AND E-COMMERCE
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 any time 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.
-14-
<PAGE>
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.
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.
-15-
<PAGE>
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.
Warrants and Options; Potential Dilution and Adverse Impact on Additional
-------------------------------------------------------------------------
Financing
---------
As of December 22, 2000, the Company had outstanding options and warrants
to purchase an aggregate of 3,282,071 shares of Common Stock. The Company is
also obligated to issue a number of warrants to purchase Common Stock in the
event this Registration Statement is not effective by January 16, 2001.
To the extent that such options and warrants are exercised and the Warrants
are exercised, substantial dilution of the interests of the Company's
shareholders is likely to result and the market price of the Common Stock may be
materially adversely affected. Such dilution will be greater if the future
market price of the Common Stock decreases. For the life of the warrants and
options, the holders will have the opportunity to profit from a rise in the
price of the Common Stock. The existence of the warrants and options is likely
to affect materially and adversely the terms on which the Company can obtain
additional financing and the holders of the warrants and options can be expected
to exercise them at a time when the Company would otherwise, in all likelihood,
be able to obtain additional capital by an offering of its unissued capital
stock on terms more favorable to the Company than those provided by the warrants
and options.
Shares Eligible for Future Sale
-------------------------------
Sales of substantial amounts of the Company's Common Stock in the public
market after this offering could adversely affect prevailing market prices for
the Common Stock. The shares of Common Stock offered hereby will be freely
tradeable without restriction in the public market.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares offered hereunder by the Registering Shareholders. The offering is made
to fulfill the Company's contractual obligations to the Registering Shareholders
to register certain shares held by the Registering Shareholders. However,
certain of the shares of Common Stock offered hereby are issuable in the future
upon the exercise of outstanding warrants. The Company will receive the exercise
prices payable upon any exercise of the warrants. There can be no assurance that
all or any part of the warrants will be exercised. If the warrants are exercised
in total, the cash proceeds to the Company would be $2,287,500 which would be
used for general ongoing expenditures.
-16-
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of December 22, 2000 by each of the security
holders whose shares are being registered in this registration statement
("Registering Shareholders"). Unless otherwise indicated below, to the knowledge
of the Company, all persons listed below have sole voting and investment power
with respect to the shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
The information included below is based upon information provided by the
Registering Shareholders. Because the Registering Shareholders may exercise
their warrants and offer all, some or none of the Common Stock, no definitive
estimate as to the number of shares thereof that will be held by the Registering
Shareholders after such offering can be provided and the following table has
been prepared on the assumption that all shares of Common Stock offered under
this Prospectus will be sold.
-17-
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Common Stock
Beneficially Owned on
Selling Security Holder December 22, 2000 (1)
-------------------------------------------------------------------------------------------------------
Name Shares Percent Shares That May be
---- ------ ------- Offered Hereunder
------------------
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity National Title Insurance Company (2), (3) 144,755 * 42,396
-------------------------------------------------------------------------------------------------------
Stuart G. Gauld (2), (4) 27,671 * 8,479
-------------------------------------------------------------------------------------------------------
William David O'Brien (2), (5) 128,717 * 67,833
-------------------------------------------------------------------------------------------------------
William J. O'Brien (2), (6) 46,496 * 42,396
-------------------------------------------------------------------------------------------------------
Martin A. Cooper Defined Benefit Pension Plan (2),(7) 139,396 * 42,396
-------------------------------------------------------------------------------------------------------
Reza and Mohammad Beshid, JTWROS. (2), (8) 26,438 * 25,438
-------------------------------------------------------------------------------------------------------
Jorge and Lucille Ragde, JTWROS (2), (9) 66,629 * 10,175
-------------------------------------------------------------------------------------------------------
Jorge and Jennifer Ragde, JTWROS (2), (10) 24,140 * 2,544
-------------------------------------------------------------------------------------------------------
Ali R. Moghaddami (2), (11) 4,239 * 4,239
-------------------------------------------------------------------------------------------------------
Mercantile Capital Partners I, L.P. (2), (12) 777,174 4.54% 678,337
-------------------------------------------------------------------------------------------------------
Stonehill Partners, L.P. (2), (13) 169,584 1.03% 169,584
-------------------------------------------------------------------------------------------------------
PPM America Private Equity Fund, L.P. (2), (14) 135,677 * 44,516
-------------------------------------------------------------------------------------------------------
MGN Opportunity Group LLC (2), (15) 84,792 * 84,792
-------------------------------------------------------------------------------------------------------
Oscar Investment Fund (2), (16) 152,626 * 152,626
-------------------------------------------------------------------------------------------------------
Oscar Opportunistic Offshore Fund Limited (2), (17) 16,958 * 16,958
-------------------------------------------------------------------------------------------------------
Peconic Fund, Ltd. (2), (18) 42,396 * 42,396
-------------------------------------------------------------------------------------------------------
Crestview Capital Fund, L.P. (2), (19) 144,146 * 144,146
-------------------------------------------------------------------------------------------------------
RLA 1993 Trust (2), (20) 33,917 * 33,917
-------------------------------------------------------------------------------------------------------
The Mabinogi LLC (2), (21) 68,682 * 68,682
-------------------------------------------------------------------------------------------------------
Bruce Nakfoor (2), (22) 84,792 * 84,792
-------------------------------------------------------------------------------------------------------
Denmore Investments Ltd (2), (23) 194,772 1.18% 2,056
-------------------------------------------------------------------------------------------------------
Kave Khosrowshahi (2), (24) 4,239 * 4,239
-------------------------------------------------------------------------------------------------------
Sandford T. Waddell (2), (25) 57,656 * 21,198
-------------------------------------------------------------------------------------------------------
P. Scott Turner (2), (26) 75,601 * 21,198
-------------------------------------------------------------------------------------------------------
Dianne B. Edelson IRA No. 557048907 (2), (27) 2,544 * 2,544
-------------------------------------------------------------------------------------------------------
Jefferies & Company, Inc. (28) 243,893 1.47% 51,975
-------------------------------------------------------------------------------------------------------
Qwest Internet Ventures (29) 600,000 3.54% 600,000
-------------------------------------------------------------------------------------------------------
Online Research Partners, LLC (30) 159,000 * 150,000
-------------------------------------------------------------------------------------------------------
Peter Wilson (31) 331,290 1.99% 200,000
-------------------------------------------------------------------------------------------------------
Next Millennium Capital Holdings, LLC (32) 23,990 * 23,990
-------------------------------------------------------------------------------------------------------
Ira Terk (33) 11,995 * 11,995
-------------------------------------------------------------------------------------------------------
Double 12 Ltd. (34) 187,451 1.13% 75,353
-------------------------------------------------------------------------------------------------------
Millennium Depot, LLC (35) 160,204 * 75,353
-------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
-18-
<PAGE>
(1) As required by SEC regulations, the number of shares shown as beneficially
owned includes shares which could be purchased within 60 days after
December 22, 2000.
(2) Each Investor Warrant has an exercise price of $6.41 and is exercisable
until September 17, 2005.
(3) Includes 39,002 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 3,394 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 95,959 shares of Series 1-A
Preferred and 6,400 shares of Common Stock.
(4) Includes 7,800 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 679 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 19,192 shares of Series 1-A
Preferred.
(5) Includes 62,402 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 5,431 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 38,384 shares of Series 1-A
Preferred and 22,500 options to purchase Common Stock exercisable within 60
days. Mr. O'Brien is an employee of the Company.
(6) Includes 39,002 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 3,394 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 4,100 shares of Common Stock.
(7) Includes 39,002 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 3,394 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 97,000 shares of Common
Stock.
(8) Includes 23,401 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 2,037 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 1,000 shares of Common Stock.
(9) Includes 9,360 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 815 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 18,384 shares of Series 1-A
Preferred. Also included 38,070 shares of Common Stock.
(10) Includes 2,340 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 204 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 20,000 shares of Series 1-A
Preferred. Also includes 1,800 shares of Common Stock.
(11) Includes 3,900 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 339 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(12) Includes 624,025 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 54,312 shares of Common Stock issuable upon the
exercise of Investor
-19-
<PAGE>
Warrants. Also includes 98,837 shares of Common Stock issuable upon the
conversion of Series 1-A Convertible Preferred Stock held by Mercantile
Equity Partners III, L.P., an affiliate of Mercantile Capital Partners I,
L.P, and other affiliates of Mercantile Capital Partners I, L.P.
(13) Includes 156,006 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 13,578 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(14) Includes 40,952 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 3,564 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 91,161 shares of Common Stock
issuable upon the conversion of Series 1-A Convertible Preferred Stock held
by PPM America.
(15) Includes 78,003 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 6,789 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(16) Includes 140,406 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 12,220 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(17) Includes 15,600 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 1,358 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(18) Includes 39,002 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 3,394 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(19) Includes 132,605 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 11,541 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(20) Includes 31,201 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 2,716 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(21) Includes 63,183 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 5,499 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(22) Includes 78,003 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 6,789 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(23) Includes 1,891 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 165 shares of Common Stock issuable upon the
exercise of Investor
-20-
<PAGE>
Warrants. Also includes 115,151 shares of Series 1-A Preferred and 77,565
shares of Common Stock held by Denmore and a principal of Denmore.
(24) Includes 3,900 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 339 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(25) Includes 19,501 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 1,697 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes options to purchase 36,458
shares of Common Stock exercisable within 60 days. Mr. Waddell is the
Chief Financial Officer of the Company.
(26) Includes 19,501 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 1,697 shares of Common Stock issuable upon the
exercise of Investor Warrants. Also includes 29,405 shares of Common Stock
and options to purchase 25,000 shares of Common Stock exercisable within 60
days. Mr. Turner is the Chief Operating Officer of the Company.
(27) Includes 2,340 shares of Common Stock issuable upon the conversion of the
Series 2-A Preferred and 204 shares of Common Stock issuable upon the
exercise of Investor Warrants.
(28) Includes 51,975 shares of Common Stock issuable upon exercise of a warrant
with an exercise price of $6.69 which is exercisable until September 17,
2005. Also includes 191,918 shares of Common Stock issuable upon the
conversion of the Series 1-A Convertible Preferred Stock. Jefferies &
Company Inc. subsequently transferred certain of its shares of Series 1-A
Preferred to Jefferies Employees Merchant Banking Fund LLC, Jefferies
Investors II LLC, David Wachter, Susan Lacerra & Steven Tingey Jt Ten, Mark
Carmen & Allison Carmen Jt. Ten, Eddie Sugar, David K. J. Atkinson, George
B. Rogers, Ezra Lightman and Richard Nevins & Sharon Nevins Jt Ten, William
Q. Derrough and Thane W. Carlston, affiliates of Jefferies.
(29) Includes 600,000 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $5.00 per share with an expiration of
January 26, 2003. Qwest (formerly U.S. West, Inc.) is a former strategic
partner of the Company.
(30) Includes 150,000 shares of Common Stock issuable upon the exercise of
warrants at exercise prices ranging from $6.00 to $25.00 per share with an
expiration of March 31, 2003. Includes 9,000 shares of Common Stock held
by Online Research Partners and its affiliates. Online Research Partners,
LLC provided financial consulting services to the Company.
(31) Includes 200,000 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $6.00 per share with an expiration of
March 10, 2001. Mr. Wilson was a consultant to the Company. Also includes
38,384 shares of Series 1-A Preferred and 92,906 warrants held by Octane
Partners LLC, a consulting firm in which Mr. Wilson is a member.
-21-
<PAGE>
(32) Includes 23,990 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $6.00 per share with an expiration of
February 24, 2003. Next Millennium Capital Holdings, LLC was a consultant
to the Company.
(33) Includes 11,995 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $6.00 per share with an expiration of
February 24, 2003. Mr. Terk was a consultant to the Company.
(34) Includes 75,353 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $2.50 per share with an expiration date of
May 10, 2005. Double 12 Ltd. was a consultant to the Company. Also includes
19,192 shares of Series 1-A Preferred held by Kimberly Norton, a principal
of Double 12 Ltd. and 92,906 warrants held by Octane Partners LLC, a
consulting firm in which Ms. Norton is a member.
(35) Includes 75,353 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $2.50 per share with an expiration of May
10, 2005. Millennium Depot, LLC was a consultant with the Company. Also
includes 38,384 shares of Common Stock held by Millennium Group Trust and
34,800 shares of Common Stock held by Pat J. DeMicco. Mr. DeMicco, a member
of Millennium Depot LLC, is the trustee of Millennium Group Trust. Also
includes options to purchase 11,667 shares of Common Stock exercisable
within 60 days. Mr. DeMicco is an employee of the Company.
PLAN OF DISTRIBUTION
We are registering the Shares on behalf of the Registering Shareholders.
The Shares covered by this prospectus may be offered and sold by the Registering
Shareholders, or by purchasers, transferees, donees, pledgees or other
successors in interest, directly or through brokers, dealers, agents or
underwriters who may receive compensation in the form of discounts, commissions
or similar selling expenses paid by a Registering Shareholder or by a purchaser
of the Shares on whose behalf such broker-dealer may act as agent. Sales and
transfers of the shares may be effected from time to time in one or more
transactions, in private or public transactions, in the Nasdaq National Market,
in the over-the-counter market, in negotiated transactions or otherwise, at a
fixed price or prices that may be changed, at market prices prevailing at the
time of sale, at negotiated prices, without consideration or by any other
legally available means. Any or all of the Shares may be sold from time to time
by means of (a) a block trade, in which a broker or dealer attempts to sell the
Shares as agent but may position and resell a portion of the Shares as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and the subsequent sale by such broker or dealer into the public market in any
manner permitted by the Registering Shareholders under this prospectus; (c)
ordinary brokerage transactions (which may include long or short sales) in which
the broker solicits purchasers or executes unsolicited orders; (d) the writing
(sale) or settlement of non-traded or exchange-traded put or call option
contracts, and by means of the establishment or settlement of other hedging
transactions, including forward sale transactions; (e) the pledging of the
Shares as collateral to a broker/dealer or other pledgee to secure loans, credit
or other financing arrangements or obligations and, upon any subsequent default,
the disposition of the shares so pledged; and (f) any other legally available
means. In addition, the Registering Shareholders may loan their shares to
broker/dealers who are counterparties to hedging transactions and such
broker/dealers may sell the Shares so borrowed into the public market.
-22-
<PAGE>
The Registering Shareholders may transfer the shares by means of gifts,
donations and contributions. This prospectus may be used by the recipients of
such gifts, donations and contributions to offer and sell the shares received by
them, directly or through brokers, dealers or agents and in private or public
transactions.
To the extent required with respect to a particular offer or sale of the
shares, a prospectus supplement will be filed pursuant to Section 424(b)(3) of
the Securities Act and will accompany this prospectus, to disclose (a) the
number of Shares to be sold, (b) the purchase price, (c) the name of any broker,
dealer or agent effecting the sale or transfer and the amount of any applicable
discounts, commissions or similar selling expenses, and (d) any other relevant
information.
In connection with distributions of the Shares or otherwise, the
Registering Shareholders may enter into hedging transactions with brokers,
dealers or other financial institutions. In connection with such transactions,
brokers, dealers or other financial institutions may engage in short sales of
our common stock in the course of hedging the positions they assume with
Registering Shareholders. To the extent permitted by applicable law, the
Registering Shareholders also may sell the shares short and redeliver the shares
to close out such short positions.
The Registering Shareholders and any broker-dealers who participate in the
distribution of the shares may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act and any discounts, commissions or similar
selling expenses they receive and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. As a result, we have informed the Registering
Shareholders that Regulation M, promulgated under the Securities Exchange Act of
1934, as amended, may apply to sales by the Registering Shareholders in the
market. The Registering Shareholders may agree to indemnify any broker, dealer
or agent that participates in transactions involving the sale of the Shares
against certain liabilities, including liabilities arising under the Securities
Act. The aggregate net proceeds to the Registering Shareholders from the sale of
the shares will be the purchase price of such shares less any discounts,
concessions or commissions.
The Registering Shareholders are acting independently of us in making
decisions with respect to the timing, price, manner and size of each sale. No
broker, dealer or agent has been engaged by us in connection with the
distribution of the Shares. There is no assurance, therefore, that the
Registering Shareholders will sell any or all of the Shares.
The Shares covered by this prospectus may qualify for sale pursuant to
Section 4(1) of the Securities Act or Rule 144 promulgated thereunder, and may
be sold pursuant to such provisions rather than pursuant to this prospectus.
We will not receive any proceeds from the sale of the Shares covered by
this prospectus and have agreed to pay all of the expenses incident to the
registration of the shares, other than discounts and selling concessions or
commissions, if any, and fees and expenses of counsel for the Registering
Shareholders, if any.
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LEGAL PROCEEDINGS
On October 23, 2000, the Company filed a suit in the Superior Court of
the State of California for the County of Los Angeles for fraudulent
misrepresentation, fraudulent concealment, rescission and mutual mistake,
seeking to rescind a contract the Company purportedly entered into with Vitria
Technology, Inc. ("Vitria") in February of this year. The suit was subsequently
transferred to Santa Clara County. Although Vitria has not as yet
responded to the substance of the Company's complaint, it is anticipated that
Vitria will deny the substantive allegations in the complaint and seek the award
of monetary damages against the Company for breach of contract. The Company
intends to pursue its claims against Vitria aggressively. However, if the
Company is unsuccessful in this litigation, damages could be awarded against the
Company in excess of $700,000 plus Vitria's legal fees and costs.
There are currently no other 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.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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NAME AGE POSITION WITH VSOURCE, INC.
---------------------------------------------------------------------
Robert C. McShirley 46 President, Chief Executive Officer
and Chairman of the Board
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Samuel E. Bradt (1) 62 Director
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Scott T. Behan (1) 39 Director
---------------------------------------------------------------------
Robert N. Schwartz (1) 60 Director
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Ramin Kamfar 37 Director
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P. Scott Turner 34 Chief Operating Officer
---------------------------------------------------------------------
Sandford T. Waddell 59 Chief Financial Officer and Secretary
---------------------------------------------------------------------
Richard McShirley 44 Vice President, Business Development
---------------------------------------------------------------------
Daniel J. Jinguji 44 Vice President, Product Development
---------------------------------------------------------------------
Ronald J. Sanderson 53 Vice President, Marketing
---------------------------------------------------------------------
(1) Member of the Audit Committee.
ROBERT C. MCSHIRLEY. Mr. McShirley has served as President and Chief Executive
Officer of the Company since May 1997, as a director since January 1998, and as
Chairman since June 1999. From 1995 to May 1997, he was an independent
consultant specializing in the field of manufacturing, with his most recent
assignment being with AML Communications, Inc., a manufacturer of wireless
amplifiers. Prior to that, he was the founder of Virtual Source, Inc. (formerly
Buyer/Seller Interactive Software, Inc., which was acquired by the Company in
1995). Robert C. McShirley and Richard S. McShirley are brothers.
-24-
<PAGE>
SAMUEL E. BRADT. Mr. Bradt has served on the Company's board since 1996. From
December 1996, through March 6, 2000, he served as Chief Financial Officer and
Secretary of the Company. He is currently a director of three non-profit
organizations and three private companies. Mr. Bradt has a B.S. from Stanford
University, and an M.B.A. from the University of Chicago Graduate School of
Business.
ROBERT N. SCHWARTZ. Mr. Schwartz has served on the Company's board since January
1998. From 1981 to the present, Mr. Schwartz has been a Senior Research
Scientist at HRL Laboratories LLC, Malibu, California. From 1979 to the present,
Mr. Schwartz has been a visiting professor at U.C.L.A. He has a B.A. in
Mathematics, Chemistry and Physics, and an M.S. in Chemical Physics from the
University of Connecticut, and a PhD. in Chemical Physics from the University of
Colorado.
SCOTT T. BEHAN. Mr. Behan has served on the Company's board since January 1998.
For the past five years, Mr. Behan has been employed as the Executive Vice
President of AML Communications, Inc., a manufacturer of wireless amplifiers. He
has been a director of AML since February 1999. Mr. Behan has a B.S. in
Electrical Engineering from Worcester Polytechnic Institute.
RAMIN KAMFAR. Mr. Kamfar has served on the Company's board since April 2000. Mr.
Kamfar is a Managing Partner at New World Venture Partners, Inc., an investment
banking boutique focusing on technology and new economy companies. Since 1993,
Mr. Kamfar has also served in various capacities at New World Coffee- Manhattan
Bagel, Inc., a company he founded. Most recently he has served as Chairman and
Chief Executive Officer. From 1988 to 1993 Mr. Kamfar worked in the investment
banking department of Lehman Brothers, Inc., most recently as a Vice President
in private placements. Mr. Kamfar has a B.S. in Finance from the University of
Maryland and an M.B.A. in Finance from The Wharton School at the University of
Pennsylvania.
P. SCOTT TURNER. Mr. Turner has served as the Company's Chief Operating Officer
since March 2000. Mr. Turner was a member of Company board from January 1998 to
the date he joined the Company as an officer. From July 1997 to March 31, 2000,
Mr. Turner was Vice President of Operations for Holbrook Design LLC, a company
engaged in product realization. From January 1990 to June 1997, Mr. Turner
served as the Vice president of Operations of SCICON Technologies Corp., a
company engaged in rapid prototyping and product development automation. He is
presently a director of SCICON Technologies Corp. Mr. Turner has a B.S. in
Computer Science and Engineering from the Milwaukee School of Engineering.
SANDFORD T. WADDELL. Mr. Waddell has served as the Company's Chief Financial
Officer and Secretary since March 2000. From October 1999 to March 2000 , Mr.
Waddell as the Chief Financial Officer for Snyder Diamond, Inc., a privately
owned retail company. From March 1998 to October 1999, Mr. Waddell served as
Chief Financial Officer for Rampage Clothing Company, a privately held clothing
manufacturer which was in bankruptcy, and which he helped to restore to
profitability and effected a successful reorganization. From October 1966 to
March 1988, Mr. Waddell served initially as Chief Financial Officer and later
also as Interim Chief Executive Officer at Reddi Brake Supply Corporation, a
wholesale auto parts distributor, where he directed a reorganization of the
company's operating subsidiary. From February 1992 to October 1996, Mr. Waddell
served as Interim Chief Financial Officer or Financial Consultant
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for approximately twelve privately held companies. Mr. Waddell holds a B.S. in
Engineering from Michigan Technological University and an M.B.A. from University
of Minnesota.
RICHARD S. MCSHIRLEY. Richard McShirley has served the Company as Vice President
of Business Development since 1995. Mr. McShirley has more than fifteen years
experience developing and implementing marketing and sales programs. Prior to
working for the Company, he worked with the creators of King World Productions,
and the creators of the television series "Wild America". He led the development
of a merchandising and licensing program related to that television series. He
has a B.A. in International Relations from the University of Southern
California. Robert C. McShirley and Richard S. McShirley are brothers.
DANIEL J. JINGUJI. Since April 1999, Mr. Jinguji has served as the Company's
Vice President of Product Development. From 1993 to March 1999, Mr. Jinguji was
a Software Design Engineer at Microsoft. Mr. Jinguji spent fifteen years with
Microsoft Corporation, where he co-authored "Learn Microsoft Visual J++ 6.0" to
help explain the Microsoft version of the Java programming language. He attended
the University of Washington in Seattle where he received his B.A. in
mathematics, B.S. in biology and M.S. in computer science.
RONALD J. SANDERSON. Since September 1999, Mr. Sanderson has served as the
Company's Vice President of Marketing. From June 1998 to September 1999, Mr.
Sanderson was principal consultant with Netsource Management, Inc., focusing on
strategic sourcing, supply chain and marketing. From March 1986 to June 1998,
Mr. Sanderson was a consultant with A.T. Kearney, Inc. He has a B.S. in
Mechanical Engineering from Northwestern University and an M.B.A. from
Northwestern University.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth, as of December 22, 2000, information
regarding ownership of the Company's common stock, by each person known by the
Company to be the beneficial owner of more than 5% of its outstanding common
stock, by each director, by certain related stockholders, and by all executive
officers and directors of the Company as a group. All persons named below have
sole voting and investment power over their shares except as otherwise noted. As
of December 22, 2000, there were 16,338,750 shares of the Company's common
stock outstanding. There are no existing arrangements which may, or are expected
to, result in a change in control of the Company.
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------------------------------------------------------------------------------
Name and Address of Number of Shares Percent of Class
Beneficial Holder
------------------------------------------------------------------------------
Robert C. McShirley ** 1,160,757 (1) 7.08%
4536 Falkirk Bay
Oxnard, CA 93035
------------------------------------------------------------------------------
Richard S. McShirley ** 1,010,134 (2) 6.17%
794 Hot Springs Road
Santa Barbara, CA 93108
------------------------------------------------------------------------------
Samuel E. Bradt ** 632,318 (3) 3.87%
6925 N. Wildwood Point
Chenequa, WI 53029
------------------------------------------------------------------------------
DX3, Inc. 902,778 (4) 5.39%
Dennis W. McQuilliams
16623 N.E. 145th Street
Woodinville, WA 98072
------------------------------------------------------------------------------
Trusthouse 86 Ltd. 1,030,069 (5) 6.30%
4660 La Jolla Village Dr.
Suite 480
San Diego, CA 92122
------------------------------------------------------------------------------
Scott T. Behan ** 10,240 *
P.O. Box 1244
Somis, CA 91384
------------------------------------------------------------------------------
Robert N. Schwartz** 19,647 *
Hughes Research Laboratories
3011 Malibu Canyon Road
Malibu, CA 90265
------------------------------------------------------------------------------
P. Scott Turner ** 75,606 (6) *
30452 Winchester Road
Castaic, CA 91384
------------------------------------------------------------------------------
Ronald J. Sanderson ** 85,845 (7) *
1425 London Lane
Glenview, IL 60025
------------------------------------------------------------------------------
Sandford T. Waddell ** 57,656 (8) *
1822 Marisol Drive
Ventura, CA 93001
------------------------------------------------------------------------------
Ramin Kamfar ** 62,500 (9) *
666 Greenwich Street, #710
New York, NY 10014
------------------------------------------------------------------------------
All Executive Officers and 3,179,539 (10) 18.62%
Directors (10 individuals)
------------------------------------------------------------------------------
* Less than 1%.
** Officer and/or director.
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<PAGE>
(1) Also includes options to purchase 50,000 shares. The option is exercisable
within 60 days.
(2) Also includes options to purchase 25,000 shares exercisable within 60 days.
(3) Includes 60,768 shares held by Merganser Corporation. Mr. Bradt is the
President and sole owner of Merganser Corporation. Also includes options
to purchase 12,500 shares which are exercisable within 60 days.
(4) Includes options to purchase 402,778 shares exercisable within 60 days.
(5) Includes 38,374 shares of the Company's Series 1-A Preferred Stock
currently convertible on a one-for-one basis into Common Stock.
(6) Includes options to purchase 25,000 shares exercisable within 60 days.
Also includes 19,501 shares of the Company's Series 2-A Preferred Stock
currently convertible on a one-for-one basis into Common Stock and warrants
to purchase 1,697 shares of Common Stock.
(7) Includes options to purchase 81,250 shares exercisable within 60 days.
(8) Includes options to purchase 36,458 shares exercisable within 60 days. Also
includes 19,501 shares of the Company's Series 2-A Preferred Stock
currently convertible on a one-for-one basis into Common Stock and warrants
to purchase 1,697 shares of Common Stock.
(9) Includes warrants to purchase 30,000 shares exercisable within 60 days.
(10) Includes the convertible securities listed here for the 9 Officers and
Directors, a total of 302,604 shares convertible or exercisable within 60
days.
SERIES 1-A
The following table sets forth, as of December 22, 2000, information
regarding ownership of the Company's Series 1-A Preferred Stock, by each person
known by the Company to be the beneficial owner of more than 5% of its
outstanding Series 1-A Preferred Stock. No director, related stockholders, or
executive officers hold any Series 1-A Preferred Stock. All persons named below
have sole voting and investment power over their shares except as otherwise
noted. As of December 22, 2000, there were 2,648,464 shares of the Company's
Series 1-A Preferred Stock outstanding. There are no existing arrangements which
may, or are expected to, result in a change in control of the Company.
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<PAGE>
------------------------------------------------------------------------------
Name and Address of Number of Shares Percent of Class
Beneficial Holder
------------------------------------------------------------------------------
Anglo East Trust 326,260 12.32%
c/o Farrokh Nazerian
1978 Mission Ridge Road
Santa Barbara, CA 93101
-------------------------------------------------------------------------------
787, LLC 191,918 7.25%
c/o James F. Voelker
9919 S.E. Fifth Street
Bellvue, WA 98004
-------------------------------------------------------------------------------
Jefferies Employees Merchant 136,318 5.15%
Banking Fund LLC (1)
Attn: Ron Johnson
11100 Santa Monica Blvd.
Los Angeles, CA 90025
-------------------------------------------------------------------------------
(1) Jefferies & Company, Inc., an affiliate of Jefferies Employees Merchant
Banking Fund LLC, initially held 191,918 shares, or 7.04%, but subsequently
assigned certain shares to Jefferies Employees Merchant Banking Fund LLC,
and its other affiliates.
SERIES 2-A
The following table sets forth, as of December 22, 2000, information
regarding ownership of the Company's Series 2-A Preferred Stock, by each person
known by the Company to be the beneficial owner of more than 5% of its
outstanding Series 2-A Preferred Stock, by each director, by certain related
stockholders, and by all executive officers and directors of the Company as a
group. All persons named below have sole voting and investment power over their
shares except as otherwise noted. As of December 22, 2000, there were 1,609,926
shares of the Company's Series 2-A Preferred Stock outstanding. There are no
existing arrangements which may, or are expected to, result in a change in
control of the Company.
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<PAGE>
-------------------------------------------------------------------------------
Name And Address of Number of Shares Percent of Class
Beneficial Holder
-------------------------------------------------------------------------------
Mercantile Capital Partners
I, L.P. 678,337 (1) 42.13%
1372 Shermer Road
Northbrook, IL 60062
-------------------------------------------------------------------------------
Stonehill Partners, L.P. 169,584 (1) 10.53%
c/o WHX Corporation
110 East 59th Street
New York, NY 10022
-------------------------------------------------------------------------------
Oscar Investment Fund 152,626 (1) 9.48%
c/o Oscar Capital Management, LLC
900 Third Avenue, Second Floor
New York, NY 10022
-------------------------------------------------------------------------------
Crestview Capital Fund, L.P. 144,146 (1) 8.95%
c/o Dillon Capital
3000 Dundee Road, Suite 105
Northbrook, IL 60062
-------------------------------------------------------------------------------
Sandford T. Waddell * 21,198 (1) 1.32%
1822 Marisol Drive
Ventura, CA 93001
-------------------------------------------------------------------------------
P. Scott Turner * 21,198 (1) 1.32%
30452 Winchester Road
Castaic, CA 91384
-------------------------------------------------------------------------------
All Executive Officers and 42,396 (1) 2.63%
Directors (2 individuals)
-------------------------------------------------------------------------------
* Officer and/or director.
(1) Includes warrants to purchase Common Stock issued in connection with the
Series 2-A Preferred.
DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock
------------
The Company's Certificate of Incorporation currently authorizes 105,000,000
shares, 100,000,000 of which is Common Stock with a par value of $0.01, and
5,000,000 of which is Preferred Stock with a par value of $0.01. The Preferred
Stock is divided into series. The Series 1-A Convertible Preferred Stock
consists of 2,802,000 shares, and the Series 2-A Convertible Preferred Stock
consists of 1,672,328 shares. As of December 22, 2000, there are issued and
outstanding 16,338,750 shares of Common Stock, 2,648,464 shares of Series 1-
A Convertible Preferred Stock and 1,609,926 shares of Series 2-A Convertible
Preferred Stock, without giving effect to the exercise of warrants or options or
the conversion of debt. There remains 525,672
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<PAGE>
shares of Preferred Stock which may be issued with rights, preferences and
privileges to be designated by the board of directors.
The holders of Common Stock, Series 1-A Convertible Preferred Stock and
Series 2-A Convertible Preferred Stock are entitled to one vote for each share
held of record (or, in the case of Preferred Stock, each share on Common Stock
into which such shares may be converted) on each matter submitted to a vote of
shareholders. The Company's charter documents do not provide for cumulative
voting in the election of directors.
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding senior securities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, when issued, validly issued, fully paid and nonassessable.
See "Anti-Takeover Provisions" under "RISK FACTORS."
Series 1-A and 2-A Preferred Stock
----------------------------------
Each share of Series 1-A Convertible Preferred Stock and Series 2-A
Convertible Preferred Stock is convertible into one share of common stock. The
voting rights of the holders of the Series 1-A Convertible Preferred Stock and
Series 2-A Convertible Preferred Stock are discussed above under "Common Stock."
Holders of the Series 1-A Convertible Preferred Stock are entitled to
noncumulative dividends, if declared by the Board of Directors, of $0.20 per
share annually. Holders of the Series 2-A Convertible Preferred Stock are
entitled to noncumulative dividends, if declared by the Board of Directors, of
$0.51 cents per share annually.
In the event of a liquidation or dissolution of the Company, the holders of
the Series 1-A Convertible Preferred Stock shall be entitled to receive a
preference amount for each outstanding share equal to $2.50 plus declared but
unpaid dividends. In such event, the holders of the Series 2-A Convertible
Preferred Stock shall be entitled to receive a preference amount for each
outstanding share equal to $6.41 plus declared but unpaid dividends at the same
time and with the same priority as the holders of the Series 1-A Convertible
Preferred Stock.
Registration Rights
-------------------
The Company is obligated to register the shares of Common Stock underlying
the Series 2-A Preferred and the warrants held by the holders of the Series 2-A
Preferred. This registration statement is a result of the Company's obligation
to the holders of the Series 2-A Preferred. If this registration statement is
not effective on or before January 16, 2001, the Company must issue to each
holder of Series 2-A Preferred an additional warrant to purchase Common Stock in
an aggregate amount equal to two percent (2%) of the registrable shares held by
such holder for each thirty day period this registration statement is not
effective by January 16, 2001. The additional warrants would have terms of five
(5) years and an exercise price of $6.41 per share. For
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<PAGE>
example, if this registration statement is not effective until February 15,
2001, warrants to purchase an aggregate of 36,358 shares of Common Stock would
be issued. If this registration statement is not effective until March 17, 2001,
warrants to purchase an aggregate of 72,715 shares of Common Stock would be
issued. The Company will amend this registration statement to add the Common
Stock underlying those warrants to be covered by this registration statement.
The holders of certain warrants have piggy-back rights on the Company's
registration of securities pursuant to which the holders of warrants have
contractual rights to have the Company include shares of Common Stock issuable
upon exercise of the warrants in a registration statement filed by the Company
covering any of its securities.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the monetary liability of directors, officers, employees and
agents for breach of fiduciary duty of care, subject to certain limitations.
The Company's certificate of incorporation provides that our directors and
officers shall not be liable to the Company or its stockholders for monetary
damages arising from a breach of fiduciary duty owed by such director or
officer, as applicable, except for liability (1) for any breach of a director's
or officer's duty of loyalty to the Company or its stockholders, (2) for
intentional misconduct, fraud or a knowing violation of law, under Section 174
of the General Corporation Law of the State of Delaware or (3) for a transaction
from which the officer or director derived an improper personal benefit. The
Company's bylaws provide for the indemnification of our directors, officers,
employees and agents to the extent permitted by the Delaware General Corporation
Law. Our directors and officers are insured against certain liabilities for
actions taken in such capacities, including liabilities under the Securities
Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
DESCRIPTION OF THE BUSINESS
THE COMPANY
Vsource, Inc. (the "Company") is positioning itself to be a leading
provider of business-to-business electronic procurement services (eProcurement).
The Company's Virtual Source Network (VSN) allows buyers and suppliers to
conduct business transactions on the Internet in an efficient and cost-effective
manner. The Company creates and markets its eProcurement services via a "pure"
Internet-based Application Service Provider (ASP) model which enables the
Company's clients to access computer software and data that reside on a remote
server rather than the user's own computer or local area network server. The
clients may access the Company's software on a rental basis through an Internet
browser and, therefore, are not required to invest in the ownership of a
perpetual right to use the software, nor do the clients
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<PAGE>
have to procure any hardware to operate the software application. Using the ASP
model, the Company charges an initial set-up fee to use the software and then
charges on a time or transaction basis for usage of the software depending on
the requirements of the individual client.
The Company's objective is to create the leading pure Internet-based ASP
electronic commerce network platform for the business-to-business customer and
supplier. The Company intends to create the leading virtual marketplace for
business-to-business goods and services, and feels that the ASP technology
provides customers an advantage not presently offered by competitive
eProcurement providers.
INDUSTRY BACKGROUND
Growth of the Internet and E-commerce
-------------------------------------
The Internet has emerged as the fastest growing communication medium in
history. eMarketer, a leading Internet consulting firm, has estimated that the
number of Internet users in the United States will reach 66 million in 2000,
with projected growth to more than 100 million users by 2002. The Internet is
dramatically changing how businesses and individuals communicate, share
information and conduct business, such as business-to-consumer and person-to-
person electronic commerce. Recently, the widespread adoption of intranets and
the acceptance of the Internet as a business communications medium have created
a foundation for business-to-business electronic commerce that will enable
organizations to streamline complex processes, lower costs and improve
productivity.
Inefficiencies in Traditional Business Procurement
--------------------------------------------------
Historically, most organizations have purchased goods and services through
paper-based or semi-automated processes. These processes are costly, time
consuming, complex and often include the re-keying of information, lengthy
approval cycles and significant attention of financial and administrative
personnel. Furthermore, corporate purchasing has historically been highly
fragmented and decentralized, thus making it difficult for businesses to manage
employee purchases, control spending and prevent duplicative or unauthorized
ordering. The cost of each corporate purchasing transaction generally ranges
from $75 to $175, often exceeding the cost of the items being purchased. Facing
increasing competitive pressures to lower costs and improve productivity,
businesses are seeking to replace these traditional paper-based transactions
with centralized eProcurement solutions that provide cost-effective and
efficient networks for the purchase of goods and services. Beyond the time and
expense associated with manual processing costs, organizations suffer even
greater costs when they cannot fully exploit procurement economies of scale.
Most businesses lack the systems that enable them to monitor purchases and
compile data necessary to negotiate better volume discounts with preferred
suppliers. When preferred suppliers are not used, the cost of items purchased
tends to be higher. With the increasingly widespread use of the Internet,
businesses are now in a position to further automate purchasing activities. The
availability of this technology creates a significant market opportunity for
Internet-based business-to-business electronic commerce solutions. With this
foundation, management believes that Internet-based, business- to-business
electronic commerce is poised for rapid and substantial growth and represents a
significantly larger opportunity than business-to-consumer or person-to-person
electronic commerce. Numerous well-regarded market research organizations, such
as the GartnerGroup and Yankee Group, have projected that business-to-business
e-commerce will grow substantially during the next few years. The
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<PAGE>
GartnerGroup, for example, has projected that business-to-business e-commerce
will grow from $145 billion worldwide in 1999 to $7.4 trillion worldwide in
2004.
Traditional Electronic Procurement Solutions
--------------------------------------------
Currently a number of companies provide traditional eProcurement solutions
that attempt to reduce the inefficiencies of corporate purchasing through the
implementation of information technology. However, while these solutions do
facilitate eProcurement transactions, the Company believes that each of these
solutions has limitations that will prevent widespread adoption of the platforms
by business consumers and suppliers.
Businesses have historically looked to electronic data interchange
("EDI") systems to address procurement cycle inefficiencies. EDI has
gained wide acceptance in automating the sale and procurement of
goods, principally in environments characterized by high dollar-volume
transactions with a limited number of suppliers. EDI systems involve a
uniform set of formats for commercial documents used in procurement
that are exchanged across private networks without human intervention.
Because the EDI model relies on the uniformity of documentation, and
therefore transactions, it is not well suited to address the
requirements of a dynamic procurement environment involving a large
community of buyers and sellers of a wide variety of goods and
services. Furthermore, the EDI model does not provide real-time
interaction between the buyer and seller, thus leaving the buyer with
supplier information that may not be up to date. Lastly, the EDI model
involves a high-cost of installation and maintenance in addition to
significant transaction fees making it an unsuitable solution for most
businesses.
Many vendors have developed purchasing software systems to coordinate
the purchasing of goods and services across large enterprises.
However, theses systems tend to be cost-prohibitive due to up-front
licensing fees that can exceed $1 million and maintenance fees.
Furthermore, these systems tend to be very complex, thus requiring a
lengthy and expensive implementation process.
Neither of these current solutions provides the full spectrum of online
functions, such as placing simultaneous bid requests with multiple suppliers,
that is needed to create an open electronic marketplace for the procurement of
goods and services. Furthermore, both solutions are too costly for all but the
largest businesses. The Internet, on the other hand, provides the cost-
effective medium through which an open and interoperable trading community can
be established and grown. With the widespread adoption of the Internet as a
business communication platform, a significant market opportunity exists for an
Internet-based business-to-business electronic commerce solution.
The Vsource Solution
--------------------
The VSN Network ("VSN") is the Company's flagship product. It is an
Internet-based application that requires no software on the client side beyond
an Internet browser. VSN allows organizations to establish central control --
and either centralized or decentralized implementation - of procurement for
indirect and direct goods and services. These include maintenance, repair and
operations (MRO), capital equipment, services, travel and entertainment and all
of the finished goods and raw materials required by any business. VSN
accommodates
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<PAGE>
100% of the procurement process within the supply chain. Because customers do
not have to install software on their servers and client computers, the average
cost to test the effectiveness of VSN is approximately $50,000.
With VSN, the inefficiencies associated with paper-based procurement
processes are significantly reduced. Information only needs to be entered once,
and a continuous audit trail follows all transactions. This means that clerical
activities, such as re-keying information, are substantially reduced or
eliminated. Further, since VSN automatically tracks data, such as volume of
purchases from each supplier, much less time is required from financial and
administrative personnel to monitor results. Approval cycle times are reduced,
since the application provides user-specific access controls, such as budget
limits, item purchase authorization limits, and restricted supplier
availability. This enables organizations to reduce or eliminate the complex
approval processes that slow the purchase cycle, and it greatly reduces the
likelihood of unauthorized ordering from non-approved suppliers.
When VSN is employed throughout an organization, the purchasing process
becomes much more uniform and streamlined than with paper-based or semi-
automated processes. Each user can place orders directly, based on individual
authorization limits. While procurement can be implemented in a decentralized
manner, it can be controlled centrally, along with the flow of information.
Organizations are able to better utilize historical and current purchasing
information to negotiate more cost effective agreements with preferred suppliers
and achieve much greater economies of scale. Finally, organizations can focus
resources on developing improved supply strategies rather than conducting
transactional procurement.
Benefits of the Vsource Solution
--------------------------------
Greater Access for Businesses of All Sizes. VSN provides all of its
members access to new customer and supplier relationships through its
eProcurement network. The system provides an extremely easy and
efficient way for members to communicate with a broad array of
companies at a low cost and with little risk. Furthermore, because VSN
only requires an Internet browser as an interface, it is an innovative
platform for offering eProcurement solutions to small-to-medium sized
businesses that might not otherwise be able to afford such a system.
Speed to Implement. Typical procurement implementation cycles can
range from 6 to 18 months and require significant human resources.
Conversely, depending on the number of users being entered into the
system, a procurement client can implement VSN in just 1 week. More
complex organizations could take up to 2 to 3 months, not including
systems integration between legacy systems and VSN. However, VSN is
fully functional in parallel with the integration effort, so there is
no waiting time or opportunity cost to using VSN.
Cost Flexibility. The VSN pricing structure is highly flexible and
accommodates how companies want to manage their business. The low cost
makes it a truly "disposable" solution for companies who prefer not to
make large capital expenditures in technology that is rapidly
changing. Components of VSN can be selected according to a company's
current needs, yet offer a way for companies to stay with VSN by
adding capability as their needs grow. Likewise, companies that have
already
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invested in other procurement processes can leverage the Request For
Quote (RFQ) and product development capabilities of VSN by utilizing
it as a front-end system.
True Scalability. The VSN roll out is coordinated with client
development so that each client can experience unrestrained access to
current and potential suppliers. Additional clients can be added with
incremental additions to systems and implementation resources.
Improved Management and Control. Every user in VSN can have a unique
profile along with associated permissions and workflow assigned by a
manager. Therefore, users can only purchase items that are previously
approved for their profile and fall within a specified dollar value
threshold.
Ease of Use and Configuration. VSN is easily configured by the client
and has pre-determined default configurations that companies can opt
to use. The entire configuration process is menu and "checkbox"
driven. All forms, defaults and user access/workflow can be edited
online.
Access to All Products/Services. VSN enables direct and indirect
purchasing of products and services. VSN accommodates fixed catalog
content similar to competitors, as well as additional catalog content
provided by RFQ responses previously requested by the company.
World Class Systems Integration. The Company uses IBM as the preferred
provider of procurement consulting and systems integration services
for its clients for most Enterprise Resource Planning (ERP) and legacy
systems integration.
Training and After Sales Support. The Company has contracted with IBM
Global Services to provide full training services for up front system
planning, user training, ongoing training design and help desk
services.
Platform Independence. VSN is not software-based, thus systems
integration only consists of mapping the VSN database to share
information with the client's systems. VSN is compatible with Windows,
Unix and Apple operating systems.
Project Management. VSN can embed project codes into a user profile so
that all costs associated with a project can be tracked.
Formation of Consortiums/Trading Communities. VSN easily and
economically enables companies to form consortiums among their chosen
trading communities or across multiple industries. Companies can host
consortiums for their suppliers and customers or can align with other
companies who buy similar items. VSN offers the security,
affordability and configuration flexibility of the Company's solution
that make it a viable solution for any company seeking to capitalize
on the opportunities presented by consortium purchases.
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The Vsource Growth Strategy
---------------------------
The Company's objective is to create the leading pure Internet-based ASP
electronic commerce network platform for the business-to-business customer and
supplier. Key strategies to achieve this objective include:
Market and sell VSN through direct sales to private and public
organizations in a variety of industries on a global basis. VSN is
being marketed to this group as a cost-effective new process to
replace traditional software-based procurement systems. Large and
medium sized organizations are seeking alternatives to expensive
software systems, and they are looking for ways to significantly
reduce total procurement costs.
Develop joint marketing programs with alliance partners, consisting of
companies that offer complementary technology, products or services to
VSN. Alliance relationships are also formed with companies that plan
to market VSN directly to their own customer bases as part of
comprehensive electronic business application packages.
Develop relationships with marketplace hosts, who will use VSN as the
engine for a variety of electronic marketplaces. VSN would act as the
eProcurement engine for industry-specific electronic procurement
marketplaces, or VSN may be the eProcurement portion of a broader
electronic business marketplace.
PRODUCTS AND SERVICES
Virtual Source Network (VSN)
----------------------------
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 through a business model based primarily on transaction fees. The
contract includes an initial fee of approximately $50,000 for a pilot program, a
requirements analysis and a ten-user license. 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. The
costs to the client of a full implementation may be significant, particularly if
the client requires sophisticated integration with internal ERP or accounting
systems. Most of the costs will result from the use of outside systems
consultants (non-Company employees) to perform the integration. Management
expects that these costs will vary significantly from client to client. VSN is
also offered for use as a private label marketplace. For such use, an initial
fee of approximately $100,000 covers development of the private label Web site,
one user company pilot, requirements analysis and ten user licenses. The VSN
marketplace business model is also based on transaction revenues from
marketplace users, as shared with the marketplace.
While VSN is accessed by the Internet, all customer-specific data, such as
special catalogs and purchasing-related data, is kept confidential by means of
encryption and other data security features. Clients only know of other VSN
clients if they have reason to do business with each other. Clients use VSN to
purchase items by generating electronic purchase orders directly after shopping
in online catalogs. Clients may also initiate RFQs, Requests for Proposals
(RFPs)
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or Requests for Information (RFIs) which are electronically distributed to
vendors via the Internet. Vendors respond, via the Internet, with appropriate
information, proposals or price quotations for the items requested. At that
point, the client may select one of the vendor quotations and send an electronic
purchase order, or the buyer may communicate electronically with the vendor
regarding counter-proposals or to request additional information.
All buying processes are completed by issuing electronic purchase orders,
receiving electronic invoices from the suppliers, verifying that the invoiced
goods or services have been received, and issuing payment authorizations.
Clients also can have VSN data exported to requisite internal ERP or accounting
systems, although this will require the use of customized interfaces or third-
party interconnection products.
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. Vsource'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.
Technology
----------
Companies handle their procurement processes on VSN using the Internet-
based browser available on their personal computers. The VSN application itself
is hosted by the Company on servers that reside on the Internet. The VSN system
has a three-tier database-driven architecture that has been built for
reliability and scalability. As more companies use the system, the Quality of
Service associated with using VSN can be maintained at a constant level by
adding additional processing resources required by each tier of the
architecture. By adding more servers at multiple processing locations, the
overall system has a virtually unlimited ability to scale.
An important technological capability is improved control and enhancement
of the application. Because the application resides on company-controlled
computers, bug fixes and new features can be added on a continual basis as they
become available, rather than released on a periodic basis as is done with
virtually all software that resides on customer-controlled computers, requiring
no maintenance effort on the part of the customers to upgrade the system.
Because the application is accessed via the Internet, all client data is
stored centrally at the Company's host site. Such data can be downloaded to the
customer's internal processing systems as required, although this typically
requires a customized integration with the client's existing internal software
systems.
All data is transmitted securely on the Internet via Secure Socket Layers
(SSL). Data transfers are performed using industry standard formats.
Localization of the product is performed with language translation of all
prompts and content. A software tool has been developed allowing direct
modification of prompts and content in the system by third-party linguists.
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Strategic Relationships
-----------------------
In December 2000, the Company announced that it had entered into a
definitive agreement to acquire Online Transaction Technologies, Inc., ("OTT") a
web auction developer, in a stock for stock transaction. Financial statements
of OTT will be reported as soon as they are available. See Note 7 in Notes to
October 31, 2000 Consolidated Financial Statements.
In October 2000, the Company and IBM announced an alliance to provide
eProcurement services to mid-sized companies. IBM agreed to establish a
national practice to support the alliance.
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 eProcurement web site. In October 2000, the parties announced that
the agreement was to be implemented through Sure Pay LLC, a joint venture of
First Data and Entrust Technologies, Inc.
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.
Sales and Marketing
-------------------
The Company sells its services through two primary channels. First, a
direct sales force, consisting of six sales professionals as of December 15,
2000, is organized geographically into four regions. These Sales Professionals
focus on selling VSN to middle market organizations, typically companies with
annual sales of at least $50 million to $2 billion per year. Sales
professionals receive a base salary and earn commissions based on achieving
quarterly and annual sales goals. The Company has also developed an indirect
channel through various alliance relationships to leverage and accelerate market
adoption of VSN. Alliance companies provide leverage through joint marketing
programs with Vsource and through direct sales to their customer base, using
their own company sales force.
The alliance program identifies and proactively approaches leading
companies whose products/services are complementary to its own. Current
alliance partners include IBM. Additional consulting firms and systems
integrators will be selectively added as alliance members as appropriate.
Alliance members share in transaction fees if they are involved in the sale of
VSN to a client as well as in the ongoing management of the client relationship.
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Additionally, alliance member services, such as systems integration or training,
are charged directly to the clients as required.
The VSN associate program is designed to identify individuals or companies
who are interested and capable of helping sell VSN services to potential clients
globally. These individuals will also share in the transaction fees for any
clients where they have played a role in completing a sale.
Customer Service, Training and Support
--------------------------------------
The Company uses IBM as its preferred providers of procurement consulting
and systems integration services for its clients for most ERP and legacy systems
integration. The Company has also contracted IBM Global Services to provide
full training services for up front system planning, user training, ongoing
training design and help desk services. IBM's business unit provides custom
translation of VSN's system commands and instructions, so that it can be used in
other languages as requested by clients.
All alliance and associate program members are required to attend, complete
and become certified at a VSN boot camp before working with VSN at the client
level. The boot camp is an intensive 2 to 3 day training session developed in
association with IBM Global Services and includes training for sales and
technical certifications.
Research and Development
------------------------
In fiscal year 2000, the company spent $3,458,933 on research and
development. In fiscal year 1999, the Company spent $1,263,720. The increase
is the result of the Company's decision to change VSN from a PC-based to an
Internet-based application. The Company is presently performing research and
development in four major functional areas: application functionality, security,
external integration and global Quality of Service. In the area of application
functionality, the Company is continuing to add new features and improve the
operational reliability of the system. In the area of security, the Company is
working on improved methods of secure data transmission, storage and fraud
detection.
In the area of external integration, the Company is continuing to explore
improved ways of connecting the procurement processes performed by VSN with a
client's back end computing systems, including the use of Electronic Data
Interchange (EDI), custom integration with Enterprise Resource Planning (ERP)
systems, and the potential use of the RosettaNet transaction standards that are
under development. In the area of global Quality of Service, the Company is
exploring advanced system architectures that will allow virtually unlimited
processing capability. The Company is also exploring alternative technologies to
land-based communications, such as satellite and cellular wireless communication
technologies.
Competition
-----------
The market for VSN is very competitive and likely to become more so, and is
subject to rapid technological change. Increased competition is likely to
result in price reductions, to some extent caused by VSN pricing which
management believes is below current industry averages (see "RISK FACTORS -
COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET; EFFECT ON MARKET
SHARE AND BUSINESS)." Although
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management believes that VSN compares favorably with respect to most competitive
offerings (several having greater financial capability than VSN), and favorably
with respect to overall cost, VSN does not yet have a large referral base, nor
large numbers of buyers or vendors using the network, and its performance has
yet to be proven with regard to the new Internet version of VSN. As a result, it
is yet to be seen whether VSN can compete successfully.
GOVERNMENT APPROVALS
While there are no governmental approvals required specifically related to
the licensing or use of VSN and no direct governmental regulation, that could
change. In those circumstances, competitors with larger administrative staffs
and more financial resources will be in a better position to comply with this
regulation and obtain any necessary approvals. However, management is not aware
of any pending or anticipated government regulations that will negatively impact
the Company in a material way.
DEPENDENCE UPON SUPPLIERS
The Company is not dependent on suppliers of raw materials, although it is
dependent on the Internet, including the ability to communicate with its remote
servers. The Company's clients are also dependent on the Internet for this
communication, without which clients would be unable to use any of the Internet-
based services provided by the Company. Should the Company and its clients not
be able to access the Internet for an extended period of time, it could have an
adverse material effect on the Company's operations.
TRADEMARKS
Vsource has been awarded the trademark VIRTUAL SOURCE. It also has
applications pending for the trademark Vsource and the service mark DELIVERING
ON THE PROMISE OF THE INTERNET.
Vsource does not have patents or patent applications pending. Vsource
technology is protected by the security of the Company-maintained Web site in
which Vsource software code resides, by confidentiality agreements it has with
its development personnel, and by the separation of development responsibilities
and access authorities.
ENVIRONMENTAL ISSUES
The Company's operations are not currently impacted by federal, state,
local and foreign environmental protection laws and regulations.
BACKGROUND
Vsource was incorporated in Nevada on October 22, 1980, and ultimately
adopted the name "Vsource, Inc." on December 16, 1999. Vsource reincorporated
in Delaware on November 8, 2000. The Company's executive offices are located at
5740 Ralston Street, Suite 110, Ventura, California 93003.
REPORTS TO SECURITY HOLDERS
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<PAGE>
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, NW, Washington D.C. 20549, at prescribed rates. The Commission maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The address of the World Wide Web site is http:/www.sec.gov.
CAPITALIZATION
The following table sets forth the Capitalization of Vsource, Inc. at
October 31, 2000, unadjusted for any exercise of outstanding options or
warrants:
Convertible Notes Payable $ 150,000
------------
Shareholders' Equity (1)
Preferred Stock (2) 43,975
Common Stock (3) 161,015
Additional Paid-in Capital 63,955,951
Deferred Compensation (12,953,649)
Accumulated Deficit (41,841,773)
Less: Note Receivable-Sale of Stock (426,798)
------------
Total Shareholders' Equity/(Deficit) 8,938,721
------------
$ 9,088,722
============
(1) Does not include (a) up to 1,575,450 shares of Common Stock issuable upon
exercise of outstanding incentive stock Options and (b) up to 1,547,121
shares of Common stock issuable upon exercise of Warrants at October 31,
2000.
(2) Preferred Stock consists of 5,000,000 shares authorized, $0.01 par value,
including Series 1-A Stock with 2,725,232 shares issued and outstanding and
Series 2-A Stock with 1,672,328 shares issued and outstanding, both at
October 31, 2000.
(3) Common Stock consists of 50,000,000 shares authorized, $0.01 par value,
with 16,101,523 shares issued and outstanding at October 31, 2000.
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.
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Forward Looking Statements
--------------------------
This Registration Statement on Form S-1 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 under "RISK FACTORS." 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 setup 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 ongoing transaction fees and an
initial setup 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.
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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 "RISK FACTORS."
Recent Events
-------------
In December 2000, the Company announced that it had entered into a
definitive agreement to acquire Online Transaction Technologies, Inc., a web
auction developer, in a stock for stock transaction. The acquisition has not yet
been completed. See Note 7 in Notes to October 31, 2000 Consolidated Financial
Statements.
In October 2000, the Company and IBM announced an alliance to provide
eProcurement services to mid-sized companies. IBM agreed to establish a national
practice to support the alliance.
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 eProcurement web site. In October 2000, the parties announced that
the agreement was to be implemented through Sure Pay LLC, a joint venture of
First Data and Entrust Technologies, Inc.
In July 2000, the Company discontinued technical support for Virtual Source
Publisher, the commercially inactive web site publishing activity acquired as
part of the Wpg.Net, Inc. acquisition in June 1998. All remaining intangible
assets relating to Wpg.Net, Inc. were written off as of January 31, 2000.
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 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
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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.
RESULTS OF OPERATIONS - NINE MONTHS ENDED OCTOBER 31, 2000,
COMPARED TO THE NINE MONTHS ENDED OCTOBER 31, 1999
Revenue
-------
For the nine months ended October 31, 2000, revenues were $214,000, up
$203,785 or 1,995% compared to $10,215 in revenues during the nine months ended
October 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 yet begun to generate transaction
fees, the anticipated primary source of revenue.
General and Administrative Expenses
-----------------------------------
For the nine months ended October 31, 2000, general and administrative
expenses were $9,746,801 (including $6,617,357 of stock-based compensation), up
$8,943,059, or 1,113%, from $803,742 during the nine months ended October 31,
1999. This increase was caused primarily by the increase of expenses associated
with marketing, advertising, public relations, stock based compensation and
executive staff.
Research and Development
------------------------
For the nine months ended October 31, 2000, research and development
expenses were $9,087,797 (including $3,031,209 of stock-based compensation), up
$6,933,724 or 322% from $2,154,073 during the nine months ended October 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.
Net Loss
--------
For the nine months ended October 31, 2000, the net loss was $18,537,691,
an increase of $15,590,091 or 529%, from the net loss of $2,947,600 during the
nine months ended October 31, 1999. This increase is a result of significantly
increased marketing and advertising expenses, stock based compensation, as well
as significantly increased research and development expense.
Weighted Average Common Shares Outstanding - Basic and Diluted
--------------------------------------------------------------
For the nine months ended October 31, 2000, the basic weighted average
common shares outstanding were 15,869,895, up 2,573,886 or 19.4%, from
13,296,009 for the nine months ended October 31, 1999. This increase resulted
primarily from the issuance of 2,118,269 shares of common stock of the Company
upon conversion of convertible notes and accrued interest, the issuance of
217,584 shares of common stock upon exercise of stock options, as well as the
issuance of 236,084 shares of common stock 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.
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Net Loss Per Common Share - Basic and Diluted
---------------------------------------------
The basic net loss per common share for the nine months ended October 31,
2000 was $2.02 per share, up $1.80 per share from a net loss of $0.22 per share
for the nine months ended October 31, 1999. This increase reflects the
$15,590,091 increase in the net loss, the return of equity to preferred
stockholders of $13,499,177, created by the deemed dividend to preferred
shareholders, and partially offset by the increase of 2,573,886 shares in the
basic weighted average outstanding common shares.
FINANCIAL CONDITION - AT OCTOBER 31, 2000, COMPARED TO JANUARY 31, 2000
Cash
----
On October 31, 2000, cash totaled $8,263,168, up $3,056,001 or 58.7%, from
$5,207,167 at January 31, 2000. This increase reflects the proceeds from the
sale of preferred stock in private transactions that closed September 18, 2000,
in the net amount of $10,171,108, and is offset by a decrease in the funds used
for operations during the nine months ended October 31, 2000.
Accounts Receivable
-------------------
On October 31, 2000, accounts receivable were $191,500 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.
Notes Receivable - Officers and Other
-------------------------------------
On October 31, 2000, employee and other receivables totaled $183,367, up
from no balance at January 31, 2000. This increase results from advances to
officers and employees, net of partial repayments.
Prepaid Expenses
----------------
On October 31, 2000, prepaid expenses totaled $148,383 as compared to no
balance at January 31, 2000. This increase primarily reflects prepaid fees of
$148,383 that will be expensed in the next twelve months.
Total Current Assets
--------------------
On October 31, 2000, total current assets totaled $8,786,418, up $3,579,251
or 68.7%, from $5,207,167 at January 31, 2000. This increase reflects the net of
proceeds from the sale of preferred stock in private transactions that closed
September 18, 2000, in the net amount of $10,171,108, and is offset by a
decrease in the funds used for operations during the nine months ended October
31, 2000.
Fixed Assets
------------
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<PAGE>
On October 31, 2000, fixed assets totaled $819,017, an increase of
$578,809, or 241%, 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 October 31, 2000, accumulated depreciation totaled $121,564, up
$103,856, or 586.5%, from $17,808 at January 31, 2000. This increase reflects
the addition of normal depreciation expense for the nine months ended October
31, 2000.
Property and Equipment, Net
---------------------------
On October 31, 2000, property and equipment, net totaled $697,453, up
$474,953, or 213.5%, 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.
Notes Receivable - Officers and Other, Non-Current
--------------------------------------------------
On October 31, 2000, other assets totaled $50,755, down $59,973, or 54.2%,
from $110,728 at January 31, 2000. This decrease is due to the recognition of
partial repayment on these notes receivable for the nine months ended October
31, 2000.
Total Assets
------------
On October 31, 2000, total assets were $9,534,626, up $3,994,231, or 72.1%,
from $5,540,395 at January 31, 2000. This change primarily reflects cash
proceeds from the private placement during the period, offset by cash used in
research and development costs, and general and administrative expenses
associated with the development and marketing of VSN.
Accounts Payable
----------------
On October 31, 2000, accounts payable were $366,818, up $119,346, or 48.2%,
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 October 31, 2000, accrued liabilities were $79,087, down $21,850, or
21.6%, 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 October 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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<PAGE>
Liabilities Related to the Private Placement of Preferred Stock
---------------------------------------------------------------
On October 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 October 31, 2000, total current liabilities totaled $595,905, down
$5,905,004, or 90.8%, 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 $119,346 and a decrease
in accrued liabilities of $21,850.
Preferred Stock, $0.01 Par Value
--------------------------------
On October 31, 2000, preferred stock for Series 1-A totaled $27,252 and
stock for Series 2-A totaled $16,723 versus no preferred stock at January 31,
2000. This reflects the issuance of 2,802,000 new Series 1-A preferred shares
less 76,768 shares converted to common shares during the nine-month period and
the issuance of 1,672,328 shares of new Series 2-A preferred shares. All of the
shares were issued in exchange for cash invested in the Company.
Common Stock, $0.01 Par Value
-----------------------------
On October 31, 2000, common stock totaled $161,015, up $2,944, or 1.86%,
from $158,071 at January 31, 2000. This reflects the issuance of 294,352 shares
of common stock , $0.01 par value, during the nine months ended October 31,
2000.
Additional Paid-In Capital
--------------------------
On October 31, 2000, paid-in-capital totaled $63,955,951, up $53,310,017 or
500.8%, 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 4,397,560 preferred shares were issued in return for cash invested in the
Company, and 294,352 common shares were issued for cash and services. This
primarily reflects the recording of additional paid in capital for common
stockholders' of $13,499,177 related to the beneficial conversion feature of
preferred stock, compensation of $10,539,257 related to stock options granted to
employees in accordance with the Statement of Financial Accounting Standards No.
123, accounting for stock-based compensation, and $10,966,310 in compensation
for marketing, investor relations and referral services.
Deferred Compensation
---------------------
On October 31, 2000, deferred compensation was $12,953,649, up $11,172,832,
or 326% from $ 1,780,817 at January 31, 2000. This change was due to the
granting of stock options to
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<PAGE>
employees as employment incentives and bonuses, and compensation for marketing,
investor relations and referral services. This is amortized over periods from
one to three years, in accordance with the individual agreement terms.
Accumulated Deficit
-------------------
On October 31, 2000, the accumulated deficit was $41,841,773 up $32,036,869
or 326% from $9,804,904 at January 31, 2000. This change resulted from a net
loss of $18,537,691 during the nine months ended October 31, 2000 and the
recognition of a deemed dividend to preferred stockholders of $13,499,177.
Notes Receivable From the Sale of Stock
---------------------------------------
On October 31, 2000, notes receivable from the sale of stock totaled
$426,798, up $248,000 from $178,798 at January 31, 2000. This amount is recorded
as an offset to stockholders' equity. These notes are receivable from officers
who exercised stock options during the current period, and in 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.
Total Stockholders' Equity/(Deficit)
------------------------------------
On October 31, 2000, total stockholders' equity was $8,938,721, up
$9,899,235, or 1,031%, from a deficit of $960,514 at January 31, 2000. This
change resulted primarily from increases in preferred stock and paid-in-capital
of $53,356,936 offset by an increase in deferred compensation of $11,172,832,
the recognition of a deemed dividend to preferred stockholders of $13,499,177,
the increase in notes receivable relating to the sale of stock of $248,000 and
the net loss of $18,537,691 during the nine months ended October 31, 2000.
Liquidity and Capital Resources
-------------------------------
The Company had $214,000 of revenue during the nine months ended October
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 October 31, 2000, the
Company had cash balances totaling $8,263,168, primarily as a result of its
private placement of preferred stock during the first and third quarters of 2000
offset by current operating activity. The Company is currently expending
approximately $900,000 per month of cash and cash equivalents. With anticipated
revenue from current clients only and at the current rate of expenditure,
management expects those funds to last through July 2001.
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 October 31, 2000,
other than the sale of equity and debt securities, has been from implementation
fees. $214,000 was derived from such sales made in the nine months ended October
31, 2000. The Company has not yet begun to generate transaction fees, the
anticipated primary source of revenue.
-49-
<PAGE>
The Company anticipates client revenues to continue increasing during the
twelve-month period from November 1, 2000 to October 31, 2001. In September
2000, the Company completed a private equity offering and received $10,719,623
less offering costs of $531,792. There can be no assurances that the Company
will continue generating additional revenue from clients. If client revenues or
future private equity offerings do not materialize, the Company has a contingent
plan of cash conservation that will allow it to operate through October 31,
2001.
The Consolidated Statements of Cash Flows for the nine months ended October
31, 2000, and nine months ended October 31, 1999 show that net losses were
$18,537,691 and $2,947,600, respectively, with the issuance of preferred stock
for cash of $10,889,828, partially offsetting the cash requirement. A non-cash
entry was made for the period ended October 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 $20,808,006 was made to increase additional paid-in capital, with an
offsetting entry of $9,648,566 for compensation expense, and $11,159,440 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 $12,000,000, including 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.
RESULT OF OPERATIONS - FISCAL YEAR 2000 VERSUS FISCAL YEAR 1999
Revenues
--------
Revenues for the year ended January 31, 2000 decreased to $3,500 from
revenues of $60,527 for the year ended January 31, 1999, a decrease of $57,027,
or 94%. Revenues decreased primarily because the Company ceased its sales of
subscriptions to the software version of VSN in the year ended January 3, 1999,
and because the new Internet version of VSN did not generate revenues in the
year ended January 31, 2000.
General and Administrative Expenses
-----------------------------------
General and administrative expenses increased to $1,167,328 for the year
ended January 31, 2000 from $298,468 for the year ended January 31, 1999, an
increase of $868,860, or 291%. The increase was due primarily to expenses
associated with an increase in personnel, including payroll, rent and travel.
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<PAGE>
Research and Development
------------------------
Research and development expenses of $3,458,933 for the year ended January
31, 2000 grew from $1,263,720 for the year ended January 31, 1999, an increase
of $2,195, 213, or 174%. The increase was due to increased costs associated with
the development of the Company's Internet version of its VSN electronic
purchasing system. Such increased costs include additional personnel and
personnel-related expenses as well as increased licensing fees for development-
related tools and systems.
Total Expenses
--------------
Total expenses of $4,626,261 for the year ended January 31, 2000 increased
from $1,562,368 for the year ended January 31, 1999, an increase of $3,063,893,
or 196%. The increase in total expenses was due primarily to the increases in
both research and development and general and administrative expenses.
Loss From Operations
--------------------
The Company had a loss from operations of $4,622,761 for the year ended
January 31, 2000 versus a loss of $1,501,841 for the year ended January 31,
1999, an increase of $3,120,920, or 207%. The loss increased because of
increased costs associated with developing the Internet version of VSN versus a
decline in revenues associated with discontinuing the software version of VSN.
Interest Expense
----------------
Interest expense of $388,571 for the year ended January 31, 2000 grew from
$351,499 for the year ended January 31, 1999, an increase of $37,072, or 11%.
The increase was due primarily to the difference between the conversion rates of
Convertible Demand Notes issued by the Company, and the market prices of the
Company's unrestricted common stock on or about the dates such Notes were
issued. Since the Notes are convertible into restricted common stock, however,
investors require discounted conversion rates which reflect the illiquid nature
of restricted stock, and Generally Accepted Accounting Principles require that
interest expense be charged for any such price difference.
Loss on Impairment of Intangible Assets
---------------------------------------
The Company incurred a loss of $527,356 for the year ended January 31, 2000
versus no impairment losses in the year ended January 31, 1999. The Company
determined that its June 1998 investment in Wpg Net, Inc., and its technology,
did not continue to carry the value originally anticipated. As a result, the
goodwill remaining on the books as of January 31, 2000 was eliminated and
charged to expense.
Other Income
------------
Other Income of $15,394 for the year ended January 31, 2000 declined from
$91,110 for the year ended January 31, 1999, a decrease of $75,716, or 83%.
Other income in 1999 was derived primarily from the settlement of a lawsuit
against the Company's landlord in which the Company received free rent.
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<PAGE>
Net Loss
--------
The net loss of $5,523,294 for the year ended January 31, 2000 increased
from $1,762,230 for the year ended January 31, 1999, an increase of $3,761,064,
or 213%, almost entirely as a result of increased loss from operations, and loss
on impairment as noted above.
Basic Weighted Average Number of Common Shares Outstanding
----------------------------------------------------------
The weighted average number of shares of 13,931,634 for the year ended
January 31, 2000 grew from 10,529,147 for the year ended January 31, 1999, an
increase of 3,402,487 shares, or 32%. The increase resulted from issuing
2,210,201 shares upon conversion of Convertible Demand Notes, 1,500,213 shares
in return for cash invested in the company during the year, 636,100 shares upon
exercise of stock options, and 64,165 shares in return for services provided to
the Company.
Net Loss Per Common Shares
--------------------------
The net loss per common share of $0.40 for the year ended January 31, 2000
grew from $0.17 per share for fiscal 1999, an increase of $0.23, or 135%, as a
result of the increased net loss for the year, partially offset by the increase
in outstanding Common Shares, as noted above.
CHANGES IN CONSOLIDATED STATEMENT OF CASH FLOWS - FISCAL YEAR 2000 VERSUS FISCAL
YEAR 1999
Cash Flows from Operating Activities
------------------------------------
The Company had a decrease in cash of $2,863,183 from operating activities
in the year ended January 31, 2000 versus a decrease in cash of $811,229 in the
year ended January 31, 1999, an increase of $2,051,954, or 252% in the use of
cash. The increased use of cash resulted from a net loss of $5,523,294 offset
by non-cash items affecting income and changes in operating assets and
liabilities of $2,660,111. The net loss was primarily due to increases in
general and administrative and research and development expenses associated with
the development of the Company's Internet version of its VSN eProcurement
software, while the Company generated no offsetting revenues.
Cash Flows from Investing Activities
------------------------------------
For the year ended January 31, 2000, cash flows from investing activities
decreased $282,028 because of advances to employees of $41,820 and purchase of
equipment of $240,208. For the year ended January 31, 1999, cash flows from
investing activities decreased $9,400 for advances to employees.
Cash Flows from Financing Activities
------------------------------------
For the year ended January 31, 2000, cash flows from financing activities
increased by $8,292,441, consisting of $6,002,500 from a private placement,
$2,139,941 from the issuance of common stock, and $150,000 from borrowings. See
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS - RECENT SALE
OF UNREGISTERED SECURITIES.
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<PAGE>
For the year ended January 31, 1999, cash flows from financing activities
increased $825,160 from borrowings. This debt has all been converted into
equity. See "RECENT SALE OF UNREGISTERED SECURITIES."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash and cash equivalents were derived
from private sales of Company's equity and debt securities. The sole source of
funds for the Company from the date of inception through January 31, 2000, other
than the sale of equity and debt securities, has been from sales of the earlier
software products. No cash was derived from such sales made in the year ended
January 31, 2000.
The Company completed the year ended January 31, 2000 with cash and cash
equivalents totaling approximately $5.2 million. As of March 31, 2000 the total
of cash and cash equivalents was approximately $4.0 million.
PLAN OF OPERATION
The Company has disclosed in its Form 10-QSB for the quarter ended October
31, 2000 that its monthly cash consumption rate was approximately $900,000 and
that at that rate it had sufficient cash to operate through July 2001. The
Company further disclosed that it had a contingency plan for extending the
current cash through October 2001. The Company is currently reviewing several
alternative development and operating plans. All alternatives will reduce
monthly cash consumption to $750,000 or less. The company expects to select a
plan, review it with the Company's board of directors, make disclosure and begin
implementation during January 2001. The plan will provide, among other factors,
for cash sufficiency through calendar year 2001.
A major factor in each plan alternative is an appraisal, now underway, of
the current VSN product release and the timing and cost of the next VSN release
which is now in development.
The Company is also actively engaged in seeking supplemental funding for
specific client implementations of the VSN product.
The Company has announced a definitive agreement to acquire Online
Transaction Technologies, Inc. ("OTT") for Company stock. The acquisition,
which has not yet closed, will be accounted for by purchase accounting. After
the closing, the Company will offer the OTT auction-related product line which
is fully developed. Other than normal capital expenditures for computer
equipment, software and general business support equipment, the Company has no
plans for any significant purchases or sales.
The Company has no plans at this time to significantly increase or reduce
its number of employees. However, certain of the plan alternatives referenced
above include significant reductions in the number of employees.
PROPERTY
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<PAGE>
The Company, through its subsidiary Virtual Source, inc., leases
approximately 5,500 square feet of standard office space at its principal
location in Ventura, California. The lease expires on March 21, 2002. Rent is
$8,307 per month.
The Company rents approximately 6,700 square feet of standard office in
Bothell, Washington. The lease expires on October 21, 2002, under a 36-month
lease. Rent is $11,117 per month.
The Company's main servers are housed in a Seattle facility especially
designed for mission-critical computers. The cost is $3,200 per month, and is
available on a month-to-month basis. This facility maintains back-up electrical
power, fire protection, and other security features. Data communications
connections available within this facility provide direct access to the
Internet, without the need to connect through T-1, T-2, or T-3 high volume
telephone lines. Alternative sites in Seattle are available, and redundant
servers at other Internet access sites are under development.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has issued convertible demand notes, from time to time, each in
a private transaction. In July 1999, all such notes were converted into an
aggregate of 2,210,201 shares. Robert McShirley, chairman, president and chief
executive officer of the Company, received an aggregate of 245,317 shares of
Common Stock upon the conversion of notes in the principal amount of $95,600.
Richard McShirley, vice president of the Company, received an aggregate of
188,116 shares of Common Stock upon the conversion of notes in the principal
amount of $33,100.
In May 1999, Robert C. McShirley exercised an option to purchase 80,000
shares of Common Stock (of the Company's predecessor) at $0.625 per share and
100,000 shares at $0.18 per share in exchange for promissory notes payable to
the Company. Mr. McShirley was also granted an option to purchase 100,000
shares of Common Stock at $0.75 per share.
Malcolm Powell and his family, through various trusts, were the beneficial
owners of $55,000 principal amount of the notes. The principal amount plus
accrued interest was converted into 232,757 shares of common stock. Dr. Powell
also owns 150,000 shares of the Company common stock and, through a trust,
22,071 shares of Preferred Stock. Dr. Powell is a first cousin of Samuel Bradt,
a director of the Company and the Company's former chief financial officer,
secretary, and treasurer. Two other cousins of Mr. Bradt, R. Adolph Miller and
Alison Sapikowski, hold 32,626 and 22,071 shares of Preferred Stock
respectively.
The largest principal amount of the Notes held by any one holder was held
by Daniel Bunn who held $266,000 principal amount. The principal amount plus
accrued interest was converted into 673,348 shares of common stock in July of
1999. Mr. Bunn also holds 33,374 shares of Preferred Stock. Mr. Bunn is a
business associate of Robert C. McShirley.
In April 2000, Mr. McShirley was issued 245,317 of restricted Common Stock
pursuant to the conversion of convertible notes.
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<PAGE>
In May 1999, and in accordance with the terms of the option agreements, the
Company accepted six promissory notes totaling $178,798 from three executive
officers, Robert McShirley, Richard McShirley and Samuel Bradt, as consideration
for the exercise price of 636,100 fully vested non-qualified stock options. The
notes carry an interest rate of 6% per annum and are payable on demand.
In August 2000, Robert C. McShirley received a bonus of approximately
$115,000 which was used to retire a loan from the Company.
In September 2000, Sandford T. Waddell, the Chief Financial Officer, and P.
Scott Turner, the Chief Operating Officer, each purchased shares of the
Company's Series 2-A Convertible Preferred Stock for nominal cash and three year
promissory notes with interest rate of 8% per annum and principal amounts of
$124,000 and $124,000, respectively. The preferred stock purchased by Mr.
Waddell and Mr. Turner was 19,501 shares and 19,501 shares, respectively. In
connection with such transactions, Mr. Waddell and Mr. Turner each received a
warrant to purchase 1,697 shares of common stock with an exercise prices of
$6.41 with a term of five years.
In October 2000, Robert McShirley borrowed $400,000 from the Company in
exchange for a secured ninety day promissory note in such amount and an interest
rate of 8% per annum. The note is secured by 100,000 shares of Mr. McShirley's
common stock of the Company. Mr. McShirley repaid the Company $250,000 late in
October 2000, leaving a balance of $150,000 plus interest. In addition, P.
Scott Turner borrowed $50,000 from the Company in exchange for a one year
promissory note in such amount with an interest rate of 8% per annum.
In the quarter ended October 31, 2000, a sale was made to a related party.
Ramin Kamfar is a member of the Board of directors of the Company and is also
the Chief Executive Officer of New World Coffee, one of the customers with which
a sale of $25,000 was recorded.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Nasdaq National Market on
October 30, 2000 under the symbol "VSRC." Due to the stock's limited history on
the Nasdaq National Market, the Company sets forth historical data from its
prior trading on the over-the-counter securities market.
The Company's common stock began trading under the symbol "VSRC-BB" in the
over-the-counter securities market on January 4, 2000. Prior to January 4,
2000, the Company's common stock traded under the symbol "IBNL-BB" in the over-
the-counter securities market. The over-the-counter quotations reflect
interdealer bid prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. The over-the-counter market does not
constitute active trading and trading in the Company's common stock is limited
and sporadic. The following table sets forth the range of high bid and low bid
quotations and the closing price for the fiscal quarters within the last two
years. The source for this information is the Nasdaq OTC Bulletin Board.
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<PAGE>
Common Stock
------------
For Fiscal Year Ended January 31, 1999 High Low
-------------------------------------- ---- ---
Quarter ended April 30, 1998 $ 3.25 $ 0.40
Quarter ended July 31, 1998 $ 2.94 $ 1.06
Quarter ended October 31, 1998 $ 1.31 $ 0.63
Quarter ended January 31, 1999 $ 3.00 $ 0.69
For Fiscal Year Ended January 31, 2000 High Low
-------------------------------------- ---- ---
Quarter ended April 30, 1999 $ 2.38 $ 1.38
Quarter ended July 31, 1999 $ 2.13 $ 1.38
Quarter ended October 31, 1999 $ 2.88 $ 1.53
Quarter ended January 31, 2000 $ 19.88 $ 1.88
For Fiscal Year Ended January 31, 2001 High Low
-------------------------------------- ---- ---
Quarter ended April 30, 2000 $ 85.00 $14.50
Quarter ended July 31, 2000 $28.125 $9.125
Quarter ended October 31, 2000 $16.125 $6.357
Quarter ended January 31, 2001* $15.812 $ 1.50
*As of December 28, 2000
HOLDERS
As of December 22, 2000, there were 945 registered stockholders of record
of the Company's common stock. In addition, approximately 10,784,000 of the
Company's outstanding shares are held in "street name" by Cede, Inc. on behalf
of stockholders.
DIVIDENDS
The Company has not declared any dividends on the common stock in the last
two fiscal years or in the first three fiscal quarters of the fiscal year ending
January 31, 2001. The Company has no present intention to pay cash dividends in
the foreseeable future.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding the compensation for the
last three completed fiscal years of the CEO and Richard McShirley, the only
other person whose total annual salary and bonus exceed $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
Name And Fiscal Year ---------------------------------------------------
Principal Position Ended Jan. 31, Securities Underlying
Salary Options/sars
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert C. McShirley, CEO 2000 $117,000 200,000 (1)
-------------------------------------------------------------------
1999 $ 63,750 80,000 (2)
-------------------------------------------------------------------
1998 -0- 100,000 (3)
----------------------------------------------------------------------------------------------------------------
Richard McShirley, Vice President 2000 $117,000 85,000 (4)
-------------------------------------------------------------------
1999 $ 90,000 35,000 (5)
-------------------------------------------------------------------
1998 $ 90,000 406,100 (6)
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options to purchase 100,000 shares of Common Stock were granted May 15,
1999 with an exercise price of $0.75 per share. In addition, options to
purchase 100,000 shares of Common Stock previously granted August 4, 1998
were repriced on May 15, 1999.
(2) Options granted August 4, 1998 and exercised May 25, 1999. The options had
an exercise price of $1.25 per share and were repriced to $0.625 per share
on May 15, 1999.
(3) Options granted August 29, 1997 and exercised May 25, 1999. The options
had an exercise price of $0.18164 per share.
(4) Options to purchase 50,000 shares of Common Stock were granted May 15, 1999
with an exercise price of $0.75 per share. In addition, options to
purchase 35,000 shares of Common Stock previously granted August 4, 1998
were repriced on May 15, 1999.
(5) Options granted August 4, 1998 and exercised May 25, 1999. The options had
an exercise price of $1.25 per share and were repriced to $0.625 per share
on May 15, 1999.
(6) Options granted February 5, 1997 for 306,100 shares and August 29, 1997 for
100,000 shares. All options were exercised May 25, 1999 at an exercise
price of $0.20 per share for 306,100 shares and $0.18164 per share for
100,000 shares.
Option Grants In The Last Fiscal Year
OPTION/SAR GRANTS TABLE
(Individual Grants)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Number Of Percent Of Total Exercise
Securities Options/SARs Or Base
Underlying Granted To Price Expiration Maturation
Name Options/SARs Employees in ($/Sh) Date Date
Granted Fiscal Year 2000
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert C. McShirley, CEO 100,000 7.9% $0.75 5-15-2009 5-15-2001
---------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Number Of Percent Of Total Exercise
Securities Options/SARs Or Base
Underlying Granted To Price Expiration Maturation
Name Options/SARs Employees in ($/Sh) Date Date
Granted Fiscal Year 2000
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard McShirley 50,000 3.9% $0.75 5-15-2009 5-15-2001
--------------------------------------------------------------------------------------------------
</TABLE>
Option Exercises And Holdings
AGGREGATED OPTIONS/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Number Of Unexercised Value Of Unexercised
Shares Securities Underlying In-The-Money
Name Acquired On Value Options/SARs Options/SARs
Exercise Realized At FY-End (#) At F-Y End ($)
Exercisable/Unexercisable Exercisable/Unexercisable
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert C. McShirley, CEO 180,000 $258,086 50,000/50,000 ($721,875/$721,875)
-------------------------------------------------------------------------------------------------------------
Richard McShirley 441,100 $698,255 25,000/25,000 ($360,937/$360,937)
-------------------------------------------------------------------------------------------------------------
</TABLE>
Report of Repricing of OptionS/SARS
Certain options to purchase Common Stock were repriced pursuant to
resolutions of the Board of Directors on May 15, 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Number
Option Holder Grant Date of Original Amended Vesting
Shares Exercise Price Exercise Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert C. McShirley 08/04/98 80,000 $1.25 $0.625 2 years
-------------------------------------------------------------------------------------------------------------
Richard S. McShirley 08/04/98 35,000 $1.25 $0.625 2 years
-------------------------------------------------------------------------------------------------------------
Samuel E. Bradt 08/04/98 15,000 $1.25 $0.625 2 years
-------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation of Directors
Upon the election to the Board of Directors in April, 2000, Ramin Kamfar was
granted 2,500 shares of the Company's Common Stock. The Company does not
currently offer any other compensation to the directors.
-58-
<PAGE>
Employment Agreements
The Company has not entered into any employment agreements with any of the
executive officers.
-59-
<PAGE>
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Vsource, Inc.
We have audited the accompanying consolidated balance sheet of Vsource, Inc. (a
Nevada corporation) as of January 31, 2000 and the related consolidated
statements of operations, shareholders' deficit and cash flows for the year
ended January 31, 2000. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vsource, Inc. as of
January 31, 2000 and the results of its operations, and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Grant Thornton LLP
Los Angeles, California
April 7, 2000
-60-
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Interactive Buyers Network International Ltd.
and Subsidiaries
Ventura, California
We have audited the accompanying consolidated statements of operations,
consolidated stockholders' equity and consolidated cash flows for the year ended
January 31, 1999 of Interactive Buyers Network International Ltd. and
subsidiaries. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, shareholders'
equity and its cash flows for the year then ended January 31, 1999 of
Interactive Buyers Network International Ltd. and subsidiaries in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,762,230 during the year ended
January 31, 1999, and as of that date, had a working capital deficiency of
$920,680 and stockholders' equity of $128,796. These conditions raise
substantial doubt about its ability to continue as a going concern.
/s/ Lucas Horsfall, Murphy & Pindroh, LLP
Pasadena, California
May 15, 1999
-61-
<PAGE>
VSOURCE, INC.
CONSOLIDATED BALANCE SHEET
January 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 5,124,399
Restricted cash 82,768
-----------
Total current assets 5,207,167
PROPERTY AND EQUIPMENT
Equipment and fixtures 240,208
Less - accumulated depreciation (17,708)
-----------
222,500
EMPLOYEE AND OTHER RECEIVABLES 110,728
-----------
$ 5,540,395
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 247,472
Accrued expenses 100,937
Amounts related to in-process
private placement of preferred stock 6,002,500
Convertible notes payable 150,000
-----------
Total Current Liabilities 6,500,909
SHAREHOLDERS' DEFICIT
Preferred stock ($0.01 par value, 5,000,000
shares authorized; no shares issued) -
Common stock ($0.01 par value, 50,000,000
shares authorized; 15,807,130 issued and outstanding) 158,071
Additional paid-in capital 10,645,934
Deferred Compensation (1,780,817)
Accumulated deficit (9,804,904)
------------
(781,716)
Less: Notes receivable from the sale of stock (178,798)
------------
(960,514)
------------
$ 5,540,395
============
The accompanying notes are an integral part of this statement.
-62-
<PAGE>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended January 31,
2000 1999
-----------------------------
Revenue $ 3,500 $ 60,527
General and administrative expenses 1,167,328 298,648
Research and development 3,458,933 1,263,720
----------- -----------
Total expenses 4,626,261 1,562,368
----------- -----------
Loss from operations (4,622,761) (1,501,841)
Other income (expense):
Interest expense (388,571) (351,499)
Loss on impairment of intangible asset (527,356) -
Other income 15,394 91,110
----------- -----------
Net loss $(5,523,294) $(1,762,230)
=========== ===========
Basic weighted average number of
common shares outstanding 13,931,634 10,529,147
=========== ===========
Net loss per common share $ (0.40) $ (0.17)
=========== ===========
The accompanying notes are an integral part of this statement.
-63-
<PAGE>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended January 31,
2000 1999
------------------------------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net loss $(5,523,294) $(1,762,230)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 436,671 285,340
Interest expense related to the beneficial conversion feature 349,710 290,657
Interest expense converted to equity 36,568 --
Impairment of intangible asset 527,356 --
Compensation expense from stock option grants 424,266 155,112
Services paid with equity 548,513 192,235
Settlement of rent litigation 37,500 (37,500)
Changes in assets and liabilities:
Accounts receivable 3,590 (3,590)
Prepaid expenses -- 27,562
Other assets -- 877
Accounts payable 198,250 16,735
Deferred revenue (3,250) (25,469)
Accrued liabilities 100,937 49,042
----------- -----------
Net cash used in operating activities (2,863,183) (811,229)
Cash flows from investing activities:
Advances to employees (41,820) (9,400)
Purchase of equipment (240,208) --
----------- -----------
Net cash used in investing activities (282,028) (9,400)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,139,941 --
Proceeds from private placement 6,002,500 --
Proceeds from borrowings 150,000 825,160
----------- -----------
Net cash provided by financing activities 8,292,441 825,160
----------- -----------
Net increase in cash 5,147,230 4,531
Cash at beginning of period 59,937 55,406
----------- -----------
Cash at end of period $ 5,207,167 $ 59,937
=========== ===========
Supplemental disclosure of non-cash financing activities:
Issuance of warrants in exchange for services $ 435,000 --
Conversion of debt to equity $ 971,553 $ 319,007
</TABLE>
The accompanying notes are an integral part of this statement.
-64-
<PAGE>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Notes Accumulated Shareholders'
Shares Amount Paid-in-Capital Compensation Receivable Deficit Equity/(Deficit)
----------- ----------- --------------- ------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1998 10,804,295 $ 108,043 $ 2,310,724 $ - $ - $(2,519,380) $ (100,613)
Common stock surrendered (1,000,000) (10,000) 10,000 -
Issuance of common stock-
Acquisition of WPG.Net 500,000 5,000 1,181,555 1,186,555
Issuance of common stock
upon conversion of demand
notes 778,656 7,786 311,221 319,007
Beneficial conversion
feature 290,657 290,657
Granting of common stock
options for services 45,725 45,725
Issuance of common stock
for services 318,500 3,185 146,510 149,695
Net loss (1,762,230) (1,762,230)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 1999 11,401,451 114,014 4,296,392 (4,281,610) 128,796
Issuance of common stock,
net of issuance costs 1,495,213 14,952 2,124,990 2,139,942
Issuance of common stock
upon conversion of
demand notes 2,210,201 22,102 949,451 971,553
Issuance of common
stock for services 64,165 642 112,735 113,377
Granting of common stock
options for services 2,123,382 (1,780,817) 343,015
Issuance of warrants -
related party 435,136 435,136
Beneficial conversion
feature 349,710 349,710
Modification in terms
of stock options 81,251 81,251
Exercise of stock options 636,100 6,361 172,437 (178,798) -
Net loss (5,523,294) (5,523,294)
----------- ----------- ------------- ----------- ----------- ----------- ----------
Balance at January 31, 2000 $15,807,130 $ 158,071 $ 10,645,934 $(1,780,817) $ (178,798) $(9,804,904) $ (960,514)
=========== =========== ============= =========== =========== =========== ==========
</TABLE>
The accompanying Notes are an integral part of this statement.
-65-
<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION AND BUSINESS
VSource, Inc. (VSource or the "Company") creates and markets Internet-based
applications for businesses. An Internet-based application is best described as
computer software and data that reside on a remote server, rather than the
user's computer, where that software and data are accessed over the Internet.
The Company intends to generate fees by licensing its Internet-based
applications for use by businesses. Currently, the Company offers VSN as its
primary application. VSN may be used by corporate clients to purchase goods and
services via the Internet. The Company has also developed and has previously
offered Virtual Source Publisher, a do-it-yourself Internet web site builder.
Virtual Source Publisher is currently inactive but is being retained for future
use as a supporting application.
VSource was incorporated in Nevada on October 22, 1980 as Cinema-Star
Corporation and, in September 1989, was renamed Dyna-Seal Corporation. Prior to
February 1, 1995, the Company's name was changed several times, and its former
line of business (manufacturing, packaging and distribution of coatings,
sealants and adhesive for use in aircraft and marine industries) was completely
discontinued. In July 1995, the Company changed its name to Interactive Buyers
Network International, Ltd., and acquired all of the outstanding shares of
Buyer/Seller Interactive Software, Inc., a Nevada corporation whose name was
subsequently changed to Virtual Source, Inc., ("VSI"). The Company changed its
name to VSource, Inc. in December 1999.
On June 1, 1998, the Company acquired all of the outstanding stock of Wpg.Net,
Inc. ("Wpg.Net"). See Note 3.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VSource, Inc. and
its wholly owned subsidiaries Virtual Source, Inc. and Wpg.Net, Inc. Significant
intercompany accounts have been eliminated.
REVENUE RECOGNITION
The Company accounts for revenue in accordance with the American Institute of
Certified Public Accountants (the AICPA) Statement of Position (SOP) No. 97-2
"Software Revenue Recognition," which provides guidance on applying generally
accepted accounting principles for software revenue recognition transactions.
When the Internet version of the Company's software is fully functional and
available for sale, the Company plans on charging initial license fees and user
fees.
-66-
<PAGE>
The initial license fees are charged in return for granting the client access to
the network and the Interactive Buyer's servers where the system resides. The
Company has not yet received revenue related to the Internet version of the
software. The revenue related to the initial license fees will be amortized over
the service life of a customer relationship, currently estimated to be five
years.
In addition to the initial fees, the Company plans on charging a transaction fee
for each transaction consummated by the licensee on the network.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
SOFTWARE DEVELOPMENT COST
Software development costs have been accounted for in accordance with Statement
of Financial Accounting Standard (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under that standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations.
Capitalized software costs are amortized over the greater of: 1) the amount
computed using the ratio that current gross revenues for a product bear to the
total current and anticipated future gross revenues for that product; or 2) the
straight-line method over the remaining estimated useful life of the product in
which the life is generally estimated to be three years. The Company has not
incurred any significant capitalizable costs after technological feasibility was
achieved and thus does not have any capitalized software development costs for
the years ended January 31, 1999 and 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The assets are depreciated using the
straight-line method over their estimated useful lives of five years. Carrying
values are reviewed periodically for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable.
The policy of the Company is to capitalize significant improvements and to
expense repairs and maintenance.
Depreciation expense for the years ended January 31, 1999 and 2000 was $21,661
and $40,275, respectively.
IMPAIRMENT OF LONG LIVED ASSETS
The Company evaluates its long lived assets by measuring the carrying amount of
the assets against the estimated undiscounted future cash flows associated with
them. If such evaluations indicate that the future undiscounted cash flows of
certain long lived assets are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values.
-67-
<PAGE>
INTANGIBLE ASSETS
Intangible assets, principally goodwill, are amortized on the straight-line
method over a period of 3 years. The carrying amounts of intangible assets are
assessed for impairment when operating profit from the related business
indicates the carrying amounts of the assets may not be recoverable. Carrying
values are reviewed periodically for impairment whenever events or changes in
circumstances indicate that the carrying amounts of intangible assets may not be
recoverable. The Company recorded an impairment of goodwill in the amount of
$527,356 for the year ended January 31, 2000. Amortization for the years ended
January 31, 1999 and 2000 was $263,757 and $396,396, respectively.
STOCK BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation. The
Company has chosen under the provisions of SFAS 123 to continue using the
intrinsic-value method of accounting for employee stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees.
LOSS PER SHARE
Loss per share of common stock is computed using the weighted average number of
common shares outstanding during the period shown. Common stock equivalents are
not included in the determination of the weighted average number of shares
outstanding, as they would be antidilutive.
ADVERTISING COST
The Company charges advertising costs to expense as incurred. Advertising
expense for the years ended January 31, 1999 and 2000 was $1,073 and $245,680,
respectively.
STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, cash includes amounts "on-hand"
and amounts deposited with financial institutions.
Supplemental disclosure of cash flow information is as follows:
Cash paid during the periods:
For the Years Ended January 31,
-------------------------------
2000 1999
-------------------------------
Interest $ - $ -
====== ======
Income taxes $1,600 $1,600
====== ======
Supplemental schedule of non-cash investing and financing transactions:
Issuance of common stock in connection with the following transactions:
-68-
<PAGE>
For the Years Ended January 31,
-------------------------------
2000 1999
-------------------------------
Conversion of notes payable $996,553 $ 319,007
-------- ----------
Purchase of Wpg.Net $ - $1,186,555
======== ==========
For the year ended January 31, 2000, options for 636,100 shares of common stock
were exercised for notes receivable in the amount of $178,798.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements, and revenues and expenses during the reporting
period. Actual results could differ from estimates and assumptions made.
2. REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
company as a going concern. However, the company has sustained substantial
losses from operations in recent years, and such losses have continued through
the year ended January 31, 2000. In addition, the company has used, rather than
provided, cash in its operations.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the company with the
ability to continue its operations: it has retained experienced operating and
financial management, it has concluded contracts with clients which will provide
revenues in future periods, and it has retained an investment bank to raise
additional capital.
3. ACQUISITION OF WPG.NET, INC.
On June 1, 1998, the Company acquired all of the outstanding stock of Wpg.Net,
Inc. for an aggregate purchase price of $1,186,555. VSource, Inc. issued 500,000
shares of common stock with a fair value of $625,000 ($1.25 per share), plus
stock options for 500,000 shares with a fair value of $561,555. The options
vest ratably, on a monthly basis, over the 3 years subsequent to the purchase.
If Wpg.Net, Inc. division revenues reach $500,000 before the 3-year vesting
period has expired, the 500,000 options vest immediately. The former
-69-
<PAGE>
shareholders of Wpg.Net, Inc. (Wpg.Net, Inc. shareholders) are entitled to a
commission of 50% of revenue generated by the Wpg.Net, Inc. division. Wpg.Net,
Inc. shareholders are entitled to 25% of the revenues produced by Virtual
Source, Inc. relating to the sales of Virtual Source Publisher. As of January
31, 2000, no revenues have been generated related to Wpg.Net, Inc. or the
Virtual Source Publisher. In the event that VSource is sold, the Wpg.Net, Inc.
shareholders are entitled to a one-time payment of $3,000,000, the options vest
immediately, and all commission obligations cease to accrue at that time. The
Company guaranteed a minimum stock price of $7.00 per share for stock held by
Wpg.Net, Inc. shareholders upon the sale of the Company.
The acquisition was accounted for as a purchase and was included with the
combined operations for the dates subsequent to June 1, 1998. As a result of
the acquisition, goodwill was recorded in the amount of $1,186,555. In
conjunction with the acquisition of Wpg.Net, three of Wpg.Net's executives
signed one-year employment agreements with the Company. The contracts guaranteed
the Wpg.Net executives salaries ranging from $49,500 to $77,250 per year. These
contracts have expired; however, these executives remain active employees of the
Company.
During the year ended January 31, 2000, the Company determined that the present
value of future cash flows related to the acquisition of Wpg.Net was not
material. Consequently, the remaining unamortized goodwill has been written off
as of January 31, 2000.
4. NOTES RECEIVABLE - RELATED PARTIES
The Company has unsecured notes receivables from several officers which totaled
$288,645 as of January 31, 2000. The notes are due on demand and bear interest
at an annual rate of 6%. Included in these receivables are notes in the amount
of $178,798, which were granted in connection with the exercise of 636,100 stock
options on May 15, 1999, as allowed by the option agreement.
5. CONVERTIBLE NOTES PAYABLE
In July 1999, the company converted all of its outstanding convertible debt to
equity. To induce debt holders to convert prior to the 90-day notice period,
the Company offered a financial inducement. The total amount of the inducement,
charged to interest expense, was $19,860. The total amount of shares issued in
connection with the conversion of debt for the year ended January 31, 2000 was
2,210,201 shares.
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 January 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 year ended January 31,
2000 was $112,500.
-70-
<PAGE>
6. STOCK OPTIONS AND WARRANTS
The Company has granted various non-qualified stock options to key executives,
management and other employees at exercise prices equal to or below the market
price at the date of grant. In general, options become exercisable from 8 months
to 3 years from the grant date.
On June 10, 1998, the Board of Directors granted options to shareholders of
Wpg.Net, Inc. to purchase 500,000 shares of the Company's restricted common
stock at an exercise price of $0.59 per share. The options vest monthly over a
three-year period and have a term ending in June 2008.
The following table summarizes information about stock option transactions for
the years ended January 31, 1999 and 2000:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at January 30, 1998 506,100 $0.19
Granted 630,000 0.73
Exercised - -
Cancelled - -
Outstanding at January 31, 1,136,100 0.49
Granted 1,273,250 0.93
Exercised (636,100 0.28
Cancelled (130,000) 1.25
---------
Outstanding at January 31, 2000 1,643,250 $0.85
=========
Exercisable at January 31, 2000 676,856 $0.72
=========
The following table summarizes information about stock options outstanding at
January 31, 2000:
<TABLE>
<CAPTION>
Weighted Exercisable
Average Weighted
Range of Number of Remaining Years Weighted Number of Average
Exercise Options of Contractual Average Options Exercise
Prices Outstanding Life Exercise Price Exercisable Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 31, 2000 $0.59-1.66 1,643,250 8.76 $0.85 676,856 $0.72
</TABLE>
The Company has elected to continue using the intrinsic-value method of
accounting for stock-based awards granted to employees in accordance with APB
25. For the year ended January 31, 2000, the Company recorded compensation
expense in the amount of $424,266.
The following table reflects pro forma net income and earnings per share had the
Company elected to adopt the fair value approach of SFAS 123 for the years
ended:
-71-
<PAGE>
<TABLE>
<CAPTION>
January 31,
2000 1999
----------- -----------
<S> <C> <C>
Net loss as reported $(5,523,294) $(1,762,230)
Pro forma $(6,921,005) $(1,802,545)
Loss per share as reported $ (0.40) $ (0.17)
Pro forma $ (0.50) $ (0.17)
</TABLE>
The estimated fair value of each option granted is calculated using the Black-
Scholes option-pricing model with a weighted average risk free rate of 6.5%,
volatility of 219.4% and expected life of 1 to 5 years.
In connection with a financing transaction, the Company issued warrants to an
outside consultant to purchase 120,000 shares of the Company's common stock for
a purchase price of $2.00 per share. The warrants were exercised prior to their
November 7, 2000 expiration.
7. INCOME TAXES
Income taxes are provided pursuant to SFAS No. 109 Accounting for Income Taxes.
The statement requires the use of an asset and liability approach for financial
reporting for income taxes. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized. Accordingly, as the realization and use of the net operating loss
carryforward is not probable at January 31, 1999 or 2000, the tax benefit of the
loss carryforward has been offset by a valuation allowance of the same amount.
The composition of deferred tax assets is as follows:
<TABLE>
<CAPTION>
January 31,
2000 1999
--------------------------
<S> <C> <C>
Total deferred tax assets $ 2,424,637 $ 902,000
Total valuation allowance (2,434,637) (902,000)
----------- ----------
Total deferred tax assets $ - $ -
=========== ==========
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
deferred assets are as follows:
<TABLE>
<CAPTION>
January 31,
2000 1999
-----------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,149,575 $3,452,000
Stock option conversion 164,217 -
</TABLE>
As of January 31, 2000, the Company had approximately $9,149,575 of federal and
-72-
<PAGE>
state loss carryforwards available to reduce future federal and state tax
liability through the year 2020 for federal loss carryforwards and 2005 for the
state loss carryforwards.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has used market information for similar instruments and applied
judgment to estimate fair values of financial instruments. At January 31, 1999
and 2000, the fair values of cash, accounts receivable, employee receivables,
notes payable and accounts payable approximated carrying values because of the
short-term nature of these instruments.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its main office facilities under a noncancellable operating
lease agreement expiring March 31, 2002. The future minimum rent expense that
will be incurred under operating leases are as follows:
2001 $184,000
2002 206,000
2003 97,000
--------
$487,000
========
Rent expense for the years ended January 31, 1999 and 2000 was $35,063 and
$114,221, respectively.
10. SUBSEQUENT EVENTS
In February 2000, the company completed a private placement of non-cumulative
convertible preferred stock in the amount of $7,005,000. The convertible
preferred stock accrues dividends at a rate of $0.20 per share per annum and is
convertible into shares of common stock at any time at the election of the
holder. The preferred stock is automatically convertible upon an underwritten
public offering of shares of the Company with aggregate proceeds of at least
$10,000,000, or by a vote of the majority of the outstanding Series 1-A
preferred stock. The amount as of January 31, 2000 in the in-progress offering,
$6,002,500, was included in current liabilities in the accompanying balance
sheet until the closing of the offering in February 2000 when stock certificates
were issued to subscribers.
In February 2000, the Company entered into a strategic relationship with a
vendor in which the two companies agreed to make the Company's Virtual Source
Network available to the vendor's business customers. In connection with this
agreement, the Company issued warrants to the vendor to purchase 600,000 shares
of the Company's common stock at a base exercise price of $5.00 per share. The
exercise price is subject to various adjustments, as defined in the agreement.
The warrants may be exercised in whole or in part through February 2007.
-73-
<PAGE>
The following financial statements are unaudited.
VSOURCE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
October 31, 2000 January 31, 2000
(Unaudited)
------------------ ---------------
<S> <C> <C>
Current assets:
Cash in bank $8,154,474 $5,124,399
Restricted cash 108,694 82,768
---------- ----------
Total cash 8,263,168 5,207,167
Accounts receivable 191,500 --
Notes receivable - officers and other 183,367 --
Prepaid expenses 148,383 --
---------- ----------
Total current assets 8,786,418 5,207,167
Property and equipment
Fixed assets 819,017 240,208
Less: accumulated depreciation (121,564) (17,708)
---------- ----------
Property and equipment, net 697,453 222,500
Notes receivable - officers and other, non-current 50,755 110,728
---------- ----------
$9,534,626 $5,540,395
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-74-
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
October 31, 2000 January 31, 2000
(Unaudited)
---------------- ----------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 366,818 $ 247,472
Accrued liabilities 79,087 100,937
Convertible notes payable 150,000 150,000
Liabilities related to private placement of preferred stock -- 6,002,500
------------ -----------
Total current liabilities 595,905 6,500,909
Shareholders' equity (deficit)
Preferred stock Series 1-A ($0.01 par value,
2,900,000 shares authorized:
2,725,232 issued and outstanding;
aggregate liquidation value is $6,813,080) 27,252 --
Preferred stock Series 2-A ($0.01 par value,
2,100,000 shares authorized:
1,672,328 issued and outstanding;
aggregate liquidation value is $10,719,622) 16,723 --
Common stock ($0.01 par value, 50,000,000 shares
authorized: 16,101,523 issued and outstanding) 161,015 158,071
Additional paid-in capital 63,955,951 10,645,934
Deferred compensation (12,953,649) (1,780,817)
Accumulated equity (deficit) (41,841,773) (9,804,904)
Less: Notes receivable from the sale of stock (426,798) (178,798)
------------ -----------
Total shareholders' equity (deficit) 8,938,721 (960,514)
------------ -----------
$ 9,534,626 $ 5,540,395
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
October 31, 2000 October 31, 1999
---------------- ----------------
<S> <C> <C>
Revenue $ 151,500 $ 2,230
Expenses
General and administrative (including
$1,168,952 of stock based compensation for
the three month period ended October 31, 2000) 2,017,562 226,745
Research and development (including
$1,210,201 of stock based compensation for
the three month period ended October 31, 2000) 4,004,459 1,034,021
------------ ------------
6,022,021 1,260,766
------------ ------------
Loss from operations (5,870,521) (1,258,536)
Other income/(expense)
Interest income 36,023 --
Other income -- --
Interest expense (3,698) --
------------ -----------
Loss before income taxes (5,838,196) (1,258,536)
Provision for income taxes -- --
------------ -----------
Net loss $ (5,838,196) $(1,258,536)
============ ===========
Basic loss available to
common stockholders $(12,468,976) $(1,258,536)
============ ===========
Basic weighted average number of
common shares outstanding: 15,969,038 14,339,164
============ ===========
Net loss per share available to common stockholders
Basic $ (0.78) $ (0.09)
============ ===========
Diluted $ (0.78) $ (0.09)
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-76-
<PAGE>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
October 31, 2000 October 31, 1999
---------------- ----------------
<S> <C> <C>
Revenue: $ 214,000 $ 10,215
Expenses:
General and administrative (including
$6,617,357 of stock based compensation for
the nine month period ended October 31, 2000) 9,746,801 803,742
Research and development (including
$3,031,209 of stock based compensation for
the nine month period ended October 31, 2000) 9,087,797 2,154,073
------------ ----------
18,834,598 2,957,815
------------ ----------
Loss from operations (18,620,598) (2,947,600)
Other income/(expense):
Interest income 91,584 --
Other income 4,019 --
Interest expense (11,096) --
------------ ------------
Loss before income taxes (18,536,091) (2,947,600)
Provision for income taxes 1,600 --
------------ ------------
Net loss $(18,537,691) $ (2,947,600)
============ ============
Basic loss available to common stockholders $(32,036,868) $ (2,947,600)
============ ============
Basic weighted average number of
common shares outstanding: 15,869,895 13,296,009
============ ============
Net loss per share available to common stockholders
Basic $ (2.02) $ (0.22)
============ ============
Diluted $ (2.02) $ (0.22)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-77-
<PAGE>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
October 31, 1999 October 31, 2000
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,537,691) $(2,947,600)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 104,517 322,090
Compensation expense for stock option grants 3,775,099 --
Compensation expense for warrant grants 5,708,810 --
Compensation expense for stock issued 164,656 --
Beneficial conversion feature -- 241,753
Issuance of stock and debt for services, expense
reimbursements and accrued interest -- 647,839
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable (191,500) 3,590
(Increase)/decrease in note receivables-officer and other (183,367) --
(Increase)/decrease in prepaid expenses (148,383) 33,750
(Increase)/decrease in note receivable-officers
and other, non-current 59,312 281
Increase/(decrease) in accounts payable 119,345 250,953
Increase/(decrease) in deferred revenue -- (3,250)
Increase/(decrease) in accrued expenses (21,850) (27,034)
------------ -----------
Net cash used in operating activities (9,151,052) (1,477,628)
Cash flows from investing activities:
Purchase of property and equipment (463,269) (151,088)
Purchase of capitalized software (115,540) --
</TABLE>
-78-
<PAGE>
<TABLE>
<S> <C> <C>
Advances to related parties (248,000) (52,833)
------------ -----------
Net cash used in investing activities (826,809) (203,921)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,144,034 1,749,942
Proceeds from issuance of preferred stock 10,889,828 --
Proceeds from borrowings -- 29,700
------------ -----------
Net cash provided by financing activities 13,033,862 1,779,642
------------ -----------
Net increase in cash 3,056,001 98,093
------------ -----------
Cash at beginning of period 5,207,167 59,937
------------ -----------
Cash at end of period $ 8,263,168 $ 158,030
============ ===========
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.
-79-
<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31,2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The interim consolidated financial statements as of October 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 US GAAP. 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 5 and 6.
REVENUE RECOGNITION
Revenue is recognized for time and materials-based arrangements as services
are performed and fixed fee arrangements on the percentage-of-completion
method. Under this approach, revenues and gross profit are recognized as
the work is performed, based on the ratio of costs incurred to total
estimated costs, commencing when progress reaches a point where experience
is sufficient to estimate final results with reasonable accuracy.
-80-
<PAGE>
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Customer deposits represent the
amount of customer payments received in advance of services being
performed. Transaction revenue, which the company has not yet begun to
receive, will be accounted for in the period earned.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation using the intrinsic value
based method in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), which
allows companies to continue to recognize compensation expense pursuant to
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" but requires companies to disclose the effect on
earnings of compensation expense for stock options based on the fair value
of the options at the grant date. Accordingly, employee compensation cost
for stock options is measured as the excess of the fair market value over
the exercise price at the measurement date.
2. NOTES RECEIVABLE FROM THE SALE OF STOCK
The Company has notes receivable related to the sale of stock from several
officers, which totaled $426,798 as of October 31, 2000. The notes bear
interest at the annual rates shown below. The notes were granted in
connection with the purchase of stock or exercise of stock options as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Balance as of
Date Granted Interest Rate Shares Due Date October 31
Related 2000
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unsecured May 15, 1999 6% per annum 636,100 On Demand $178,798
---------------------------------------------------------------------------------------------------------
Secured September 19, 2000 8% per annum 39,002 September 15, 2003 248,000
---------------------------------------------------------------------------------------------------------
Total: $426,798
---------------------------------------------------------------------------------------------------------
</TABLE>
3. NOTES RECEIVABLE - OFFICERS AND OTHER
In October 2000, Robert C. McShirley, the Chief Executive Officer borrowed
$400,000 from the Company in exchange for a secured ninety-day promissory
note which bears interest at a rate of 8% per annum. The note is secured by
100,000 shares of Mr. McShirley's common stock of the Company. In late
October 2000, Mr. McShirley repaid the Company $250,000 of the original
balance, leaving a balance of $150,000 plus interest. This note receivable
is included in the current portion of Notes Receivable - officers and
other. In addition, the Chief Operating Officer borrowed $50,000 from the
Company in exchange for a two-year promissory note in such amount, which
bears interest at a rate of 8% per annum. This note receivable is included
in the long-term portion of notes receivable - officers and other.
-81-
<PAGE>
The Company has issued loans and other advances to officers and other
employees. The current portion is $183,367 and the long-term portion is
$50,755 as of October 31, 2000. The notes are due from two to twenty-four
months and bear interest at rates up to 8% per annum.
4. 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 had been converted as of October 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 nine-month
period ended October 31, 2000 was $11,096.
5. SHAREHOLDERS' EQUITY
Common Stock - On October 31, 2000 there were 16,101,523 shares of common
stock outstanding. This reflects the issuance of 294,352 shares of common
stock during the nine months ended October 31, 2000, an increase from
15,807,171 shares 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 initially issued with a conversion feature 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. The remaining 2,100,000 shares were
designated as "Series 2-A Convertible Preferred Stock", of which 1,672,328
were 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
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<PAGE>
$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. Holders of the Series 1-A Convertible Preferred Stock are
entitled to noncumulative dividends, if declared by the Board of directors,
of $0.20 per share annually. In the event of a liquidation or dissolution
of the Company, the holders of the Series 1-A Convertible Preferred Stock
shall be entitled to receive a preference amount for each outstanding share
equal to $2.50 plus declared but unpaid dividends. (See Note 7 - Subsequent
Events for additional information.)
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 quarter ended July 31, 2000, 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 October 31, 2000, 1,547,121
warrants and 1,575,450 options had been granted and were outstanding.
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 Qwest's
business customers. This relationship was terminated after the end of the
third quarter. (See Note 7 - Subsequent Events).
Qwest provides telecommunications and related services, wireless services,
high-speed data and Internet services and directory services. In exchange
for services to be rendered and a nominal amount of cash, Vsource granted
to Qwest 600,000 warrants with a three-year term, at an exercise price of
$5.00. The terms of the distribution 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 nine months ended October
31, 2000, the Company recognized $3,154,500 of this charge as a marketing
expense. The Company plans to recognize the remaining $5,257,500 as a
marketing expense in the quarter ending January 31, 2001 due to the
cancellation of this arrangement.
During the period August 28, 2000 to September 18, 2000, the Company sold
1,672,328 shares of Series 2-A Convertible Preferred Stock to 25 accredited
investors and received $10,719,623 less offering costs. Each share of
preferred stock is convertible into one share of common stock at the
election of the holder. Each purchaser also received a warrant to purchase
common stock at an exercise price of $6.41 per share, with a five-year
term. The aggregate of such shares of common stock is 145,550. No
underwriters were used and offering costs were $531,792 including transfer
agent fees, printing cost, 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
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<PAGE>
represented their intention to acquire the shares for investment purposes
only, and not with a view for resale or distribution, and appropriate
restrictive legends were placed on each stock certificate issued pursuant
to this offering.
The Company is obligated to register the shares of Common Stock underlying
the Series 2-A Preferred and the warrants held by the holders of the Series
2-A Preferred. This registration statement is a result of the Company's
obligation to the holders of the Series 2-A Preferred. If this registration
statement is not effective on or before January 16, 2001, the Company must
issue to each holder of Series 2-A Preferred an additional warrant to
purchase Common Stock in an aggregate amount equal to two percent (2%) of
the registrable shares held by such holder for each thirty day period this
registration statement is not effective by January 16, 2001. The additional
warrants would have terms of five (5) years and an exercise price of $6.41
per share.
In connection with the sales of the Series 2-A Convertible Preferred Stock,
the Company issued warrants to purchase an aggregate of 144,881 shares of
common stock at exercise prices ranging from $6.41 to $6.69 as additional
finder's fees, commissions and other services in connection with the
offering. No underwriters were used, and no commissions were paid. The
warrants were issued to two 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 for resale or distribution, and
appropriate stop transfer instructions and restrictive legends indicating
the transfer restrictions will be place 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.
The Company allocated $6,630,780 of the net proceeds from the issuance of
the Series 2-A Preferred Stock to Common Stock as required by an embedded
beneficial conversion feature. The deemed 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 2-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 of (A) $6.41 for each outstanding share of Series 2-A
Preferred Stock, and (B) an amount equal to declared but unpaid dividends
on such shares, if any. Each share of Series 2-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.
In September 2000, the Chief Financial Officer and the Chief Operating
Officer each purchased shares of the Company's Series 2-A Convertible
Preferred Stock for nominal cash and three-year promissory notes that bear
interest at a rate of 8% per annum and principal amounts of $124,000 each.
The preferred stock purchased was 19,501 for each officer. In connection
with these transactions, they also each received a warrant to purchase
1,697 shares of common stock with an exercise price of $6.41 and a term of
five years.
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<PAGE>
On October 31, 2000, paid-in-capital totaled $63,955,951, an increase of
$53,310,017 from $10,645,934 at January 31, 2000. This primarily reflects
the recording of the issuance of preferred stock of $30,347,529, and the
related beneficial conversion feature and deemed dividend, the recording of
$9,677,123 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 $2,154,481, and the recording of $11,130,883 in compensation for
marketing, investor relations and referral services in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation." Stockholders equity is partially offset by deferred
compensation of $12,953,649 as of October 31, 2000.
6. 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
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.
The loss available to common shareholders for the three and nine months
ended October 31, 2000 is the net loss for the period, adjusted for deemed
dividends on preferred stock.
The following table illustrates the calculation of basic and diluted
earnings/(loss) per share:
<TABLE>
<CAPTION>
Nine Three
---- -----
Months Months
------ ------
<S> <C> <C>
Net loss $( 18,537,691) $( 5,868,196)
Less - deemed dividend to preferred shareholders ( 13,499,177) ( 6,630,780)
------------- -------------
Basic loss available to common shareholders $( 32,036,868) $( 12,468,976)
============= =============
</TABLE>
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.
7. SUBSEQUENT EVENTS
On November 8, 2000, the Company reincorporated in Delaware. In connection
with the Company's reincorporation, the Company issued a warrant to
purchase 1,500 shares of common stock at an exercise price of $13.00 as
consideration for the name change of Vsource, Inc., a Delaware corporation
(a corporation unrelated to Vsource, Inc.), to
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<PAGE>
Arizon, Inc., a Delaware corporation. No underwriters were used, and no
commissions were paid. The warrant was issued as a private placement exempt
from registration under Section 4(2) of the Securities Act.
On December 11, 2000 the Company announced that it's strategic relationship
with Qwest had ended, citing that U.S. West had been acquired by Qwest and
that their business strategy no longer met the objectives of the
relationship with Vsource. In conjunction with the ending of this
relationship, the balance of the previously deferred warrant expense will
be expensed fully in the fourth quarter of this fiscal year in the amount
of $5,257,500.
In the quarter ended October 31, 2000, a sale was made to a related party.
Ramin Kamfar is a member of the Board of directors of the Company and is
also the Chief Executive Officer of New World Coffee, one of the customers
with which a sale of $25,000 was recorded.
On December 14, 2000, the Company entered into an Agreement and Plan of
Merger dated as of the same date, with OTT Acquisition Corp., a California
corporation, Online Transaction Technologies, Inc., a California
corporation ("OTT"), Colin P. Kruger and Michael Shirman (the "Merger
Agreement"). The closing of the transactions under the Merger Agreement are
expected to occur in January 2001 (the "Closing"). The proposed merger is
to be a tax-free reorganization under Section 368(a) of the Internal
Revenue Code.
OTT is an Application Service Provider (ASP) that develops and hosts
transaction solutions for public (many to many) and private (one to many)
exchanges. Among the solutions that OTT brings to Vsource is
LiquidMarketplace(TM), a complete suite of fully integrated transaction
solutions, including auctions, fixed-price catalogs and RFQ engines. These
solutions are identified as LiquidAuction(TM), LiquidCatalog(TM) and
LiquidRFP(TM). This suite allows public exchange clients to handle both
seller- and buyer-initiated transactions in their e-Marketplaces. OTT's
private exchange solution, LiquidStore(TM), offers private catalog and
auction functionality to LiquidMarketplace(TM) participants or stand-alone
clients. In addition to offering a complete suite, OTT has developed
proprietary modules and applications that reduce customization and
deployment time and simplify integration.
The aggregate purchase price payable at Closing is to be 1,130,950 shares
of the Company's common stock. The number of shares was calculated from the
Merger Agreement purchase price of $7,000,000, less $77,115 paid as certain
warrants and options, divided by $6.1213 per share ("Acquisition Price", as
calculated from the average closing price of a share of Company common
stock for the 30 calendar days immediately prior to execution of the Merger
Agreement). Such aggregate price shall be subject to adjustment based on
reductions or increases in the net book value of the assets of OTT since
September 30, 2000.
In connection with the Closing, two key employees of OTT will enter into
mutually agreeable employment contracts with the Company providing for,
among other things, salaries of $125,000 and options to purchase 100,000
shares of the Company's common stock which vest over 24 months and have an
exercise price of $6.41 per share.
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<PAGE>
Twenty-five percent of the equity securities comprising the aggregate
purchase price will be held for six months in an escrow (the "Escrow
Securities"). The Escrow Securities and Company shares issued to OTT
management shareholders will be the sole recourse for the Company for
indemnification against claims and losses arising from breaches by OTT of
representations and warranties or covenants made pursuant to the definitive
agreements. Such representations and warranties shall terminate over
varying periods. The Escrow Securities will be valued for purposes of any
such indemnification at the Acquisition Price. OTT shareholders may at
their option pay any such indemnity in cash in lieu of Escrow Securities.
Closing of the transaction is contingent upon several conditions,
including, without limitation, approval of OTT minority shareholders and
warrant holders. This transaction will be recorded under the Purchase
method of accounting.
OTT's financial statements are presently unaudited. Upon closing of the
merger, the Company will retain its auditors to perform audits of OTT's
financial statements for January 1, 1999 to December 31, 1999 and January
1, 2000 to September 30, 2000. The Company previously reported the
execution of the letter of intent in a Form 8-K filed on October 23, 2000
and the execution of the acquisition agreement in its Form 10-QSB filed on
December 15, 2000. A Form 8-K incorporating the audited OTT financial
statements will be filed as soon as the audits are completed.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective February 8, 2000, Vsource, Inc., a Nevada corporation
("Registrant" or the "Company"), agreed to retain Grant Thornton LLP as the
principal accountant to audit the Company's financial statements.
Concurrently with the agreement to engage Grant Thornton LLP, the Company's
former accountants, Lucas, Horsfall, Murphy & Pindroh, LLP resigned as the
Company's independent accountants. The Company's Board of Directors
approved the decision to change accountants.
Lucas, Horsfall, Murphy & Pindroh, LLP's report, dated May 15, 1999 (except
for Note 10 to the financial statements which is as of September 3, 1999),
on the consolidated financial statements as of and for the years ended
January 31, 1999 and 1998 contained an additional paragraph adding emphasis
to the matter of the Company's ability to continue as a going concern.
During the Company's two most recent fiscal years and any subsequent
interim period, there were no disagreements between the Company and Lucas,
Horsfall, Murphy & Pindroh, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Lucas,
Horsfall, Murphy & Pindroh, LLP, would have caused it to make a reference
to the subject matter of the disagreements in connection with its reports.
-87-
<PAGE>
PART II. Information Not Required In Prospectus
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the monetary liability of directors, officers, employees
and agents for breach of fiduciary duty of care, subject to certain
limitations. The Company's certificate of incorporation provides that our
directors and officers shall not be liable to the Company or its
stockholders for monetary damages arising from a breach of fiduciary duty
owed by such director or officer, as applicable, except for liability (1)
for any breach of a director's or officer's duty of loyalty to the Company
or its stockholders, (2) for intentional misconduct, fraud or a knowing
violation of law, under Section 174 of the General Corporation Law of the
State of Delaware or (3) for a transaction from which the officer or
director derived an improper personal benefit. The Company's bylaws provide
for the indemnification of our directors, officers, employees and agents to
the extent permitted by the Delaware General Corporation Law. Our directors
and officers are insured against certain liabilities for actions taken in
such capacities, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing, the Company has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Each holder of the Series 2-A Preferred has agreed to indemnify the Company
from any liability for any untrue statement or any omission in this
registration statement caused by the holder. The Company has agreed to
indemnify each holder of Series 2-A Preferred from any liability for any
untrue statement or omission in this registration statement, excluding any
untrue statement or omission caused by the holder of the Series 2-A
Preferred. If the indemnification provisions are held to be invalid, each
holder and the Company have agreed to contribute payment to the other to
cover any liability intended to be covered by the indemnification
provisions.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Following is the Company's estimate of expenses of the offering, all of
which shall be paid by the Company:
Registration Fees $ 5,381.47
Printing Costs $ 7,500.00
Legal Fees and Costs $ 90,000.00
Accounting Fees and Costs $ 26,500.00
-----------
TOTAL $129,381.47
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
The following are all securities sold by Registrant (or its predecessor) within
the past three (3) years without registering the securities under the Securities
Act:
During January and February of 1997, the Company sold 2,918,653 shares of
restricted common stock and received proceeds of $583,731 before expenses.
Since no underwriters were used and no commissions were paid, expenses were
limited to legal fees approximating $10,000. This offering was a private
placement made in accordance with Regulation D, and in the opinion of legal
counsel for the Company, was exempt from registration under the Securities Act.
There were less than 25 offerees. The recipients of these shares, except one
who was a senior sales executive of the Company, were accredited investors. The
investors, approximately ten in total, were primarily existing Company
investors, or friends, relatives and business associates of the Company
officers, directors or investors. The chief executive officer and the former
chief financial officer were included as investors. 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. Each
investor had ample access to the kind of information from the Company that a
registration statement would include.
From August through November of 1997, the Company sold 1,487,763 shares of
unrestricted common stock, and received $346,721 before offering costs. As
before, no underwriters were used, and no commissions paid. Offering costs were
limited to approximately $4,000 for legal fees. This offering was a private
placement and in the opinion of legal counsel for the Company, was exempt from
registration under the Securities Act and made in accordance with Regulation D.
Further, the Company was eligible under Securities and Exchange Commission Rule
504, which allowed the shares sold in this private placement to be issued
without restrictive legend. The recipients of these shares, primarily existing
Company investors, or friends, relatives and business associates of the Company
officers, directors and investors, represented their intention to acquire the
shares for investment purposes only, and not with a view to resale or
distribution.
In June 1998, the Company issued 500,000 shares of its common stock and granted
an option to purchase an additional 500,000 shares in exchange for all of the
shares of Wpg.Net, Inc., a Washington corporation. The shares and options were
issued to DX3, Inc., a Washington corporation wholly owned by the three Wpg.Net
shareholders. The options have an exercise price of $0.59 per share and vest
ratably each month over a three year period subject to acceleration upon the
achievement of certain revenue goals. No underwriters were used, and no
commissions were paid. The issuances were a private placement and exempt from
registration under Section 4(2) of the Securities Act. The transactions did not
involve a public offering. There were three shareholders of Wpg.Net who were
also the sole shareholders of DX3, each of whom was familiar with the Company.
DX3 represented its intention to acquire the shares and option 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 were placed on each stock certificate issued and will be placed on
each stock certificate issued upon exercise of
<PAGE>
the options. Each individual had ample access to the kind of information from
the Company that a registration statement would include.
During March and April of 1999, the Company sold 737,493 shares of unrestricted
common stock, and received $999,942 less offering costs. No underwriters were
used, and no commissions were paid. Legal fees approximated $5,000. This
offering was a private placement and, in the opinion of counsel, was exempt from
registration under the Securities Act and made in accordance with Regulation D.
The Company was again eligible under Securities and Exchange Commission Rule
504, which allowed the shares sold in this private placement to be issued
without restrictive legend. Because Rule 504 was changed effective April 7,
1999, the last sale of shares under this offering was made on April 6, 1999.
The recipients of these shares, primarily existing Company investors, or
friends, relatives and business associates of the Company officers, directors
and investors, represented their intention to acquire the shares for investment
purposes only, and not with a view to resale or distribution.
On May 15, 1999, the Company issued an aggregate of 636,100 shares of common
stock upon the exercise of options by three of the Company's executive officers.
The exercise prices ranged from $0.18 to $0.625. No underwriters were used, and
no commissions were paid. The issuances were exempt pursuant to Rule 701
promulgated by the Securities and Exchange Commission under the Securities Act.
The option grants were made under written compensatory contracts. Appropriate
stop transfer instructions and restrictive legends indicating the transfer
restrictions were placed on each stock certificate when issued.
During the period May 1999 to October 1999, the Company granted options to
purchase 1,039,500 shares of its common stock to officers, employees and
consultants. The exercise prices ranged from $0.75 to $1.10. The options vest
over periods of 27 to 36 months from date of grant. No underwriters were used,
and no commissions were paid. The issuances were exempt pursuant to Rule 701
promulgated by the Securities and Exchange Commission under the Securities Act.
The consultants were natural persons and the option grants were made under
written compensatory contracts. Appropriate stop transfer instructions and
restrictive legends indicating the transfer restrictions will be placed on each
stock certificate when issued.
During the period July 1, 1999 to December 31, 1999, the Company sold 757,720
shares of restricted common stock, and received $1,140,000. No underwriters
were used and no commissions were paid. The sales were a private placement and,
in the opinion of counsel, exempt from registration under Section 4(2) of the
Securities Act. The transactions did not involve a public offering. There were
eleven offerees and nine purchasers, each of whom was an accredited investor,
and familiar with the Company and four of whom were existing shareholders. The
investors represented their intention to acquire the shares 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 stock certificate when issued. Each
individual had ample access to the kind of information from the Company that a
registration statement would include.
<PAGE>
As of July 31, 1999, the Company converted all of its outstanding convertible
debt to equity. The convertible demand notes totaled $971,553 in aggregate
principal amount and accrued interest at 10% per annum. The notes were
convertible at rates ranging from $0.20 to $1.30 per share. In order to induce
the conversion, the Company offered an additional three months of interest.
Interest and principal were converted into an aggregate of 2,210,201 shares of
the company's common stock. No underwriters were used, and no commissions were
paid. The issuance of the Company's common stock upon the conversion of the
notes was a private placement to 22 investors and exempt from registration under
Section 4(2) of the Securities Act. The investors represented their intention
to acquire the shares 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
stock certificate when issued. Each investor had ample access to the kind of
information from the Company that a registration statement would include.
In November 1999, the Company issued an aggregate of $150,000 of 10% convertible
demand notes due on demand after December 2000 to two accredited investors. The
notes, principal and interest, are convertible into restricted shares of the
Company's common stock at a rate of $2.50 per share. None of these notes have
been converted. No underwriters were used, and no commissions were paid. The
issuance of the Company's notes was a private placement exempt from registration
under Section 4(2) of the Securities Act. Prior to conversion, the investors
must represent their intention to acquire the conversion shares 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 stock certificate when issued. Each
investor had ample access to the kind of information from the Company that a
registration statement would include.
During the period November 1999 to February 2000, the Company issued or
committed to issuing warrants to purchase an aggregate of 870,000 shares of
common stock to one consultant and four corporations 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 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.
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 and received $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 were approximately $151,269 including transfer agent fees, printing costs,
legal fees and commissions or finders' fees. The offering was a private
placement
<PAGE>
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.
In connection with the sales of the Series 1-A Convertible Preferred Stock, the
Company issued warrants to purchase an aggregate 386,691 shares of common stock
at exercise prices ranging from $2.50 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
to five 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.
On January 17, 2000, the Company granted options to purchase an aggregate of
78,750 shares of common stock to 6 key employees exercisable at $1.66 per share.
No underwriters were used, and no commissions were paid. The grants were
intended to be private placements exempt from registration under Section 4(2) of
the Securities Act. The option grants were made under written compensatory
contracts. Appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each stock certificate
when issued.
On February 23, 2000, the Company granted options to purchase an aggregate of
125,000 shares of common stock to an executive officer exercisable at $2.50 per
share. No underwriters were used, and no commissions were paid. The grants
were a private placement exempt from registration under Section 4(2) of the
Securities Act. The option grants were made under written compensatory
contracts. Appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each stock certificate
when issued.
On March 27, 2000, the Company granted options to purchase an aggregate of
100,000 shares of common stock to an executive officer exercisable at $3.00 per
share.
During the period August 28, 2000 to September 18, 2000, the Company sold
1,672,328 shares of Series 2-A Convertible Preferred Stock to 25 accredited
investors and received $10,719,623 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. Each purchaser also received a warrant
to purchase common stock at an exercise price of $6.41 per share with a five
year term. The aggregate of such shares of common stock is 145,550. No
underwriters were used. Offering costs were approximately $465,225 including
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
<PAGE>
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.
In connection with the sales of the Series 2-A Convertible Preferred Stock, the
Company issued warrants to purchase an aggregate 144,881 shares of common stock
at exercise prices ranging from $6.41 to $6.69 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
to two 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 connection with the Company's reincorporation in Delaware, the Company issued
a warrant to purchase 1,500 shares of common stock at an exercise price of
$13.00 as consideration for the name change of V-Source, Inc., a Delaware
corporation (a corporation unrelated to Vsource, Inc.), to Arizon, Inc., a
Delaware corporation. No underwriters were used, and no commissions were paid.
The warrant was issued as a private placement exempt from registration under
Section 4(2) of the Securities Act.
The Company expects to issue 1,130,950 shares of common stock and options and
warrants for which 478,069 shares of common stock must be reserved in connection
with the impending acquisition of Online Transaction Technologies, Inc.
No underwriters will be used, and no commissions will be paid. The securities
will be issued as private placements except from registration under Section 4(2)
at the Securities Act.
<PAGE>
EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(*) Certificate of Incorporation incorporated herein by reference to
Exhibit 3.1 to Registrant's Form 8-K for the period ended October
30, 2000 (SEC File No. 000-30326)
3.2(*) Bylaws incorporated herein by reference to Exhibit 3.2 to
Registrant's Form 8-K for the period ended October 30, 2000 (SEC
File No. 000-30326)
4.1(*) Certificate of Designation of Series 2-A Convertible Preferred
Stock incorporated herein by reference to Exhibit 4.1 to
Registrant's Form 8-K for the period ended October 30, 2000 (SEC
File No. 000-30326)
4.2(*) Certificate of Merger incorporated herein by reference to Exhibit
4.2 to Registrant's Form 8-K for the period ended October 30,
2000 (SEC File No. 000-30326)
4.3(*) Form of Series 3 Convertible Demand Note incorporated herein by
reference to Exhibit 3.2 to Registrant's Registration Statement
on Form 10-SB filed on September 21, 1999 (SEC File No. 000-
26563)
4.4(*) Form of Series 2 Convertible Demand Note incorporated herein by
reference to Exhibit 3.3 to Registrant's Registration Statement
on Form 10-SB filed on September 21, 1999 (SEC File No. 000-
26563)
4.5(*) Form of Common Stock Purchase Warrant incorporated herein by
reference to Registrant's Form 8-K filed September 26, 2000 (SEC
File No. 000-30326)
4.6(*) Form of Registration Rights Agreement incorporated herein by
reference to Registrant's Form 8-K filed September 26, 2000 (SEC
File No. 000-30326)
5.1 Opinion of Sheppard, Mullin, Richter & Hampton LLP
10.1(*) Distribution and Marketing Agreement between Vsource, Inc. and
U.S. West Interprise America, Inc. dated February 15, 2000
incorporated herein by reference to Exhibit 10.1 to Registrant's
Form 10-KSB filed May 11, 2000 (SEC File No. 000-30326)
10.2(*) Ventura Professional Center First Amendment to Lease between
Virtual Source, Inc. and Security National Properties, LLC, dated
October 27, 1998 incorporated herein by reference to Exhibit 10.2
to Registrants Form 10-KSB filed May 11, 2000 (SEC File No. 000-
30326)
10.3(*) Lease - Razore Land Company, Landlord and Interactive Buyers
Network International, Tenant, dated October 11, 1999
incorporated herein by
<PAGE>
reference to Exhibit 10.3 to Registrants Form 10-KSB filed May
11, 2000 (SEC File No. 000-30326)
10.4(*) Promissory Note by Robert C. McShirley dated October 11, 2000
incorporated herein by reference to Exhibit 10.4 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.5(*) Pledge and Security Agreement with Robert C. McShirley dated
October 11, 2000 incorporated herein by reference to Exhibit 10.5
to Registrant's Form 10-QSB filed December 15, 2000 (SEC File No.
000-30326)
10.6(*) Promissory Note by P. Scott Turner dated October 13, 2000
incorporated herein by reference to Exhibit 10.6 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.7(*) Promissory Note by Sandford T. Waddell dated September 18, 2000
incorporated herein by reference to Exhibit 10.7 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.8(*) Pledge and Security Agreement with Sandford T. Waddell dated
September 18, 2000 incorporated herein by reference to Exhibit
10.8 to Registrant's Form 10-QSB filed December 15, 2000 (SEC
File No. 000-30326)
10.9(*) Promissory Note by P. Scott Turner dated September 18, 2000
incorporated herein by reference to Exhibit 10.9 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.10(*) Pledge and Security Agreement with P. Scott Turner dated
September 18, 2000 incorporated herein by reference to Exhibit
10.10 to Registrant's Form 10-QSB filed December 15, 2000 (SEC
File No. 000-30326)
10.11(*) Agreement and Plan of Merger dated as of December 14, 2000
incorporated herein by reference to Exhibit 10.11 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditor, Grant Thornton LLP
23.2 Consent of Independent Auditor, Lucas, Horsfall, Murphy &
Pindroh, LLP
27.1(**) Financial Data Schedule
99.1(*) Vsource, Inc. 2000 Stock Option Plan incorporated herein by
reference to Exhibit 99.1 to Registrant's Form 10-QSB/A filed
September 25, 2000 (SEC File No. 000-30326)
______________
<PAGE>
* Previously filed with Securities and Exchange Commission.
** Filed electronically via EDGAR.
<PAGE>
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That, for determining liability under the Securities Act of 1933, treat
each such post-effective amendment shall be deemed to be a new registration
statement of the securities offered, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering.
<PAGE>
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act o 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(6) For determining any liability under the Securities Act, treat each post-
effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that
offering of the securities at that time as the initial bona fide offering of
those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that its has reasonable grounds to believe that it meets
all of the requirements for the filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Ventura, State of California, on December 29,
2000.
VSOURCE, INC.
By: /s/ ROBERT C. MCSHIRLEY
____________________________________________
Robert C. McShirley
President, Chief Executive Officer
and Director (Principal Executive Officer)
By: /s/ SANDFORD T. WADDELL
____________________________________________
Sandford T. Waddell
Chief Financial Officer and
Secretary (Principal Accounting Officer)
<PAGE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT C. MCSHIRLEY Chief Executive Officer,
_______________________ President and Director December 29, 2000
Robert C. McShirley
/s/ SANDFORD T. WADDELL Chief Financial Officer
_______________________ and Secretary (Principal December 29, 2000
Sandford T. Waddell Accounting Officer)
/s/ SAMUEL E. BRADT
_______________________ Director December 29, 2000
Samuel E. Bradt
/s/ SCOTT T. BEHAN
_______________________ Director December 29, 2000
Scott T. Behan
/s/ ROBERT N. SCHWARTZ
_______________________ Director December 29, 2000
Robert N. Schwartz
/s/ RAMIN KAMFAR
_______________________ Director December 29, 2000
Ramin Kamfar
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
3.1(*) Certificate of Incorporation incorporated herein by reference to
Exhibit 3.1 to Registrant's Form 8-K for the period ended October
30, 2000 (SEC File No. 000-30326)
3.2(*) Bylaws incorporated herein by reference to Exhibit 3.2 to
Registrant's Form 8-K for the period ended October 30, 2000 (SEC
File No. 000-30326)
4.1(*) Certificate of Designation of Series 2-A Convertible Preferred
Stock incorporated herein by reference to Exhibit 4.1 to
Registrant's Form 8-K for the period ended October 30, 2000 (SEC
File No. 000-30326)
4.2(*) Certificate of Merger incorporated herein by reference to Exhibit
4.2 to Registrant's Form 8-K for the period ended October 30,
2000 (SEC File No. 000-30326)
4.3(*) Form of Series 3 Convertible Demand Note incorporated herein by
reference to Exhibit 3.2 to Registrant's Registration Statement
on Form 10-SB filed on September 21, 1999 (SEC File No. 000-
26563)
4.4(*) Form of Series 2 Convertible Demand Note incorporated herein by
reference to Exhibit 3.3 to Registrant's Registration Statement
on Form 10-SB filed on September 21, 1999 (SEC File No. 000-
26563)
4.5(*) Form of Common Stock Purchase Warrant incorporated herein by
reference to Registrant's Form 8-K filed September 26, 2000 (SEC
File No. 000-30326)
4.6(*) Form of Registration Rights Agreement incorporated herein by
reference to Registrant's Form 8-K filed September 26, 2000 (SEC
File No. 000-30326)
5.1 Opinion of Sheppard, Mullin, Richter & Hampton LLP
10.1(*) Distribution and Marketing Agreement between Vsource, Inc. and
U.S. West Interprise America, Inc. dated February 15, 2000
incorporated herein by reference to Exhibit 10.1 to Registrant's
Form 10-KSB filed May 11, 2000 (SEC File No. 000-30326)
10.2(*) Ventura Professional Center First Amendment to Lease between
Virtual Source, Inc. and Security National Properties, LLC, dated
October 27, 1998 incorporated herein by reference to Exhibit 10.2
to Registrants Form 10-KSB filed May 11, 2000 (SEC File No. 000-
30326)
10.3(*) Lease - Razore Land Company, Landlord and Interactive Buyers
Network International, Tenant, dated October 11, 1999
incorporated herein by
<PAGE>
reference to Exhibit 10.3 to Registrants Form 10-KSB filed May
11, 2000 (SEC File No. 000-30326)
10.4(*) Promissory Note by Robert C. McShirley dated October 11, 2000
incorporated herein by reference to Exhibit 10.4 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.5(*) Pledge and Security Agreement with Robert C. McShirley dated
October 11, 2000 incorporated herein by reference to Exhibit 10.5
to Registrant's Form 10-QSB filed December 15, 2000 (SEC File No.
000-30326)
10.6(*) Promissory Note by P. Scott Turner dated October 13, 2000
incorporated herein by reference to Exhibit 10.6 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.7(*) Promissory Note by Sandford T. Waddell dated September 18,
2000 incorporated herein by reference to Exhibit 10.7 to
Registrant's Form 10-QSB filed December 15, 2000 (SEC File No.
000-30326)
10.8(*) Pledge and Security Agreement with Sandford T. Waddell dated
September 18, 2000 incorporated herein by reference to Exhibit
10.8 to Registrant's Form 10-QSB filed December 15, 2000 (SEC
File No. 000-30326)
10.9(*) Promissory Note by P. Scott Turner dated September 18, 2000
incorporated herein by reference to Exhibit 10.9 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
10.10(*) Pledge and Security Agreement with P. Scott Turner dated
September 18, 2000 incorporated herein by reference to Exhibit
10.10 to Registrant's Form 10-QSB filed December 15, 2000 (SEC
File No. 000-30326 )
10.11(*) Agreement and Plan of Merger dated as of December 14, 2000
incorporated herein by reference to Exhibit 10.11 to Registrant's
Form 10-QSB filed December 15, 2000 (SEC File No. 000-30326)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditor, Grant Thornton LLP
23.2 Consent of Independent Auditor, Lucas, Horsfall, Murphy &
Pindroh, LLP
27.1(**) Financial Data Schedule
99.1(*) Vsource, Inc. 2000 Stock Option Plan incorporated herein by
reference to Exhibit 99.1 to Registrant's Form 10-QSB/A filed
September 25, 2000 (SEC File No. 000-30326)
______________
<PAGE>
* Previously filed with Securities and Exchange Commission.
** Filed electronically via EDGAR.
