RESOURCEPHOENIX COM
10-Q, 2000-05-12
COMPUTER PROGRAMMING SERVICES
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   ------------

                                    FORM 10-Q

  X   QUARTERLY  REPORT UNDER  SECTION 13  OR 15(d)  OF THE  SECURITIES EXCHANGE
- ----- ACT OF 1934

                For the quarterly period ended March 31, 2000

                                       OR

      TRANSITION REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
- ----- EXCHANGE ACT OF 1934

         For the transition period from ______________ to______________.

                         Commission file number 000-27449
                                                ---------

                               RESOURCEPHOENIX.COM
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                     52-2190830
- --------------------------------              ----------------------------------
       State of Jurisdiction                  I.R.S. Employer Identification No.


2401 Kerner Boulevard, San Rafael, California                   94901-5527
- --------------------------------------------------------------------------------
   Address of Principal Executive Offices                        Zip Code

       Registrant's telephone number, including area code: (415) 485-4500
                                                           --------------

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
preceding requirements for the past 90 days.

                                Yes   X    No
                                    -----     -----

The number of shares  outstanding of the  Registrant's  Common Stock as of April
28, 2000 was 11,210,800.

<PAGE>

                                      INDEX


                       RESOURCEPHOENIX.COM AND SUBSIDIARY


            FORM 10-Q - For the Quarterly Period Ended March 31, 2000


Part I.       Financial Information                                         Page


     Item 1.  Financial Statements

              a)  Condensed Consolidated Balance Sheets - March 31, 2000
                  (unaudited) and December 31, 1999...........................3

              b)  Condensed Consolidated Statements of Income - Three
                  Months Ended March 31, 2000 and March 31, 1999
                  (unaudited).................................................4

              d)  Condensed Statements of Cash Flows - Three Months
                  Ended March 31, 2000 and March 31, 1999 (unaudited).........5

              e)  Notes to Condensed Consolidated Financial Statements -
                  March 31, 2000 (unaudited)..................................6

     Item 2.  Management's Discussion and Analysis of
              Financial Condition and Results of Operations...................9

     Item 3.  Quantitative and Qualitative Disclosures about Market Risk.....25


Part II.      Other Information

     Item 1.  Legal Proceedings..............................................25
     Item 2.  Changes in Securities and Use of Proceeds......................25
     Item 3.  Defaults Upon Senior Securities................................25
     Item 4.  Submission of Matters to a Vote of Security Holders............25
     Item 5.  Other Information..............................................26
     Item 6.  Exhibits and Reports on Form 8-K...............................26

         Signature    .......................................................27


                                       2
<PAGE>

                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                       RESOURCEPHOENIX.COM AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


                                                         March 31,  December 31,
                                                           2000          1999
                                                        ----------- ------------
                                                        (unaudited)

                                     ASSETS

Current Assets:
     Cash and cash equivalents                           $  9,614    $   15,78
     Accounts receivable, net of allowance of $55 at        1,422          948
       March 31, 2000 and $54 at December 31, 1999
     Receivable from affiliates                                42           33
     Prepaid expenses and other current assets                687          729
                                                         --------     --------
     Total current assets                                  11,765       17,490
Property and equipment, at cost, net of accumulated
   depreciation                                             7,015        6,287
Other assets                                                  332          276
                                                         --------     --------
       Total assets                                      $ 19,112     $ 24,053
                                                         ========     ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable                                    $  3,196     $  1,455
     Accrued liabilities                                    2,008        1,655
     Deferred revenue - current                               705          306
                                                         --------     --------
       Total current liabilities                            5,909        3,416
Deferred revenue                                              931          688
                                                         --------     --------
Total Liabilities                                           6,840        4,104
Commitment and Contingencies
Stockholder's Equity:
     Class A Common Stock, $.001 par value; 4,028,000
       shares issued and outstanding at December 31,
       1999 and 4,038,800 shares issued and outstanding
       at March 31, 2000                                   32,892       32,869
     Class B Common Stock, $.001 par value; 7,172,000
       shares issued and outstanding at December 31,
       1999 and March 31, 2000                              9,957        9,957
       Accumulated deficit                                (30,577)     (22,877)
                                                         --------     --------
       Total stockholder's equity                          12,272       19,949
                                                         --------     --------
       Total liabilities and stockholder's equity        $ 19,112     $ 24,053
                                                         ========     ========

        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

                       RESOURCEPHOENIX.COM AND SUBSIDIARY
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
               (In thousands, except share and per share amounts)
                                   (unaudited)


                                                            Three months ended
                                                                 March 31,
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
Revenue:
     Contract service revenue                               $  1,403   $    809
     Contract service revenue - affiliate                      1,016        478
     Software revenue                                            532         94
                                                            --------   --------
       Total revenue                                           2,951      1,381
Operating expenses:
     Cost of providing services                                3,343      1,028
     Cost of providing software revenue                          324        177
     General and administrative                                2,305        511
     Research and development                                  1,002        656
     Client acquisition                                        3,122        476
     Stock-related compensation                                 --        2,358
     Depreciation and amortization                               601         91
                                                            --------   --------
       Total operating expenses                               10,697      5,297
                                                            --------   --------
Loss from operations                                          (7,746)    (3,916)
Other income (expense)                                           175          9
                                                            --------   --------
Net loss before effect of accounting change                   (7,571)    (3,907)
     Cumulative effect of accounting change                     (129)      --
                                                            --------   --------

Net loss                                                    $ (7,700)  $ (3,907)
                                                            ========   ========

Basic and diluted net loss per share:
     Net loss before effect of accounting change            $  (0.68)  $   (.54)
     Cumulative effect of accounting change                    (0.01)      --
                                                            --------   --------

     Net loss                                               $  (0.69)  $  (0.54)
                                                            ========   ========

Shares used in computing basic and
     diluted net loss per share                               11,201      7,200

Proforma amounts assuming  accounting change had been
in effect during the three months ended March 31, 1999:

     Net Loss                                               $ (7,522)  $ (3,992)
     Basic and diluted net loss per share                   $  (0.67)  $  (0.55)

        The accompanying notes are an integral part of these statements.

                                       4
<PAGE>

                       RESOURCEPHOENIX.COM AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)


                                                            Three Months Ended
                                                                 March 31,
                                                            -------------------
                                                              2000       1999
                                                            --------   --------

Operating Activities
     Net loss                                               $ (7,700)  $ (3,907)
     Adjustments to reconcile net loss to net cash used in
         operating activities:
         Depreciation and amortization                           601         91
         Stock-related compensation                             --        2,358
         Change in operating assets and liabilities:
           Accounts receivable                                  (474)       666
           Receivable from affiliates                             (9)        84
           Prepaid expenses and other assets                     (14)       (75)
           Accounts payable and accrued liabilities            2,094       (367)
           Deferred revenue                                      642        186
                                                            --------   --------
              Net cash used in operating activities           (4,860)      (964)
Investing activities
     Purchase of property and equipment                       (1,329)        (5)
                                                            --------   --------
              Net cash used in investing activities           (1,329)        (5)
Financing activities
     Proceeds from capital contribution                         --          921
     Proceeds from exercise of options                            23       --
                                                            --------   --------
              Net cash provided by financing activities           23        921

Net decrease in cash and cash equivalents                     (6,166)       (48)
Cash and cash equivalents, beginning of period                15,780        503
                                                            --------   --------
Cash and cash equivalents, end of period                    $  9,614   $    455
                                                            ========   ========


        The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

                       RESOURCEPHOENIX.COM AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2000
                                   (Unaudited)


NOTE 1.  BASIS OF PRESENTATION

         The accompanying  condensed consolidated financial statements have been
prepared without audit by ReSourcePhoenix.com (the "Company") in accordance with
generally accepted  accounting  principles for interim financial  statements and
pursuant to the rules of the Securities  and Exchange  Commission for Form 10-Q.
Certain  information  and footnotes  required by generally  accepted  accounting
principles  for  complete  financial  statements  have been  omitted.  It is the
opinion of management that all adjustments are of a normal and recurring nature.
For further information, refer to the audited financial statements and footnotes
included in the Company's  Annual  Report on Form 10-K dated  December 31, 1999.
Reclassification of certain prior year balances have been made to conform to the
March 31, 2000 presentation.


NOTE 2.  CHANGE IN ACCOUNTING PRINCIPLE

         In December  1999,  the  Securities  and  Exchange  Commission  ("SEC")
released Staff  Accounting  Bulletin  ("SAB") No. 101,  "Revenue  Recognition in
Financial  Statements" which provides guidance on the recognition,  presentation
and  disclosure  of  revenue  in  financial   statements  filed  with  the  SEC.
Subsequently,  the SEC released SAB 101A, which delayed the implementation  date
of SAB 101 for  registrants  with fiscal years that begin  between  December 16,
1999 and March 15, 2000 to the second  quarter of their fiscal year. The Company
has  elected  to  implement  SAB No.  101 this  quarter,  the effect of which is
described as follows:

         Effective  January  1,  2000,  the  Company  deferred   recognition  of
implementation fees for its Financial Outsourcing, S.T.A.R. and M.A.R.S. hosting
services and will amortize such fees ratably over a three-year  period as client
services  are  performed.  Prior to January 1,  2000,  implementation  fees were
recognized when the work was completed on a percentage of completion  basis. The
cumulative  effect of the  change in the  method of  recognizing  implementation
revenue on prior  years'  income was a one-time  charge of $129,000 or $0.01 per
share. Of this amount, $85,000 is attributable to the first quarter of 1999. The
effect of this change in accounting  principle on first quarter  2000's  revenue
was to reduce total revenue from $3.7 million to $3.0 million.  Costs related to
client implementation activities are expensed as incurred.

         Set forth  below is a  comparison  of  operating  results for the three
months ended March 31, 2000:

                                                          Assuming SAB 101 had
                                                            not been adopted
                                       March 31, 2000        March 31, 2000
                                       --------------        --------------

         Revenue                          $ 2,951               $ 3,701
         Operating Expenses                10,697                10,697
         Net Loss from Operations          (7,746)               (6,996)


NOTE 3.  BASIC AND DILUTED NET LOSS PER SHARE

         Shares used in computing basic and diluted net loss per share are based
on the weighted  average shares  outstanding in each period.  Basic net loss per
share excludes any dilutive effects of stock options. Diluted net loss per share
includes the dilutive effect of the assumed  exercise of stock options using the

                                       6
<PAGE>

                       RESOURCEPHOENIX.COM AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2000
                                   (Unaudited)


treasury stock method. However, the effect of outstanding stock options has been
excluded from the  calculation of diluted net loss per share as their  inclusion
would be antidilutive.

         If the Company had  reported  net income,  the  calculation  of diluted
earnings per share would have included the shares used in the computation of net
loss  per  share  as well as an  additional  672,000  common  equivalent  shares
(determined  using the  treasury  stock  method)  related to  outstanding  stock
options not included above for the first quarter of fiscal 2000.


NOTE 4.  LEGAL PROCEEDINGS

         We are not currently  involved in any material  legal  proceedings.  We
are,  however,  party to various legal  proceedings and claims from time to time
arising in the ordinary course of business. We do not expect that the results in
any of these legal  proceedings  will  seriously harm our business or results of
operations.


NOTE 5.  GOING CONCERN

         The Company  will need to raise  additional  capital  during the second
quarter. In late April the Company began to implement a number of steps aimed at
reducing its operating costs, which, prior to that point, had been predicated on
higher  anticipated  revenue levels.  Those steps included,  among other things,
staff reductions  amounting to approximately 15% of its work force and cessation
of  certain  development  efforts  that will  reduce  expenditures  for  outside
consulting expertise.  We expect to record a charge of approximately $900,000 in
the second quarter of 2000 related to these  reductions.  Despite these efforts,
the Company  will  continue to operate at a  significant  cash  negative  level.
Absent additional  financing,  the Company may not have sufficient  resources to
continue as a going concern beyond its second  quarter.  We may sell  additional
debt or equity  securities or enter into new credit  facilities to meet our cash
needs.  To that end,  the  Company  has entered  into a  commitment  letter with
Tourneau  Fund,  Ltd.  to  provide  us  with  equity  financing.  (See  Note 5 -
Subsequent  Events.) Our ability to raise funds through the equity facility with
Tourneau is subject to certain  conditions at the time of each sale of our Class
A  common  stock.  We may not be able to  negotiate  and  execute  a  definitive
agreement  with Tourneau or satisfy the  conditions for each sale of our Class A
common stock.  We cannot assure you that we will be able to complete this or any
other  financing,  that such financing will be adequate for the Company's needs,
or that a financing will be completed prior to the Company running out of funds.

         The  factors  discussed  above  create   substantial  doubt  about  the
Company's  ability to continue as a going concern and an  uncertainty  as to the
recoverability  and classification of recorded asset amounts and the amounts and
classification  of liabilities.  The  accompanying  financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
asset carrying  amounts or the amount and  classification  of  liabilities  that
might  result  should the Company be unable to continue as a going  concern.  In
connection  with the  expected  filing of a resale  registration  statement,  as
contemplated  in our  commitment  letter  with  the  Tourneau  Fund,  Ltd.,  our
independent  auditors,  Arthur  Andersen  LLP,  are  expected  to reissue  their
auditors'  report on our financial  statements  for the year ended  December 31,
1999.  They are expected to modify  their  report to reflect  their view that we
require additional funding to continue our operations and their view that we may
be unable to continue our operations absent receiving  additional funding.  More
specifically, the modified opinion, among other things, raises substantial doubt
about our ability continue as a going concern.


                                       7
<PAGE>


                       RESOURCEPHOENIX.COM AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2000
                                   (Unaudited)


NOTE 6.  SUBSEQUENT EVENTS

Management Changes

         On April 19, 2000,  Bryant Tong  resigned his  positions as  President,
Chief  Operating  Officer  and  Director of our  Company.  Gus  Constantin,  our
Chairman  and Chief  Executive  Officer,  will  continue in these roles and will
share the office of President with Corey West, our Senior Vice President,  Sales
and Marketing.

Financing Arrangement with Tourneau Fund, Ltd.

         On May 5, 2000, we signed a commitment  letter with Tourneau Fund, Ltd.
to provide us with equity financing.  The principal terms of the proposed equity
draw  down  facility  provide  for the  sale of up to  7,000,000  shares  of the
Company's  Class A common  stock  over a 14 month  period at a  discount  of six
percent from the trading price of our stock. That 14 month period would commence
subsequent to the SEC declaring a resale  registration  statement to be filed by
the Company  effective and approval by our  shareholders.  The 14 months will be
divided into pricing  periods,  each consisting of 20 trading days on the Nasdaq
National  Market.  We may make 12  monthly  draw  downs,  by giving  notice  and
requiring  Tourneau Fund,  Ltd. to purchase  shares of our Class A common stock,
for the draw down amount.  If our  threshold  price is at least $1.00,  the draw
down amount is $1,500,000.  For every $1.00 increase in our threshold price, the
drawn down amount will  increase by $500,000.  Prior to each draw down,  we will
provide  Tourneau Fund,  Ltd. with a notice that sets forth the number of shares
of Class A common  stock we will sell and the  commencement  date of the pricing
period.

         Under a separate Warrant  Agreement,  we will issue Tourneau Fund, Ltd.
warrants  to  purchase  up to  1,800,000  shares of our Class A common  stock at
exercise prices ranging from $2.50 to $7.00 per share.

         Our  ability to cause  Tourneau to purchase  common  stock  through the
equity facility is subject to certain conditions,  including the negotiation and
execution of a  definitive  agreement  that reflect the terms of the  commitment
letter,   approval  of  the  equity  facility  by  our   shareholders   and  the
effectiveness  of a resale  registration  statement  registering  the  resale by
Tourneau  Fund of the  shares  of common  stock it  purchases  under the  equity
facility.  Our ability to raise funds through the equity  facility also would be
subject to the  satisfaction  of certain  conditions at the time of each sale of
Class A common  stock to  Tourneau  Fund.  We may not be able to  negotiate  and
execute  a  definitive  agreement  with  Tourneau  Fund  or  satisfy  the  other
conditions to the initial sale to Tourneau Fund under the equity  facility prior
to the end of June 2000.  If this  occurs,  we would  likely need to raise money
from other sources in order to continue to fund our operations. Such alternative
funding may not be  available.  In  addition,  we may not be able to satisfy the
conditions to the subsequent  sales to Tourneau Fund under the equity  facility.
If this  occurs,  we  would  not be able to sell the full  7,000,000  shares  to
Tourneau  Fund  pursuant  to the  equity  facility,  and we may  need  to  raise
additional money from other sources in order to continue to fund our operations.
Such alternative funding may not be available on favorable terms, if at all.


                                       8
<PAGE>

                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The  following  discussion  should  be read  in  conjunction  with  our
financial  statements  and the notes  appearing  elsewhere in this  report.  The
following discussion contains forward-looking statements. Our actual results may
differ  materially  from  those  projected  in the  forward-looking  statements.
Factors  that  might  cause  future  results  to differ  materially  from  those
projected in the  forward-looking  statements  include those  discussed in "Risk
Factors" and elsewhere in this report.

Overview

         ReSourcePhoenix.com   provides  outsourced   financial  and  management
reporting,  accounting  management,  transaction  processing  and record keeping
services.  We allow our clients to focus on their core businesses by outsourcing
the infrastructure and operations of these critical back-office functions.

         Our operating subsidiary,  ReSource/Phoenix, Inc., commenced operations
on January 1, 1997.  Before this time,  we  operated as part of Phoenix  Leasing
Incorporated,  a commercial lender and sponsor and syndicator of publicly-traded
limited  partnerships.  In August 1999, we  reorganized  into a holding  company
structure.  As a result, we currently conduct all of our operations  through our
wholly-owned subsidiary ReSource/Phoenix, Inc.

         At the  time of our  formation,  we  provided  information  technology,
accounting,  finance and transaction  processing services to entities affiliated
with Phoenix  Leasing which had at that time total combined  assets of more than
$200 million.  We currently  provide  services to three clients  affiliated with
Phoenix Leasing.

         We  introduced  our S.T.A.R.  and our original  Financial  Outsourcing,
formerly  ReFOCOS,  services in 1993. Using our S.T.A.R.  service,  we perform a
variety of investor relations functions for sponsors of limited partnerships and
real estate investment trusts. Using our original Financial Outsourcing service,
we perform a wide variety of  accounting,  finance,  transaction  processing and
other related services for our clients.  Our original Financial  Outsourcing and
S.T.A.R. services are based on point-to-point client-server technology.

         In March 1999,  we began  licensing our M.A.R.S.  software,  which is a
customer  relationship  management  application  aimed  at the  mutual  fund and
variable  annuity  industries.  All of our  software  clients  have entered into
annual software maintenance and support contracts.  The first of these contracts
comes up for renewal in the second quarter of 2000.

         We introduced our  Web-enabled  Financial  Outsourcing  service and our
hosted  M.A.R.S.  service in November  1998 and August 1999,  respectively.  Our
Web-enabled  Financial  Outsourcing service is similar to our original Financial
Outsourcing  service,  except that clients can now access the service  using the
Internet.  We successfully  implemented the first hosted M.A.R.S.  client during
the fourth  quarter of 1999.  With the hosted  M.A.R.S.  service  offerings,  we
install and maintain the M.A.R.S. software in our data operations center for our
clients.

         Contract service revenue.  We derive contract service revenue primarily
from fees to provide monthly  information  technology,  accounting,  finance and
transaction  processing  for  services  related  to  Financial  Outsourcing  and
S.T.A.R.  We recognize  monthly fees as these services are  performed.  Prior to
January  1,  2000,  implementation  fees and  subsequent  consulting  fees  were
recognized  when the work was completed on a percentage of completion  basis. As
of January 1, 2000,  fees for these services are deferred and amortized over the
estimated  contract  service period,  which is estimated to be three years.  The
method of recognizing implementation and consulting fees was changed in response
to the Security and Exchange  Commission's  Staff Accounting  Bulletin (SAB) No.
101  "Revenue  Recognition."  The effect is reported  as a change in  accounting
principle in accordance with Accounting Principles Board Opinion ("APB") No. 20,

                                       9
<PAGE>

"Accounting  Changes".  The  cumulative  effect of  changing  to a new method of
accounting  effective  January 1, 2000 was to  increase  net loss by $129,000 or
$0.01 basic and fully  diluted  loss per share for the three  months ended March
31, 2000.

         Contract  service  revenue --  affiliate.  We derive  contract  service
revenue from  affiliates  by providing our S.T.A.R.  and  Financial  Outsourcing
service to certain affiliate companies.  Prior to August 1, 1999, we charged our
affiliates the fully allocated cost to provide such services.  Effective  August
1, 1999,  we  increased  our fees to  affiliates  to reflect a market  rate.  We
recognize affiliate revenue in the same manner as our contract service revenue.

         Software  revenue.  We derive  software  revenue from software  license
fees,  consulting services,  maintenance,  hosting and training for our M.A.R.S.
software. Maintenance and hosting fees have been reclassed from contract service
revenue to software revenue.  Software license fee revenue consists  principally
of up-front license fees earned from the licensing of the M.A.R.S.  software and
related implementation and installation.  Revenue from up-front software license
agreements is recognized in accordance with the American  Institute of Certified
Public  Accountants  Statement of Position 97-2. This revenue is recognized when
delivery  has  occurred,  collection  is  deemed  probable,  the fee is fixed or
determinable,  and  vendor-specific  objective  evidence  exists to allocate the
total  fee  to all  delivered  and  undelivered  elements  of  the  arrangement.
Historically,  we licensed our M.A.R.S.  product primarily on a perpetual basis.
Consulting  services  and  training  revenues  are  recognized  as services  are
performed  and  accepted by the  customers.  Maintenance  revenue is  recognized
ratably over the term of the  agreement.  In instances  where  software  license
agreements   include  a  combination  of  consulting   services,   training  and
maintenance,  these separate  elements are unbundled from the agreement based on
the element's fair value.

         The Company also provides M.A.R.S.  services on a hosted basis, whereby
our  customers do not take  possession of the  software,  instead,  the software
resides on the Company's server. We then provide  implementation and maintenance
services as described in the paragraph above.  Revenue from our hosting services
(including up front  implementation fees) is recognized ratably over the term of
the  agreement.  This treatment is in accordance  with the tentative  conclusion
reached by the  Emerging  Issues Task Force (EITF) of the  Financial  Accounting
Standards  Board (FASB) in its January  19-20,  2000 meeting , on Issue No. 00-3
"Application of AICPA Statement of Position 97-2,  Software Revenue  Recognition
to  Arrangements  that  Include  the Right to Use  Software  Stored  on  Another
Entity's Hardware".  That tentative conclusion was that SOP 97-2 only applies to
hosting  arrangements in which the customer has the  contractural  right to take
possession  of the  software  at  anytime  during  the  hosting  period  without
significant  penalty  and it is  feasible  for the  customer  to either  run the
software on its own hardware or contract  with an unrelated  third party to host
the software. In the case of our hosting arrangements,  the software may only be
used through access to our data processing facility under our direct supervision
and control.

         We  expect  that in the  future  software  revenue  will  decline  as a
percentage  of  total  revenue  as we  devote  greater  resources  to our  other
outsourced business services.

         Components of costs and expenses.  Cost of providing  services includes
salaries and benefits for  personnel in our Financial  Outsourcing  and S.T.A.R.
operations   groups,   fees  paid  to  outside  service   providers  other  than
implementation  service providers and other miscellaneous  operating costs. Cost
of providing  software revenue  includes  salaries and benefits for personnel in
our M.A.R.S.  technical  support and  installation  groups and costs  related to
consulting,  training  and  updates.  Prior to the quarter  ended June 30, 1998,
these   costs  were   recorded  as  research   and   development.   General  and
administrative expenses includes salaries and benefits for management personnel,
fees paid to outside service providers for corporate-related  services and other
overhead  expenses.  Research  and  development  expenses  include  salaries and
benefits for personnel engaged in M.A.R.S. development,  consulting fees paid to
outside service providers engaged in M.A.R.S.  development,  miscellaneous costs
associated with M.A.R.S.  development,  and similar types of expenses engaged in
application  development efforts related to our Financial  Outsourcing  service.
Client acquisition expense primarily includes salaries, benefits and commissions
paid to our sales and marketing and implementation personnel, travel expenses of

                                       10
<PAGE>

our  sales and  marketing  and  implementation  personnel,  certain  advertising
expenses and fees paid to outside implementation consultants.

         Stock-related  compensation  expense.  As a  result  of  stock  options
granted  in 1999,  we  recognized  stock-related  compensation  expense  of $5.0
million in 1999,  $3.1 million of which was  recognized  in the first quarter of
1999.

         Revenue and  operating  expense  trends.  On April 14, 2000 the Company
announced that its revenue growth would be less than previously  anticipated due
to business conditions and the impact of the adoption of SAB 101. Factors acting
to slow future revenue growth from levels previously  anticipated include, among
other  things,  an expected  reduction in fees from  affiliate  companies due to
reduced  operations  and the  closure  of one of the  affiliates,  delays in the
selling cycle,  due in part to concerns over the Company's  financial  viability
going forward, planned strategic reductions in client acquisition  expenditures,
and the adoption of SAB 101 which will defer revenue that would  otherwise  have
been reported during the current year. 1

         In response to  anticipated  slower sales growth the Company  initiated
several steps in late April to reduce its operating cost structure.  Those steps
include, among other things, staff reductions, primarily in the areas of general
and  administrative  and client  acquisition  expenses,  and reduced spending in
certain  support and product  development  areas.  These steps,  together with a
slower pace of staff  additions in the client  services  areas,  are expected to
reduce the Company's cash operating  requirements beginning in the middle of the
second  quarter.  Despite  these steps the Company will continue to incur losses
and negative cash flow over at least the balance of the fiscal year. 1










- --------------------
1 This  paragraph  contains  forward-looking  statements  reflecting our current
expectations.  In  addition,  our  actual  future  performance  may not meet our
current expectations. You are strongly encouraged to review the section entitled
"Risk Factors" commencing on page 15 and discussions elsewhere in this Quarterly
Report on Form 10-Q of the factors that could affect future performance.


                                       11
<PAGE>


Consolidated Results of Operations

         The  following  table sets forth,  for the periods  indicated,  certain
items  reflected in our  consolidated  statements of  operations  expressed as a
percentage of revenue and the percentage  change in the  underlying  values from
period to period.

                                              Quarter Ended March 31,
                                              ----------------------- Percentage
                                                  2000        1999      Change
                                               ----------  ---------  ----------
Consolidated Statements of Operations Data:
Revenue:
   Contract service revenue...................    47.5%       58.6%      74.3%
   Contract service revenue-- affiliate.......    34.4        34.6      112.6
   Software revenue...........................    18.0         6.8      466.0
                                               ----------  ---------  ---------
         Total Revenue........................   100.0       100.0      114.0
                                               ----------  ---------  ---------
Operating expenses:...........................
   Cost of providing services.................   113.3        74.4     (225.2)
   Cost of providing software revenue.........    11.0        12.8      (83.1)
   General and administrative.................    78.1        37.0     (351.1)
   Research and development...................    34.0        47.5      (52.7)
   Client acquisition.........................   105.8        34.5     (555.9)
   Stock-related compensation.................     0.0       170.8      100.0
   Depreciation and amortization..............    20.4         6.6     (560.4)
                                               ----------  ---------  ---------
         Total operating expenses.............   362.5       383.6     (101.9)
                                               ----------  ---------  ---------
Loss from operations..........................  (262.5)     (283.6)     (97.8)
Other income..................................     5.9          .7    1,844.4
                                               ----------  ---------  ---------
Net loss before change in accounting
  principle...................................  (256.6)     (282.9)     (93.6)
Cumulative effect on prior years of change
  in accounting principle.....................    (4.4)       -        (100.0)
                                               ----------  ---------  ---------

Net loss......................................  (261.0)%    (282.9)%    (97.1)%
                                               =========   =========  =========

         Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999

         Revenue.  Total revenue  increased  114.0% or $1.6 million in the first
quarter ending 2000 when compared with the same period in 1999, primarily due to
growth in both our Financial Outsourcing service for affiliate and non-affiliate
clients and sales of our M.A.R.S. product.

         Contract service revenue.  Contract service revenue  increased 74.3% or
$0.6  million in the first  quarter of fiscal 2000 when  compared  with the same
period of fiscal 1999  primarily  due to an increase  in  Financial  Outsourcing
revenue of $0.5 million.  The higher revenue from Financial  Outsourcing was due
to the net addition of 22 new clients between March 31, 1999 and March 31, 2000.
An increase in S.T.A.R.  revenue of $0.04 million was due to the addition of two
new clients and increased activity for existing clients.

         Contract  service revenue -- affiliate.  Contract  service revenue from
affiliates  increased 112.6% or $0.5 million in the first quarter of fiscal 2000
compared with the same period in 1999. The increase in contract  service revenue
from affiliates was primarily due to a change in August 1999 from a fee based on
allocated  cost to a fee schedule  that was  reflective  of market rates for the
services provided.

         Software revenue.  Software revenue increased 466.0% or $0.4 million in
the first  quarter of fiscal  2000 when  compared  with the same period in 1999.
This  increase was  primarily due to the  introduction  of our current  M.A.R.S.
release in March 1999.  Revenue in the current quarter was primarily  related to
the sale of additional licenses to existing clients, rather than the addition of
new clients, and higher maintenance revenue.

                                       12
<PAGE>


         Cost of providing services. Cost of providing services increased 225.2%
or $2.3 million in the first  quarter of fiscal 2000 when compared with the same
period in 1999.  The increase was primarily due to the increase in the number of
clients serviced,  which required us to add full time and contract  personnel in
our operations group. Increased labor,  labor-related benefit and contract labor
expenses accounted for 71.2% of the increase in our cost of providing services.

         The rate of increase in cost of services  exceeded  the rate of revenue
growth from  services for the quarter.  In Note 2 to the  financial  statements,
revenues from  implementation  services are now deferred and recognized  ratably
over three years rather than the actual average  implementation  phase of one to
three months.

         This was due in part to the adoption of SAB 101 which had the effect of
deferring  a  significant  portion of revenue  that  would  otherwise  have been
recorded  in the  period  and to the  rapid  expansion  of staff  in the  client
services  area.  Such  staff were hired in  anticipation  of a higher  number of
client additions than materialized. Staff reduction, together with a slower rate
of staff  additions  going  forward  and are  expected  to return the Company to
positive gross margins later in the fiscal year.

         Cost of providing software revenue.  Cost of providing software revenue
increased  83% or $0.1 million in the first quarter of fiscal 2000 when compared
with the same period in 1999.  The increase was due primarily to the increase in
M.A.R.S. clients from seven as of March 31, 1999 to 10 at the end of the current
quarter.

         General  and  administrative   expenses.   General  and  administrative
expenses  increased  351.1% or $1.8 million in first  quarter 2000 compared with
the same period in. The increase was  primarily  due to the hiring of additional
management and administrative personnel to support our operations.

         Research and development  expenses.  Research and development  expenses
increased 52.7% or $0.3 million in the first quarter 2000 when compared with the
same period of fiscal 1999. The increase was due primarily to hiring  additional
full-time and contract personnel to develop enhancements and new features to our
M.A.R.S  software  product  and  conduct  application  development  work for our
Financial Outsourcing services.

         Client  acquisition  expenses.  Client  acquisition  expenses increased
555.9% or $2.6 million in first  quarter 2000  compared  with the same period of
fiscal 1999.  The increase  was due largely to  incremental  salary and benefits
expense  of  $1.2  million   associated   with  hiring   additional   sales  and
implementation personnel for our Financial Outsourcing services and, to a lesser
extent,  M.A.R.S.  An increase of $0.4 million in consultant  expenses  incurred
supporting new Financial  Outsourcing  client  implementations.  Increased sales
support costs, including the opening of 14 regional sales offices, together with
higher advertising and promotional  expenses also contributed to higher costs in
first quarter 2000 compared to the same period in 1999.

         Stock-related  compensation  expense.  As a  result  of  stock  options
granted  in 1999,  we  recognized  stock-related  compensation  expense  of $2.4
million in first quarter 1999. We had no stock-related  compensation  expense in
the first quarter of 2000.

         Cumulative effect on prior years for a change in accounting  principle.
As of January 1, 2000,  the method of  recognizing  implementation  fees for our
Financial  Outsourcing  and for  M.A.R.S.  hosted  clients  was  changed  from a
percentage  of  completion  basis to  recognition  ratably  over  the  estimated
contract   life.   The  Company  has  adopted  a  three  year  period  for  such
amortization,  in response  to the  Security  and  Exchange  Commission's  Staff
Accounting  Bulletin  (SAB) No. 101 "Revenue  Recognition."  In accordance  with
Accounting  Principles Board Opinion ("APB") No. 20,  "Accounting  Changes," the
effect of changing to a new method of  accounting  effective at the beginning of
our fiscal  year,  January 1, 2000 is to report the  cumulative  effect on prior
year  income as of January 1, 2000 which  resulted in an increase in net loss of
$129,000.

                                       13
<PAGE>


         The impact of the change was to reduce Financial Outsourcing revenue by
$415,000 and  Software  revenue by $335,000 for a total of $750,000 or $0.07 per
share for the quarter ended March 31, 2000.

Liquidity and Capital Resources

         Since  inception,  we have financed our  operations  primarily  through
equity contributions and loans from the Gus and Mary Jane Constantin 1978 Living
Trust,  our sole  stockholder  prior to our initial public offering and from the
net proceeds of our initial public offering, which closed in October 1999.

         At March 31, 2000, we had  approximately  $9.6 million of cash and cash
equivalents.  Net cash used in operating activities in the first three months of
2000 and 1999 was $4.9 million and $1.0 million,  respectively. The cash used in
operating activities in 2000 and 1999 was primarily the result of net losses.

         Net cash used in investing activities was $1.3 million in first quarter
2000 and  $5,000 in the first  quarter of 1999.  The net cash used in  investing
activities  resulted  primarily from capital  expenditures  for data  processing
equipment,  leasehold improvements and furniture and fixtures. We expect to make
additional capital  expenditures for computer hardware and software,  furniture,
equipment and fixtures to support the continued growth of our operations.

         Net cash provided by financing  activities was $23,000 in first quarter
2000 and $0.9  million,  in the first three  months 1999.  Net cash  provided by
financing  activities  in 2000  resulted  from the exercise of certain  employee
options.  Net cash provided by financing activities in the first three months of
1999 was due to capital contributions from our then sole stockholder.

         We will need to raise  additional  capital  during the second  quarter.
Subsequent  to the end of the first  quarter,  the Company  began to implement a
number of steps aimed at reducing its  operating  costs.  Those steps  included,
among other things,  staff reductions amounting to approximately 15% of its work
force and cessation of certain development efforts that will reduce expenditures
for outside  consulting  expertise.  Despite  these  efforts,  the Company  will
continue to operate at a significant  cash  negative  level.  Absent  additional
financing,  the Company may not have sufficient resources to continue as a going
concern beyond its second  quarter.  To that end, the Company has entered into a
commitment  letter with Tourneau Fund, Ltd. to provide us with equity financing.
(See Note 5 - Subsequent  Events.) Our ability to raise funds through the equity
facility with Tourneau is subject to certain conditions at the time of each sale
of our  Class A common  stock.  We may not be able to  negotiate  and  execute a
definitive  agreement  with Tourneau or satisfy the  conditions for each sale of
our Class A common stock.  We cannot assure you that we will be able to complete
this or any  other  financing,  that such  financing  will be  adequate  for the
Company's  needs,  or that a financing  will be  completed  prior to the Company
running out of funds.

Forward Looking Statements

         This report contains forward-looking  statements that involve risks and
uncertainties.   These  statements  relate  to  our  future  plans,  objectives,
expectations and intentions,  and the assumptions  underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect,"  "anticipate,"  "intend" and "plan." Our actual  results may differ
materially  from  those  discussed  in  these  statements.  Factors  that  could
contribute to such differences  include, but are not limited to, those discussed
below and elsewhere in this report.

                                       14
<PAGE>


Risk Factors

We may not be able to continue  operating our business if we do not complete our
previously  announced  equity line  financing  with  Tourneau  Fund,  Ltd. or an
alternative equity or debt financing prior to the end of June 2000.

         Our  business  has not  generated  sufficient  cash  flow  to fund  our
operations  without  requiring  external  sources of  capital,  and we expect to
continue to have  significant  net cash  outflow.  As of March 31, 2000,  we had
working  capital  of $5.9  million.  If we do not  complete  an  equity  or debt
financing  prior to the end of June  2000,  we may not have  sufficient  cash to
continue  operating our business.  In that event,  our  shareholders  could lose
substantially all, if not all, of their investment in our company.

         On May 5, 2000, we entered into a commitment  letter with Tourneau Fund
Ltd. to provide us with equity financing. The commitment letter provides for the
purchase of up to 7,000,000  shares of Class A common stock at a discount to the
prevailing market price and the issuance of warrants to purchase up to 1,800,000
shares of Class A common  stock at exercise  prices  ranging from $2.50 to $7.00
per share.  Our ability to cause  Tourneau to purchase  common stock through the
equity facility is subject to certain conditions,  including the negotiation and
execution of a  definitive  agreement  that reflect the terms of the  commitment
letter,   approval  of  the  equity  facility  by  our   shareholders   and  the
effectiveness  of a resale  registration  statement  registering  the  resale by
Tourneau of the shares of common stock it purchases  under the equity  facility.
Our ability to raise funds through the equity  facility also would be subject to
the  satisfaction  of  certain  conditions  at the time of each  sale of Class A
common  stock  to  Tourneau.  We may not be  able to  negotiate  and  execute  a
definitive  agreement  with  Tourneau  or satisfy  the other  conditions  to the
initial  sale to  Tourneau  under the equity  facility  prior to the end of June
2000. If this occurs,  we would likely need to raise money from other sources in
order to continue to fund our operations.  Such  alternative  funding may not be
available.  In  addition,  we may not be able to satisfy the  conditions  to the
subsequent sales to Tourneau under the equity facility. If this occurs, we would
not be able to sell the full 7,000,000 shares to Tourneau pursuant to the equity
facility,  and we may need to raise additional money from other sources in order
to  continue  to  fund  our  operations.  Such  alternative  funding  may not be
available on favorable terms, if at all.

We may have difficulty raising money we need for our operations in the future.

         Even if we execute a definitive agreement with Tourneau and satisfy the
conditions to the initial sale and subsequent  sales under the equity  facility,
we may have to raise additional money from other sources in the future.  Because
the price at which we would sell  stock to  Tourneau  under the equity  facility
will depend on the prevailing  market price of our Class A common stock over the
14 month term of the equity  facility,  we cannot predict the amount of proceeds
we would receive under the equity facility.  Due to price  fluctuations,  we may
receive  less  proceeds  than we need to fund our  operations  until the Company
achieves  cash  breakeven.  If this  occurs,  we would need to raise  additional
funds.  Outside  sources  may not  provide  us with money when we need it. If we
cannot  obtain  money  when we  need  it,  we may  need to  further  reduce  our
operations.  In addition,  even if we are able to find outside sources that will
provide  us with  money  when we need it, in order to raise this money we may be
required to issue  securities  with better rights than the rights of our Class A
common stock or we may be required to take other  actions which lessen the value
of our current Class A common stock, including borrowing money on terms that are
not favorable to us.

We expect to continue to incur losses and experience negative cash flow.

         We expect to have  significant  operating losses and continue to record
significant  net cash outflow on a quarterly and annual  basis.  We reported net
loss from  operations of $30.8 million for the period from January 1, 1997,  the
date on which we began operations as a separate company, through March 31, 2000,
and  reported  net cash used in  operating  and  investing  activities  of $26.4
million for the same period.  Further  developing our business and expanding our
network  may require  significant  capital in addition to the amount that may be

                                       15
<PAGE>

raised under the proposed equity  facility with Tourneau.  We may not be able to
obtain additional capital on terms favorable to us or at all.

         Our ability to achieve and maintain  profitability  is highly dependent
upon the successful  commercialization of our Financial Outsourcing services. We
may not ever be able to  successfully  commercialize  our  products  or  achieve
profitability.

Modifications of the report of our independent public accountants  regarding our
ability to continue as a going concern may  significantly  impair our ability to
sell our products and services.

         In  connection  with  the  expected  filing  of a  resale  registration
statement,  as  contemplated  in our  commitment  letter with the Tourneau Fund,
Ltd., our  independent  auditors,  Arthur  Andersen LLP, are expected to reissue
their auditors'  report on our financial  statements for the year ended December
31, 1999. They are expected to modify their report to reflect their view that we
require additional funding to continue our operations and their view that we may
be unable to continue our operations absent receiving  additional funding.  More
specifically,  the modified report, among other things, raises substantial doubt
about our  ability to  continue  as a going  concern.  We believe  that  growing
concern  among our existing and  potential  customers  regarding  our  continued
financial  viability  has  been a  significant  factor  causing  demand  for our
products to grow more slowly than we previously anticipated. The modified report
from Arthur  Andersen  may  reinforce  our  existing  and  potential  customers'
concern.

         Even if we close the equity  facility with  Tourneau,  we cannot assure
you that Arthur  Andersen's  report on our future financial  statements will not
include a similar  modification.  The  continued  inclusion  of a going  concern
modification in Arthur  Andersen's  report could  perpetuate  concerns about our
ability to fulfill our contractual obligations,  as well as adversely affect our
relationships  with third  parties  and impair our  ability to  complete  future
financings. Each of the foregoing could significantly damage our business.

Our Class A common stock may be delisted from the Nasdaq  National  Market if we
cannot meet the continued listing requirements.

         While the  Class A common  stock has met the  current  initial  listing
requirements  for  inclusion  in the  Nasdaq  National  Market,  there can be no
assurance that we will meet the continued listing requirements.  To maintain our
listing on the Nasdaq National Market:

    o    we must have at least 750,000 shares  publicly held with a market value
         of at least $5 million;

    o    we will have to maintain at least $4 million in net tangible assets;

    o    the minimum bid price of our Class A common stock will have to be $1.00
         per share;

    o    our Class A common must be held by at least 400 holders; and

    o    our Class A common stock must have at least two active market makers.

         If we are  unable to satisfy  the  maintenance  criteria  of the Nasdaq
National Market,  our Class A common stock may be delisted.  If this occurs, our
Class A common stock would be traded only in the  over-the-counter  market. As a
result,  the  liquidity  of our  Class A common  stock  would  be  significantly
impaired  and the  price of our  Class A  common  stock  would be  significantly
adversely  affected.  Among other  things,  our company could receive less media
coverage and have fewer security analysts.

         If our Class A common  stock is  delisted,  then trading in our Class A
common stock would be subject to rules under the Securities Exchange Act of 1934
that require  additional  disclosure by  broker-dealers  in connection  with any
trades involving a stock defined as "penny stock." In general,  a penny stock is

                                       16
<PAGE>

an equity  security  that is not listed on a national  exchange and has a market
price of less than $5.00 per share,  subject  to some  exceptions.  Prior to any
transaction  in a penny  stock,  the rules  require the delivery of a disclosure
schedule  explaining  the penny  stock  market and  associated  risks and impose
various sales practice  requirements on broker-dealers  who sell penny stocks to
persons other than  established  customers and accredited  investors.  For these
transactions,  the broker-dealer must make a special  suitability  determination
for the  purchaser  and have  received the  purchaser's  written  consent to the
transaction prior to sale. The broker-dealer  also must disclose the commissions
payable to the  broker-dealer,  current bid and offer  quotations  for the penny
stock.  In  addition,  if  the  broker-dealer  is  the  sole  market-maker,  the
broker-dealer must disclose this fact and the  broker-dealer's  presumed control
over the market.  This information must be provided to the customer orally or in
writing prior to the  transaction  and in writing  before or with the customer's
confirmation.   Monthly   statements  must  be  sent  disclosing   recent  price
information  for the penny  stock held in the  account  and  information  on the
limited market in penny stocks. The additional burdens imposed on broker-dealers
by these  requirements  may discourage  them from effecting  transactions in our
Class A common stock,  which could  severely  limit the liquidity of our Class A
common stock and the ability of  purchasers in this offering to sell our Class A
common stock in the secondary market.

Our  success  depends on the  acceptance  and  increased  use of  Internet-based
software applications and business process outsourcing  solutions.  We cannot be
sure that these solutions will gain market acceptance.

         Our business model depends on the adoption of  Internet-based  software
applications and business process outsourcing solutions by commercial users. Our
business would suffer  dramatically  if these  solutions are not accepted or not
perceived to be effective.  The market for Internet  services,  virtual  private
networks and widely distributed  Internet-enabled  packaged application software
has only  recently  begun to  develop.  The  growth of  Internet-based  business
process outsourcing solutions could also be limited by:

    o    concerns over transaction security and user privacy;

    o    inadequate network infrastructure for the entire Internet; and

    o    inconsistent performance of the Internet.

         In addition,  growth in, demand for and  acceptance  of  Internet-based
software applications and business process outsourcing solutions,  including our
Financial  Outsourcing  service,  by early stage and middle market  companies is
highly  uncertain.  It is  possible  that our  outsourced  business  information
solutions  may never  achieve  broad  market  acceptance.  If the market for our
services does not grow  significantly  or continues to grow less rapidly than we
currently  anticipate,  our business,  financial condition and operating results
would be seriously harmed.

Our Financial  Outsourcing  service is targeted at early stage and middle market
companies,  which may be more likely to be acquired or to cease  operations than
other  companies.  As a result,  our client base may be more  volatile  than the
client  bases of  companies  whose  client  bases  consist  of more  established
companies.

         Our Financial Outsourcing service is targeted at early stage and middle
market companies, which may be more likely to be acquired or to cease operations
than other companies. As a result, our client base may be more volatile than the
client  bases of  companies  whose  client  bases  consist  of more  established
companies. From our inception through the end of 1999, we lost five unaffiliated
clients,  including  one because the client was acquired  and three  because the
clients  ceased  operations  or no longer had  financial  means to continue  our
services.  In the quarter ended March 31, 2000, we lost two clients because they
were  purchased  and one  client  because it no longer  had  financial  means to
continue our services.  If we experience  greater than expected client turnover,
either  because our  clients are  acquired,  cease  operations  or for any other

                                       17
<PAGE>

reason,  our  business,  financial  condition  and  operating  results  could be
seriously harmed.

Our growth  will be limited  if we are  unable to attract  and retain  qualified
personnel.

         We  must   continue  to  attract  and  retain   qualified   information
technology,  accounting,  finance and transaction  processing  professionals  in
order to perform  services for our existing and future  clients.  The  personnel
capable of filling  these  positions  are in great  demand  and  recruiting  and
training them  requires  substantial  resources.  We may not be able to hire the
necessary  personnel to implement our business  strategy,  or we may need to pay
higher compensation for employees than we currently expect. We cannot assure you
that we will succeed in attracting and retaining the personnel we need to grow.

Our current and historical  financial  information  may not be comparable to our
future financial results.

         Our historical revenues were derived primarily from services that we do
not expect to be the focus of our  business in the  future.  We  introduced  our
S.T.A.R.  services and our original Financial  Outsourcing  service in 1993. Our
Web-enabled Financial  Outsourcing service and our hosted M.A.R.S.  service were
introduced in November 1998 and August 1999,  respectively.  For the years 1998,
1999 and the first quarter of 2000, we derived  approximately  67%, 50% and 40%,
respectively,  of total revenue from our S.T.A.R.  services. For the years 1998,
1999 and the first  quarter of 2000, we derived  approximately  1%, 25% and 18%,
respectively, of total revenue from the sale of software, including license fees
and related  services.  Because our  historical  revenues  were  derived  from a
different  type of service  than the  services  that we plan to emphasize in the
future,  our  historical  financial  results may not be comparable to our future
financial results. In addition, our M.A.R.S. and S.T.A.R.  services are marketed
to specialized  financial services clients.  Our Financial  Outsourcing services
are marketed to a broader,  less specialized  market than either of our M.A.R.S.
or S.T.A.R.  services.  We may be  unsuccessful in our efforts to market to this
target market.

         Our  strategy  does  not  contemplate  M.A.R.S.  as  one  of  our  core
offerings.  As a result,  we expect that software license fees will decline as a
percentage of revenues as we devote  greater  resources to our other  outsourced
financial and management reporting services.

Our stock price could  fluctuate  dramatically  because of  fluctuations  in our
quarterly  operating  results.  This  could  result  in  substantial  losses  to
investors.

         Period-to-period comparisons of our operating results may not be a good
indication of our future  performance.  Moreover,  our operating results in some
quarters may not meet the expectations of stock market analysts or investors. In
that event,  our stock price would likely fall  significantly.  For example,  on
April 14, 2000,  we  announced  that we expected our revenue to grow more slowly
than previously  expected.  We also announced on that date that we would adopt a
recently introduced accounting policy, the effect of which would be, among other
things, to reduce our reported revenue for 2000.  Following these announcements,
the trading price of our Class A common stock immediately fell dramatically.

         As a result of the evolving  nature of the markets in which we compete,
we may have difficulty  accurately  forecasting our revenue in any given period.
In addition to the factors  discussed  elsewhere  in this  section,  a number of
factors  may cause our  revenue to fall short of our  expectations  or cause our
operating results to fluctuate, including:

    o    the  announcement  or  introduction  of new  or  enhanced  products  or
         services by our competitors;

    o    pricing changes by us or our competitors;

                                       18
<PAGE>


    o    the timing and frequency of new client  engagements  or  cancellations;
         and

    o    sales cycle fluctuations.

         We  must  implement  our  services  for new  clients  in a  timely  and
cost-effective  manner.  To the  extent  that  we are  unable  to  staff  client
implementations  using  internal  staff,  we  will  need  to  delay  our  client
implementations  or hire outside software and systems  integration  consultants,
whose services  generally are much more costly. If we delay  implementation  for
any client, we may not meet the expectations of that client,  which could damage
our relationship with that client. A delay in implementation would also postpone
our  recognition  of  revenues  from  that  client,  perhaps  into a  subsequent
financial reporting period, which could cause us not to meet analyst or investor
expectations  for  that  period.   If  we  hire  outside  software  and  systems
integration consultants,  our operating expenses will increase and our operating
results will be harmed.

         Stock   markets   often   experience   significant   price  and  volume
fluctuations.  These  fluctuations,  as well as general  economic and  political
conditions  unrelated to our performance,  may adversely affect the price of our
Class A common stock.  The market prices of the  securities of  Internet-related
and  technology-related  companies have been  especially  volatile.  The closing
price of our Class A common stock, for example, has fluctuated between $1.66 and
$25.37 since our initial public offering in October 1999 through April 28, 2000.
In  addition,  if our  performance  in a given  quarter or our  expected  future
performance  falls below the  expectations of securities  analysts or investors,
the price of our Class A common stock will likely fall significantly,  as it did
in April 2000.

Our  operating  results  depend on our  relationships  with a limited  number of
clients.  As a  result,  the  loss of a single  client  may  seriously  harm our
operating results.

         Our results of operations and our business depend on our  relationships
with a limited number of large clients. As a result, the loss of a single client
may seriously harm our operating  results.  Set forth below is the percentage of
revenues  during  the three  months  ended  March 31,  2000 and the years  ended
December 31, 1999 and 1998 for each of our clients that  accounted for more than
10% of our revenues and for our ten largest clients combined:

                                        Quarter Ended
                                          March 31,      Year Ended December 31,
                                          ---------      -----------------------
                                            2000           1999           1998
                                            ----           ----           ----
Phoenix Leasing (an affiliate)               26%            24%            41%
GE Capital Aviation Services/PIMC             8%             9%            20%
John Hancock Advisors                        --             16%            --
Total of ten largest clients combined:       72%            77%            86%

         We cannot assure you that we will be able to maintain our current level
of  revenues  derived  from any of our  clients or markets  in the  future.  The
termination of our business relationships with any of our significant clients or
a  material  reduction  in the  use of our  services  by any of our  significant
clients, could seriously harm our business and operating results.

We rely on third parties to supply us with the  software,  hardware and services
necessary to provide our services. The loss of any of this third party software,
hardware  or services  may be  difficult  to replace and may harm our  operating
results.

         A  substantial  portion of the  software  that is  integrated  into our
services  is  licensed  from  third  parties,   including  Oracle   Corporation,
BroadVision,  Inc. and Vitria  Technology,  Inc. If we were to lose the right to
use the software that we have licensed from Oracle, BroadVision, Vitria or other
third parties, our operations would be seriously harmed. Our agreements with our
software  vendors are  non-exclusive.  Our vendors may choose to compete with us
directly.  Oracle,  for example,  is now offering a  Web-enabled  version of its
enterprise  resource planning software that it markets directly to middle market

                                       19
<PAGE>

businesses.  Our vendors may also enter into  strategic  relationships  with our
competitors.  These relationships may take the form of strategic investments, or
marketing or other  contractual  arrangements.  Our competitors may also license
and utilize the same  technology  in  competition  with us. We cannot assure you
that the vendors of  technology  used in our products  will  continue to support
this  technology  in its current form. We also cannot assure you that we will be
able to adapt our own offerings to changes in this technology.  In addition,  we
cannot assure you that the financial or other  difficulties  of our vendors will
not adversely affect the technologies incorporated into our services, or that if
these  technologies  become  unavailable  we  will  be  able  to  find  suitable
alternatives.

         In addition,  we depend on third parties,  such as Cisco Systems,  Inc.
and Sun Microsystems,  Inc., to supply servers, routers,  firewalls,  encryption
technology  and other  key  components  of our  telecommunications  and  network
infrastructure.  If any of our  vendors  fail  to  provide  needed  products  or
services in a timely fashion or at an acceptable  cost, our business,  financial
condition  and  operating  results  could be seriously  harmed.  A disruption in
telecommunications  capacity could prevent us from  maintaining  our standard of
service. Some of the key components of our system and network are available only
from sole or limited sources in the quantities and quality we demand.

         We also  depend on the  services of  software  and systems  integration
firms to help us establish  service  with new clients.  If the services of these
firms became  unavailable  for any reason,  our services to new clients could be
delayed. In addition, we could be forced to pay higher rates for the services of
these or  substitute  firms.  If  either  of these  events  were to  occur,  our
business, financial condition and operating results could be seriously harmed.

Our business and  reputation may be harmed if we make mistakes in performing our
services.

         Our  business  is subject to various  risks  resulting  from errors and
omissions  in  performing  services  for our  clients.  We  perform  accounting,
finance,  transaction  processing,  tax  reporting,  transfer  agency  and other
services for our  clients.  We process  data  received  from our clients that is
critical to our clients'  businesses  and  operations.  We may make  mistakes in
performing our services, which may result in claims being made against us. If we
do make mistakes,  we cannot assure you that our financial reserves or insurance
will be adequate to cover any claims made against us. In addition,  our business
reputation  will be  seriously  harmed  if we make  any  mistakes,  which  could
adversely affect our relationships  with our existing clients and our ability to
attract new clients.

Our software products and the software that we have integrated into our services
may have  unknown  defects  that could harm our  reputation  or decrease  market
acceptance of our services.

         We  derived  approximately  18%  of our  revenues  from  licensing  our
M.A.R.S.  software  product during the quarter ended March 31, 2000. Our clients
rely on this software to perform critical  business  functions such as sales and
expense tracking and fulfillment/inventory  tracking. Because our clients depend
on our M.A.R.S.  software for their critical systems and business functions, any
interruptions  caused by  unknown  defects  in our  software  could  damage  our
reputation,  cause our clients to initiate  product  liability suits against us,
divert our research and development resources, cause us to lose revenue or delay
market  acceptance  of any  outsourced  business  service  that is based on this
software.  Any of these things could harm our business. Our software may contain
errors or defects,  particularly when new versions or enhancements are released.
We may not  discover  software  defects  that  affect our  current  software  or
enhancements  until after they are sold.  Although we have not  experienced  any
material  software  defects to date,  any  defects  could  cause our  clients to
experience severe system failures.

         The software  applications  that we license  from Oracle,  BroadVision,
Vitria and other third  parties and  integrate  into our service  offerings  may
contain  defects  when  introduced  or when new  versions  or  enhancements  are
released.  We cannot assure you that software  defects will not be discovered in
the future.  If our  services  incorporate  software  that has defects and these
defects  adversely affect our service  offerings,  our business,  reputation and
operating results may be harmed.

                                       20
<PAGE>


The markets we serve are highly  competitive  and many of our  competitors  have
much greater resources.

         Our current and  potential  competitors  include  applications  service
providers,   systems  integrators,   and  software  and  hardware  vendors.  Our
competitors,  who may operate in one or more of these areas,  include  companies
such as Andersen  Consulting,  Corio, Inc., DIGEX, Inc., Exodus  Communications,
Inc.,    International   Business   Machines   Corporation,    Navisite,   Inc.,
PricewaterhouseCoopers LLP, and USInternetworking,  Inc. Some of our competitors
may make strategic  acquisitions or establish  cooperative  relationships  among
themselves  or with third  parties to  increase  their  ability to rapidly  gain
market  share  by  addressing  the  needs  of  our  prospective  clients.  These
relationships  may take the form of strategic  investments or marketing or other
contractual arrangements.

         Many of our competitors have substantially greater financial, technical
and marketing  resources,  larger customer bases,  longer  operating  histories,
greater name recognition and more established relationships in the industry than
we do. We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:

    o    more  quickly  develop and expand  their  network  infrastructures  and
         service offerings;

    o    better  adapt to new or emerging  technologies  and  changing  customer
         needs;

    o    negotiate more favorable licensing agreements with software application
         vendors;

    o    more successfully recruit qualified information technology, accounting,
         finance and transaction processing professionals;

    o    negotiate more favorable services  agreements with software and systems
         integrators;

    o    devote greater  resources to the marketing and sale of their  services;
         and

    o    adopt more aggressive pricing policies.

         Some of our  competitors  may also be able to  provide  customers  with
additional  benefits at lower overall  costs.  We cannot be sure that we will be
able to match cost reductions by our competitors.  In addition,  we believe that
there is likely to be consolidation  in our markets,  which could increase price
and other competition in ways that could seriously harm our business,  financial
condition and operating results.  Finally, there are few substantial barriers to
entry,  and we have no patented  technology that would bar competitors  from our
market.

We rely on rapidly changing technology and must anticipate new technologies.

         The technologies in which we have invested are rapidly  evolving.  As a
result,  we must  anticipate  and rapidly adapt to changes in technology to keep
pace with the  latest  technological  advances  that are  likely  to affect  our
business  and  competitive  position.  For  example,  we  recently  adapted  our
Financial   Outsourcing   service,   which   formerly   used   a   client-server
communications architecture, to use an Internet communications architecture. Our
future success will depend on our ability to deploy  advanced  technologies  and
respond to technological advances in a timely and cost effective manner. Even if
we are able to deploy  new  technologies  in a timely  manner,  we are likely to
incur  substantial cost in doing so. If we are unable to develop or successfully
introduce new technology on an as needed basis or if we are unable to do so in a
cost effective manner, our business,  financial  condition and operating results
would be seriously harmed.

                                       21
<PAGE>


We  recently  began to expand  very  rapidly  and  managing  our  growth  may be
difficult.

         In mid-1999,  we began to aggressively  expand our  operations.  To the
extent that our business  continues to grow both  geographically and in terms of
the number of products and services we offer, we must:

    o    expand, train and manage our employee base effectively;

    o    enlarge our network and infrastructure to accommodate new clients;

    o    expand our  infrastructure and systems to accommodate the growth of our
         existing clients; and

    o    improve our management, financial and information systems and controls.

         We must recruit qualified information  technology personnel,  for which
there is high demand and short supply.  In addition,  we must recruit  qualified
accounting, finance and transaction processing personnel, which are also in high
demand.  During the second half of 1999,  we opened  eight new  offices  outside
northern California. In April 2000, we closed five offices, including one office
in California. We have little experience operating a multi-office business.

         There will be  additional  demands on our  operations  group and sales,
marketing and administrative  resources as we increase our service offerings and
expand our target markets. The strains imposed by these demands are magnified by
the  early  stage  nature of our  operations.  If we cannot  manage  our  growth
effectively,  our business,  financial  condition or operating  results could be
seriously harmed.

We depend  on a  limited  number of key  executives  who would be  difficult  to
replace.

         Our success  depends in significant  part on the continued  services of
our senior management personnel.  Losing one or more of our key executives could
seriously  harm our business,  financial  condition and  operating  results.  We
cannot  assure you that we will be able to retain our key  executives or that we
would be able to  replace  any of our key  executives  if we were to lose  their
services  for any  reason.  If we had to replace any of our key  executives,  we
would not be able to replace the  significant  amount of knowledge  that many of
our key executives have about us.

If we do not  effectively  address our market,  we may never realize a return on
the investments we have made to execute our strategy.

         We have made  substantial  investments  to pursue our  strategy.  These
investments include:

    o    developing relationships with particular software providers,  including
         Oracle, BroadVision and Vitria;

    o    investing  to  develop  unique  product  features,   including  invoice
         reporting and imaging functions; and

    o    developing implementation resources around specific applications.

         These investments may not be successful. More cost-effective strategies
may be available  to compete in this market.  We may have chosen to focus on the
wrong application areas or to work with the wrong partners.  Potential customers
may not value the specific product features in which we have invested. We cannot
assure you that our strategy will prove successful.

                                       22
<PAGE>


Intellectual  property infringement claims against us, even without merit, could
cost a significant amount of money to defend and divert  management's  attention
away from our business.

         As the number of software  products in our target market  increases and
the  functionality  of  these  products  further  overlaps,   software  industry
participants may become increasingly subject to infringement claims. Someone may
even  claim  that  our  technology   infringes  their  proprietary  rights.  Any
infringement  claims, even if without merit, can be time consuming and expensive
to defend. These suits may divert management's attention and resources and could
cause service  implementation  delays.  They also could require us to enter into
costly  royalty  or  licensing  agreements.  If  successful,  a claim of product
infringement  against us and our  inability to license the  infringed or similar
technology could adversely affect our business.

We may be  liable  if we lose  client  data  from  natural  disasters,  security
breaches or for any other reason.

         We currently conduct all of our data processing and network  operations
at our  facility  in San  Rafael,  California.  In the  event of a  catastrophic
disaster at our San Rafael data operations  center,  SunGard  Recovery  Services
Inc. will provide business resumption of our critical systems at its data center
in Philadelphia.

         We have comprehensive  disaster recovery procedures in place, including
uninterruptible  power supply  systems with seven day  capacity,  back-up  power
generators,  nightly  backup of our critical  data,  systems with  off-site data
vaults,  and 24 and 72 hour service level agreements for recovering  systems and
data from the last  available  backup.  However,  we cannot  assure you that our
disaster recovery procedures are sufficient,  or that our client's data would be
recoverable in the event of a disaster.

         Our  operations  are  dependent on SunGard  being able to  successfully
provide back-up  processing  capability if we are unable to protect our computer
and  network  systems  against  damage  from  a  major  catastrophe  such  as an
earthquake  or other  natural  disaster,  fire,  power  loss,  security  breach,
telecommunications  failure  or  similar  event.  We cannot  assure you that the
precautions  that we have  taken to protect  ourselves  against  these  types of
events will prove to be adequate.  If we suffer damage to our data or operations
center, experience a telecommunications failure or experience a security breach,
our  operations  could be seriously  interrupted.  We cannot assure you that any
such  interruption  or other  loss will be covered  by our  insurance.  Any such
interruption or loss could seriously harm our business and operating results.

Gus Constantin can exert substantial control over our company.

         Gus Constantin, our founder, chairman and chief executive officer, owns
all of the shares of our Class B common stock,  each share of which entitles him
to five votes on most stockholder  actions. As a result, Mr. Constantin controls
89.9% of the combined voting power of both classes of our common stock.  Holders
of Class A common stock are entitled to one vote per share and in the  aggregate
have 10.1% of the combined  voting power of both classes of our common stock. As
a result of his stock ownership, Mr. Constantin can, without the approval of our
public  stockholders,  take  corporate  actions  that  could  conflict  with the
interests of our public stockholders, such as:

    o    amending our charter documents;

    o    approving or defeating mergers or takeover attempts;

    o    determining  the amount and timing of dividends  paid to himself and to
         holders of Class A common stock;

                                       23
<PAGE>


    o    changing  the size  and  composition  of our  board  of  directors  and
         committees of our board of directors; and

    o    otherwise controlling management and operations and the outcome of most
         matters submitted for a stockholder vote.

Our charter  documents could deter a takeover  effort,  which could inhibit your
ability to receive an acquisition premium for your shares.

         Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more  difficult  for a third party to acquire us, even if doing so
would be  beneficial  to our  stockholders.  In addition,  we are subject to the
provisions of Section 203 of the Delaware General  Corporation Law. This statute
could  prohibit  or delay the  accomplishment  of mergers or other  takeover  or
change  in  control  in  attempts  with  respect  to us  and,  accordingly,  may
discourage attempts to acquire us.

We could be harmed if our products,  services or technologies are not compatible
with other products, services or technologies.

         We believe that our ability to compete successfully also depends on the
continued  compatibility  of our services  with  products,  services and network
architectures  offered by various vendors. If we fail to conform to a prevailing
or emerging standard,  our business,  financial  condition and operating results
could be  seriously  harmed.  We  cannot  be sure that  their  products  will be
compatible  with ours or that they will  adequately  address  changing  customer
needs.  We also cannot be sure what new  industry  standards  will  develop.  We
cannot assure you that we will be able to conform to these new standards quickly
enough to stay  competitive.  In addition,  we cannot assure you that  products,
services  or  technologies  developed  by  others  will not  make our  products,
services or technologies noncompetitive or obsolete.



                                       24
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

         We do not hold derivative financial  instruments,  derivative commodity
investments or other financial investments or engage in foreign currency hedging
or other transactions that expose us to material market risk.


                           PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

         We are not currently  involved in any material  legal  proceedings.  We
are,  however,  party to various legal  proceedings and claims from time to time
arising in the ordinary course of business. We do not expect that the results in
any of these legal  proceedings  will  seriously harm our business or results of
operations.

Item 2.    Changes in Securities and Use of Proceeds

         On October  14, 1999 we  commenced  our initial  public  offering  (the
"Offering"),  which consisted of 4,000,000 shares of our Class A common stock at
$8.00 per share pursuant to a registration  statement (No.  333-84589)  declared
effective by the  Securities  and Exchange  Commission on October 14, 1999.  The
Offering  has been  terminated  and all  shares  have been  sold.  The  managing
underwriters  for the Offering  were  BancBoston  Robertson  Stephens,  Inc. and
Thomas  Weisel  Partners  LLC.  Aggregate  proceeds  from the Offering  were $32
million.

         We incurred  approximately $3.2 million in total expenses in connection
with the  Offering,  comprised of  approximately  $2.2 million in  underwriters'
commissions and $1.0 million in other expenses.

         After deducting expenses of the Offering,  the net offering proceeds to
us were $28.8 million.  As of March 31, 2000, we used the net offering  proceeds
to repay approximately $6.6 million outstanding promissory notes to our majority
stockholder,  to make  capital  additions  of  approximately  $5.5  million  and
approximately  $7.1 million for general  corporate  purposes,  including working
capital.  The  remaining  net proceeds  have been  invested in  short-term  cash
instruments  pending final deployment.  We currently estimate that the remaining
net proceeds of the Offering will be used as follows:

    o    15% to 25% for capital expenditures; and

    o    75% to 85% for general corporate purposes, including working capital.

         As of the date of this Form 10-Q, we can only  estimate the  particular
uses for the net proceeds received from the Offering. As a result, the foregoing
estimates  and our use of  proceeds  are  subject to change at our  management's
discretion.  The amounts actually expended for each of the purposes listed above
may  vary  significantly  depending  upon a number  of  factors,  including  the
progress of our marketing programs and capital spending requirements.


Item 3.    Defaults Upon Senior Securities

         None.

Item 4.    Submission of Matters to a Vote of Security Holders

         No  matter  was  submitted  to a vote  of the  Company's  stockholders,
through the  solicitation  of proxies or otherwise,  during the first quarter of
fiscal year 2000.
                                       25
<PAGE>


Item 5.    Other Information

         None.

Item 6.    Exhibits and Reports on Form 8-K

           a.     Exhibits

                  None.

           b.     Reports on Form 8-K

                  No  reports on Form 8-K were filed  during the  quarter  ended
                  March 31, 2000.



                                       26
<PAGE>

                                   SIGNATURES


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                              RESOURCEPHOENIX.COM
                                              -------------------
                                                  (Registrant)



    Date                       Title                              Signature
    ----                       -----                              ---------

May 12, 2000       President                                  /S/ W. COREY WEST
- ------------       (Principal Executive Officer)              -----------------
                                                              (W. Corey West)


May 12, 2000       Chief Financial Officer                    /S/ GREG THORNTON
- ------------       (Principal Accounting Officer)             -----------------
                                                              (Greg Thornton)



                                       27

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