RESOURCEPHOENIX COM, 10-Q, 2000-08-14

RESOURCEPHOENIX COM
10-Q, 2000-08-14
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 June 30, 2000

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) 485-4600
--------------

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 July 31,
2000 was 11,376,760.

<PAGE>

INDEX

RESOURCEPHOENIX.COM

FORM 10-Q - For the Quarterly Period Ended June 30, 2000

Part I. Financial Information Page

Item 1. Financial Statements

a) Condensed Consolidated Balance Sheets - June 30, 2000
(unaudited) and December 31, 1999...........................3

b) Condensed Consolidated Statements of Income - Three
and Six Months Ended June 30, 2000 and June 30, 1999
(unaudited).................................................4

d) Condensed Statements of Cash Flows - Six Months
Ended June 30, 2000 and June 30, 1999 (unaudited)...........5

e) Notes to Condensed Consolidated Financial Statements -
June 30, 2000 (unaudited)...................................6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................10

Item 3. Quantitative and Qualitative Disclosures about Market Risk.....28

Part II. Other Information

Item 1. Legal Proceedings..............................................28
Item 2. Changes in Securities and Use of Proceeds......................28
Item 3. Defaults Upon Senior Securities................................29
Item 4. Submission of Matters to a Vote of Security Holders............29
Item 5. Other Information..............................................30
Item 6. Exhibits and Reports on Form 8-K...............................30

Signature .......................................................31

2
<PAGE>
PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RESOURCEPHOENIX.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2000 1999
-------- ------------
(unaudited)

ASSETS

Current Assets:
Cash and cash equivalents $ 4,210 $ 15,780
Accounts receivable, net of allowance 1,119 948
Receivable from affiliates 41 33
Prepaid expenses and other current assets 1,143 729
-------- --------

Total current assets 6,513 17,490

Property and equipment 9,979 7,669
Accumulated depreciation (2,599) (1,382)
-------- --------
Net property and equipment 7,380 6,287

Other assets 450 276
-------- --------

Total assets $ 14,343 $ 24,053
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 1,701 $ 1,455
Accrued liabilities 1,773 1,655
Deferred revenue 1,029 306
Other liabilities 522 --
Notes payable - bank 133 --
Notes payable - affiliate 662 --
-------- --------
Total current liabilities 5,820 3,416

Notes payable - affiliate 2,189 --
Deferred revenue 1,118 688
-------- --------
Total long term liabilities 3,307 688
-------- --------

Total Liabilities 9,127 4,104

Stockholders' Equity:
Preferred Stock, $.001 par value: 5,000,000
shares authorized -- --
Class A Common Stock, $.001 par value:
27,800,000 shares authorized, 4,204,760
and 4,028,000 issued and outstanding at
June 30, 2000 and December 31, 1999,
respectively 31,570 32,869
Warrants 1,927 --
Class B Common Stock, $.001 par value:
7,200,000 shares authorized, 7,172,000
issued and outstanding at June 31, 2000 and
December 31, 1999 9,957 9,957

Accumulated deficit (38,238) (22,877)
-------- --------

Total stockholders' equity 5,216 19,949
-------- --------

Total liabilities and stockholders' equity $ 14,343 $ 24,053
======== ========

The accompanying notes are an integral part of these statements.

3
<PAGE>
RESOURCEPHOENIX.COM
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------

<S> <C> <C> <C> <C>
Revenue:
Contract service revenue $ 1,628 $ 932 $ 3,031 $ 1,741
Contract service revenue - affiliate 944 435 1,960 913
Software revenue 271 1,413 803 1,507
-------- -------- -------- --------

Total revenue 2,843 2,780 5,794 4,161

Operating Expenses:
Cost of providing services 3,414 1,378 6,757 2,406
Cost of providing software revenue 289 225 613 402
General and administrative 2,747 488 5,052 999
Research and development 796 695 1,798 1,351
Client acquisition costs 2,607 613 5,729 1,089
Depreciation and amortization 667 137 1,268 228
Stock-related compensation -- 2,933 -- 5,291
-------- -------- -------- --------

Total operating expenses 10,520 6,469 21,217 11,766

Loss from operations (7,677) (3,689) (15,423) (7,605)

Other income (expense) 16 8 191 17
-------- -------- -------- --------

Net loss before change in accounting principal (7,661) (3,681) (15,232) (7,588)
-------- -------- -------- --------

Cumulative effect on prior years -- -- (129) --
-------- -------- -------- --------

Net loss $ (7,661) $ (3,681) $(15,361) $ (7,588)
======== ======== ======== ========

Basic and diluted net loss per share:
Net loss before effect of accounting change $ (0.68) $ (0.51) $ (1.35) $ (1.05)
Cumulative effect of accounting change -- -- (0.01) --
-------- -------- -------- --------

Net loss $ (0.68) $ (0.51) $ (1.36) $ (1.05)
======== ======== ======== ========

Shares used in computing basic and
diluted net loss per share 11,318 7,200 11,260 7,200

Proforma amounts assuming accounting change
had been in effect during the three
and six months ended June 30, 1999:

Net Loss $ (7,661) $ (3,719) $(15,232) $ (7,711)
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.68) $ (0.52) $ (1.35) $ (1.07)
-------- -------- -------- --------
</TABLE>

The accompanying notes are an integral part of these statements.

4
<PAGE>

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

Six months ended
June 30,
2000 1999
-------- --------

Operating Activities
Net income (loss) $(15,361) $ (7,588)
Loss on disposal of assets 39 --
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,267 229
Stock compensation expense -- 5,291
Change in operating assets and liabilities:
Accounts receivable, net (171) (540)
Receivable from (due to) affiliates (8) 93
Prepaid expenses and other assets (463) (78)
Accounts payable and accrued liabilities 364 (230)
Deferred revenue 1,153 374
Other 522 --
-------- --------
Net cash used in operating activities (12,658) (2,449)

Investing activities
Purchase of equipment, furniture and fixtures (2,397) (1,529)
-------- --------
Net cash used in investing activities (2,397) (1,529)

Financing activities
Proceeds from capital contributions from
stockholder -- 3,603
Proceeds from sale of stock 352 --
Bank credit facility, net 133 --
Notes payable - affiliate 3,000 --
-------- --------
Net cash provided by financing activities 3,485 3,603
-------- --------

Net decrease in cash and cash equivalents (11,570) (375)

Cash and cash equivalents, beginning of period 15,780 503
-------- --------

Cash and cash equivalents, end of period $ 4,210 $ 128
======== ========

Supplemental disclosure of noncash financing
activities:
Issuance of warrants in connection with
affiliate note payable $ (149) $ --
Issuance of warrants in connection with
bank credit facility (127) --
Issuance of warrants in connection with
equity financing (1,651) --
Contribution of fixed assets from affiliate -- 1,474

The accompanying notes are an integral part of these statements.

5
<PAGE>

RESOURCEPHOENIX.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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
June 30, 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 SAB 101A and SAB 101B, which delayed the implementation
date of SAB 101 for registrants with fiscal years that begin after December 15,
1999 to the fourth quarter of their fiscal year. The Company elected to
implement SAB No. 101 the first quarter of 2000, the effect of which is
described as follows:

Effective January 1, 2000, the Company deferred recognition of
implementation fees for its Financial Outsourcing services and for its 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.
Costs related to client implementation activities are expensed as incurred.

Set forth below is a comparison of operating results for the six months
ended June 30, 2000:

Assuming SAB 101 had
not been adopted
June 30, 2000 June 30, 2000
------------- -------------

Revenue $ 5,794 $ 6,786
Operating Expenses 21,217 21,217
Net Loss from Operations (15,423) (14,431)

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 and warrants. Diluted net
loss per share includes the dilutive effect of the assumed exercise of stock

6
<PAGE>

RESOURCEPHOENIX.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)

options using the treasury stock method. However, the effect of 3,049,000
outstanding stock options and 2,111,000 outstanding warrants have been excluded
from the calculation of diluted net loss per share as their inclusion would be
antidilutive.

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
from any of these legal proceedings will have a material effect on our financial
position or results of operations.

NOTE 5. GOING CONCERN

The Company will need to raise additional capital during the third
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 reduce expenditures for outside consulting
expertise. The company recorded a charge of approximately $800,000 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 third 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 an agreement with Torneaux Ltd. to provide us
with equity financing. (See Note 6 - Financing Arrangement with Torneaux Ltd.)
Our ability to raise funds through the equity facility with Torneaux is subject
to certain conditions at the time of each sale of our Class A common stock. We
may not be able to 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 filing a registration statement, our independent auditors,
Arthur Andersen LLP, reissued their auditors' report on our financial statements
for the year ended December 31, 1999. They modified 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,
recognizes substantial doubt about our ability to continue as a going concern.

7
<PAGE>
RESOURCEPHOENIX.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)

NOTE 6. FINANCING ARRANGEMENT WITH TORNEAUX LTD.

On June 6, 2000, we entered into a common stock purchase agreement with
Torneaux Ltd. Pursuant to the agreement, we may issue and sell, from time to
time, up to 7,000,000 shares of our Class A common stock, subject to the
satisfaction of certain conditions.

Beginning on the date a registration statement is declared effective by
the SEC, and continuing for 14 months thereafter, we may in our sole discretion
sell, or put, shares of our Class A common stock to Torneaux. The 14-month
period is divided into pricing periods, each consisting of 20 trading days on
the Nasdaq National Market.

From time to time during the 14-month term, we may make 12 monthly draw
downs, by giving notice and requiring Torneaux to purchase shares of our Class A
common stock, for the draw down amount. Torneaux's purchase price may fluctuate
based upon the daily volume weighted average price over a 20 day trading period.
Prior to each draw down, we will provide Torneaux with a notice that sets forth
the number of shares of Class A common stock we will sell, the commencement date
of the pricing period, and the threshold price, which is the lowest price per
share at which we will issue new shares of Class A common stock. We may issue a
draw down notice for up to $1,500,000 if the threshold price is equal to or
exceeds $1.00, and an additional $500,000 for every $1.00 increase of the
threshold price above $1.00 up to $21.00, for a maximum draw down amount of
$11,500,000. If we set the threshold price between $1.00 and $10.00, then the
purchase price to be paid by Torneaux is 94% of the daily volume weighted
average price over the pricing period. If we set the threshold price between
$10.00 and $21.00, then for each $1.50 increase in the threshold price above
$10.00, the purchase price to be paid by Torneaux is increased by 0.10%. If the
daily volume weighted average price on a given trading day is less than the
threshold price set by us, then the amount that we can draw down will be reduced
by 1/20 for that pricing period. In addition, if trading in our Class A common
stock is suspended for more than three hours in any trading day, then the daily
volume weighted average price for that trading day is deemed to be below the
threshold price and, consequently, reduces the draw down amount by 1/20.

On June 6, 2000, we also issued warrants to Torneaux 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. Torneaux may exercise the warrants through June 5,
2003. The first warrant, Warrant A, is immediately exercisable for 125,000
shares of Class A common stock. Thereafter, Warrant A is exercisable in
increments of 125,000 shares upon the sale of the 125,000 shares previously
issued. 500,000 shares of Class A common stock are issuable to Torneaux at $2.50
per share upon the exercise of Warrant A. Once all of the shares issued upon
exercise of Warrant A have been sold, then Warrant B may be exercised in
increments of 125,000 shares upon the sale of the 125,000 shares previously
issued. 500,000 warrant shares are issuable to Torneaux at $4.00 per share upon
the exercise of Warrant B. After the Warrant B shares have been sold, then
Torneaux may exercise Warrant C for up to 400,000 warrant shares at $6.00 per
share. Warrant C may be exercised in increments of 100,000 shares upon the sale
of the 100,000 shares previously issued. Upon the sale of all shares issued
under Warrant C, then Torneaux may exercise Warrant D for up to 400,000 shares
of Class A common stock at $7.00 per share. Warrant D may be exercised in
increments of 100,000 shares upon the sale of the 100,000 shares previously
issued. The warrants contain provisions that protect Torneaux against dilution
by adjustment of the exercise price and the number of shares issuable thereunder
upon the occurrence of specified events, such as a merger, stock split, stock
dividend, recapitalization and additional issuances of common stock. The
exercise price for the warrant shares is payable in cash.

8
<PAGE>

RESOURCEPHOENIX.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)

NOTE 7. DEBT FINANCING

On June 7, 2000, we entered into a line of credit, in the form of a
factoring arrangement, for up to $2,000,000 with Pacific Business Funding, a
division of Cupertino National Bank. Pursuant to the credit agreement, we may
borrow up to 80% against all eligible receivables due within 90 days, and we
will pay interest at a rate of 15% per annum on the average daily balance of the
amount borrowed, and an administration fee of 1/2% of the face amount of each
invoice financed. In addition, we paid a commitment fee of 1% of the commitment
amount. The line of credit is secured by our accounts receivable. Eligible
receivables are expected to yield actual borrowing capacity under the facility
in the $500,000 to $800,000 range over the balance of the calendar year.
Borrowings are made against specific receivables and then repaid as the
receivables are collected by the Company. As such, most borrowings are made and
repaid within the same month. The Company had a balance of $0.1 million and $0.1
million outstanding under the facility at June 30, 2000 and July 31, 2000,
respectively. In connection with the credit agreement, we issued a warrant to
Pacific Business Funding to purchase up to 85,715 shares of our Class A common
stock at $1.75 per share, which is the average closing price of our Class A
common stock on the Nasdaq National Market, for the five trading days prior to
Pacific Business Funding's credit commitment.

On June 23, 2000, our wholly owned subsidiary, ReSource/Phoenix, Inc.
entered into a senior loan and security agreement with Lease Management
Associates, Inc., or LMA, an affiliate of Gus Constantin, our Chairman, Chief
Executive Officer and majority stockholder, for a loan in the amount of
$3,000,000. The full amount of the loan was drawn down by the Company on June
23, 2000. During the term of the loan, we will make thirty-six monthly payments
of $90,000 and a final payment of $600,000. ReSource/Phoenix, Inc. granted LMA a
security interest in specific equipment, machinery, furniture and fixtures. The
interest rate on the loan is approximately 15% per annum. We issued a guaranty
to LMA in connection with the loan to our wholly owned subsidiary. In addition,
we issued a warrant to LMA to purchase up to 150,000 shares of our Class A
common stock at $2.07 per share.

9
<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 Financial Outsourcing services consisting
of outsourced hosting and application support (ASP) services as well as
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 performed 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
was renewed 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. 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

10
<PAGE>

accounting principle in accordance with Accounting Principles Board Opinion
("APB") No. 20, "Accounting Changes."

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 reclassified 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.

We also provide 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 conclusion reached by
the Emerging Issues Task Force (EITF) of the Financial Accounting Standards
Board (FASB) 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 conclusion is that SOP 97-2
only applies to hosting arrangements in which the customer has the contractual
right to take possession of the software at any time 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 data center, 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. General and administrative expenses include
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

11
<PAGE>

marketing and implementation personnel, travel expenses of 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 $5.3
million in the first six months of 1999, $2.9 million of which was recognized in
the second quarter of 1999.

Revenue and operating expense trends. On April 14, 2000 we announced
that our 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 defers revenue that would otherwise have been
reported during the current year.

In response to anticipated slower sales growth we initiated several
steps in late April to reduce our operating cost structure. Those steps
included, 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. Those steps, together with a
slower pace of staff additions in the client services areas, did reduce the
Company's cash operating requirements late in the second quarter. Despite these
steps we will continue to incur losses and negative cash flow over the next
several quarters.

Recent Developments Regarding Debt Financings

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<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.

<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------

2000 1999 2000 1999
--------- --------- -------- --------

% of % of Percent % of % of Percent
Revenue Revenue Change Revenue Revenue Change
--------- --------- -------- -------- -------- ---------

Consolidated Statements of Operations Data:

<S> <C> <C> <C> <C> <C> <C>
Revenue:
Contract service revenue............ 57.3% 33.7% 74.7% 52.3% 42.1% 74.1%
Contract service revenue-- affiliate 33.2 15.7 117.0 33.8 21.9 114.7
Software revenue.................... 9.5 50.6 80.8 13.9 36.0 (46.7)
--------- --------- -------- -------- -------- ---------

Total Revenue................. 100.0 100.0 2.3 100.0 100.0 39.2

Operating expenses:
Cost of providing services.......... 120.1 49.6 (147.8) 116.6 57.8 (180.8)
Cost of providing software revenue.. 10.2 8.1 (28.4) 10.6 9.6 (52.5)
General and administrative.......... 96.6 17.5 (462.9) 87.2 24.0 (405.7)
Research and development............ 28.0 25.0 (14.5) 31.0 32.5 (33.1)
Client acquisition costs............ 91.7 22.1 (325.3) 98.9 26.2 (426.1)
Depreciation and amortization....... 23.4 4.9 (386.9) 21.9 5.5 (456.1)
Stock-related compensation.......... - 105.5 100.0 - 127.2 100.0
-------- --------- -------- -------- -------- ---------

Total operating expenses...... 370.0 232.7 (62.6) 366.2 282.8 (80.3)

Loss from operations................... (270.0) (132.7) (108.1) (266.2) (182.8) (102.8)

Other income/(expense)........ 0.5 0.3 100.0 3.3 0.4 1,023.5
--------- --------- -------- -------- -------- ---------

Net loss before change in accounting
principle........................... (269.5) (132.4) (108.0) (262.9) (182.4) (100.7)
--------- -------- -------- -------- --------- ---------

Cumulative effect on prior years....... - - - (2.2) - (100.0)

Net loss .............................. (269.5)% (132.4)% (108.0)% (265.1)% (182.4)% (102.4)%
========= ========= ======== ======== ======== =========
</TABLE>

Second Quarter Comparison for 2000 and 1999

Revenue. Total revenue increased 2.3% or $63,000 for the three months
ended June 30, 2000 when compared with the same periods in 1999. The small
increase was a result of growth in our Financial Outsourcing service offering,
for both affiliate and non-affiliate clients, being largely offset by a decrease
in revenue from our software product.

Contract service revenue. Contract service revenue increased 74.7% or
$0.7 million for the quarter ended June 30, 2000 when compared with the same
period in 1999. The growth was primarily due to an increase in our Financial
Outsourcing business of $0.6 million. The higher revenue from Financial
Outsourcing was due to the net addition of 25 new clients between June 30, 1999
and June 30, 2000. Revenue from our S.T.A.R. service was $0.1 million higher
compared to the prior year due to the addition of one new client and increased
activity for existing clients.

Contract service revenue -- affiliate. Contract service revenue from
affiliates increased 117.0% or $0.5 million for the three months ended June 30,
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.

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<PAGE>

Software revenue. Software revenue decreased 80.8% or $1.1 million for
the quarter ended June 30, 2000 when compared with the same period in 1999. The
decrease was primarily due to the final installation and acceptance in June 1999
for some clients who had been in beta testing of our current M.A.R.S. product
released in March 1999. Revenue in the current period was derived from the sale
of additional licenses and services to existing clients, rather than the
addition of new clients, and higher maintenance revenue.

Cost of providing services. Cost of providing services increased 147.8%
or $2.0 million for the three months ended June 30, 2000 compared with the same
period in 1999. The increase was primarily due to the increase in full time and
contract personnel and related expenses to our operations and data center groups
since the second quarter of 1999. The increase in personnel was in support of
client additions and to prepare for anticipated growth in clients for our
Financial Outsourcing product offerings. Increased labor, labor-related benefit,
and contract labor expenses accounted for $1.5 million or 75% of the total
increase in our cost of providing services for the three months ended June 30,
2000, when compared with the same period in 1999.

Cost of providing software revenue. Cost of providing software revenue
increased 28.4% or $64,000 for the three months ended June 30, 2000 when
compared with the same period in 1999. The increase was due primarily to the
increase in M.A.R.S. clients from 8 as of June 30, 1999 to 10 at the end of the
second quarter of fiscal 2000.

General and administrative expenses. General and administrative
expenses increased 462.9% or $2.3 million in the second quarter of 2000 compared
with the same period in 1999. The increase was primarily due to the hiring of
additional management and administrative personnel to support our anticipated
growth. Included in the increase in expense was a one time charge of
approximately $800,000 associated with the cost reduction program initiated
during the second quarter. Excluding that charge, the increase in general and
administrative expense was $1.5 million for the three months ended June 30, 2000
compared with the same period in fiscal 1999.

Research and development expenses. Research and development expenses
increased 14.5% or $0.1 million for the three months ended June 30, 2000 when
compared with the same period of fiscal 1999. The increase was due primarily to
salary, benefit and contract service costs for staff added to develop
enhancements and new features to our M.A.R.S. software product and conduct
application development work for our Financial Outsourcing services. The company
capitalized approximately $0.3 million in development expenses during the second
quarter just ended related to a new version of the M.A.R.S. software that is
expected to be released during the third quarter.

Client acquisition expenses. Client acquisition expenses increased
325.3% or $2.0 million in the quarter ended June 30, 2000 compared with the same
period in fiscal 1999. The increase was due largely to incremental salary and
benefits expense of $1.1 million associated with hiring additional sales and
implementation personnel for our Financial Outsourcing services. Outside
consultant expenses incurred to support new Financial Outsourcing client
implementations increased $0.3 million over the prior year. 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
second quarter 2000 compared to the same period in 1999.

Six Month Comparison for Years 2000 and 1999

Revenue. Total revenue increased 39.2% or $1.6 million for the six
months ended June 30, 2000 when compared with the same period in 1999. The
increase was primarily due to growth in our Financial Outsourcing service for
both affiliate and non-affiliate clients offset by a decrease in revenues from
our software product.

14
<PAGE>

Contract service revenue. Contract service revenue increased 74.1% or
$1.3 million for the six months ended June 30, 2000 when compared with the same
period of fiscal 1999. Revenue from our Financial Outsourcing service
contributed $1.1 million of the increase with the balance coming from growth in
our S.T.A.R. offering. The higher revenue from Financial Outsourcing was due
primarily from client additions and, to a lesser extent, increased fees from
existing clients.

Contract service revenue -- affiliate. Contract service revenue from
affiliates increased 114.7% or $1.0 million for the six months ended June 30,
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 decreased 46.7% or $0.7 million for
the six months ended June 30, 2000 when compared with the same period in 1999.
The decrease was primarily due to the final installation and acceptance in June
1999 for some clients who had been in beta testing of our current M.A.R.S.
product released in March 1999. Revenue for the first six months of 2000 was
primarily related to the sale of additional licenses to existing clients, rather
than the addition of new clients, and higher maintenance revenue.

Cost of providing services. Cost of providing services increased 180.8%
or $4.4 million in the six months ended June 30, 2000 when compared with the
same period in 1999. The increase was primarily due to the increase in full time
and contract personnel and related expenses to our operations and data center
groups since the second quarter of 1999. Increased labor, labor-related benefit
and contract labor expenses accounted for $3.2 million or 72.7% of the increase
in our cost of providing services compared with the same period in 1999.
Expenses for general office expenses, travel and software maintenance costs
contributed most of the balance of the increase in cost over the prior year.

Cost of providing software revenue. Cost of providing software revenue
increased 52.5% or $0.2 million for the six months ended June 30, 2000 when
compared with the same period in 1999. The increase was due to the increase in
M.A.R.S. clients from eight as of June 30, 1999 to 10 at the end of the second
quarter of fiscal 2000 and to increased maintenance costs related to the client
base.

General and administrative expenses. General and administrative
expenses increased 405.7% or $4.1 million for the six months ended 2000 compared
with the same period in 1999. The increase was primarily due to the hiring of
additional management and administrative personnel to support our anticipated
growth. Included in the increase in expenses is a one time charge of
approximately $800,000 associated with the cost reduction program initiated
during the second quarter. Excluding those charges, the increase in general and
administrative expenses was $3.3 million for the six months ended June 30, 2000
compared with the same period in fiscal 1999.

Research and development expenses. Research and development expenses
increased 33.1% or $0.4 million for the six months ended June 30, 2000 when
compared with the same period of fiscal 1999. The increase was due primarily to
salary, related benefits and contract service costs for individuals hired 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
426.1% or $4.6 million for the six months ended June 30, 2000 compared with the
same period in fiscal 1999. The increase was due largely to incremental salary
and benefits expense of $2.3 million resulting from hiring additional sales and
implementation personnel for our Financial Outsourcing services. Outside
consultant expenses incurred supporting new Financial Outsourcing client
implementations increased $0.8 million over the same period in the prior year.
Other sales support costs, including higher advertising and promotional

15
<PAGE>

expenses, together with the opening of 14 regional sales offices, also
contributed to the higher costs incurred in 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 $2.9
million and $5.3 million in the three and six months ended June 30, 1999. We had
no stock-related compensation expense in the first six months 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. We 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.

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 June 30, 2000, we had approximately $4.2 million of cash and cash
equivalents. Net cash used in operating activities in the first six months of
2000 and 1999 was $12.7 million and $2.4 million, respectively. The increase in
cash used in operating activities in 2000 compared to 1999 was primarily the
result of higher net losses.

Net cash used in investing activities in first six months of 2000 and
1999 was $2.4 million and $1.5 million, respectively. The net cash used in
investing activities resulted primarily from capital expenditures for data
processing equipment, software, leasehold improvements and furniture and
fixtures. We expect to make additional capital expenditures for computer
hardware and software, equipment and fixtures to support the continued growth of
our operations.

Net cash provided by financing activities in the first six months of
2000 and 1999 was $3.5 million and $3.6 million, respectively. Net cash provided
by financing activities in 2000 resulted from proceeds from borrowings under the
company's credit arrangements, $3.1 million; and the purchase of shares under
certain employee benefit plans, $0.4 million. Net cash provided by financing
activities in 1999 was due to capital contributions from our then sole
stockholder.

16
<PAGE>

common stock on the Nasdaq National Market, for the five trading days prior to
Pacific Business Funding's credit commitment.

We will need to raise additional capital during the third quarter.
Subsequent to the end of the first quarter we began to implement a number of
steps aimed at reducing our operating costs. Those steps included, among other
things, staff reductions and the cessation of certain development efforts that
have reduced expenditures for outside consulting expertise. Despite these
efforts, we will continue to operate at a significant cash negative level. To
obtain additional financing, we entered into a common stock purchase agreement
with Torneaux. Our ability to raise funds pursuant to the agreement with
Torneaux requires an effective registration statement and is subject to certain
conditions at the time of each sale of our Class A common stock. We may not be
able to satisfy the conditions for each sale of our Class A common stock.

Recent Accounting Pronouncements

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 delayed the implementation date of SAB 101 for registrants
with fiscal years that begin after December 15, 1999 to the fourth quarter of
their fiscal year. We elected to implement SAB No. 101 the first quarter of
2000, the effect of which is described as follows:

Effective January 1, 2000, we deferred recognition of implementation
fees for our 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 and a reduction in revenue
from $6.8 million to $5.8 million in the first six months of fiscal 2000. Costs
related to client implementation activities are expensed as incurred.

In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. We
are required to adopt this statement in fiscal 2001. Because we do not currently
use any derivative instruments, we do not anticipate that the adoption of the
new statement will have a significant effect on our business or operating
results.

In December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and
SOP 98-4 extending the deferral of the application of certain provisions of SOP
97-2 as amended by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. We have adopted SOP
98-9 and it did not have a material effect on our operating results or financial
position.

17
<PAGE>

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.

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.

Risk Factors

We may not be able to continue operating our business if we do not satisfy all
conditions to our common stock financing with Torneaux Ltd.

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 June 30, 2000, we had
working capital of $0.7 million. On June 6, 2000, we entered into the common
stock purchase agreement with Torneaux Ltd. Our ability to raise funds through
the agreement is subject to the satisfaction of certain conditions at the time
of each sale of Class A common stock to Torneaux. We may not be able to satisfy
the conditions to the initial sale and subsequent sales to Torneaux under the
agreement. If this occurs, we would not be able to sell the full 7,000,000
shares to Torneaux pursuant to the agreement, 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. If
we do not have sufficient cash to continue operating our business, our
shareholders could lose substantially all, if not all, of their investment in
our company.

Stockholders may experience significant dilution from our sale of shares to
Torneaux Ltd. under the common stock purchase agreement and warrants.

The sale of our Class A common stock to Torneaux under the common stock
purchase agreement and warrants will have dilutive effect on our stockholders.
The number of shares that we issue to Torneaux upon a draw down is based upon
the daily weighted average market price of our stock over a 20-day trading
period. As the market price declines, the number of shares which may be sold to
Torneaux will increase. If we put shares to Torneaux at a time when our stock
price is low, our stockholders would be significantly diluted. In addition, the
perceived risk of dilution by Torneaux and our other stockholders may cause them
to sell their shares, which could further decrease the market price of our
shares. Furthermore, the significant downward pressure on the market price of
our shares could encourage Torneaux and other stockholders to engage in short
sales of our shares, which would cause our stock price to decline even further.
Torneaux's resale of our Class A common stock will increase the number of our
publicly traded shares, which could also lower the market price of our Class A
common stock.

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

Even if we satisfy the conditions to the initial sale and subsequent
sales under the common stock purchase agreement, we may have to raise additional
money from other sources in the future. Because the price at which we would sell
stock to Torneaux under the agreement will depend on the prevailing market price
of our Class A common stock over the 14 month term of the agreement, we cannot

18
<PAGE>

predict the amount of proceeds we would receive under the agreement. Due to
price fluctuations, we may receive less proceeds than we need to fund our
operations until we achieve 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 $38.5 million for the period from January 1, 1997, the
date on which we began operations as a separate company, through June 30, 2000,
and reported net cash used in operating and investing activities of $35.3
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
raised under the common stock purchase agreement with Torneaux. 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.

Our independent auditors, Arthur Andersen LLP, reissued their auditors'
report on our financial statements for the year ended December 31, 1999. They
modified 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.

We cannot assure you that the conditions that raise substantial doubt
about our ability to continue as a going concern will not persist. As a result,
we cannot assure you that Arthur Andersen's report on our future financial
statements will not include a similar modification. This situation 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 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. Any

19
<PAGE>

significant decrease in the trading price of a company's stock can prompt
shareholders and securities class action attorneys to file lawsuits against the
company and those who control the company, regardless of the merits of such
lawsuits. Any such lawsuits, regardless of the outcome, can significantly
distract management, cause the company to incur significant defense costs and
impair the company's reputation, all of which could materially and adversely
affect the company's stock price.

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;

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 $1.25 and
$25.37 since our initial public offering in October 1999 through June 30, 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 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;

20
<PAGE>

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
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.

21
<PAGE>

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, for many reasons including acquisition and the client's financial
instability. In the six months ended June 30, 2000, we lost three clients. If we
experience greater than expected client turnover, either because our clients are
acquired, cease operations or for any other 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 six months ended June 30, 2000, we derived approximately 67%, 50%
and 19%, respectively, of total revenue from our S.T.A.R. services. For the
years 1998, 1999 and the six months ended June 30, 2000, we derived
approximately 1%, 25% and 14%, 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 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 six months ended June 30, 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:

22
<PAGE>

Six Months Ended
June 30, Year Ended December 31,
-------- -----------------------
2000 1999 1998
---- ---- ----
Phoenix Leasing (an affiliate) 27% 24% 41%
GE Capital Aviation Services/PIMC 8% 9% 20%
John Hancock Advisors -- 16% --
Total of ten largest clients combined: 69% 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
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

23
<PAGE>

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 14% of our revenues from licensing our
M.A.R.S. software product during the six months ended June 30, 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.

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., 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;

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

24
<PAGE>

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.

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

In mid-1999, we began to aggressively expand our operations. Although
we terminated a number of employees and closed several offices beginning in
April 2000, 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

25
<PAGE>

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.

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.

26
<PAGE>

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. If we issue the full 7,000,000 common
shares to Torneaux and if Torneaux exercises all of the warrants that we have
issued to them, Mr. Constantin will still control 73.4% 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 will have 26.6% of the
combined voting power of both classes of our common stock if we issue the full
7,000,000 common shares to Torneaux and if Torneaux exercises all of the
warrants that we have issued to them. 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;

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.

27
<PAGE>

Item 3. Quantitative and Qualitative Disclosures about 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 June 30, 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 $6.6 million and
approximately $14.9 million for general corporate purposes, including working
capital.

On June 6, 2000, we entered into a stock purchase agreement pursuant to
which we may put up to 7,000,000 shares of Class A common stock to Torneaux Ltd.
In addition, we issued warrants to Torneaux Ltd. 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. The foregoing transactions were made in reliance on Section
4(2) of the Securities Act as a transaction not involving any public offering.

On June 6, 2000, we issued a warrant to Peter Benz to purchase up to
75,000 shares of our Class A common stock. The foregoing issuance was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.

On June 7, 2000, we entered into a line of credit, in the form of a
factoring arrangement, for up to $2,000,000 with Pacific Business Funding, a
division of Cupertino National Bank. Pursuant to the credit agreement, we issued
a warrant to Pacific Business Funding to purchase up to 85,715 shares of our
Class A common stock at $1.75 per share. The foregoing issuance was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.

On June 23, 2000, we entered into a senior loan and security agreement
with Lease Management Associates, Inc., or LMA, an affiliate of Gus Constantin,
our Chairman, Chief Executive Officer and majority stockholder, for a loan in
the amount of $3,000,000. Pursuant to that agreement, we issued a warrant to LMA

28
<PAGE>

to purchase up to 150,000 shares of our Class A common stock at $2.07 per share.
The foregoing issuance was made in reliance on Section 4(2) of the Securities
Act as a transaction not involving any public offering.

On July 7, 2000, the Company entered into an agreement with Continental
Capital & Equity Corporation, or CCEC, wherein CCEC has agreed to provide us
with services in the area of investor relations. As part of the consideration
for such services, we issued a warrant for 200,000 shares of our Class A common
stock at exercise prices ranging from $2.50 to $5.50 per share. The foregoing
issuance was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.

Item 3. Defaults Upon Senior Securities

None.

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

At our Annual Meeting of Shareholders held on May 19, 2000, the
following proposals were adopted by the margins indicated:

1. To elect a Board of Directors to hold office until the next annual
meeting of shareholders and until their successors are elected and qualified.

Number of Shares
----------------
For Withheld
--- --------
Class A Common Stock
--------------------
Gus Constantin 3,408,421 33,855
James Barrington 3,410,561 31,715
Glen McLaughlin 3,410,676 31,600
Roger Smith 3,410,676 31,600

Class B Common Stock
--------------------
Gus Constantin 7,172,000 0
James Barrington 7,172,000 0
Glen McLaughlin 7,172,000 0
Roger Smith 7,172,000 0

2. To approve an amendment to the Restated 1999 Stock Plan to increase
the number of shares of Class A Common Stock available for grant.

Class A Common Stock
--------------------
For: 1,270,856
Against: 661,765
Abstain: 0
Broker Non-Vote 1,509,655

Class B Common Stock
--------------------
For: 7,172,000
Against: 0
Abstain: 0
Broker Non-Vote 0

29
<PAGE>

3. To ratify the appointment of Arthur Andersen LLP as independent
auditors for the current fiscal year.

Class A Common Stock
--------------------
For: 3,435,876
Against: 4,100
Abstain: 2,300
Broker Non-Vote 0

Class B Common Stock
--------------------
For: 7,172,000
Against: 0
Abstain: 0
Broker Non-Vote 0

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

None.

b. Reports on Form 8-K

We filed a Report on Form 8-K dated April 25, 2000 relating to
a press release dated April 19, 2000 announcing the resignation of Bryant Tong
as President and Chief Operating Officer and as a member of the Board of
Directors.

30
<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
---- ----- ---------

August 14, 2000 President /S/ W. COREY WEST
--------------- (Principal Executive Officer) -----------------
(W. Corey West)

August 14, 2000 Chief Financial Officer /S/ GREG THORNTON
--------------- (Principal Accounting Officer) -----------------
(Greg Thornton)