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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

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

                                   FORM 10-K


       [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended December 31, 1999

                                      OR

       [ ]     TRANSITION REPORT PURSUANT TO SECTON 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                       Commission File Number 000-27945

                               ASD SYSTEMS, INC.
            (Exact name of Registrant as specified in its charter)

          Texas                                              75-2737041
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

3737 Grader Street, Suite 110, Garland, Texas                  75041
(Address of principal executive offices)                     (Zip Code)

       Registrant's telephone number, including area code: 214.348.7200
                             --------------------
       Securities registered pursuant to Section 12(b) of the Act:  None

 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
                                 value $.0001
                             --------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
  Yes  [X]     No  [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.         [ ]

At February 29, 2000, the aggregate market value of the voting stock held by
non-affiliates was approximately $59,991,296.

At February 29, 2000, 21,097,400 shares of common stock were outstanding.
                              -----------------
                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the Annual Meeting of Stockholders to be held May 12, 2000
are incorporated by reference into Part III.
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                               ASD SYSTEMS, INC.

                                   FORM 10-K

                  For the Fiscal Year Ended December 31, 1999

                               Table of Contents

                                                                            Page
                                                                            ----
                                    PART I.

Item 1.    Business........................................................   1

Item 2.    Properties......................................................  10

Item 3.    Legal Proceedings...............................................  10

Item 4.    Submission of Matters to a Vote of Security Holders.............  10

                                   PART II.

Item 5.    Market for Registrant's Common Equity and Related Stockholder
           Matters.........................................................  11

Item 6.    Selected Financial Data.........................................  15

Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.......................................  17

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk......  33

Item 8.    Financial Statements and Supplementary Data.....................  34

Item 9.    Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure.............................  57

                                   PART III.

Item 10.   Directors and Executive Officers of the Registrant..............  57

Item 11.   Executive Compensation..........................................  57

Item 12.   Security Ownership of Certain Beneficial Owners and
           Management......................................................  57

Item 13.   Certain Relationships and Related Transactions..................  57

                                   PART IV.

Item 14.   Exhibits, Financial Statement Schedules, and Reports
           on Form 8-K.....................................................  58


Signatures  ...............................................................  59

                                       i
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                                    PART I.

ITEM 1.  BUSINESS

          The following discussion of our business contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth below
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risks Related to Our Business," "--Risks Related to Our Industry"
and "--Other Risks," as well as elsewhere in this Form 10-K.

General

          ASD Systems, Inc. offers software and service solutions that enable
Internet retailers and direct marketing businesses to outsource their order
management and fulfillment operations. Fulfillment operations, which are
conducted at warehouses and other types of facilities, include all of the
activities necessary to pick, pack and ship a customer's order. Our systems
automate and integrate in real-time Web sites, call centers, fulfillment centers
and vendors. We have assembled a network of call centers and fulfillment centers
which, as of February 29, 2000, consisted of one company-owned call center, four
third-party call centers, one company-owned fulfillment center and seven third-
party fulfillment centers. Our network can increase or decrease in size and
services offered to meet the specific needs of our clients. Our systems and
services offer our clients an alternative to the costs, complexities and risks
associated with developing and maintaining these commerce-related operations in-
house. Our systems and services are priced on a per-transaction basis, reducing
our clients' initial infrastructure costs and speeding their time to market,
while providing us with recurring revenue.

          Our systems integrate multiple sales channels, including Web sites and
call centers, thus giving our clients' customers greater control over their
shopping experience. The customer can research products, access real-time item
availability and pay for the order through either a Web site or by calling a
customer service representative in any of our integrated call centers. The
customer can then either visit the Web site or call an 800 number for customer
service or real-time order status, regardless of how the order was originally
entered. Once the order is placed, our systems route the order to the
fulfillment center closest to the customer or drop-ship vendor, reducing
shipping costs and time-in-transit. For clients that have retail stores, we
expect to expand the functionality of our systems to further enhance the
shopping experience by integrating the stores into our systems. We anticipate
that this integration will give our clients' customers the added option of
confirming availability and price at the closest retail store.

          The order management and fulfillment business currently operated by us
was commenced in January 1995 by Athletic Supply of Dallas, Inc. Athletic Supply
of Dallas, Inc. was a direct marketing cataloger for a variety of sports
merchandise, including licensed sports products of the NFL, NHL, NBA and Major
League Baseball and the Sears "My Team" catalogs. In January 1995, Athletic
Supply of Dallas began providing order management and fulfillment services
relating to the Craftsman Power and Hand Tool and Home Healthcare catalogs using
the proprietary software that had been developed for its own catalog operations.
On December 20, 1996, Athletic Supply of Dallas, Inc. was sold, in its entirety,
to Genesis Direct, Inc. On October 14, 1997, ASD Partners, Ltd., a limited
partnership controlled by Norman Charney (our Chairman and Chief Executive
Officer), acquired all of the software, the call center and fulfillment center
assets and the Sears contracts previously owned by Athletic Supply of Dallas
from Genesis Direct, Inc. Effective January 1, 1998, ASD Partners, Ltd.
transferred this business to ASD Systems, Inc. in connection with our conversion
into a corporation.

          Our principal executive offices are located at 3737 Grader Street,
Suite 110, Garland, Texas 75041 and our telephone number at this location is
214.348.7200.

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<PAGE>

The ASD Systems Solution

          Traditionally, Internet retailers and direct marketing companies have
had two alternatives when developing order management and fulfillment
operations:

 .         In-House Alternative. First, these enterprises could develop the
          necessary operations in-house. This approach, however, has been
          generally complicated by significant initial and continuing costs and
          delayed time to market. In addition, most in-house operations do not
          provide real-time systems integration or an infrastructure that can
          expand or contract on demand.

 .         Traditional Outsourcing Alternative. Secondly, Internet retailers and
          direct marketing companies could choose to outsource their commerce-
          related operations. In these situations, companies have traditionally
          sought solutions from a variety of service providers including
          software companies, technology consultants, call centers, fulfillment
          centers and Web developers. However, the ability to provide and
          integrate these functions has typically been beyond the capabilities
          of most single-function service providers and has therefore required
          companies to outsource their operations to multiple nonintegrated
          providers.

          We believe that our solution offers the following benefits to Internet
retailers and direct marketing companies for outsourcing their commerce-related
operations:

 .         Cost savings and faster time to market. By outsourcing their commerce-
          related operations to us, our clients avoid the significant initial
          and ongoing capital investments associated with acquiring and
          maintaining the necessary systems and facilities. Because our clients
          pay for our services as they are needed, their operating costs are
          generally lower and more predictable. Additionally, our network of
          strategically located fulfillment centers allows our clients to reduce
          shipping costs and decrease time in transit by shipping from multiple
          locations. Furthermore, our systems and services permit businesses to
          expand their existing operations or enter into new markets on an
          accelerated time frame by eliminating the time they would require to
          develop their own commerce-related operations.

 .         Comprehensive and reliable outsourced operations. Using our systems,
          we actively manage and integrate in real-time Web sites, call centers,
          fulfillment centers and vendors. We believe that a single source
          solution provides our clients with greater efficiency, higher customer
          service levels and greater management control. We believe that the
          comprehensive nature of our solution allows our clients to remain
          focused on their core competencies.

 .         Capacity that can expand and contract with the clients' changing
          needs. Our systems and network of call centers and fulfillment centers
          can increase or decrease in size and services offered to meet our
          clients' changing requirements. We maintain relationships with
          multiple third-party call centers and fulfillment centers that have
          been integrated with our systems to provide our clients with the
          ability to expand and contract their operations as necessary. We
          enhance this network of service providers as necessary to support the
          requirements of our clients. We also ship from additional warehouses
          that are owned by, or under contract with, our clients. Our systems
          can also be expanded to support our network as needed. We believe that
          our clients directly benefit from our flexible solution because they
          are ensured of the appropriate processing capacity at each stage of
          their business life cycle.

 .         High levels of customer service. One of our service objectives is to
          differentiate our clients by enabling them to provide high levels of
          customer service. Toward that end, we recently instituted a Best
          Practices Initiative to review and improve our customer service levels
          on an ongoing basis. Our systems are designed to allow our clients'
          customers to access inventory availability, order status details and
          delivery information through either a call center representative or
          the client's Web site. At engagement, each client is assigned an
          account team consisting of technical, systems and customer support
          personnel. Through these processes, we work with the client as
          requested to customize our services and systems in order to create a
          feature set that meets the client's needs, including the ability to
          control inventory, service its customers and maintain the efficiency
          of their commerce-related operations.

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Our Services

          Our systems and services allow our clients to outsource some or all of
their commerce-related operations. We typically charge on a per-transaction
basis for systems processing, on a per-minute basis for call center services and
on a per-item basis for fulfillment services. Additional fees are billed for
other services.

          Systems Services

          Our systems support and integrate order capturing, processing and
fulfillment. We do not sell or license our software on a stand-alone basis;
rather, we install and operate our systems as a service. Our systems services
include customizing our software solution to meet the clients' needs,
integrating applications, managing data centers and supporting networks for our
clients. Our systems also form the foundation for our expandable call center and
fulfillment center services. While some of our clients use their own call center
services or fulfillment center services, all of our clients use our systems
services.

          We have invested significant resources in developing and improving the
proprietary software currently used by us in our operations. This application
automates and integrates each of the key commerce-related operations and
consists of the following three modules:

<TABLE>
<CAPTION>
        Order-entry module                         Processing module                         Fulfillment module
----------------------------------            ----------------------------              ----------------------------
<S>                                           <C>                                       <C>
 .  Order entry through both Web               .  Order routing                          .  Inventory control and
   sites and call centers                     .  Credit card processing                    replenishment
 .  Customer service from both Web             .  Back order processing                  .  Purchase order management
   sites and call centers                     .  Payment settlement                     .  Invoice generation
                                              .  Forecasting                            .  Pick, pack and ship processing
                                                                                        .  Manifest generation
                                                                                        .  Returns processing
</TABLE>

          Our systems also integrate vendors using online or electronic data
interchange capabilities. As a result, our systems provide access to both order
and inventory status. In addition, our systems generate summary reports for our
clients that are posted on the Internet so that they may be retrieved from
remote and multiple locations.

          Our payments processing services support both traditional call center
payment processing as well as Web site payment processing. We also handle credit
denials. We provide the systems module and conduct and manage the payment
processing function.

          Our data center supports around-the-clock systems hosting and
maintenance and has a help desk for clients' inquiries. Certain systems
installations also have built-in redundancy that enables remote call centers and
fulfillment centers to remain fully operable should connectivity be lost.

          Call Center Services

          Our call center services include both order acquisition and post-sale
customer support. At February 29, 2000, our call center network was comprised of
one company-owned call center and four third-party call centers. Three of the
third-party call centers in our network traditionally have been dedicated to
servicing the needs of our largest client. We contract with third-party call
centers that meet our criteria of service standards, financial stability,
available capacity and systems compatibility. The third-party call centers use
our call center software and are integrated into our network. As a result, our
third-party call centers are able to provide customers with real-time customer
support -- regardless of whether the order originated in that call center, in
another call center or over the

                                       3
<PAGE>

Web. Each third-party call center is evaluated, trained and continuously
monitored by us to ensure that it adheres to the standards established by us and
our clients. The involvement of our third-party call centers in servicing a
client is transparent because each is fully integrated and each provides the
same high standards of service.

          Our call-center network can be expanded and customized to meet the
particular service needs and capacity requirements of Internet retailers and
direct marketing companies. Our network can either provide supplementary call
center services for clients whose centers are running at capacity or can support
the entire call center needs for our clients. Our call center services are
available 24 hours per day, 365 days per year.

          Our internal call center handled approximately 57% of all calls
received during the year ended December 31, 1999, and our network of third-party
call centers handled the remaining 43% of calls received during that period. We
anticipate that the percentage of calls handled by our internal call center will
decrease over time if the demand for our services increases and we add
additional third-party call centers to our network.

          Fulfillment Services

          At February 29, 2000, our fulfillment center network was comprised of
one company-owned fulfillment center and seven third-party fulfillment centers.
One of the third-party fulfillment centers in our network traditionally has been
dedicated to servicing the needs of our largest client. We contract with third-
party fulfillment centers that meet our criteria of service standards, financial
stability, available capacity and system compatibility. Our third-party
fulfillment network can expand as our clients' needs grow. At February 29, 2000,
we maintained relationships with third-party fulfillment centers located in
Sparks, Nevada; Indianapolis, Indiana; Harrisburg, Pennsylvania; Atlanta,
Georgia; Los Angeles, California; and two centers in Chicago, Illinois. This
network of third-party fulfillment centers allows our clients to reduce shipping
costs and decrease time in transit by shipping from multiple locations. When an
order is entered either through a Web site or call center, our systems locate
the fulfillment center closest to the customer that has the item in stock.
Consequently, the customer gets the order more quickly without paying a premium
for delivery.

          Our third-party fulfillment centers are fully integrated into our
systems. Therefore, these fulfillment centers are capable of facilitating real-
time fulfillment, order status, inventory allocations and physical inventory
counts. Each third-party fulfillment center is evaluated, trained and
continuously monitored by us to ensure that it adheres to the standards
established by us and our clients. As with our network of third-party call
centers, a third-party fulfillment center's involvement in servicing a client is
transparent because each is fully integrated and each provides the same high
standards of service.

          Our third-party fulfillment center network can be expanded and
customized to meet the particular service needs and capacity requirements of our
clients. Our fulfillment centers:

          .    facilitate real-time order tracking;

          .    accommodate semi- and fully-automated picking methods;

          .    offer specialized services such as customized packaging, gift
               wrapping and product personalization;

          .    integrate with various shipping carriers; and

          .    provide inventory management services such as purchasing,
               receiving, returns processing and replenishment.

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<PAGE>

          Our fulfillment services are designed to assist our clients in
achieving their objectives for inventory levels and initial fill rates. Initial
fill rates are the rates at which inventory is in stock when a customer first
orders the item. Our solutions provide access to a team of experienced inventory
managers who are available to ensure that product is available for order
fulfillment. The account managers use our systems to streamline inventory
replenishment, thereby minimizing back orders.

          Our internal fulfillment center handled approximately 50% of all items
shipped during the year ended December 31, 1999, and our network of third-party
fulfillment centers handled the remaining 50% of items shipped during that
period. We anticipate that the percentage of items shipped by our internal
fulfillment center will decrease over time if the demand for our services
increases and we add additional third-party fulfillment centers to our network.

          Other Services

          Client management.  Each client is assigned an account team consisting
of account managers, data administrators, programmers and one or more help desk
representatives. In addition, technical support is provided by our data center,
which monitors network operations 24 hours per day, 365 days per year. This team
ensures that client requests are met promptly and issues are resolved as quickly
as possible. Our account team is responsible for meeting with clients'
management on strategic planning issues, such as improving inventory turns and
generating cross-sell opportunities. Our client services team is experienced in
direct marketing operations and applies its collective experience and knowledge
to improving each client's operations.

          Web site related services.  We also provide Web site design and
hosting services in addition to our systems services. Traditionally, we have
partnered with a third-party Web design firm when necessary.

          Consulting services.  We offer consulting services on an as-needed
basis to potential clients to help them understand and define their order
management and fulfillment needs and to demonstrate how our services and systems
could support those needs.

Client Relationships

          For the fiscal years ended December 31, 1998 and December 31, 1999,
Sears, our largest client, accounted for approximately 84% and 54% of our gross
revenues, respectively. The termination by one or any number of our clients, or
the failure by our clients to renew the terms of their contracts, may have a
material adverse effect on our business, including our financial performance and
revenue stream, or may result in the loss of an important client reference. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Risks Related to Our Business -- Sears currently represents a
significant majority of our business and our success depends in part on our
ability to retain them as a client" and "-- Our significant client contracts are
either short-term or terminable with minimal notice."

          Since October 1, 1999, our business relationships with four clients
have terminated. The loss of these clients will result in the loss of recurring
revenues previously expected from them. Furthermore, these terminations have
resulted in certain increased bad debt expense and settlement costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Collection of Accounts Receivable." For the year ended December
31, 1999, total revenues generated from terminating clients amounted to
approximately 36% of gross revenues during that period. e4L, Inc. and The
Original Honey Baked Ham Company of Georgia, Inc., two of such terminating
clients, accounted for approximately 22% and 9%, respectively, of total revenues
for the year. No other terminating client accounted for 5% or more of our total
revenues for the year ended December 31, 1999. Partly in response to these
terminations, we have implemented a Best Practices Initiative to review and
improve our customer service levels on an ongoing basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-- Risks
Related to Our Business -- The recent loss of certain clients will result in the
loss of recurring revenue from these clients," "-- We may not be able to satisfy
the unique and sophisticated requirements of our clients" and "--Our contracts
may be terminated and we may be exposed to potential liability for actual or
perceived failure to provide required services."

                                       5
<PAGE>

Sales and Marketing

          Sales Strategy

          Direct sales channel.  A majority of our sales and marketing efforts
are focused on our direct sales channel, which we have identified to include
Internet retailers and direct marketing companies. Within this channel, we
believe that Internet retailers will provide us with the greatest opportunity
for growth. We intend to add additional sales professionals to our sales
organization during 2000. In this regard, we are actively conducting a
nationwide search for an Executive Vice President - Sales to assume
responsibility for our direct sales channel. As of February 29, 2000, we had a
sales organization consisting of 11 sales professionals with an average of more
than 10 years of sales experience. As of February 29, 2000, we also maintained
two additional senior outside sales consultants to supplement our sales force.

          Indirect sales channel.  We are also committed to expanding our
indirect sales channel by forming additional relationships with Web developers,
systems integrators, Internet consultants, technology companies, call centers
and fulfillment centers:

          .    Web developers. We believe that our comprehensive service
               offering strongly complements a Web developer's efforts and
               capabilities. While a Web developer specializes in front-end Web
               design and marketing, we specialize in providing the order
               management and fulfillment systems and services supporting the
               commerce-related operations.

          .    Systems integrators and Internet consultants. We believe that
               systems integrators and Internet consultants are actively seeking
               outsourcing solutions to support their clients' operations. As a
               result, we anticipate that these entities will find our
               comprehensive service offering an attractive alternative.

          .    Technology companies. We believe that there are numerous software
               companies, Web-hosting companies, Internet service providers and
               value-added resellers targeting our potential clients. We believe
               that we can assist these enterprises in differentiating
               themselves from their competitors by providing additional
               services to complete their proposed solutions.

          .    Call centers and fulfillment centers. We anticipate that our
               network of call centers and fulfillment centers will provide us
               with significant opportunities for expanding sales in the future.
               Because each of our third-party service providers is familiar
               with our proprietary systems and level of service, we believe
               that they will be more likely to recommend our complete set of
               services to their clients.

          Marketing Strategy

          Our primary marketing goal is to identify and target executives of
potential clients that have authority over their respective company's electronic
commerce initiatives and order management and fulfillment operations. Initial
sales activities typically include a demonstration of our capabilities followed
by one or more detailed technical reviews.

          We use a variety of marketing programs to build market awareness of
our brand name and our systems and services. A broad mix of programs is used to
accomplish these goals, including:

          .   advertising;

          .   direct mail campaigns;

          .   technology and strategy updates with industry analysts;

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          .   public relations activities;

          .   relationship marketing programs;

          .   seminars, trade shows and speaking engagements; and

          .   Web site marketing.

          Strategic Business Alliances

          A critical element of our sales and marketing strategies is to engage
in strategic business alliances to assist in marketing, selling and developing
client applications. This approach is intended to:  (1) increase the number of
personnel available to perform application design and development services for
our clients; (2) enhance our market credibility, potential for lead generation,
and access to large accounts; and (3) provide additional marketing and technical
expertise in certain vertical industry segments. We recently announced the
hiring of a Vice President of Business Partnerships to oversee these operations.

          We expect that many of our strategic partners will have numerous
strategic relationships and there can be no assurance that any of our strategic
partners will regard their relationships with us as significant to their own
businesses or that they will regard it as significant in the future. In
addition, there can be no assurance that any strategic partners will not pursue
other partnerships or relationships or attempt to develop or acquire products or
services that compete with us, either on their own or in collaboration with
others, including our competitors.

Technology

          We have made substantial investments in the development of our
proprietary software. For the year ended December 31, 1998, we incurred
approximately $1.0 million of software development expense and for the year
ended December 31, 1999, we incurred an additional $789,000 of such costs which
have been capitalized in 1999. Prior to January 1, 1999, all software
development costs were expensed as incurred.

          Management of the company is considering several strategies concerning
our software technology assets to achieve improved customer service capabilities
in our existing market and enable future entry into potential new markets. We
are currently conducting an ongoing extensive evaluation of possible strategic
technology alliances with third parties to supplement, extend or supplant our
current software. Moreover, we are considering proposals to accelerate the
development of our "Mercury" next generation software technology through a sale
or other partnership involving the project. The intent of these proposals is to
provide dedicated management attention, more attractive equity incentives to key
technical employees and increased investment capital in order to realize the
full potential of "Mercury." The combination of these actions should improve our
long-term competitive position and accelerate the introduction of new software
and service capabilities. In each case, our objective will be to ensure that our
service solution is capable of meeting or exceeding industry standards by taking
advantage of new and emerging technologies, although no assurances can be given
that we will be successful in this regard.

          If we are unable, for technical or other reasons, to develop and
introduce enhancements of existing products and services in a timely manner in
response to changing market conditions or client requirements, our business,
prospects, financial condition and results of operations will be materially
adversely affected.

Acquisition Strategy

          Our strategy for growth includes both internal development of our
operations and strategic business transactions. The goal of our acquisition
strategy is to accelerate market penetration, build upon our core competencies
and expand our technology infrastructure. We intend to target acquisition
candidates based on their fit into our overall business plan with a particular
focus on technology base. We expect that a successful acquisition program will
permit us to leverage our existing infrastructure, accelerate market
penetration, open new markets and gain established customer relationships as
well as provide additional capabilities.

                                       7
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          There can be no assurance that any future acquisition or business
combination will be completed or that, if completed, any such acquisition will
be effectively assimilated into our business. Acquisitions involve numerous
risks, including, among others, loss of key personnel, the difficulty associated
with assimilating the personnel and operations of the acquired company, the
potential disruption of our ongoing business, the maintenance of uniform
standards, controls, procedures and policies and the impairment of our
reputation and relationships with clients and employees. In addition, any future
acquisitions could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities and amortization expenses related
to goodwill and other intangible assets, any of which could have a material
adverse effect on our business, operating results or financial condition.

Competition

          The markets in which we operate are characterized by intense
competition from several types of service providers, including call centers
(such as West TeleServices Corporation; Matrixx Marketing, Inc.; and APAC
TeleServices, Inc.); systems integrators (such as EDS; Perot Systems Corporation
and Andersen Consulting); software providers (such as Smith Gardner and
Associates, Inc.; CommercialWare, Inc.; Ariba, Inc.; Commerce One, Inc.; and
IBM); traditional fulfillment companies (such as GENCO Distribution System and
ODC Integrated Logistics); outsourcing divisions of direct marketing companies
(such as Keystone Fulfillment, Inc. and Fingerhut Companies, Inc.); order
processing companies (such as Order Trust) and electronic commerce service
providers (such as ComAlliance; PFSWeb; SubmitOrder.com; ClientLogic; Digital
River, Inc.; Pandesic LLC and INTERSHOP Communications, Inc.). Our competitors
may also operate in areas not identified above. We expect there are other
competitors that we have not identified. We believe that we compete with these
and our other competitors on the basis of our technical capabilities, scope of
service, industry experience, past contract performance, service level and
price.

          We expect to face further competition from new market entrants and
possible alliances between competitors in the future. In particular, we believe
that traditional catalog companies looking to fully utilize excess capacity by
outsourcing may enter the market and provide competition in the future. Certain
of our current and potential future competitors have greater financial,
technical, market and other resources than we do. As a result, these competitors
may be able to respond more quickly to new or emerging technologies and changes
in client requirements or to devote greater resources to the development,
promotion and sales of their services than we can.

          There can be no assurance that we will be able to compete successfully
with existing or new competitors or that competition will not have a material
adverse effect on our business, financial condition and operating results.

Intellectual Property

          We rely on a combination of copyrights, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect the
proprietary rights of our software and services. However, we will not be able to
protect our intellectual property if we are unable to enforce our rights or if
we do not detect unauthorized use of our intellectual property. In addition,
these legal protections only provide us with limited protection. If we litigate
to enforce our rights, it would be expensive, divert management resources and
may not be adequate to protect our business. Our inability to protect our
proprietary technology could have a material adverse effect on our business,
prospects, financial condition and results of operations.

          We have not filed any United States patent applications with respect
to our order management systems, nor do we have any patent applications pending.
As a result, we currently do not have patented technology that would preclude or
inhibit competitors from entering our market. Moreover, none of our technology
is patented abroad, nor do we currently have any international patent
applications pending. As of February 29, 2000, we had not secured registration
on any of our service marks in the United States nor had we pursued registration
in any foreign country. We cannot be certain that any future patents, registered
trademark or registered service marks, if any, will be granted or that any
future patent, trademark or service mark will not be challenged, invalidated or
circumvented, or that rights granted under any patents, trademarks or service
marks that may be issued in the future will actually provide a competitive
advantage to us.

                                       8
<PAGE>

          We generally enter into confidentiality agreements with our employees
and consultants and with our clients and corporations with whom we have
strategic relationships. We attempt to maintain control over access to and
distribution of our software documentation and other proprietary information.
However, the steps we have taken to protect our technology and intellectual
property may be inadequate. Our competitors may independently develop
technologies that are substantially equivalent or superior to ours or may have
jointly developed such technologies under agreements giving them co-equal rights
to exploit those technologies.

          The ASD Systems name and logo, "From Click to Consumer" and "The
Ultimate Shopping Experience" are trademarks, registered trademarks, service
marks or registered service marks of ASD Systems.

Employees

          As of February 29, 2000, we had a total of 444 employees. Of the total
employees, 11 were in sales and marketing, 205 were in call center operations,
26 were in finance and administration, 14 were in software development, 126 were
in customer and software support and 62 were in fulfillment. Our employees are
not represented by any collective bargaining unit, and we have never experienced
a work stoppage. We believe our relations with our employees to be good. From
time to time, we also employ independent contractors to support our professional
services, product development, sales, marketing and business development
organizations.

          Our future success will depend, in part, on our ability to attract,
retain and motivate highly qualified technical and management personnel for whom
competition is intense. As part of our retention efforts, we work to minimize
turnover of key employees by emphasizing our industry experience, the nature of
our work, our work environment, our encouragement of technical enhancements and
our competitive compensation packages.

                                       9
<PAGE>

ITEM 2.  PROPERTIES

          Our headquarters are currently located at a leased facility in
Garland, Texas, consisting of approximately 100,000 square feet of fulfillment
center space and 13,000 square feet of office space under a lease expiring in
March 2003. Our call center and systems operation center is located in Dallas,
Texas within one mile of our corporate offices in a 20,000 square foot building
owned by Norman Charney, our Chairman and Chief Executive Officer. This facility
is the subject of a lease expiring June 30, 2002. See Item 13. "Certain
Relationship and Related Transactions." We have also leased an aggregate of
29,000 square feet of additional space in Dallas, Texas near our headquarters
building for our data processing personnel and additional warehouse space. This
lease will expire April 30, 2001.


ITEM 3.  LEGAL PROCEEDINGS

          We have been notified by The Original Honey Baked Ham Company of
Georgia, Inc. that Honey Baked Ham is withholding payment for services rendered
by us during the year ended December 31, 1999. To date, no litigation has been
filed by Honed Baked Ham. However, Honey Baked Ham has alleged a variety of
service failures resulting in approximately $4.5 million in damages to date and
has asserted a claim for consequential damages in excess of that amount.
Management has reviewed the terms of the contract with Honey Baked Ham and is of
the opinion that the company has performed as required under its terms. Under
the terms of a Standstill Agreement, we have agreed with Honey Baked Ham not to
sue one another during the period that we are in discussions concerning the
matter; however, such agreement can be terminated by either party at any time
whereupon Honey Baked Ham may immediately file suit concerning these matters.
Management believes that the company has sound defenses against claims, if any,
that might be formally asserted by Honey Baked Ham and intends to vigorously
defend against any such claims.

          We are also occasionally involved in other claims and proceedings
which are incidental to our business. Based on all of the information available
to us to date, we believe that the ultimate resolution of all currently pending
claims and proceedings (including any potential claim made by Honey Baked Ham),
will not have a material adverse effect on our financial position.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          There were no matters submitted to our security holders during the
fourth quarter ended December 31, 1999.

                                       10
<PAGE>

PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Prices; Record Holders and Dividends

          Our stock is listed and trades on The Nasdaq Stock Market's National
Market under the symbol "ASDS." During the period from November 11, 1999 (the
first day of trading in our common stock) through December 31, 1999, the highest
and lowest sales prices were $32-3/8 and $7-15/16, respectively. The price
quotations noted herein represent prices between dealers, without retail mark-
ups, mark-downs or commissions and may not represent actual transactions.

          On March 24, 2000, the last reported sale price of our common stock on
The Nasdaq Stock Market's National Market was $6-5/8 per share.

          At February 29, 2000, there were 78 holders of record of our common
stock.

          We have not paid any cash dividends on our common stock and do not
anticipate declaring dividends in the foreseeable future. Our current policy is
to retain earnings, if any, to finance the expansion of our business. The future
payment of dividends will depend on the results of operations, financial
condition, capital expenditure plans and other factors that we deem relevant and
will be at the sole discretion of our board of directors. Our credit facility
with Comerica Bank-Texas currently restricts our ability to pay dividends.

Recent Sales of Unregistered Securities

          During the year ended December 31, 1999, we issued the following
securities that were not registered under the Securities Act of 1933, as
amended:

          .    In January and February 1999, we issued an aggregate of 4,500,000
               shares of common stock for an aggregate purchase price of
               $4,500,000 to accredited investors.

          .    On February 5, 1999, we issued various affiliates of CKM Capital,
               LLC stock purchase warrants exercisable for an aggregate of
               1,000,000 shares of Series B non-voting common stock at the
               following exercise prices: 500,000 at $1.00 per share, 300,000 at
               $2.00 per share and 200,000 at $3.00 per share. These warrants
               were issued in connection with the services performed by CKM for
               us in the private placement referred to in the immediately
               preceding paragraph. CKM also received $281,250 as additional
               consideration for the services rendered. Upon completion of our
               initial public offering, the warrants became exercisable for a
               like number of shares of our common stock, without modification
               to the exercise price.

          .    On February 10, 1999, we granted an option exercisable for
               957,500 shares of Series B non-voting common stock to Mr. Paul
               Jennings at an exercise price of $1.00 per share. Upon completion
               of our initial public offering, this option became exercisable
               for a like number of shares of our common stock, without
               modification to the exercise price.

          .    On March 12, 1999, we granted various options exercisable for an
               aggregate of 50,000 shares of Series B non-voting common stock to
               directors, officers, employees and consultants pursuant to our
               Long-Term Incentive Plan, each of which had an exercise price of
               $1.00 per share. Upon completion of our initial public offering,
               these options became exercisable for a like number of shares of
               our common stock, without modification to the exercise price.

          .    On March 12, 1999, we granted incentive stock options for an
               aggregate of 410,000 shares of Series B non-voting common stock
               to employees pursuant to our Long-Term Incentive Plan, each

                                       11
<PAGE>

               of which had an exercise price of $1.00 per share. Upon
               completion of our initial public offering, these options became
               exercisable for a like number of shares of our common stock,
               without modification to the exercise price.

          .    On April 30, 1999, we granted incentive stock options for 40,000
               shares of Series B non-voting common stock to certain officers
               pursuant to our Long-Term Incentive Plan at an exercise price of
               $1.00 per share. Upon completion of our initial public offering,
               these options became exercisable for a like number of shares of
               our common stock, without modification to the exercise price.

          .    On August 23, 1999, we issued (1) 1,111,111 shares of Series A
               convertible preferred stock, (2) 1,111,111 shares of Series B
               redeemable preferred stock and (3) common stock purchase warrants
               exercisable for 2,925,000 shares of common stock to VantagePoint
               Venture Partners III (Q), L.P. and VantagePoint Communications
               Partners, L.P. for an aggregate purchase price of $12,000,000.
               The shares of the Series A convertible preferred stock were
               converted into 2,250,000 shares of common stock contemporaneously
               with the closing of our initial public offering and the shares of
               Series B redeemable preferred stock were redeemed for $6.0
               million cash upon completion of the same offering.

          .    On September 7, 1999, we granted various options exercisable for
               an aggregate of 238,500 shares of Series B non-voting common
               stock to certain officers and employees pursuant to our Long-Term
               Incentive Plan, each of which had an exercise price of $5.40 per
               share. Upon completion of our initial public offering, these
               options became exercisable for a like number of shares of our
               common stock, without modification to the exercise price.

          .    On November 15, 1999, we granted various stock options
               exercisable for an aggregate of 141,000 shares of our common
               stock to certain employees under our Long-Term Incentive Plan,
               each of which has an exercise price of $8.25 per share.

          .    On November 29, 1999, we issued to VantagePoint Venture Partners
               III (Q), L.P. and VantagePoint Communications Partners, L.P., a
               total of 2,597,400 shares of our common stock upon exercise of
               the common stock purchase warrants held by the funds. The
               warrants were acquired by the funds in connection with our
               preferred stock financing closed August 23, 1999 and carried an
               exercise price of $2.94 per share. The funds elected to satisfy
               the exercise price by using the cashless exercise feature of the
               warrants.

          All transactions described above were deemed to be exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
such Act (and/or applicable provisions of Regulation D thereunder) as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us and/or through documents furnished at the
time of their investment intent, to information about us.

                                       12
<PAGE>

Use of Proceeds

(1)  On November 10, 1999, the Securities and Exchange Commission declared
     effective the Registration Statement on Form S-1 (File No. 333-85983)
     relating to our initial public offering.

(2)  The offering date was November 11, 1999.

(3)  Not applicable.

(4)  (i)   The offering has terminated and all of the securities registered have
           been sold.

     (ii)  The managing underwriters were:

           .    Bear Stearns & Co. Inc.

           .    Prudential Securities

           .    Friedman Billing Ramsey

           .    E* Offering

     (iii) Title of class of securities registered: common stock, par value
           $0.0001 per share.

     (iv)  Shares of common stock were sold for the account of ASD Systems, as
           follows:

                                                                       ISSUER
                                                                     -----------
           .    Amount registered (shares).........................   5,750,000
           .    Aggregate price of the offering amount registered.. $46,000,000

           .    Amount sold (shares)...............................   5,750,000

           .    Aggregate offering price of the amount sold
                to date............................................ $46,000,000

     (v)   From November 10, 1999 (the effective date of the Registration
           Statement) to December 31, 1999 (the ending date of this report), we
           incurred the following expenses in connection with the issuance and
           distribution of the securities sold in our initial public offering:

           .    Underwriters' discounts and commissions............  $3,220,000
           .    All other expenses.................................     900,000
                                                                     ----------

           .    Total expenses paid by us..........................  $4,120,000
                                                                     ==========

           All of the expenses paid by us were comprised of direct or indirect
           payments to others.

     (vi)  Net offering proceeds to us:  $41,880,000.

                                       13
<PAGE>

     (vii)  From November 10, 1999 (the effective date of the Registration
            Statement) to December 31, 1999 (the ending date of this report), we
            expended net offering proceeds for the following uses:

           .    Construction of plant, building and facilities... $     0
           .    Purchase and installation of machinery and
                equipment........................................ $   500,000
           .    Purchases of real estate......................... $     0
           .    Acquisition of other businesses.................. $     0
           .    Repayment of indebtedness........................ $ 3,400,000
           .    Working capital.................................. $   780,000
           .    Temporary investments............................ $37,200,000*

           All of the payments referenced above were direct or indirect payments
           to others.

            -----------------
            *    Pending final application of the net proceeds of the offering,
                 we have invested such proceeds primarily in cash and cash
                 equivalents.

     (viii) Material change in the use of proceeds:  Not applicable.

     We have not yet determined the actual use of the proceeds derived from the
offering, and thus cannot estimate the amounts to be used for each purpose
discussed above. The amounts and timing of these expenditures will vary
significantly depending on a number of factors, including such factors as the
amount, if any, of cash generated by our operations and the market response to
our service offerings. Accordingly, our management will have broad discretion in
the application of the net proceeds. Our stockholders will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the proceeds.

                                       14
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

          The following selected financial data should be read in conjunction
with the financial statements, the notes to such statements and the information
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" beginning on page 15 of this report. The statement of operations
data for the period from January 1, 1996 through December 20, l996; the period
from December 21, 1996 through October 13, 1997; the period from October 14,
1997 through December 31, 1997 and the years ended December 31, 1998 and 1999
and the balance sheet data at December 20, 1996; October 13, 1997; December 31,
1997; December 31, 1998 and December 31, 1999 are derived from our audited
financial statements. The statement of operations data for the year ended
December 31, 1995 is derived from our unaudited statements which reflect all
adjustments necessary for a fair presentation of that data.

          The selected financial data for all periods ending on or prior to
December 31, 1997, include information derived from the order management and
fulfillment business of our predecessors as follows:

Predecessor name                         Period of operation
---------------------------------------  -------------------------------------
Athletic Supply of Dallas, Inc.          January 1, 1995 (inception) to
                                         December 20, 1996
Athletic Supply of Dallas, LLC           December 21, 1996 to October 13, 1997
ASD Partners, Ltd.                       October 14, 1997 to December 31, 1997

The unaudited pro forma net income (loss) information for the periods ended
December 31, 1995, December 20, 1996, October 13, 1997 and December 31, 1997
reflect a tax provision computed by applying the anticipated effective tax rate
of approximately 37% to pretax income. The unaudited pro forma basic and diluted
net income (loss) per share information for the periods ended on or prior to
December 31, 1997 have been calculated as if based on the number of shares of
common stock outstanding at January 1, 1998.

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                         Predecessors
                                ---------------------------------------------------------------
                                  Period from
                                January 1, 1995     Period from     Period from     Period from
                                  (Inception)       January 1,      December 21,    October 14,
                                    through        1996 through     1996 through    1997 through
                                  December 31,     December 20,     October 13,     December 31,    Year Ended December 31,
                                                                                                    -----------------------
                                      1995             1996             1997            1997           1998         1999
                                   -----------     ------------    -------------    -------------   ---------   -----------
                                                            (in thousands, except per share data)
<S>                             <C>               <C>              <C>             <C>          <C>           <C>
Statements of Operations Data:
   Revenues...................        $5,279            $6,826         $4,882          $2,574         $ 8,020     $ 12,313
   Cost of revenues...........         1,308             2,094          2,686           1,248           5,051        9,701
                                      ------            ------         ------          ------         -------      -------
   Gross profit..............          3,971             4,732          2,196           1,326           2,969        2,612

Operating expenses:
   Selling, general, and
      administrative expenses.         2,616             2,819          2,649           1,074           4,258       10,035
      Depreciation and                   121               517            367             252           1,084        1,482
       amortization...........        ------            ------         ------          ------         -------      -------
      Total operating expenses         2,737             3,336          3,016           1,326           5,342       11,517
                                      ------            ------         ------          ------         -------      -------

Operating income (loss).......         1,234             1,396           (820)             --          (2,373)      (8,905)
Interest expense, net.........            --                --             --              27             233           98
                                      ------            ------         ------          ------         -------      -------
Net income (loss).............        $1,234            $1,396         $ (820)         $  (27)        $(2,606)    $ (8,807)
                                      ======            ======         ======          ======         =======      =======

Preferred stock dividend......                                                                                      (6,000)
Accretion of preferred
   stock discount                                                                                                   (1,145)
                                                                                                                   -------
Net loss attributable to
   common shareholders                                                                                            $(15,952)
                                                                                                                   =======
Basic and diluted net loss
   per share (1)..............                                                                        $ (0.43)    $  (1.39)
                                                                                                      =======      =======
Unaudited Pro Forma Data:
Net income (loss).............        $  777            $  879         $ (820)         $  (27)
                                      ======            ======         ======          ======
Basic and diluted net income
      (loss) per share (1)....        $ 0.13            $ 0.15         $(0.14)         $(0.01)
                                      ======            ======         ======          ======
Shares used in computing basic
   and diluted net income (loss)
   per share (1)..............         6,000             6,000          6,000           6,000           6,000       11,464
                                      ======            ======         ======          ======         =======      =======
-------------------------
</TABLE>

(1)  See Note 11 of Notes to Consolidated Financial Statements for an
     explanation of the method employed to determine the number of shares used
     to compute per share amounts.
<TABLE>
<CAPTION>
                                                                               December 31,
                            December 31,   December 20,  October 13,   ----------------------------
                                1995           1996          1997       1997      1998      1999
                            -------------  ------------  ------------  -------  --------  ---------
<S>                         <C>            <C>           <C>           <C>      <C>       <C>
Balance Sheet Data:
Cash and cash
 equivalents............        $     --      $      --           --   $   97   $    --    $37,278
Working capital                     (219)         1,126       (1,629)    (442)   (2,575)    36,995
 (deficit)..............
Total assets............           1,801          2,693        1,262    3,624     3,266     44,453
Long-term debt
 (including                          935             --           --    1,754     1,360      1,020
   current maturities)..
Division equity                     (866)         2,263          820       --        --         --
 (deficit)..............
Partners' capital.......              --             --           --      943        --         --
Shareholders' equity                  --             --           --       --    (1,664)    41,048
 (deficit)..............
</TABLE>

                                       16
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

       The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and notes thereto
included elsewhere in this report. Except for the historical information
contained herein, the discussion in this report contains certain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. Our actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below under "Risks Related to Our Business," "Risks Related to Our Industry" and
"Other Risks." Our forward-looking statements are based on the current
expectations of management, and we assume no obligation to update this
information. The cautionary statements made in this report should be read as
being applicable to all related forward-looking statements, wherever they appear
in this report.

Overview

       We offer software and service solutions that enable Internet retailers
and direct marketing businesses to outsource their order management and
fulfillment operations. Our systems automate and integrate in real-time Web
sites, call centers, fulfillment centers and vendors. We have assembled a
network of call centers and fulfillment centers which, at February 29, 2000,
consisted of one company-owned call center, four third-party call centers, one
company-owned fulfillment center and seven third-party fulfillment centers. Our
network can increase or decrease in size and services offered to meet the
specific needs of our clients.

       We derive our revenues from systems services, call center services,
fulfillment services and, to a much lesser extent, other services, consisting of
client management services, Web site related services and consulting services.
For the year ended December 31, 1999, the percentage of total revenues by
service category was as follows:

                                                  % of Total Revenue
        Service Category                              for FY 1999
        ----------------                          ------------------
        Systems services                                  38%
        Call center services                              35
        Fulfillment services                              27
        Other services                               Less than 1%
                                                  ------------------
                 TOTAL                                   100%
                                                  ==================

       We typically charge on a per-transaction basis for systems processing, on
a per-minute basis for call center services and on a per-item basis for
fulfillment services. Additional fees are billed for other services. We price
our services based on a variety of factors including the depth and complexity of
the services provided, the amount of required systems customization, length of
contract and other factors. Our revenues are recognized as our services are
rendered and the majority of our clients are billed on a weekly basis. Our
client contracts can be cancelled on a 180 or fewer days notice.

       Our expenses are comprised of:

       .  cost of revenues, which consists primarily of compensation and related
          expenses of our call center and fulfillment center and the variable
          costs of third-party call center and fulfillment center services;

       .  selling, general and administrative, which consists primarily of
          compensation and related expenses for sales and marketing staff,
          client service and administrative personnel and software development
          technicians; occupancy costs; software development costs; marketing
          programs; and bad debt expense; and

                                       17
<PAGE>

       .  depreciation and amortization expense.

       The order management and fulfillment business currently operated by us
was commenced in January 1995 by Athletic Supply of Dallas, Inc. Athletic Supply
of Dallas, Inc. was a direct marketing cataloger for a variety of sports
merchandise, including licensed sports products of the NFL, NHL, NBA and Major
League Baseball and the Sears "My Team" catalogs. In January 1995, Athletic
Supply of Dallas began providing order management and fulfillment services
relating to the Craftsman Power and Hand Tool and Home Healthcare catalogs using
the proprietary software that had been developed for its own catalog operations.
On December 20, 1996, Athletic Supply of Dallas, Inc. was sold, in its entirety,
to Genesis Direct, Inc. On October 14, 1997, ASD Partners, Ltd., a limited
partnership controlled by Norman Charney, acquired all of the software, the call
center and fulfillment center assets and the Sears contracts previously owned by
Athletic Supply of Dallas from Genesis Direct, Inc. Effective January 1, 1998,
ASD Partners, Ltd. transferred this business to ASD Systems, Inc. in connection
with our conversion into a corporation.

       According to applicable reporting procedures and policies, the "Selected
Financial Data" included in this report (and the related management's discussion
and analysis) corresponds to these differing periods of predecessor ownership.
However, we believe that period-to-period comparisons of revenues and operating
results, particularly of incongruent periods, are not necessarily meaningful. We
have therefore included, as supplemental disclosure below, a comparison of
certain selected financial data derived from audited financial statements for
the year ended December 31, 1998 to certain unaudited, internally prepared
selected financial data for the year ended December 31, 1997. See "--
Supplemental comparison of the years ended December 31, 1998 and December 31,
1997 (unaudited)."

Results of Operations

       Comparison of the year ended December 31, 1999 to the year ended December
       31, 1998.

       Revenues.  Our revenues increased 54% to $12.3 million for the year ended
December 31, 1999 from $8.0 million for the year ended December 31, 1998. The
increase in revenue over the period was due primarily to an increase in the
number of clients from 6 at December 31, 1998 to 8 at December 31, 1999. Sears
accounted for 54% of total revenues for the year ended December 31, 1999 and 84%
of total revenues for the year ended December 31, 1998. Four of our client
relationships which generated revenue during the year ended December 31, 1999
have terminated. Specifically, for the year ended December 31, 1999, e4L, Inc.
and The Original Honey Baked Ham Company of Georgia, Inc. accounted for
approximately 22% and 9%, respectively, of our total revenues and two other
clients accounted for an aggregate of 5% of our total revenues for this period.
Due to the termination of our business relationships with these clients,
revenues from them are not expected to continue in future periods. See "--Risks
Related to Our Business -- The recent loss of certain clients will result in the
loss of recurring revenues from these clients."

       Cost of Revenues.  Cost of revenues increased 92% to $9.7 million for the
year ended December 31, 1999 from $5.1 million for the year ended December 31,
1998. The increase in cost of revenues resulted primarily from the addition of
call center, fulfillment center and technical service personnel to support our
anticipated growth. As a percentage of revenues, cost of revenues was 79% for
the year ended December 31, 1999 and 63% for the year ended December 31, 1998.

       Selling, General and Administrative Expense.  For the year ended December
31, 1999, our selling, general and administrative, or SG&A, expense was $10.0
million compared to $4.3 million for the same period of 1998, an increase of
133%. Approximately $1.2 million of this increase in total SG&A expense was
associated with the salaries and related benefits of additional personnel in the
executive, financial, sales and marketing departments. In addition,
approximately $1.3 million of this increase in total SG&A expense was associated
with increased professional and consulting fees, approximately $1.5 million in
increased bad debt expense and settlement costs (which related primarily to
e4L). We anticipate that the amount of SG&A expense, in absolute dollars, will
continue to increase in subsequent periods as we are required to hire additional
personnel to meet our growth strategies and

                                       18
<PAGE>

comply with our obligations as a public company. SG&A expense increased to 81%
of revenues for the year ended December 31, 1999 from 53% for the year ended
December 31, 1998.

       Depreciation and Amortization.  For the year ended December 31, 1999,
depreciation and amortization expense was $1.5 million compared to $1.1 million
for the same period of 1998, an increase of 36%. The increase corresponds with
the increase in computer equipment purchased for internal and client use.

       Operating Loss.  For the year ended December 31, 1999, our operating loss
was $8.9 million compared with $2.4 million for the year ended December 31,
1998. The significant majority of this increase in loss is attributable to
increased salaries and related benefits expense. The total increase in expenses
was partially offset by decreases in certain other expenses and the effect of
capitalizing software development costs.

       Interest income (expense), net.  For the year ended December 31, 1999
interest income net of expense was approximately $100,000 compared to
approximately $230,000 in net interest expense for the prior year. The interest
income for the year ended December 31, 1999 is attributed to investment income
on proceeds from our initial public offering completed in the fourth quarter of
1999.

       Preferred stock dividend.  For the year ended December 31, 1999, a $6.0
million non-cash preferred stock dividend was recorded. The dividend related to
the embedded beneficial conversion feature of the Series A convertible preferred
stock which was fully converted into common stock in November 1999.

       Accretion of preferred stock discount.  During the year ended December
31, 1999, we recorded a total of $1.1 million of preferred stock accretion. This
had the same effect as a dividend on preferred stock. Of the total, $635,555 is
attributed to the value placed on the preferential conversion feature of
warrants we issued with the sale of our preferred stock. In addition, $255,130,
representing the difference between the face amount of the Series A convertible
preferred stock and the net funds received and $255,130 representing the
difference between the face amount of the Series B redeemable preferred stock
and the net funds received, have been recorded as accretion of preferred stock.

       Comparison of the periods ended December 31, 1998, December 31, 1997 and
       October 13, 1997.

       For purposes of this comparison:

       .  the period ended December 31, 1998 represents a 365-day period from
          January 1, 1998 through December 31, 1998;

       .  the period ended December 31, 1997 represents a 79-day period from
          October 14, 1997 through December 31, 1997; and

       .  the period ended October 13, 1997, represents a 297-day period from
          December 21, 1996 through October 13, 1997.

       These periods correspond to the different periods of our predecessors'
ownership of the business currently operated by us. As a result, these periods
necessarily reflect inconsistent management regimes and cost structures. In
addition, interim periods were affected by the seasonal nature of our business.

       Prior to October 1997, our business was part of larger operations that
were focused principally on direct marketing of sports licensed products. We did
not begin to focus on expanding the clients of our order management and
fulfillment business or transition our business to meet the demands of Internet
retailers until January 1998. Consequently, we believe that period-to-period
comparisons of revenues and operating results, particularly in light of the
incongruent periods, are not necessarily meaningful.

       Revenues.  Prior to January 1998, our predecessors were not focused on
growing the revenues related to the order management and fulfillment business
now comprising our business. For the period ended December 31,

                                       19
<PAGE>

1998, our revenues were $8.0 million compared to $2.6 million for the period
ended December 31, 1997 and $4.9 million for the period ended October 13, 1997.
The general increase in revenue over this period was due primarily to an
increase in the number of clients from 3 at October 13, 1997 to 6 at December
31, 1998.

       Cost of Revenues.  For the period ended December 31, 1998, our cost of
revenues was $5.1 million compared to $1.2 million for the period ended December
31, 1997 and $2.7 million for the period ended October 13, 1997. As a percentage
of revenues, cost of revenues was 63% for the period ended December 31, 1998,
48% for the period ended December 31, 1997 and 55% for the period ended October
13, 1997. This general increase in the cost of revenues, as a percentage of
revenues, was due to an increase in expenses to expand our sales and marketing,
administrative and systems infrastructure in anticipation of future revenue
growth.

       Sales, General and Administrative Expense.  For the period ended December
31, 1998, our total SG&A expense was $4.3 million compared to $1.1 million for
the period ended December 31, 1997 and $2.6 million for the period ended October
13, 1997. As a percentage of revenues, SG&A expense was 53% for the period ended
December 31, 1998, 42% for the period ended December 31, 1997 and 54% for the
period ended October 13, 1997. As a general trend, SG&A expense as a percentage
of revenues increased modestly due to an increase in expenses to expand our
sales and marketing, administrative and systems infrastructure in anticipation
of future revenue growth. In addition, we increased our software development
activities in 1998 in connection with the development of our browser-based
application. Interim periods were affected by the seasonal nature of our
business.

       Operating Income (Loss).  For the period ended December 31, 1998, our
operating loss was $2.4 million compared to operating income for the period
ended December 31, 1997 of $1,000 and an operating loss for the period ended
October 13, 1997 of $820,000. As a general trend, our operating results were
negatively impacted by the expansion of our software development efforts and an
expanded sales and marketing, administrative and systems infrastructure in
anticipation of future growth.

       Supplemental comparison of the years ended December 31, 1998 and December
       31, 1997 (unaudited).

       The following table sets forth selected financial data for the 365-day
period ended December 31, 1998 and the 365-day period ended December 31, 1997.
Management prepared the financial data for the year ended December 31, 1997 by
combining the historical financial data for the period from December 21, 1996
through October 13, 1997 with the historical financial data for the period from
October 14, 1997 through December 31, 1997 and subtracting the internally
prepared results for the period from December 21, 1996 through December 31,
1996. Although the resulting information has not been audited by our independent
auditors, we believe that the preparation and inclusion of this data provides a
basis upon which a more meaningful comparison can be made to the financial data
for the year ended December 31, 1998. The financial data for the period ended
December 31, 1997 has been prepared on substantially the same basis as the
historical statements, consisting of only normal recurring adjustments necessary
for a fair presentation of the results of operations for such period.

       Due to the changes in ownership of the business occurring in 1996 and
1997 and the consequential differences in management and cost structure
applicable to each such owner, we have elected to set forth below only a
comparison of gross revenues, cost of revenues, gross profit, total SG&A
expenses and operating income (loss) before depreciation and amortization.

                                                        Year Ended
                                           -------------------------------------
                                           December 31, 1997   December 31, 1998
                                           -----------------   -----------------
                                                      (in thousands)
Revenues.................................       $7,328                 $ 8,020
Cost of revenues.........................        3,866                   5,051
                                                ------                 -------
Gross profit.............................        3,462                   2,969
Selling, general and administrative
  expenses...............................        3,442                   4,258
                                                ------                 -------
Operating income (loss) before
  depreciation and amortization..........       $   20                 $(1,289)
                                                ======                 =======

                                       20
<PAGE>

       Revenues.  Our revenues increased 9% to $8.0 million for the year ended
December 31, 1998 from $7.4 million for the year ended December 31, 1997. The
increase in revenues was due primarily to an increase in the number of clients
from 2 at December 31, 1997 to 6 at December 31, 1998. Most of the clients we
added in 1998 began generating revenues in the fourth quarter.

       Cost of Revenues. Cost of revenues increased 28% to $5.1 million for the
year ended December 31, 1998 from $3.9 million for the year ended December 31,
1997. As a percentage of revenues, cost of revenues were 63% for the year ended
December 31, 1998 and 53% for the year ended December 31, 1997. The increase in
the cost of revenues was primarily due to the increased salaries and related
benefits expense of additional call center and fulfillment center personnel
required in order to support additional client service volume.

       Sales, General and Administrative Expense. For the year ended December
31, 1998, our total SG&A expense increased 24% to $4.3 million from $3.4 million
for the year ended December 31, 1997. As a percentage of revenues, SG&A expense
increased to 53% for the year ended December 31, 1998 from 47% for the year
ended December 31, 1997, primarily due to the expansion of our software
development and an expanded sales and marketing, administrative and systems
infrastructure in anticipation of future growth.

       Operating Income (Loss) Before Depreciation and Amortization. Operating
income (loss) before depreciation and amortization for the year ended December
31, 1998 was $(1.3) million compared to $20,000 for the year ended December 31,
1997. This loss was due to the expansion of our software development efforts and
an expanded sales and marketing, administrative and systems infrastructure in
anticipation of future growth.

Factors Affecting Operating Results

       We have experienced significant fluctuations in our results of operations
from quarter to quarter. As a result of these fluctuations, period-to-period
comparison of our operating results is not necessarily meaningful and should not
be relied upon as an indicator of future performance. We expect our future
operating results to fluctuate. Factors that are likely to cause these
fluctuations include:

       .  demand for and market acceptance of our order management and
          fulfillment systems and services;

       .  client retention;

       .  fluctuations in third-party call center and fulfillment center costs;

       .  timing and magnitude of capital expenditures;

       .  costs relating to the expansion of our operations and the development
          and/or acquisition of additional software applications;

       .  introduction of new systems and services or enhancements by us or our
          competitors;

       .  the ability to meet the technological demands of our clients;

       .  changes in our pricing policies or those of our competitors;

       .  economic conditions specific to the order management and fulfillment
          industry, as well as generally; and

       .  the effect of potential strategic acquisitions or alliances.

As a result of these and other factors, our future operating results may fall
below the expectations of securities analysts and investors. In this event, the
price of our common stock could decrease, perhaps significantly.

                                       21
<PAGE>

Seasonality

       Our revenues and business are seasonal. We expect to continue to
experience seasonal fluctuation of revenues and operating results in the future
which, we believe, will cause period-to-period comparisons of our results of
operations to be inappropriate as indicators of future performance. Many retail
businesses, including Sears and other clients, sell more products during the
holiday season than in any other portion of the year. For example, the Sears
Wish Book catalog is mailed only twice per year during the third and fourth
calendar quarters. Accordingly, because we generate the vast majority of our
revenue on a per-transaction basis, we recognize a disproportionate portion of
our annual revenue in the last three months of the year. As a result of our
seasonal business, we also have additional risks in processing a large volume of
transactions in short time periods.

Liquidity and Capital Resources

       Since inception in January 1998, we have financed our operations
principally through funds from the private and public placement of equity
securities. We completed our initial public offering of 5,750,000 shares of
common stock in November 1999 which yielded net proceeds of approximately $41.9
million. Prior to the initial public offering, we also supplemented our capital
needs with short-term borrowings under a credit facility maintained with
Comerica Bank-Texas. As of December 31, 1999, we had working capital of
approximately $37.0 million.

       For the year ended December 31, 1999, net cash used in operating
activities was approximately $7.2 million compared to approximately $2.0 million
for the year ended December 31, 1998. Significant uses of cash in operations for
the year ended December 31, 1999 include costs associated with increased sales
and marketing activities to promote our services and capital expenditures in
connection with systems infrastructure.

       Our capital expenditures amounted to approximately $4.3 million for the
twelve months ended December 31, 1999 and approximately $180,000 for the twelve
months ended December 31, 1998. For the year ended December 31, 1999, capital
expenditures included software development costs as well as the purchase of
technical equipment, including the replacement of a significant portion of call
center workstations, data center servers and the upgrading of our
telecommunications switches. In addition, during the third quarter of 1999, we
consolidated all of our technical development and programming personnel into a
new facility requiring upgraded equipment.

       Effective August 23, 1999, we completed a private round of equity
financing with VantagePoint Venture Partners III (Q), L.P. and VantagePoint
Communications Partners, L.P., affiliated venture capital funds, through the
issuance of our Series A convertible preferred stock, Series B redeemable
preferred stock and common stock purchase warrants exercisable for 2,925,000
shares of our common stock. This transaction resulted in aggregate cash proceeds
to us of approximately $11.5 million, after deducting estimated expenses. We
used a portion of the net proceeds from the preferred stock financing to repay
some of our credit facility with Comerica Bank-Texas. In addition, we used $6.0
million of the net proceeds from the preferred stock financing to redeem our
Series B redeemable preferred stock upon the closing of the initial public
offering. In December 1999 we issued 2,597,400 shares of stock for the cashless
conversion of the warrants.

       We maintain a $2.0 million revolving line of credit with Comerica Bank.
This facility matures on May 13, 2000 and borrowings are limited to a borrowing
base defined as $750,000 plus 80% of eligible accounts receivable. Borrowings
bear interest at the bank's prime rate plus .75%, which was 9.25% at December
31, 1999. At December 31, 1999 we did not have any debt outstanding under the
revolving credit facility. All borrowings with Comerica Bank are collateralized
by our assets. Our credit agreement requires us to comply with some standard
financial covenants such as a minimal amount of tangible net worth, a minimal
quick ratio and a maximum amount of debt to tangible net worth. We pay a
quarterly commitment fee under the terms of our credit agreement equal to 0.25%
of the daily available borrowings thereunder. Prior to September 2, 1999, Mr.
Charney was the guarantor of up to $2.5 million borrowed under our credit
facility and received a fee from us as an inducement to do so.

                                       22
<PAGE>

       We believe that the proceeds from our initial public offering closed in
November 1999 will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. However, the execution
of our business plan will require substantial additional capital to fund our
operating losses, working capital needs, sales and marketing expenses, lease
payments and capital expenditures thereafter. In the event our plans or
assumptions change or prove to be inaccurate, we may be required to seek
additional sources of capital. In addition, although no significant acquisitions
were planned or reasonably likely at the time of filing this report, we may need
to seek additional sources of capital to the extent any materializes during that
period. Sources of additional capital may include public and private equity and
debt financings, sales of nonstrategic assets and other financing arrangements.

       While we have no material commitments for capital expenditures, we
anticipate making up to $3.5 million of capital expenditures over the next 12
months. Actual capital requirements may vary based upon the timing and success
of the expansion of our operations. In addition, several factors may affect our
capital requirements, including:

       .  technological and competitive developments;

       .  the demand for our systems and services or our anticipated negative
          cash flows from operations being more than anticipated;

       .  our projections relating to the development and/or acquisition of
          software applications proves to have been inaccurate;

       .  whether we engage in acquisitions or other strategic transactions; and

       .  whether we accelerate or otherwise alter the schedule of our expansion
          plans.

       At December 31, 1999, we had approximately $11.1 million of federal net
operating loss carryforwards available to offset future taxable income which, if
not utilized, will expire in 2019. The future benefit of our net operating loss
carryforwards may be limited as a result of the various ownership changes that
have occurred during 1999. Our total deferred tax assets have been fully
reserved due to the uncertainty of future taxable income. Accordingly, no tax
benefit has been recognized in the periods presented.

Collection of Accounts Receivable

       As a result of our conditional settlement with e4L, we wrote off amounts
due from them of about $1.5 million. Accounts receivable from other terminating
clients were approximately $1.5 million at December 31, 1999, of which
approximately $1.2 million was current. We believe that all of our billings to
these clients were appropriate, and will make whatever collection efforts are
necessary to collect in full what is due to us. However, there is a risk that
not all of these amounts will be collected in full. If a significant portion of
these accounts, or any other outstanding accounts receivable, are ultimately
uncollectible, our financial condition and results of operations could suffer.
In addition, our collection efforts could include litigation if necessary, which
could require considerable cost and the diversion of management's attention from
other activities required for the successful operations of our company.

New Accounting Pronouncements

       In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivatives and Similar Financial Instruments and Hedging Activities," which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. We were required to adopt
SFAS 133 at the beginning of fiscal year 2000. SFAS 133 is not expected to have
a significant impact on us.

                                       23
<PAGE>

       In March 1998, the American Institute of Certified public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed for or Obtained for Internal Use." SOP 98-1 requires all
costs related to the development of internal use of software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software.
SOP 98-1 is effective for our fiscal year ended December 31, 1999. Prior to this
date, we expensed such costs as incurred. As a result of adopting SOP 98-1, we
capitalized approximately $800,000 relating to internal use of software
development projects in 1999. In addition, we incurred additional development
costs of approximately $900,000 which were expensed under SOP 98-1 in 1999.
Development costs expensed in the year 1998 and the nine months period from
October 14, 1997 to December 31, 1997 were $1.0 million and $800,000,
respectively.

       In May 1999, The Emerging Issues Task Force finalized its EITF 98-5
Issue, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios," which gives guidance on
transactions involving convertible debt and securities arrangements which
contain beneficial conversion features (as defined). According to the EITF
Issue, embedded beneficial conversion features should be recognized as dividends
with an offset to additional paid-in capital. Further, according to a Securities
and Exchange Commission interpretive release, any recorded discount on
redeemable convertible preferred stock should also be recorded as a dividend
when the accretion of the discount is recognized. Our Series A and Series B
preferred stock transactions in 1999, including the beneficial conversion
feature of warrants attached to the preferred stock, required us to record
dividends and accretion totaling $7,145,815.

                                       24
<PAGE>

Risks Related to Our Business

     We have a history of losses and negative cash flow and anticipate continued
     losses.

     Since our formation on January 1, 1998, we have incurred operating losses
and negative cash flow.  As of December 31, 1999, we had an accumulated deficit
of approximately $18.6 million.  In addition, for the periods ended October 13,
1997 and December 31, 1997, predecessors to the company also experienced net
losses.  We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future.  We anticipate that our business
will generate operating losses until we are successful in generating significant
additional revenues to support our level of operating expenses.  We cannot
assure you that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.  If we do achieve
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future.  To the extent we
are unable to achieve profitability in the future, our business, prospects,
financial condition and results of operations will suffer.

     Our business is difficult to evaluate because we have an extremely limited
     operating history.

     We were formed in January 1998 to acquire the order management and
fulfillment business of an affiliated predecessor entity.  This business,
although significantly different in focus and scale, was originally commenced in
January 1995 by another predecessor to service the fulfillment needs of a single
client.  Accordingly, our business has had an extremely limited operating
history, which makes evaluation of our prospects difficult.  In addition, our
business prospects and market are relatively unproven.  We caution readers of
this Form 10-K to consider the risks, uncertainties and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, including the market of
outsourced order management systems and services.  These risks and difficulties
include our ability to:

     .  increase awareness of our systems and services;

     .  offer compelling solutions to our clients' order management
        requirements;

     .  maintain and expand our network of third-party call centers and
        fulfillment centers;

     .  implement and improve operational, financial and management information
        systems;

     .  respond effectively to the offerings of competitors;

     .  expand the scale of our operations to meet client demands;

     .  develop and/or acquire technology that meets the demands of the
        marketplace; and

     .  attract, retain and motivate qualified personnel.

     If we fail to adequately address any of these risks or difficulties, our
business would likely suffer and it is likely that we would not meet our
financial projections.  We would expect our business, prospects, operating
results and financial condition to be materially adversely affected if our
revenues do not meet our projections and, in such event, our net losses in a
given quarter would be even greater than expected.

     Sears currently represents a significant majority of our business and our
success depends in part on our ability to retain them as a client.

     If Sears, our largest client, was to substantially reduce or stop its use
of our services prior to the time we were able to obtain significant additional
clients and thereby reduce our reliance on it, our business, operating results
and financial condition would be materially adversely affected.  Sears, Roebuck
and Co. and Sears Wish Book, Inc., a subsidiary of Sears, Roebuck and Co.,
collectively accounted for approximately 54% of our gross

                                       25
<PAGE>

revenues during the year ended December 31, 1999 and for approximately 84% for
the year ended December 31, 1998. We have used the term "Sears" throughout this
report to refer to both of these affiliated Sears entities. "Sears Roebuck" has
been used to refer to Sears, Roebuck and Co. which operates the Craftsman Power
and Hand Tool and Home Healthcare catalogs and "Sears Wish Book" has been used
to refer to Sears Wish Book, Inc., which operates the annual holiday catalog.
Our contract with Sears Roebuck expires July 1, 2001, unless earlier terminated.
Our arrangement to provide Sears Wish Book with services is generally renewed on
a year to year basis, and was last renewed on July 2, 1999 for a period expiring
August 31, 2000. We presently anticipate that our agreement with Sears Roebuck
and our arrangement with Sears Wish Book will be extended upon their scheduled
termination dates; however, our loss of Sears as a client would have a material
adverse effect on our business, prospects, financial condition and results of
operations and may affect our relationship with King World Direct, Inc., which
is a distributor of Sears merchandise. A termination by Sears would result in
significant lost revenues and the loss of an important client reference that, we
believe, will be instrumental in securing future clients. Moreover, to the
extent that Sears' financial performance does not meet expectations and our
revenues attributable to Sears consequently decline, our prospects and financial
performance would also be negatively impacted, perhaps materially. We cannot
assure that Sears will be a client of ours in future periods.

     Our client contracts are either short-term or terminable with minimal
     notice.

     Each of our clients has the option to terminate its contract with us for
any reason after giving us 180 or fewer days prior written notice.  King World
Direct may terminate its contract after giving as few as 30 days prior written
notice. In addition, depending upon applicable law, clients may terminate their
contracts with us sooner if we fail to substantially perform our obligations
under the relevant agreement. The Sears Wish Book arrangement is governed by a
course of conduct between the parties and a letter agreement which provides that
the arrangement is immediately terminable by Sears Wish Book at any time and
will automatically terminate if we do not negotiate a definitive contract by
August 31, 2000.  The terms of our client contracts typically range from six
months to three years. Toys "R" Us typically contracts with us on a short-term
basis to handle specific contracts. As of February 29, 2000, we were not
performing under any active contracts with Toys "R" Us. Consequently, as of
February 29, 2000, we were providing service to only five active clients.  The
termination by one or any number of these clients, or the failure by these
clients to renew the terms of their contracts, may have a material adverse
effect on our business and prospects including our financial performance and
revenue stream or may result in the loss of an important client reference.

     The recent loss of certain clients will result in the loss of recurring
     revenues from these clients.

     Since October 1, 1999, our business relationships with four clients have
terminated. Specifically, we have been informed by e4L, Inc. and The Original
Honey Baked Ham Company of Georgia, Inc., as well as two smaller clients,
including EDS for Sony's Metreon.com, that such clients have terminated their
respective relationships with us. The loss of these clients will result in the
loss of recurring revenues previously expected from them. Furthermore, these
terminations have resulted in significant bad debt expense and settlement costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Collection of Accounts Receivable." For the year ended December
31, 1999, total revenues generated from these terminating clients amounted to
approximately 36% of gross revenues during that period. e4L and Honey Baked Ham
accounted for approximately 22% and 9%, respectively, of total revenues for the
year. No other terminating client accounted for 5% or more of our total revenues
for the year ended December 31, 1999.

     We may not be able to satisfy the unique and sophisticated requirements of
     our clients.

     If we experience difficulties in meeting the needs of our clients, our
business will suffer.  Our target market, consisting of Internet retailers and
direct marketing companies, has unique and sophisticated requirements.  In
addition, some clients have pre-existing complex infrastructures consisting of
call centers, fulfillment centers and other business processes.  Accordingly,
the software application currently utilized by us rarely fits exactly into a new
client's operations and we must be able to customize the software accordingly
and generally within a relatively short time frame.  Although we believe that we
have generally been successful in the timely modification of our systems to meet
the specific needs of our clients, there may be situations where we are unable
or unwilling to

                                       26
<PAGE>

customize our systems to meet these requirements. We were unwilling to modify
our systems to meet the unique requirements of e4L. This was one of several
factors that led to the mutual termination of our relationship with e4L. If we
encounter similar situations in the future, other clients could elect to
terminate their relationships, which could have a material adverse effect on our
business, prospects, financial condition and results of operations.

     Our contracts may be terminated and we may be exposed to potential
liability for actual or perceived failure to provide required services.

     Because our clients rely on our services to satisfy their customer order
requirements, we may suffer the loss of client contracts or be exposed to
potential claims for damages caused to an enterprise, including special or
consequential damages, as a result of an actual or perceived failure of our
services. For example, we believe that the termination by Honey Baked Ham was
caused by, among other things, lower than expected customer satisfaction levels.
Our failure or inability to meet a client's expectations in the performance of
our services or to do so in the time frame required by the client, regardless of
our responsibility for the failure, could:

     .  result in a claim for substantial damages against us by the client;

     .  discourage other clients from engaging us for these services;

     .  damage our business reputation, and

     .  have a material adverse effect on our business, prospects, financial
        condition and results of operations.

     We cannot predict the outcome of any potential legal claims.

     If we fail to properly manage our growth, our business could be adversely
     affected.

     We intend to continue the expansion of our operations in the foreseeable
future to pursue existing and potential market opportunities.  If we do not
manage the growth of our business effectively, our results of operations or
financial condition would be materially adversely affected.  Our growth places
significant demands on our management and operational resources.  In order to
manage our growth effectively, we must continue to invest in our systems and
internal and third-party call centers and fulfillment centers, and continue to
expand, train and manage our work force.

     Our business is seasonal and we expect our quarterly revenues and operating
     results to fluctuate.

     Our revenues and business are seasonal.  We expect to continue to
experience seasonal fluctuation of revenues and operating results in the future
which, we believe, will cause period-to-period comparisons of our results of
operations to be inappropriate as indicators of future performance.  Many retail
businesses, including Sears and other clients, sell more products during the
holiday season than in any other portion of the year.  For example, the Sears
Wish Book catalog is mailed only twice per year, during the third and fourth
calendar quarters Accordingly, because we generate the vast majority of our
revenues on a per-transaction basis, we recognize a disproportionate portion of
our annual revenues in the last three months of the year. As a result of our
seasonal business, we also have additional risks in processing a large volume of
transactions in short time periods.

     Failure of our computer and communications systems could result in our
failure to provide timely and error-free services to our clients.

     Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems.  Our systems and
operations may be vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins, the occurrence of significant human
error and similar events.  We do not currently have a formal disaster recovery
plan or carry sufficient business interruption insurance to compensate us for
losses that may occur.  We generally do not maintain redundant

                                       27
<PAGE>

systems. Servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays.
loss of data or our inability to provide timely and error-free services to our
clients. The occurrence of any of the foregoing risks could have a material
adverse effect on our business, prospects, financial condition and results of
operations.

     If we are unable to respond to rapid changes in technology, our solution
could become obsolete and revenues could be lost.

     The market for our order management systems and services is characterized
by rapid technological change, frequent new systems enhancements, evolving
industry standards and rapidly changing client requirements.  The introduction
of systems incorporating new technologies and the emergence of new industry
standards could render existing systems obsolete which could ultimately result
in lost revenues.  Our future success will depend, in part, on our ability to
anticipate changes, enhance our current systems, develop or acquire, through
license or otherwise, technology solutions from third parties, and/or introduce
new systems that keep pace with technological advancements and address the
increasingly sophisticated needs of our clients.  New systems or enhancements to
existing systems may not adequately meet the requirements of our current and
prospective clients and may never achieve any degree of significant market
acceptance. Even if we successfully address all of these challenges, we must
then work with our current clients to transition them to any new technology,
which could also create a risk of business disruption.

     Our failure to timely increase the capacity of our service provider network
may reduce demand for our services.

     Due to the limited deployment of our services to date, the ability of our
network of company-owned facilities and third-party service providers to connect
to and manage a substantially larger number of clients is as yet unknown.  Our
network may not be expandable to expected client levels while maintaining
adequate service quality.  Upgrading our infrastructure may cause delays or
failures in our systems.  As a result, we may be unable to develop a network of
third-party service providers capable of supporting outsourced operations at a
commercially viable level.  Failure to achieve or maintain such a network could
significantly reduce demand for our services and our business and prospects
could suffer.

     We depend on third-party relationships, many of which are short-term or
terminable, to perform services for our clients.

     We currently operate only one call center and one fulfillment center.  In
addition, three of the third-party call centers and one of the third-party
fulfillment centers used by us is currently dedicated to servicing the needs of
our largest client. Accordingly, we depend, and will continue to depend, on a
number of third-party service providers to perform services for our clients.  We
cannot assure you that we will be able to maintain relationships with third-
parties that provide services to our clients or that we will be able to locate
or secure additional relationships as demanded by future business.  In addition,
we cannot assure you that the services provided by these third-parties will meet
the needs or expectations of our clients.  Outside parties on which we depend
include:

     .  fulfillment centers;

     .  call centers;

     .  Web designers; and

     .  shipping companies.

     As the demand for these services grows, we believe that there will be
increasing competition for the best third-party service providers, which could
result in significantly higher fees payable to such parties or the inability to
maintain such relationships altogether.

                                       28
<PAGE>

     Many of our arrangements with third-party service providers are not
exclusive and are short-term or may be terminated at the convenience of either
party.  In addition, certain of our clients maintain the relationships with the
third-party service providers directly.  We cannot assure you that third-parties
regard our relationship with them as important to their own respective
businesses and operations.  They may reassess their commitment to us at any time
in the future and may develop their own competitive services or products.

     Our success depends on our ability to protect our proprietary technology.

     We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect the
proprietary rights in our software and services.  However, we will not be able
to protect our intellectual property if we are unable to enforce our rights or
if we do not detect unauthorized use of our intellectual property.  In addition,
these legal protections only provide us with limited protection.  If we litigate
to enforce our rights, it would be expensive, divert management resources and
may not be adequate to protect our business.  Our inability to protect our
proprietary technology could have a material adverse effect on our business,
prospects, financial condition and results of operations.

     We have not filed any United States patent applications with respect to our
order management systems, nor do we have any patent applications pending.  As a
result, we currently do not have patented technology that would preclude or
inhibit competitors from entering our market.  Moreover, none of our technology
is patented abroad, nor do we currently have any international patent
applications pending.  As of February 29, 2000, we had not secured registration
on any of our service marks in the United States nor had we pursued registration
in any foreign country.  We cannot be certain that future patents, registered
trademarks or registered service marks, if any, will be granted or that any
future patent, trademark or service mark will not be challenged, invalidated or
circumvented, or that rights granted under any patents, trademarks or service
marks that may be issued in the future will actually provide a competitive
advantage to us.

     We generally enter into confidentiality agreements with our employees and
consultants and with our clients and corporations with whom we have strategic
relationships.  We attempt to maintain control over access to and distribution
of our software documentation and other proprietary information.  However, the
steps we have taken to protect our technology and intellectual property may be
inadequate.  Our competitors may independently develop technologies that are
substantially equivalent or superior to ours or may have jointly developed such
technologies under agreements giving them co-equal rights to exploit those
technologies.

     Our success depends on retaining our key personnel and attracting
additional personnel, particularly in the areas of client support and technical
services.

     We depend on a limited number of executive officers and senior management
personnel. Consequently, our success will depend largely on our ability to
retain and incentivize them.  Our business may be adversely affected if the
services of any one or more of our key personnel become unavailable to us.  As
of February 29, 2000, we had not entered into employment agreements with any
employees other than Messrs. Charney and Jennings. Even with these employment
agreements, there is a risk that these individuals will not continue to serve
for any particular period of time.  While we have obtained a key person life
insurance policy on the life of Mr. Charney and Mr. Jennings in the amount of $
1.0 million each, these amounts may not be sufficient to offset the loss of
their services.

     We may add additional groups of key personnel particularly in our client
support and technical services organizations. Hiring client support and
technical personnel is very competitive in our industry due to the limited
number of people available with the necessary technical skills and understanding
of our systems and services.  Our inability to attract, train or retain the
number of highly qualified client support and technical services personnel that
our business needs, or the inability to hire qualified outside consultants to
perform these tasks, may cause our business and prospects to suffer.

                                       29
<PAGE>

     The integration of officers and key new employees into our management team
may interfere with our operations.

     During the last quarter of 1999 and continuing throughout the first quarter
of 2000, we have retained a number of officers and key employees. In addition,
we intend to continue to hire additional key employees and officers to support
our business growth.  To integrate into our company, such individuals must spend
a significant amount of time learning our business model and management system,
in addition to performing their regular duties.  If we fail to complete this
integration in an efficient manner, our business and prospects will suffer.

Risks Related to Our Industry

     We cannot accurately predict the size of our market, and if our market is
not as large as we expect, our business prospects will suffer.

     Our business was originally developed to manage the commerce-related
operations of direct marketing companies. Although presently most of our clients
are in the direct marketing industry, we believe that we have transitioned our
business to meet the growing demands of electronic commerce businesses. Further,
we believe that much of our future growth, if any, will come for Internet-based
retailers. Accordingly, our growth will largely depend on the development and
widespread acceptance of the Internet as a medium for commerce.  Use of the
Internet by consumers is at an early stage of development, and market acceptance
of the Internet as a medium for commerce is subject to a high level of
uncertainty.  Our estimates of the size of our market or the potential demand
for our services may turn out to be inaccurate.  If use of the Internet as a
medium for commerce stops growing, our business prospects will be harmed.

     Predicting market size is also complicated by the fact that not all
potential clients will outsource their order management and fulfillment
operations.  Potential clients may resist outsourcing for a number of reasons
including:

     .  risks or perceived risks of providing third-party service providers with
        access to their proprietary technology or information;

     .  a desire to retain control over inventory, customer service, shipping
        and related order processing functions;

     .  concerns associated with warehousing large amounts of inventory with a
        third-party: and

     .  concerns over the level of service to be expected from a third-party
        service provider and the ability to properly control and measure
        acceptable levels of service.

     If the Internet retailing or direct marketing industries, or any
significant existing or potential client, concludes that the disadvantages of
outsourcing order management and fulfillment operations outweigh the advantages,
our business and prospects will suffer.

     Our systems and services will need to achieve widespread market acceptance
for us to succeed.

     Even if the Internet grows at the rate we anticipate, our systems and
services must achieve widespread market acceptance for us to succeed.  We
believe that our potential to grow and increase our market acceptance depends
principally on the following factors, some of which are beyond our control:

     .  our ability to develop or otherwise acquire a technology solution that
        meets with widespread market acceptance;

     .  the differentiation and quality of our systems and services;

     .  the extent of our third-party service provider network coverage;

                                       30
<PAGE>

     .  our ability to provide timely and effective client support;

     .  our pricing strategies as compared to our competitors;

     .  our industry reputation;

     .  the effectiveness of our marketing strategy;

     .  concerns about transaction security;

     .  our ability to locate, negotiate, close and integrate strategic
        acquisitions and/or alliances; and

     .  general economic conditions, such as downturns in the systems markets.

     The failure of our systems and services to achieve widespread market
acceptance could have a material adverse effect on our business, prospects,
financial condition and results of operations.

     The relationships with our clients would likely be compromised if our
security measures were to fail

     The relationships with our clients may be adversely affected if the
security measures that we use to protect their proprietary or confidential
information, such as sales information, or the confidential information of their
customers, such as credit card numbers, are ineffective.  We may be required to
expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches.  In addition,
security breaches could expose us to a risk of litigation and possible
liability.  Our security measures may be inadequate to prevent security
breaches, and our business would be harmed if we do not prevent them.

     Government regulation and legal uncertainties could increase the cost and
add additional burdens to our doing business on the Internet.

     Due to the increasing popularity of the Internet, laws and regulations
applicable to Internet communications, commerce, advertising and direct
marketing are becoming more prevalent.  The adoption or modification of such
laws or regulations could inhibit the growth of Internet use and decrease the
acceptance of the Internet as a communications and commercial medium, which
could have a material adverse effect on our business, results of operations and
financial condition.

     Further, due to the global nature of the Internet, governments of states or
foreign countries may attempt to regulate Internet transmissions.  We cannot be
certain that violations of domestic or foreign laws or regulations will not be
alleged by applicable governments or that we will not violate such laws or
regulations or new laws or regulations will not be enacted in the future.
Moreover, the applicability of existing laws or regulations governing issues
such as intellectual property ownership, libel, consumer protection, personal
privacy, taxation, quality of services, and distribution is uncertain regarding
the Internet.  Legal compliance may prove difficult for us and may harm our
business, operating results and financial condition.

Other Risks

     Our stock will continue to be subject to substantial price and volume
fluctuations due to a number of factors, some of which are beyond our control.

     During the period from November 11, 1999 (the date of completion of our
initial public offering) through December 31, 1999, the stock price fluctuated
between a high of $32-3/8 and a low of $7-15/16. Stock prices and trading
volumes for many Internet-related companies fluctuate widely for a number of
reasons, including some reasons that may be unrelated to their businesses or
results of operations. This market volatility, as well as general domestic or
international economic, market and political conditions, could materially
adversely affect the price of

                                       31
<PAGE>

our common stock in the future without regard to our operating performance. In
addition, our operating results may be below the expectations of public market
analysts and investors. If this were to occur, the market price of our common
stock could significantly decrease.

     In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. In the future we may be the target of similar litigation. Securities
litigation, including spurious claims, may result in substantial costs and
divert management's attention and resources, which may seriously harm our
business, prospects, financial condition and results of operations and may also
harm our reputation.

     We have anti-takeover defenses that could delay or prevent a takeover that
shareholders may consider favorable.

     Certain provisions of our amended and restated articles of incorporation
and bylaws and the provisions of Texas law could have the effect of delaying,
deterring or preventing an acquisition of ASD Systems. For example, our board of
directors is divided into three classes to serve staggered three-year terms, we
may authorize the issuance of "blank check" preferred stock, our shareholders
may take action only by a vote at a meeting or by unanimous written consent and
our shareholders are limited in their ability to make proposals at shareholder
meetings.

                                       32
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We currently do not engage in commodity futures trading or hedging
activities and do not enter into derivative financial instrument transactions
for trading or other speculative purposes. We also do not currently engage in
transactions in foreign currencies or in interest rate swap transactions that
could expose us to market risk.

     We may be exposed, in the normal course of doing business, to market risk
through changes in interest rates. We currently minimize such risk by investing
our temporary cash primarily in repurchase obligations collateralized by
commercial mortgages. As a result, we do not believe that we have a material
interest rate risk to manage.

                                       33
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                                                           Page
                                                                           ----
ASD SYSTEMS, INC.

Report of Independent Auditors...........................................   35

Balance Sheets as of December 31, 1999 and 1998..........................   36

Statements of Operations for the Years Ended December 31, 1999
and 1998 and the Period from October 14, 1997 to December 31, 1997.......   37

Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1999 and 1998 and the Period from October 14, 1997
to December 31, 1997.....................................................   38

Statements of Cash Flows for the Years Ended December 31, 1999
and 1998 and the Period from October 14, 1997 to December 31, 1997.......   39

Notes to Financial Statements............................................40-49


FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

Report of Independent Auditors...........................................   50

Balance Sheet as of October 13, 1997.....................................   51

Statement of Operations and Division Deficit for the Period from
     December 21, 1996 to October 13, 1997...............................   52

Statement of Cash Flows for the Period from December 21, 1996 to
October 13, 1997.........................................................   53

Notes to Financial Statements............................................54-56


                                       34
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS



Stockholders and Board of Directors
ASD Systems, Inc.

     We have audited the accompanying balance sheet of ASD Systems, Inc. (the
"Company") as of December 31, 1999 and 1998, and the related statements of
operations, stockholders equity and cash flows for the years ended December 31,
1999 and 1998 and for the period from October 14, 1997 to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ASD Systems, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998 and for the period October 14,
1997 to December 31, 1997, in conformity with accounting principles generally
accepted in the United States.



                                                Ernst & Young LLP



Dallas, Texas
February 18, 2000

                                       35
<PAGE>

                               ASD SYSTEMS, INC.
                                BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                     -------------------------
                                                                        1999           1998
                                                                     ----------     ----------
                                 Assets
<S>                                                                <C>           <C>
Current Assets:
    Cash and cash equivalents..................................     $37,277,760    $       280
    Accounts receivable, less allowance for doubtful
      accounts of $100,000 at December 31, 1999 and
      $50,000 at December 31, 1998.............................       2,378,580      1,334,226
    Prepaid expenses...........................................          63,522            -
                                                                     ----------     ----------
           Total current assets................................      39,719,862      1,334,506
Property and equipment, net....................................       4,679,642      1,868,097
Other assets...................................................          53,350         63,350
                                                                     ----------     ----------
Total assets...................................................     $44,452,854    $ 3,265,953
                                                                     ==========     ==========

            Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
   Revolving credit line.......................................     $       -      $ 2,400,000
   Accounts payable............................................       1,648,154        696,650
   Accrued liabilities.........................................         737,018        472,842
   Current portion of long-term debt...........................         340,000        340,000
                                                                     ----------     ----------
           Total current liabilities...........................       2,725,172      3,909,492
Long term debt.................................................         680,000      1,020,000
Stockholders' equity (deficit):
    Preferred stock, $.0001 par value:
        Authorized shares--7,500,000
        Issued and outstanding--none...........................             -              -
    Class A common stock, $0.0001 par value:
        Authorized shares--50,000,000
        Issued and outstanding shares--21,097,400 at
            December 31, 1999 and 6,000,000 at
            December 31, 1998..................................           2,110            600
    Class B common stock, $.0001 par value:
        Issued and outstanding--none...........................             -              -
    Additional paid-in capital.................................      59,603,870        941,818
    Accumulated deficit........................................     (18,558,298)    (2,605,957)
                                                                     ----------     ----------
          Total stockholders' equity (deficit).................      41,047,682     (1,663,539)
                                                                     ----------     ----------
          Total liabilities and stockholders'
             equity (deficit)..................................     $44,452,854    $ 3,265,953
                                                                     ==========     ==========
</TABLE>

                            See accompanying notes.

                                       36
<PAGE>

                               ASD SYSTEMS, INC.
                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                            Year Ended December 31,      Period From
                                                          --------------------------- October 14, 1997 to
                                                              1999           1998      December 31, 1997
                                                          ------------   ------------ -------------------
<S>                                                     <C>            <C>            <C>
Revenues..............................................    $ 12,313,038   $  8,020,021    $  2,574,467
Cost of revenues......................................       9,700,727      5,051,297       1,248,232
                                                          ------------   ------------    ------------
Gross profit..........................................       2,612,311      2,968,724       1,326,235
Operating expenses:
Selling, general, and administrative expenses.........      10,034,674      4,257,780       1,074,096
Depreciation and amortization.........................       1,482,431      1,083,994         251,722
                                                          ------------   ------------    ------------
Total operating expenses..............................      11,517,105      5,341,774       1,325,818
                                                          ------------   ------------    ------------
      Operating income (loss).........................      (8,904,794)    (2,373,050)            417
Interest income (expense), net........................          98,268       (232,907)        (27,500)
                                                          ------------   ------------    ------------
      Net loss........................................      (8,806,526)    (2,605,957)        (27,083)
Preferred stock dividend..............................      (6,000,000)           -               -
Accretion of preferred stock discount.................      (1,145,815)           -               -
                                                          ------------   ------------    ------------
Net loss attributable to common shareholders..........    $(15,952,341)  $ (2,605,957)   $    (27,083)
                                                          ============   ============    ============
Basic and diluted net loss per share..................    $      (1.39)  $      (0.43)   $        -
                                                          ============   ============    ============
Shares used in computing basic and diluted
     net loss per share...............................      11,464,285      6,000,000             -
                                                          ============   ============    ============
Pro forma basis and diluted net loss per share........                                   $      (0.01)
                                                                                         ============

Shares used in computing pro forma basic and diluted
     net loss and diluted net loss per share..........                                      6,000,000
                                                                                         ============
</TABLE>

                           See accompanying notes.

                                       37
<PAGE>

                               ASD SYSTEMS, INC.
                 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                          Series A        Common Stock
                                                                                        Convertible          Class A
                                                                         Parnters'       Preferred    --------------------
                                                                          Capital         Stock         Shares     Amount
                                                                        ----------      -----------   ----------  --------
<S>                                                                     <C>             <C>              <C>      <C>
Balance at October 14, 1997..........................................   $     -         $       -            -         -
   Contribution of a note receivable to the partnership..............    1,000,000              -            -         -
   Contribution of cash to the partnership...........................       10,000              -            -         -
   Distribution to the partners......................................      (40,000)             -            -         -
   Net loss..........................................................      (27,083)             -            -         -
                                                                        ----------      -----------   ----------  --------
Balance at December 31, 1997.........................................   $  942,917              -            -         -
                                                                        ==========

   Conversion from a partnership to a corporation through
     the issuance of common stock....................................                           -      6,000,000       600
   Net loss..........................................................                           -            -         -
                                                                                        -----------   ----------  --------
Balance at December 31, 1998.........................................                           -      6,000,000       600
   Issuance of common stock in a private transaction.................                           -      4,500,000       450
   Issuance of series A convertible preferred stock..................                     5,744,870          -         -
   Issuance of warrants..............................................                           -            -         -
   Issuance of common stock in a public offering.....................                           -      5,750,000       575
   Conversion of series A convertible stock to common stock..........                    (5,744,870)    2,250,000       225
   Preferred stock dividend resulting from beneficial conversion.....
   Accretion of preferred stock discount.............................
   Conversion of warrants into common stock..........................                           -      2,597,400       260
   Net loss..........................................................                           -            -         -
                                                                                        -----------   ----------  --------
Balance at December 31, 1999.........................................                   $       -     21,097,400  $  2,110
                                                                                        ===========   ==========  ========
<CAPTION>
                                                                                                                      Total
                                                                                       Additional                  Stockholders'
                                                                                        Paid-in      Accumulated      Equity
                                                                                        Capital        Deficit       (Deficit)
                                                                                      ------------   ------------  -------------
<S>                                                                                   <C>            <C>           <C>
Balance at October 14, 1997..........................................                 $        -     $        -    $         -
   Contribution of a note receivable to the partnership..............                          -              -              -
   Contribution of cash to the partnership...........................                          -              -              -
   Distribution to the partners......................................                          -              -              -
   Net loss..........................................................                          -              -              -
                                                                                      ------------   ------------  -------------
Balance at December 31, 1997.........................................                          -              -              -

   Conversion from a partnership to a corporation through
     the issuance of common stock....................................                      941,818            -          942,418
   Net loss..........................................................                          -       (2,605,957)    (2,605,957)
                                                                                      ------------   ------------  -------------
Balance at December 31, 1998.........................................                      941,818     (2,605,957)    (1,663,539)
   Issuance of common stock in a private transaction.................                    4,144,877            -        4,145,327
   Issuance of series A convertible preferred stock..................                          -              -        5,744,870
   Issuance of warrants..............................................                      635,555       (635,555)           -
   Issuance of common stock in a public offering.....................                   41,882,105                    41,882,680
   Conversion of series A convertible stock to common stock..........                    5,999,775       (255,130)           -
   Preferred stock dividend resulting from beneficial conversion.....                    6,000,000     (6,000,000)           -
   Accretion of preferred stock discount.............................                                    (255,130)      (255,130)
   Conversion of warrants into common stock..........................                         (260)                          -
   Net loss..........................................................                          -       (8,806,526)    (8,806,526)
                                                                                      ------------   ------------  -------------
Balance at December 31, 1999.........................................                 $ 59,603,870   $(18,558,298) $  41,047,682
                                                                                      ============   ============  =============
</TABLE>

                           See accompanying notes.

                                       38
<PAGE>

                               ASD SYSTEMS, INC.
                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,           Period from
                                                                        ---------------------------      October 14, 1997 to
                                                                            1999           1998           December 31, 1997
                                                                        ------------   ------------      -------------------
<S>                                                                     <C>            <C>               <C>
Operating Activities
Net Loss...........................................................     $ (8,806,526)  $ (2,605,957)        $    (27,083)
Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
       Depreciation and amortization...............................        1,482,431      1,083,994              251,722
       Provision for doubtful accounts.............................           50,000         50,000                  -
       Write-off of accounts receivable............................        1,527,715            -                    -
       Changes in operating assets and liabilities:
         Accounts receivable.......................................       (1,094,354)      (626,281)            (337,300)
         Prepaid expenses and other assets.........................          (63,522)       (32,806)             (31,043)
         Accounts payable..........................................          951,504        202,463              407,202
         Accrued liabilities.......................................          264,177        (47,209)              10,599
                                                                        ------------   ------------         ------------
Net cash provided by (used in) operating activities................       (5,688,575)    (1,975,796)             274,097
                                                                        ------------   ------------         ------------
Investing Activities
Purchases of property and equipment................................       (4,283,977)      (180,776)            (126,015)
Cash acquired through stock issuances..............................              -           96,852                  -
                                                                        ------------   ------------         ------------
Net cash provided by (used in) investing activities................       (4,283,977)       (83,924)            (126,015)
                                                                        ------------   ------------         ------------
Financing Activities
Borrowings (payments) on revolving line of credit..................       (2,400,000)     2,400,000                  -
Contributions from partners........................................              -              -                 10,000
Distributions to partners..........................................              -              -                (40,000)
Proceeds from issuances of common stock............................       46,028,007            -                    -
Net proceeds from issuance of series A convertible
    preferred stock................................................        5,744,870            -                    -
Net proceeds from issuance of series B mandatorily
    redeemable preferred stock.....................................        5,744,870            -                    -
Redemption of series B mandatorily redeemable
    preferred stock................................................       (6,000,000)           -                    -
Borrowings of long-term debt.......................................        1,795,541            -                    -
Payments of long-term debt..........................................      (2,135,541)      (340,000)                 -
                                                                        ------------   ------------         ------------
Net cash provided by (used in) financing activities.................      48,777,747      2,060,000              (30,000)
                                                                        ------------   ------------         ------------
Net increase in cash and cash equivalents...........................      38,805,195            280              118,082
Cash and cash equivalents at beginning of year......................             280            -                    -
                                                                        ------------   ------------         ------------
Cash and cash equivalents at end of year............................    $ 38,805,475   $        280         $    118,082
                                                                        ============   ============         ============

Noncash Investing and Financing Activities:
Assets acquired under capital leases...............................     $        -     $     32,968         $        -
                                                                        ============   ============         ============
Preferred stock dividends..........................................     $ (6,000,000)  $        -           $        -
                                                                        ============   ============         ============
Accretion of preferred stock discount..............................     $ (1,145,815)  $        -           $        -
                                                                        ============   ============         ============
</TABLE>

                            See accompanying notes.

                                       39
<PAGE>

1.   Organization and Significant Accounting Policies

     Description of Business

     ASD Systems, Inc. (the "Company") provides comprehensive order management
and fulfillment services to Internet retailers and traditional direct marketing
companies in the United States.  The Company is headquartered in Garland, Texas.

     Business Formation and Background

     The Company was formed as a Texas corporation January 1, 1998 by the
issuance of 6,000,000 shares of Series A Common Stock to ASD Partners, Ltd., a
Texas limited partnership (the "Partnership") in exchange for substantially all
of the assets and liabilities of the Partnership.  The transaction was recorded
as a merger of companies under common control similar to a pooling.  The
recorded value of the total assets acquired and liabilities assumed amounted to
$3,624,187 and $2,681,270, respectively.

     The Partnership was formed effective October 14, 1997 to purchase certain
assets (including software, call center and fulfillment facilities) and assume
certain liabilities of Athletic Supply of Dallas, LLC, a wholly owned subsidiary
of Genesis Direct, Inc. ("Genesis"), for $2,700,000.  The Partnership funded the
acquisition by (1) issuing a promissory note for $1,700,000 to Genesis and (2)
causing the majority partner of the Partnership and former employee of Athletic
Supply of Dallas, LLC to forgive $1,000,000 of a note receivable due from
Genesis.  The original note due to the majority partner of the Partnership was
for approximately $3,400,000 with an interest rate of 6.35%.  The forgiveness of
the $1,000,000 represents the September 1997, June 1998 and March 1999 payments
due on the note which were canceled.  The forgiveness was recorded as a
contribution to the Partnership.  This acquisition was recorded as a purchase.

     On December 20, 1996, Genesis purchased all the outstanding common stock of
Athletic Supply of Dallas, Inc. ("Athletic Supply") for $10,000,000, consisting
of $5,000,000 in cash and a $5,000,000 promissory note due to the Athletic
Supply common stockholders.  The acquisition was recorded as a purchase by
Genesis.  Athletic Supply was a catalog sales company that sold sports apparel
and provided fulfillment services to retailers and direct marketing companies.

     Initial Public Offering

     In November 1999, the Company completed its initial public offering (the
"IPO") of 5,750,000 shares (including the underwriters' over-allotment) of its
common stock at $8.00 per share.  Net proceeds to the Company aggregated
approximately $41,883,000.  As of the closing date of the IPO, all of the Series
A convertible preferred stock outstanding was converted into 2,250,000 shares of
common stock (See note 8).

     Reclassifications

     Certain amounts have been reclassified from prior years' classifications to
conform with the current year's presentation.

     Cash and Cash Equivalents

     The Company classifies all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair value.

     Concentration of Credit Risk

     At December 31, 1999 and 1998, 27% and 28%, respectively, of accounts
receivable were due from one customer.  The Company generally does not require
collateral.  The Company maintains an allowance for doubtful

                                       40
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

accounts for potential credit losses. See notes 11 and 13 for further
discussions of significant customers, accounts receivable and uncollectible
accounts.

     The Company's allowance for bad debts was $100,000 and $50,000 at
December 31, 1999 and 1998, respectively. During each of the years ended
December 31, 1999 and 1998, the Company recorded a provision for uncollectible
accounts of $50,000. In addition, the Company wrote off receivables of
$1,527,715 as a result of a dispute with a client during 1999. There were no
write-offs of receivables during 1998 or the period from October 14,1997 to
December 31, 1997.

     Property and Equipment

     Property and equipment are stated at cost.  Equipment acquired under
capital leases is stated at the lower of the present value of future minimum
lease payments or fair value of the equipment at the inception of the lease.
Depreciation and amortization of property and equipment, other than leasehold
improvements, are provided over the estimated useful lives of the assets
(ranging from three to seven years) using the straight-line method.  Leasehold
improvements are amortized on a straight-line basis over the shorter of the
respective lease term or estimated useful life of the asset.

     Revenue Recognition

     Revenues relate primarily to order management and fulfillment services and
are recognized on a per transaction basis as the services are rendered.

     Cost of revenues consists primarily of direct labor costs for providing
order management and fulfillment services and, to a lesser extent, the cost of
contracting for third-party call center and fulfillment center services.

     Advertising Costs

     Advertising costs are expensed as incurred.  Amounts expensed were
approximately $366,000 and $100,000 for the years ended December 31, 1999 and
1998, respectively, and $18,000 for the period from October 14, 1997 to
December 31, 1997.

     Software Development

     Software development costs were expensed as incurred through December 31,
1998.  Since January 1, 1999, with the adoption of SOP 98-1 as discussed in note
2, software application development costs have been capitalized.

     Use of Estimates

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported financial statements and accompanying
notes.  Actual results could differ from those estimates.

     Income Taxes

     Since its incorporation on January 1, 1998, the Company has accounted for
income taxes under the liability method.

     During the period from October 14, 1997 through December 31, 1997, the
Company was a partnership and, therefore, was not subject to income taxes at the
partnership level.  Therefore, no income taxes were recorded for that period.  A
tax benefit for income taxes on a pro forma basis as if the Company were liable
for income taxes as a taxable corporate entity is not presented because of the
uncertainty of utilization of the loss carryforwards in future periods.

                                       41
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

     Long-Lived Assets

     The Company evaluates the carrying values of long-lived assets to determine
if the facts and circumstances suggest that they may be impaired.  If this
review indicates that long-lived assets will not be recoverable, as determined
based on the undiscounted cash flows of the entity over the remaining
amortization period, the carrying value of the long-lived assets will be reduced
accordingly based on discounted cash flow analyses.

     Net Loss Per Share and Pro Forma Net Loss Per Share

     Basic and diluted net loss per share is computed based on the loss
applicable to common shareholders divided by the weighted average number of
shares of common stock outstanding during each period.  Potentially dilutive
securities consisting of warrants and stock options were not included in the
calculation as their effect is antidilutive.  If the Company had reported net
income for the year ended December 31, 1999 the dilutive shares calculation
would have included 1,734,000 additional shares, before applying the treasury
stock method.  The number of dilutive shares resulting from assumed conversion
of stock options would be determined by using the treasury stock method.

     The pro forma basic and diluted net loss per share presented when the
company was a partnership is computed based on net loss divided by the number of
shares outstanding when the Partnership sold assets to the Company.

     Stock Based Compensation

     The Company has elected to follow Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees," in accounting for its
employee stock options and stock based awards.  Under APB 25, if the exercise
price of an employee's stock option equals or exceeds the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.  The additional disclosures required under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation," are included in note 8.

     Fair Value of Financial Instruments

     The Company's financial instruments include cash, accounts receivable,
accounts payable, loans payable and capital lease obligations that are carried
at cost which approximates fair value.

     Derivatives

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivatives
and Similar Financial Instruments and Hedging Activities," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities.  The Company will be required to adopt SFAS
133 at the beginning of fiscal year 2000.  SFAS 133 is not expected to have a
significant impact on the Company.

2.   Software Development Costs

     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal Use."  SOP 98-1
requires all costs related to the application development stage to be
capitalized and amortized over the estimated useful life of the software.  All
other development costs are to be expensed as incurred.  The Company implemented
SOP 98-1 as of January 1, 1999 and, accordingly, capitalized approximately
$789,000 of related costs during the year.

                                       42
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

     Prior to January 1, 1999, the Company expensed all software development
costs.  Such amounts were approximately $1,000,000 for the year ended
December 31, 1998. No software development costs were incurred during the period
from October 14, 1997 to December 31, 1997.

3.   Details of Certain Balance Sheet Accounts

     Property and equipment consist of the following:
<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                            --------------------
                                                                         1999                   1998
                                                                     -------------          -------------
<S>                                                                  <C>                    <C>
Software.........................................................    $   1,953,061          $   1,164,054
Furniture, fixtures and equipment................................        4,564,459              1,767,805
Leasehold improvements.......................................,...          491,836                140,748
                                                                     -------------          -------------
                                                                         7,009,356              3,072,607
Less accumulated depreciation and amortization............,......        2,329,714              1,204,510
                                                                     -------------          -------------
Net property and euipment........................................    $   4,679,642          $   1,868,097
                                                                     =============          =============
</TABLE>

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                                     ------------
                                                                             1999                 1998
                                                                          -----------          -----------
<S>                                                                       <C>                  <C>
Accrued vacation expense..........................................        $   353,858          $   181,824
Accrued salary expense............................................            218,918              152,902
Other.............................................................            164,242              138,116
                                                                          -----------          -----------
   Total accrued liabilities                                              $   737,018          $   472,842
                                                                          ===========          ===========
</TABLE>

4.   Revolving Credit Line

     The Company has available a $2 million line of credit. Any borrowings under
the line bear interest at the bank's prime rate plus 0.75% (9.25% at
December 31, 1999).

5.   Long-term Debt

     Long-term debt relates to a long-term note due to Genesis (see Note 1) in
the original amount of $1,700,000 ($1,020,000 as of December 31, 1999).  The
note bears interest at a rate of 6% and principal and interest payments are due
quarterly beginning January 14, 1998.  The note is collateralized by all the
assets acquired from Genesis.  The note is payable in quarterly installments of
$85,000 ($340,000 annually) until its final maturity on October 14, 2002.

     Interest expense under the revolving line of credit and long-term debt was
approximately $320,000 and  $214,000 for the years ended December 31, 1999 and
1998.  There was no interest expense for the period from October 14, 1997 to
December 31, 1997.

6.   Income Taxes

     The provision (benefit) for income taxes is reconciled with the statutory
rate for the years ended December 31, 1999 and 1998 as follows:

                                       43
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

<TABLE>
<CAPTION>
                                                                                                         1999         1998
                                                                                                     -----------   ----------
<S>                                                                                                  <C>           <C>
   Provision (benefit) computed at federal statutory rate..........................................  $(2,994,219)   $(886,025)
   State income taxes, net of federal tax effect...................................................     (261,346)     (76,166)
   Change in deferred tax assets valuation allowance...............................................    3,253,181      946,835
   Other...........................................................................................        2,384       15,356
                                                                                                     -----------    ---------
                                                                                                     $       -     $      -
                                                                                                     ===========   ==========
</TABLE>

Significant components of the deferred tax asset at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
                                                                                                        1999          1998
                                                                                                     -----------    ---------
<S>                                                                                                  <C>            <C>
   Deferred tax assets (liabilities):
     Net operating loss carryforward...............................................................  $ 4,114,235    $ 793,185
     Property and equipment........................................................................      (58,771)     128,595
     Accrued expenses..............................................................................      130,821        6,570
     Prepaid expenses..............................................................................      (23,240)          --
     Allowance for doubtful accounts...............................................................      (36,970)      18,485
                                                                                                     -----------    ---------
   Total deferred tax assets.......................................................................    4,200,015      946,835
   Less valuation allowance........................................................................   (4,200,015)    (946,835)
                                                                                                     -----------    ---------
   Net deferred taxes..............................................................................  $       -      $     -
                                                                                                     ===========    =========
</TABLE>

     The Company has federal net operating loss carryforwards of $11,128,587 at
December 31, 1999 which, if not utilized, will expire in 2019.  The Company's
total deferred tax assets have been fully reserved because of the uncertainty of
future taxable income.  Accordingly, no tax benefit has been recognized in the
accompanying financial statements.


7.   Leases

     As of December 31, 1999 the Company was obligated under various
noncancelable operating lease agreements for office and warehouse facilities. A
summary of future minimum lease payments follows:

<TABLE>
<S>                                                                                                            <C>
       2000................................................................................................     $  476,157
       2001................................................................................................        392,507
       2002................................................................................................        382,507
       2003................................................................................................         62,085
       2004................................................................................................              -
                                                                                                                ----------
         Total...........................................................................................       $1,313,256
                                                                                                                ==========
</TABLE>

     Rental expense under noncancelable operating leases for facilities and
equipment approximated $820,000, $503,000 and $75,000 for the years ended
December 31, 1999 and 1998 and the period from October 14, 1997 through
December 31, 1997.

     The Company leases an office/warehouse building from its Chairman, CEO and
significant shareholder for an annual rental expense of $100,000.  The lease
expires June 30, 2002.

     In connection with the Company's lease of its corporate office and
warehouse facility, the significant shareholder has executed a limited guaranty
with respect to payments by the Company under such lease.  Such guaranty is
presently for a maximum amount of $400,000 and decreases by $100,000 increments
on January 1 of each year from January 1, 1999.  The significant shareholder is
not entitled to receive a fee or any other remuneration for his agreement to
guaranty this obligation.

                                       44
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)


8.   Stockholders' Equity

Common Stock

     In February 1999, the Company completed a private placement of 4,500,000
shares of its common stock for a gross amount of $4,500,000.  A third party was
engaged to assist with the transaction, and was paid a commission of $281,250
plus warrants to purchase an aggregate of 1,000,000 shares of common stock at
prices ranging from $1.00 to $3.00 per share.  The warrants expire in February
2004.

     In November 1999, the Company completed an IPO of 5,750,000 common shares
(including underwriters' overallotment) for $8 per share. Net proceeds to the
Company aggregated approximately $41,883,000.  As of the closing date of the
offering, all of the Series A convertible preferred stock outstanding was
converted into 2,250,000 shares of common stock.

Preferred Stock

     The Company has authorized preferred stock as follows:

       Series A convertible preferred stock, $.0001 par
          value.........................................     1,111,111 shares

       Series B redeemable preferred stock, $.0001 par
          value.........................................     1,111,111 shares

       Series C non-voting preferred stock, $.0001 par
          value.........................................     3,200,000 shares

       "Blank check" preferred stock, $.0001 par
          value.........................................     2,077,778 shares
                                                             ---------
           Total........................................     7,500,000 shares
                                                             =========

     In August 1999, the Company sold to outside investors, 1,111,111 shares of
its Series A convertible preferred stock and 1,111,111 shares of its Series B
redeemable preferred stock for gross proceeds of $12,000,000.  The Series A
preferred stock was convertible into common stock at a conversion price of $5.40
per share.  However, in the event of an IPO, the conversion price was defined as
the lesser of $5.40 or one-third of the issue price of the stock in the IPO.
Therefore, upon the closing of the IPO, all of the Series A preferred stock was
converted at $2.67.  In addition, a deemed $6,000,000 non-cash preferred stock
dividend related to the embedded beneficial conversion feature of the Series A
convertible preferred stock has been recorded in accordance with "EITF 1998-5:
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios".

     The Series B redeemable preferred stock, in accordance with its terms, was
redeemed at $5.40 per share by the Company upon the closing of the IPO.

     In connection with the Series A preferred stock sale, the investors were
issued warrants to purchase additional shares of common stock equal to 1.3 times
the number of shares of common stock issuable with respect to the Series A
preferred stock at an exercise price equal to 110% of the conversion price as
described above. The fair value of the warrants on the date of grant was
$635,555 and has been recorded as accretion of preferred stock discounts.

     In December 1999, the Company issued 2,597,400 common shares as a result of
the cashless conversion of the aforementioned warrants.  The total number of
warrants converted was 2,925,000 at $2.94 per share.  In accordance with the
terms of the original preferred stock purchase and sale agreement (see below),
the number of shares issued was reduced by 327,600, which when multiplied by the
then market price of the shares ($26.25), yielded an amount equal to the total
exercise price of all the warrants.  No cash proceeds were received from this
transaction.

     Also in connection with the sale of the Series A and B preferred stock, the
Company amended and restated its Articles of Incorporation to establish Series A
voting common stock as the sole class of outstanding common stock, and to
convert Series B non-voting common stock into shares of Series C non-voting
preferred stock.

     No preferred stock was outstanding at December 31, 1999 or 1998.

                                       45
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

     As part of the sale of the Series A and B preferred stock, the Company paid
$420,000 to an entity affiliated with a director of the Company in consideration
for commissions on the sale of the preferred stock.

9.   Stock Option Plan

     The Company's Long-Term Incentive Plan (the "Plan"), approved in May 1999
and amended in August 1999, provides for the issuance to qualified participants
options to purchase up to 1,200,000 of common stock.  As of December 31, 1999
options to purchase 746,500 shares of common stock were outstanding under the
Plan.

     The exercise price of the options is determined by the administrators of
the Plan, but cannot be less than the fair market value of the Company's common
stock on the date of the grant.  Options vest ratably over five years from the
date of the grant.

     Following is a summary of the activity of the Plan:
<TABLE>
<CAPTION>
                                                                                                             Weighted
                                                                                                Number        Average
                                                                                                  Of          Exercise
                                                                                                Options        Price
                                                                                             ----------      -----------
<S>                                                                                          <C>             <C>
   Outstanding, December 31, 1998.............................................                    --              --
   Granted in 1999............................................................                  879,500      $   3.36
   Exercised in 1999..........................................................                    --              --
   Canceled in 1999...........................................................                  133,000          2.16
                                                                                                -------
   Outstanding, December 31, 1999.............................................                  746,500          3.57
                                                                                               ========
</TABLE>

Additional information regarding options outstanding as of December 31, 1999 is
as follows:
<TABLE>
<CAPTION>


                                             Options Outstanding                             Options Exercisable
                                   -----------------------------------------         -----------------------------------
        Exercise                     Number      Weighted  Average Remaining           Number           Weighted Average
         Price                     Outstanding     Contractual Life (Yrs.)           Exercisable         Exercise Price
        --------                   -----------   ---------------------------         -----------        ----------------
<S>                                <C>           <C>                                 <C>                <C>
        $ 1.00                         400,000               9.21                        --                     --
          5.40                         208,500               9.69                        --                     --
          8.25                         138,000               9.88                        --                     --
                                       -------
                                       746,500
                                       =======
</TABLE>

     The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan.  Had compensation cost been recognized consistent with
SFAS No. 123, the Company's net loss attributable to common shareholders and
loss per share would have been increased to pro forma amounts indicated below
for the year ended December 31, 1999:

     Net loss attributable to common shareholders:

       As reported......................................... $ (15,952,341)
       Pro forma........................................... $ (16,005,084)

                                       46
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

     Basic and diluted net loss per share:

       As reported......................................... $ (1.39)
       Pro forma........................................... $ (1.40)

     The Company used the Black-Scholes option pricing model to determine the
fair value of grants made during 1999.  The following weighted average
assumptions were applied in determining the pro forma compensation cost:

   Risk-free interest rate.................................    4.7%
   Expected option life in years...........................    3.75
   Expected stock price volatility.........................    .526
   Expected dividend yield.................................    0.0%

     In February 1999, in a separate transaction outside of the Plan, an
executive of the Company was granted options exercisable for 957,500 shares of
common stock.  The stock options are exercisable at any time at a price of $1.00
per share which equaled the fair value of the common stock on the date of the
grant.  The term of the options is five years.

10.  Employee Benefit Plan

     In October 1998, the Company adopted the ASD Systems Employees Profit
Sharing Plan & Trust (the "401k Plan") to provide retirement and incidental
benefits for the Company's employees.  The 401k Plan covers substantially all
employees who meet minimum age and service requirements. Employees vest at 20%
per year, for five years of service, to share in the Company's matching
contribution.  As allowed under Section 401(k) of the Internal Revenue Code, the
401(k) Plan provides tax deferred salary deductions for eligible employees.

     Employees may contribute from 1% to 19% of their annual compensation to the
401k Plan, limited to a maximum amount set by the Internal Revenue Service.  The
Company matches employee contributions at the rate of $0.25 per each $1.00 of
contribution on the first 4% of deferred compensation.  Company matching
contributions to the 401k Plan were approximately $23,000 in 1999 and $6,000 in
1998.

11.  Significant Customers

     The Company provides services to two major clients, which are related
through common control.  Sales to the combined entities amounted to 54%, 84% and
94% for the years ended December 31, 1999 and 1998 and the period from
October 14, 1997 through December 31, 1997, respectively. Accounts receivable
due from the combined entities amounted to 27% and 28% of total receivables at
December 31, 1999 and 1998, respectively.

     The Company's current contracts with the customers expire in August 2000
and July 2001.  Management of the Company expects the contracts to be renewed
before their expiration dates.

                                       47
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

12.  Computations of Basic and Diluted Net Loss Per Common Share

<TABLE>
<CAPTION>
                                                                                                                   Period from
                                                                                                                 October 14, 1997
                                                                                   December 31,    December 31,      through
                                                                                       1999           1998       December 31, 1997
                                                                                   ------------    ------------   -----------------
<S>                                                                                <C>             <C>            <C>
Numerator:
   Numerator for basic and diluted net
        Loss per common share..............................................        $ (8,806,526)   $ (2,605,957)      $  (27,083)
        Preferred stock dividend...........................................          (6,000,000)          --                 --
        Accretion of preferred stock discount..............................          (1,145,815)          --                 --
                                                                                    -----------    ------------
                                                                                   $(15,952,341)   $ (2,605,957)      $  (27,083)
                                                                                   ============    ============       ==========
Denominator:
   Denominator for basic net loss per common
        share--weighted-average shares.....................................          11,464,285       6,000,000        6,000,000
                                                                                   ============    ============       ==========
Effect of dilutive securities:
   Employee stock options..................................................              --             --                --
   Warrants................................................................              --             --                --
                                                                                   ------------    ------------       ----------
Basic and diluted net loss per common share................................        $      (1.39)   $      (0.43)      $     (.01)
                                                                                   ============    ============       ==========

</TABLE>

13.  Transactions with Certain Clients

     In October 1999, a client advised the Company that it wished to terminate
its relationship with the Company.  Shortly thereafter, the client presented the
Company with a summary of amounts representing lost revenues and other costs
that the client asserted were caused by the Company.

     In February 2000, the Company and the client agreed to a settlement of the
client's claims, and the amount owed by the client to the Company was adjusted
to $350,000, resulting in total bad debts and claims costs of approximately
$1,500,000.  Sales to this client amounted to $2,688,189 in 1999 and none in
1998 and 1997.

     In January 2000, another client advised the company that it would no longer
be requiring the Company's services.  This client has identified certain claims
against the Company resulting from an alleged lack of performance under the
contract.  Management has reviewed the terms of the contract and is of the
opinion that the Company has performed as required under its terms.

     The Company and the client have agreed to a standstill agreement until
further facts can be developed.  During the term of the standstill agreement,
the client will not make payments on outstanding accounts receivable to from the
Company, which totaled $978,877 at December 31, 1999.

     Management further believes that none of the potential claims alleged by
the client relate to services actually performed by the Company and the related
billings.  Management believes that the Company has sound defenses against
claims, if any, that might be formally asserted by the client.  However, because
this matter is in the preliminary stage of negotiation and review, management is
unable to predict its outcome with assurance and consequently is unable to
ascertain the ultimate amount of monetary liability, if any, or financial impact
with respect to this matter at December 31, 1999.  The amount of any potential
claims has not been documented by the client and, therefore, is not presently
determinable.  Sales to this company amounted to $1,141,991 in 1999 and none in
1998 and 1997.

                                       48
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS
                                  (continued)

14.  Legal Proceedings

     From time to time, the Company may be involved in litigation claims and
other administrative proceedings that arise through the normal course of
business operations.  All such matters, including claims by two former clients
as discussed in Note 13, are subject to many uncertainties and outcomes not
predictable with assurance.  Consequently, management is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to one remaining matter at December 31, 1999.

                                       49
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS



Stockholders and Board of Directors
Athletic Supply of Dallas, LLC

     We have audited the accompanying balance sheet of the Fulfillment Division
of Athletic Supply of Dallas, LLC (the "Division") as of October 13, 1997 and
the related statements of operations and division deficit and cash flows for the
period from December 21, 1996 to October 13, 1997. These financial statements
are the responsibility of the Division's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Fulfillment Division of
Athletic Supply of Dallas, LLC at October 13, 1997, and the results of its
operations and its cash flows for the period December 21, 1996 to October 13,
1997, in conformity with accounting principles generally accepted in the United
States.



                                    Ernst & Young LLP



Dallas, Texas
August 5, 1999

                                       50
<PAGE>

            FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

                                 BALANCE SHEET

                               October 13, 1997


<TABLE>
<S>                                                                                    <C>
Assets
  Current assets
  Accounts receivable                                                                         $  454,166
 Total current assets                                                                            454,166
                                                                                     -------------------
 Property and equipment, net                                                                     782,648
 Other assets                                                                                     25,582
                                                                                     -------------------
Total assets                                                                                  $1,262,396
                                                                                     ===================

Liabilities and Division Deficit
 Current liabilities
  Accounts payable                                                                            $   35,378
  Accrued liabilities                                                                            563,681
  Due to Athletic Supply of Dallas, LLC                                                        1,483,745
                                                                                     -------------------
 Total current liabilities                                                                     2,082,804

Commitments and contingencies

Division deficit                                                                                (820,408)
                                                                                     -------------------
Total liabilities and division deficit                                                        $1,262,396
                                                                                     ===================
</TABLE>

                            See accompanying notes.

                                       51
<PAGE>

            FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

                 STATEMENT OF OPERATIONS AND DIVISION DEFICIT

<TABLE>
<CAPTION>
                                                                                          Period from
                                                                                       December 21, 1996
                                                                                      to October 13, 1997
                                                                                    --------------------
<S>                                                                                   <C>
Revenues                                                                                      $4,881,787
Cost of revenue                                                                                2,685,838
                                                                                    --------------------
Gross profit                                                                                   2,195,949

Selling, general, and administrative expenses                                                  3,016,357
                                                                                    --------------------

Net loss                                                                                        (820,408)
Division deficit, December 21, 1996                                                                    -
                                                                                    --------------------
Division deficit, October 13, 1997                                                            $ (820,408)
                                                                                    ====================
</TABLE>


                            See accompanying notes.

                                       52
<PAGE>

            FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                               Period from
                                                                                               December 21,
                                                                                          1996 to October 13, 1997
                                                                                          ------------------------
<S>                                                                                       <C>
Operating Activities
Net loss                                                                                           $ (820,408)
Adjustments to reconcile net loss to net cash provided by  operating activities:
  Depreciation                                                                                        367,300
  Changes in operating assets and liabilities:
         Accounts receivable                                                                        1,092,308
         Accounts payable                                                                            (110,617)
         Accrued liabilities                                                                          279,182
                                                                                                 ------------
Net cash provided by  operating activities                                                            807,765

Investing Activities
Purchases of property and equipment                                                                   (38,665)
                                                                                                 ------------
Net cash used in investing activities                                                                 (38,665)

Financing Activities
Financing provided  to Athletic Supply LLC                                                           (769,100)
                                                                                                 ------------
Net cash used in financing activities                                                                (769,100)

Net change in cash and cash equivalents                                                                     -
Cash and cash equivalents at beginning of year                                                              -
                                                                                                 ------------

Cash and cash equivalents at end of year                                                           $        -
                                                                                                 ============

Net assets acquired by parent allocated to the division                                            $2,252,845
                                                                                                 ============
</TABLE>

                            See accompanying notes.

                                       53
<PAGE>

            FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

                         NOTES TO FINANCIAL STATEMENTS


1.   Description of the Business, Basis of Presentation, and Summary of
Significant Accounting Policies

     Basis of Presentation and Description of Business

     The Fulfillment Division (the "Division") of Athletic Supply of Dallas LLC
(the "Parent") provides comprehensive order management and fulfillment services
to internet retailers and traditional direct marketing companies in the United
States.  The Parent is a subsidiary of Genesis Direct Inc. ("Genesis") which
acquired the Parent on December 20, 1996 by purchasing all the common stock of
Athletic Supply of Dallas Inc. ("Athletic Supply") for $10,000,000, consisting
of $5,000,000 in cash and $5,000,000 promissory note due to the Athletic Supply
common stockholders. On October 14, 1997, certain assets and liabilities of the
Division were sold by Genesis to ASD Partners Ltd. for $2,700,000, consisting of
(1) a $1,700,000 promissory note due to Genesis and (2) causing the majority
partner and executive of the Parent and Athletic Supply to forgive a $1,000,000
note receivable from Genesis.

     The accompanying financial statements reflect the financial position and
results of operations of the Fulfillment Division of Athletic Supply of Dallas,
LLC for the period December 21, 1996 to October 13, 1997.  The balance sheet as
of October 13, 1997 has been prepared using the historical basis of accounting
and includes all of the assets and liabilities specifically identifiable to the
Division.  Only specific assets and liabilities could be included because
corporate accounting systems of the Parent were not designed to track cash
receipts and payments on a division specific basis.

     The statement of operations for the period December 21, 1996 to October 13,
1997 includes all revenue and costs directly attributable to the Division,
including the allocation of facilities, salaries and employee benefits.
Specifically, the Division was allocated rent expense of approximately $242,000
for the period December 21, 1996 to October 13, 1997.

     All of the allocations reflected in the financial statements are based on
assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the Division had been operated on a stand-
alone basis during the period December 21, 1996 to October 13, 1997 nor are they
necessarily indicative of future costs to support the operations of the
Division.

     Accounts Receivable and Concentration of Credit Risk

     Financial instruments, which potentially subject the Division to
concentrations of credit risk, consist primarily of its accounts receivable from
customers.  At October 13, 1997, 97% of accounts receivable were due from one
customer. The Company generally does not require collateral.  During the period
from December 21, 1996 to October 13, 1997, the Division did not record a
provision for uncollectible accounts nor write off any bad debts.

                                       54
<PAGE>

            FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

                   NOTES TO FINANCIAL STATEMENTS (Continued)


     Property and Equipment

     Property and equipment are stated at cost.  Equipment allocated to the
Division and acquired under capital leases by the Parent is stated at the lower
of the present value of future minimum lease payments or fair value of the
equipment at the inception of the lease.  Depreciation and amortization of
property and equipment, other than leasehold improvements, are provided over the
estimated useful life of the assets (ranging from three to seven years) using
the straight-line method.  Leasehold improvements allocated to the Division are
amortized on a straight-line basis over the shorter of the respective lease term
or estimated useful life of the asset.

     Revenue Recognition

     Revenues relate primarily to order management and fulfillment services and
are recognized on a per transaction basis as the services are rendered.

     Cost of revenues consist of direct labor costs for providing order
management and fulfillment services and, to a lesser extent, the cost of
contracting for third party call center and fulfillment center services.

     The Division had one major customer, Sears, Roebuck, and Co ("Sears"), a
major national retailer that accounted for 95% of its revenues for the period
from December 21, 1996 to October 13, 1997.

     Advertising Costs

     Advertising costs are expensed as incurred.  Amounts expensed were
approximately $18,000 for the period from December 21, 1996 to October 13, 1997.

     Use of Estimates

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported financial statements and accompanying
notes. Actual results could differ from those estimates.

     Income Taxes

     During the period from December 21, 1996 to October 13, 1997, the Division
was not a taxable entity and was part of the taxable entity of the Parent.  A
provision for income taxes on a pro forma basis, as if the Division were liable
for federal and state income taxes as a taxable corporate entity for the period
December 21, 1996 to October 13, 1997, is not presented as the parent had zero
tax expense due to the loss carryforward being fully reserved.

2.   Detail of Certain Balance Sheet Accounts

     Property and equipment are stated at cost and consist of the following at
October 13, 1997:

<TABLE>
<CAPTION>

<S>                                                            <C>
Furniture, fixtures, and equipment                                     $2,535,335
Leasehold improvements                                                    113,218
                                                             --------------------
                                                                        2,648,553
Less accumulated depreciation and amortization                          1,865,905
                                                             --------------------
Net property and equipment                                             $  782,648
                                                             ====================
</TABLE>

                                       55
<PAGE>

            FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC

                   NOTES TO FINANCIAL STATEMENTS (Continued)


Accrued liabilities consists of the following at October 13, 1997:

<TABLE>
<CAPTION>

<S>                                                          <C>
        Accrued vacation expense                             $  164,054
        Accrued salary expense                                  347,712
        Accrued property taxes                                   51,915
        Other                                                         -
                                                             ----------
        Total accrued liabilities                              $563,681
                                                             ==========
</TABLE>

3.   Due to Athletic Supply of Dallas, LLC

     The Division utilized the Parent's centralized cash management services and
processes related to receivables, payables, payroll, and other activities.  The
amounts due the Parent represent funding supplied by the Parent for capital
expenditures, payment of operating and capital lease obligations, and other
working capital needs. There were no intercompany transfers and no amounts were
paid to the Parent in repayment of the financing provided.

                                       56
<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

     Not Applicable.


PART III.

     Certain information required by Part III is incorporated by reference in
this report from our definitive Proxy Statement for our 2000 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the "Proxy Statement").


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item is incorporated by reference from the
sections of the Proxy Statement captioned "Election of Directors -- Class A
Directors - Nominees for Election to a Three Year Term Ending with the 2003
Annual Meeting," "-- Class C Directors - Nominees for Election to a Three Year
Term Ending with the 2002 Annual Meeting," "-- Class B Directors - Nominees for
Election to a Three Year Term Ending with the 2001 Annual Meeting," and
"Management -- Executive Officers."


ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference from the
sections of the Proxy Statement captioned "Election of Directors -- Compensation
of Directors," "Management -- Executive Compensation," "-- Long-Term Incentive
Plan," "--401(k) Plan," "--Compensation Committee Interlocks and Insider
Participation," "Board Report on Executive Compensation" and "Performance
Graph."


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference from the
sections of the Proxy Statement captioned "Stock Ownership."


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference from the
sections of the Proxy Statement captioned "Management -- Certain Transactions."

                                       57
<PAGE>

PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STAEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)  The following documents are filed as a part of this report:

          1.   Financial Statements - ASD Systems, Inc.  The following Financial
               Statements of the Company are included at Part II, Item 8, of
               this Annual Report on Form 10-K.

               Independent Auditors' Report
               Balance Sheets as of December 31, 1999 and 1998
               Statements of Operations for the years ended December 31, 1999
                  and 1998 and the period from October 14, 1997 to December 31,
                  1997
               Statements of Stockholders' Equity (Deficit) for the years ended
                  December 31, 1999 and 1998 and the period from October 14,
                  1997 to December 31, 1997
               Statements of Cash Flows for the years ended December 31, 1999
                  and 1998 and for the period from October 14, 1997 to December
                  31, 1997
               Notes to Financial Statements

          2.   Financial Statements - Fulfillment Division of Athletic
               Supply of Dallas, LLC. The following Financial Statements of the
               Company are included at Part II, Item 8, of this Annual Report on
               Form 10-K.

               Independent Auditors' Report
               Balance Sheet as of October 13, 1997
               Statement of Operations and Division Deficit for the period from
                  December 21, 1996 to October 31, 1997
               Statement of Cash Flows for the period from December 21, 1996 to
                  October 13, 1997
               Notes to Financial Statements

          3.   Financial Statement Schedules.  All required schedules are
               omitted because the required information is not present in
               amounts sufficient to require submission of the schedule or
               because the information required is included in the financial
               statements or notes thereto.

          4.   Exhibits.  The exhibits listed on the accompanying Index to
               Exhibits immediately following the signature page are filed as
               part of, or incorporated by reference into, this Annual Report on
               Form 10-K.

     (b)  Reports on Form 8-K

          No reports on Form 8-K were filed by us during the quarter
          ended December 31, 1999.

                                       58
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on
March 27, 2000.

                                ASD SYSTEMS, INC.


                                By:  /s/ David E. Bowe
                                   ---------------------------------------
                                   David E. Bowe
                                   President and Chief Financial Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the 27th day of March, 2000, below by
the following persons in the capacities indicated.

<TABLE>
<CAPTION>
               Signature                                                  Title
               --------                                                   -----
<S>                                      <C>
     /s/ Norman Charney                  Chairman of the Board and Chief Executive Officer
-----------------------------------      (Principal Executive Officer)
       Norman Charney

     /s/ David E. Bowe                   President and Chief Financial Officer
-----------------------------------      (Principal Financial and Accounting Officer)
       David E. Bowe

     /s/ Paul M. Jennings                Chief Technology Officer and Director
-----------------------------------
       Paul M. Jennings

     /s/ Jonathan R. Bloch               Director
-----------------------------------
       Jonathan R. Bloch

     /s/ Alan E. Salzman                 Director
-----------------------------------
       Alan E. Salzman

     /s/ Paul G. Sherer                  Director
-----------------------------------
       Paul G. Sherer

     /s/ Kevin P. Yancy                  Director
-----------------------------------
       Kevin P. Yancy
</TABLE>

                                       59
<PAGE>

                              INDEX TO EXHIBITSc

Exhibit
Number          Description
------          -----------

3.1       Amended and Restated Articles of Incorporation of ASD Systems, Inc.
          (Exhibit 3.1) (1)

3.2       Amended and Restated Bylaws of ASD Systems, Inc. (Exhibit 3.2) (1)

4.1.      Form of Common Stock Certificate (Exhibit 4.1) (1)

4.2       1999 Long-Term Incentive Plan for ASD Systems, Inc. (Exhibit 4.2) (1)

4.3       Form of Stock Option Agreement under 1999 Long-Term Incentive Plan
          (Exhibit 4.3) (1)

4.4       401(k) Plan for ASD Systems, Inc. (Exhibit 4.4) (1)

10.1      Agreement, dated January 4, 1995, between Sears, Roebuck and Co. and
          ASD Systems, Inc., as amended June 11, 1998 and April 20, 1999+
          (Exhibit 10.1) (1)

10.2      Form of ASD Certified Service Provider Agreement (Exhibit 10.2) (1)

10.3      Credit Agreement between ASD Systems, Inc. and Comerica Bank-Texas,
          dated May 13, 1999 (Exhibit 10.3) (1)

10.4      Forms of Employee Nondisclosure Agreements (Exhibit 10.4) (1)

10.5      Net Commercial Lease Agreement, dated November 1, 1986, between Norman
          Charney and ASD Systems, Inc., as amended May 31, 1991 and March 15,
          1996 (Exhibit 10.5) (1)

10.6      Multi-Tenant Industrial Triple Net Lease Agreement, dated January 1,
          1998, between ASD Systems, Inc. and Catellus Development Corporation
          (Exhibit 10.6) (1)

10.7      Real Property Lease Agreement, dated May 1, 1999, between ASD Systems,
          Inc. and AMB Property II, L.P. (Exhibit 10.7) (1)

10.8      Employment Agreement, dated as of December 14, 1998, between ASD
          Systems, Inc. and Norman Charney (Exhibit 10.8) (1)

10.9      Employment Agreement, dated as of October 14, 1997, between ASD
          Partners, Inc. and Paul M. Jennings (Exhibit 10.9 (1)

10.10     Form of Indemnification Agreements with directors (Exhibit 10.10) (1)

10.11     Stock Option Agreement dated as of February 10, 1999 between ASD
          Systems and Paul M. Jennings (Exhibit 10.11) (1)

10.12     Amended and Restated Shareholders' Agreement, dated as of August 23,
          1999, between ASD Systems, Inc., and certain holders of equity
          securities of ASD Systems, Inc. (Exhibit 10.12) (1)

10.13     Form of Warrant granted to affiliates of CKM Capital LLC
          (Exhibit 10.15)

10.14     First Amendment to Credit Agreement between ASD Systems, Inc. and
          Comerica Bank-Texas, dated June 24, 1999 (Exhibit 10.16) (1)

                                       60
<PAGE>

10.15     Second Amendment to Credit Agreement between ASD Systems, Inc. and
          Comerica Bank-Texas, dated September 2, 1999 (Exhibit 10.17) (1)

10.16     Third Amendment to Lease Agreement, dated May 15, 2000, between Norman
          Charney and ASD Systems, Inc.

23.1      Consent of Ernst and Young LLP

27.1      Financial Data Schedule

---------------------------
(1)  Incorporated by reference to the exhibits shown in parenthesis filed in our
     Registration Statement on Form S-1, File No. 333-85983.
+    Portions of this exhibit have been omitted pursuant to a request for
     confidential treatment.

                                       61