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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITY EXCHANGE ACT OF 1934
(MARK ONE)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 1998;
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________.
Commission File Number 0-11791
GREENTREE SOFTWARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
New York 13-2897997
- ------------------------------- ---------------------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
7901 Flying Cloud Drive
Suite 200 55344
Eden Prairie, Minnesota 55344 ---------------
- ---------------------------------------- (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (612) 941-1500
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Title of Each Class
- --------------------------------------
Common Shares, par value $0.01 per share
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Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 or
Regulation S-B in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $616,639
The aggregate market value of the Common Shares, par value $0.01 per share
("Common Shares"), held by non-affiliates of the Registrant (totaling
approximately 2,463,799 shares) was approximately $5,235,573 as of June 30, 1998
(based upon the closing bid of the Registrant's Common Shares in the OTC
Bulletin Board on June 30, 1998 of $2.125 per share). The term affiliates is
deemed, for this purpose only, to refer only to directors, officers, and
principal stockholders of the Registrant.
State the number of shares outstanding in each of the issuer's classes of common
equity, as of June 30, 1998.
<TABLE>
<CAPTION>
CLASS OUTSTANDING
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<S> <C>
Common Shares, par value 8,029,761 shares
$0.01 per share
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be delivered to
Shareholders in connection with the Annual Meeting of Shareholders to be held on
September 17, 1998 are incorporated by reference into Part III hereof. With the
exception of the portions of such Proxy Statement expressly incorporated into
this Annual Report on Form 10-KSB by reference, such Proxy Statement shall not
be deemed filed as part of this Annual Report on Form 10-KSB.
2
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GREENTREE SOFTWARE, INC.
ANNUAL REPORT ON FORM 10-KSB
MAY 31, 1998
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C> <C>
Item 1 Description of Business 1
Item 2 Description of Property 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis or Plan of Operations 11
Item 7 Financial Statements 13
Item 8 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 13
PART III
Item 9 Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the Exchange Act 14
Item 10 Executive Compensation 14
Item 11 Security Ownership of Certain Beneficial Owners and
Management 15
Item 12 Certain Relationships and Related Transactions 15
Item 13 Exhibits, List and Reports on Form 8-K 15
</TABLE>
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Except for the historical information contained herein, this Annual Report on
Form 10-KSB may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, but not limited to, (i) the Company's belief in the growth
of the purchasing and procurement systems software market and (ii) expectations
for the Company's strategy and future performance. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, but not limited to, the risks and uncertainties set forth under the
heading "Risk Factors" and the following risks and uncertainties: (i) the
Company's history of losses and accumulated deficit, limited revenues, and the
uncertainty of future profitability; (ii) the uncertainty of market acceptance
of PurchaseSoft software; (iii) new management and ability to recruit sales,
service, and implementation personnel; (iv) the intense competition in the
software field; (v) the dependence on one product and rapid technological change
in the industry; and (vi) fluctuations in quarterly operating results. The
forward-looking statements contained herein represent the Company's judgment as
of the date of this Annual Report on Form 10-KSB, and the Company cautions
readers not to place undue reliance on such statements.
Except as otherwise noted, all information in this Annual Report on Form 10-KSB
reflects a one-for-six reverse stock split of the Company's Common Shares
effected on July 22, 1997.
PART I:
ITEM 1: DESCRIPTION OF BUSINESS
THE COMPANY
Greentree Software, Inc. (the "Company" or "Greentree") was incorporated in
New York in June 1977 and began operations as a management consulting firm
specializing in the area of purchasing and materials management. In 1985, the
Company introduced its first software product for purchasing and materials
management, Computer Aided Purchasing-Registered Trademark- ("CAP1") for use on
IBM compatible personal computers. Since 1991, all of the Company's revenues
have been derived from the sale and maintenance of software products.
The Company released its first Microsoft Windows and client/server based
purchasing and materials management software system (GT Purchase PRO) in May
1994. In March 1996, the Company released its GT Purchase PRO version 5.0. In
May 1997, GT Purchase PRO version 6.0 was released, which provided additional
major enhancements to the product. In a press release dated October 4, 1997,
the Company announced that the product name was being changed from GT Purchase
Pro to PurchaseSoft 2.0. The Company believes this name more accurately
describes the new enterprise scope of their software solution.
PURCHASESOFT
PurchaseSoft is a full life-cycle suite of software for improving the
performance of Purchasing and Materials Management. As a companion to Financial
Accounting Software, PurchaseSoft gives everyone, including requisitioners,
managers, buyers, and executives, a better and more efficient solution for
purchasing and materials management automation. PurchaseSoft is compatible with
Structured Query Language ("SQL") databases, the client/server architecture, and
e-mail. PurchaseSoft is an enterprise-wide application developed in
Powerbuilder 5.0 that is shipped as a 16-bit application for Windows 3.1 users
or as a true 32-bit application for Windows 95, 98 and NT users.
1
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The complete PurchaseSoft software suite includes the following modules:
Purchasing Inventory
Requisitioning Invoice Matching
Receiving Asset Management
Quotations Blanket Orders
Request for Quotations (RFQ's) Accounts Payable Interface
All of the modules can be integrated into one common logical system, and
interfaces are available for supporting external Accounts Payable and MRO
applications and systems. The software routes electronic purchase requisitions
as application-level communication. Requisitions flow via corporate LANs, WANs,
Internet, or Intranet to back-office solution processing. Requisitions are
created using on-line, electronic product, and services catalogs. Before
reaching back-office processing, requisitions must be approved, and this is
achieved using an authorization cycle as established through user-defined
workflow routed on top of existing e-mail systems.
Requisitions can be converted to RFQ's to support the bidding and sourcing
process, or requisitions can be turned directly into purchase orders. All
information is processed at the line item level. Buyers can turn one
requisition into many P.O.'s or many requisitions into one P.O. A Blanket
Purchase Order feature handles routine and repetitive purchases. Purchase
orders can be sent to vendors via paper, fax, and e-mail or exported for EDI
exchange.
The system uses industry standard, leading technology. Internet/intranet
technologies are combined with client/server technologies, creating a versatile,
highly reliable software solution. Modules are available for creating and
sending purchase requisitions via the internet, and the system also allows for
remote receipt of goods via the internet. There are multiple security levels
for requisition authorization.
Requisitions move over existing e-mail systems using MAPI. Contracts,
product specifications, and other documents are managed as file attachments
using OLE automation. Also, the system supports robust industry standard
databases - Microsoft SQL Server and Oracle.
For corporations embracing internet/intranet technologies, the Company
believes that the system is well planned. A thin client approach is available
for purchase requisitioners via their intranet, and remote users with no WAN
access can create and send requisitions via a web browser and the internet. In
addition, vendor web sites can be easily launched from within the system. The
vendor file maintains URL's for quick launch of a desktop web browser.
MARKETS
Purchasing, procurement and materials management automation is an emerging
market within the supply chain segment of software applications. Movement to
Client/Server Systems began when corporations migrated from host-based systems
to Client/Server Human Resources and Financial Systems followed by the migration
of Manufacturing Management Systems. Over the next few years, the Company
believes that MMS (Materials Management Systems) or SCM (Supply Chain Management
Systems) will continue to emerge in the area of financial applications.
With the advent of internet/intranet technologies, self-service
applications, such as material requisitions and approvals, can now be
efficiently deployed on every desktop of the enterprise. This streamlines
the expenditure cycle within an organization allowing for more effective
purchasing control and management and enhanced supplier relationships. To
capture this market, applications vendors will need to offer sensible
implementations of client/server, intranet/internet, and workflow
technologies. More importantly, the applications must integrate best
practices purchasing and supplier management.
2
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According to Purchasing Magazine, an estimated $250 billion was spent last
year on maintenance, repairs, and operations (MRO) purchases by the top 100
"buying" companies. Most of these companies have either paper systems or
automated systems that are not integrated with an automated materials management
procurement system. The Gartner Group states that world class procurement
leaders will enjoy an 8% to 10% revenue advantage by year 2000. By targeting
customers within fast-growing industries, such as telecommunication, computer
technologies, and financial services, the Company's goal is to gain momentum and
capture an early market share of this emerging segment. By offering executive
management a practical implementation of client/server, intranet, and workflow
technologies, such as materials management automation, the Company's strategy is
to obtain larger contract values with shorter sales cycles.
DISTRIBUTION STRATEGY
The enterprise wide, client/server and browser markets, because they are
emerging markets, afford the greatest immediate revenue opportunity. The
Company's strategy is two-fold: first; build a direct sales force to sell
directly to Fortune 2000 accounts and second; build partnerships and alliances
with system integrators, strategic partners and other software vendors. There
can be no assurance that the Company will be successful in developing its
alliance and partner network or in recruiting a sales staff to meet its needs.
COMPETITION
The market for purchasing and procurement software in which the Company
competes is highly competitive. The Company faces competition from several
sources ranging from large ERP vendors (SAP, BAAN, Oracle and PeopleSoft),
medium sized vendors (Great Plains Software and Lawson Software), industry
specific vendors and best of breed vendors. The Company believes it competes
on the basis of product features, performance, and price and compares
favorably to the competition on each of these categories. The Company
believes that its history of financial performance has negatively affected
its image in the marketplace and that it has lost potential business from
potential customers whom expressed concerns about the Company's financial
status and ability to remain solvent. The Company believes that the
investment made by L-R Global Partners, L.P. in April 1998, that has allowed
the Company to report a cash balance of $2,918,548 and a Total Stockholders'
Equity of $2,379,458 as of May 31, 1998 will position the Company to overcome
these past objections. It is impossible to predict what effect these issues
may have on the Company's future market image, overall competitiveness, and
ability to market its products. There can be no assurance that the Company
will be able to grow sufficiently to enable it to compete effectively.
DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. The Company spent approximately $227,000 and $261,000
in fiscal 1998 and fiscal 1997, respectively, on research and development
activities, including amounts capitalized as part of deferred software
development costs of approximately $75,000 and $228,000, respectively. The
Company believes that timely development of new software product enhancements to
existing software products is essential to build its position in the
marketplace. From February 1996 to July 1997, the Company had all software
development work on the Company's product performed by outside developers.
Beginning in July 1997, the Company moved all software development and product
support to internal operations.
As with any new software product, PurchaseSoft has, and may continue to
contain, "bugs." The Company has a formal quality assurance program, as well
as beta testing by select customers and/or prospects to identify those bugs
which are considered significant and need to be corrected prior to general
release of the product/module to prospects and customers. Management
believes that all significant bugs with respect to the modules released to
date have been identified and corrected or are being corrected.
3
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SOFTWARE MAINTENANCE
Maintenance revenues for fiscal 1998 and fiscal 1997 were $79,090 and
$175,871, respectively. This decrease reflects non-renewals for many of the
DOS-based product users. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional comments related to the
trend of billings for these revenues. Maintenance contracts have been generally
sold to customers for 15% of the software product cost. These contracts entitle
the customer to telephone support and upgrades, as they become available.
WARRANTIES
The Company's standard maintenance agreement for its CAPS System and
PurchaseSoft modules provide that the Company will furnish services as are
necessary to correct any malfunction in the software. Under the terms of these
agreements, if the Company is unable to correct a malfunction by means of
telephone or telecommunication assistance, repairs may, at the customer's
option, be performed on the premises where the software is located. For such
services rendered, the customer is obligated to pay the Company fees at certain
prescribed rates as set forth in the agreement and to provide reimbursement for
travel and other expenses. Such services were not significant during fiscal
1998 or 1997.
COPYRIGHTS, TRADEMARKS, AND PATENTS
The trade names "Computer Aided Purchasing" or "CAP" and CAPlink" have been
registered by the Company with the United States Patent and Trademark Office and
will expire in March 1999 and December 2000, respectively, unless renewed.
Under the Trademark Revision Act of 1988, trademark registrations in the United
States have a ten-year term and can be renewed repeatedly for ten-year terms
provided certain criteria are met. The Company has applied to register its
trademark PurchaseSoft for its purchasing and materials management software
product.
The Company has sought, and will continue to seek, to protect all software
programs and documentation developed by it under a combination of contract,
patent, copyright, trademark and trade secret laws. Existing copyright laws
afford only limited protection. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are superior to the Company's technology. There can
be no assurance that third parties will not assert infringement claims against
the Company in the future. Management intends to protect aggressively the
Company's trademark, copyright and proprietary rights against any attempt by a
competitor to infringe or interfere with such rights. However, litigation in
this area is expensive and the Company may not wish to commit funds to commence
or pursue such litigation, especially because the high costs thereof could
adversely affect the Company's results of operation. Even if the Company
commences such litigation, there is no assurance that the Company would prevail.
EMPLOYEES
As of July 22, 1998, the Company had twenty-one full-time employees
consisting of: four executive officers, eight sales and marketing personnel,
six in development and support and three in administration. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes relations with employees are good.
4
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"Executive Officers"
As of July 22, 1998, the executive officers of the Company were as follows:
<TABLE>
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Year Became
Name Age Position With Company Officer
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<S> <C> <C> <C>
Joseph D. Mooney 60 Chairman of the Board, 1996
Chief Executive Officer,
and Director
Jeffrey B. Pinkerton 50 President and Director 1994
Robert Kilpatrick 46 Chief Operating Officer 1998
Philip D. Wolf 46 Chief Financial Officer
and Secretary 1998
</TABLE>
JOSEPH D. MOONEY has served as Chairman of the Board since June 1997 and as
Chief Executive Officer and a director of the Company since December 1996. From
August 1996 to December 1996, Mr. Mooney served as a consultant to the Company
to assist the Company in product development and marketing strategy. Since
1973, Mr. Mooney has served in various management and marketing positions with
Benchmark Computer Systems, Inc., a software management company. He is also
currently a member of the Board of Directors of Benchmark Computer Systems, Inc.
and Spanlink Communications, Inc.
JEFFREY B. PINKERTON has served as President of the Company since August
1996 and as a member of the Board of Directors since October 1995. Since 1994
and from 1987 to 1991, Mr. Pinkerton has served in various positions for the
Company, including President, Executive Vice President, Vice President-Product
Development, and as a member of the Board of Directors. From 1991 to 1994, Mr.
Pinkerton served as the owner of Viewpoint Consulting, a reseller of the
Company's software products.
ROBERT KILPATRICK has served as Chief Operating Officer of the Company
since July 1998. From 1994 to 1998, Mr. Kilpatrick has served in various
management positions with Integral Partners and KPCB Java Fund. Mr. Kilpatrick
was a director of Calico Technologies. From 1989 to 1994, Mr. Kilpatrick was
President of FirstSource Financial. FirstSource Financial developed complex
underwriting software for the residential mortgage and insurance industry. From
1984 to 1989, Mr. Kilpatrick worked as an independent consultant at various
venture capital and investment firms specializing in distessed investments.
From 1977 to 1984, Mr. Kilpatrick served as a Vice President for Primerica (now
Travelers). Mr. Kilpatrick holds degrees from the University of Texas and
Stanford.
PHILIP D. WOLF received his B.S. Degree in Accounting from the University
of Minnesota in 1974, following which he has spent 24 years in various financial
management positions. Mr. Wolf joined the Company in October 1997 and has
served as Chief Financial Officer since January 1998. During 1997, Mr. Wolf
served as a consultant to several start-up companies. From 1989 to 1997, Mr.
Wolf was Vice President of Finance and CFO for Nice Man Merchandising, a
worldwide entertainment merchandising company. From 1987 to 1989, he was Chief
Financial Officer for Benchmark Computer Systems, Inc., a value added reseller
and software developer of integrated computer systems. From 1983 to 1987, he
was Vice President of Finance and Administration for National Information
Systems, Inc., which provided computer and information services to the direct
marketing industry. From 1974 to 1983, Mr. Wolf was staff accountant and became
the Controller for Patchin Appraisals, Inc., a national valuation firm.
ENVIRONMENTAL REGULATIONS
The Company believes that compliance with federal, state, and local laws
and regulations which have been enacted or adopted regulating the discharge of
materials into the environment currently have, or in the foreseeable future,
will not have any material adverse effect upon the capital expenditures,
earnings, or competitive position of the Company.
5
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RISK FACTORS
Stockholders and prospective purchasers of the Company's Common Stock
should carefully consider the following risk factors in addition to the other
information appearing in this Annual Report on Form 10-KSB.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY.
The Company had a net loss of approximately $2.3 million for the fiscal
year ended on May 31, 1998 and had an accumulated deficit at May 31, 1998 of
approximately $16.9 million. The Company has experienced ongoing losses from
operations and expects that such losses will continue for at least some period
until product sales may be generated in sufficient volume to offset expenses.
For the fiscal year ended May 31, 1998, the Company had revenues of $616,639.
For the fiscal year ended May 31, 1997, the Company had revenues of $599,373.
There can be no assurance the Company's revenues will continue at all or will
grow sufficiently to achieve profitability. The Company does not expect to be
profitable unless and until such time as sales of its software products generate
sufficient revenue to fund its operations.
UNCERTAINTY OF MARKET ACCEPTANCE OF PURCHASESOFT SOFTWARE.
The Company has invested heavily in research for, and development of, its
core purchasing and materials management software system - PurchaseSoft. There
can be no assurance that the Company's PurchaseSoft product will achieve market
acceptance. The Company believes that its history of financial performance has
negatively affected its image in the marketplace and that it has lost potential
business from potential customers whom expressed concerns about the Company's
financial status and ability to remain solvent. The Company believes that the
investment made by L-R Global Partners, L.P. in April 1998, that has allowed the
Company to report a cash balance of $2,918,548 and a Total Stockholders' Equity
of $2,379,458 as of May 31, 1998 will position the Company to overcome these
past objections. There can be no assurance that the improved balance sheet will
be successful in overcoming customer concerns. The Company believes its largest
challenge is to gain wide spread market acceptance of its PurchaseSoft product.
The failure to obtain market acceptance would have a material adverse affect on
the Company's business.
NEW MANAGEMENT, ABILITY TO RECRUIT SALES, SERVICE, AND IMPLEMENTATION PERSONNEL.
The Company's new management has a very limited history in operating the
Company even though they are experienced in managing companies with the
challenges similar to those being faced by the Company. There can be no
assurance that the Company's management will be successful in meeting their
planned objectives for the Company. The ability to achieve anticipated revenues
is substantially dependent on the ability of the Company to attract on a timely
basis and retain skilled personnel, especially key management, sales, support,
and implementation personnel. The Company believes that its future success will
depend in large part on its ability to attract and retain highly skilled
technical, managerial, marketing, and professional services personnel to ensure
the quality of products and services provided to its customers. Competition for
such personnel, in particular for product development and implementation
personnel, is intense, and the Company competes in the market for such personnel
against numerous companies, including larger, more established companies with
significantly greater financial resources than the Company. There can be no
assurance that the Company will be successful in attracting and retaining
skilled personnel. The Company's inability to attract and retain qualified
employees would have a material adverse effect on the Company's business.
6
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INTENSE COMPETITION.
The Company faces competition from several sources ranging from large ERP
vendors (SAP, BAAN, Oracle and PeopleSoft), medium sized vendors (Great Plains
Software and Lawson Software), industry specific vendors and best of breed
vendors. These competitors all offer software products performing functions
similar to the Company's products. The market space in which the Company
competes is going through tremendous growth and this will invite new
competitors. Existing competitive products offered by companies with greater
financial or marketing resources impact and limit the Company's revenues. There
can be no assurance that competitors do not have or will not offer or develop
products that are superior to the Company's products or that achieve greater
market acceptance. In addition, suppliers of relational database management
systems and companies that develop management information software applications
for large multinational manufacturers have begun to target the firms targeted by
the Company and offer applications that compete in the Company's markets. As a
result, competition (including pricing competition) may increase, which could
result in price reductions and loss of market share. The Company may also face
market resistance from potential customers within the large installed base of
legacy systems, who may be reluctant to commit the time and resources necessary
to convert to an open systems-based client/server software product. As the
client/server computing market expands, a large number of companies, many with
significantly greater resources than the Company, may enter the market or
increase their market share by acquiring or entering into the alliances with
competitors of the Company. There can be no assurance that the Company will be
able to compete successfully against its competitors or that the competitive
pressures faced by the Company will not adversely affect its financial
performance.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS.
The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards, change in end-user
requirements, and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development as obsolete and unmarketable. Accordingly, the
Company's future success will depend upon its ability to enhance its current
products and develop and introduce new products that keep pace with
technological developments, satisfy varying end-user requirements, and achieve
market acceptance. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could severely damage
the Company's competitive position and have a material adverse effect on
revenues. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements on a timely basis
or that the Company will not experience significant delays in the future which
could have a material adverse effect on the Company's results of operations. In
addition, there can be no assurance that new products or product enhancements
developed by the Company will achieve market acceptance.
DEPENDENCE ON ONE PRODUCT.
Substantially all of the Company's revenues are expected to be derived from
the sale of its PurchaseSoft product and related support services. Accordingly,
any event that adversely affects revenue generated from the sale of software or
from the professional fees derived from the installation of such product, such
as competition from other products, significant flaws in the product, or
incompatibility with third party hardware or software products, negative
publicity or evaluation, or obsolescence of the hardware platforms or software
environments in which the product runs, could have a material adverse effect on
the Company's results of operations. The Company's future financial performance
will depend on the continued development and introduction of new and enhanced
versions of PurchaseSoft and other products and on customer acceptance of such
new enhanced products.
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FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results can vary substantially from
quarter to quarter. Sales revenues in any quarter are substantially dependent
on aggregate contracting activity and the Company's ability to recognize revenue
in that quarter in accordance with its revenue recognition policies.
Revenues may vary from quarter to quarter due to variances in prior quarter
contracting activity, which impacts revenue on a lag and which may not reflect
positively or adversely the Company's future financial performance. The
Company's sales cycle is relatively long and variable. The Company's ability to
increase revenue is dependent on its ability to grow sales activity which
provides opportunities for consulting, training and subsequent maintenance
revenues. Additionally the Company may not be able to recruit, hire, and train
sufficient numbers of qualified consultants to perform such services.
Due to the forgoing, it is likely that in one or more future quarters the
Company's operating results will be below expectations of public securities
market analysts. In such event, the price of the Company's Common Shares would
likely be materially adversely affected.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
The Company intends to rely on a combination of copyright, trademark and
trade secret laws, employee and third party nondisclosure agreements, and other
industry standard methods for protecting ownership of its proprietary software.
There can be no assurance, however, that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the mechanisms used by the Company to
protect its software will be adequate or that the Company's competition will not
independently develop software products that are substantially equivalent or
superior to the Company's software products.
The Company expects that, as the number of software products in the
industry increases and the functionality of these products further overlaps,
software products will increasingly be subject to claims of infringement on
third party proprietary rights. Any such claim, whether with or without merit,
could result in costly litigation and require the Company to enter into royalty
or licensing arrangements. Such royalty or license arrangements, if required,
may not be available on terms acceptable to the Company or at all.
ITEM 2: DESCRIPTION OF PROPERTY
In October 1996, the Company relocated its corporate office to 7901 Flying
Cloud Drive in Eden Prairie, Minnesota, where it currently occupies 3,163 sq.
ft. under a lease that expires on March 1, 2001. The Company has entered into a
two-year lease that expires on August 31, 2000 for 10,262 sq. ft. of office
space in Edina, Minnesota (approximately five miles from the present
headquarters) and the Company intends to relocate its corporate office to this
space in August 1998. Once the Company relocates to its new office space, the
Company intends to negotiate a release from their Eden Prairie lease once the
landlord locates a new tenant for the space. The Company also leases an office
in Westborough, Massachusetts that expires on November 15, 1999 and has a lease
for office space in Sarasota, Florida that expires on October 1, 2000, which it
subleases at a rate approximating its lease obligation.
ITEM 3: LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation
proceedings.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended May 31, 1998.
PART II:
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Shares are traded in the National Association of Securities
Dealers OTC Bulletin Board (Symbol: GTSW). The following table sets forth the
range of high and low bid quotations of the Common Shares for each quarterly
period during the two fiscal years ended May 31, 1998 and May 31, 1997 as
reported by NASD Bulletin Board. The quotations in the table and the succeeding
paragraph represent prices in the over-the-counter market between dealers in
securities, do not include retail markup, markdown, or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
BID
PERIOD HIGH LOW
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<S> <C> <C>
FISCAL YEAR ENDING:
May 31, 1998
First Quarter $3.3000 $1.0000
Second Quarter $1.9370 $1.1250
Third Quarter $1.6250 $0.9370
Fourth Quarter $3.7500 $0.9060
FISCAL YEAR ENDING:
May 31, 1997
First Quarter $6.0000 $2.6220
Second Quarter $4.8750 $2.2500
Third Quarter $6.3750 $2.2500
Fourth Quarter $4.3125 $2.7000
</TABLE>
The closing bid sales price of the Common Shares on June 30, 1998 in the
NASD OTC Bulletin Board (as reported by the NASD) was $2.125 per share.
HOLDERS
The number of holders of record of the Common Shares at June 30, 1998 was
approximately 400. Management of the Company is of the opinion that, based on
copies of proxy statements and Annual Reports requested by brokers, banks, and
other record holders for beneficial owners in connection with the last two
meetings of shareholders, that approximately 2,000 registered shares are held
for beneficial owners.
9
<PAGE>
DIVIDENDS
The Company has never paid cash dividends on the Common Shares nor does the
Board of Directors anticipate the Company paying cash dividends in the
foreseeable future because of the financial requirements necessary to develop
operations.
NASD REQUIREMENTS
The Company's Common Shares are traded in the over-the-counter market and
reported in the NASD's OTC Bulletin Board or in the "pink sheets" as reported by
the National Quotation Bureau, Inc. However, because the bid price of the
Common Shares was below $5.00 per share when the Common Shares were delisted
from the NASDAQ System, the Common Shares, when recommended by a broker-dealer,
are subject to the limitations of Rule 15g-9 under the Exchange Act, which Rule
imposes additional sales practices requirements on broker-dealers which sell the
Common Shares (1) to persons other than (a) existing customers with a previous
history of trading through such broker-dealer, (b) institutional accredited
investors (for example, a bank or savings and loan association), and (c) a
director and/or officer of the Company and/or the beneficial owner of 5% or more
of the Common Shares, or (2) in transactions not exempt by the Rule. For
transactions under Rule 15g-9, the broker-dealer must obtain written information
from the prospective purchaser as to his or her financial situation, investment
experience, and investment objectives, and based on such information, reasonably
determine that transactions in the security are suitable for that person and
that the prospective investor (or his or her independent advisor) has sufficient
knowledge and experience in financial matters so as to be reasonably expected to
be capable of evaluating the risks of transactions in such security. The
broker-dealer must also receive the purchaser's written agreement to the
transaction prior to the sale. Certain broker-dealers, particularly if they are
market makers in the Common Shares, will have to comply with the disclosure
requirements of Rules 15g-2, 15g-3, 15g-4, 15g-5, and 15g-6 under the Exchange
Act. Consequently, Rule 15g-9 and these other Rules may adversely affect the
ability of broker-dealers to sell the Common Shares as a result of the
delisting.
RECENT SALES OF UNREGISTERED SECURITIES
In April and May 1998, the Company sold 458,250 shares of Common Shares at
a price of $.80 per share, raising $364,600 in gross proceeds. The issuance and
sale of the Common Shares in this offering were made in reliance on Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended, and
Section 4(2) of the Securities Act.
On April 17, 1998, the Company sold a convertible promissory note in the
principal amount of $3.2 million to L-R Global Partners, L.P. ("L-R Global"), an
accredited investor. The note was convertible at any time into shares of Common
Shares at a conversion price of the lesser of $.80 or 80% of the average closing
bid price of the Common Shares for the five trading days preceding the
conversion date. The note would have automatically converted into shares of
Common Shares at the applicable conversion price upon the later of the filing of
certain amendments to the Corporation's Certificate of Incorporation or July
16,1998, provided that certain covenants were not in default. On May 29, 1998,
L-R Global elected to convert their note into 4,000,000 shares of Common Shares
at a price of $.80 per share. The issuance and sale of the convertible note in
this offering was made in reliance on Rule 506 of Regulation D, promulgated
under the Securities Act, and Section 4(2) of the Securities Act.
10
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and Notes thereto and the other financial information
included elsewhere in the Form 10-KSB Annual Report. This Discussion and
Analysis of Financial Condition and Results of Operations contains descriptions
of the Company's expectations regarding future trends affecting its business.
These forward-looking statements and other forward-looking statements made
elsewhere in this document are made in reliance upon the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The discussion below
and under the heading "Risk Factors" sets forth certain factors the Company
believes could cause actual results to differ materially from those contemplated
by the forward looking statements. The Company undertakes no obligation to
update the information contained in this Item 6.
Fiscal 1998 showed improvements in certain areas, including the addition of
seasoned management and sales staff and also product improvements with
PurchaseSoft. The Company has moved forward with an increase in its installed
customer base and referenceable sites. In May 1997, GT Purchase Pro Version 6.0
(renamed PurchaseSoft 2.0 in October 1997) was released, which provided
additional major enhancements to the product, including additional modules and
web capabilities.
FISCAL YEAR ENDED MAY 31, 1998 VS. 1997
REVENUES
Total revenue, which includes product and service revenue for fiscal 1998
was $616,639 compared to $599,393 for fiscal 1997. Product revenue for fiscal
1998 was $383,877 compared to $368,915 for fiscal 1997. Service revenue for
fiscal 1998 was $232,762 compared to $230,458 for fiscal 1997. Included in
service revenue for fiscal 1998 were professional services of $153,672 compared
to $54,587 for fiscal 1997, an increase of $99,085 or 181.5%. Also included in
service revenues for fiscal 1998 were maintenance revenues of $79,090, compared
to $175,871 for fiscal 1997, a decrease of $96,781 or 55.0%.
The increase in professional services revenue is the result of the Company
mandating that customers purchase training and implementation services to insure
a successful installation. The decrease in maintenance revenues is the result
of non-renewal of many of the DOS-based users, as this version of the software
has required very little support, and these customers do not receive free
upgrades as the DOS-based product is no longer being developed.
Product revenues increased 4.1%, but were constrained due to limited
financial resources during the bulk of fiscal 1998. Due to the Company's
continued losses from operations and low sales volume, the Company has
previously experienced difficulties in securing the funds necessary to support
the negative cash flow from operations during fiscal 1998 and 1997 (see the
section "Liquidity and Capital Resources" in this section for further comments).
In addition, the Company believes that certain prospective customers may have
deferred orders, or not placed orders, due to concerns with respect to the
financial viability of the Company.
11
<PAGE>
EXPENSES
Cost of revenues for fiscal 1998 increased to $611,468 from $508,705 in
fiscal 1997, an increase of $102,763 or 20.2%. The primary reason for this was
the write-off of $119,000 of capitalized software due to impairment. As of May
31, 1998, the Company had written off all capitalized software costs.
Selling expenses for fiscal 1998 were $635,039 compared to $584,984 in
fiscal 1997, an increase of $50,055 or 8.6%. This increase was primarily due to
an increase in sales personnel as the Company continues to expand its sales and
marketing activities in connection with the improved PurchaseSoft product and
attempts to reach new customers.
General and administrative expenses for fiscal 1998 were $1,670,549
compared to $1,321,842 in fiscal 1997, an increase of $348,707 or 26.4%. This
increase was due primarily to an increase in salaries and related payroll
expenses for administrative management as the Company works to build a stable
and qualified management team and administrative support group.
Fiscal 1998 reflects interest income of $11,200 compared with interest
expense of $7,042 for fiscal 1997. Interest income in fiscal 1998 resulted from
the interest earned on the proceeds of the Company's private placement on April
17, 1998.
NET INCOME
For fiscal 1998, the Company reported a net loss of $2,289,217 (or $.79 per
share) as compared with a net loss of $1,823,200 ($1.14 per share) for fiscal
1997. The fiscal 1998 loss increased over the fiscal 1997 loss due to the
write-off of the remaining capitalized software balance, the Company's increased
sales and marketing efforts and the Company's continued investment in building
its management and support infrastructure. The decrease in the loss per share
resulted from an increase in the average outstanding shares of 1,596,510 for
fiscal 1997 to 2,885,760 for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company raised gross proceeds of $4,274,989 from
the issuance of Common Shares in Private Placements in October 1997, March 1998
and April 1998 and from the issuance of convertible Notes Payable in December
1997, March 1998 and April 1998, which have all been converted into Common
Shares. The Company incurred $103,190 in expenses in connection with these
capital raising efforts. All such proceeds were used to fund product
development, sales, and the Company's general operating expenses.
The Company had working capital of $2,324,267 as of May 31, 1998 as
compared with a working capital deficit of $2,181,387 as of May 31, 1997, an
increase of $4,505,654. The primary reason for this increase in working capital
was the cash proceeds from the sale of Common Shares and the issuance of the
convertible Notes Payable and the conversion of the Notes Payable to Common
Stock, all of which were used to fund operations for fiscal 1998.
The Company made $13,691 in capital expenditures during fiscal 1998 as
compared with $24,567 in fiscal 1997. The Company had no significant
commitments as of May 31, 1998 for capital expenditures.
12
<PAGE>
The Company believes that its existing capital resources, interest
income, and revenue from software sales and services will be sufficient to
fund its planned operating expenses and capital requirements through the end
of fiscal 1999. However, there can be no assurance that such funds will be
sufficient to meet the Company's operating expenses and capital requirements
during such period. The Company's actual cash requirements may vary
materially from those now planned and will depend upon numerous factors,
including the results of the Company's software development efforts, the
level of resources the Company commits to marketing and sales efforts, the
ability of the Company to maintain existing and develop new customers, and
activities of competitors and other factors.
YEAR 2000 ISSUES
The Company has and will continue to evaluate year 2000 issues and their
potential impact on its information systems and computer technologies. All
evaluation costs will be expensed as incurred. Year 2000 issues are not
expected to have a significant impact on the Company's ongoing results of
operations, however, there can be no assurance that the Company will not suffer
adverse effects from the failure of any of its vendors, suppliers or partners to
be year 2000 compliant.
ITEM 7: FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of PricewaterhouseCoopers LLP F-2
Balance Sheets at May 31, 1998 and 1997 F-3
Statements of Operations For the Years Ended May 31, 1998 and 1997 F-4
Statements of Stockholders' Equity (Deficit) for the Years Ended
May 31, 1998 and 1997 F-5
Statements of Cash Flows for the Years Ended May 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
</TABLE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
CHANGE IN INDEPENDENT ACCOUNTANTS
On May 15, 1997, the Board of Directors of the Company authorized the
Company to engage Price Waterhouse LLP ("PW") rather than KPMG Peat Marwick LLP
("KPMG") as the Company's independent public accountants for the fiscal year
ending May 31, 1997, subject to the Chief Financial Officer of the Company
confirming acceptance by PW of such appointment and notifying KPMG. On May 15,
1997, the Company advised KPMG and PW of its decision. On May 15, 1997, PW
advised the Company that it accepted the appointment, and the Company officially
engaged PW as its independent public accountants for the fiscal year ending
May 31, 1997.
13
<PAGE>
KPMG served as the Company's independent public accountants and auditors
since November 21, 1994. KPMG was dismissed by the Board of Directors as of May
15, 1997. The Company's decision to employ PW rather than KPMG was the result
of the Company's decision to move its executive offices to Eden Prairie,
Minnesota, upon the hiring of Mr. Mooney as Chief Executive Officer, and the
fact that the Company wanted to utilize the services locally of a large
independent public accounting firm which had particular expertise in the
software industry.
In fiscal 1996, KPMG in its report noted that, although the financial
statements had been prepared assuming that the Company will continue as a going
concern, the Company has suffered recurring losses from operations that raise
substantial doubt about its ability to continue as a going concern. Such firm
also stated that the financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
There were no disagreements with KPMG, whether or not resolved, on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to that firm's satisfaction,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report. The Company notes that, in
connection with the fiscal year 1996 audit, certain matters concerning the
Company's internal controls were brought to the Company's attention in a letter
to the Board of Directors dated September 11, 1996. These concerns were
discussed with the former accountant and addressed by the Board of Directors of
the Company. All required adjustments were made in the Company's annual
financial statements in connection with the audit. KPMG's audit opinion was not
qualified as to these matters, and no disagreement existed between the Company
and KPMG with respect to these issues. The Company has authorized KPMG to
respond fully to the inquiries of PW concerning the internal control issues
raised in the Management Letter.
Neither the Company, nor any person acting on its behalf, prior to the
engagement of PW, consulted PW regarding the application of accounting
principles to a specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on the Company's financial statements.
PART III:
Certain information required by Part III is omitted from this report because the
Company will file a definitive Proxy Statement pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information concerning the Company's executive officers required by
this item is included in the section in Part I hereof entitled "Employees." The
information concerning the Company's directors, promoters and control persons
required by this Item is incorporated by reference to the Company's Proxy
Statement under the heading "Election of Directors." Information concerning the
Company's officers, directors, and 10% shareholders compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by
reference to the Company's Proxy Statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 10: EXECUTIVE COMPENSATION
The information required with respect to this item may be found in the
section captioned, "Executive Compensation" appearing in the definitive Proxy
Statement to be delivered to Shareholders in connection with the Annual Meeting
of Shareholders to be held on September 17, 1998. Such information is
incorporated herein by reference.
14
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required with respect to this item may be found in the
section captioned, "Security Ownership of Certain Beneficial Owners and
Management" appearing in the definitive Proxy Statement to be delivered to
Shareholders in connection with the Annual Meeting of Shareholders to be held on
September 17, 1998. Such information is incorporated herein by reference.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required with respect to this item may be found in the
section captioned, "Certain Relationships and Related Transactions" appearing in
the definitive Proxy Statement to be delivered to Shareholders in connection
with the Annual Meeting of Shareholders to be held on September 17, 1998. Such
information is incorporated herein by reference.
ITEM 13: EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits which are designated with a footnote reference are
incorporated by reference to a prior registration statement declared effective
under the Securities Act or a periodic report file pursuant to Section 13 of the
Exchange Act. Exhibits which are designated with an asterisk are filed with
this Report.
<TABLE>
<CAPTION>
Number Exhibit
<S> <C>
3.1 Certificate of Incorporation of the Company. (1)
3.2 Amendment to Certificate of Incorporation of the Company as filed in the
State of New York on August 18, 1983. (1)
3.3 Amendment to Certificate of Incorporation of the Company as filed in the
State of New York on January 26, 1988. (2)
3.4 Amendment to Certificate of Incorporation of the Company as filed in the
State of New York on December 23, 1993. (6)
3.5 Amendment to Certificate of Incorporation of the Company as filed in the
State of New York on April 28, 1994. (6)
3.6 Amendment to Certificate of Incorporation of the Company as filed in the
State of New York on June 22, 1997. (8)
3.7 By-laws of the Company. (3)
4.1 Specimen Certificate for Shares of Common Stock
4.2 Warrant expiring January 31, 1999 issued by the Company to Wm. Smith &
Co.
4.3 Form of Warrant issued to Wm. Smith Securities & Gilmore & Co. (5)
15
<PAGE>
4.4 Form of Warrant issued to TIS Acquisitions and Management Group, Inc.,
The Travelers Indemnity Company, and Mark Cahill, dated October 25,
1996. (8)
4.5 Form of Warrant issued to Wm. Smith Securities, Inc., dated October 25,
1996. (8)
4.6 Form of Warrant issued to Wm. Smith Securities, Inc., dated October 25,
1996. (8)
10.1 The Company's Stock Option Plan of 1987. (4)
10.2 The Company's Stock Option Plan of 1994. (6)
10.3 The Company's 1997 Stock Option Plan. (8)
10.4 Employment Agreement dated April 1, 1998 between the Company and Jeffrey
B. Pinkerton. (9)
10.5 Agreement dated September 23, 1993 between Focus Capital Corp. and the
Company. (6)
10.6 Registration Rights Agreement dated as of December 25, 1995 among the
Company and certain of its Shareholders. (5)
10.7 Registration Rights Agreement dated as of April 23, 199_ among the
Company and certain of its Shareholders. (5)
10.8 Lease between the Company and Fruitville-Tuttle, Ltd. (7)
10.9 Employment Agreement dated February 2, 1998 between the Company and
Joseph D. Mooney. (9)
10.10 Lease between the Company and The Protective Group. *
10.11 Lease between the Company and Racotek, Inc. *
10.12 Registration Rights Agreement dated October 25, 1996 between the Company
and certain of its Shareholders. (8)
</TABLE>
FOOTNOTES:
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-18, File No. 2-86249-NY.
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1992.
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1993.
(4) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1991.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form S-1, File No. 333-45475.
16
<PAGE>
(6) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1994.
(7) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1996.
(8) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1997.
(9) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB/A for the quarter ended February 28, 1998.
Reports on Form 8-K
1. On April 17, 1998, the Company filed a report on Form 8-K announcing it
had raised $3.2 million through a private offering of convertible debt.
2. On May 4, 1998, the Company filed an Item 1, Change in Control report on
Form 8-K announcing that on April 17, 1998, the Company consummated a private
offering of a convertible promissory note in the principal amount of $3.2
million to an accredited investor
3. On May 18, 1998, the Company filed a report on Form 8-K announcing the
completion of its $4.2 million private placement, of which $3.2 million was
provided by L-R Global Partners, L.P. in the form of a convertible promissory
note.
4. On May 29, 1998, the Company filed a report on Form 8-K announcing that
L-R Global Partners, L.P. had elected to convert the entire amount of its
convertible promissory note.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto to be duly authorized.
Greentree Software, Inc.
(Registrant)
Date: July 24, 1998
/s/ Joseph D. Mooney
____________________________________
Joseph D. Mooney
Chairman, Chief Executive Officer, & Director
17
<PAGE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
July 24, 1998.
Signature Title
- --------- -----
/s/ Joseph D. Mooney Chairman, Chief Executive Officer
and Director
_________________________________
Joseph D. Mooney
/s/ Philip D. Wolf Chief Financial Officer and Secretary
_________________________________
Philip D. Wolf
/s/ Jeffrey B. Pinkerton President and Director
_________________________________
Jeffrey B. Pinkerton
/s/ Brad I. Markowitz Director
_________________________________
Brad I. Markowitz
/s/ J. Murray Logan Director
_________________________________
J. Murray Logan
/s/ Don LaGuardia Director
_________________________________
Don LaGuardia
18
<PAGE>
Greentree Software, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Description Page
- --------------------------------------------------------------------------
<S> <C>
Report of PricewaterhouseCoopers LLP F-2
Balance Sheets as of May 31, 1998 and 1997 F-3
Statements of Operations for the years ended May 31, 1998 and 1997 F-4
Statements of Stockholders' Equity (Deficit) for the years
ended May 31, 1998 and 1997 F-5
Statements of Cash Flows for the years ended May 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Greentree Software, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Greentree Software, Inc. at
May 31, 1998 and 1997, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/S/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 1, 1998
F-2
<PAGE>
GREENTREE SOFTWARE, INC
BALANCE SHEETS
MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,918,548 $ 245,649
Accounts receivable, net 103,145 164,556
Prepaid expenses and other current assets 5,045 30,204
------------ ------------
Total Current Assets 3,026,738 440,409
------------ ------------
Property and Equipment, net 46,067 54,554
------------ ------------
Other Assets:
Customer list - 29,345
Capitalized software development costs - 526,372
Security deposits 9,124 9,124
Debt issue costs - 76,261
------------ ------------
Total Other Assets 9,124 641,102
------------ ------------
Total Assets $ 3,081,929 $ 1,136,065
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 219,092 $ 348,148
Convertible notes payable - 2,049,566
Accrued expenses 389,781 146,214
Deferred revenues 93,598 77,868
------------ ------------
Total Current Liabilities 702,471 2,621,796
------------ ------------
Commitments and Contingencies (Note 5)
Stockholders' Equity (Deficit)
Common stock, $.01 par value, 15,000,000
shares authorized, 8,029,761 and 1,610,610
shares issued and outstanding, respectively 80,298 16,106
Additional paid-in-capital 19,321,482 13,231,268
Accumulated deficit (16,933,290) (14,644,073)
------------ ------------
2,468,490 (1,396,699)
Less treasury stock (4,780 shares) at cost (89,032) (89,032)
------------ ------------
Total Stockholders' Equity (Deficit) 2,379,458 (1,485,731)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 3,081,929 $ 1,136,065
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GREENTREE SOFTWARE, INC
STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net revenues:
Product $ 383,877 $ 368,915
Services 232,762 230,458
------------ ------------
Total net revenues 616,639 599,373
------------ ------------
Costs and expenses:
Cost of revenues 611,468 508,705
Selling expenses 635,039 584,984
General and administrative 1,670,549 1,321,842
------------ ------------
Total costs and expenses 2,917,056 2,415,531
------------ ------------
Operating loss (2,300,417) (1,816,158)
Interest income (expense), net 11,200 (7,042)
------------ ------------
Net loss $ (2,289,217) $ (1,823,200)
------------ ------------
------------ ------------
Net loss per common share $ (0.79) $ (1.14)
(Basic and diluted) ------------ ------------
------------ ------------
Weighted average shares outstanding 2,885,760 1,596,510
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
GREENTREE SOFTWARE, INC
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Total
------------------------ Additional Accumulated Treasury Stockholders'
Shares Amount Paid-in-Capiltal Deficit Stock Equity
--------- ------- ---------------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1996 1,583,944 $15,839 $13,198,158 $(12,820,873) $(89,032) $ 304,092
Sale of common stock, net 26,666 267 33,110 - - 33,377
Net loss - - - (1,823,200) - (1,823,200)
--------- ------- ----------- ------------ -------- ----------
Balance, May 31, 1997 1,610,610 16,106 13,231,268 (14,644,073) (89,032) (1,485,731)
Convertible notes converted
to common stock 5,060,253 50,603 5,172,457 - - 5,223,060
Sale of common stock 1,358,898 13,589 986,400 - - 999,989
Warrants issued for services - - 34,547 - - 34,547
Capital raising expenses - - (103,190) - - (103,190)
Net loss - - - (2,289,217) - (2,289,217)
--------- ------- ----------- ------------ -------- ----------
Balance, May 31, 1998 8,029,761 $80,298 $19,321,482 $(16,933,290) $(89,032) $2,379,458
--------- ------- ----------- ------------ -------- ----------
--------- ------- ----------- ------------ -------- ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GREENTREE SOFTWARE, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,289,217) $(1,823,200)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 51,524 139,228
Amortization of deferred software costs 601,733 470,513
Changes in operating assets and liabilities:
Accounts receivable 61,412 (51,807)
Prepaid expenses and other 29,913 (111,308)
Accounts payable and accrued expenses 149,057 (383,725)
Deferred revenue 15,730 (73,584)
----------- -----------
Net cash used in operating activities (1,379,848) (1,833,883)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (13,691) (24,567)
Additions to capitalized software development costs (75,361) (228,369)
----------- -----------
Net cash used in investing activities (89,052) (252,936)
----------- -----------
Cash flows from financing activities:
Net proceeds from sale of common stock 4,171,799 33,377
Net proceeds from issuance of convertible notes - 2,049,566
Repayment of note payable (30,000) -
----------- -----------
Net cash provided by financing activities 4,141,799 2,082,943
----------- -----------
Net increases (decrease) in cash and cash equivalents 2,672,899 (3,876)
Cash and cash equivalents, beginning of year 245,649 249,525
----------- -----------
Cash and cash equivalents, end of year $ 2,918,548 $ 245,649
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,879 $ 8,282
----------- -----------
----------- -----------
Supplemental disclosure of non-cash transaction:
Conversion of convertible notes payable
issued in fiscal 1997 $ 2,049,566 $ -
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Greentree Software, Inc.
Notes to Financial Statements
May 31, 1998 and 1997
NOTE 1-GENERAL INFORMATION
Greentree Software, Inc. (the "Company" or "Greentree") was incorporated in
New York in June 1977 and began operations as a management consulting firm
specializing in the area of purchasing and materials management. In 1985, the
Company introduced its first software product for purchasing and materials
management, Computer Aided Purchasing-Registered Trademark- ("CAP1") for use on
IBM compatible personal computers. Since 1991, all of the Company's revenues
have been derived from the sale and maintenance of software products.
The Company released its first Microsoft Windows and client/server based
purchasing and materials management software system (GT Purchase PRO) in May
1994. In March 1996, the Company released its GT Purchase PRO version 5.0. In
May 1997, GT Purchase PRO version 6.0 was released, which provided additional
major enhancements to the product. In a press release dated October 4, 1997,
the Company announced that the product name was being changed from GT Purchase
Pro to PurchaseSoft 2.0. The Company believes this name more accurately
describes the new enterprise scope of their software solution.
PurchaseSoft is a full life-cycle suite of software for improving the
performance of Purchasing, Requisitioning and Materials Management in the
growing market of MRO (maintenance, repair and operating) Resource Management.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
Management is required to make estimates and assumptions during the
preparation of financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. They also affect reported
amounts of net income (loss) during the period. Actual results could differ
materially from these estimates and assumptions.
(b) Revenue Recognition and Accounts Receivable
The Company recognizes revenue in accordance with the provisions of
Statement of Position (SOP) No. 91-1, "Software Revenue Recognition." The
Company recognizes software license revenue at the time products are shipped
provided that no significant Company obligations remain outstanding and
collection of the resulting receivable is deemed probable by management.
Insignificant obligations remaining at the time of shipment are accrued.
Revenues related to software licenses for which there are significant remaining
performance obligations are deferred and recognized once such obligations are
fulfilled.
Service revenues are comprised of revenues derived from software
maintenance agreements and professional services. Maintenance fees are recorded
as deferred revenue and recognized ratably over the maintenance period, which is
usually twelve months. Professional service revenue is recognized as the
services are performed.
F-7
<PAGE>
Accounts receivable is presented net of an allowance for uncollectible
accounts of $30,000 and $57,096 at May 31, 1998 and 1997, respectively. Bad
debt expense is recorded in general and administrative expenses.
(c) Software Development Costs
The Company is engaged in research and development activities in the area
of computer software. In accordance with generally accepted accounting
principles, costs incurred prior to determination of technological feasibility
are considered research and development and expensed as incurred. Once
technological feasibility has been established, development costs are
capitalized and amortized over the shorter of an economic life of one to three
years or the proportion of current period product revenues to total expected
product revenues. Amortization charged to cost of revenues amounted to $601,733
and $470,513 during the fiscal years ended May 31, 1998 and 1997, respectively.
(d) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to operations over the estimated useful lives of the
related assets, generally 5 to 7 years, using the straight-line method.
Depreciation expense, was $22,178 and $90,013 for the years ended May 31, 1998
and 1997, respectively.
(e) Customer List
The Company acquired a customer list of one of its resellers for $80,000 in
1994 and amortized these costs over the last four years. Amortization expense
related to this intangible asset was $29,345 and $15,996 for the fiscal years
ended May 31, 1998 and 1997, respectively.
(f) Cash and Cash Equivalents
The Company considers all highly liquid instruments with original
maturities of 90 days or less to be cash equivalents for financial statement
purposes.
(g) Income Taxes
The Company accounts for income taxes using the liability method in
accordance with the provisions of the Statement of Financial Accounting Standard
(SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires that
deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts.
F-8
<PAGE>
(h) Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share". SFAS No. 128 applies to entities with publicly
held common stock and is effective for financial statements issued for periods
ending after December 15, 1997. Under SFAS No. 128 the presentation of primary
earnings per share is replaced with a presentation of basic earnings per share.
SFAS No. 128 requires dual presentation of basic and diluted earnings per share
for entities with complex capital structures. Basic earnings per share includes
no dilution and is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. Due to the Company's continued net losses there has
been no impact from unexercised stock options and warrants on diluted net loss
per share as the effect would be anti-dilutive. Earnings per share amounts for
all periods have been presented or restated to conform with the provisions of
SFAS No. 128.
(i) Recently Issued Accounting Standard
The American Institute of Certified Public Accountants' has approved a new
Statement of Position, SOP 97-2, which will supersede Statement of Position
91-1, "Software Revenue Recognition." Management has assessed this new
statement and believes that its adoption beginning June 1, 1998 will not have a
material effect on the timing of the Company's revenue recognition or cause
significant changes to its revenue recognition policies.
NOTE 3-PROPERTY AND EQUIPMENT
At May 31, 1998 and 1997, property and equipment balances consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property and equipment, at cost $ 519,475 $ 505,784
Less accumulated depreciation (473,408) (451,230)
--------- ---------
Net property and equipment $ 46,067 $ 54,554
--------- ---------
--------- ---------
</TABLE>
NOTE 4 - INCOME TAXES
The Company has available net operating loss carry forwards (NOL's) for
Federal income tax purposes of approximately $5,000,000 at May 31, 1998. The
NOL's expire at various times from 1999 through 2012.
No future tax benefit for the Company's NOL's and other cumulative
temporary differences has been recognized since utilization of the benefit is
not determinable. The tax effects of NOL's and other cumulative temporary
differences that give rise to the Company's deferred tax asset are presented
below as of May 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,914,000 $858,000
Other, net 58,000 -
----------- -----------
Total gross deferred tax assets 1,972,000 858,000
Less valuation allowance (1,972,000) (858,000)
----------- -----------
Net deferred tax asset $ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
NOTE 5-COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space in several locations under non-cancelable
operating leases, which expire on various dates through March 2001. Rent expense
amounted to $80,245 and $57,922 for the fiscal years ended May 31, 1998 and
1997, respectively.
Future minimum lease payments under the noncancelable operating leases as
of May 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years
Ending Committed
May 31 Commitment Sublease Net
------ ---------- --------- ---
<S> <C> <C> <C>
1999 $128,864 $(46,613) $82,251
2000 116,007 (15,538) 100,469
2001 59,425 0 59,425
-------- ---------- -------
Total $304,296 $(62,151) $242,145
-------- ---------- -------
-------- ---------- -------
</TABLE>
Contingencies
The Company is involved in various contingent matters in the normal course
of business. Management is of the opinion that the outcome of such matters will
not have a significant adverse effect on the Company's financial position,
results of operations or cash flows.
NOTE 6-STOCKHOLDERS' EQUITY
Private Placements
During the fiscal year ended May 31, 1998 and 1997, the following equity
and convertible debt placements occurred:
FISCAL YEAR ENDED MAY 31, 1998
During the period from October 1997 through December 1997, the Company sold
an aggregate of 567,315 shares of its common stock at a price of $.68 per
share in a private placement offering. Gross proceeds realized by the
Company were $385,389.
On March 26, 1998, the Company sold an aggregate of 333,333 shares of its
common stock at a price of $.75 per share. Gross proceeds realized by the
Company were $250,000. In addition, a warrant to purchase 125,000 shares
of common stock was issued with an exercise price of $1.50 per share. The
exercise price was subsequently reduced to $1.14 per share due to an
anti-dilution clause in the warrant agreement. The warrants can be called
by the Company if the bid price of the common stock trades at or above
$2.00 per share for ten trading days. On June 15, 1998, the Company called
these warrants and the holder has exercised the warrant by remitting to the
Company the sum of $142,500 to purchase 125,000 shares of common stock.
F-10
<PAGE>
During April and May 1998, the Company sold an aggregate of 458,250 shares
of its common stock at a price of $.80 per share. Gross proceeds realized
by the Company were $364,600.
On December 19, 1997, the Company issued a convertible note in the original
principal amount of $50,000. This convertible note was converted in May
1998 into 72,727 shares of common stock at an exchange price of $.69 per
share.
On March 11, 1997, the Company issued a convertible note in the original
principal amount of $25,000. This convertible note was converted in May
1998 into 33,333 shares of common stock at an exchange price of $.75 per
share. In addition, a warrant to purchase 3,333 shares of common stock was
issued with an exercise price of $1.50 per share.
On April 17, 1998, the Company issued a convertible note in the original
principal amount of $3,200,000. This convertible note was converted in May
1998 into 4,000,000 shares of common stock at an exchange price of $.80 per
share.
The Company incurred $103,190 in expenses associated with raising this
capital during the fiscal year ended May 31, 1998.
FISCAL YEAR ENDED MAY 31, 1997
During October and December 1996 (October Private Placement) the Company
sold an aggregate of 26,666 shares of its common stock at a price of $1.50
per share in a private placement offering. Net proceeds realized by the
Company were $33,377.
During October 1996, The Company issued a Convertible Term Promissory Note
in the original principal amount of $750,000. The note automatically
converted to 500,000 shares of the Company's common stock upon the
Amendment to the Company's Articles of Incorporation effecting a
one-for-six reverse stock split of the issued and outstanding common
shares. The Amendment became effective and the conversion took place in
July 1997.
During March and April 1997, (February 1997 Private Placement), The Company
issued Convertible Term Promissory Notes in the aggregate principal amounts
of $1,299,566. The notes automatically converted to 457,322 shares of the
Company's common stock upon the Amendment to the Company's Articles of
Incorporation effecting a one-for-six reverse stock split. The Amendment
became effective and the conversion took place in July 1997.
STOCK OPTIONS
The Company maintains three Stock Option Plans, the 1997 Stock Option Plan,
the 1994 Stock Option Plan and the 1987 Stock Option Plan, under which stock
options can be granted to consultants, key employees, directors and officers of
the Company. Generally, options granted vest over a period of up to two years
and expire five to ten years from the date of grant. Options cancelled under
the 1997 plan can be re-granted. As of May 31, 1998, there are 637,954 options
under the 1997 Stock Option Plan, which are available for future grant.
F-11
<PAGE>
The following summary of outstanding options and shares reserved under
the plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
1987 Plan 1994 Plan 1997 Plan Total Exercise Price
--------- --------- --------- -------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1996 18,167 86,250 - 104,417 $ 16.32
Grants - 33,333 - 33,333 2.16
Exercise - - - - -
Cancelled (625) (41,667) - (42,292) (17.04)
------- ------- ------- -------
Outstanding at May 31, 1997 17,542 77,916 - 95,458 11.02
Grants - - 868,544 868,544 1.08
Exercise - - - - -
Cancelled (9,209) (32,083) (6,498) (47,790) (14.65)
------- ------- ------- ------- -------
Outstanding at May 31, 1998 8,333 45,833 862,046 916,212 $ 1.42
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
As of May 31, 1998 options outstanding covering 883,160 shares were exercisable
at prices ranging from $.94 to $16.80 per share.
<TABLE>
<CAPTION>
Number Average Weighted
Range of Outstanding Remaining Average
Exercise Prices May 31,1998 Life Exercise Price
- ---------------- ------------ ------------ --------------
<S> <C> <C> <C>
$ .94 - 1.50 859,156 5.4 $1.07
$ 1.51 - 3.00 36,223 3.8 2.23
$ 7.20 - 11.52 8,333 1.7 10.44
$16.80 12,500 1.7 16.80
- ---------------- ------------ ------------ --------------
$ .94 - 16.80 916,212 5.2 $1.42
- ---------------- ------------ ------------ --------------
- ---------------- ------------ ------------ --------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the Company's stock options. For purposes of the pro
forma disclosures below, the estimated fair value of options has been calculated
and is expensed over the options' vesting period. Pro forma compensation cost
for the Company's stock plans for awards granted in 1997 was immaterial. Had
compensation cost for the Company's stock options been recognized based on the
fair value at the date of grant for awards during 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Net loss - as reported $(2,289,217)
Net loss - pro forma $(2,996,681)
Net loss per share - basic and diluted, as reported $ (0.79)
Net loss per share - basic and diluted, pro forma $ (1.04)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1998: dividend yield of 0%; risk-free
interest rate of 6.2%; expected volatility of 103%; and expected lives of 5
years. The weighted-average fair value of options granted during fiscal 1998
using the Black-Scholes option-pricing model was $0.84.
F-12
<PAGE>
Warrants to Purchase Common Stock
At May 31, 1998, the Company had a total of 728,987 outstanding warrants
for the purchase of the Company's common stock. Exercise prices range from
$1.11 to $2.66 per share, with the price of certain warrants subject to
adjustment for anti-dilution provisions. Warrants expire at various times from
January 1999 through October 2001. These warrants have a weighted-average
exercise price of $1.29, which would result in an aggregate exercise value of
$936,801. Using the fair value method prescribed in SFAS No. 123, the fair
value of warrants issued in fiscal 1998 and 1997 was immaterial.
Stock Split
In July 1997, the Company effected a one-for-six reverse stock split. All
applicable share and per share amounts contained in the financial statements and
notes thereto reflect the retroactive application of such reverse stock split
for all periods presented.
NOTE 7-RELATED PARTY TRANSACTIONS
There were no related party transactions during the fiscal years ended May
31, 1998 and 1997 other than deferred compensation awarded, compensation costs
paid and stock options granted to officers of the Company. Such individuals
also own shares of the Company's common stock.
NOTE 8-SIGNIFICANT CUSTOMERS
During the fiscal year ended May 31, 1998, two customers accounted for
approximately $199,000 (32%) of total revenues. No single customer accounted
for 10% or more of total revenues for the fiscal year ended May 31, 1997.
NOTE 9-EXPORT SALES
During the fiscal year ended May 31, 1998, Export sales to customers in
Canada accounted for approximately $175,000 (28%) of total revenues. Export
sales were less than 10% of total revenues for the fiscal year ended May 31,
1997.
F-13
<PAGE>
EXHIBIT 10.10
STANDARD LEASE AGREEMENT
THIS LEASE, made this day of December 15, 1997, by and between THE PROTECTIVE
GROUP, INC., hereinafter referred to as "Landlord," and Greentree Software,
Inc., hereinafter referred to as "Tenant."
WITNESSETH: In consideration of the mutual convenants contained herein the
parties agree as follows:
1. PREMISES. Landlord leases to Tenant, and Tenant leases from Landlord, that
certain space (the "Premises") shown on the diagram attached hereto and marked
Exhibit A located on the 2nd floor of the office building presently known as the
7901 FLYING CLOUD DRIVE BUILDING (the "Building") located in the city of Eden
Prairie, County of Hennepin and State of Minnesota, said Premises to be used by
Tenant only as office space in which to carry on the business of sales &
marketing. In addition to the foregoing Premises, the Tenant shall have the
non-exclusive right to use lavatory facilities and all other common areas both
indoor and outdoor in common with Landlord and other tenants, occupants and
visitors in the Building.
2. COMMON AREAS AND PARKING. Tenant agrees that the use of all corridors,
passageways, elevators, toilet rooms, unrestricted parking areas and landscaped
areas around the Building, by Tenant or Tenant's employees, visitors, or
invitees, shall be subject to the Building Rules and Regulations attached hereto
as Exhibit B and such additional rules and regulations as may from time to time
be made by Landlord for the safety, comfort and convenience of the owners,
occupants, tenants and invitees of the Building. Tenant agrees that no awnings,
curtains, drapes or shades shall be used upon the Premises except as may be
approved by Landlord.
In addition to the Premises, Tenant shall have the right to non-exclusive
use, in common with others, of (i) unrestricted automobile parking areas,
driveways and walkways, and (ii) loading facilities, freight elevators and other
facilities as may be constructed in the Building, all to be subject to the terms
and conditions of this Lease, including without limitation Exhibit B, and to all
such reasonable rules and regulations for the use thereof as prescribed from
time to time by Landlord.
Landlord and Tenant agree that Landlord will not be responsible for any
loss, theft or damage to vehicles, or the contents thereof, parked or left in
the parking areas around the Building. Tenant agrees to so advise its
employees, visitors or invitees who may use such parking areas. Tenant further
agrees not to use or permit its employees, visitors or invitees to use the
parking areas for overnight storage of automobiles or other vehicles.
3. LEASEHOLD IMPROVEMENTS. Landlord and Tenant shall finish the Premises as
set forth in Exhibit C. All work performed by Tenant shall conform to the
1
<PAGE>
Building Standards set forth in Exhibit C. Landlord is under no obligation to
make any structural or other alterations, decoration, additions or improvements
in or to the Premises except as expressly set forth in Exhibit C. If no Exhibit
C is attached hereto, then Tenant is taking the Premises "AS IS" and Landlord
shall not be obligated to do any work in the Premises.
4. TERM OF LEASE. The term of this Lease shall be thirty-six (36) months
commencing on the first day of March 1998 (the "Commencement Date"), and
terminating on the last day of February 2001. Tenant shall surrender the
Premises to Landlord in the condition required by this Lease immediately on
termination of the Lease.
5. OPTION TO RENEW. Tenant shall have the option to renew the Lease for an
additional two (2) years based on the following terms and conditions:
(i). Tenant shall give written notice to Landlord no later than
10/1/2000.
(ii). Tenant shall not be in default of the Lease at the time of said
notice.
(iii). Rent shall be market rent for the Building, as reasonably
determined by Landlord, at the time of said notice.
6. DELIVERY OF POSSESSION. If, for any reason, Landlord cannot deliver
possession of the Premises on or before the Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting therefrom; provided, however, unless Landlord's inability to
deliver possession of the Premises is due to an act or omission of Tenant or its
agents, Tenant shall be entitled to reimbursement of rental costs incurred at
its present location for the late delivery period on a monthly basis and a
proportionate deduction in Base Rent covering the period between the
Commencement Date and actual delivery of the Premises to Tenant, and if the
Premises are not ready or available for occupancy by Tenant within sixty (60)
days of the Commencement Date, Tenant shall have the right to terminate this
Lease by delivering written notice thereof to Landlord within thirty (30) days
after the end of said sixty (60) day period.
7. BASE RENT. Tenant shall pay as "Base Rent" a total of
One-Hundred-Seventy-Five-Thousand-Five-Hundred-Forty-Seven DOLLARS ($175,547.00)
for the term of this Lease, payable in equal monthly installments of
Forty-Eight-Hundred-Seventy-Six and 29/100ths DOLLARS ($4,876.29) each on the
first day of each month in advance, commencing on the Commencement Date. In no
event shall the Base Rent be less than $4,876.29 per month.
8. ADDITIONAL RENT. In addition to the Base Rent, Tenant agrees for each year
subsequent to the Base Year to pay an additional rent ("Additional Rent") based
upon Tenant's proportional share of the excess of operating costs in each such
subsequent year over Landlord's operating costs in the Base Year. For purposes
of this Lease, the
2
<PAGE>
"Base Year" shall be 1997. Additional Rent will be payable in equal monthly
installments during each year based upon the cost increases for such year, as
estimated by Landlord, with and adjustment to be made at such time as the actual
operating costs for such year are determined. Operating costs as used herein
shall be the Landlord's costs during each calendar year for real estate taxes
and special assessments, heat, air conditioning and ventilation, energy costs,
elevator service, cleaning and janitorial services, security, landscaping and
care of grounds, supplies, maintenance, repairs, painting wall and window
washing, tools and equipment (which are not required to be capitalized for
Federal Income Tax purposes) labor, including all wages and salaries and all
Social Security and other taxes may be levied upon such wages and salaries,
insurance and all other costs properly constituting direct operating costs
according to standard accounting practices including administrative and
management expense but not including depreciation of building or equipment,
interest, income taxes, costs of maintaining the Landlord's corporate existence
or any costs required to be capitalized for Federal Income Tax purposes. The
proportionate share of Tenant shall be computed by multiplying the excess of
operating costs, if any, for the applicable subsequent year over the operating
costs for the Base Year by the ratio of the rentable area of the Premises to the
total rentable area of the Building, it being agreed that the rentable area of
the Premises is 3,163 square feet and the total rentable area of the Building is
61,217 square feet.
Landlord shall, as soon as conveniently possible and in any event not later
than February 1st in each year, advise Tenant of the amount of Additional Rent
and thereafter Tenant shall pay the Additional Rent indicated, which Additional
Rent shall apply to the then current lease year, such new rates being applied to
any months to which the Base Rent shall then have been paid as well as the
unexpired months of the current lease year, the adjustment for the then expired
months to be made at the payment of the next succeeding monthly rental. Under
no circumstances shall the total monthly rental be less then the scheduled
monthly Base Rent provided herein.
9. RESTRICTION ON USE OF PREMISES. Tenant shall not use or permit the
premises or any part thereof to be used for any purposes other than those set
forth herein. Tenant shall neither permit on the Premises any act, sale or
storage that may be prohibited under standard forms of fire insurance policies
nor use the premises for any such purpose. In addition, no use shall be made or
permitted to be made that shall result in (i) waste of the Premises, (ii) a
public or private nuisance that may disturb the quiet enjoyment of other tenants
in the building, (iii) improper, unlawful or objectionable use including sale,
storage or preparation of food, alcoholic beverages or materials generating an
odor on the Premises, or (iv) noises or vibrations that may disturb other
tenants. Tenant shall not install, use, generate, store or dispose of in or
about the Premises any hazardous substance, toxic chemical, pollutant or other
material regulated by the Comprehensive Environmental Response, Compensation and
Liability Act of 1985 or the Minnesota Environmental Response and Liability Act
or any similar law or regulation, including without limitation any material
containing asbestos, PCB, CFC or HCFC (collectively "Hazardous Materials")
without Landlord's written approval of each Hazardous Material. Landlord shall
not unreasonably withhold its approval of use by Tenant of immaterial quantities
of Hazardous Materials customarily used in office
3
<PAGE>
business operations so long as Tenant uses such Hazardous Materials in
accordance with all applicable laws. Tenant shall indemnify, defend and hold
Landlord harmless from and against any claim, damage or expense arising out of
Tenant's installation, use, generation, storage, or disposal of any Hazardous
Materials, regardless of whether Landlord has approved the activity. Tenant
shall comply with all governmental regulations and statutes affecting the
Premises either now in force or hereafter enacted. Tenant shall also comply
with the Building Rules and Regulations attached hereto as Exhibit B and with
such other reasonable rules and regulations as may be prescribed by Landlord
from time to time.
10. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease or sublet
any part of the Premises without the prior written consent of Landlord, which
consent shall not be unreasonably withheld. Consent by Landlord to one such
assignment or sublease shall not waive this provision and all subsequent
assignments and subleases shall be subject to all of the terms and conditions
contained herein. Any transfer or assignment of a controlling interest in
Tenant, whether voluntary or by operation of law, shall constitute an assignment
for purposes of this Lease. Tenant agrees that any sublease agreement approved
by Landlord, shall entitle Landlord to -0- percent (-0-%) of all rent paid by
the subtenant to Tenant that exceeds the amount of Base Rent and Additional Rent
Tenant is required to pay to Landlord pursuant to this Lease for the space
sublet to said subtenant. No such assignment, sublease or other transfer,
whether or not consented to by Landlord, shall relieve Tenant of its liability
under this Lease.
11. SERVICES; MAINTENANCE; RIGHT OF ENTRY. Landlord will furnish such heat,
air conditioning, electricity and general janitor or cleaning services as shall
be reasonably necessary to the comfortable use or occupancy of the Premises
during normal business hours, Sundays and holidays excepted, upon the condition
that the Landlord shall not be liable for damages for failure to do so due to
causes beyond its reasonable control. Landlord agrees to furnish all
electricity required by Tenant in the normal conduct of business activities on
the premises, but Landlord shall be entitled to renew the proposal of Tenant to
add any equipment requiring large electrical power supplies, and to charge
Tenant for the additional cost of the increased electrical service, if Landlord
deems the necessity therefor to be reasonable.
Landlord shall be responsible for making all routine repairs and for
performing routine maintenance to the Premises. Tenant shall permit Landlord
and its agents to enter the Premises at all reasonable times to inspect the
Premises; clean windows; perform other janitorial services; maintain the
Building and Premises; make repairs, alterations or additions to the Premises
or any portion of the Building, including the erection of scaffolding, props
or other mechanical devices; and to post notices of nonliability for
alterations, additions, or repairs, without any rebate of rent to Tenant or
damages for any loss of occupation or quiet enjoyment of the premises.
Landlord and its agents may at any time within one hundred twenty (120) days
prior to the expiration of this Lease enter on the Premises at reasonable
hours and exhibit same to prospective tenants.
4
<PAGE>
12. CARE OF THE PREMISES; ALTERATIONS. Tenant has inspected the Premises, and
acknowledges that the Premises are now in a tenantable and good condition.
Tenant shall take reasonable care of the Premises and shall not alter, repair or
change the Premises without the written consent of Landlord, which consent may
be withheld by Landlord in its sole discretion. All alterations, improvements
and changes that Tenant may desire shall be done either by or under the
direction of the Landlord, but at the expense of Tenant and shall become the
property of Landlord, and remain on the Premises, except at the option of the
Landlord, and Tenant shall, at Tenant's expense, remove from the Premises all
personal property when surrendering the Premises. All damage or injury done to
the Premises by Tenant or by any person who may be in or on the Premises with
the consent of Tenant shall be paid for by Tenant. Tenant shall at the
termination of this Lease, surrender the Premises to Landlord in as good
condition and repair as reasonable and proper use thereof will permit.
13. MECHANIC'S LIEN. In the event any mechanic's lien shall at any time be
filed against the Premises or any part of the Building by reason of work, labor,
services or materials performed or furnished to Tenant or to anyone holding the
Premises through or under Tenant, Tenant shall forthwith cause the same to be
discharged of record. If Tenant shall fail to cause such lien forthwith to be
discharged within twenty-five (25) days after being notified of the filing
thereof, then, in addition to any other right or remedy of Landlord, Landlord
may, but shall not be obligated to, discharge the same by paying the amount
claimed to be due, or by bonding, and the amount so paid by Landlord and all
costs and expenses, including reasonable attorney's fees incurred by Landlord in
procuring the discharge of such lien, shall be due and payable in full by Tenant
to Landlord on demand.
14. INDEMNIFICATIONS. Tenant agrees to indemnify, defend and hold Landlord and
its partners, officers and employees and property manager harmless from and
against any claim, loss or expense arising out of injury, death or property loss
or damage occurring in the Premises, except to the extent caused by the
negligent act or intentional misconduct of Landlord or its partners, officers or
employees or property manager. Landlord agrees to indemnify, defend and hold
Tenant and its partners, officers and employees harmless from and against any
claim, loss or expense arising out of injury, death or property loss or damage
occurring in the common areas of the Project, except to the extent caused by the
negligent act or intentional misconduct of Tenant or its partners, officers or
employees.
15. LIABILITY OF LANDLORD. Notwithstanding anything apparently to the contrary
in this Lease, Landlord and its partners, officers and employees and property
manager shall not be liable to Tenant, and Tenant hereby releases such parties
from all damage, compensation or claims from any cause other than the
intentional misconduct of Landlord or its partners, officers or employees or
property manager arising from: loss or damage to personal property or trade
fixtures in the Premises including but not limited to books, records, files,
computer equipment, computer data, money, securities, negotiable instruments or
other papers; lost business or other consequential damage arising out of
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interruption in the use of the Premises; and any criminal act by any person
other than Landlord or its partners, officers or employees.
16. WAIVER OF SUBROGATION RIGHTS. Notwithstanding anything apparently to the
contrary in this Lease, Landlord and Tenant hereby release one another and their
respective partners, officers and employees and property manager from any and
all liability (to the other or anyone claiming through or under them by way of
subrogation or otherwise) for any loss or damage covered by property insurance
or coverable by a customary policy of insurance required by this Lease, even if
such loss or damage shall have been caused by the fault or negligence of the
other party, or anyone for whom such party may be responsible. It is the
intention and agreement of Landlord and Tenant that the rentals reserved by this
Lease have been fixed in contemplation that each party shall fully provide its
own property insurance protection at his own expense, and that each party shall
look at its respective property insurance carrier for reimbursement of any such
loss, and further, that the insurance carriers involved shall not be entitled to
subrogation under any circumstances against any party to this Lease. Neither
Landlord nor Tenant shall have any interest or claim in the other's insurance
policy or policies, or the proceeds thereof, unless specifically covered therein
as a joint insured.
17. INSURANCE. Tenant agrees to purchase in advance and to carry in full force
and effect throughout the Term of this Lease the following insurance:
(1) "All risk" property insurance covering the full replacement value
of all of Tenant's leasehold improvements, trade fixtures and
personal property within the Premises.
(2) Comprehensive general public liability insurance covering all
acts of Tenant, its employees, agents, representatives or guests
on or about the Premises, containing a contractual liability
endorsement, in a combined single limit amount of not less that
$1,000,000.00 and written on an "occurrence" basis.
All such policies shall name Landlord as an additional insured and contain
a clause requiring the insurer to provide Landlord with thirty (30) days written
notice prior to cancellation of the policy. If at any time Tenant allows said
insurance to lapse, Landlord shall have the right to place said insurance on
behalf of Tenant and immediately bill Tenant for the amount of the insurance
premium, which amount shall constitute additional rent under this Lease.
With the exception of any willful negligence on the part of Landlord, its
employees, and its agents, Tenant shall be responsible for the security and
safeguarding of the Premises and all property kept, stored or maintained in the
Premises. Landlord will make available to Tenant, at Tenant's request, the
plans and specifications for construction of the Building and the Premises.
Tenant represents that it is satisfied that the construction of the Building and
Premises, including the floors, walls, windows, doors and means of access
thereto are suitable for the particular needs of Tenant's
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business. Tenant further represents that it is satisfied with the security of
said Building and Premises for the protection of any property which may be
owned, held, stored or otherwise caused or permitted by Tenant to be upon the
Premises. The placement and sufficiency of all safes, vaults, cash or security
drawers, cabinets or the like placed upon the Premises by Tenant shall be at the
sole responsibility and risk of Tenant. Tenant shall maintain in force
throughout the Term, insurance upon all contents of the Premises, including that
owned by others and Tenant's equipment and any alterations, additions, fixtures,
or improvements in the Premises acknowledged by Landlord to be the Tenant's.
Landlord agrees to purchase in advance and to carry in full force and
effect throughout the Term of this Lease the following insurance:
(1) "All risk" property insurance coverage on the Building, exclusive
of Tenant's leasehold improvements, in such amount as Landlord
deems prudent.
(2) Comprehensive general public liability insurance covering the
Building, in a combined single limit amount of not less that
$2,000,000.00 and written on an "occurrence" basis.
18. DAMAGE BY FIRE OR OTHER CAUSES AND REPAIR. It is agreed between Landlord
and Tenant that if, during the Term of this Lease, the Premises shall be injured
or destroyed by fire or the elements, or through any other cause, so as to
render the Premises unfit for occupancy, or make it impossible to conduct the
business of Tenant thereon, and the Premises cannot be repaired with reasonable
diligence within sixty (60) days from the happening of such injury, then either
party may by written notice to the other terminate this Lease and The Term
herein demised from the date of such damage or destruction, and Tenant shall
immediately surrender the Premises and all interest therein to Landlord, and
Tenant shall pay rent only to the time of such surrender. If the Premises can
reasonably be restored within sixty (60) days from the happening of the injury
thereto, and Landlord within fifteen (15) days from the occurrence of such
injury elects in writing to so repair or restore the Premises within said sixty
(60) days, then this Lease shall not end or terminate on account of such injury
by fire or otherwise, and the Base Rent and Additional Rent shall continue to
accrue after the injury and during the process of repair and up to the time when
the repair shall be completed, except that Tenant shall during such time pay
only a pro rata portion of such rent apportioned to the portion of the Premises
which are in condition for occupancy or which may be actually occupied during
such repairing. If, however, the Premises shall be so slightly injured by any
cause aforesaid as not to be rendered unfit for occupancy then Landlord shall
repair same with reasonable promptness and in that case the rent shall not cease
or be abated during such repairing. Unless this Lease is terminated as provided
hereinabove, all improvements or betterments placed by Tenant on the Premises
shall be repaired and replaced by Tenant at its own expense and not at the
expense of Landlord.
19. CONDEMNATION. A condemnation of the entire Building or a condemnation of
the portion of the Premises occupied or used by Tenant shall result in a
termination of
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this Lease as of the date the condemning authority takes possession thereof.
All future rent installments to be paid by Tenant under this Lease shall be paid
up to the effective date of termination. Landlord shall receive the total of
any amount awarded as damages as a result of condemnation proceedings. Tenant
shall retain any separate award made for relocation and other benefits provided
to it under state and federal law.
20. ABANDONING PREMISES OR PERSONAL PROPERTY. Tenant shall not vacate or
abandon the Premises at any time during the Term of this Lease, but if Tenant
does vacate or abandon the Premises or is dispossessed by process of law, any
personal property belonging to Tenant and left on the Premises shall be deemed
abandoned at the option of Landlord and shall become the property of Landlord.
21. BREACH OR DEFAULT. Tenant shall have breached this Lease and shall be
considered in default hereunder if (i) Tenant makes an assignment of this Lease
or subleases all or any part of the Premises without the prior written consent
of Landlord, (ii) Tenant fails to pay any rent when due and does not make the
delinquency good within ten (10) days after receipt of notice thereof from
Landlord, (iii) Tenant fails to perform or comply with any of the other
covenants or conditions of this Lease and such failure continues for a period of
thirty (30) days after receipt of notice thereof from Landlord, (iv) Tenant
shall file or have filed against it or any guarantor of this Lease any
bankruptcy or other creditor's action or make an assignment for the benefit of
creditors, or (v) Tenant fails more than three (3) times in any calendar year
during the Term of this Lease to pay when due any installment of rent or other
payment required to be made by Tenant hereunder (the forth such failure
constituting a non-curable default for which no notice from Landlord shall be
required).
22. EFFECT OF BREACH. In the event of a breach of this Lease by Tenant as
set forth above, Landlord shall have the following rights:
(i) Landlord shall have the right to terminate this Lease, as well as
all of the right, title and interest of Tenant hereunder, by
giving to Tenant written notice of termination. On expiration of
the time fixed in the notice, this Lease and the right, title,
and interest of Tenant hereunder shall terminate in the same
manner and with the same force and effect, except as to Tenant's
liability, as if the date fixed in the notice of cancellation and
termination were the end of the Term herein originally specified.
Neither the passage of time after the occurrence of the breach
nor the exercise by Landlord of any other remedy with regard to
such breach shall limit Landlord's rights under this section.
(ii) Landlord may enter the Premises for the purpose of correcting or
remedying any such default and to remain until the default has
been corrected or remedied, but any expenditure for the
correction by Landlord shall not be deemed to waive or release
Tenant's default or Landlord's right to take any action which may
otherwise be permissible hereunder in the case of any default.
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(iii) Whether or not Landlord elects to terminate this Lease, Landlord
may re-enter and repossess the Premises immediately and remove
the property and personnel of Tenant, and store the property in a
public warehouse or at a place selected by Landlord, at the
expense of Tenant. After re-entry Landlord may terminate this
Lease by giving written notice of termination to Tenant. Without
said notice, re-entry will not terminate the lease. On
termination, Landlord may recover from Tenant all damages
proximately resulting from the breach, including the cost of
recovering the premises.
From time to time after re-entry and repossession of the Premises, whether
or not this Lease has been terminated, Landlord may relet the Premises or any
part thereof for any term and at such rent and upon such terms as Landlord may
choose. Landlord may, but shall not be obligated to, make alterations and
repairs to the Premises. Any rent received from any such reletting shall be
applied against Tenant's obligations hereunder, but Landlord shall not be
responsible or liable for any failure to collect any rent due upon any such
reletting. Landlord may at any time after a reletting terminate the Lease for
the breach on which Landlord has based the re-entry and subsequently relet the
Premises.
No termination of this Lease or repossession of the Premises by Landlord
pursuant to this section or otherwise shall relieve Tenant of its liabilities
and obligations under this Lease, all of which shall survive any such
termination or repossession. In the event of any such termination or
repossession, whether or not the Premises shall have been relet, Tenant shall
pay to Landlord the Base Rent and other sums and charges to be paid by Tenant up
to the time of such termination or repossession, and thereafter Tenant, until
the end of what would have been the Term in the absence of such termination or
repossession, shall pay to Landlord, as and for liquidated and agreed current
damages for Tenant's default, the equivalent of the amount of the Base Rent and
such other sums and charges which would be payable under this Lease by Tenant if
this Lease were still in effect, less the net proceeds, if any, of any reletting
effected pursuant to the provisions of this section after deducting all of
Landlord's expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage and management commissions,
operating expenses, legal expenses, attorneys' fees, alteration costs, and
expenses of preparation for such reletting. Tenant shall pay such current
damages to Landlord monthly on the days on which the Base Rent would have been
payable under this Lease if this Lease were still in effect, and Landlord shall
be entitled to recover the same from Tenant on each such day. At any time after
such termination or repossession, whether or not Landlord shall have collected
any current damages as aforesaid, Landlord shall be entitled to recover from
Tenant, and Tenant shall pay to Landlord on demand, as and for liquidated and
agreed final damages for Tenant's default, an amount equal to the then present
value of the excess of the Base Rent and other sums or charges reserved under
this Lease from the day of such termination or repossession for what would be
the then unexpired term if the same had remained in effect, over the amount of
rent Tenant demonstrates that Landlord could in all likelihood actually collect
for the Premises for the
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same period, said present value to be arrived at on the basis of a discount of
four percent (4%) per annum.
23. UNLAWFUL DETAINER AND ATTORNEY'S FEES. In case suit shall be brought for
an unlawful detainer of the Premises, for the recovery of any rent due under the
provisions of this Lease, or for Tenant's breach of any other condition
contained herein, Tenant shall pay to Landlord upon demand all reasonable
attorney's fees incurred by Landlord in connection therewith.
24. LATE PAYMENT; REMEDIES OF LANDLORD CUMULATIVE. If any installment of rent
or any other charge payable hereunder is not paid by Tenant when due, the unpaid
balance due Landlord shall bear interest at the Interest Rate from the date due
thereof until paid, and such interest shall constitute additional rent hereunder
which shall be immediately due and payable. The "Interest Rate" as used herein
shall mean the lesser of eighteen percent (18%) or the maximum rate permitted by
law. Further, in the event Tenant fails to pay any installment of rent or other
charge hereunder as and when such installment or charge is due, Tenant shall pay
to Landlord on demand a late charge of $25.00, and failure to pay such late
charge within ten (10) days after demand therefor shall be a default hereunder.
The provision for such late charge is to defray the cost to Landlord of handling
delinquent payments and shall be in addition to, not in lieu of, accrued
interest as provided above and any and all of Landlord's other rights and
remedies hereunder or at law, and shall not be construed as liquidated damages
or as limiting Landlord's remedies in any manner.
The remedies herein given to Landlord shall be cumulative and the exercise
of any one remedy by Landlord shall not be to the exclusion of any other remedy.
Failure of Landlord to assert any or all of its rights under this Lease in the
event of breach of any condition hereof by Tenant shall not be construed to be a
waiver of Landlord's rights hereunder in the event of any other breach hereof.
25. SUBORDINATION. This Lease is subject and subordinate to the lien of any
Mortgage which may now or hereafter encumber the Project or any development
of which the Project is a part. In confirmation of such subordination,
Tenant shall, at Landlord's request from time to time, promptly execute any
certificate or other document requested by the holder of the Mortgage.
Tenant agrees that in the event that any proceedings are brought for the
foreclosure of any Mortgage, Tenant shall immediately and automatically
attorn to the purchaser at such foreclosure sale, as the landlord under this
Lease, and Tenant waives the provisions of any statute or rule of law, now or
hereafter in effect, which may give or purport to give Tenant any right to
terminate or otherwise adversely affect this Lease or the obligations of
Tenant hereunder in the event that any such foreclosure proceeding is
prosecuted or completed. Neither the holder of the Mortgage (whether it
acquires title by foreclosure or by deed in lieu thereof) nor any purchaser
at foreclosure sale shall be liable for any act or omission of Landlord,
subject to any offsets or defenses which Tenant might have against Landlord
or bound by any prepayment by Tenant of more than one month's installment of
Base Rent and additional rent or by any modification of this Lease made
subsequent to the granting of the
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Mortgage. Notwithstanding anything to the contrary in this section, so long as
Tenant is not in default under this Lease, this Lease shall remain in full force
and effect and the holder of the Mortgage and any purchaser at foreclosure sale
thereof shall not disturb Tenant's possession hereunder.
For the purposes of this section, the term "Mortgage" shall mean at any
time, any mortgage of record now or hereafter placed against the Building, any
increase, amendment, extension, refinancing or recasting of a Mortgage and, in
the case of a sale or lease and leaseback by Landlord of all or any part of the
Building, the lease creating the leaseback. For the purposes hereof, a Mortgage
shall be deemed to continue in effect after foreclosure thereof and during the
period of redemption therefrom.
26. COVENANT OF QUIET ENJOYMENT. Landlord covenants that it has the right to
make this Lease for the term aforesaid and covenants that if Tenant shall pay
the rent and perform all of the covenants, terms and conditions of this Lease to
be performed by Tenant, Tenant shall, during the Term hereby created, freely,
peaceably and quietly occupy and enjoy the full possession of the Premises. The
term "Landlord" as used in this Lease shall mean solely the owner of the
Building and underlying land, or in the case of a sale-leaseback, the lessee of
the underlying land, at the relevant time. In the event of the sale of the
Building or the transfer of the title thereto, upon notification to Tenant,
Landlord shall be relieved of all of the covenants and obligations created by
this Lease, except as to breaches thereof occurring prior to such sale or
transfer, and such sale or transfer shall automatically result in the purchaser
or transferee assuming and agreeing to carry out all of the covenants and
obligations of Landlord herein from and after such sale or transfer. The
liability of the original Landlord and any successor Landlord under this Lease
is limited to its interest in the Building.
27. NO REPRESENTATIONS BY LANDLORD. Neither Landlord nor any agent or employee
of Landlord has made any representations or promises with respect to the
Premises or the Building except as herein expressly set forth, and no right,
privileges, easements or licenses are acquired by Tenant except as herein
expressly set forth. No exhibit attached to this Lease nor any other materials
provided by Landlord shall constitute a warranty or agreement as to the
configuration of the Building or the occupants thereof. Landlord reserves the
right from time to time to modify the Building, including common areas,
appurtenances and rentable areas, without in any case reducing the obligations
of Tenant hereunder. Tenant has no right to light or air over any premises
adjoining the Building. Tenant, by taking possession of the Premises, shall
accept the same "as is" except as expressly provided in this Lease and such
taking of possession shall be conclusive evidence that the Premises and the
Building are in good and satisfactory condition at the time of such taking of
possession. In addition to and without limitation of the immediately preceding
sentence, Tenant agrees that it is leasing the Premises on an "AS IS", "WHERE
IS" and "WITH ALL FAULTS" basis, based upon its own judgment, and hereby
disclaims any reliance upon any statement or representation whatsoever made by
Landlord or Landlord's agent. LANDLORD MAKES NO WARRANTY WITH RESPECT TO THE
PREMISES, THE PROJECT OR ANY PART THEREOF, EXPRESS OR IMPLIED, AND LANDLORD
SPECIFICALLY
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DISCLAIMS ANY WARRANTY OF MERCHANTABILITY AND OF FITNESS FOR A PRATICULAR
PURPOSE AND ANY LIABILITY FOR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OF
THE INABILITY TO USE THE PREMISES, THE BUILDING OR ANY PART THEREOF.
28. RELOCATION. At any time during the Term of this Lease, upon written notice
form Landlord, Tenant agrees to relocate to other comparable space in the
Building designated by Landlord. Tenant shall have thirty (30) days from the
date of said notice to complete the relocation. Landlord shall pay all
reasonable moving expenses incurred by Tenant for said relocation. In the event
of such relocation, this Lease shall continue in full force and effect without
any change in the terms or conditions of this Lease, but with the new location
substituted for the old location set forth in Exhibit A of this Lease Agreement.
29. HOLDING OVER. If Tenant holds possession of the Premises after the Term of
this Lease, Tenant shall, at Landlord's option, become a Tenant from
month-to-month on terms herein specified, but at a monthly gross rental of
$7,315.00 per month plus any operating cost escalator as herein provided payable
monthly in advance on the first day of each month and Tenant shall continue to
be a month-to-month tenant until the tenancy shall be terminated by Landlord, or
until Tenant has given to Landlord a written notice at least one month prior to
the date of termination of the monthly tenancy of Tenant's intention to
terminate the tenancy.
30. NOTICE. Where notice is required to be given by either Landlord or Tenant,
such notice shall be in writing and shall be hand delivered or sent by
registered or certified first class mail, postage prepaid, (i) if to Landlord at
the office of Landlord C/O The O'Neill Real Estate Group, 7901 Flying Cloud
Drive, Suite 117, Eden Prairie, Minnesota 55344 and (ii) if to Tenant, at the
Premises, unless notice of a change of address is given in accordance with the
provisions hereof.
31. ESTOPPEL CERTIFICATES. Each party hereto agrees that at any time, and
from time to time during the term of this Lease (but not more often than twice
in each calendar year), within ten (10) days after request by the other party
hereto, it will execute, acknowledge and deliver to such other party or to any
prospective purchaser, assignee or mortgagee designated by such other party, an
estoppel certificate in a form acceptable to Landlord.
32. BROKERAGE. Each of the parties represents and warrants that there are no
claims for brokerage commissions or finder's fees in connection with this Lease
Agreement except for The O'Neill Real Estate Group which is representing
Landlord and paid by Landlord, and agrees to indemnify the other against, and
hold it harmless from all liabilities arising from any such claim, including
without limitation, the cost of attorney's fees in connection therewith.
33. DEPOSIT. Tenant has deposited with Landlord the sum of $1,496.25
transferred from existing lease. Said sum shall be held by Landlord as security
for the faithful
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performance by Tenant of all of the terms, covenants, and conditions of this
Lease to be kept and performed by Tenant. The deposit shall not bear interest
and may be applied by Landlord to any default or nonpayment by Tenant. If
Tenant shall fully and faithfully perform every provision of this Lease to be
performed by it, the security deposit or any balance thereof shall be applied to
Tenant's rent for the last month of the Term.
34. MISCELLANEOUS.
(a) This is a Minnesota contract and shall be construed according to the
laws of Minnesota.
(b) The captions in this Lease are for convenience only and are not a part
of this Lease.
(c) If more than one person or entity shall sign this Lease as Tenant, the
obligations set forth herein shall be deemed joint and several
obligations of each such party.
(d) Time is of the essence.
(e) The provisions of this Lease which relate to periods subsequent to the
expiration of the Term shall survive expiration.
(f) If any provision of this Lease is invalid or unenforceable to any
extent, then such provision and the remainder of this Lease shall
continue in effect and be enforceable to the fullest extent permitted
by law.
(g) This Lease contains the entire agreement of the parties hereto with
respect to the Premises and Building. This Lease may be modified only
by a writing executed and delivered by both parties.
(h) Nothing contained in this Lease shall be deemed or construed to create
a partnership or joint venture of or between Landlord and Tenant, or
to create any other relationship between the parties other than that
of landlord and tenant.
(i) This Lease shall be binding upon and inure to the benefit of the
parties hereto and, subject to the restrictions and limitations herein
contained, their respective heirs, successors and assigns.
(j) The parties hereto agree that the addendums set forth in Exhibits A, B
and C and such other addendums as may be attached hereto, shall become
a part of this Lease.
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35. EARLY TERMINATION. If Landlord cannot provide additional office space
within the Building that satisfies the office space requirements of Tenant,
Tenant shall have the right to terminate the Lease after the 24th month of the
Lease Term by giving written notice to Landlord on or by October 1, 1999.
IN WITNESS WHEREOF, This Lease has been duly executed by the parties hereto on
the day and year first written above.
TENANT LANDLORD
GREENTREE SOFTWARE, INC. THE PROTECTIVE GROUP, INC.
/s/ Philip D. Wolf /s/ M. J. Cochrine
- -------------------------- ------------------------------
Philip D. Wolf M. J. Cochrine
Chief Financial Officer Vice President
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EXHIBIT "A"
PREMISES FLOOR PLAN
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EXHIBIT "B"
BUILDING RULES AND REGULATIONS
NO SMOKING IN PUBLIC AREAS OF THE BUILDING: The Building is a "smoke free"
building in all areas of the Building except for space leased by tenants.
Tenants shall not smoke in any non-tenant leased area of the building.
OBSTRUCTIONS: Tenants shall not obstruct sidewalks, entries, halls or stairways
nor use the same for any purpose other than for ingress and egress to and from
their respective premises.
SIGNS: No sign, advertisement of notice shall be placed or painted on any part
of the outside or inside of the Building or leased premises except on doors and
directory boards and then only in such location, size, color, style and material
as shall be designated by Landlord; and Landlord reserves the right to remove
all other at the expense of tenants.
DOGS AND OTHER ANIMALS: Tenants shall not bring or harbor any dogs or other
animals in or about the Building.
SAFES: All metal safes shall be moved in and out of the Building as designated
by Landlord and Landlord shall at all times have the right to prescribe the
weight and position thereof in the leased premises.
FURNITURE AND BULKY ARTICLES: All furniture, boxes and other bulky articles
belonging to tenants shall be carried in and out of the Building and moved from
place to place therein at the times and in the manner prescribed by Landlord.
PASS KEYS: Landlord shall have the right to keep pass keys to all leased
premises and to use the same to enter such premises in any emergency for
inspection.
DISTURBANCE OF TENANTS: No tenant or his employees or visitors shall disturb
other tenants by the use of musical instruments, radios, sound systems, unseemly
noises or other means and annoyances.
TELEGRAPH AND TELEPHONE CONNECTIONS: Landlord shall have the right to direct all
electric wiring and cabling in the Building for telegraph, telephone and other
purposes and tenants shall not do or permit any boring or cutting for such
purposes except with the consent and direction of Landlord.
DEFACEMENT OF WALLS AND WOODWORK: Tenants shall not allow spikes, hooks, nails,
screws or tacks to be driven into woodwork of leased premises and nothing shall
be allowed to be attached to walls or woodwork except with the permission and
under the direction of Landlord.
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LOCKS AND KEYS: Tenants shall not place additional locks on any of the doors in
said Building and shall have no additional keys made except as shall be
furnished by Landlord upon request.
REMOVAL OF FURNITURE AND FIXTURES: Tenants shall remove any and all furniture,
fixtures and goods whenever requested to do so by Landlord for purposes of
repairs.
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EXHIBIT 10.11
SUBLEASE
THIS SUBLEASE, made and entered into this 26 day of June, 1998, between RACOTEK,
INC., a Delaware corporation, ("Sublessor") and GREENTREE SOFTWARE, INC., a New
York corporation (Sublessee).
RECITALS:
A. A lease ("Prime Lease") dated May 2, 1994 was made and entered into
between Connecticut General Life Insurance Company, on behalf of its Closed End
Real Estate Fund I, as Landlord, and Racotek, Inc., as Tenant, pertaining to
Premises consisting of the entire second and sixth floors at 7301 Ohms Lane,
City of Edina, County of Hennepin, State of Minnesota and is attached hereto as
Exhibit B. ***
B. The parties hereto desire that the Sublessor sublet to the Sublessee
and that the Sublessee take from the Sublessor that portion of the second floor
of the Premises leased under the Prime Lease containing approximately 10,262
square feet of rentable area (hereinafter referred to as the "Sublet Area" and
designated "Suite 220") as depicted on Exhibit A, attached hereto.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants hereinafter contained, but subject to the consent thereto by
Landlord, the Sublessor does hereby sublet to the Sublessee and the Sublessee
does hereby rent and take from the Sublessor, the Sublet Area, subject to the
following terms and conditions:
1. Except for those portions of Article 5, 6, 13, 34, 35, 36, and 37
contained in the Addendum to the Prime Lease and Article 4 of the Prime Lease
(hereinafter collectively referred to as the "Excluded Provisions") which shall
not apply to this Sublease, all other applicable terms and conditions of the
Prime Lease are incorporated into and made a part of this Sublease as if the
Sublessor were the Landlord under the Prime Lease, the Sublessee was the Tenant
under the Prime Lease, and the Sublet Area were the Premises under the Prime
Lease. Sublessee hereby assumes and agrees to be bound by all terms, covenants,
and conditions of the Prime Lease except for the Excluded Provisions and except
as otherwise provided for herein.
2. The term of this Sublease shall commence August 1, 1998, and shall
terminate August 31, 2000.
3. The Sublessee shall pay to the Landlord on behalf of the Sublessor
$6,413.75 per month from August 1, 1998 to August 31, 2000, as Minimum Rent for
the Sublet Area, due and payable on the first day of each month during the
entire term of this Sublease. Commencing August 1, 1998, Sublessee shall also
pay the Landlord on behalf of the Sublessor, as Additional Rent, its share of
Real Estate Taxes and Operating Expenses pursuant to Article 6 of the Prime
Lease based on 10,262 rentable square feet for the term of this Sublease.
Sublessee shall initially pay estimated 1998 Real Estate Taxes and Operating
Expenses in the amount of $7,149.19 per month ($8.36 per rentable square foot
per year) subject to adjustment at the end of 1998 as provided for in said
Article 6.
All rent shall be paid to the Landlord at the address set forth in
Paragraph 6 hereof or at such other address and/or to such other party as the
Landlord may from time to time elect by giving not less than ten (10) days
advance written notice thereof to the Sublessee.
4. The Sublessee may use the Sublet Area for the purposes stated in the
Prime Lease and for no other purposes whatsoever.
5. The Sublessee will notify the Landlord forthwith in the event of any
default that occurs under the provisions of this Sublease which comes to the
attention of the Sublessee, such notice to be given to the Landlord by United
States Mail, registered or certified, postage prepaid, at the address provided
for Landlord in the Prime Lease or as such other address as Tenant shall be
advised to use by Landlord.
*** WHOCC Real Estate Limited Partnership is the current Landlord, and as such
has succeeded Connecticut Life Insurance Company as the Landlord.
1
<PAGE>
6. Any notice provided for herein shall be deemed to be duly given if
made in writing and delivered in person to an office of such party or mailed by
first class registered or certified mail, postage prepaid, addressed as follows:
If to Sublessor: If to Landlord:
Racotek, Inc. WHOCC Real Estate Limited Partnership
7301 Ohms Lane, Suite 200 Attn: John F. Markey
Edina, Minnesota 55439 Senior V.P. - East
C/o WCB Properties
3400 Park Lane
Pittsburgh, PA 15275
If to Sublessee: With copy to:
Greentree Software, Inc. Property Manager
7301 Ohms Lane, Suite 200B One Corporate Center IV
Edina, MN 55439 Grubb & Ellis - 5850 Opus Pkwy
Minnetonka, MN
or to such other address with respect to the parties hereto as such party shall
notify the other parties hereto in writing. Any notice so given, if mailed as
aforesaid, shall be deemed received the second (2nd) day after it is deposited
in the United States Mail.
7. Sublessee shall, at its expense, during the term of the Sublease,
maintain public liability insurance and such other insurance coverages in the
amounts required under Article 24 of the Prime Lease in one or more companies
acceptable to Sublessor and Landlord, naming Sublessor, Landlord and Landlord's
manager of the Building as additional insureds. No policy of insurance obtained
by the Sublessee in compliance with the Prime Lease may be cancelled or
terminated except upon not less than ten (10) days written notice to Sublessor
and Landlord. True and correct copies of each policy of such insurance, and
renewals thereof, obtained by the Sublessee in compliance with the Prime Lease
shall be delivered to the Sublessor and to Landlord.
8. Sublessee agrees to pay a leasing commission in the amount of
$46,179.00 payable in full upon full execution of this Sublease. United
Properties has agreed under separate agreement that half of said commission is
payable to The O'Neill Real Estate Group, Sublessee's agent. Sublessee shall
issue two checks of $23,089.50 each, one payable to "United" and the other
payable to "O'Neill". In no event shall Sublessor have any liability whatsoever
with respect to fees or commissions as a result of this Sublease.
9. Immediately, upon the full execution of this Sublease (including the
Consent by the Landlord), Sublessee agrees, at its cost, to complete the
improvements set forth on Exhibit A hereof and upon the completion thereof,
Sublessor shall deliver the Sublet Area to Sublessee for occupancy. Sublessee
agrees that it shall make no alterations or improvements to the Sublet Area
except as are consented to in writing by Sublessor and by Landlord as to the
nature of such alterations or improvements and the manner of doing the work as
provided for under the Prime Lease.
10. On or before Sublessee takes possession of any portion of the Sublet
Area (the "Delivery Date") Sublessee, at its sole cost and expense, shall
deliver to Sublessor a certificate of deposit from a bank (which is reasonably
acceptable to Sublessor) in the principal amount of not less than $27,125.89
(the "BANK CD"). The Bank CD shall be accompanied by an agreement (in form
satisfactory to Sublessor and its legal counsel) pledging the Bank CD jointly to
Sublessor and Landlord as security for the prompt, full and faithful performance
by Sublessee of the terms and provisions of this Sublease Agreement (the "PLEDGE
AGREEMENT"). At the time of delivery of the Bank CD and Pledge Agreement, a
UCC-1 financing statement (in form acceptable to Sublessor, Landlord and its
legal counsel) shall be executed by Sublessee and delivered to Sublessor (the
"FINANCING STATEMENT").
Notwithstanding any provision to the contrary contained within this
Sublease, upon the occurrence of a default by Sublessee in the payment of rent
or of any other default by Sublessee pursuant to the terms of this Sublease,
Sublessor may foreclose on the Bank CD, including liquidating the Bank CD, by
giving (5) days' written notice to Sublessee. Sublessee acknowledges and agrees
that the compliance with the notice provisions of this sublease for default plus
the giving of said (5) days' notice prior to foreclosure shall be commercially
reasonable notice to Sublessee. Sublessor may apply all or a part of the
proceeds from said Bank CD to the payment of the amount of any monetary default.
No foreclosure upon the Bank CD or otherwise converting the Bank CD to cash or
the use of the proceeds thereof shall be deemed a waiver by Sublessor of any
default by Sublessee under any provision of the Sublease, nor shall the use
thereof prevent Sublessor from exercising any other right or remedy provided in
the
2
<PAGE>
Sublease or under any law, nor shall the same be construed as liquidated
damages. In the event of any such foreclosure and/or conversion to cash,
Sublessor shall not be responsible for and Sublessee hereby indemnifies
Sublessor against any claims resulting from any penalties, fees or charges
imposed by the bank issuing the Bank CD with respect to early withdrawal or
other otherwise imposed in connection with the cashing of the Bank CD.
Sublessee acknowledges and agrees that if the Bank CD, Pledge Agreement and
Financing Statement are not delivered to Sublessor by the Delivery Date, then
Sublessor may, at its option, terminate this Sublease by giving written notice
to Sublessee.
IN WITNESS WHEREOF, each of the parties hereto has caused their presence to
be duly executed as of the day and year first above written.
SUBLESSOR: SUBLESSEE:
RACOTEK, INC. GREENTREE SOFTWARE, INC.
/s/ Ian L. Nemerov /s/ Philip D. Wolf
By By
---------------------------- ----------------------------
Ian L. Nemerov Philip D. Wolf
Secretary and Attorney Chief Financial Officer
11. Sublessor promises and agrees that it will not make any change,
alteration or termination of the underlying Prime Lease, as it affects the space
described in this Sublease without obtaining the prior written approval of the
Sublessee.
12. Sublessor and Landlord agree that the Sublessee shall have right to
standard signage for the "Building" including but not limited to inclusion in
the Building's tenant directory and hallway signage sufficient to direct
visitors to Sublessee's Space. Said signage costs shall be the responsibility
of Sublessee.
13. Sublessee agrees not to assign, sublet, license, mortgage or encumber
this Sublease, whether by voluntary act, operation of law or otherwise without
the specific prior written consent of Sublessor and Landlord which consent shall
not be unreasonably withheld or delayed. Consent by Sublessor and Landlord in
one such instance shall not be a waiver of Sublessor's or Landlord's rights
under this paragraph as to requiring consent for any subsequent instance. In
the event Sublessee desires to sublet a part or all of the Premises, or assign
this Sublease Agreement, Sublessee shall give written notice to Sublessor and
Landlord at least thirty (30) days prior to the proposed subletting or
assignment, which notice shall state the name of the proposed subtenant or
assignee, the terms of any sublease or assignment documents and copies of
financial information of the proposed subtenant or assignee. At Landlord's
option, any and all payments by the proposed assignee or sublessee with respect
to the assignment or sublease shall be paid directly to the Landlord. In any
event no subletting or assignment shall release Sublessee of its obligation to
pay the rent and to perform all other obligations to be performed by the
Sublessee hereunder for the Term of this Sublease. The acceptance of rent by
Landlord from any other person shall not be deemed to be a waiver by Landlord of
any provision hereof.
3
<PAGE>
CONSENT OF LANDLORD
A. The undersigned Landlord does hereby consent to the above Sublease
provided, however, in no event shall: (i) the Tenant under the Prime Lease be in
any way whatsoever relieved of its obligations to keep and perform promptly each
of the terms, covenants and conditions to be kept or performed by it under the
Prime Lease, or (ii) the terms, covenants or conditions of the Prime Lease be,
in any manner whatsoever, amended or otherwise changed or (iii) the undersigned
be deemed to consent to any further subletting or assignment under the Prime
Lease, or (iv) the acceptance of rent by the Landlord be deemed to create
privity of contract by and between Sublessee and Landlord. This consent shall
not be effective unless Sublessee delivers to Landlord, prior to taking
possession of the Sublet Area, evidence that Sublessee is in full compliance
with all insurance requirements of the Prime Lease including but not limited to
the requirement that the Landlord and Landlord's manager of the Building are
named as an additional insured in all insurance policies required under the
Prime Lease.
B. Landlord agrees that so long as Sublessee pays the Minimum Rental and the
Additional Rental as provided for in Paragraph 3 of this Sublease, that the
obligations of Sublessor under the Prime Lease shall be credited in the amounts
provided for in said Paragraph 3.
LANDLORD:
WHOCC REAL ESTATE LIMITED PARTNERSHIP,
a Delaware limited partnership
By: WHOCC Gen-Par, Inc., a Delaware corporation,
general partner
/s/ John F. Markey
By:
---------------------------------
John F. Markey
Senior Vice President - East
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 2,918,548
<SECURITIES> 0
<RECEIVABLES> 103,145
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,026,738
<PP&E> 46,067
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,081,929
<CURRENT-LIABILITIES> 702,471
<BONDS> 0
0
0
<COMMON> 80,298
<OTHER-SE> 2,299,160
<TOTAL-LIABILITY-AND-EQUITY> 3,081,929
<SALES> 616,639
<TOTAL-REVENUES> 616,639
<CGS> 611,468
<TOTAL-COSTS> 611,468
<OTHER-EXPENSES> 2,305,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,200)
<INCOME-PRETAX> (2,289,217)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,289,217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,289,217)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.79)
</TABLE>
