<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES 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, 2000;
or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________.
Commission File Number 0-11791
PURCHASESOFT, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 13-2897997
------------------------------- ---------------------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
One Research Drive
Suite 100 B 01581
Westborough, MA 01581 ----------
---------------------------------------- (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (508) 599-1300
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
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Common Stock, 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 of
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: $337,898
The aggregate market value of the Common Stock, par value $0.01 per share
("Common Stock"), held by non-affiliates of the Registrant (totaling
3,708,473 shares) was $9,037,549 as of August 1, 2000 (based upon the closing
bid of the Registrant's Common Stock on the OTC Bulletin Board on August 1,
2000 of $2.437 per share). The term affiliates is deemed, for this purpose
only, to refer only to directors, officers, and principal stockholders of the
Issuer.
State the number of shares outstanding in each of the issuer's classes of common
equity, as of August 1, 2000.
<TABLE>
<CAPTION>
CLASS OUTSTANDING
----- -----------
<S> <C>
Common Stock, par value 14,733,046 shares
$0.01 per share
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form
10-KSB.
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PURCHASESOFT, INC.
ANNUAL REPORT ON FORM 10-KSB
MAY 31, 2000
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C>
Item 1 Description of Business 2
Item 2 Description of Property 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 13
Item 6 Management's Discussion and Analysis or Plan of Operations 15
Item 7 Financial Statements 21
Item 8 Changes in and Disagreements with Accountants on Accounting 21
and Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 22
Item 10 Executive Compensation 24
Item 11 Security Ownership of Certain Beneficial Owners and
Management 28
Item 12 Certain Relationships and Related Transactions 30
Item 13 Exhibits, List and Reports on Form 8-K 31
</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 e-Procurement and e-Commerce systems software and services
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) capital
requirements; (iii) the uncertainty of market acceptance of the Company's
products; (iv) new management and ability to recruit sales, service, and
implementation personnel; (v) the intense competition in the software field;
(vi) rapid technological change and new products; (vii) dependence on a single
product-line; (viii) new product development and functionality enhancements;
(ix) fluctuations in quarterly operating results; and (x) intellectual property
and proprietary rights. 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.
PART I:
ITEM 1: DESCRIPTION OF BUSINESS
OVERVIEW
PurchaseSoft, Inc. (the "Company") is an emerging provider of strategic
e-Procurement and B2B solutions to medium and large organizations worldwide.
PurchaseSmart-TM-, the Company's flagship e-Procurement product enables
organizations to automate their procurement processes thereby reducing costs and
improving productivity, while providing real-time decision support information
to management. The Company is aggressively marketing its solutions throughout
North America, Europe and Asia. The Company's principal goals are twofold: to be
the leader in the e-Procurement solutions marketplace addressing organizational
procurement needs; and to be the preferred B2B exchange enabler for leading
industry marketplaces. The Company expects to achieve these objectives by
continuing to offer the most functional and easy to use leading edge, end-to-end
software solutions and unparalleled customer service.
The Company's expertise in procurement comes from its extensive
experience in this area. The Company began operations as a management consulting
firm specializing in "best practices" for purchasing and materials management in
1977. In 1985, the Company, then called Greentree Software, Inc. sensed the
market need for an automated purchasing software package and introduced its
first software product for purchasing materials management for use on IBM
compatible PCs. Since that time, the Company has continued to offer leading
edge software solutions by adapting the latest technology and incorporating
procurement best practices and knowledge gained from successful customer
implementations. In October 1999, the Company released its newest Solution,
PurchaseSmart-TM-, SourceSmart-TM- and WebQuote-TM- a Web-based, end-to-end
software solution, written in JAVA and HTML, which provides operational
support for strategic procurement and e-commerce.
One of the critical advantages of the solutions the Company provides
is the ability to customize the software to fit each customers' specific
needs. The Company expects that this flexibility will allow it to capitalize
on a developing market in business-to-business exchanges and portals. The
Company's solutions can easily be configured to be the e-Procurement engine
for business-to-business exchanges and portals. The Company believes that its
solutions offer the robustness and depth of functionality that such trading
communities demand. This is a new and important business opportunity for the
Company. It allows the Company to continue its evolution from a software
application vendor to a provider of vital infrastructure software to the new
Internet economy.
Customers' expectations are evolving at the same pace as technology.
Today, e-Procurement customers expect ready-made catalog content from their
solution providers. To address this need for normalized data from suppliers, the
Company is developing its supplier exchange service offering. Through this
service, which will be hosted and managed by the Company, the Company
expects to continue to serve its clients' full value procurement needs.
THE PURCHASESOFT SOLUTION
The PurchaseSoft solution (the "System") consists of three key
components - PurchaseSmart-TM-, the core product designed for the purchasing
professional, SourceSmart-TM-, the easy-to-use casual buyer front-end and
WebQuote-TM-, which enables supplier participation in the procurement process.
The PurchaseSoft solution offers functionality in the areas of Web-based
procurement, transaction management, supply chain management and planning &
forecasting. The System covers all procurement needs from requisitioning and
purchasing through auctioning and advanced analysis.
PURCHASESMART-TM-: PurchaseSmart-TM- is an integrated suite of software
modules that provide Web-based, end-to-end operational support for strategic
procurement and e-Commerce. It enables organizations to reduce processing costs
and improve productivity, by automating the procurement cycle, linking end-users
throughout the organization with approvers and financial systems.
PurchaseSmart-TM- is designed to connect large numbers of end users, approvers,
and administrative personnel through Web based applications that automate
procurement and financial processes. The functionality of PurchaseSmart-TM- is
directed at the purchasing
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professionals in an organization. It provides all the tools that are needed by
buyers and purchasing managers to effectively manage the procurement process and
supplier performance. PurchaseSmart-TM- features the following functionality:
<TABLE>
<CAPTION>
<S><C>
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- Requisitioning - Electronic Cataloging
----------------------------------- ------------------------------------
- Purchase Order Management - Receiving
----------------------------------- ------------------------------------
- Request for Quotations (RFQs) - User Self Registration
----------------------------------- ------------------------------------
- Auctioning - Advanced Analysis and Reporting
----------------------------------- ------------------------------------
- Quotations and Bid Analysis - Data Integration and Migration
----------------------------------- ------------------------------------
</TABLE>
Several additional powerful modules can be added to PurchaseSmart-TM-
allowing the customer to customize the System to match the needs of the
organization. These modules are Inventory, Asset Tracking, and Invoice Matching.
SOURCESMART-TM-: SourceSmart-TM- is an easy-to-use requisitioning
system for the casual user. Written in HTML, SourceSmart-TM- is accessed using a
Web browser. With SourceSmart-TM-, users can scan catalogs, select items, create
requisitions and with proper authorization, approve requisitions created by
others. The requisitions, depending on business rules, can be converted to
purchase orders to be sent directly to suppliers or sent to an approval workflow
process as defined by the organization. Information from SourceSmart-TM- is
immediately available in PurchaseSmart-TM- for analysis, so that total corporate
spending can easily be controlled and managed.
WEBQUOTE-TM-: WebQuote-TM- provides buyers with the ability to issue
pricing requests and/or initiate auctioning events over the Internet. Suppliers
can be specifically invited to participate by an email message directing them
to the organization's auction Web site through a hyperlink. Using the Bid
Analysis feature, the competing suppliers' bids can be analyzed and purchase
orders placed with selected suppliers. The auctioning feature and the ability
to analyze supplier bids allows for dynamic pricing and reduction in cost of
goods purchased.
The PurchaseSoft solution was designed to meet the needs of procurement
professionals and the larger organizations within which they work. The System
meets these sometime competing needs by incorporating and consistently employing
the following key features:
Easy-to-use Interfaces: All features of the PurchaseSoft solution are
accessed through a browser-based interface. The user interface is designed to be
intuitive and requires minimal training.
E-mail enabled workflow: The system uses an organization's e-mail
infrastructure to implement a flexible workflow process linking requisitioners,
buyers, managers, and approvers.
Powerful Analytics: The system actively tracks the procurement activity
in an organization. The data collected can be analyzed with the built-in tools
that include Buyer/Requisitioner Analysis, Supplier Performance Analysis and
Item/Commodity Analysis. These real-time analyses help the key decision-makers
make strategic sourcing decisions that result in better control of procurement,
improved supplier performance, reduction of "maverick" buying and overall
improvements to the full procurement cycle.
Integration Capability: The system can be integrated to existing ERP
and legacy systems using the built-in Integration functionality.
Multi-platform Architecture: Based on the SilverStream Application
Server platform, the system can be hosted on multiple hardware and software
configurations such as Microsoft Windows NT, Sun Solaris, AIX, and Linux on the
Intel and Sun architectures. The system supports robust industry standard
databases including Microsoft SQL Server and Oracle.
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The Company has always endeavored to incorporate the latest
technologies into its solution to keep its software on the cutting edge of
software design. The Company believes its solutions have historically
featured the most breadth and functionality available by continually
developing new features for its customers. The Company, in keeping with these
traditions, has the following upcoming features for its solution currently in
development:
- Multi-lingual and multi-currency capability
- P-Card integration
- XML document exchange
- Travel &Entertainment processing
- Advanced workflow capabilities
The Company has also begun development of an advanced, feature-rich
Supplier Exchange system. The Company's e-Procurement customers will be able
to subscribe to various levels of service on this exchange, allowing them
access to catalog content and to produce transactions with suppliers.
Suppliers participating in the exchange will be able to manage their content
and receive and respond to various types of transactions with customers.
Advanced features such as auctioning and reverse auctioning will also be
available within the exchange. The Company intends to position the exchange as
a convenient and cost effective content and transaction solution for its
customers, while also making it convenient and cost effective for suppliers to
participate in the exchange.
MARKETING
The primary functions of our marketing efforts are to create market
awareness of our e-Commerce solutions, create new sales opportunities for sales
initiatives and to educate the marketplace regarding the capabilities of our
products. The Company expects to reach targeted markets through an integrated
marketing campaign consisting of direct mail, trade shows, public relations,
advertising, seminars, and through Web site programs. The Company's marketing
programs are targeted at the decision-makers within the enterprise.
The Company has increased its marketing staff and expects to incur
significant marketing expenses in the future. However, the market space in which
the Company competes is very competitive and the Company cannot assure you that
its marketing efforts will be successful.
DISTRIBUTION STRATEGY
The Company intends to distribute its software solutions using
primarily an indirect sales organization consisting of strategic alliances
and partnerships and augmented by a small group of highly motivated direct
sales representatives. The Company plans to increase its direct sales force
while simultaneously stepping up its efforts to secure alliances with systems
integrators and other critical strategic relationships. Both the Company's
direct and indirect sales efforts will feature its full end-to-end solutions
that may be installed directly at the customer site or available as a hosted
application through its partnership with US internetworking (USi). In
addition, the Company intends to work closely with business-to-business
marketplace makers, to power their offerings with PurchaseSoft's
e-Procurement software.
One of the principal benefits of the Company's partnership with USi is
that it can deploy its software virtually anywhere in the world via its hosted
application. The Company believes that considerable opportunity exists for the
sale of its products outside of the United States. The Company is pursuing these
worldwide initiatives via critical relationships with strategic partners in
these countries. The Company believes that these strategic partnerships will
assist it in the international distribution of its software and will provide a
critical component of its international efforts. However, the competition for
successful sales personnel as well as strong technology partnerships is intense
and there can be no guarantee that the Company will be successful in recruiting
this personnel or in developing a strong alliance network. The Company intends
to incur significant sales and distribution expenses in future periods.
COMPETITION
The market for the Company's solution is intensely competitive,
constantly evolving and subject to instant change brought on by changes in
technology and/or offerings of other participants in the industry. The intensity
of the competition increases each quarter and is likely to continue at its
current pace as new participants enter the industry and current players expand
their product offerings. The Company believes that its principal source of
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competition is from independent software vendors with whom it competes directly.
Potential customers also compete with the Company indirectly through internal
development efforts as they continue to attempt to develop new functionality for
legacy systems. The Company's current and potential competitors include Ariba,
Commerce One, Clarus, Concur Technologies, iPlanet, Intellysis, Oracle and I2.
Some of the Company's potential competitors are developing Web-based solutions
designed to allow their customers to buy more effectively from suppliers while
other competitors are attempting to add procurement applications to their
existing suite of products. Chief among this last group are the significant ERP
vendors such as SAP, PeopleSoft, and Oracle. These ERP vendors have a
substantial installed customer base into which to offer these products. In
addition, there are relatively low barriers to entry into this marketplace and
the Company expects additional competition to come from new and/or emerging
companies.
The Company believes that the principal competitive factors affecting
its market include the breadth and depth of the solution, the functionality of
the solution and its ability to integrate easily with legacy technology,
customer satisfaction, the relative ease of use of the solution, the ability to
successfully implement the solution and the total cost of the solution. The
Company believes that it competes favorably with its competition in these areas.
However, this market is new and evolving constantly and the Company may not be
able to maintain its competitive position against both its current and potential
competitors, especially those with greater resources.
Many of the Company's competitors have longer operating histories,
larger customer bases, greater financial and technical resources and better name
recognition than the Company does. There is a significant potential that some
of the Company's competitors may establish strategic or other commercial
relationships or alliances that may enable them to compete more effectively
against it. It is therefore possible that these partnerships and alliances
could gain significant market share. Competitive pressures brought about by new
technologies and consolidations within the industry will continue to escalate.
The Company cannot assure you that it will be able to compete against its
current and future competitors.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. Research and development expenses were $860,012 and
$753,902 in fiscal 2000 and fiscal 1999, respectively. In October 1999, the
Company released its newest solution, consisting of PurchaseSmart-TM-,
SourceSmart-TM-, and WebQuote-TM-. PurchaseSmart-TM- is a Web-based, end-to-end
software solution, written in JAVA, which provides operational support for
strategic procurement and e-Commerce. SourceSmart-TM- is an easy-to-use
requisitioning system, written in HTML and is accessed using a Web browser.
WebQuote-TM- provides buyers with the ability to issue pricing requests and/or
initiate auctioning events over the Internet. The Company intends to make
continual and substantial investments in its research and development
activities to keep the Company's software solutions at the leading edge of
e-Procurement and e-Commerce offerings. The research and development group
currently has the following features in development:
- Multi-lingual and multi-currency capability
- P-Card integration
- XML document exchange
- Travel & Entertainment processing
- Advanced workflow capabilities
The Company has also begun development of an advanced, feature-rich
Supplier Exchange system. The Company's e-Procurement customers will be able to
subscribe to various levels of service on this exchange, allowing them access
to catalog content and to produce transactions with suppliers. Suppliers
participating in the exchange will be able to manage their content and receive
and respond to various types of transactions with customers. Advanced features
such as auctioning and reverse auctioning will also be available within the
exchange. The Company intends to position the exchange as a convenient and cost
effective content and transaction solution for its customers, while also making
it convenient and cost effective for suppliers to participate in the exchange.
The Company expects to develop enhancements and future products
primarily through internal resources. The Company also intends to license
third-party technology to integrate with its own software to take advantage of
the ever-increasing availability of new e-Commerce offerings, which can shorten
research to market time and provide functionality beyond the Company's core
competencies. The Company maintains a formal quality assurance program to
create versions of its software that are reliable and documented before they
are released for general distribution. The Company believes in continuous
product enhancement based on feedback from key customers, prospects, analysts
and other sources.
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The Company's development and QA (qualitative assurance) teams are
highly trained software professionals specializing in Internet technologies
including Java, HTML and XML. The Company expects to continue to recruit the
highest caliber software professionals to ensure its products provide customers
with state-of-the-art features and intuitive ease of use.
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SOFTWARE MAINTENANCE
Maintenance revenues for fiscal 2000 and fiscal 1999 were $159,826 and
$175,869, respectively, a decrease of $16,043, or 9.1%. During fiscal 2000, the
Company was supporting all three versions of its software as shown in the
following table:
<TABLE>
<CAPTION>
CAP GTPP PurchaseSoft Total
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<S> <C> <C> <C> <C>
FY 2000 $ 350 $ 87,223 $72,253 $159,826
FY 1999 5,056 $145,942 $24,871 $175,869
Dollar change ($ 4,706) ($ 58,719) $47,382 ($ 16,043)
Percentage change (93.1%) (40.2%) 90.5% (9.1%)
</TABLE>
CAP-TM- - Computer Aided Purchasing, DOS based system (Supported
through December 31, 1999).
GTPP-TM- - GT PurchasePro, Two-tier, 16 bit client server based system
(Supported generally through May 31, 2000, except for several
specific customers who will be supported until their one year
agreements expire).
PURCHASESOFT-TM- - Two-tier, 32 bit client server based system.
In fiscal 2000, maintenance revenue associated with products that were
no longer being supported or being phased out was down $63,425 over the prior
period. In contrast, the Company's maintenance revenue on its PurchaseSoft-TM-
product increased by $47,382, or 90.5%, over the prior period.
Maintenance contracts have been generally sold to customers for 15% of
the software product list price for a one-year renewable term. The Company
records payment of these maintenance contracts as deferred maintenance revenue
and recognizes revenue on a pro-rata basis over the term of the contract. These
contracts entitle the customer to telephone support and unspecified upgrades, as
they become available. The Company believes that maintenance and support
services are a very important component of the overall solution it is providing
and intends to continue investing in the personnel and technical resources
necessary to provide customers with state of the art maintenance and support
services. In order to provide this level of service, the Company is considering
raising its pricing of maintenance contracts.
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WARRANTIES
The Company's standard license agreement for both PurchaseSoft-TM-
and PurchaseSmart-TM- software warrants that the software will be free from
defects in materials and workmanship for a period of 90 days following
delivery of the software to the customer. The Company's customers have the
option and are encouraged to purchase annual maintenance contracts for the
software. The Company's standard maintenance agreement for PurchaseSoft-TM-
and PurchaseSmart-TM- software provides that the Company will furnish such
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 2000 or 1999.
COPYRIGHTS, TRADEMARKS, AND PATENTS
The Company has registered with the United States Patent and Trademark
Office the trademark "PurchaseSoft-Registered Tradmark-" for its purchasing and
materials management software product. The Company has applied for registration
for the marks "PurchaseSmart-TM-" and "SourceSmart-TM- as well. The Company has
sought, and will continue to seek, the protection of all of its software and
documentation through a combination of contract, copyright, trademark and trade
secret laws, as appropriate. The Company will continue to aggressively protect
its trademark, copyright and proprietary rights against any attempt by a
competitor or any other person or entity 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 could adversely affect its operational results. Even if the
Company commences litigation, there is no assurance that it would prevail, or
have adequate resources to fully pursue any claims the Company may have or
vigorously defend its position.
EMPLOYEES
As of August 17, 2000, the Company had twenty-nine full-time employees
consisting of: five sales and marketing personnel; ten development personnel;
three customer support personnel and eleven administrative personnel. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes relations with its employees are good.
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 have not had, or in the foreseeable future,
will not have any material adverse effect upon the capital expenditures,
earnings, or competitive position of the Company.
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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 $3.9 million for the fiscal
year ended on May 31, 2000 and had an accumulated deficit at May 31, 2000 of
approximately $25.3 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, 2000, the Company had revenues of $337,898.
For the fiscal year ended May 31, 1999, the Company had revenues of $372,255.
The Company does not expect to be profitable unless and until such time as sales
of its software products and services generate sufficient revenue to fund its
operations.
Capital Requirements;
At May 31, 2000, the Company had a cash balance of approximately
$4,992,000. On March 23, 2000, the Company borrowed $5,000,00 from L-R Global
Partners, L.P. and signed a promissory demand note in exchange. Subsequent to
year end, L-R Global Partners, L.P. issued a letter to the Company stating
that it would not make a demand for repayment prior to June 15, 2001 and
accordingly the Company has classified the note payable as non-current on its
balance sheet dated May 31, 2000. The Company believes that its existing
capital resources and revenue from future software sales and services will be
sufficient to fund its planned operating expenses and capital requirements
through the end of fiscal 2001, which is May 31, 2001. At May 31, 2000, the
Company's net equity was approximately $131,000. This reflects the
classification of the $5,000,000 investment by L-R Global Partners, L.P. in
March 2000 as long-term debt. The Company expects continuing losses, which
will cause the net equity of the Company to be reflected as a deficit should
the Company not raise new equity capital. The Company recognizes that to be
competitive it must raise additional equity capital to accelerate its sales
and marketing programs and to establish a stronger financial position. The
Company is pursuing two primary capital raising strategies to raise this
growth capital: In the short term, the Company's strategy is to seek a
strategic partnership with an established technology company that could
provide the necessary growth capital as well as technology expertise, a
reseller network and an installed customer base into which the Company could
market its products. As a strategy for the mid-term, the Company might seek
to raise additional funds through public or private debt or equity
financings, including, but not limited to, another rights offering. In the
event that the Company conducts another rights offering, L-R Global partners,
L.P. has given the Company a written commitment to purchase up to $5,000,000
of the Company's Common Stock in a rights offering and pay for its purchase
by canceling the debt that the Company owes to L-R Global Partners, L.P.
should other financing options not be available. The ability of the Company
to conduct any future financings is likely contingent upon the Company's
ability to demonstrate market acceptance of its PurchaseSmart-TM- software
solution as evidenced by revenue growth. There can be no assurances that the
Company will be able to demonstrate such market acceptance or achieve any
revenue growth. Furthermore, additional financings may not be available on
terms favorable to the Company, or at all. A failure to obtain additional
funding could have a material adverse effect on the Company's ability to
continue, maintain or grow its operations.
Uncertainty of Market Acceptance of the Company's Products.
The Company has invested heavily in research for, and development of,
its core purchasing and materials management software system - PurchaseSmart
-TM-. Although the Company feels its GT Purchase Pro-TM- and PurchaseSoft-TM-
products have been received favorably in the marketplace, the Company cannot
offer any assurance that its PurchaseSmart-TM- suite of products will achieve
market acceptance. The Company believes that its history of poor financial
performance has negatively affected its image in the marketplace and that it may
have forfeited business from potential customers who expressed concerns about
the Company's financial status and ability to remain solvent. The Company
believes that the commitment to an indirect distribution strategy made in the
third quarter of fiscal 2000 and the costs savings to the Company that it
represents will help position the Company to overcome these past objections. The
Company believes its largest challenge is to gain wide spread market acceptance
of its PurchaseSmart-TM- suite of products. The failure to obtain market
acceptance would have a material adverse effect on the Company's business.
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New Management, Ability to Recruit Sales, Service, and Implementation Personnel.
The Company's management team consists of three members who have
less than one year with the Company, one member who has been with the Company
more than two years, three members who have been with the Company more than
three years and one member who has been with the Company more than six years.
As a team, the Company's management has a very limited history in operating
PurchaseSoft, although they are experienced in managing companies facing
challenges similar to those being faced by PurchaseSoft. The Company cannot
be assured that its management will be successful in meeting planned
objectives for PurchaseSoft. The Company's ability to achieve anticipated
revenues depends substantially upon its ability to attract on a timely basis,
and retain, skilled personnel, especially key management, business
development and sales and marketing 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 high quality of products and services the Company
seeks to provide to its customers. Competition for qualified personnel, in
particular for product development, business development and sales and
marketing personnel, is intense, and the Company competes in the marketplace
against numerous companies, including larger, more established companies with
significantly greater financial resources than the Company possesses. The
Company cannot assure you that it will be successful in attracting and
retaining such skilled personnel. The Company's inability to attract and
retain qualified personnel would have a material adverse effect on its
business.
Intense Competition.
The software products industry is intensely competitive. The Company
faces competition from many sources including independent software vendors
such as Ariba, Commerce One, Clarus, Concur Technologies, iPlanet,
Intellysis, Oracle and I2. These competitors all offer software products
performing functions similar to the Company's products. The Company also
faces indirect competition from its prospective customer base as these
organizations go forward with internal efforts to expand the capacity and
functionality of legacy systems. The market space in which the Company
competes is experiencing tremendous growth and this will invite new
competitors. 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 Company's potential customers and offer applications that compete
in its markets. As a result, competition (including pricing competition) may
increase, which could result in price reductions and loss of market share.
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. Many of
the Company's competitors have longer operating histories, larger customer
bases, greater financial and technical resources and better name recognition
than it does. There is a significant potential that some of the Company's
competitors may establish strategic or other commercial relationships or
alliances that may enable them to compete more effectively against it. It is
therefore possible that these partnerships and alliances could gain
significant market share. Competitive pressures brought about by new
technologies and consolidations within the industry will continue to
escalate. The Company cannot assure you that it will be able to compete
against its current and future competitors.
10
<PAGE>
Rapid Technological Change and New Products.
The market for the Company's software products is characterized by
rapid technological advances, constantly evolving industry standards, changing
end-user requirements, and frequent new product introductions and/or
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, 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 a Single Product-Line.
Substantially all of the Company's revenues are expected to be derived
from the sale of its PurchaseSmart-TM- suite of software products 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 or customization of such products, such as competition from
other products, significant flaws in the products, 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
products run, 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
PurchaseSmart-TM- and other products and on customer acceptance of such new
enhanced products.
New Product Development.
The Company's current products are developed in Java and HTML, and
these will be the Company's development tools of choice for the near to mid-term
future. In addition to continually enhancing the Company's core products, the
Company will be adding modules, and also releasing new products that would open
new markets for the Company. Most of the Company's working capital allocated to
research and product development is being channeled towards the design and
development of these new features, modules and products. The Company cannot be
assured that its design and development of these products will achieve the
desired results, nor can it assure you that it will be able to successfully
develop the products on a timely basis. Even if development is completed as
planned, the Company cannot be assured that it will be able to market new
products or new versions of products successfully. The failure of new products
to gain market acceptance, or the Company's inability to introduce products
compatible with ever-changing technology on a timely basis, would damage its
ability to compete in the marketplace and would have a material adverse effect
on its business and operations.
11
<PAGE>
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 and generally accepted accounting principles. 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 and/or the Company's stockholders. In such event, the price of the
Company's Common Stock would likely be materially adversely affected.
Intellectual Property and Proprietary Rights.
The Company relies 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 and business practices. 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
competitors providing 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 may require the Company to enter into royalty or licensing
arrangements with third parties. Such royalty or license arrangements, if
required, may not be available to the Company or may not be available on
acceptable terms.
ITEM 2: DESCRIPTION OF PROPERTY
In June 2000, the Company relocated its corporate office to One
Research Drive in Westborough, Massachusetts, where it currently occupies 10,320
sq. ft. under a lease that expires on May 31, 2007. In June 2000, the Company
opened its Client Care Facility at 101 Eisenhower Parkway in Roseland, New
Jersey, where it currently occupies 1,930 sq. ft. under a lease that expires on
July 31, 2005. The Company is intending to lease approximately 800 sq. ft. of
office space in Bloomington, Minnesota to replace is current office space that
expires on August 31, 2000.
12
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation
proceedings.
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, 2000.
PART II:
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the National Association of
Securities Dealers OTC Bulletin Board (Symbol: PURC). The following table sets
forth the range of high and low bid quotations of the Common Stock for each
quarterly period during the two fiscal years ended May 31, 2000 and May 31, 1999
as reported by the NASD OTC 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
---- ---
<S> <C> <C>
FISCAL YEAR ENDED:
May 31, 2000
First Quarter $0.937 $0.437
Second Quarter $0.593 $0.320
Third Quarter $9.750 $0.410
Fourth Quarter $8.000 $2.062
FISCAL YEAR ENDED:
May 31, 1999
First Quarter $2.625 $1.031
Second Quarter $1.750 $0.687
Third Quarter $1.500 $0.687
Fourth Quarter $1.375 $0.687
</TABLE>
The closing bid price of the Common Stock on August 1, 2000 on the NASD
OTC Bulletin Board (as reported by the NASD) was $2.437 per share.
HOLDERS
As of August 1, 2000, there were approximately 400 holders of record of
the Company's Common Stock. Management of the Company believes that, based on
the number of proxy materials distributed in connection with the Special Meeting
in Lieu of the 2000 Annual Meeting of Stockholders, that the number of
beneficial owners as of August 1, 2000 was approximately 2,000.
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<PAGE>
DIVIDENDS
The Company has never paid cash dividends on its Common Stock 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 Stock is traded on 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 Stock was below $5.00 per share when the Common Stock was
delisted in 1995 from the NASDAQ System, the Common Stock, when recommended
by a broker-dealer, is subject to the limitations of Rule 15g-9 under the
Exchange Act, which Rule imposes additional sales practices requirements on
broker-dealers that sell the Common Stock (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 Stock, 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 Stock, 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 Stock as a
result of the delisting.
RECENT SALES OF UNREGISTERED SECURITIES
On February 11, 2000, the Company issued a warrant to an employee to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$5.50 per share. This warrant has a five-year term and will expire on February
10, 2005. This warrant was granted as an inducement for this individual to join
the Company as an employee.
On May 1, 2000, the Company issued 3,333 shares of the Company's Common
Stock upon the exercise of warrants held by a non-reporting person at an
exercise price of $1.26 per share, for the aggregate sum of $4,199. The issuance
of the Common Stock was made in reliance on Section 4(2) of the Securities Act
of 1933, as amended.
14
<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 this Annual Report on Form 10-KSB. This Management's
Discussion and Analysis of Financial Condition and Results of Operations section
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 YEAR ENDED MAY 31, 2000 VS. 1999
OVERVIEW
The Company reported a net loss for the year of $3,899,987 on
revenues of $337,898 as compared to a net loss for the prior year of
$4,469,376 on revenues of $372,255.
The Company experienced substantial turnover in the office of the
CEO during fiscal 2000. On September 9, 1999, the Company announced the
resignation of Michael G. Kerrison as CEO, Chairman of the Board and a
Director, effective September 10, 1999. Existing board member, J. Murray
Logan, was elected acting Chairman of the Board of Directors and was later
elected the Chairman of the Board of Directors at the Company's Special
Meeting in Lieu of the 2000 Annual Meeting of Stockholders held on January
25, 2000. Replacing Mr. Kerrison was interim CEO Pamela Cabalka, who was also
the Company's Vice President of Sales. On December 9, 1999, the Company
announced the restructuring of certain positions within the Company and a
redirection of its sales and marketing efforts to give greater emphasis to
the development of strategic partnerships and alliances. At this time, the
Company also announced that Ms. Cabalka had tendered her resignation from the
Company. The Company also announced that its President, Jeffrey B. Pinkerton
would be the senior officer of the Company. On March 7, 2000, the Company
announced the appointment of Jeffrey B. Pinkerton as CEO of the Company and
that Mr. Pinkerton would continue to serve as the Company's President. On
August 14, 2000, subsequent to the year ended May 31, 2000, the Company
announced the appointment of Mr. Pinkerton as Vice Chairman and Chief Product
Strategist and the appointment of existing board member, Donald S. LaGuardia,
as interim CEO and President. Mr. Pinkerton will focus on product strategy
and at the same time undertake a more active role in the promotion of the
Company's products and solutions. He has been associated with PurchaseSoft
and has held various positions within the Company since 1987, when it first
began marketing its computer-based purchasing system. Donald S. LaGuardia is
a member of L-R Managers LLC, the general partner of L-R Global Partners, LP,
the majority stockholder in PurchaseSoft. He has served as a director of the
Company since June 1998 and chairs the Company's audit committee. Mr.
LaGuardia was an auditor and then a consultant with PricewaterhouseCoopers
from 1987 to 1991. He joined BMW of North America, Inc. in 1991 as a
Financial Analyst and then became the Network Business Planning Manager. He
joined L-R Global Partners in 1997 as an equity analyst and is also a member
of L-R Managers LLC, the general partner of L-R Global Partners, L.P.
In October 1999, the Company released its newest solution, consisting of
PurchaseSmart-TM-, SourceSmart-TM- and WebQuote-TM-. PurchaseSmart-TM- is a
Web-based, end-to-end software solution, written in JAVA, which provides
operational support for strategic procurement and e-Commerce. SourceSmart-TM-
is an easy-to-use requisitioning system, written in HTML and accessed using a
Web browser. WebQuote-TM- provides buyers with the ability to issue pricing
requests and/or initiate auctioning events over the Internet.
15
<PAGE>
On January 24, 2000, the Company announced its partnership with
USinternetworking (USi) (NASDAQ: USIX), a leading Application Service
Provider, to provide PurchaseSmart-TM- and SourceSmart-TM- software as an
Internet service through USi's AppHost program. This agreement was entered
into by PurchaseSoft and USi to respond to the market need for affordable,
fully featured, Web-based procurement software. Under the agreement, USi will
host PurchaseSoft's business-to-business e-Commerce applications via its
AppHost model. PurchaseSoft's clients will be able to obtain and operate
PurchaseSmart-TM- and SourceSmart-TM- software as a subscription service over
USi's network of enterprise data centers, eliminating the need to build out
additional in-house infrastructure to support the application and speeding up
the implementation process.
On January 31, 2000, the Company announced the hiring of Mr. P.
Gopalakrishnan as Senior Vice President of Business Development. He will be
responsible for building and expanding the Company's partnerships, alliance
networks, reseller programs and marketing efforts. Before joining
PurchaseSoft, he was a Principal Consultant for PricewaterhouseCoopers
Management Consulting Services specializing in e-Commerce best practices and
major project implementation and management. Mr. Gopalakrishnan has over
eighteen years experience in information technology. He has concentrated on
design, development and implementation for multinational and multi- location
e-Commerce projects for the last nine years. Mr. Gopalakrishnan received his
BSc from the University of Delhi, an FBA from the Canadian School of
Management, Toronto, and an MBA from City University, Seattle, WA.
On March 23, 2000, the Company borrowed $5,000,000 from L-R Global
Partners, L.P. and signed a promissory demand note in exchange. Subsequent to
year end, L-R Global Partners, L.P. issued letter to the Company stating
that it would not make a demand for repayment prior to June 15, 2001 and
accordingly the Company has classified the note payable as non-current on its
balance sheet dated May 31, 2000. The Company believes that its existing
capital resources and revenue from future software sales and services will be
sufficient to fund its planned operating expenses and capital requirements
through the end of fiscal 2001, which is May 31, 2001. At May 31, 2000, the
Company's net equity was approximately $131,000. This reflects the
classification of the $5,000,000 investment by L-R Global Partners, L.P. in
March 2000 as long-term debt. The Company expects continuing losses, which
will cause the net equity of the Company to be reflected as a deficit should
the Company not raise new equity capital. The Company recognizes that to be
competitive it must raise additional equity capital to accelerate its sales
and marketing programs and to establish a stronger financial position. The
Company is pursuing two primary capital raising strategies to raise this
growth capital: In the short term, the Company's strategy is to seek a
strategic partnership with an established technology company that could
provide the necessary growth capital as well as technology expertise, a
reseller network and an installed customer base into which the Company could
market its products. As a strategy for the mid-term, the Company might seek
to raise additional funds through public or private debt or equity
financings, including, but not limited to, another rights offering. In the
event that the Company conducts another rights offering, L-R Global Partners,
L.P. has given the Company a written commitment to purchase up to $5,000,000
of the Company's Common Stock in a rights offering and pay for its purchase
by canceling the debt that the Company owed to L-R Global Partners, L.P.
should other financing options not be available.
The executive team and the Board of Directors acknowledge the
difficulties that the Company has faced in the past. We remain optimistic and
enthusiastic for the upcoming year and believe that the recently completed
restructuring of the office of CEO and the creation of the office of Vice
Chairman and Chief Product Strategist will position the Company to take
advantage of the strengths of Donald LaGuardia and Jeffrey Pinkerton. Fiscal
2001 represents a critical juncture in the Company's history. Fiscal 2001
must begin to show substantial revenue growth and the Company's software
products must receive market acceptance. PurchaseSoft is firmly committed to
achieving these two goals in fiscal 2001 and we believe if we are able top do
so, stockholder value will be enhanced.
16
<PAGE>
NET REVENUES
TOTAL NET REVENUE
Total net revenue, which includes product and service revenue, for
fiscal 2000 was $337,898 compared to $372,255 for fiscal 1999, a decrease of
$34,357, or 9.2%.
PRODUCT REVENUES
Product revenue for fiscal 2000 was $116,155 compared to $86,550 for
fiscal 1999, an increase of $29,605, or 34.2%. During fiscal 2000, the
Company added three new customers and delivered three PurchaseSoft-TM-
software systems. In fiscal 1999, the Company added two new customers and
delivered three GT PurchasePro-TM- software systems. During the first half of
fiscal 2000, the Company's only software product was PurchaseSoft-TM-, a
two-tier, 32-bit client server based solution. The target market for this
solution was the middle market. During the second half of the year, the
Company began marketing and selling its new flagship product,
PurchaseSmart-TM- / SourceSmart-TM-, written in Java and HTML. This new
product was priced substantially higher than the PurchaseSoft-TM- product and
was being marketed into Fortune 2000 accounts. The Company had no sales of
PurchaseSmart-TM- / SourceSmart-TM- in fiscal 2000. At this same time, the
Company changed its distribution model from direct sales based to one based
on resellers and strategic partnerships. The Company believes that this
method of distribution will be successful but that it will take some time to
implement.
SERVICE REVENUES
Professional service revenue for fiscal 2000 was $61,917 compared to
$109,836 for fiscal 1999, a decrease of $47,919, or 43.6%. This decrease is a
combination of two factors. The first factor is the relationship of service
revenue generated by product revenue, both in terms of absolute dollars and
percentages. In fiscal 2000, service revenues generated by product revenues were
$25,917, or 22.3%, of product revenues compared to $34,512 in service revenues,
or 39.9%, for fiscal 1999, a decrease of $8,595 or 24.9%. The second factor is
the service revenue generated from existing customers. In fiscal 2000, the
Company generated $36,000 in service revenues from existing customers compared
to $75,324 in service revenues from existing customers for fiscal 1999, a
decrease of $39,324 or 52.2%.
Maintenance revenue for fiscal 2000 was $159,826 compared to $175,869
for fiscal 1999, a decrease of $16,043 or 9.1%. During fiscal 2000, the Company
was supporting all three versions of its software as shown in the following
table:
<TABLE>
<CAPTION>
CAP GTPP PurchaseSoft Total
--- ---- ------------ -----
<S> <C> <C> <C> <C>
FY 2000 $ 350 $ 87,223 $72,253 $159,826
FY 1999 5,056 $145,942 $24,871 $175,869
Dollar change ($4,706) ($ 58,719) $47,382 ($ 16,043)
Percentage change (93.1%) (40.2%) 90.5% (9.1%)
</TABLE>
CAP-TM- - Computer Aided Purchasing, DOS based system (Supported
through December 31, 1999).
GTPP-TM- - GT PurchasePro, Two-tier, 16-bit client server based system
(Supported generally through May 31, 2000, except for several
specific customers who will be supported until their one year
agreements expire).
PURCHASESOFT-TM- - Two-tier, 32-bit client server based system.
In fiscal 2000, maintenance revenue associated with products that were
no longer being supported or being phased out was down $63,425 over the prior
period. In contrast, the Company's maintenance revenue on its PurchaseSoft-TM-
product increased by $47,382, or 90.5%, over the prior period.
17
<PAGE>
Maintenance contracts have been generally sold to customers for 15% of
the software product list price for a one-year renewable term. The Company
records payment of these maintenance contracts as deferred maintenance revenue
and recognizes revenue on a pro-rata basis over the term of the contract. These
contracts entitle the customer to telephone support and unspecified upgrades, as
they become available. The Company believes that maintenance and support
services are a very important component of the overall solution it is providing
and intends to continue investing in the personnel and technical resources
necessary to provide customers with state of the art maintenance and support
services. In order to provide this level of service, the Company is considering
raising its pricing of maintenance contracts.
COSTS AND EXPENSES
COST OF PRODUCT REVENUES
Cost of product revenues for fiscal 2000 was $465 compared to $1,577 in
fiscal 1999, a decrease of $1,112 or 70.5%. These costs have been very
insignificant in comparison to product revenues.
COST OF SERVICE REVENUES
Cost of service revenue for fiscal 2000 was $343,112 compared to
$171,696 in fiscal 1999, an increase of $171,416 or 99.8%. Compensation and
benefits increased $197,755 as the Company continued to build its customer
support infrastructure. Offsetting increased compensation costs was a
decrease in contract labor of $60,982, which resulted from converting
contract labor to employee headcount. In fiscal 2000, the headcount peaked at
five personnel, while in fiscal 1999, the Company hired its first customer
support employee in the last month of that fiscal year. Travel expenses
increased $13,512 relating to non-billable trips to visit customers and
assess their level of satisfaction with the Company's software as well as put
on a user conference in New York. Cost of service revenues, which increased
99.8%, did not move in the same direction as service revenues, which
decreased 22.3% for several reasons. The Company expected fiscal 2000
revenues to show substantial growth and was committed to building a better,
more responsive customer support organization and began staffing its customer
support and professional services group accordingly. Fiscal 2000 revenues
were off projections, but the increased compensation costs
incurred were fixed over this period. The Company expects that cost of
service revenues will continue to increase in absolute dollars, and that they
are likely to grow in proportional terms, at a faster rate than the related
service revenue, until such time as revenues grow and reach full utilization
of the costs used to produce them.
SALES AND MARKETING.
Sales and marketing expenses for fiscal 2000 were $1,255,424
compared to $1,448,634 in fiscal 1999, a decrease of $193,210, or 13.3%.
Sales expenses decreased from $1,068,255 in fiscal 1999 to $574,079 in fiscal
2000, a decrease of $494,176, or 46.3%. In December 1999, the Company
restructured its primary method of distribution from a direct sales force to an
indirect sales force using resellers and partners. Many of the direct sales
positions were eliminated. The significant items accounting for the decrease
in sales expenses were sales compensation and benefit expenses, which
decreased by $328,007 and travel expenses, which decreased by $118,708.
Marketing expenses for fiscal 2000 were $681,345 compared to $380,379 in
fiscal 1999, an increase of $300,966, or 79.1%. The Company ended fiscal 2000
with two employees dedicated to managing the Company's marketing activities,
which increased marketing expenses by $103,456. In the prior year, there were
no dedicated employees in the marketing department. As a result of these new
marketing employees, the Company eliminated many of the outside consulting
fees it had been contracting for and saved $246,997. The Company also
increased trade show expenses by $190,924 and increased other initiatives
including collateral materials, advertising, analyst fees and other marketing
expenses by $253,583. The Company expects to incur significant sales and
marketing expenses in future periods.
18
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 2000 were $1,849,116
compared to $1,911,309 in fiscal 1999, a decrease of $62,193, or 3.3%.
Although general and administrative expenses were flat for fiscal years 2000
and 1999, there were several areas that had changes. Compensation and benefit
expenses increased $346,031, which included $144,758 in severance benefits
and $201,273 in compensation to new employees and increases to existing
employee compensation. Travel costs increased $78,605 related to the
Company's efforts to develop a reseller organization and develop partnerships
to increase the promotion and distribution of the Company's software
solution. Offsetting these increases was a decrease in general expenses of
$154,509, resulting from the adjustment of certain accrued liabilities, which
the Company provided for in prior years. Legal Fees decreased $144,858
resulting from savings realized by the creation of an internal General
Counsel position, which eliminated many of the outside legal costs the
Company historically incurred. Recruiting fees decreased $145,778 as the
Company did not use any recruiters in fiscal 2000. In fiscal 1999, the
Company used recruiters to fill direct sales positions.
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 2000 were $860,012
compared to $753,902 in fiscal 1999, an increase of $106,110, or 14.1%.
Compensation and benefit expenses increased $177,289 and were offset in part
by a $71,516 decrease in contract labor that was eliminated. The average
headcount for research and development increased by two individuals for
fiscal 2000 and also included overtime payments and certain performance
bonuses paid for meeting aggressive development deadlines. The Company
intends to make continual and substantial investments in its research and
development activities to keep the Company's software solutions at the
leading edge of e-Procurement and e-Commerce offerings.
NET INTEREST INCOME
Net interest income for fiscal 2000 was $70,244 compared to $55,940 for
fiscal 1999, an increase of $14,304, or 25.6%. This additional income resulted
from a higher average cash balance.
NET LOSS
For fiscal 2000, the Company reported a net loss of $3,899,987 (or
$0.28 per share) as compared with a net loss of $4,469,376 (or $0.52 per
share) for fiscal 1999. The fiscal 2000 loss decreased over the fiscal 1999
loss by $569,389 and this decrease is primarily attributable to the absence
of a restructuring charge in fiscal 2000, which accounted for $610,453 of
expense in fiscal 1999. The other components of costs and expenses, although
they included both increases and decreases, netted out to an increase of only
$21,011. This net increase of $21,011 in combination with the increase in net
interest income of $14,304, the decrease in revenues of $34,357, and the
absence of $610,453 in restructuring charges, accounts for the $569,389
decrease in the fiscal 2000 net loss. The decrease in the loss per share
results from a combination of both the lower net loss in fiscal 2000 and an
increase in the average outstanding shares during fiscal 2000 to 14,088,270
from 8,553,362 for fiscal 1999.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2000, the Company had cash and cash equivalents totaling
$4,992,306 and working capital of $4,415,686. The Company used $4,274,462 of
cash in operating activities during fiscal 2000. The net loss for the period of
$3,899,987 represents the largest item of cash used in operating activities.
The other significant items of cash used in operating activities are a
reduction of $284,587 in accounts payable and a reduction of $220,767 in
accrued severance payments related to past restructuring charges and these
items using cash were offset in part by $131,339 of non cash charges, which
increased cash and represent primarily depreciation and amortization charges
and stock issued for services. The Company used $436,298 of cash in investing
activities during fiscal 2000 to acquire property and equipment and increase
its security deposits relating to the Company's new corporate headquarters in
Westborough, Massachusetts. The Company raised $5,878,561 of cash from
financing activities during fiscal 2000 of which $5,000,000 was a demand
promissory note from L-R Global Partners, LP, $941,351 was raised from the
exercise of options and warrants and $62,790 was used for capital lease
payments.
In March 2000, the Company borrowed $5,000,000 from L-R Global
Partners, LP and signed a demand promissory note in return. Under the terms of
this note, the Company must repay the principal and interest due at any time
upon the demand of L-R Global. Subsequently, L-R Global issued to the Company a
letter, which stated that they would not demand repayment prior to June 15,
2001. Accordingly, the Company has classified this note payable as non-current
in its balance sheet dated May 31, 2000. During fiscal 2000, the Company raised
gross proceeds of $941,351 from the exercise of stock options and warrants.
Proceeds from the demand promissory note and exercise of options and warrants
are being used to fund the Company's sales and marketing activities, product
development initiatives, customer support, and other general operating expenses.
In connection with the resignation of Joseph D. Mooney, the Company is
obligated under an Agreement and General Release to continue to pay Mr. Mooney's
salary through January 31, 2001. The unpaid obligation as of May 31, 2000 was
$133,332 and is classified as a current liability. This obligation is payable in
equal installments on a semi-monthly basis.
The Company made $254,854 in capital expenditures during fiscal 2000,
including assets acquired under capital leases as compared with $314,580 in
fiscal 1999. The Company had no significant commitments as of May 31, 2000 for
capital expenditures.
On March 23, 2000, the Company borrowed $5,000,000 from L-R Global
Partners, L.P. and signed a promissory demand note in exchange. Subsequent to
year end, L-R Global Partners, L.P. issued letter to the Company stating
that it would not make a demand for repayment prior to June 15, 2001 and
accordingly the Company has classified the note payable as non-current on its
balance sheet dated May 31, 2000. The Company believes that its existing
capital resources and revenue from future software sales and services will be
sufficient to fund its planned operating expenses and capital requirements
through the end of fiscal 2001, which is May 31, 2001. At May 31, 2000, the
Company's net equity was approximately $131,000. This reflects the
classification of the $5,000,000 investment by L-R Global Partners, L.P. in
March 2000 as long-term debt. The Company expects continuing losses, which
will cause the net equity of the Company to be reflected as a deficit should
the Company not raise new equity capital. The Company recognizes that to be
competitive it must raise additional equity capital to accelerate its sales
and marketing programs and to establish a stronger financial position. The
Company is pursuing two primary capital raising strategies to raise this
growth capital: In the short term, the Company's strategy is to seek a
strategic partnership with an established technology company that could
provide the necessary growth capital as well as technology expertise, a
reseller network and an installed customer base into which the Company could
market its products. As a strategy for the mid-term, the Company might seek
to raise additional funds through public or private debt or equity
financings, including, but not limited to, another rights offering. In the
event that the Company conducts another rights offering, L-R Global Partners,
L.P. has given the Company a written commitment to purchase up to $5,000,000
of the Company's Common Stock in a rights offering and pay for its purchase
by canceling the debt that the Company owed to L-R Global Partners, L.P.
should other financing options not be available.
20
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP F-2
Balance Sheets at May 31, 2000 and 1999 F-3
Statements of Operations For the Years Ended May 31, 2000 and 1999 F-4
Statements of Stockholders' Equity for the Years Ended May 31, 2000 and 1999 F-5
Statements of Cash Flows for the Years Ended May 31, 2000 and 1999 F-6
Notes to Financial Statements F-7
</TABLE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
<PAGE>
PART III:
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
As of August 17, 2000, the executive officers and directors of the Company were
as follows:
<TABLE>
<CAPTION>
Year Became
Officer or
Name Age Position with Company Director
-------------------- --- ------------------------------------------- -----------
<S> <C> <C> <C>
Donald S. LaGuardia 33 Chief Executive Officer, 1998
President and Director
Jeffrey B. Pinkerton 52 Vice Chairman, Chief Product 1994
Strategist and Director
P. Gopalakrishnan 39 Senior Vice President, Business Development 2000
Philip D. Wolf 48 Chief Financial Officer, Treasurer, 1998
and Assistant Secretary
Terry J. Bartz 40 Vice President, General Counsel, 1999
and Secretary
J. Murray Logan 65 Chairman of the Board 1998
Brad I. Markowitz 42 Director 1994
</TABLE>
DONALD S. LAGUARDIA has served as President and Chief Executive Officer
of the Company since August 14, 2000 and as a member of the Board of Directors
since June 1998. From 1987 to 1991, Mr. LaGuardia served as an auditor and then
a consultant for PricewaterhouseCoopers. From 1991 to 1997, Mr. LaGuardia joined
BMW of North America, Inc. as a Financial Analyst and then became the Network
Business Planning Manager. In 1997, Mr. LaGuardia joined L-R Global Partners,
L.P. as an equity analyst and is a member of L-R Managers LLC, the general
partner of L-R Global Partners, LP, the majority stockholder in PurchaseSoft,
Inc. Mr. LaGuardia is a Certified Public Accountant and a candidate for the
Chartered Financial Analyst designation. Mr. LaGuardia received his B.A. in 1989
from Pace University and his MBA in International Finance from New York
University in 1997
JEFFREY B. PINKERTON has served as Vice Chairman and Chief Product
Strategist of the Company since August 14, 2000 and as a member of the Board of
Directors since October 1995. He formerly served as President and Chief
Executive Officer from March 2000 to August 14, 2000 and as President from
August 1996 to March 2000. From 1987 to 1991 and from 1994 to July 1996, Mr.
Pinkerton has served in various positions for the Company, including Executive
Vice President and Vice President-Product Development. From 1991 to 1994, Mr.
Pinkerton founded and operated Viewpoint Consulting, a reseller of the Company's
software products. Prior to joining the Company, Mr. Pinkerton was Director of
Purchasing for American-Standard, Inc. in New York. His industrial experience
includes both materials management and systems analysis. Mr. Pinkerton has
published numerous articles on Purchasing and Purchasing Applications, taught a
course on application design for procurement at Baruch College, NY, and
published two books. Mr. Pinkerton received a BSc in Mathematics and Statistics
from Sheffield University in England in 1970.
22
<PAGE>
P. GOPALAKRISHNAN has served as Senior Vice President, Business
Development of the Company since January 17, 2000. From August 1998 to
January 2000, Mr. Gopalakrishnan was a Principal Consultant for the
PricewaterhouseCoopers Management Consulting Services specializing in
e-Commerce best practices and major project implementation and management.
From 1994 to 1998, he was a Senior Consultant/Project Manager (EC Services)
with ABB, Inc. From 1989 to 1994, he was a Technical Consultant for
Datronics, Inc. From 1987 to 1989, he was a Senior Consultant for Tata-Unisys
Ltd. From 1986 to 1987, he was an Analyst/Programmer with American Express
Bank. From 1983 to 1986, he was a Consultant with ORG Systems. From 1981 to
1983 he was a Programmer with ABC Consultants. He has concentrated on design,
development and implementation for multinational and multi location
e-Commerce projects for the last nine years. Mr. Gopalakrishnan received his
BSc in Science from the University of Delhi, Delhi, India an FBA in Business
Administration from the Canadian School of Management, Toronto and an MBA in
Management from City University, Seattle, WA.
PHILIP D. WOLF joined the Company in October 1997 and has served as
Chief Financial Officer, Treasurer and Assistant Secretary 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, Mr. Wolf 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. Mr. Wolf received his BS Degree in Accounting from the
University of Minnesota in 1974.
TERRY J. BARTZ began advising PurchaseSoft as outside counsel in 1996
and joined the Company in May 1999 as Vice President and General Counsel. Prior
to joining the Company, Mr. Bartz had a private law practice focused on serving
the needs of start-up, financially distressed and emerging businesses. Mr.
Bartz's law practice provided representation and advice on a wide variety of
general business and corporate law matters including litigation, corporate
governance, employment and executive compensation. Mr. Bartz received his B.A.
degree (with major in business) from Gustavus Adolphus College in 1982 and his
J.D. degree, cum laude, from Hamline University School of Law in 1985.
J. MURRAY LOGAN has served as a member of the Board of Directors of
the Company since June 1998. Since 1975, Mr. Logan has served as a vice
president, portfolio manager, Chairman of Investment Policy of Rockefeller &
Co., Inc., and as a vice president of Rockefeller Gas & Oil Inc., general
partner of various Rockefeller partnerships. Mr. Logan is the Managing
Partner of L-R Global Partners, L.P. since its inception in 1997 and along
with Rockefeller & Co., Inc., is a member of L-R Managers, LLC which is the
management company for L-R Global Partners, L.P. Mr. Logan is a director of
The World Trust Fund, an unaffiliated investment trust. Mr. Logan served as a
trustee of the Johns Hopkins University and chaired its Committee on
Investments. Mr. Logan is also a director of the Camphill Foundation,
Camphill Village USA and the Berkshire Opera Company. Mr. Logan received his
B.A. from Johns Hopkins University in 1959.
BRAD I. MARKOWITZ has served as a member of the Board of Directors of
the Company since February 1994. From February 1994 to June 1997, Mr. Markowitz
served as Chairman of the Board of Directors. Since 1995, Mr. Markowitz has
served as President and a member of the Board of Directors of Park Avenue Health
Care Management, Inc., a physician practice management company. From 1987 to
1995, Mr. Markowitz served as Vice President of the ADCO Group, a real estate,
banking and venture capital company.
23
<PAGE>
FAMILY RELATIONSHIPS
There are no family relationships among any of the directors or
executive officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
the Company's directors and certain of its officers and persons holding more
than ten percent of the Company's Common Stock are required to report their
ownership of the Common Stock and any changes in ownership to the Securities and
Exchange Commission and the Company. Specific due dates have been established
and the Company is required to report in this Form 10-KSB any failure to file by
these dates during the fiscal year ended May 31, 2000. Based on the Company's
review of copies of such reports, Michael Kerrison failed to file one Form 4,
Pamela Cabalka failed to file one Form 3 and one Form 4, Donald LaGuardia
filed one untimely Form 5, and P. Gopalakrishnan filed one untimely Form 3.
ITEM 10: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth certain compensation information for the
fiscal years ended May 31, 2000, 1999, and 1998 with respect to the Company's
Chief Executive Officers and each of the most highly compensated executive
officers whose compensation for fiscal 2000 exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
--------------------------- ---- ---------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Jeffrey B. Pinkerton 2000 (1) $160,360 - - 320,113 $ 10,880 (4)
President and Chief 1999 $160,000 - - - - $ 7,800 (16)
Executive Officer 1998 $125,000 - - 304,166 $ 9,750 (5)
Pamela Cabalka
Chief Executive Officer 2000 (11) $ 82,227 - - - - $ 75,188 (12)
Michael G. Kerrison 2000 (2) $ 42,045 - - - - - -
Chairman and Chief 1999 $100,000 - - 625,000 $ 35,000 (6)
Executive Officer
Joseph D. Mooney 2000 - - - - - - - -
Chairman and Chief 1999 (3) $133,333 - - - - $445,200 (7)
Executive Officer 1998 $200,000 - - 366,666 $ 68,083 (8)
Philip D. Wolf 2000 $100,630 - - - - $ 1,644 (9)
Chief Financial Officer, 1999 $ 88,717 - - 139,000 - -
Treasurer and 1998 (14) $ 51,667 - - - - - -
Ass't.Secretary
Terry J. Bartz 2000 $100,150 - - - - $ 1,630 (10)
Vice President, General 1999 (15) $ 4,688 - - 135,000 $ 80,803 (13)
Counsel and Secretary
</TABLE>
24
<PAGE>
---------------------------
(1) See the section "Executive Officers and Directors" for information as
to the offices held by Mr. Pinkerton in fiscal 2000 and his subsequent
appointment as Vice Chairman and Chief Product Strategist effective
August 14, 2000. Mr. Donald LaGuardia succeeded Mr. Pinkerton in the
offices of President and Chief Executive Officer effective August 14,
2000.
(2) Mr. Kerrison was appointed Chief Executive Officer by the Board of
Directors on January 31, 1999 and resigned on September 9, 1999.
(3) Mr. Mooney was appointed President and Chief Executive Officer by the
Board of Directors on June 23, 1997 and resigned on January 31, 1999.
(4) Represents a $7,800 automobile allowance and a $3,080 Company
contribution to employee's 401K account.
(5) Represents a $9,750 automobile allowance.
(6) Represents $35,000 earned as an independent contractor.
(7) Represents a $400,000 compensation charge under Mr. Mooney's
termination agreement, of which $266,668 was paid as of May 31, 2000
and the balance of $133,332 to be paid evenly over the next eight
months, a $40,000 contract settlement payment, and a $5,200 automobile
allowance.
(8) Represents $58,333 in deferred compensation and a $9,750 automobile
allowance.
(9) Represents a $1,644 Company contribution to employee's 401K account.
(10) Represents a $1,630 Company contribution to employee's 401K account.
(11) Ms. Cabalka was appointed interim Chief Executive Officer by the Board
of Directors on September 10, 1999 and resigned on December 8, 1999.
(12) Represents a $75,000 accrued severance benefit of which $71,023 was
paid as of May 31, 2000 and the balance of $3,977 was paid in June
2000, and a $188 Company contribution to employee's 401K account.
(13) Represents $80,803 earned as an independent contractor.
(14) Mr. Wolf joined the Company in October 1997 and was appointed Chief
Financial Officer in January 1998.
(15) Mr. Bartz joined the Company in May 1999 as Vice President, General
Counsel and Corporate Secretary.
(16) Represents a $7,800 automobile allowance.
25
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
NUMBER OF ------------------ EXERCISE
SECURITIES % OF TOTAL OPTIONS GRANTED PRICE EXPIRATION
NAME UNDERLYING TO EMPLOYEES IN FISCAL ($/ SHARE) DATE
---- OPTIONS GRANTED YEAR ---------- ----
--------------- ----
<S> <C> <C> <C> <C>
Jeffrey B. Pinkerton 300,000 (1) 16.5% $0.920 December 12, 2004
1,334 (2) 0.1% $0.937 October 14, 2003
1,483 (2) 0.1% $0.843 November 15, 2003
1,741 (2) 0.1% $0.718 December 14, 2003
953 (2) 0.1% $1.312 January 14, 2004
1,177 (2) 0.1% $1.062 February 15, 2004
1,250 (2) 0.1% $1.000 March 14, 2004
1,483 (2) 0.1% $0.843 April 14, 2004
1,111 (2) 0.1% $1.125 May 13, 2004
1,483 (2) 0.1% $0.843 June 14, 2004
1,905 (2) 0.1% $0.656 July 14, 2004
2,860 (2) 0.2% $0.437 August 15, 2004
3,333 (2) 0.2% $0.375 September 14, 2004
Pamela Cabalka - - - - - - - -
Michael G. Kerrison - - - - - - - -
Joseph D. Mooney - - - - - - - -
Philip D. Wolf - - - - - - - -
Terry J. Bartz - - - - - - - -
</TABLE>
---------------------------
(1) Mr. Pinkerton was granted an incentive stock option exercisable for an
aggregate of 300,000 shares of common stock of which 100,000 shares
vested immediately, 100,000 will vest on December 13, 2000 and 100,000
will vest on December 13, 2001.
(2) Mr. Pinkerton was granted options, which were fully vested on the date
of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information as to options exercised
during the fiscal year ended May 31, 2000, and unexercised options held at the
end of such fiscal year, by the individuals listed in the Summary Compensation
Table.
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBERS OF UNEXERCISED IN-THE-MONEY OPTIONS
ON VALUE OPTIONS AT 5/31/00 AT 5/31/00
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------ ------------ ------------------------- -----------------------------
<S> <C> <C> <C> <C>
Jeffrey B. Pinkerton 0 $ 0 424,279 / 200,000 $795,094 / $391,000
Pamela Cabalka 150,000 $ 604,641 0 / 0 $ 0 / $ 0
Michael G. Kerrison 0 $ 0 0 / 0 $ 0 / $ 0
Joseph D. Mooney 366,666 $1,230,615 0 / 0 $ 0 / $ 0
Philip D. Wolf 0 $ 0 139,000 / 0 $261,885 / $ 0
Terry J. Bartz 0 $ 0 105,633 / 29,533 $192,894 / $ 52,877
</TABLE>
26
<PAGE>
---------------------------
(1) Value is based on the closing bid price supplied by the National
Quotations Bureau in the Nasdaq System and reported by the NASD as of May
31, 2000, the last trading date during fiscal 2000, which was $2.875 minus
the exercise price.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Jeffrey B.
Pinkerton, the then President of the Company, effective as of December 15,
1996 for a five (5) year term from the effective date (the "Pinkerton
Employment Agreement"). Pursuant to the Pinkerton Employment Agreement, the
Company agreed to grant Mr. Pinkerton options exercisable for up to 200,000
shares of common stock. Mr. Pinkerton's current annual base salary is
$165,000, subject to annual review and increase by the Board of Directors of
the Company.
If the Pinkerton Employment Agreement is terminated by the Company for
any reason other than cause, death, disability, mutual agreement or is
terminated by Mr. Pinkerton for good reason, the Company shall continue to pay
Mr. Pinkerton his base salary for twenty-four (24) months (or twelve (12) months
for termination as a result of good reason) and provide benefits, including but
not limited to, plan participation, vacation time, and office facilities for a
twelve (12) month period. In the event of a termination in connection with a
change in control of the Company (as defined in the Pinkerton Employment
Agreement), the Company shall pay a lump sum payment to Mr. Pinkerton equal to
2.99 times the sum of (i) his annual base salary and (ii) his earned executive
compensation plan benefits, which shall be "grossed-up" in the event of certain
excise tax charges. In addition the Company shall reimburse, for a twelve (12)
month period, Mr. Pinkerton's reasonable expenses while seeking employment. In
addition to compensatory provisions, the Pinkerton Employment Agreement also
contains certain confidentiality and non-competition provisions intended to
protect the Company.
DIRECTOR COMPENSATION
At the current time, directors of the Company receive no cash
compensation for their service to the Company as directors.
27
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 1,
2000, as reported to the Company, as to the beneficial ownership of the Common
Stock of the Company by each director, each named officer, by all directors and
executive officers as a group and each person known to the Company to be the
beneficial owner of more than 5% of the issued and outstanding common stock as
of August 1, 2000 or other date noted below. As of August 1, 2000, 14,733,046
shares of common stock were outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP OUTSTANDING SHARES OF
OF BENEFICIAL OWNER OF COMMON STOCK (1) COMMON STOCK OWNED (2)
------------------- ------------------- ----------------------
<S> <C> <C>
J. Murray Logan (3)
c/o L-R Global Partners, L.P.
30 Rockefeller Plaza, Room 5425
New York, New York 10112 10,152,947 67.88%
Donald S. LaGuardia (4)
c/o L-R Global Partners, L.P.
30 Rockefeller Plaza, Room 5425
New York, New York 10112 9,969,128 66.21%
L-R Global Partners, L.P. (5)
c/o Rockefeller & Co., Inc.
30 Rockefeller Plaza, Room 5425
New York, New York 10112 9,852,128 65.87%
Larry E. Jeddeloh (6)
c/o T.I.S. Acquisition & Management
Group, Inc.
200 South Sixth Street, Suite 450
Minneapolis, MN 55402 1,020,337 6.92%
T.I.S. Group, Inc. (7)
c/o T.I.S. Acquisition & Management
Group, Inc.
200 South Sixth Street, Suite 450
Minneapolis, MN 55402 1,019,504 6.92%
Jeffrey B. Pinkerton (8) 438,156 2.89%
Brad I. Markowitz (9) 130,820 0.88%
Philip D. Wolf (10) 174,000 1.17%
Terry J. Bartz (11) 105,633 0.71%
P. Gopalakrishnan (12) 41,667 0.28%
All current directors and executive 11,160,223 70.26%
officers as a group (7 persons) (13)
</TABLE>
28
<PAGE>
(1) The shares owned, and the shares included in the total number of shares
outstanding, have been adjusted, and the percentage owned has been
computed, in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended, and includes, options and warrants to
the extent called for by such rule, with respect to shares of common
stock, that can be exercised within 60 days. Except as set forth in the
footnotes below, such shares are beneficially owned with sole
investment and sole voting power.
(2) The percent of class calculation is based on 14,733,046 shares of the
Company's Common Stock being issued and outstanding as of August 1,
2000 and effect being given, where appropriate, pursuant to Rule
13d-3(d)(1)(i) under the Exchange Act, to any option or warrant then
exercisable or exercisable within 60 days thereafter.
(3) Includes 9,627,553 shares held by L-R Global Partners, L.P. Also
includes 224,575 shares that L-R Global Partners, L.P. has the right to
acquire within 60 days of August 1, 2000 upon the exercise of warrants.
Mr. Logan, together with L-R Managers, LLC, Rockefeller & Co., Inc.,
and Rockefeller Financial Services, Inc. share voting and investment
control with respect to L-R Global Partners, L.P. Mr. Logan may be
deemed the beneficial owner of shares held by L-R Global Partners, L.P.
although he disclaims beneficial ownership to the extent of his
purported ownership interest.
(4) Includes 9,627,553 shares held by L-R Global Partners, L.P. Also
includes 224,575 shares that L-R Global Partners, L.P. has the right to
acquire within 60 days of August 1, 2000 upon the exercise of warrants.
Mr. LaGuardia, together with L-R Managers, LLC, Rockefeller & Co.,
Inc., and Rockefeller Financial Services, Inc. share voting and
investment control with respect to L-R Global Partners, L.P. Mr.
LaGuardia may be deemed the beneficial owner of shares held by L-R
Global Partners, L.P. although he disclaims beneficial ownership to the
extent of his purported ownership interest. Also includes 100,000
shares that Mr. La Guardia has the right to acquire within 60 days of
August 1, 2000 upon the exercise of stock options.
(5) Includes 224,575 shares that L-R Global Partners, L.P. has the right to
acquire within 60 days of August 1, 2000 upon the exercise of warrants.
(6) Based upon information provided by Mr. Jeddeloh's Schedule 13D/A filed
with the SEC as of January 13, 1999. By virtue of his positions with
T.I.S. Acquisition and Management Group ("TIS Acquisition") and T.I.S.
Group, Inc. ("TIS Group"), which owns a majority of the stock of and
controls TIS Acquisition, Mr. Jeddeloh has the right to vote and
dispose of the shares of common stock held by TIS Acquisition and TIS
Group, respectively, and may be deemed the beneficial owner of such
shares. Includes 193,888 shares held by TIS Acquisition, which may be
deemed beneficially owned by TIS Group. Includes 820,616 shares held by
TIS Group for client accounts managed by T.I.S. Group Managers. TIS
Group has the right to dispose of the shares held by T.I.S. Group
Managers and may be deemed the beneficial owner of such shares.
Includes 833 shares held by Mr. Jeddeloh over which he has sole power
to vote and power to dispose. Includes 5,000 shares that TIS Group has
the right to acquire within 60 days of August 1, 2000 upon the exercise
of a warrant.
(7) Based upon information provided by Mr. Jeddeloh's Schedule 13D/A filed
with the SEC as of January 13, 1999. See note (6) above.
(8) Includes 424,279 shares issuable within 60 days of August 1, 2000 upon
the exercise of stock options.
(9) Includes 115,833 shares issuable within 60 days of August 1, 2000 upon
exercise of stock options and 10,544 shares owned by Focus Capital
Corp. Mr. Markowitz may be deemed the beneficial owner of shares held
by Focus Capital Corp. although he disclaims beneficial ownership of
such shares.
(10) Includes 139,000 shares issuable within 60 days of August 1, 2000 upon
the exercise of stock options.
(11) Includes 105,633 shares issuable within 60 days of August 1, 2000 upon
the exercise of stock options.
(12) Includes 41,667 shares issuable within 60 days of August 1, 2000 upon
the exercise of stock options.
(13) Includes 926,412 shares issuable within 60 days of August 1, 2000 upon
the exercise of stock options and 224,575 shares issuable within 60
days upon the exercise of warrants.
29
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 1, 1998, the Company issued 125,000 shares of its Common
Stock to TIS Group Managers, Inc. upon the exercise of a warrant held by TIS
Growth Fund at an exercise price of $1.14 per share, for an aggregate sum of
$142,500. The issuance of the Common Stock was made in reliance on Section 4(2)
of the Securities Act of 1933, as amended.
On January 31, 1999, the Company entered into an Agreement and General
Release with Joseph D. Mooney, CEO and Chairman of the Board of the Company.
Under this agreement, the Company accepted the resignation of Mr. Mooney as
Chief Executive Officer, Chairman of the Board of Directors and as a Director of
the Company. Mr. Mooney was granted the following benefits under this agreement:
$400,000 gross salary continuation, payable in 48 equal installments beginning
February 15, 1999 and ending January 31, 2001 ($133,332 remaining to be paid as
of May 31, 2000); $60,000 representing the balance of Mr. Mooney's deferred
employment compensation; a $40,000 contract settlement payment; and continuation
of insurance benefits until January 31, 2000.
On February 9, 1999, the Company received $2 million from L-R Global
Partners, L.P. and signed a demand promissory note in return. The note provided
for interest at 6% per annum. The note was cancelled as partial payment for the
common stock that L-R Global Partners, L.P. purchased in the rights offering in
May 1999.
On May 5, 1999, the Corporation issued 5,605,173 shares of its Common
Stock for rights subscribed to in a rights offering and shares purchased on a
standby basis as part of the rights offering. These shares were purchased at
$0.90 per share and raised $5,044,655 in gross proceeds. L-R Global Partners,
L.P. purchased a total of 4,930,000 shares in the offering for $4,437,000 and
Michael G. Kerrison, CEO of the Company purchased 111,111 shares in the offering
for $100,000. Expenses associated with the rights offering were $119,052.
On March 23, 2000, the Company borrowed $5,000,000 from L-R Global
Partners, L.P. and signed a demand promissory note in return. Under the terms of
this note, the Company must repay the principal and interest due at any time
upon the demand of L-R Global. Subsequent to year-end, L-R Global provided the
Company with a letter stating that they would not make a demand for repayment
prior to June 15, 2001. This note provided for interest at 6% per annum.
30
<PAGE>
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>
2.1 Agreement and Plan of Merger, dated November 10, 1998, by and between
PurchaseSoft, Inc., a Delaware corporation, and GreenTree Software,
Inc., a New York corporation. (1)
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-laws of the Company. (1)
4.1 Specimen Certificate for Shares of Common Stock. (11)
10.1 The Company's Stock Option Plan of 1987. (2)
10.2 The Company's Stock Option Plan of 1994. (3)
10.3 The Company's 1997 Stock Option Plan. (4)
10.4 Employment Agreement dated April 1, 1998 between the Company and
Jeffrey B. Pinkerton. (5)
10.5 Registration Rights Agreement dated as of December 25, 1995 among the
Company and certain of its Shareholders. (6)
10.6 Registration Rights Agreement dated as of April 23, 199_ among the
Company and certain of its Shareholders. (6)
10.7 Lease between the Company and Fruitville-Tuttle, Ltd. (7)
10.8 Lease between the Company and The Protective Group. (8)
10.9 Sub-lease between the Company and Racotek, Inc. (9)
10.10 Registration Rights Agreement dated October 25, 1996 between the
Company and certain of its Shareholders. (4)
10.11 Demand Promissory Note, dated February 9, 1999, of PurchaseSoft, Inc.
to L-R Global Partners, L.P. (10)
10.12 Agreement and General Release, dated as of January 31, 1999, by and
between Joseph D. Mooney and PurchaseSoft, Inc. (10)
10.13 Compensation Agreement, dated as of February 1, 1999, by and between
Michael G. Kerrison and PurchaseSoft, Inc. (10)
10.14 Form of Warrant issued to Wm. Smith Securities & Gilmore & Co. (A
substantial number of these warrants have been assigned to L-R Global
Partners, L.P.) (6)
31
<PAGE>
10.15 Form of Warrant issued to TIS Acquisitions and Management Group, Inc.,
The Travelers Indemnity Company, and Mark Cahill, dated October 25,
1996. (4)
10.16 Form of Warrant issued to Wm. Smith Securities, Inc., dated October 25,
1996. (A substantial number of these warrants have been assigned to L-R
Global Partners, L.P.) (4)
10.17 Form of Warrant issued to Wm. Smith Securities, Inc., dated October 25,
1996. (A substantial number of these warrants have been assigned to L-R
Global Partners, L.P.) (4)
10.18 Promissory note dated March 23, 2000, of PurchaseSoft, Inc. to L-R
Global Partners, L.P. (12)
10.19 Lease agreement between the Company and Flanders Westborough Delaware,
Inc. *
10.20 Lease agreement between the Company and Office Associates L.L.C. *
23.1 Consent of PricewaterhouseCoopers LLP *
27.1 Financial Data Schedule*
</TABLE>
FOOTNOTES:
(1) Incorporated herein by reference to the Company's Report on Form 8-K,
filed on November 25, 1998.
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1991.
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1994.
(4) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1997.
(5) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB/A for the quarter ended February 28, 1998.
(6) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, File No. 333-45475.
(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, 1998.
(9) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended August 31, 1998.
(10) Incorporated herein by reference from the Company's Form S-3
Registration Statement, File No.333-73209 filed on March 22, 1999.
(11) Incorporated herein by reference from the Company's Annual Report of
Form 10-KSB for the fiscal year ended May 31, 1999.
(12) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-QSB for the quarter ended February 29, 2000.
32
<PAGE>
Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto to be duly authorized.
PurchaseSoft, Inc.
(Issuer)
Date: August 29, 2000
/s/ Donald S. LaGuardia
---------------------------------------
Donald S. LaGuardia
President, Chief Executive Officer, and
Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Issuer and in the capacities and on
August 29, 2000.
Signature Title
--------- -----
/s/ Donald S. LaGuardia President, Chief Executive Officer
-------------------------------- and Director
Donald S. LaGuardia
/s/ Jeffrey B. Pinkerton Vice Chairman, Chief Product Strategist
-------------------------------- and Director
Jeffrey B. Pinkerton
/s/ Philip D. Wolf Chief Financial Officer, Treasurer
-------------------------------- and Assistant Secretary
Philip D. Wolf
/s/ Terry J. Bartz VP, General Counsel, and Secretary
--------------------------------
Terry J. Bartz
/s/ J. Murray Logan Chairman of the Board of Directors
--------------------------------
J. Murray Logan
/s/ Brad I. Markowitz Director
--------------------------------
Brad I. Markowitz
33
<PAGE>
PurchaseSoft, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Description Page
-------------------------------------------------------------------------------
<S> <C>
Report of PricewaterhouseCoopers LLP F-2
Balance Sheets as of May 31, 2000 and 1999 F-3
Statements of Operations for the years ended May 31, 2000 and 1999 F-4
Statements of Stockholders' Equity for the years ended May 31, 2000
and 1999 F-5
Statements of Cash Flows for the years ended May 31, 2000 and 1999 F-6
Notes to Financial Statements F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
PurchaseSoft, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of PurchaseSoft, Inc. at May 31,
2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles
in the United States. 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 in
the United States, 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
June 30, 2000
F-2
<PAGE>
PURCHASESOFT, INC.
BALANCE SHEETS
MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 4,992,306 $ 3,824,505
Accounts receivable, net 12,709 115,927
Prepaid expenses and other current assets 149,940 121,460
------------ ------------
Total Current Assets 5,154,955 4,061,892
------------ ------------
Property and equipment, net 460,408 304,614
------------ ------------
Security deposits 297,269 38,879
------------ ------------
Total Assets $ 5,912,632 $ 4,405,385
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 126,893 $ 411,480
Current obligations under capital leases 50,002 49,428
Accrued expenses 509,493 528,924
Deferred revenues 52,881 163,804
------------ ------------
Total Current Liabilities 739,269 1,153,636
------------ ------------
Noncurrent Obligations
Note payable with a related party 5,000,000 --
Noncurrent obligations under capital leases 42,460 28,878
Noncurrent restructuring charges -- 133,332
------------ ------------
Total Noncurrent Obligations 5,042,460 162,210
------------ ------------
Commitments and Contingencies (Note 5)
Stockholders' Equity
Common stock, $0.01 par value, 25,000,000
shares authorized, 14,730,549 and 13,807,015
issued and outstanding, respectively 147,305 138,070
Additional paid-in-capital 25,375,283 24,443,167
Accumulated deficit (25,302,653) (21,402,666)
------------ ------------
219,935 3,178,571
Less treasury stock (4,780 shares) at cost (89,032) (89,032)
------------ ------------
Total Stockholders' Equity 130,903 3,089,539
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,912,632 $ 4,405,385
============ ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
PURCHASESOFT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Product $ 116,155 $ 86,550
Services 221,743 285,705
------------ ------------
Total revenues 337,898 372,255
------------ ------------
Costs and expenses:
Cost of product revenues 465 1,577
Cost of service revenues 343,112 171,696
Sales and marketing 1,255,424 1,448,634
General and administrative 1,849,116 1,911,309
Research and development 860,012 753,902
Restructuring charge -- 610,453
------------ ------------
Total costs and expenses 4,308,129 4,897,571
------------ ------------
Operating loss (3,970,231) (4,525,316)
Interest income, net 70,244 55,940
------------ ------------
Net loss $ (3,899,987) $ (4,469,376)
============ ============
Net loss per common share $ (0.28) $ (0.52)
(Basic and diluted) ============ ============
Weighted average shares outstanding 14,088,270 8,553,362
============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
PURCHASESOFT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- Additional Accumulated Treasury Stockholders'
Shares Amount Paid-in-Capital Deficit Stock Equity
-------------- ----------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1998 8,029,761 $ 80,298 $ 19,321,482 $ (16,933,290) $ (89,032) $ 2,379,458
Common stock issued through
rights offering net of expenses
of $119,052 5,605,173 56,051 4,869,552 - - 4,925,603
Common stock issued for services 47,081 471 49,529 - - 50,000
Stock options issued for services - - 61,354 - - 61,354
Common stock issued upon exercise
of a warrant 125,000 1,250 141,250 - - 142,500
Net loss - - - (4,469,376) - (4,469,376)
-------------- ----------- ------------- -------------- ------------ -------------
Balance, May 31, 1999 13,807,015 $ 138,070 $ 24,443,167 $ (21,402,666) $ (89,032) $ 3,089,539
============== =========== ============= ============== ============ =============
Common stock issued upon exercise
of stock options 907,868 9,078 913,534 - - 922,612
Common stock issued upon exercise
of a warrant 15,666 157 18,582 - - 18,739
Net loss - - - (3,899,987) - (3,899,987)
-------------- ----------- ------------- -------------- ------------ -------------
Balance, May 31, 2000 14,730,549 $ 147,305 $ 25,375,283 $ (25,302,653) $ (89,032) $ 130,903
============== =========== ============= ============== ============ =============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
PURCHASESOFT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,899,987) $ (4,469,376)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 99,060 56,032
Provision for bad debts 2,279 26,250
Stock issued for services 30,000 20,000
Options granted for services -- 61,354
Changes in operating assets and liabilities:
Accounts receivable 100,939 (39,032)
Prepaid expenses and other assets (58,480) (86,415)
Accounts payable and accrued expenses (437,350) 464,863
Deferred revenue (110,923) 70,206
------------ ------------
Net cash used in operating activities (4,274,462) (3,896,118)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (177,908) (253,047)
Additions to security deposits (258,390) (29,755)
------------ ------------
Net cash used in investing activities (436,298) (282,802)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock -- 4,925,603
Net proceeds from exercise of options/warrants 941,351 142,500
Proceeds from financing equipment -- 50,508
Proceeds form issuance of note payable 5,000,000 --
Payment of capital leases (62,790) (33,734)
------------ ------------
Net cash provided by financing activities 5,878,561 5,084,877
------------ ------------
Net increase in cash and cash equivalents 1,167,801 905,957
Cash and cash equivalents, beginning of year 3,824,505 2,918,548
------------ ------------
Cash and cash equivalents, end of period $ 4,992,306 $ 3,824,505
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,651 $ 33,830
============ ============
Supplemental disclosure of non-cash transaction:
Stock compensation award -- 50,000
Capital lease obligation incurred $ 76,946 $ 61,533
============ ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
PURCHASESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND 1999
NOTE 1-GENERAL INFORMATION
PurchaseSoft, Inc. (the "Company") is an emerging provider of strategic
e-Procurement and B2B solutions to medium and large organizations worldwide.
PurchaseSmart-TM-, the Company's flagship e-Procurement product enables
organizations to automate their procurement processes thereby reducing costs and
improving productivity, while providing real-time decision support information
to management. The Company is aggressively marketing its solutions throughout
North America, Europe and Asia. The Company's principal goals are twofold: to be
the leader in the e-Procurement solutions marketplace addressing organizational
procurement needs; and to be the preferred B2B exchange enabler for leading
industry marketplaces. The Company expects to achieve these objectives by
continuing to offer the most functional and easy to use leading edge, end-to-end
software solutions and unparalleled customer service.
The Company's expertise in procurement comes from its extensive
experience in this area. The Company began operations as a management consulting
firm specializing in "best practices" for purchasing and materials management in
1977. In 1985, the Company, then called Greentree Software, Inc. sensed the
market need for an automated purchasing software package and introduced its
first software product for purchasing materials management for use on IBM
compatible PCs. Since that time, the Company has continued to offer leading
edge software solutions by adapting the latest technology and incorporating
procurement best practices and knowledge gained from successful customer
implementations. In October 1999, the Company released its newest Solution,
PurchaseSmart-TM-, SourceSmart-TM- and WebQuote-TM- a Web-based, end-to-end
software solution, written in JAVA and HTML, which provides operational
support for strategic procurement and e-Commerce.
One of the critical advantages of the solutions the Company provides is
the ability to customize the software to fit each customer's specific needs. The
Company expects that this flexibility will allow it to capitalize on a
developing market in business-to-business exchanges and portals. The Company's
solutions can easily be configured to be the e-Procurement engine for
business-to-business exchanges and portals. The Company's solutions offer the
robustness and depth of functionality that such trading communities demand. This
is a new and important business opportunity for the Company. It allows the
Company to continue its evolution from a software application vendor to a
provider of vital infrastructure software to the new Internet economy.
Customers' expectations are evolving at the same pace as technology.
Today, e-Procurement customers expect ready-made catalog content from their
solution providers. To address this need for normalized data from suppliers, the
Company is developing its supplier exchange service offering. Through this
service, which will be both hosted and managed by the Company, the Company
expects to continue to serve its clients' full value procurement needs.
The Company believes that its existing capital resources and revenue
from future software sales and services will be sufficient to fund its
planned operating expenses and capital requirements through the end of fiscal
2001, which is May 31, 2001. 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 recognizes that to be
competitive it must raise additional equity capital to accelerate its sales
and marketing programs and to establish a stronger financial position. The
Company is pursuing two primary capital raising strategies to raise this
growth capital: In the short term, the Company's strategy is to seek a
strategic partnership with an established technology company that could
provide the necessary growth capital as well as technology expertise, a
reseller network and an installed customer base into which the Company could
market its products. As a strategy for the mid-term, the Company might seek
to raise additional funds through public or private debt or equity
financings, including, but not limited to, another rights offering. At May
31, 2000, the Company's net equity was approximately $131,000. This reflects
the classification of the $5,000,000 investment by L-R Global Partners, L.P.
in March 2000 as long-term debt. The Company expects continuing losses, which
will cause the net equity of the Company to be reflected as a deficit should
the Company not raise new equity capital. In the event that the Company
conducts another rights offering, L-R Global Partners, L.P. has given the
Company a written committment to purchase up to $5,000,000 of the Company's
Common Stock in a rights offering and pay for its purchase by canceling the
debt that the Company owes to L-R Global Partners, L.P. should other
financing options not be available.
F-7
<PAGE>
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. 97-2, "Software Revenue Recognition," as amended
by SOP 98-4 and SOP 98-9. The Company recognizes software license revenue at the
point when evidence of an arrangement exists, the software product has been
shipped, there are no uncertainties surrounding product acceptance, the fees are
fixed and determinable and collection of the related receivable is considered
probable. In multiple-element software arrangements that include rights to
multiple software products, maintenance or services, the Company allocates the
total arrangement fee using the residual method. Under the residual method, the
fair value of the undelivered maintenance and services elements, as determined
based on vendor-specific objective evidence, is deferred and the remaining
(residual) arrangement fee is recognized as software product revenue. 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.
Accounts receivable is presented net of an allowance for uncollectible
accounts of $35,890 and $55,000 at May 31, 2000 and 1999, respectively. Bad debt
expense is recorded in general and administrative expenses.
(c) Research and Development
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. Technological
feasibility is determined after a working model has been completed. Capitalized
costs are 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. During fiscal 2000, the Company's research and development costs
primarily relate to software development during the period prior to
technological feasibility and have been charged to expense as incurred. Costs
otherwise capitalizable after technological feasibility is achieved have also
been expensed because they have been insignificant.
(d) 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.
(e) 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 and amortization expense were $99,060 and $56,032 for the
years ended May 31, 2000 and 1999, respectively.
F-8
<PAGE>
(f) 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.
(g) Loss Per Common Share
The Company accounts for income (loss) per share in accordance with
SFAS No. 128, "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 Stock outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity. Diluted net loss per common share does not differ from
basic net loss per common share since potential shares of common stock from the
exercise of stock options and warrants are anti-dilutive for all periods
presented. Shares excluded from diluted earnings per share totaled 3,064,038 and
3,692,546 on May 31, 2000 and 1999, respectively.
(h) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
(i) Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This statement establishes a new model for accounting for derivatives
and hedging activities. Under SFAS No. 133, all derivatives must be recognized
as SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133" which defers the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. In June 2000, the FASB issued Statement of Accounting Standards No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities an
Amendment of FASB Statement No. 133" which amends certain aspects of SFAS No.
133. The adoption of SFAS No. 133 and SFAS No. 138, which is effective for the
Company on June 1, 2001, is not expected to have a significant impact on the
Company's financial position or results of operations.
In April 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB No. 25", which is effective July 1, 2000, except for
certain conclusions which cover specific events after either December 15, 1998
or January 12, 2000. FIN No. 44 clarifies the application of APB No. 25 related
to modifications of stock options, changes in grantee status, and options issued
on a business combination, among other things. The adoption of FIN No. 44 is not
expected to have a significant impact on the Company's financial position or
results of operations.
F-9
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
At May 31, 2000 and 1999, property and equipment balances consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Property and equipment, at cost 1,073,694 $ 833,457
Less accumulated depreciation (613,286) (528,843)
----------- -----------
Net property and equipment $ 460,408 $ 304,614
========== ==========
</TABLE>
NOTE 4 - INCOME TAXES
The Company has available net operating loss carry forwards (NOLs)
for Federal income tax purposes of approximately $10,000,000 at May 31, 2000.
The NOLs expire at various times from 2001 through 2020. Future utilization
of the available net operating loss carryforwards may be limited under
Internal Revenue Code Section 382 as a result of future changes in ownership.
No future tax benefit for the Company's NOLs and other cumulative
temporary differences has been recognized since utilization of the benefit is
not presently likely based on the weight of available information. The tax
effects of NOLs and other cumulative temporary differences that give rise to the
Company's deferred tax asset are presented below as of May 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $4,940,000 $ 3,438,000
Other, net 130,000 65,000
-------------- --------------
Total gross deferred tax assets 5,070,000 3,503,000
Less valuation allowance (5,070,000) (3,503,000)
-------------- --------------
Net deferred tax asset $ 0 $ 0
============== ==============
</TABLE>
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 May 31,
2007. Rent expense amounted to $209,608 and $221,516 for the fiscal years ended
May 31, 2000 and 1999, respectively. Future minimum lease payments under the
non-cancelable operating leases as of May 31, 2000 are as follows:
<TABLE>
<CAPTION>
Years
Ending
May 31 Commitment
------ ----------
<S> <C>
2001 $ 306,681
2002 258,000
2003 258,000
2004 258,000
2005 258,000
2006 268,320
2007 268,320
-------
Total $1,875,321
==========
</TABLE>
F-10
<PAGE>
Capital Leases
The Company leases certain computer and communication equipment under
non-cancelable capital leases, which expire on various dates through October 31,
2002. Future minimum lease payments under the non-cancelable financing leases as
of May 31, 2000 are as follows:
<TABLE>
<CAPTION>
Years
Ending
May 31 Commitment
------ ----------
<S> <C>
2001 $ 56,740
2002 32,982
2003 12,260
------
Total minimum lease payments $ 101,982
Less amount representing interest (9,520)
------
Present value of net minimum lease payments 92,462
Less current portion (50,002)
------
Non-current portion $ 42,460
</TABLE>
Long Term Note Payable
In March 2000, the Company borrowed $5,000,000 from L-R Global
Partners, LP and signed a demand promissory note in return. Under the terms of
this note, the Company must repay the principal and interest due at any time
upon the demand of L-R Global. Subsequently, L-R Global issued to the Company a
letter, which stated that they would not demand repayment prior to June 15,
2001. Accordingly, the Company has classified this note payable as non-current
in its balance sheet dated May 31, 2000.
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 or results of operations.
The Company has entered into various employment agreements with certain
executives of the Company, which provide for severance payments ranging from six
to twenty-four months subject to certain conditions.
F-11
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY
During the fiscal year ended May 31, 2000 and 1999, the following
equity and convertible debt placements occurred:
FISCAL YEAR ENDED MAY 31, 2000
On February 9, 2000, the Company issued 8,333 shares of its Common
Stock upon the exercise of a warrant, which raised an aggregate sum of
$9,500 and had an exercise price of $1.14 per share.
On February 9, 2000, the Company issued 4,000 shares of its Common
Stock upon the exercise of a warrant, which raised an aggregate sum of
$5,040 and had an exercise price of $1.26 per share.
On February 11, 2000, the Company issued a warrant to purchase 25,000
shares of Common Stock at an exercise price of $5.50 per share. This
warrant had a five year life and will expire on February 10, 2005.
On May 1, 2000, the Company issued 3,333 shares of its Common Stock
upon the exercise of a warrant, which raised an aggregate sum of $4,199
and had an exercise price of $1.26 per share.
FISCAL YEAR ENDED MAY 31, 1999
On September 1, 1998, the Company issued 125,000 shares of its Common
Stock upon the exercise of a warrant, which raised an aggregate sum of
$142,500 and had an exercise price of $1.14 per share.
On February 1, 1999, the Company issued 47,081 shares of its Common
Stock at $1.062 per share to its CEO for services under a compensation
agreement.
On February 9, 1999, the Company received $2 million from L-R Global
Partners, L.P. and signed a demand promissory note in return. The note
provided for interest at 6% per annum. The note was cancelled as
partial payment for the common stock that L-R Global Partners, L.P.
purchased in the rights offering in May 1999.
On May 5, 1999, the Company issued 5,605,173 shares of its Common Stock
as part of a rights offering. These shares were purchased at $0.90 per
share and raised $5,044,655 in gross proceeds. L-R Global Partners,
L.P. purchased a total of 4,930,000 shares in the offering for
$4,437,000 and Michael G. Kerrison, CEO of the Company purchased
111,111 shares in the offering for $100,000. Expenses associated with
the rights offering were $119,052.
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
between two to three years and expire five to ten years from the date of
grant. Options cancelled under the 1997 plan can be re-granted. At the
Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders held on
January 25, 2000, stockholders approved an increase in the number of shares
available to grant under the 1997 Plan from 3,500,000 shares to 4,500,000
shares. As of May 31, 2000, there were 1,179,668 option shares under the 1997
Stock Option Plan, which are available for future grant.
F-12
<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, 1998 8,333 45,883 862,046 916,212 $ 1.42
Granted 0 0 2,304,162 2,304,162 1.03
Exercised 0 0 0 0 0
Cancelled 0 0 (146,943) (146,943) (1.15)
-------------- -------------- -------------- -------------- --------------
Outstanding at May 31, 1999 8,333 45,883 3,019,265 3,073,431 1.14
Granted 0 0 1,986,279 1,986,279 2.25
Exercised 0 0 907,868 907,868 1.02
Cancelled (8,333) (12,500) (1,685,212) (1,706,045) (1.20)
-------------- -------------- -------------- -------------- --------------
Outstanding at May 31, 2000 0 33,333 2,412,464 2,445,797 $ 2.04
============== ============== ============== ============== ==============
</TABLE>
As of May 31, 2000 outstanding options covering 2,445,797 shares were
exercisable at prices ranging from $0.01 to $7.13 per share.
<TABLE>
<CAPTION>
Number Average Weighted
Range of Outstanding Remaining Average
Exercise Prices May 31,2000 Life Exercise Price
----------------- ----------- --------- --------------
<S> <C> <C> <C>
$ 0.01 - 1.50 1,578,390 4.2 $0.86
$ 1.51 - 3.00 114,557 4.2 2.71
$ 3.01 - 5.00 477,850 4.6 3.47
$ 5.01 - 7.13 275,000 4.7 6.07
----------------- ----------- --------- --------------
$ 0.01 - 7.13 2,445,797 4.3 $2.04
================= =========== ========= ==============
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
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.
Had compensation cost for the Company's stock options been recognized based on
the fair value at the date of grant 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>
2000 1999
---- ----
<S> <C> <C>
Net loss - as reported $ (3,899,987) $ (4,469,376)
Net loss - pro forma $ (4,269,155) $ (4,674,364)
Net loss per share - basic and diluted, as reported $ (0.28) $ (0.52)
Net loss per share - basic and diluted, pro forma $ (0.30) $ (0.55)
</TABLE>
F-13
<PAGE>
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:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Risk-free interest rate 6.5% 6.2%
Expected volatility 80% 60%
Expected lives 4 4
Weighted-average fair value of options granted
using the Black-Scholes option pricing model $1.58 $0.53
</TABLE>
Warrants to Purchase Common Stock
At May 31, 2000, the Company had a total of 618,241 outstanding
warrants for the purchase of the Company's common stock. Exercise prices ranged
from $1.03 to $5.50 per share, with the price and shares of certain warrants
subject to adjustment for anti-dilution provisions. Warrants expire at various
times from December 2000 through February 2005. These warrants have a
weighted-average exercise price of $1.32. In fiscal 2000, the Company issued a
warrant for 25,000 shares of Common Stock to an employee at $5.50, which was the
fair market value on the date of grant. There were no warrants issued in fiscal
1999.
NOTE 7 - SIGNIFICANT CUSTOMERS
During the fiscal year ended May 31, 2000, three customers accounted
for $162,735 (48.2%) of total revenues.
Customer A 18.6%
Customer B 18.6%
Customer C 11.0%
During the fiscal year ended May 31, 1999, two customers accounted for $110,544
(29.7%) of total revenues.
Customer D 17.8%
Customer E 11.9%
NOTE 8 - EXPORT SALES
During the fiscal year ended May 31, 2000, export sales to customers in
Canada accounted for $87,063 (25.8%) of total revenues. During the fiscal year
ended May 31, 1999, export sales to customers in Canada accounted for $67,083
(18.0%) of total revenues.
F-14
