**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)** |   |                                                                                                                                                                                                                                          |
|----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                                                                                                                                                          |
| **ý**     |   | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the fiscal year ended May 31, 2003;**                                                                                                            |
|           |   |                                                                                                                                                                                                                                          |
| **or**         |   |                                                                                                                                                                                                                                          |
|           |   |                                                                                                                                                                                                                                          |
| **o**          |   | **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.**

(Nameof Small Business Issuer in its Charter)

 

| **Delaware**                                                    |   | **13-2897997**        |
|-----------------------------------------------------------------|--------|-----------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (IRS Employer ID No.) |
|                                                            |   |                  |
| **7514 Girard Avenue   Suite 1440   La Jolla, CA**              |   | **92037**             |
| (Address of Principal Executive Offices)                        |   | (Zip Code)            |
|                                                            |   |                  |
| Issuer’s Telephone Number, Including Area Code:            |   | **(858)  456-6608**   |
|                                                            |   |                  |
| Securities Registered Under Section 12(b) of the  Exchange Act: |   | **None**              |
| Securities Registered Under Section 12(g) of the  Exchange Act: |   |                  |
|                                                            |   |                  |
| **Title of  Each Class**                                        |   |                  |
| Common Stock, par value $0.01 per share                         |   |                  |

 

Check whether the issuer: (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter 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   ý | No   o |
|-----------------------------|-----------------------|

 

Check if there is no disclosure of delinquent filers in response toItem 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 informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).   Yes   o   No   ý

 

Issuer’s revenues for its most recent fiscal year:  $ 3,186

 

The aggregate market value of the common stock, par value $0.01 pershare, held by non-affiliates of the Registrant (totaling 6,026,889 shares) was$30,134 as of August 10, 2003 (based upon the closing bid of the Registrant’scommon stock on the OTC Pink Sheets on August 10, 2003 of $0.01 pershare).  The term affiliate is deemed,for this purpose only, to refer only to directors, officers, and principalstockholders of the Issuer.

 

State the number of shares outstanding in each of the issuer’s classesof common equity, as of August 10, 2003.

 

| **Class**                                |   | **Outstanding**   |
|------------------------------------------|--------|-------------------|
|                                     |   |              |
| Common Stock, par value  $0.01 per share |   | 33,287,267 shares |

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

No documents are incorporated by reference into thisAnnual Report on Form 10-KSB.

 

 

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**PurchaseSoft, Inc.**

**Annual Report on Form 10-KSB**

**May 31, 2003**

 

**Cross Reference Sheet**

 
|     | **PART  I**                                                                                                       |
|----------|-------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                              |
| Item 1   | Description of Business                                                                                           |
|     |                                                                                                              |
| Item 2   | Description  of Property                                                                                          |
|     |                                                                                                              |
| Item 3   | Legal  Proceedings                                                                                                |
|     |                                                                                                              |
| Item 4   | Submission  of Matters to a Vote of Security Holders                                                              |
|     |                                                                                                              |
|     | **PART II**                                                                                                       |
|     |                                                                                                              |
| Item 5   | Market  for Common Equity and Related Stockholder Matters                                                         |
|     |                                                                                                              |
| Item 6   | Management’s  Discussion and Analysis of   Financial Condition and Results of Operations                     |
|     |                                                                                                              |
| Item 7   | Financial  Statements                                                                                             |
|     |                                                                                                              |
| Item 8   | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                             |
|     |                                                                                                              |
| Item  8a | Controls  and Procedures                                                                                          |
|     |                                                                                                              |
|     | **PART III**                                                                                                      |
|     |                                                                                                              |
| Item 9   | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |
|     |                                                                                                              |
| Item  10 | Executive  Compensation                                                                                           |
|     |                                                                                                              |
| Item  11 | Security  Ownership of Certain Beneficial Owners and   Management and Related Stockholder Matters                 |
|     |                                                                                                              |
| Item  12 | Certain  Relationships and Related Transactions                                                                   |
|     |                                                                                                              |
| Item  13 | Exhibits  and Reports on Form 8-K                                                                                 |
|     |                                                                                                              |
| Item  14 | Principal  Accountant Fees and Services                                                                           |

 

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**WARNING ABOUT FORWARD-LOOKING STATEMENTS**

 

Except for the historical information containedherein, this Annual Report on Form 10-KSB contains and may incorporate byreference “forward-looking” statements, including statements regarding ourexpectations, beliefs, intentions or strategies regarding the future.  These statements can be identified by theuse of forward-looking terminology such as “may,” “will,” “believe,” “intend,”“expect,” “anticipate,” “estimate,” “continue,” or other similar words.  Variations on those or similar words, or thenegatives of those words, also may indicate forward-looking statements.  Although we believe that the expectationsreflected in this Annual Report are reasonable, we cannot assure you that ourexpectations will prove to be correct. We have included a discussion entitled “Risk Factors” in this AnnualReport, highlighting important factors that could cause our actual results todiffer materially from our expectations. If in the future you hear or read any forward-looking statements aboutus, you should refer back to the discussion in “Risk Factors.”  The forward-looking statements in thisAnnual Report are accurate only as the date of this Annual Report.  If our expectations change, or if newevents, conditions or circumstances arise, we are not required to, and may not,update or revise any forward-looking statement in this Annual Report.

 

These forward-looking statements may includeexpressions of interest in our software product, as well as the potential forfuture orders of our software product or new products that we may laterintroduce. Forward-looking statements are inherently uncertain.  Our actual performance and results ofoperations may differ materially from those projected or suggested in theforward-looking statements due to risks and uncertainties.

 

The forward-looking statements contained in thisAnnual Report on Form 10-KSB represent our judgment as of the date of thisAnnual Report, and you should not unduly rely on these statements.

 

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**PART I****:**

 

**ITEM1:   DESCRIPTIONOF BUSINESS**

 

The following discussion of our financial conditionand results of operations should be read in conjunction with our financialstatements and attached notes and the other financial information includedelsewhere in this report. This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations section contains descriptions ofour expectations regarding future trends affecting our business. Theseforward-looking statements and other forward-looking statements made elsewherein this document are made in reliance upon the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995. The discussion below andunder the heading “Risk Factors” sets forth numerous factors we believe couldcause actual results to differ materially from those contemplated by theforward-looking statements. We are not under any obligation to update theinformation contained in this section.

 

**Overview**

 

In July 2003 the Company successfully settled the lastof the remaining liabilities that had been incurred prior to and during thewind down period.  Management has beencompletely successful in discharging those liabilities, preserving theintellectual property and public filing status of the Company for the futurebenefit of all its existing shareholders. With a clean and newly restated balance sheet at May 31, 2003, theCompany can now focus on the future and the task of rebuilding shareholdervalue.

 

Before the announcement to wind down the Company inDecember 2001, PurchaseSoft was positioned to become one of the leaders ineProcurement and eSourcing software. The Company had been supplying software for procurement since the late1980’s.  Over 150 manufacturing,insurance, publishing, distribution and financial services firms had installedtheir software.  PurchaseSoft 5.0 (GTPurchase Pro), the Company’s client-server solution had over 25 active clientsand the newer Enterprise solution, PurchaseSmart 3.0 was just gaining tractionwith four installations.

 

Unfortunately, the Company suffered the same fate asmany others when the tech funding bubble burst, and faced without the abilityto raise more capital in the public equity markets, the Board decided to winddown operations and close the Company. Attracted by projections of substantial growth in the procurementsoftware market, PurchaseSoft investor and senior software executive SteveFlagg teamed with Tom Marsh to purchase controlling interest in the Company inAugust 2002 and restart operations.

** **

**Business Strategy**

 

The Company’s strategy is to acquire the software,intellectual property (IP), customer base and maintenance contracts of softwarecompanies with a focus on the procurement, sourcing and supply chain segmentsof the enterprise software market. PurchaseSoft was the first of these acquisitions and will serve as aplatform.  These acquisitions will besmall to medium sized firms that are generally too small to attract the largerworkout funds and strategic buyers.

 

The Company believes there are a substantial number ofbusinesses meeting these criteria due to continued weakness in IT spending, thepoor IPO market, and the need for alternative exit strategies for the many VCfirms stuck with a portfolio of small software companies.  The collapse of the public markets isespecially severe in Germany and there are more than a dozen opportunities theCompany is aware of where IP can be acquired at substantial discounts.

 

PurchaseSoft’s operating strategy for acquisitions isto reduce breakeven to levels sustainable by the businesses’ recurring revenuefrom maintenance and support.  Productswill be repositioned as necessary with emphasis on third party resellers,business partners and OEM channels to leverage the financial return on IP.  Sales and development will be focused onareas that maximize synergies between the Company’s portfolio assets andimmediate return on acquired assets.

 

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For example, in the case of PurchaseSoft’s 5.0product, support was established at nominal cost through an outsourcingagreement and the first two former customers have signed maintenance contracts(JPMorganCHASE and Chiquita Brands). Customers have been very loyal to this client server product, abandonedby the Company four years ago, so it is being upgraded and will be relaunchedas an SME solution in August 2003.  TheCompany intends to execute a similar strategy with the PurchaseSmart 3.0product.

** **

**Business Model**

 

The Company’s initial financial strategy is to executeusing a low overhead model that emphasizes outsourcing, independentcontractors, and shared office facilities, particularly at the headquarterslevel.  Compensation agreements will bestructured around partnerships and collaborative development with the primarycash compensation derived from revenue sharing or royalties from revenues.  To the degree possible, the financialmanagement of subsidiary operations will be structured in the same manner.  The Company believes that the aggressiveimplementation of this strategy will produce short term positive cash flow fromoperations that will enable the Company to grow without depending on additionalrounds of financing.

** **

**The Procurement and Sourcing Market**

 

AMR Research projects that the strategic sourcingmarket will grow to approximately $1.8 billion by 2006. Representing afive-year Compound Annual Growth Rate of 40 percent from 2001, this growth willbe driven by maturing software and a growing awareness of the compelling ROIthese solutions deliver.  E-procurementand strategic sourcing software applications are among the fastest growingsectors of the enterprise software industry. This relatively new field of automated sourcing solutions is poised to experienceexplosive growth as advancements in technology allow the real time capture andmanipulation of data previously unavailable in the traditional back officesystems.

 

The software industry has traditionally been focusedon reducing costs within an enterprise via Enterprise Resource Planning (ERP)implementations.  This has led to therise of many large software companies and products.  The advent and subsequent adoption of the Internet provides theability to reduce costs between companies. It is estimated that as much as 75% of organizational cost is betweenbuyers and suppliers as opposed to inefficiencies found inside acorporation.  The rapid adoption ofoutsourcing has also led to the increased need for corporations to collaboratewith trading partners within and across industries.  As companies focus on their own core competencies and outsourcethe rest it becomes increasingly important to be able to manage and monitorthose outsourced services. Manufacturers continually seek new ways to speed time to market andreduce product development and warranty costs while increasing quality.

 

Many of the software solutions in the market todayeither support direct or indirect sourcing, but the procurement departments ofmost organizations have to deal with both types of purchases.  PurchaseSoft supports the purchase of directand indirect goods and integrates with the proper back office systems.  One of the greatest advantages inimplementing sourcing technology is the ability to capture data that can be usedto make better purchasing decisions in the future.  Most systems on the market today do not take advantage of thiscapability and end up automating the process without providing the informationrequired to adapt purchasing behavior. PurchaseSoft products have a robust set of analytics that are used forthis purpose.

** **

**Competition**

 

As a software vendor focused strictly on procurementand sourcing solutions since 1985, PurchaseSoft squandered the opportunity tolead the industry during the late 1990’s when today’s procurement softwareleaders like Ariba, I2, Agile, FreeMarkets, and Commerce One, were juststarting.  At the time, procurementsolutions were one of the hot sectors of the software industry.  A quick look at the miserable earningsperformance of today’s leaders also suggests that PurchaseSoft may be fortunateto

 

5

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have the opportunity to restart with a fresh solution and newstrategy.  While these vendors are stillfar from profitability and critical mass, the big ERP vendors such as SAP,Oracle, PeopleSoft and JD Edwards are extending their applications intoprocurement and customers are looking for stability and integrated suites ofapplications.

 

PurchaseSoft’s strategy and competitive advantage liesin its buyer centric focus and the SME market segment.  The Company’s products are robust and fullfeatured enough for big departments but can be easily repositioned for the SMEmarket.  This market is years away fromERP applications whose implementations are mature enough for most customer ITdepartments to be considering sophisticated integration projects inPurchasing.  In the meantime, PurchasingDepartments need good software tools to combat reduced staff, global sourcingchallenges, more extensive outsourcing (more vendors to manage) and pressure toreduce costs.  PurchaseSoft’s strategycalls for it to build a market leading position in sourcing and catalogingapplications, stay focused on servicing the needs of the buyer, and lastlyprovide the procurement back end for requisition and purchase order automation.

** **

**The Company**

 

PurchaseSoft is a Delaware corporation that ispublicly traded via the OTC: Pink Sheets under the ticker symbol“PURC.PK”.  The new managementrepresented in this plan purchased controlling interest in the Company inAugust 2002 after the Company had been shut down due to lack of working capitaland inability to execute in the marketplace. A plan, presented herein, has been developed and management is nowraising the capital needed to develop sales, upgrade the products and completeone or more acquisitions.

 

Over the years PurchaseSoft developed relationshipswith more than 150 customers.   Onehundred of these customers have been contacted to assess the possibility of reestablishingcontact and supporting their purchasing efforts through the provision ofsoftware and services. In today’s economic environment it is increasinglydifficult to persuade senior management to replace existing softwareapplications. Fortunately for PurchaseSoft, this has disproportionately delayedthe migration of the PurchaseSoft base to other vendor products.  Furthermore, this is causing significantstress for PurchaseSoft’s competitors that have been struggling to carry largeoverhead and disappointed shareholders through lean times.

** **

**Marketing & Sales**

 

PurchaseSoft has targeted small to mid-sizedenterprises (SME) for the repositioning of its client server product,PurchaseSoft 5.2.  Previously licensedfor up to $75,000 per customer, PurchaseSoft 9.0 will be sold as a selfinstalled, “shrink wrap” solution, available in a “lite” version for a singleuser at $2,995 with the full featured version for unlimited users at$14,995.  Maintenance is priced at 30%of the license fee.  It will be sold directthrough agents, over the Internet and through third party resellers and OEMssuch as small ERP vendors.  There areseveral hundred thousand potential customers in the US.  It will also provide an upgrade path forexisting PurchaseSoft and GT Purchase Pro customers such as Chase ManhattanBank and Chiquita Brands.

 

The PurchaseSmart 3.0 product will be reintroduced inlate 2003 as PurchaseSmart V6 and will be targeted to the mid-sized enterprisemarket and as a department level application for large companies.  Previously targeted at the large enterprisemarket with licenses up to $450,000, this mid range solution will be pricedbetween $25,000 and $75,000, sold through commissioned Sales Partners and VARs.  Implementation will be outsourced initially.  Maintenance will be priced at 18% of thelicense price.  According to independentstudies there are up to 10,000 potential customers for this product in UScompanies from $100 million to $1 billion in revenue.

** **

**Sales Strategy**

 

Sales activity for PurchaseSoft is currently limitedto the re-signing of maintenance contracts with

 

6

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former customers and upgrade sales of the new PurchaseSoft 9.0product.   The Company is setting up twotiers of Sales Partners and Distributors to provide direct and indirect salesof both the new PurchaseSoft 9.0 and PurchaseSmart V6 products.  The Company has allocated 30% of the revenuefrom new or upgrade license sales for compensation of sales and distributioncompanies with the breakdown as follows:

 

Master Sales Partners will be set up withresponsibility for direct sales and the establishment of Sales Partners andDistributors.  Master Sales Partnerswill receive the same commissions as Sales Partners on direct sales and a 10%on the sales of any Sales Partners and Distributors they set up.  Sales Partners will receive commissions of20% on new licenses, 15% on upgrade licenses, 10% on Professional Services and5% on the first year of maintenance contracts. Distributors and VAR’s will receive a 20% discounts from the list priceof products purchased but will be limited to the PurchaseSoft 9.0 product thatwill be designed and configured for distribution.  Initially there will be no territory protection in theseagreements with the exception of limiting agreements to the US and Canadianmarkets.

** **

**Marketing**

 

Marketing expense is currently limited to telephonecosts, direct mail and sales calls.  TheCompany’s website was re-launched in February 2003 and has already providedsome new leads.  Plans call for enablingthe website to accept credit cards for orders for PurchaseSoft 9.0.  Brochures and collateral materials are beingdeveloped in-house to support the sales effort. There is nominal trade show andadvertising expense planned for the next twelve months, with the exception ofan effort to list the Company and its products on Internet based directoriesand with software resellers.  With thehelp of Lou De Rose, the Company is working to offer Internet-based procurementtraining on its website and PurchaseSoft software will be featured in atraining course sponsored by the Institute of Supply Management.

** **

**Products**

 

In 1977 PurchaseSoft, Inc., formerly GreentreeSoftware, Inc. began operations as a management consulting firm specializing inpurchasing and materials management. In 1985, the Company introduced its firstsoftware product for purchasing and materials management, Computer AidedPurchasing  (“CAP”), for use on IBMcompatible personal computers. Since 1991, all of the Company’s revenues havebeen derived from the sale and maintenance of software products and services.

 

“PurchaseSoft 5.0” 

 

In May 1994, the Company released its first MicrosoftWindows and client/server based purchasing and materials management softwaresystem, GT Purchase PRO. In the fall of 1997, the product name was changed fromGT Purchase PRO to PurchaseSoft 5.0 consistent with the wider “enterprise”scope of the Company’s software solution. PurchaseSoft 5.0 solutions provide acomplete end-to-end electronic procurement system featuring electroniccatalogs, requisitioning, e-mail enabled authorization, request for quotations,quotations, reports and analyses, purchasing, receiving, inventory management,fixed asset management, invoice management and advanced decision support.

 

PurchaseSoft 5.0 is a full life-cycle suite ofsoftware modules for improving the performance of Purchasing and MaterialsManagement. PurchaseSoft 5.0 is compatible with Structured Query Language(“SQL”) databases, client/server architecture, and e-mail. PurchaseSoft 5.0 wasan enterprise-wide application developed in PowerBuilder 5.0.

 

The complete PurchaseSoft 5.0 software suite includesthe following modules:

 
|   | Purchasing     |   | Inventory        |
|--------|----------------|--------|------------------|
|   | Requisitioning |   | Invoice Matching |
|   | Receiving      |   | Asset Management |
|   | Quotations     |   | Blanket Orders   |

 

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|   | Request for Quotations (RFQs) |   | Accounts Payable Interface |
|--------|-------------------------------|--------|----------------------------|
|   | Budgeting                     |   | Migration and Integration  |
|   | Third Party Billing           |   | Web Requisitioning         |
|   | Web Quotations                |   | Document Imaging           |

 

All of the modules can be integrated into one commonlogical system, and interfaces are available for supporting external AccountsPayable and MRO applications and systems. The software routes electronicpurchase requisitions as application-level communication. Requisitions flow viacorporate LANs, WANs, Internet, or Intranet to back-office solution processing.Requisitions are created using on-line, electronic product and servicescatalogs. Before reaching back-office processing, requisitions must beapproved, and this is achieved using an authorization cycle as establishedthrough user-defined workflow routed on top of existing e-mail systems.

 

Requisitions can be converted to RFQs to support thebidding and sourcing process, or requisitions can be turned directly intopurchase orders. All information is processed at the line item level. Buyerscan turn one requisition into many purchase orders or many requisitions intoone P.O. A blanket purchase order feature handles routine and repetitivepurchases. Purchase orders can be sent to vendors via paper, fax, and e-mail orexported for EDI exchange.

 

Requisition authorization requests move over existinge-mail systems using MAPI. Contracts, product specifications, and otherdocuments are managed as file attachments using OLE automation. Also, thesystem supports robust industry standard databases - Microsoft SQL Server andOracle.

 

Current Development. The client server product was sold from 1994 to 1999 and had a largeinstalled base.  This product iscurrently being upgraded to the latest PowerBuilder (Sybase) platform withenhancements for ease of implementation. It will be reintroduced asPurchaseSoft 9.0 in August 2003.  ForSMEs seeking to implement Internet/intranet procurement technology with limitedIT support and budgets, the Company believes PurchaseSoft 9.0 will be wellpositioned as the entry level procurement solution.

 

“PurchaseSmart”, “SourceSmart” and “WebQuote” 

 

In October 1999, the Company released its newestsolution, PurchaseSmart, SourceSmart and WebQuote, a Web-based, end-to-endsoftware solution, written in JAVA and HTML, which provides operational supportfor strategic procurement and e-sourcing.

 

This PurchaseSmart solution (the “System”) consists ofthree key components - PurchaseSmart, the core product designed for thepurchasing professional, SourceSmart, the easy-to-use casual buyer front-endand WebQuote, which enables supplier participation in the procurement process.The PurchaseSmart solution offers functionality in the areas of Web-basedprocurement, transaction management, supply chain management and planning &forecasting. The System covers all procurement needs from requisitioning andpurchasing through auctioning and advanced analysis.

 

PurchaseSmart is an integrated suite of softwaremodules that provide Web-based, end-to-end operational support for strategicprocurement and e-Commerce. It enables organizations to reduce processing costsand improve productivity, by automating the procurement cycle, linkingend-users throughout the organization with approvers and financial systems.PurchaseSmart is designed to connect large numbers of end users, approvers, andadministrative personnel through Web based applications that automateprocurement and financial processes. The functionality of PurchaseSmart isdirected at the purchasing professionals in mid-sized organizations. Itprovides all the tools that are needed by buyers and purchasing managers toeffectively manage the procurement process and supplier performance.PurchaseSmart features the following functionality:

 
|   | Requisitioning |   | Electronic Cataloging |
|--------|----------------|--------|-----------------------|

 

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|   | Purchase Order Management     |   | Receiving                        |
|--------|-------------------------------|--------|----------------------------------|
|   | Request for Quotations (RFQs) |   | User Self Registration           |
|   | Auctioning                    |   | Advanced Analysis and  Reporting |
|   | Quotations and Bid Analysis   |   | Data Integration and Migration   |

 

Several additional modules can be added toPurchaseSmart allowing the customer to customize the System to match the needsof the organization. These modules are Inventory, Asset Tracking, and InvoiceMatching.

 

SourceSmart is an easy-to-use requisitioning systemfor the casual user. Written in HTML, SourceSmart is accessed using a Webbrowser. With SourceSmart, users can scan catalogs, select items, create requisitionsand with proper authorization, approve requisitions created by others. Therequisitions, depending on business rules, can be converted to purchase ordersto be sent directly to suppliers or sent to an approval workflow process asdefined by the organization. Information from SourceSmart is immediatelyavailable in PurchaseSmart for analysis, so that total corporate spending caneasily be controlled and managed.

 

WebQuote provides buyers with the ability to issuepricing requests and/or initiate auctioning events over the Internet. Supplierscan be specifically invited to participate by an email message directing themto the organization’s auction Web site through a hyperlink. Using the BidAnalysis feature, the competing suppliers’ bids can be analyzed and purchaseorders placed with selected suppliers. The auctioning feature and the abilityto analyze supplier bids allows for dynamic pricing and reduction in cost ofgoods purchased.

 

The PurchaseSmart solution was designed to meet theneeds of procurement professionals and the larger organizations within whichthey work. The System meets these sometime competing needs by incorporating andconsistently employing the following key features:

 

•                  Easy-to-useInterfaces: All features of the PurchaseSmart solution are accessed through abrowser-based interface. The user interface is designed to be intuitive andrequires minimal training.

 

•                  E-mail enabledworkflow: The System uses an organization’s e-mail infrastructure to implementa flexible workflow process linking requisitioners, buyers, managers, andapprovers.

 

•                  PowerfulAnalytics: The System actively tracks the procurement activity in anorganization. The data collected can be analyzed with the built-in tools thatinclude Buyer/Requisitioner Analysis, Supplier Performance Analysis andItem/Commodity Analysis. These real-time analyses help the key decision-makersmake strategic sourcing decisions that result in better control of procurement,improved supplier performance, reduction of “maverick” buying and overallimprovements to the full procurement cycle.

 

•                  IntegrationCapability: The System can be integrated to existing ERP and legacy systemsusing the built-in Integration functionality.

 

•                  Multi-platformArchitecture: Based on the Novell exteNd Application Server platform, theSystem can be hosted on multiple hardware and software configurations such asMicrosoft, Sun Solaris, AIX, and Linux on the Intel and Sun architectures. TheSystem supports robust industry standard databases including Microsoft SQLServer and Oracle.

 

Current Development. This product is currently being evaluated with the assistance of Novellfor an upgrade to the latest Novell release of its platform.  This upgrade project is being managed byPurchaseSoft’s former VP of Software Development.  When complete late this year, this integrated suite of productswill be introduced as PurchaseSmart V6.

 

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**Development, Support and ProfessionalServices**

 

With the help of Stu Williamson, Vice PresidentSupport, the Company has identified the best former PurchaseSoft developmentand professional services employees for contract development of upgrades,enhancements and implementation. Development will be contracted on a per project basis, with the Companyproviding some or all of the development environment and infrastructure.  Initially, developers will be paid from aroyalty pool of the revenue generated by the product they worked on.  The Company has relationships with a numberof offshore development companies and intends to use those resources tosupplement its existing staff and for large new product development efforts.

 

The Company has contracted with Williamson toconfigure and maintain a server with the Company’s software for the purpose ofsupporting the maintenance requirements of its customers and delivery of newlicenses.  Williamson has configured anidentical server at the Company’s California offices for backup.  Williamson is paid a monthly retainer tomaintain the system and be available for customer support.

 

Professional services will be provided by and managedinitially by Williamson as part of the support function. The Company willcontract for these services on an as needed basis until revenue is sufficientto sustain an internal organization.

** **

**Facilities**

 

As described above in the Business Model section, theCompany has no facilities or leased office space.  The Company shares space, telephone, Internet and utilityexpenses with the offices of Marsh+Flagg, and its consultants and contractorsprovide their own space as part of their compensation.  It is the Company’s policy to continue thispractice for the near term. Consequently, there is no provision for leased office space in the firstyear of the Company’s financial plan, except as disclosed separately foracquired operations.

** **

**Corporate History and Organization**

** **

The Company was founded in 1977 as Greentree Software,Inc.  In November 1998, the Companyreincorporated in the State of Delaware by means of a migratory merger and inthe process changed its name to PurchaseSoft, Inc. to better reflect its focus.PurchaseSoft is a Delaware corporation that is publicly traded via the OTC:Pink Sheets under the ticker symbol “PURC.PK”.

 

On December 21, 2001, the Company announced that itwas suspending its operations effective immediately and was commencing anorderly wind down of its operations. All employees were terminated except thoseinvolved in effecting the wind down. The Company continued to evaluate itsstrategic alternatives in order to salvage the value of its assets during thewind down.  On July 31, 2002, L-R GlobalPartners, L.P., a Delaware limited partnership entered into a Stock PurchaseAgreement with Steven A. Flagg and Thomas B. Marsh. Pursuant to the PurchaseAgreement, Flagg and Marsh acquired 27,264,170 shares of common stock, parvalue $0.01 per share, of PurchaseSoft, Inc. Such shares constituted all of the shares of the Company held by L-RGlobal Partners, L.P.

 

On August 5th, 2002, Steven Flagg and ThomasMarsh were elected as Directors and all of the previous members of the Boardresigned as directors and officers of the Company. Immediately subsequent tothe meeting, a second Board Meeting was convened, at such time Steven Flagg wasappointed Chairman and President, and Thomas Marsh was appointed Secretary andTreasurer. As of August 10th, 2003, we had no employees and no officespace.  Administration and all of theCompany’s records had been transferred to the offices of Steven Flagg andThomas Marsh in La Jolla California.

 

Subsequent to the acquisition of controlling interestin the Company as described above, management has settled the outstandingliabilities, maintained the reporting status of the Company through completionof SEC filings, secured and restored the Company’s intellectual property,signed former customers to maintenance and support, and continues to pursuepotential acquisitions.

 

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On November 8, 2002 the Company filed a report onForm 8-K announcing that the Board of Directors had approved a plan torestart service to former PurchaseSoft customers, which if successful, wouldtake the Company out of wind down status. President Steven Flagg presented anassessment study for the restart of service to existing PurchaseSoft customersthat was requested by the Company in August.

 

On April 9th, 2003, the Company signed its firstmaintenance agreement under the Restart Plan with a Chase Manhattan Bank groupin JPMorganCHASE and later that month signed its second agreement with ChiquitaBrands.  Consequently the Company ceasedwind down status effective March 1st 2003.

 

In July 2003 the Company successfully settled the lastof the remaining liabilities that had been incurred prior to and during thewind down period.  Management has beencompletely successful in discharging those liabilities, preserving theintellectual property and public filing status of the Company for the futurebenefit of all its existing shareholders. With a clean and newly restated balance sheet at May 31, 2003, theCompany can now focus on the future and the task of rebuilding shareholdervalue.

 

**Risk Factors**

 

Stockholders and prospective purchasers of our commonstock should carefully consider the following risk factors in addition to theother information appearing in this Annual Report on Form 10-KSB.

 

History of Losses andAccumulated Deficit; Uncertainty of Future Profitability.

 

The Company has experienced ongoing losses from operations.  The Company only resumed operations as agoing concern in March 2003.  The Companyexpects that such losses may continue for at least some period until productsales may be generated in sufficient volume to offset expenses.  The Company does not expect to be profitableunless and until such time as sales of its software products and servicesgenerate sufficient revenue to fund its operations.

 

Uncertainty of Market Acceptanceof PurchaseSoft Software.

 

The Company cannot offer any assurance that its PurchaseSoft productsand/or the products of any acquired business will achieve and sustain marketacceptance.  The Company believes thatits history of financial performance has negatively affected its image in themarketplace and that it may have forfeited business from potential customerswho expressed concerns about the Company’s financial status and ability toremain solvent.   The Company believesthat the ownership and management changes in PurchaseSoft will help positionthe Company to overcome these past objections. The Company believes its largest challenge is to gain wide spread marketacceptance of its products.  The failureto obtain market acceptance would have a material adverse affect on the Company’sbusiness.

 

New Management, Ability toRecruit Sales, Service, and Implementation Personnel.

 

The Company’s management has a very limited history in operating theCompany although they are experienced in managing companies with similarchallenges similar.  There can be noassurance that the Company’s management will be successful in meeting theirplanned objectives.  The ability toachieve anticipated revenues is substantially dependent on the ability of theCompany to attract on a timely basis and retain skilled personnel, especiallykey management, sales, support, and development personnel.  The Company believes that its future successwill depend in large part on its ability to attract and retain highly skilledtechnical, managerial, marketing, and professional services personnel to ensurethe high quality of products and services provided to its customers.  The Company competes in the market for suchpersonnel against numerous companies, including larger, more establishedcompanies with significantly

 

11

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greater financial resources than the Company.  There can be no assurance that the Company will be successful inattracting and retaining skilled personnel. The Company’s inability to attract and retain qualified employees wouldhave a material adverse effect on the Company’s business.

 

Intense Competition.

 

The software products industry is intensely competitive.  The Company faces competition from severalsources ranging from large ERP vendors, medium sized ERP vendors, industryspecific vendors and best-of-breed vendors. These best-of-breed competitorshave focused on certain market segments. These competitors all offer software products performing functionssimilar to the Company’s products.  Themarket space in which the Company competes is experiencing tremendous growthand this will invite new competitors. There can be no assurance that competitors do not have or will not offeror develop products that are superior to the Company’s products or that achievegreater market acceptance.  In addition,suppliers of database systems and companies that develop management informationsoftware applications for large multinational manufacturers have begun totarget the Company’s potential customers and offer applications that compete inits markets.  As a result, competition(including pricing competition) may increase, which could result in pricereductions and loss of market share. The Company may also face market resistance from potential customerswithin the large installed base of legacy systems, who may be reluctant tocommit the time and resources necessary to convert to a web services,client-server or browser-based software product.  As the client-server and/or browser-based computing marketexpands, a large number of companies, many with significantly greater resourcesthan the Company, may enter the market or increase their market share byacquiring or entering into alliances with competitors of the Company.  There can be no assurance that the Companywill be able to compete successfully against its competitors or that the competitivepressures faced by the Company will not adversely affect its financialperformance.

 

Rapid Technological Change andNew Products.

 

The market for the Company’s software products is characterized byrapid technological advances, evolving industry standards, change in end-userrequirements, and frequent new product introductions and enhancements.  The introduction of products embodying newtechnologies and the emergence of new industry standards could render theCompany’s existing products and products currently under development asobsolete and unmarketable.  Accordingly,the Company’s future success will depend upon its ability to enhance itscurrent products and develop and introduce new products that keep pace withtechnological developments, satisfy varying end-user requirements, and achievemarket acceptance.  Any failure by theCompany to anticipate or respond adequately to technological developments orend-user requirements, or any significant delays in product development orintroduction, could severely damage the Company’s competitive position and havea material adverse effect on revenues. There can be no assurance that the Company will be successful indeveloping and marketing new products or product enhancements on a timely basisor that the Company will not experience significant delays in the future whichcould have a material adverse effect on the Company’s results ofoperations.  In addition, there can beno assurance that new products or product enhancements developed by the Companywill achieve market acceptance.

 

Dependence on a SingleProduct-Line.

 

Substantially all of the Company’s revenues are expected to be derivedfrom the sale of software products and related support services.  Accordingly, any event that adverselyaffects revenue generated from the sale of software or from the professionalfees derived from the installation of such products, such as competition fromother products, significant flaws in the products, or incompatibility withthird party hardware or software products, negative publicity or evaluation, orobsolescence of the hardware platforms or software environments in which theproducts run, could have a material adverse effect on the

 

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Company’s results of operations. The Company’s future financial performance will depend on the continueddevelopment and introduction of new and enhanced versions of its software andother products and on customer acceptance of such new enhanced products.

 

Fluctuation in Quarterly Operating Results.

 

The Company’s revenues and operating results can vary substantiallyfrom quarter to quarter.  Sales revenuesin any quarter are substantially dependent on aggregate contracting activityand the Company’s ability to recognize revenue in that quarter in accordancewith its revenue recognition policies and generally accepted accountingprinciples.  Revenues may vary fromquarter to quarter due to variances in prior quarter contracting activity,which may positively or adversely affect the Company’s future financialperformance.  The Company’s sales cycleis relatively long and variable.  TheCompany’s ability to increase revenue is dependent on its ability to grow salesactivity which provides opportunities for consulting, training and subsequentmaintenance revenues.  Additionally theCompany may not be able to recruit, hire, and train sufficient numbers ofqualified consultants to perform such services.  Due to the forgoing, it is likely that in one or more futurequarters the Company’s operating results will be below the expectations ofpublic securities market analysts.  Insuch event, the price of the Company’s Common Stock would likely be materiallyadversely affected.

 

Intellectual Property and Proprietary Rights.

 

The Company relies on a combination of copyright, trademark and tradesecret laws, employee and third party nondisclosure agreements, and otherindustry standard methods for protecting ownership of its proprietary softwareand business practices.  There can be noassurance, however, that in spite of these precautions, an unauthorized thirdparty will not copy or reverse-engineer certain portions of the Company’sproducts or obtain and use information that the Company regards asproprietary.  In addition, the laws ofsome foreign countries do not protect the Company’s proprietary rights to thesame extent as do the laws of the United States.  There can be no assurance that the mechanisms used by the Companyto protect its software will be adequate or that the Company’s competition willnot independently develop software products that are substantially equivalentor superior to the Company’s software products.  The Company expects that, as the number of software products inthe industry increases and the functionality of these products furtheroverlaps, software products will increasingly be subject to claims ofinfringement on third party proprietary rights.  Any such claim, whether with or without merit, could result incostly litigation and require the Company to enter into royalty or licensing arrangements.  Such royalty or license arrangements, ifrequired, may not be available on terms acceptable to the Company or at all.

 

Need for Additional Capital

 

The Company will need to raise additional capital tofinance its development and acquisition plans. The availability of financing for any plan will be critical to continueoperations.  Financing may not beavailable on terms that are favorable to us, or at all.

 

Future Sales of Common Stock

 

Our common stock is traded on the National Associationof Securities Dealers OTC :Pink SheetsÒ.  Our common stock has historically beenhighly illiquid.  Steven A. Flagg andThomas B. Marsh, who serve on our Board of Directors, one of whom is President,in the aggregate owned approximately 69.2% of our common stock as of August10th, 2003.  If either of thesedirectors were to sell even a small portion of their total shares in a shorttime, the market price of our common stock would likely decline dramatically.  Further, sales of a substantial number ofshares of our common stock by any holder in a short time would likely cause themarket price of our common stock to decrease significantly.  In addition, the sale of any of these sharesmay impair our future ability to raise capital through the sale of

 

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additional stock.

 

Inability to Influence the Outcome of Key Transactions 

 

The two directors of the Company, one of whom is ourPresident, in the aggregate owned approximately 69.2% of our common stock as ofAugust 10, 2003.  These two directorshave enough voting power to approve or disapprove any matters that aredetermined by a majority vote of our stockholders, which severely limits yourability to influence PurchaseSoft through voting your shares.

 

Maintenance of a Public Trading Market for Shares of Our Common Stock

 

Although shares of our common stock are presentlyquoted on the OTC Pink Sheets, we cannot assure you that they will continue tobe quoted in the future.  During theperiod of the Company’s wind down the Company lost its market makers and hasdeclined to establish new market makers until full and substantial operationsare underway through product sales or an acquisition.  Furthermore, in contrast to stock that is quoted on the NASDAQNational Market or traded on a national securities exchange, as a result of ourstock being quoted on the OTC Pink Sheets, stockholders may:

 

•                  Findit more difficult to obtain accurate and timely quotations regarding the bidand asked prices;

•                  Experiencegreater spreads between bid and asked prices;

•                  Becharged relatively higher transactional costs when buying or selling our commonstock; and

•                  Encountermore difficulty in effecting sales or purchases of common stock.

 

Cost of Compliance with Securities Laws

 

While securities listed on the NASDAQ National MarketSystem or national securities exchanges are in many cases exempt from theregistration requirements of state securities laws, securities traded on theOTC Pink Sheets must comply with the registration requirements of statesecurities laws, which increases the time and costs associated with complyingwith state securities laws when raising capital.  We cannot assure that this cost of compliance will not have amaterial adverse effect on the viability of the Company.

 

Liquidity Reduction due to “Penny Stock” Regulatory Requirements

 

The Securities and Exchange Commission has adoptedregulations imposing limitations upon the manner in which certain low pricedsecurities, referred to as a “penny stock,” are publicly traded.  Under these regulations, a penny stock isdefined as any equity security that has a market price of less than $5.00 pershare, subject to specified exceptions. Unless an exception is available, the regulations require the delivery,prior to any transaction involving a penny stock, of a disclosure scheduleexplaining the penny stock market and the risks associated with it.  Also, under these regulations, somebroker-dealers who recommend these types of securities to persons other thanestablished customers and “accredited investors” must make a special writtensuitability determination for the purchaser and receive the purchaser’s writtenagreement to a transaction prior to sale. Trading activities for penny stocks are more difficult forbroker-dealers than in the case of securities not defined as penny stocks.Because our common stock may be a penny stock this may have the result ofdepressing the market for our securities, and a stockholder may find itdifficult to sell shares of our common stock.

 

**ITEM 2****:   DESCRIPTION OF PROPERTY**

 

Administration is beingconducted from the offices of Marsh+Flagg. As of August 10, 2003 the Company’s mailing address is 7514 GirardAvenue, Ste 1440, La Jolla, California. All of the books and records of the Company are located in the officesof Marsh+Flagg.  The Company maintainsno other

 

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locations and as of August 10, 2003, with theexception of two servers (in Northboro MA and La Jolla CA), the Company had noother personal property.

 

# **ITEM3**:   LEGAL PROCEEDINGS

 

As of August 10, 2003, there areno lawsuits or threatened lawsuits pending against the Company.  Those lawsuits pending or previouslythreatened have been resolved as described below.

 

**Medico Case Settled on October 10,2002—**The Company had beennamed as a defendant in a lawsuit by a former employee. The suit alleged abreach of his separation agreement with the Company, claiming that the Companyrefused to allow him to exercise certain stock options betweenDecember 1999 and April 2000. The lawsuit seeks an award of damagesand costs. On August 16, 2002, the parties reached an agreement inprinciple to settle the case for a payment of $2,500 to the former employee bythe Company and the complaint was dismissed without prejudice onAugust 19, 2002. The settlement agreement was executed and settlementamount of $2,500 paid on October 10th, 2002.

 

**Employee Claim Dismissed onJuly 22, 2002—**OnApril 12, 2002, another former employee of the Company filed suit againstthe Company and certain Company employees alleging fraudulentmisrepresentation, negligent misrepresentation, breach of employment contractand breach of covenants of good faith and fair dealing. This former employeesought damages for three years of lost compensation pursuant to an employmentcontract allegedly arising from the vesting schedule of the employee’s stockoption plan. Since the employee failed to serve the defendants as required bythe Massachusetts Rules of Civil Procedures and the complaint was dismissedwithout prejudice on July 22, 2002.

 

**Threatened Lawsuit Settled on January22, 2003—**OnOctober 17, 2002, a former financial advisor of the Company threatenedsuit against the Company alleging the Company filed to pay the advisor themonthly preliminary advisory fee owed to the advisor pursuant to the terms ofthe parties’ March 1, 2001 engagement agreement as amended. The threatenedlawsuit sought a total payment of $210,000; a $90,000 minimum advisory fee plus$120,000 preliminary advisory fee at $10,000 per month for twelve monthsbeginning October 2001 to October 2002. Management completed anagreement to settle the claim on January 22, 2003 for $6,000 and a license forthe rights to certain intellectual property related to the development of a newversion of the Company’s procurement product. The Company will receive a royalty of 3% of any revenue generated bysales of products completed using that intellectual property for a period ofthree years.

 

**ITEM 4****:   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

No matters were submitted to a vote of securityholders during the last quarter of the fiscal year ended May 31, 2003.

 

**PART II****:**

 

**ITEM 5****:   MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

**Market Information**

 

Our common stock is listed for quotation under thesymbol “PURC.PK” on the National Association of Securities Dealers OTC PinkSheetsÒ.  The following table sets forth the range ofhigh

 

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and low bid quotations of the common stock during the two fiscal yearsended May 31, 2003 and May 31, 2002 as reported by OTC Pink SheetsÒ.

 
|                             |   | **Bid**  |   |
|----------------------------------|--------|----------|--------|
| **Period**                       |   | **High** |   | **Low** |   |
|                             |   |     |   |   |   |
| Fiscal  Year Ending May 31, 2003 |   |     |   |   |   |
| First  Quarter                   |   | $        | 0.01   |   | $ | 0.01 |   |
| Second  Quarter                  |   | $        | 0.01   |   | $ | 0.01 |   |
| Third  Quarter                   |   | $        | 0.001  |   | $ | 0.001 |   |
| Fourth  Quarter                  |   | $        | 0.001  |   | $ | 0.001 |   |
|                             |   |     |   |   |   |
| Fiscal  Year Ended May 31, 2002  |   |     |   |   |   |
| First  Quarter                   |   | $        | 1.93   |   | $ | 0.64 |   |
| Second  Quarter                  |   | $        | 1.45   |   | $ | 0.35 |   |
| Third  Quarter                   |   | $        | 0.42   |   | $ | 0.01 |   |
| Fourth  Quarter                  |   | $        | 0.03   |   | $ | 0.01 |   |

 

The closing bid price of the common stock on August10, 2003 on the OTC Pink SheetsÒwas $0.01 per share.

 

# **Stockholders**

 

As of August 10, 2003, there were approximately 350holders of record of PurchaseSoft’s common stock.  We believe that, as of August 10, 2003, there were approximately2,000 beneficial owners of PurchaseSoft’s common stock.

 

# **Dividends**

 

The Company has never paid cash dividends on ourcommon stock nor does our Board of Directors anticipate that we will pay cashdividends in the foreseeable future.

 

### **Recent Sales of Unregistered Securities**

 

On July 31, 2002, L-R Global Partners, L.P., aDelaware limited partnership entered into a Stock Purchase Agreement withSteven A. Flagg and Thomas B. Marsh. Pursuant to the Purchase Agreement, Flaggand Marsh acquired 27,264,170 shares of common stock, par value $0.01 pershare, of PurchaseSoft, Inc.  Suchshares constituted all of the shares of the Company held by L-R Global Partners,L.P.

 

As part of the effort toattract and compensate individuals to assist in the restart of the Company andconserve cash, the Company made certain verbal and written commitments to issue4,289,500 shares of common stock. These shares were to be granted ascompensation for advisory, M&A, legal, ISP and website hosting, support andsales services.  To minimize anydilution to the public shareholders during the restart period, the Company’sofficers agreed to offer their personal shares in satisfaction of the Company’sobligation to be sold in private transactions (in July 2003) to theseindividuals in the amount indicated at a price of $0.0001 per share.  Accordingly, the total cost of $429 wascharged to operations.

 

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**ITEM 6****:   MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of our financial conditionand results of operations should be read in conjunction with our financialstatements and attached notes and the other financial information includedelsewhere in this Annual Report on Form 10-KSB.  This Management’s Discussion and Analysis of Financial Conditionand Results of Operations section contains descriptions of our expectationsregarding future trends affecting our business.  These forward-looking statements and other forward-lookingstatements made elsewhere in this document are made in reliance upon the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.  The discussion below and under the heading“Risk Factors” sets forth numerous factors we believe could cause actualresults to differ materially from those contemplated by the forward-lookingstatements.  We are not under anyobligation to update the information contained in this section.

 

### **Overview**

 

In July 2003 the Companysuccessfully settled the last of the remaining liabilities that had beenincurred prior to and during the wind down period.  Management has been completely successful in discharging those liabilities,preserving the intellectual property and public filing status of the Companyfor the future benefit of all its existing shareholders.  With a clean and newly restated balancesheet at May 31, 2003, the Company can now focus on the future and the task ofrebuilding shareholder value.

 

There are severalsignificant events that have occurred during the fiscal years ending May 312002 and May 31, 2003 that render comparative discussion of operating resultsand the Company’s financial condition problematic and essentially useless.

 

1.               On December 21, 2001, the Company announced thedecision to pursue an orderly wind down and cessation of our businessoperations.

 

2.               On August 5th, 2002 the Company announced achange in control in that L-R Global sold its 82% interest to Steven Flagg andTom Marsh.

 

3.               In the Company’s 10-QSB for the period ending February28,2003, the Company announced that it would be resuming operations and willbegin reporting as a going concern effective March 1st, 2003.

 

As a result of thisdecision, the first two quarters of the fiscal year ending May 31, 2002 werereported using a going concern method of accounting under the previous controlof L-R Global.  The Company had severaloffices, dozens of employees and was attempting to develop a new softwareplatform targeted to the Global 1000 Enterprise market.  While the Company has resumed operations andreporting as a going concern with the results of the fourth quarter of the yearending May 31, 2003, the change in control accounting adjustments, theliquidation of all previous assets, liabilities, employees and locations, andthe change in business strategy make all comparative analysis with previousoperating financial periods irrelevant.

 

### **CurrentOperating Results, Liquidity and Capital Resources**

 

As of the quarter endingMay 31, 2003, two customers had executed annual software maintenance agreementsand one customer purchased an upgrade to their GT Purchase PRO softwareresulting in revenue of $3,186.  TheCompany expects to upgrade and sign maintenance contracts with a majority of

 

17

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the customers still using the PurchaseSoft 5.0 productonce the 9.0 upgrade is available.

 

Operating Expenses andCost of Service Expense for the quarter were $14,172.  The Company expects these expenses to increase significantly overthe next few quarters as a result of costs related to product development,marketing and sales expense for the 9.0 re-launch, and a full-time acquisitionsearch.  The Company does not expect tobe profitable or cash flow positive during the first three quarters of the yearending May 31, 2004.

 

The Company’s cashbalance and working capital was $17,182 at May 31, 2003.  The Company intends to finance the projectedworking capital deficit with short term bridge loans with attached warrantsfrom private investors.  The Company hasraised $60,000 as of August 10, 2003.

 

### **ITEM7**:   FINANCIAL STATEMENTS

 

### **INDEX TO FINANCIALSTATEMENTS**

 
| Report of Spector & Wong LLP                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                          |
| Balance Sheet as of May 31,  2003                                                                                                                             |
|                                                                                                                                                          |
| Statement of Operations  for the period June 1, 2001 to November 30, 2001  and the three month period ending May 31, 2003                                     |
|                                                                                                                                                          |
| Statements of Changes in Net  Liabilities in Liquidation for the period December 1, 2001  to May 31, 2002 and the three month period ending February 28, 2003 |
|                                                                                                                                                          |
| Statement of Stockholders’ Equity  for the year ending May 31, 2002 and the year ending May 31, 2003                                                     |
|                                                                                                                                                          |
| Statement of Cash Flows for the  period June 1, 2001 to November 30, 2001 and   the three month period ended May 31, 2003                                     |
|                                                                                                                                                          |
| Notes  to Financial Statements                                                                                                                                |

 

18

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INDEPENDENTAUDITORS’ REPORT

 

To the Board of Directors

of PurchaseSoft, Inc.

 

We have audited the balance sheet of PurchaseSoft,Inc. as of May 31, 2003, and the related statements of operations, changes instockholders’ equity and cash flows for the period from March 1, 2003 to May31, 2003, and for the period from June 1, 2001 to November 30, 2001. We also haveaudited the related statements of changes in net liabilities in liquidation forthe period from June 1, 2002 to February 28, 2003, and for the period fromDecember 1, 2001 to May 31, 2002.  Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

As described in Note 1 to the financial statements,the Board of Directors approved a plan of liquidation on December 21, 2001 andthe Company adopted the liquidating basis of accounting effective December 1,2001. On November 8, 2002, the Board of Directors approved a plan for therestart of operations and for the cessation of the wind down operations.  As a result, the Company changed its basisof accounting for periods after February 28, 2003 from the liquidating basis togoing concern basis.

 

In our opinion, the financial statements referred toin the first paragraph present fairly, in all material respects, the financialposition of PurchaseSoft, Inc. as of May 31, 2003, the results of itsoperations and its cash flows for the period from March 1, 2003 to May 31,2003, and for the period from June 1, 2001 to November 30, 2001, and thechanges on net liabilities in liquidation for the period from June 1, 2002 toFebruary 28, 2003 and for the period from December 1, 2001 to May 31, 2002, inconformity with accounting principles generally accepted in the United Statesof America applied on the basis of accounting described in the precedingparagraph.

 

 
| /s/ Harold Y Spector, CPA |   |
|---------------------------|--------|
|                      |
| Pasadena, California      |
|                      |
| August 14, 2003           |

 

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**PURCHASESOFT, INC.**

**BALANCE****SHEET**

 

**Year ending May 31, 2003**

 

 
| **ASSETS**                                                                                             |    |        | ** ** |
|--------------------------------------------------------------------------------------------------------|---------|-------------|------------|
| Current Assets                                                                                         |    |        |       |
| Cash                                                                                                   |    | $           | 17,938     |   |
| Total current assets                                                                                   |    | 17,938      |       |
|                                                                                                   |    |        |       |
| Property and equipment, net of accumulated depreciation of $211                                        |    | 1,052       |       |
|                                                                                                   |    |        |       |
| Goodwill                                                                                               |    | 150,803     |       |
|                                                                                                   |    |        |       |
| **TOTAL ASSETS**                                                                                       |    | $           | 169,793    |   |
|                                                                                                   |    |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                         |    |        | ** ** |
| Current Liabilities                                                                                    |    |        |       |
| Accounts payable and accrued expenses                                                                  |    | $           | 12,128     |   |
| Deferred revenue                                                                                       |    | 15,064      |       |
| Total current liabilities                                                                              |    | 27,192      |       |
|                                                                                                   |    |        |       |
| Stockholders’ Equity                                                                              |    |        |       |
| Common stock, $0.01 par value, 50,000,000 shares authorized,  33,287,267 shares issued and outstanding |    | 332,873     |       |
| Paid-in capital                                                                                        |    | 43,155,822  |       |
| Accumulated deficit                                                                                    |    | (43,257,062 | )          |
|                                                                                                   |    | 231,633     |       |
| Treasury stock (4,780 shares), at cost                                                                 |    | (89,032     | )          |
| Total stockholders’ equity                                                                        | 142,601 |        |
|                                                                                                   |    |        |       |
|                                                                                                   |    | $           | 169,793    |   |

 

See accompanying notes

 

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**PURCHASESOFT, INC.**

**STATEMENTOF OPERATIONS**

 
|                              |   | **Three  Months  ended  June 30, 2003** |   | **Six Months  ended  November 30, 2001** |   |
|-----------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|
| Revenue                           |   |                                    |   |                                     |   |
| Products                          |   | $                                       | 1,250  |                                     | $      | — |   |
| Services                          |   | 1,936                                   |   | 199,035                                  |   |
|                              |   | 3,186                                   |   | 199,035                                  |   |
| Costs and expenses                |   |                                    |   |                                     |   |
| Cost of product revenue           |   | —                                  |   | 14,000                                   |   |
| Cost of service revenue           |   | 1,200                                   |   | 465,044                                  |   |
| Sales and marketing               |   | —                                  |   | 2,086,114                                |   |
| General and administrative        |   | 12,972                                  |   | 1,447,184                                |   |
| Research and development          |   | —                                  |   | 2,514,006                                |   |
| Total costs and expenses          |   | 14,172                                  |   | 6,526,348                                |   |
|                              |   |                                    |   |                                     |   |
| **Operating (loss)**              |   | (10,986                                 | )      | (6,327,313                               | )      |
|                              |   |                                    |   |                                     |   |
| Other Income(expense):            |   |                                    |   |                                     |   |
| Interest and other income         |   | 1,753                                   |   | 46,082                                   |   |
| Interest expense                  |   | —                                  |   | (24,381                                  | )      |
|                              |   | 1,753                                   |   | 21,701                                   |   |
|                              |   |                                    |   |                                     |   |
| **Net (loss)**                    |   | $                                       | (9,233 | )                                        | $      | (6,305,612 | ) |
|                              |   |                                    |   |                                     |   |
| Loss per share-basic and diluted  |   | $                                       | (0.00  | )                                        | $      | (0.20 | ) |
|                              |   |                                    |   |                                     |   |
| Weighted average number of shares |   | 33,287,267                              |   | 31,713,927                               |   |

 

See accompanying notes

 

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**PURCHASESOFT, INC.**

**STATEMENTOF CHANGES IN NET LIABILITIES IN LIQUIDATION**

 
|                                                     |   |    |   | **Nine Months  ended  February 28, 2003** |     |     |   | **Six Months  ended  May 31, 2002** |   |
|----------------------------------------------------------|--------|---------|--------|-------------------------------------------|----------|----------|--------|-------------------------------------|--------|
| Net  (liabilities) in liquidation at beginning of period |   |    |   | $                                         | (207,780 | )        |   |                                | $      | (1,716,264 | ) |
|                                                     |   |    |   |                                      |     |     |   |                                |   |
| Sources of  Additional Cash:                             |   |    |   |                                      |     |     |   |                                |   |
| Vendor refund                                            |   | 21,370  |   |                                      |     | —   |   |                                |   |
| Interest income                                          |   | —  |   |                                      |     | 7,614    |   |                                |   |
| Sales of  property and equipment                         |   | —  |   | 21,370                                    |     | 63,123   |   | 70,737                              |   |
|                                                     |   |    |   |                                      |     |     |   |                                |   |
| Additional Use  of Cash:                                 |   |    |   |                                      |     |     |   |                                |   |
| Office costs                                             |   | (8,938  | )      |                                      |     | (156,303 | )      |                                |   |
| Professional  fees                                       |   | (18,370 | )      |                                      |     | (120,047 | )      |                                |   |
| Salaries and  Payroll Taxes                              |   | —  |   |                                      |     | (736,841 | )      |                                |   |
| Telephone and  utilities                                 |   | (469    | )      |                                      |     | (11,289  | )      |                                |   |
| Other                                                    |   | (7,586  | )      | (35,363                                   | )        | (587,360 | )      | (1,611,840                          | )      |
|                                                     |   |    |   |                                      |     |     |   |                                |   |
| Adjustments of  estimated values                         |   |    |   | 157,058                                   |     |     |   | 3,049,587                           |   |
|                                                     |   |    |   |                                      |     |     |   |                                |   |
| **Net  (liabilities) in liquidation at end of period**   |   |    |   | $                                         | (64,715  | )        |   |                                | $      | (207,780 | ) |

 

See accompanying notes

 

22

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**PURCHASESOFT, INC.**

**STATEMENTOF CHANGES IN STOCKHOLDERS’ EQUITY**

 
|                                              |   |       |   | **Additional  Paid-in capital** |    | **Deferred  Stock-based  compensation** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |     | **Total** |   |
|---------------------------------------------------|--------|------------|--------|---------------------------------|---------|-----------------------------------------|--------|--------------------------|--------|---------------------|----------|-----------|--------|
| **Common  Stock**                                 |   |
| **Shares**                                        |   | **Amount** |
| Balance at May 31, 2001                           |   | 26,988,905 |   | $                               | 269,889 |                                    | $      | 39,686,388               |   | $                   | (159,722 | )         | $      | (36,942,217 | ) | $ | (89,032 | ) | $ | 2,765,306 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Shares adjustment                                 |   | (3,789     | )      | (38                             | )       | (1,894                                  | )      | —                   |   | —              |     | —    |   | (1,932 | ) |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Non-statutory stock options issued for services   |   | —     |   | —                          |    | 8,332                                   |   | (8,332                   | )      | —              |     | —    |   | — |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Amortization of deferred compensation             |   | —     |   | —                          |    | —                                  |   | 168,054                  |   | —              |     | —    |   | 168,054 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Common stock issued upon exercise of stock option |   | 5,000      |   | 50                              |    | 4,165                                   |   | —                   |   | —              |     | —    |   | 4,215 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Common stock issued in rights offering            |   | 6,297,151  |   | 62,972                          |    | 5,294,500                               |   | —                   |   | —              |     | —    |   | 5,357,472 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Net (loss) from June 1, 2001 to November 30, 2001 |   | —     |   | —                          |    | —                                  |   | —                   |   | (6,305,612          | )        | —    |   | (6,305,612 | ) |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Balance at November 30, 2001,before liquidation   |   | 33,287,267 |   | 332,873                         |    | 44,991,491                              |   | —                   |   | (43,247,829         | )        | (89,032   | )      | 1,987,503 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Special item - wind down adjustments              |   | —     |   | —                          |    | (2,052,218                              | )      | —                   |   | —              |     | —    |   | (2,052,218 | ) |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Balance at February 28, 2003, after liquidation   |   | 33,287,267 |   | 332,873                         |    | 42,939,273                              |   | —                   |   | (43,247,829         | )        | (89,032   | )      | (64,715 | ) |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Adoption of push-down accounting                  |   | —     |   | —                          |    | 150,803                                 |   | —                   |   | —              |     | —    |   | 150,803 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Special item - wind down adjustments              |   | —     |   | —                          |    | 65,317                                  |   | —                   |   | —              |     | —    |   | 65,317 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Common stock contributed by officers for services |   | —     |   | —                          |    | 429                                     |   | —                   |   | —              |     | —    |   | 429 |   |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Net (loss) from March 1, 2003 to May 31, 2003     |   | —     |   | —                          |    | —                                  |   | —                   |   | (9,233              | )        | —    |   | (9,233 | ) |
|                                              |   |       |   |                            |    |                                    |   |                     |   |                |     |      |   |   |   |
| Balance at May 31, 2003                           |   | 33,287,267 |   | $                               | 332,873 |                                    | $      | 43,155,822               |   | $                   | —   |      | $      | (43,257,062 | ) | $ | (89,032 | ) | $ | 142,601 |   |

 

See accompanying notes

 

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**PURCHASESOFT, INC.**

**STATEMENTOF CASH FLOWS**

 
|                                                                                           |   | **Three  Months  ended  May 31, 2003** |    | **Six Months  ended  November 30, 2001** |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|------------------------------------------|--------|
| Cash Flows from  Operating Activities                                                          |   |                                   |    |                                     |   |
| Net (loss)                                                                                     |   | $                                      | (9,233  | )                                        | $      | (6,305,612 | ) |
| Adjustments to  reconcile net (loss) to net cash provided by   (used in) operating activities: |   |                                   |    |                                     |   |
| Depreciation and  amortization                                                                 |   | 211                                    |    | 137,492                                  |   |
| Loss on disposal  of assets                                                                    |   | —                                 |    | 34,552                                   |   |
| Provision for  bad debt                                                                        |   | —                                 |    | 3,981                                    |   |
| Options granted  for services                                                                  |   | —                                 |    | 168,054                                  |   |
| Stock  contrinuted by officers for services                                                    |   | 429                                    |    | —                                   |   |
| Decrease in:                                                                                   |   |                                   |    |                                     |   |
| Accounts  receivable                                                                           |   | —                                 |    | 100,877                                  |   |
| Prepaid expenses  and other assets                                                             |   | —                                 |    | 94,419                                   |   |
| Increase  (decrease) in:                                                                       |   |                                   |    |                                     |   |
| Accounts payable  and accrued expenses                                                         |   | 3,734                                  |    | (129,180                                 | )      |
| Deferred revenue                                                                               |   | 15,064                                 |    | 39,738                                   |   |
| **Net  cash flow provided by (used in) operating activities**                                  |   | 10,205                                 |    | (5,855,679                               | )      |
|                                                                                           |   |                                   |    |                                     |   |
| Cash Flows from  Investing Activities                                                          |   |                                   |    |                                     |   |
| Purchase of  property and Equipment                                                            |   | (1,263                                 | )       | (202,514                                 | )      |
| Additions to  security deposits                                                                |   | —                                 |    | (268                                     | )      |
| **Net  cash flow (used in) investing activities**                                              |   | (1,263                                 | )       | (202,782                                 | )      |
|                                                                                           |   |                                   |    |                                     |   |
| Cash Flows from  Financing Activities                                                          |   |                                   |    |                                     |   |
| Proceeds from  exercise of options/warrants                                                    |   | —                                 |    | 4,215                                    |   |
| Proceeds from  issuance of common stock in rights offering                                     |   | —                                 |    | 3,357,472                                |   |
| Proceeds from  issuance of notes payable                                                       |   | —                                 |    | 2,000,000                                |   |
| (Payments) of  capital leases                                                                  |   | —                                 |    | (56,839                                  | )      |
| **Net  cash flow provided by financing activities**                                            |   | —                                 |    | 5,304,848                                |   |
|                                                                                           |   |                                   |    |                                     |   |
| **Net  increase (decrease) in cash and cash equivalents**                                      |   | 8,942                                  |    | (753,613                                 | )      |
|                                                                                           |   |                                   |    |                                     |   |
| Cash and cash equivalents  at beginning of period                                              |   | 8,996                                  |    | 2,358,688                                |   |
|                                                                                           |   |                                   |    |                                     |   |
| **Cash  and cash equivalents at end of period**                                                |   | $                                      | 17,938  |                                     | $      | 1,605,075 |   |
|                                                                                           |   |                                   |    |                                     |   |
| Supplemental  disclosure of cash flow information:                                             |   |                                   |    |                                     |   |
| Cash paid for  interest                                                                        |   | $                                      | —  |                                     | $      | 24,381 |   |
| Supplemental schedule  of noncash investing and financing activities:                          |   |                                   |    |                                     |   |
| Goodwill  incurred on the adoption of push-down accounting                                     |   | $                                      | 150,803 |                                     | $      | — |   |

 

24

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#  

**NOTE 1 – NATURE OF OPERATIONS ANDBASIS OF ACCOUNTING**

 

PurchaseSoft, Inc. (the“Company”) is a provider of strategic e-procurement and e-sourcing solutions tosmall, medium and large organizations worldwide. PurchaseSmartTM, the Company’sflagship e-procurement product enables organizations to automate theirprocurement processes thereby reducing costs and improve productivity, whileproviding real-time decision support information to management.

 

On December 21, 2001, theBoard of Directors of the Company approved a plan to wind down the operationsof the Company, which included salvaging the value of its assets during thewind down (the “Plan”). The key objectives of the Plan were (1) to conserve theassets of the Company in order to extend operations pending a sale; (2) tomaximize the value of the Company’s assets in any sale to third party; and (3)to maintain the value in the public shell if possible. As a result of theadoption of the Plan and the imminent nature of the liquidation, the Companyadopted the liquidation basis of accounting effective December 1, 2001. Theliquidation basis of accounting requires the Company to accrue an estimate forall liabilities related to expenses to be incurred during the wind down period.Additionally, assets are stated at their estimated net realizable value andliabilities are stated at their anticipated settlement amounts. The estimatednet realizable value of assets represents management’s best estimated of therecoverable value of the assets, net of selling expenses, and withoutconsideration for the effect that the settlement of any litigation may have onthe value of the assets.

 

On November 8, 2002, theBoard of Directors approved a plan for the restart of service and support toprevious Company’s customers and for the cessation of the wind down ofoperations. Under this plan, the Company will engage certain subcontractors toprovide management, sales and support through commissions and revenue sharingagreements.  With the first new revenuegenerated in the fourth quarter, the Company changed its accounting method fromliquidating basis to going concern basis effective on March 1, 2003.

 

**NOTE 2 –CRITICAL AND OTHER ACCOUNTING POLICIES**

 

Use of EstimatesThe preparation of the accompanying financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make certain estimates and assumptions that directlyaffect the results of reported assets, liabilities, revenue, and expenses.Actual results may differ from these estimates.

 

Revenue RecognitionThe Company recognizes revenue in accordance with the provisions of Statementof Position (SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP98-4 and SOP 98-9. The Company recognizes software license revenue at the pointwhen evidence of an arrangement exists, the software products have beenshipped, there are not uncertainties surrounding product acceptance, the feesare fixed or determinable and collection of the related receivable isconsidered probable. In multiple-element software arrangements that includerights to multiple software products, maintenance or services, the Companyallocates the total arrangement fee using the residual method. Under theresidual method, the fair value of the undelivered maintenance and serviceselements, as determined based on vendor-specific objective evidence, isdeferred and the remaining (residual) arrangement is recognized as software productrevenue. Service revenues are comprised of revenues derived from softwaremaintenance agreements and professional services. Maintenance fees are recordedas deferred revenue and recognized ratable over the maintenance period, whichis usually twelve months. Professional service revenue is recognized as theservices are performed.

 

GoodwillThe Company assesses goodwill for recoverability if the market capitalizationof the Company is less than its net assets. The Company measures declines invalue of goodwill that are other than temporary using the market value method.The Company measures the market value based on the quoted market price of theCompany that is most representative of the fair value of the Company’s commonstock multiplied by the number of common shares outstanding.

 

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Stock-based CompensationThe Company accounted for stock-based compensation arrangements in accordancewith the provisions of Accounting Principles Board Opinion (APO) No. 25,“Accounting for Stock Issued to Employees,” and complied with the disclosureprovisions of Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock-Based Compensation.” The Company accounts for stockissued to non-employees in accordance with the provisions of SFAS No. 123 andthe Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services.” SFAS No. 123 states that equityinstruments that are issued in exchange for the receipt of goods or servicesshould be measured at the fair value of the consideration received or the fairvalue of the equity instruments issued, whichever is more reliably measurable.Under the guidance in Issue 96-18, the measurement date occurs as of theearlier of (a) the date at which a performance commitment is reached or (b)absent a performance commitment, the date at which the performance necessary toearn the equity instruments is complete (that is, the vesting date).

 

Income TaxesIncome tax expense is based on pretax financial accounting income. Deferred taxassets and liabilities are recognized for the expected tax consequences oftemporary differences between the tax bases of assets and liabilities and theirreported amounts.

 

**Other Accounting Policies**

 

Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all highlyliquid debt instruments with an original maturity of three months or less to becash equivalents.

 

Fair Value of FinancialInstruments The carrying amounts of the financialinstruments have been estimated by management to approximate fair value.

 

Property and EquipmentProperty and equipment are valued at cost. Maintenance and repair costs arecharged to expenses as incurred. Depreciation is computed on the straight-linemethod based on the estimated useful lives of 3 to 7 years. Depreciationexpense was $211 for the three months ended May 31, 2003, and was $137,492 forthe six months ended November 31, 2001.

 

Advertising CostsAll advertising costs are expensed as incurred. Advertising expense was $0 forthe period from March 1, 2003 to May 31, 2003, and $111,424 for the period fromJune 1, 2001 to November 30, 2001.

 

Derivatives  In June 1998, the FASB issued SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, as amended bySFAS No. 138, which was issued in June 2000. SFAS No. 133 establishes accounting and reporting standards forderivative instruments. The Company currently does not use derivative financialproducts for hedging or speculative purposes and as a result, does notanticipate any impact on the Company’s financial statements.

 

Loss Per Common ShareThe Company accounts for income (loss) per share in accordance with SFAS No.128, “Earnings Per Share.” SFAS No. 128 requires that presentation of basic anddiluted earnings per share for entities with complex capital structures. Basicearnings per share includes no dilution and is computed by dividing net income(loss) available to common stockholders by the weighted average number ofcommon stock outstanding for the period. Diluted earnings per share reflectsthe potential dilution of securities that could share in the earnings of anentity. Diluted net loss per common share does not differ from basic net lossper common share since potential shares of common stock from the exercise ofstock options and warrants are anti-dilutive for all periods presented. Sharesexcluded from diluted loss per share totaled 25,000 for both reported periods.

 

Recent AccountingPronouncements In November 2002, the EITF finalizedIssue No. 00-21. “Revenue Arrangements with Multiple Deliverables.” EITF 00-21addresses how to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting. EITF 00-21 alsoaddresses how arrangement consideration should be measured and allocated to theseparate units of accounting in the arrangement. However, it does not addresswhen criteria for revenue recognition are met or provide guidance on theappropriate revenue recognition convention for a given unit of accounting.

 

26

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EITF 00-21 is effective for all revenue arrangements entered into infiscal periods beginning after June 15, 2003, and early application ispermitted. Upon adoption, entities may elect to either apply EITF 00-21prospectively or report the change in accounting as a cumulative-effectadjustment. The Company has not yet determined the effect the adoption of EITF00-21 will have on its financial condition or results of operations.

 

In November 2002, theFASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees. Including Indirect Guarantees of Indebtedness of Others.” FIN 45requires that a liability be recorded in the guarantor’s balance sheet uponissuance of a guarantee. In addition, FIN 45 requires disclosures about theguarantees that an entity has issued, including a rollforward of the entity’s productwarranty liabilities. The Company will apply the recognition provisions of FIN45 prospectively to guarantees issued after December 31, 2002. The Company iscurrently in the process of evaluating the potential impact that the adoptionof FIN 45 will have on its consolidated financial statements.

 

On December 31, 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation–Transitionand Disclosure.”  SFAS No. 148 amendsSFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition to SFAS No. 123’s fair value method of accounting forstock-based employee compensation. SFAS No. 148 also amends the disclosureprovisions of SFAS No. 123 and APB Opinion No. 28, “Interim FinancialReporting,” to require disclosure in the summary of significant accountingpolicies of the effects of an entity’s accounting policy with respect tostock-based employee compensation on reported net income and earnings per sharein annual and interim financial statements. While SFAS No. 148 does not amendSFAS No. 123 to require companies to account for employee stock options usingthe fair value method, the disclosure provisions of SFAS No. 148 are applicableto all companies with stock-based employee compensation, regardless of whetherthey account for that compensation using the fair value method of SFAS No. 123or the intrinsic value method of APB Opinion 25.

 

In January 2003, the FASBoard issued Interpretation No. 46, Consolidation of Variable InterestEntities, an interpretation of Accounting Research Bulletin No. 51.Interpretation 46 establishes accounting guidance for consolidation of variableinterest entities that function to support the activities of the primarybeneficiary. Interpretation 46 applies to any business enterprise, both publicand private, that has a controlling interest, contractual relationship or otherbusiness relationship with a variable interest entity. The Company currentlyhas no contractual relationship or other business relationship with a variableinterest entity and therefore the adoption did not have an effect on itsconsolidated financial position or results of operations. However, if theCompany enters into any such arrangement with a variable interest entity in thefuture, its consolidated financial position or results of operations may beadversely impacted.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities,” which is generally effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. SFAS No. 149 clarifies under what circumstances a contract withan initial net investment meets the characteristic of a derivative as discussedin SFAS No. 133, clarifies when a derivative contains a financing component,amends the definition of an “underlying” to conform it to the language used inFASB Interpretation No. 45, “Guarantor Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others” andamends certain other existing pronouncements. The Company does not have anyderivative financial instruments. The Company does not anticipate that theadoption of SFAS No. 149 will have an impact on its consolidated balance sheetsor statements of operations and cash flows.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.” This Statement requires thatcertain instruments that were previously classified as equity on the Company’sstatement of financial position now be classified as liabilities. The Statementis effective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003. 

 

27

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The Company currently has no instruments impacted by the adoption ofthis statement and therefore the adoption did not have an effect on the Company’sconsolidated financial position, results of operations or cash flows.

 

**NOTE 3 –CHANGE IN MAJORITY OWNER**

 

On July 31, 2002, L-RGlobal sold all of its shares in the Company (approximately 82% of the Companyoutstanding shares) to two individuals for $10,000. The selling price was laterreduced down to $3,000. The Company is not aware of the source of thepurchasers’ funds.

 

As a result of thesetransactions, the Company adopted push-down accounting and recognized goodwillof $150,803:

 
| Total purchase  cost                       |   | $        | 3,000   |   |
|--------------------------------------------|--------|----------|---------|--------|
|                                       |   |     |    |
| Net working  deficit acquired              |   | (147,803 | )       |
|                                       |   |     |    |
| Goodwill (excess  of cost over fair value) |   | $        | 150,803 |   |

 

Goodwill, whichrepresents the excess of the purchase price over the fair value of tangible andidentified assets acquired, is not being amortized but will be reviewedannually for impairment or more frequently if impairment indicators arise, inaccordance with SFAS No. 142. Goodwill is expected to be deductible for taxpurposes over 15 years under Internal Revenue Code 197.

 

**NOTE 4 –CESSATION OF BUSINESS AND ADJUSTMENTS OF ESTIMATED VALUES**

 

On December 21, 2001, theCompany announced that it was suspending its operations effectively immediatelyand was commencing an orderly wind down of its operations. All employees wereterminated by April 2002.  Managementbelieved that disposal of the Company’s assets in an orderly wind down takingapproximately six to twelve months would yield enough cash to pay all of thegeneral creditors on a pro rata division of the Company’s available cash.Creditors were offered eleven cents on every dollar of the amount owned.Negotiations with unsecured and secured creditors have been successful andmanagement believes that bankruptcy proceedings have been avoided.

 

Effective with thedecision to liquidate, the carrying amounts of assets and liabilities wereadjusted from their historical bases to the amounts of cash expected from theirrealization and settlement. Because of the expected short liquidation period,the effects of discounting were not significant and have been ignored. Theinitial adjustment increased net liabilities by $3,705,699 from net asset of$1,989,435 to net liabilities of $1,716,264, as follows:

 
|                              |   | **Historical  Basis** |      | **Estimated  Liquidation  Value** |   |
|-----------------------------------|--------|-----------------------|-----------|-----------------------------------|--------|
| Cash                              |   | $                     | 1,605,075 |                              | $      | 1,605,075 |   |
| Customer  accounts                |   | 14,969                |      | —                            |   |
| Prepaid expense  and other assets |   | 397,648               |      | 335,861                           |   |
| Property and  equipment           |   | 1,092,830             |      | 160,000                           |   |
| Unsecured vendor  accounts        |   | (297,424              | )         | (352,616                          | )      |
| Capital lease  obligations        |   | (166,599              | )         | (166,599                          | )      |
| Accrued expenses                  |   | (582,514              | )         | (3,297,985                        | )      |
| Deferred revenue                  |   | (74,550               | )         | —                            |   |
|                              |   |                  |      |                              |   |
|                              |   | $                     | 1,989,435 |                              | $      | (1,716,264 | ) |

 

28

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**NOTE 5 –SPECIAL ITEMS-WIND DOWN ADJUSTMENTS**

 

On November 8, 2002, theBoard of Directors approved a plan for the restart of service and support toprevious Company customers and for the cessation of the wind down ofoperations. Under this plan, the Company will engage certain subcontractors toprovide management, sales and support through commissions and revenue sharingagreements.  With the first new revenuegenerated in the fourth quarter, the Company changed its accounting method fromliquidating basis to going concern basis effective on March 1, 2003. All winddown costs and adjustments incurred in the liquidation period are theneliminated by a transfer from paid-in capital.

 

A summary of the paid-incapital and the effects of the adoption of the going concern basis fromliquidation basis on the paid-in capital follow:

 
| Paid in capital  at November 30, 2001, prior to liquidation   |   | $          | 44,991,491 |   |
|---------------------------------------------------------------|--------|------------|------------|--------|
|                                                          |   |       |       |
| Initial  adjustment to liqudation value at November 30, 2001. |   | (3,705,699 | )          |
|                                                          |   |       |       |
| Wind down costs  and adjustments:                             |   |       |       |
| Wind down costs  incurred                                     |   | (1,553,164 | )          |
| Adjustments of  estimated values                              |   | 3,206,645  |       |
|                                                          |   |       |       |
| Paid in capital  at February 28, 2003,                        |   | 42,939,273 |       |
|                                                          |   |       |       |
| Wind down  adjustments after 2/28/03                          |   | 65,317     |       |
|                                                          |   |       |       |
| Paid-in capital  after liquidation                            |   | $          | 43,004,590 |   |

 

**NOTE 6 –INCOME TAXES**

 

Since gains and lossesfrom liquidating activities are taxable and deductible when they are realized,the tax bases of assets and liabilities differ from their estimated liquidationvalues.  A deferred tax liability isrecognized for the basis difference, and a deferred tax asset is recognized forcarryforwards, as follows:

 
|                              |   | **2003**    |   | **2002**    |   |
|-----------------------------------|--------|-------------|--------|-------------|--------|
| Operating loss  carryforwards     |   | 14,998,208  |   | 14,820,000  |   |
| Amortization of  goodwill         |   | (3,267      | )      | —      |   |
| Other temporary  differences, net |   | 402,572     |   | 450,298     |   |
| Valuation  allowance              |   | (15,397,513 | )      | (15,270,298 | )      |
| Net deferred tax  asset           |   | $           | — |        | $      | — |   |
|                                   |        |             |        |             |        |  |  |

 

At May 31, 2003, netfederal operating losses of approximately $38 million are available for carryforward against future years’ taxable income and expire at various times from2004 through 2023. The Company’s ability to utilize its federal net operatingloss carryforwards is uncertain and thus a valuation reserve has been providedagainst the Company’s net deferred tax assets.

 

29

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**NOTE 7 –STOCKHOLDERS’ EQUITY**

 

During the fiscal yearsended May 31, 2003 and 2002, the following equity placements occurred:

 

Fiscal year endedMay 31, 2003

 

As part of the effort toattract and compensate individuals to assist in the restart of the Company andconserve cash, the Company made certain verbal and written commitments to issue4,289,500 shares of common stock. These shares were to be granted ascompensation for advisory, M&A, legal, ISP and website hosting, support andsales services.  To minimize anydilution to the public shareholders during the restart period, the Company’sofficers have agreed to offer their personal shares in satisfaction of theCompany’s obligation to be sold in private transactions to these individuals inthe amount indicated at a price of $0.0001 per share.  Accordingly, the total cost of $429 was charged to operations.

 

Fiscal year endedMay 31, 2002

 

In June 2001, the Companyissued 5,000 shares of the Company’s common stock upon the exercise of employeestock options at $0.84 per share..

 

On July 31 2001, theCompany granted non-transferable rights to its stockholders of record on therecord date established in connection with the rights offering to purchase upto an aggregate of 12,000,000 shares non-transferable rights to purchase of theCompany’s common stock at $0.88 per share. Each stockholder received 0.41 rights or such other number as thePresident of the Company may determine such that the aggregate proceeds fromthe offering will be not more than $10,000,000 for each share of common stockheld on the record date. Upon the closing of rights offering on September 7,2001, the Company had issued 6,297,151 shares of its common stock and raised$3.3 million, net of offering expense of $200,000.

 

On May 31, 2001, theCompany converted the L-R Global Partners, L.P. (“L-R Global”), a majorityshareholder, demand promissory notes and accrued interest, totaling $10,457,808into 11,883,873 shares of the Company’s common stock with a par value of $0.01.This conversion was done pursuant to the conversion agreement the Companyentered into with L-R Global on April 12, 2001. The Company agreed to convertthis debt and accrued interest into common shares using the last reported saleprice of the Company’s common stock on April 12, 2001, which was $0.88 pershare.

 

**NOTE 8 –STOCKS OPTIONS AND WARRANTS**

 

Stock Options

 

The Company maintains twoStock Option Plans, the 1997 Stock Option Plan and the 1994 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 aperiod of between two to three years and expire five to ten years from the dateof grant and are issued with an exercise price equal to the market value of theCompany’s common stock on the date of grant. As of May 31, 2003 and 2002, therewere no option shares outstanding under the Plans since all employees wereterminated.

 

The summary ofoutstanding options under the plan is as follows:

 
|                         |   | **1994 Plan** |   | **1997 Plan** |   | **Total**  |   | **Weighted  Average  Exercise  Price** |   |
|------------------------------|--------|---------------|--------|---------------|--------|------------|--------|----------------------------------------|--------|
| Outstanding at  May 31, 2001 |   | 33,333        |   | 3,507,332     |   | 3,540,665  |   | $                                      | 1.62   |   |
| Granted                      |   | —        |   | 427,500       |   | 427,500    |   | 0.82                                   |   |
| Exercised                    |   | —        |   | (5,000        | )      | (5,000     | )      | (0.84                                  | )      |
| Expired and  Cancelled       |   | (33,333       | )      | (3,929,832    | )      | (3,963,165 | )      | (1.54                                  | )      |
|                         |   |          |   |          |   |       |   |                                   |   |
| Outstanding at  May 31, 2002 |   | —        |   | —        |   | —     |   | —                                 |   |
| Granted/Exercised/Expired    |   | —        |   | —        |   | —     |   | —                                 |   |
|                         |   |          |   |          |   |       |   |                                   |   |
| Outstanding at  May 31, 2003 |   | —        |   | —        |   | —     |   | $                                      | — |   |

 

30

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Stock Warrants

 

As of May 31, 2003 and2002, the Company had warrants to purchase up to 25,000 shares of the Company’scommon stock at an exercise price of $3.47 per share.   The warrants expire on February 10, 2005.  At May 31, 2003, all warrants are “out ofthe money”.

 

A summary of the statusof the Company’s warrants as of May 31, 2003 and 2002, and changes during theyear then ended is presented below:

 

|                              |   | **2003**                |   | **2002**                                          |   |
|-----------------------------------|--------|-------------------------|--------|---------------------------------------------------|--------|
|                              |   | **Number of  Warrants** |   | **Weighted  Average  Exercise  Price  Per Share** |   | **Number of  Warrants** |   | **Weighted  Average  Exercise  Price  Per Share** |   |
| Outstanding at  beginning of year |   | 25,000                  |   | $                                                 | 3.47   |   | 374,800 |   | $ | 1.18 |   |
| Expired                           |   | —                  |   | —                                            |   | (349,800 | ) | (1.02 | ) |
| Outstanding at  end of year       |   | 25,000                  |   | $                                                 | 3.47   |   | 25,000 |   | $ | 3.47 |   |
|                              |   |                    |   |                                              |   |   |   |   |   |
| Exercisable at  end of year       |   | 25,000                  |   | $                                                 | 3.47   |   | 25,000 |   | $ | 3.47 |   |

 

**NOTE 9 –NET LOSS PER SHARE**

 

The following table setsforth the computation of basic and diluted net loss per share:

 

|                                  |   | **Three  Months  ended  May 31, 2003** |   | **Six Months  ended  November 30, 2001** |   |
|---------------------------------------|--------|----------------------------------------|--------|------------------------------------------|--------|
| Numerator:                            |   |                                   |   |                                     |   |
| Net (Loss)                            |   | $                                      | (9,233 | )                                        | $      | (6,305,612 | ) |
|                                  |   |                                   |   |                                     |   |
| Denominator:                          |   |                                   |   |                                     |   |
| Weighted Average  of Common Shares    |   | 33,287,267                             |   | 31,713,927                               |   |
|                                  |   |                                   |   |                                     |   |
| Net Loss per  Share-basic and diluted |   | $                                      | (0.00  | )                                        | $      | (0.20 | ) |

 

**NOTE 10– RELATED PARTY TRANSACTION**

 

On July 18, 2001, theCompany borrowed $2 million from L-R Global and signed a demand promissory notein return. On August 28, 2001, L-R Global cancelled the note as partial paymenttowards its irrevocable subscriptions of its rights in the rights offeringdisclosed in Note 7.

 

**NOTE 11– COMMITMENT AND CONTINGENCIES**

 

ManagementConsulting Agreements

 

On May 30, 2003, theCompany entered into management consulting agreements with the Company’sPresident and the Company’s Secretary and Treasurer. The agreements providedthat both officers are entitled to receive compensation for their servicesrendered, as follows:

 

1.               TheCompany will pay a commission of 10% of revenue per month from softwarelicenses, upgrade, maintenance, hosting and professional services up to amaximum of $10,000 per month.

 

2.               TheCompany will pay a management fee of $10,000 at closing and $3,000 per monthfor each acquisition completed by the Company provided the aggregate value ofthe acquisition at closing is over $500,000. The total commission andmanagement fees to be paid shall be limited to

 

31

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$15,000 per month.

 

3.               TheCompany will pay a commission of 2% on the net proceeds received by the Companyfrom any debt or equity financing whose aggregate value exceeds $100,000. Themaximum paid will be up to $50,000 per transaction.

 

The agreements areautomatically renewable for successive one year at the same terms.

 

ConsultingAgreement

 

The Company also executeda Consulting Agreement with a former employee who agrees to serve as theCompany’s Vice President of Support for a monthly retainer fee of $1,200 commencingMay 2003.

 

Pending Litigation

 

On April 12, 2002, aformer employee of the Company filed suit against the Company and certainCompany employees alleging fraudulent misrepresentation, negligentmisrepresentation, breach of employment contract and breach of covenants ofgood faith and fair dealing. This former employee sought damages for threeyears of lost compensation pursuant to an employment contract allegedly arisingfrom the vesting schedule of the employee’s stock option plan. Since theemployee failed to serve the defendants as required by the Massachusetts Rulesof Civil Procedures and the complaint was dismissed without prejudice on July22, 2002. While the applicable stature of limitations has not expired for thesealleged claims, the likely outcome of this lawsuit cannot be assessed.

 

**NOTE 12– SUBSEQUENT EVENTS**

 

Note payable withdetachable warrants

 

On July 14, 2003, theCompany issued a note payable of $60,000 to raise operating capital.  The note carries interest at 6% per annumand is due and payable within 150 days. In addition, the Company granted thecreditor stock warrants to purchase up to 175,000 shares at an exercise priceof $0.01 per share commencing August 1, 2003. The warrants expire on December31, 2003.

 

BusinessAcquisition and Private Placement Offering

 

On May 30, 2003,the Board of Directors approved a plan to acquire a company out of bankruptcyproceedings in Germany for $600,000. The Company’s bid for this company was not accepted and the Company ispursuing other acquisition prospects. The Company plans a private placement offering of the Company’s commonstock to raise $1,020,000 for 8,500,000 shares at $0.12 per share. The offeringis contingent on the completion of an acquisition.

 

32

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**ITEM 8:****  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 8A****: CONTROLS AND PROCEDURES**

 

Within the 90 days prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of our President and Secretary/Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our President and Secretary/Treasurer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports.

 

There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date of our most recent evaluation.

 

**PART III****:**

 

**ITEM 9****:   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**

 

**ExecutiveOfficers and Directors**

 

Thefollowing table sets forth our directors and executive officers as of August10, 2003, their ages and the positions held by them:

 
| **Name**                 |   | **Age** |       | **Position with Company**            |       | **Year Became  Officer or Director** |       |
|--------------------------|--------|---------|------------|--------------------------------------|------------|--------------------------------------|------------|
| **Steven  A. Flagg**     |   | **44**  | ** ** | **President and Director**           | ** ** | **2002**                             | ** ** |
| **Thomas  B. Marsh**     |   | **49**  | ** ** | **Treasurer/Secretary and Director** | ** ** | **2002**                             | ** ** |
| **Werner  Kuno Loechle** |   | **52**  | ** ** | **Vice President International**     | ** ** | **2003**                             | ** ** |
| **Stuart  Williamson**   |   | **57**  | ** ** | **Vice President Support**           | ** ** | **2003**                             | ** ** |
| **Lou  De Rose**         |   | **65**  | ** ** | **Director of Strategic Services**   | ** ** | **2003**                             | ** ** |

# ** **

StevenA. Flagg (44) President and Chairman.  Mr. Flagg has served as thePresident, Chairman and as a Director since August 5th, 2002. Mr. Flagg isManaging Partner and co-founder of Marsh+Flagg, a merger and acquisition advisoryfirm in La Jolla, California.  Prior toMarsh+Flagg, Flagg was an active individual investor and turnaround consultantto early stage technology companies, including Findcom, PurchaseSoft, andPointPoint.Com.  Flagg moved to La Jollafrom Paris after several successful management assignments buildinginternational sales and consulting operations for companies such asKnowledgeWare and Sterling Software.  AtSterling, Flagg served as VP of Business Development for International where heled European M&A activity.  Flaggbuilt the international business of financial software provider SS&C.   SS&C completed a $50 million IPO led byHambrecht and Quist and Alex Brown. Prior to Paris, Flagg was a successful software sales executive in NYCworking for University Computing Company (acquired by CA), Oracle andKnowledgeWare.  Flagg graduated fromSUNY Brockport NY with a major in business and sociology.

 

ThomasB. Marsh (49) Secretary/Treasurer.  Mr. Marsh has served asSecretary and Treasurer 

 

33

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and as a Director since August 5th, 2002.  Mr. Marsh is a Partner and co-founder of Marsh+Flagg.  Marsh+Flagg is a merger and acquisitionadvisory firm with offices in La Jolla & Newport Beach, California andStuttgart Germany. Marsh is responsible for accounting, finance, SEC complianceand business development for the Company. Marsh brings strong SME, startup, turnaround, operations, acquisitionand consulting skills to the firm from a number of industries, including electronics,petroleum, software and contract manufacturing.  Prior to PurchaseSoft and Marsh+Flagg, Marsh was COO at Co-MackTechnology, CEO of Emark Corporation and President of Spectrum CompaniesInternational.  Marsh attended WilliamsCollege with a major in economics.

 

WernerKuno Loechle (52) Vice President International. Mr. Loechle has been part of the businessdevelopment team at the Company since August 2002 with the responsibility foracquisitions and partner development in Europe.  Loechle is founder and CEO of Profund Management Consulting GmbHand a Partner in Marsh+Flagg, La Jolla, CA. He is a former Ernst & Young Partner and Geschaeftsfuehrer(Stuttgart, then Paris), and served as Senior Vice President WorldwideKnowledgeWare, Paris. He was CIO in Pharmacia for five years implementing ERPin European operations. He was also on the Board of a Bombay based softwarecompany when they executed their IPO. He negotiated for E&Y aninternational partnership with SAP and served as CEO in two Internet andsoftware companies.  His focus is onfunding, M&A, turnaround, and interim management in the InformationTechnology industry.

 

StuartWilliamson (57) Vice President Support. Mr. Williamson has been a part of thePurchaseSoft restart team since January 2003 and is responsible for sales andcustomer support.  With a strongbackground in software and hardware support, and detailed knowledge ofPurchaseSoft’s products, he has been instrumental in establishing a supportinfrastructure and the re-signing of maintenance agreements with PurchaseSoftcustomers.  Williamson rejoined theCompany after serving as Sr. Quality Engineer from 1998 to 2001.  Prior to PurchaseSoft, Williamson worked forMicrosystems Software, Datawatch, Merisel and others as director of technicalsupport services.  He is a MicrosoftCertified Professional and has good working knowledge of Microsoft SQL, Oracle8i, Sybase, Rational, ClearQuest, SQA, WebLoad, PowerBuilder and Silverstream.  He graduated Cum Laude from Central NewEngland College and received his MBA from Nichols College.

 

LouDe Rose (65) Director of Strategic Services.  Mr. DeRose has been a part of the PurchaseSoft restart team since August 2002 and isresponsible for developing procurement consulting services and procurementtraining.  De Rose is a pioneer in thedevelopment of Supply Chain Management. His years of consulting and training for telecommunications, computer,and electronics-related companies on procurement, logistics, and outsourcinguniquely prepares him to apply that experience to a variety of industries.  He writes extensively for the businesspress, and is an accomplished public speaker. He is the author of the books “How to Negotiate Purchase Prices”, “ValueBuying”, and more recently, “The Value Network”.  Mr. De Rose has trained thousands of executives, managers,engineers, and other professionals on how to implement world-class procurementand logistics practices.  He is a formerProfessor and Chairman of the Business Management Department at Fordham University,and taught at Cornell and Manhattan College. De Rose is an Arbitrator on contract and trade disputes with theAmerican Arbitration Association; is a Certified Consultant with the Instituteof Management Consultants; and has served on the Procurement Advisory Committeeof the United States Senate.

 

Boardof Directors.  The Board is currently made up of SteveFlagg and Tom Marsh.  Once the Companyresumes full operations, either through an acquisition or organic growth, aBoard of at least five directors will be elected.  The other directors will include two outside directors that willbe selected on the basis of qualifications to head the audit and compensationcommittees.

 

### **FamilyRelationships**

 

There are nofamily relationships among any of the directors or executive officers.

 

34

----

 

### **Section 16(A) BeneficialOwnership Reporting Compliance**

 

Under Section16(a) of the Securities Exchange Act of 1934, as amended, our directors andcertain of our officers and persons holding more than ten percent of our commonstock are required to report their ownership of our common stock and anychanges in ownership to the Securities and Exchange Commission and to us.  Specific due dates have been established andwe are required to report in this Annual Report on Form 10-KSB any failure tofile by these dates during the fiscal year ended May 31, 2002.  Based on our review of copies of thesereports and the forms available to us by the previous management, all formswere filed in a timely manner.

### ** **

### **ITEM10**:   EXECUTIVE COMPENSATION

##### * *

**Summary Compensation Table**

 

The table belowsets forth information regarding executive compensation for the fiscal yearsended May 31, 2003, 2002, and 2001 of our Chief Executive Officers and ourother most highly compensated executive officers whose compensation for fiscal2003 exceeded $100,000.

 
|                            |   |     |   | **Annual  Compensation** |   | **Long Term  Compensation** |   |                    |   |
|---------------------------------|--------|----------|--------|--------------------------|--------|-----------------------------|--------|-------------------------|--------|
| **Name and Principal Position** |   | **Year** |   | **Salary ($)**           |   | **Bonus ($)**               |   | **Awards  Options (#)** |   | **All Other  Compensation ($)** |   |
|                            |   |     |   |                     |   |                        |   |                    |   |   |   |
| Steven A. Flagg                 |   | 2003     | (4)    | —                   |   | —                      |   | —                  |   | — |   |
| President                       |   |     |   |                     |   |                        |   |                    |   |   |   |
|                            |   |     |   |                     |   |                        |   |                    |   |   |   |
| Thomas B. Marsh                 |   | 2003     | (5)    | —                   |   | —                      |   | —                  |   | — |   |
| Secretary and  Treasurer        |   |     |   |                     |   |                        |   |                    |   |   |   |
|                            |   |     |   |                     |   |                        |   |                    |   |   |   |
| Donald L.  LaGuardia            |   | 2003     | (1)    | —                   |   | —                      |   | —                  |   | — |   |
| President and  Chief            |   | 2002     |   | —                   |   | —                      |   | —                  |   | $ | 102,083 | (2) |
| Executive  Officer              |   | 2001     |   | —                   |   | —                      |   | 400,000                 |   | $ | 341,048 | (3) |

 

----

1.               Mr. LaGuardia was appointedChief Executive Officer by the Board of Directors on August 14, 2000 andresigned effective August 5th, 2002

 

2.               Represents $102,083 in cashcompensation paid to L-R Global Managers for the services of Mr. LaGuardia.

 

3.               Represents $51,042 in cashcompensation paid to L-R Global Managers for the services of Mr.LaGuardia.  Also includes $290,006 in non-cashcompensation charges associated with two non-statutory stock option grantsissued to Mr. LaGuardia.

 

4.               Steven Flagg succeeded Mr.LaGuardia on August 5th 2002 and received no compensation duringfiscal year 2003.

 

5.               Thomas Marsh succeeded TerryBartz as Secretary and Treasurer on August 5th, 2002 and received nocompensation during fiscal year 2003.

 

**Option/SAR Grants in Last Fiscal Year**

 

No option was granted to the officers during thefiscal year ended May 31, 2003.

 

**Aggregated Option Exercises in LastFiscal Year and Fiscal Year End Option Values**

 

Officers did not hold any options during the fiscalyear ended May 31, 2003, and there were no unexercised options held at the endof such fiscal year by the officers.

 

35

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**Executive Employment Agreements**

 

ManagementConsulting Agreements

 

On May 30, 2003, theCompany entered into management consulting agreements with the Company’sPresident and the Company’s Secretary and Treasurer. The agreements providedthat both officers are entitled to receive compensation for their servicesrendered, as follows:

 

1.               TheCompany will pay a commission of 10% of revenue per month from softwarelicenses, upgrade, maintenance, hosting and professional services up to a maximumof $10,000 per month.

 

2.               TheCompany will pay a management fee of $10,000 at closing and $3,000 per monthfor each acquisition completed by the Company provided the aggregate value ofthe acquisition at closing is over $500,000. The total commission andmanagement fees to be paid shall be limited to $15,000 per month.

 

3.               TheCompany will pay a commission of 2% on the net proceeds received by the Companyfrom any debt or equity financing whose aggregate value exceeds $100,000. Themaximum paid will be up to $50,000 per transaction.

 

The agreements are automatically renewable forsuccessive one year at the same terms.

 

Consulting Agreement

 

The Company alsoexecuted a Consulting Agreement with a former employee who agrees to serve asthe Company’s Vice President of Support for a monthly retainer fee of $1,200commencing May 2003.

 

**Director Compensation**

 

At the currenttime, our directors receive no compensation for their service as directors.

 

**ITEM 11****:   SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The followingtable sets forth information as of August 10, 2003, as reported to us, as tothe beneficial ownership of our common stock by each director, each namedofficer, by all directors and executive officers as a group and each person knownto us to be the beneficial owner of more than 5% of our issued and outstandingcommon stock as of August 10, 2003 or other date noted below.  Unless otherwise specified, the address ofeach beneficial owner is c/o PurchaseSoft, Inc., 7514 Girard Ave Ste 1440, LaJolla California 92037.  As of August10, 2003, 33,287,267 shares of common stock were outstanding.

 

| **Name and Address**

**of Beneficial Owner**                        |   | **Amount and  Nature of  Beneficial Ownership of  Common Stock (1)** |   | **Percentage  of   Outstanding Shares of  Common Stock Owned (2)** |   |
|----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
| Steven A. Flagg (3)                                                  |   | 11,917,647                                                           |   | 35.80                                                              |   |
|                                                                 |   |                                                                 |   |                                                               |   |
| Thomas B. Marsh  (4)                                                 |   | 11,119,420                                                           |   | 33.40                                                              |   |
|                                                                 |   |                                                                 |   |                                                               |   |
| Werner Loechle                                                       |   | 1,000,000                                                            |   | 3.00                                                               |   |
|                                                                 |   |                                                                 |   |                                                               |   |
| Stuart  Williamson                                                   |   | 240,000                                                              |   | .72                                                                |   |
|                                                                 |   |                                                                 |   |                                                               |   |
| All current  directors and executive officers as a group (4 persons) |   | 24,277,067                                                           |   | 72.92                                                              | %      |

 

36

----

 

----

 

(1)                                  Theshares owned, and the shares included in the total number of sharesoutstanding, have been adjusted, and the percentage owned has been computed, inaccordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, asamended, and includes, options and warrants to the extent called for by suchrule, with respect to shares of common stock, that can be exercised within 60days.  Except as set forth in thefootnotes below, such shares are beneficially owned with sole investment andsole voting power.

 

(2)                                  Thepercent of class calculation is based on 33,287,267 shares of PurchaseSoft’scommon stock being issued and outstanding asof June 18, 2003 and effect being given, where appropriate, pursuant toRule 13d-3(d)(1)(i) under the Exchange Act, to any option or warrant thenexercisable or exercisable within 60 days thereafter.

 

(3)                                  Includes300,000 shares held by his children

 

(4)                                  Includes700,000 shares held by his children

 

**ITEM 12****: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

As disclosed in theCompany’s 8-K filing on August 5, 2002, Don LaGuardia and L-R Global haveresigned their positions with the Company and L-R Global sold its stock in PurchaseSoftto Steven A. Flagg and Thomas B. Marsh.

 

**ITEM 13****:  EXHIBITS AND REPORTS ON FORM 8-K**

 

**Exhibits**

 

The followingexhibits, which are designated with a footnote reference, are incorporated byreference to a prior registration statement declared effective under theSecurities Act or a periodic report file pursuant to Section 13 of the ExchangeAct.  Exhibits designated with anasterisk are filed with this report.

 
| **Number** |   | **Exhibit**                                                                                                                                                                         |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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        |   | Amendment  to Certificate of Incorporation of the Company.  (10)                                                                                                               |
|       |   |                                                                                                                                                                                |
| 3.3        |   | By-laws  of the Company.  (1)                                                                                                                                                  |
|       |   |                                                                                                                                                                                |
| 4.1        |   | Specimen  Certificate for Shares of Common Stock.   (6)                                                                                                                        |
|       |   |                                                                                                                                                                                |
| 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       |   | Registration  Rights Agreement dated as of December 25, 1995 among the Company and certain  of                                                                                      |

 

37

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|   |   | its  Shareholders. (5)                                                                                                                                                                                                                                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.5   |   | Registration  Rights Agreement dated as of April 23, 199  among the Company and  certain of its Shareholders.  (5)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.6   |   | Registration  Rights Agreement dated October 25, 1996 between the Company and certain of  its Shareholders.  (4)                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.7   |   | 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.)  (5)                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.8   |   | Form of Warrant issued to TIS Acquisitions and  Management Group, Inc., The Travelers Indemnity Company, and Mark Cahill,  dated October 25, 1996.  (4)                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.9   |   | 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)                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.10  |   | 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)                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.11  |   | Promissory  note dated March 23, 2000, of PurchaseSoft, Inc. to L-R Global Partners, L.P.  (This note is no longer outstanding.   It was converted into common stock at May 31, 2001 under a conversion  agreement dated April 12, 2001 between the Company and L-R Global.)  (7)                             |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.12  |   | Lease  agreement between the Company and Flanders Westborough Delaware, Inc.  (8)                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.13  |   | Lease  agreement between the Company and Office Associates L.L.C.  (8)                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.14  |   | Management  consulting agreement dated as of August 15, 2000 by and between the Company  and Donald S. LaGuardia.  (9)                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.15  |   | Demand  promissory note dated January 30, 2001, of PurchaseSoft, Inc. to L-R Global  Partners, L.P.  (This note is no  longer outstanding.  It was converted  into common stock at May 31, 2001 under a conversion agreement dated April  12, 2001 between the Company and L-R Global.)  (9)             |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.16  |   | Employment  agreement dated January 25, 2001 between the Company and Jeffrey  Pinkerton.  (11)                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.17  |   | Agreement  dated February 21, 2001 between the Company and VIA Marketing and Design,  Inc.  (11)                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.18  |   | Agreement  dated March 15, 2001 between the Company and Tata Infotech Limited.  (11)                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.19  |   | Conversion  Agreement dated April 12, 2001 between the Company and L-R Global Partners,  L.P.  (12)                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.20  |   | Demand  promissory note dated July 18, 2001, of PurchaseSoft, Inc. to L-R Global  Partners, L.P.  (This note is  no longer outstanding.  It was  cancelled on August 28, 2001as partial payment towards L-R Global’s  irrevocable exercise of its subscription rights in the rights offering.  (13) |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.21  |   | Stock  Purchase Agreement Dated July 31, 2002 by and between L-R Global Partners, L.P.  and Steven A Flagg and Thomas B. Marsh concerning the sale of all of L-R  Global’s stock in PurchaseSoft to Flagg and Marsh.  (14)                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.22  |   | Management  consulting agreement dated May 30, 2003 by and between Company and Steven A.  Flagg. (15)                                                                                                                                                                                                                   |

 

38

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| 10.23  |   | Management  consulting agreement dated May 30, 2003 by and between Company and Thomas B.  Marsh. (15) |
|--------|--------|-------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                  |
| 10.24  |   | Management  consulting agreement dated May 2003 by and between Company and Stuart  Williamson. (15)   |
|   |   |                                                                                                  |
| 23.1   |   | Consent  of Spector & Wong LLP  *                                                            |
|   |   |                                                                                                  |
| 31.1   |   | Certifications  of the President & CEO                                                            |
|   |   |                                                                                                  |
| 31.2   |   | Certifications  of the Secretary/Treasurer & CFO                                                  |
|   |   |                                                                                                  |
| 32.1   |   | Written  statement of the CEO pursuant to 18 SSC Section 1350                                         |
|   |   |                                                                                                  |
| 32.2   |   | Written  statement of the CFO pursuant to 18 SSC Section 1350                                         |

 

**Footnotes:**

 

(1)           Incorporatedherein by reference to the Company’s Report on Form 8-K, filed on November 25,1998.

 

(2)                                  Incorporated herein by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended May 31, 1991.

 

(3)                                  Incorporated herein by reference to the Company’sAnnual Report on Form 10-KSB for the fiscal year ended May 31, 1994.

 

(4)                                  Incorporated herein by reference to the Company’sAnnual Report on Form 10-KSB for the fiscal year ended May 31, 1997.

 

(5)                                  Incorporatedherein by reference to the Company’s Registration Statement on Form S-1, FileNo. 333-45475.

 

(6)                                  Incorporated hereinby reference from the Company’s Annual Report on Form 10-KSB for the fiscalyear ended May 31, 1999.

 

(7)                                  Incorporated herein by reference from theCompany’s Quarterly Report on Form 10-QSB for the quarter ended February 29,2000.

 

(8)                                  Incorporatedherein by reference from the Company’s Annual Report on Form 10-KSB/A for thefiscal year ended May 31, 2000.

 

(9)                                  Incorporatedherein by reference from the Company’s Quarterly Report on Form 10-QSB/A forthe quarter ended August 31, 2000.

 

(10)                            Incorporatedherein by reference from the Company’s Quarterly Report on Form 10-QSB for thequarter ended November 30, 2000.

 

(11)                            Incorporatedherein by reference from the Company’s Quarterly Report on Form 10-QSB for thequarter ended February 28, 2001.

 

(12)                            Incorporatedherein by reference from the Company’s Form S-3 Registration Statement, FileNo.333-60890 filed on May 14, 2001.

 

(13)                            Incorporatedherein by reference to the Company’s Report on Form 8-K, filed on July 25,2001.

 

(14)                            Incorporatedherein by reference to the Company’s Report on Form 8-K, filed on August 5,2002.

 

(15)                            Incorporatedherein by reference to the Company’s Report on Form 8-K, filed on June 11,2003.

 

### **REPORTS ON FORM8-K**

 

1.                                       None

 

39

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**ITEM14****:  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Audit Fees**

 

The fees paid tothe Company’s principal accountant, Spector & Wong for professionalservices rendered for the annual audit and quarterly review of the Company’sfinancial statements were $7,500 for the year ending May 31, 2002 and $12,000for the year ending May 31, 2003.

 

**Audit Related Fees**

 

There were no fees paid to the Company’s principalaccountant, Spector & Wong pursuant to Item 9(e)(1) ofSchedule 14A other than those fees reported under Audit Fees above.

 

**Tax Fees**

 

The fees paid tothe Company’s principal accountant, Spector & Wong for professionalservices rendered for the filing of state, local and federal tax returns were$2,100 for the year ending May 31, 2002 and $1,700 for the year ending May 31,2003.

 

**All Other Fees**

 

There were noother fees paid to the Company’s principal accountant, Spector & Wong forprofessional services for or during the years ending May 31, 2002 and May 31,2003.

 

**Other**

All fees paid wereapproved by the Company’s Board of Directors and none of the hours expended onthe Company’s audit and tax requirements were performed by persons other thanthose employed full-time by Spector & Wong.

 

40

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act, theIssuer caused this report to be signed on its behalf by the undersigned,thereunto to be duly authorized.

 
|                  | PurchaseSoft, Inc.                   |
|-----------------------|--------------------------------------|
|                  | (Issuer)                             |
|                  |                                 |
| Date: August 20, 2003 | /s/ Steven A. Flagg             |   |
|                  |                                 |
|                  | Steven A. Flagg                      |
|                  | President and Acting CEO             |
|                  |                                 |
| Date: August 20, 2003 | /s/ Thomas B. Marsh             |   |
|                  |                                 |
|                  | Thomas B. Marsh                      |
|                  | Secretary, Treasurer and  Acting CFO |
|                       |                                      |  |  |

 

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and onAugust 20, 2003.

 
| **Signature**        |   | **Title** |
|----------------------|--------|-----------|
|                 |   |      |
| /s/  Steven A. Flagg |   |      | Director |
| Steven  A. Flagg     |   |      |
|                 |   |      |
| /s/ Thomas B. Marsh  |   |      | Director |
| Thomas B. Marsh      |   |      |

 

41

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