CAM Commerce Solutions, Inc.

17075 Newhope Street
Fountain Valley, CA 92708

June 6, 2002

Dear Stakeholder,

I thought it was an appropriate time to update you on the progress of the company and the impact of market conditions on our expectations for the short-term and long-term results of the company. This letter may be seen as lengthy, but when in doubt about what to include I thought you would prefer too much information rather than too little.

There are so many things going right at CAM Commerce Solutions, that it is hard to accept that the top and bottom line results we are delivering have not demonstrated more improvement. Currently, in order to earn a profit we must sell a certain amount of new systems and system upgrades and add-ons to existing customers. We know that we are going to receive a certain minimum level of “add-on” business. When we add this to our service revenues, consulting and credit card business this represents close to 50% of our revenues . This is the predictable part of our business. The remaining 50% plus of our revenues are hard to predict because they involve new system sales and major customer upgrades. We try not to carry a backlog of more than 4 weeks due to our customers delivery requirements, so we have little visibility when it comes to predicting new system “shipments” beyond 4 weeks. The percentage of customers who prefer to have their orders delivered further out than 4 weeks from the time of order is not meaningful enough to use for planning purposes.

Thus, when we look forward and try and predict our sales and related profits we have to use “leading indicators”. The most important leading indicators we use are “qualified” sales lead flow, sales proposals outstanding, and sales “projections” from our sales force. All of these leading indicators have been on the positive side for the past few quarters leading us to believe that we would see a meaningful improvement in our new system sales. We have not. In examining the reasons for this we considered all possible factors. We determined that we were performing better than ever against the competition and that our product and service offerings provided us the greatest advantage we have ever had over the competition. In short, we found we were generally seeing new sale opportunities not materialize due to “no decision made” and not due to increased or more effective competition. We determined that while there is always room for improvement, our sales force as a whole was very capable and following up on sales opportunities properly.

Our inside sales force, that is now a year old has helped tremendously in handling leads and bringing in new opportunities. So this past year we have followed up with new sales leads better than ever before. We also determined that the feature set offered by our products met the needs of the vast majority of our target market and that we were not losing a significant number of deals due to the need for new features within our software. In fact, we are in an enviable position in the market with our products. Finally, a very recent quality survey of our Retail STAR customer base produced the highest scores ever for that product line with 90% of all customers responding saying they would buy again and recommend us to a friend. These are very strong results in our industry and point to yet another important area of the business that has shown significant improvement.

Our conclusion was and is that we are dealing with difficult market conditions that have significantly reduced the number of actual purchase decisions being made and we have also seen a meaningful decline in the average dollar transaction size. Some of this is due to less hardware sales, but overall there have been fewer larger sales opportunities. We have spoken with competitors who have been experiencing the same thing and if there is a competitor of any size that is seeing robust market conditions and results I am certainly not aware of it.

Poor market conditions are not an acceptable excuse for not making money and not delivering positive results and we have been slowly, but surely executing on our stated plans that should allow us in the future to be profitable even in poor market conditions like those we have been experiencing. It isn’t easy and it isn’t going as fast as we wanted, but we are definitely making progress. Allow me to explain:

Our Strategic Plan

First, the simple restatement of our strategic vision is that we have worked to be a “total infrastructure” provider for the automation needs of the small to medium-size brick and mortar and Web retailer, as well as related types of businesses. We have a large customer base. We have identified products and services our customers need that will generate recurring revenue streams for the company that will help us meet our second objective of “monetizing” our customer base. With those initiatives in place and beginning to pay off, it is our third objective to “rapidly expand” the size of our customer base. The net result of all of this is to meet our number one goal of enhancing stakeholder value.

In our effort to be a total infrastructure provider, it has taken us over 3 years but we have succeeded and we can without question boast the most complete line of products and services for our target market. We not only offer the most complete and state of the art, traditional point of sale, inventory management and retail management software, hardware, installation and training, but we have recently added fantastic new integrated accounting beyond what any of our competition comes close to offering. Add to that our own credit card processing software and service (X-Charge), fully integrated Web store (far more seamless than our competition), and a seamless interface to the world’s most successful on-line trading community (eBay), and you have a powerful set of solutions.

We are currently the ONLY eBay authorized developer addressing our target market. Our new total auction management / business management solution is totally unique. There is no other company that does this all in one system and all with one company. Everybody else has “links”, “interfaces” and “integration” to 3rd party products or services (if they have them at all), which nearly always leaves a lot to be desired, and is rarely “simple.” We also have four different retailing solutions for retailers to choose from depending on their size and type of business. I am VERY confident that our products and services as a whole are unmatched in the industry and that taken as a whole, there really isn’t anyone who comes close to offering the total package of products, services and company behind it as CAM. Of course, it is hard for me to be unbiased, but that is honestly the way I see it.

X-Charge – Payment processing software & service

In our first step towards monetizing our customer base CAM entered the credit card processing arena, and developed a state-of-the-art software package that integrates seamlessly with all of our point of sale packages for payment processing. This took us a year to form the necessary relationships and develop the software. We then launched the program nearly 18 months ago. This division is now generating approximately $900,000 in annual credit card processing fees for CAM, and over $1 million in total sales when you include X-Charge software sales. This revenue is growing on a monthly basis by $50,000 to $60,000 per year at this time. This translates to $600,000 - $720,000 annually as our current growth rate for this business.

To leverage our success in this new market we began in April an “X-Charge Reseller” program, offering resellers the opportunity to resell our X-Charge software and to participate in the recurring revenue stream. We are hopeful that through this new reseller program we can grow our X-Charge customer base faster and build our recurring revenue stream from credit card processing fees faster. It is important to note that with only a little over three million shares outstanding every $300,000 in profit is worth nearly $.10 a share in earnings to the company. So while the credit card processing fee numbers are not huge they can begin to become significant to the bottom line as they grow over time.

Significant improvements at MicroBiz

One of the most impressive improvements in our business over the past year that is not evident from the outside is our turnaround of the MicroBiz division. This was a company we acquired a couple years ago that had performed poorly for us and was a big contributor to our losses in 2001. In the March quarter MicroBiz earned very attractive profit margins. This is primarily attributable to the change in our service model, where we have added nearly $500,000 per year in recurring service revenues that did not exist when we acquired the company, along with our “right sizing” of the fixed overhead structure for the expected revenue.

MicroBiz is now a reliable profit center, earning us high pre-tax profit margins. The turn around at MicroBiz is one of the recent highlights and the way in which we did it fits in closely with our objective of monetizing our customer base.

A-Trade – Auction management for eBay

Our most exciting new product is being launched in June officially at “eBay Live” as previously announced. It has gone to live beta testing already and it is called “A-Trade”. A-Trade offers CAM another potentially meaningful recurring revenue stream based on our deal with eBay. A-Trade allows any retailer or similar business using CAM’s Retail ICE or Retail STAR software to place, track, fulfill and manage auctions on eBay’s trading community. Our software was officially “certified” by eBay on April 17th after substantial testing and thus we have earned the status of “Certified Developer”. We are unique in our market in this regard. CAM will earn fees through the successful completion of auctions on eBay by the customers who use the software.

The key to what makes this software attractive and unique for so many small retailers and businesses is the level of integration we have created between day-to-day business management functions and the entire auction process. When you consider that any small eBay seller can get our Retail ICE business management system with full accounting practically for free, and that it will include the A-Trade software for free, you can see that the barrier to getting people to try and use our software is very low. It is impossible to predict what the impact of A-Trade may be on CAM financially. We know it will take time and we know there is an education curve with our customers, but we also know the product is something our customers really need. We know that eBay works and it will benefit our customers greatly if they learn how to make eBay work for them. It is our goal to see that happen.

A-Trade is a key part of our strategy for monetizing our customer base and creating meaningful recurring revenue streams. It is just a bit early to predict what it will mean to the company. Right now we like what we see!

i.STAR integrated web storefront product

Our i.STAR Web storefront software is one of my favorite products we offer. It is unbelievable how great this product is, considering the price point for any business that truly wants a flexible and professional Web storefront that is totally integrated with their back office and/or point of sale system. i.STAR and Retail STAR share the same database. i.STAR is nothing more than a remote location for Retail STAR. The main store communicates and exchanges information with the i.STAR Web store (Web server) just like it does any other remote store in the chain. It is unbelievably simple and elegant.

In my humble opinion, we should be dominating the market with our i.STAR product, yet to date we have about 25 live i.STAR sites, with another 30 signed up. The primary reason this has not moved faster is that the small retailer has been very slow to invest in the Internet after the bubble burst. Those that have, also discovered there is a lot of work to be done in building a database that is suitable for the Web. Gathering and sizing the product images along with supplying the necessary long descriptions of items to be sold on the Web has proven time consuming. Retailers have also been reluctant to allocate the resources for the fulfillment infrastructure. So while we have provided an incredibly easy and elegant path to put ANY small retailer on the web in an image building, professional way, the real world work required that has nothing to do with our end of things keeps many of them from getting started.

The bottom line is that i.STAR is a very significant product in regards to the solution it offers at the price it is offered at, but it is not a significant factor to the top or bottom line at CAM, at this time. We have sold several nice systems to larger customers who cited our i.STAR solution as one of the primary factors in purchasing our total Retail STAR / i.STAR solution and that doesn’t show up in the top or bottom line for i.STAR. I see this trend increasing in the future. I believe that the demand for i.STAR will continue to rise, especially as the success stories build, and more retailers embrace the Internet as both a customer service and competitive offering as well as an alternative sales channel. We are seeing this increase now, albeit modest.

New dealer sales channel

We recently announced that we will be offering our Retail STAR product and related services through a new dealer channel designed to compliment our direct sales force and increase our market penetration. Many local retailers turn to local dealers and distributors without ever contacting us to evaluate our offering. For nearly 20 years we have resisted the dealer model because of the potential conflicts with our direct sales force, the loss of important recurring revenues to the dealer and the concern for the quality of sales and service. Our company, our products and services and our opportunities are different today than they were 4 or 5 years ago. The market also appears to have changed.

We feel confident we have come up with an excellent dealer plan that covers these issues, while offering the dealer the best products, services and company to represent. We have already begun to sign up dealers in strategic areas. We believe that opening up a dealer channel is the best way to leverage our market leading products and services and to build our recurring revenue streams faster by expanding our customer base far more rapidly. We don’t expect to see a meaningful impact financially until the March to June quarter of 2003 due to the training and sales cycle for new dealers. However, we do expect this program to generate meaningful revenues and profits for the company at some point in the future. We are proceeding cautiously with this new program and being careful to minimize potential conflicts with our direct sales force.

RMSA / Access deal

We recently announced that we sold our Access merchandise planning division to Private Business, Inc. for $800,000 in cash. Access provides consulting services to retailers on a monthly basis to help them with merchandise planning. Access revenues were a little over $700,000 this past year and the division earned a small profit. It was slowly growing. The reason we agreed to sell Access was not because we wanted to or even because the price was attractive. Access was not for sale, but PBI made us an offer we couldn’t refuse. We agreed to sell Access because of the significance of a larger deal we made with PBI and their RMSA merchandise planning division. RMSA is the clear market share leader in providing the kinds of consulting services for retailers that our Access division offered. They have been in business for roughly 30 years and have 50 analysts in the field. We had 6. Access was a distant number two in the market.

RMSA also offered a point of sale system that competed with our offerings based on a company called Charter they acquired in 1987. As part of the deal to sell Access they agreed to discontinue Charter sales and offer our software and systems as the upgrade path for all existing Charter customers. They further agreed to promote our products and services to new customers rather than Charter. The potential win here for us far outweighed any future benefits we could expect to realize from Access and made us partners instead of competitors with RMSA. This deal is one I am very happy with and I really don’t see how it won’t be a winner for us. It is really a matter of how significant we can make it and that is up to us. The work has already begun to leverage this new partnership.

New Competition

Many people have expressed concern about the entry of Intuit into our market and the recent purchase of a competitor by Microsoft. Intuit began marketing a very limited POS application that is a third party product designed to work with their QuickBooks accounting in late April. The third party product is one we know extremely well and compete very successfully with. The version of this product Intuit is offering is much more limited than the standard offering. We have seen almost no impact to our business from this product so far and based on our evaluation of a purchased copy of the software, the product is so limited in scope as to not be a threat in its current form to our core markets, although we could see some limited impact with our MicroBiz product line. The core customers we sell to simply can’t make that product work properly for their business due to such a limited feature set. My personal opinion is that Intuit is going to experience return rates far in excess of what they are use to with QuickBooks accounting. In addition at $800 per user, without the accounting, it is priced very high for what it offers. We are watching and are prepared to adapt if we need to, but so far this does not seem to be something we need to be overly concerned about based on our target market and where we make our money. It might be interesting to note that our Retail ICE product is a substantially more robust and complete offering than the QuickBooks POS product and includes better accounting for our customer when you look at the level of integration and the power of the complete business solution. A retailer can get this for less than $30, which is the cost of shipping, handling and materials. We decided a few years ago that we could not make money on the single user, single location retailer and decided to offer Retail ICE as a seeding strategy.

Microsoft purchased a competitor we considered our third largest competitor. MicroSoft spent $900 million on Great Plains (accounting software) a year or so ago and it is my understanding that this recent purchase of our competitor is in support of the prior Great Plains acquisition. While Microsoft has enough cash and muscle to do whatever it wants, I really don’t believe they will experience success in our market or the monetary returns that could ever justify their long-term focus on our core market. It is too early to really know what to expect and I am in no way minimizing the potential effect a company like Microsoft could have, but we have seen big companies like IBM, NCR, Fujitsu, etc. enter and leave our market in the past. There simply isn’t the return for them and every vertical market within retail is so different. What I mean by that is that there is no one market called “Retail.” That is the mistake big companies entering this market make. There are sporting good stores, paint stores, pharmacies, liquor stores, apparel retailers, footwear retailers, etc. While appearing similar on the surface, each has its own unique set of needs, its own industry suppliers to work with, and its own marketing channels to reach the prospective customers. We have spent nearly 20 years learning these individual markets and developing products and services which address their unique needs in addition to marketing efforts designed to focus on individual vertical markets within retail.

The company Microsoft purchased is a very “generic” retail solution and one that we compete with successfully. However, we have committed to an even higher level of innovation as we do not plan to wait and see what Microsoft does. In an odd sort of way, it is energizing to compete with Microsoft if that is what happens. It has already increased our productivity with our software development team. Everyone is committed to producing products and services that will keep us in the lead and continue to provide an edge against Microsoft or anyone else for that matter.

Summary

It is our goal to build our recurring revenues to a point at which we can suffer downturns in the market like we have seen, and still produce acceptable profits, while producing excellent results in a robust market. We are making progress towards that goal. Our margins are improving, our sales mix is improving and our recurring revenues are growing. We have an excellent management team and we are a well run company. Our balance sheet is very strong with over $9 million in cash and no debt. We have staying power! If market conditions improve we could see significant improvements immediately. If they don’t, it will take longer as we continue to implement the plans outlined above. I ask for your patience and thank you for your continued support.

Best regards,

Geoff Knapp
CEO & Founder
CAM Commerce Solutions, Inc.

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