<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 31, 2000
-----------------------------------------------------------------
NETsilicon, INC.
----------------
(Exact name of registrant as specified in charter)
Massachusetts 0-26761 04-2826579
--------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
411 Waverley Oaks Rd., Bldg. 227, Waltham, MA
02452
-----
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code 781-647-1234
---------------------------------------------------------------
NOT APPLICABLE
--------------
(Former name or former address, if changed since last report.)
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
On September 15, 2000, NetSilicon, Inc. filed a Form 8-K to report its
acquisition of the strategic network technology assets (the "Purchased Assets")
of Pacific Softworks Technology, Inc. ("Pacific"), a subsidiary of PASW, Inc.
("PASW"). The Purchased Assets, which represent substantially all of the assets
of Pacific, were acquired pursuant to an Asset Purchase Agreement, dated as of
August 31, 2000. Pursuant to Item 7 of Form 8-K, NetSilicon indicated that it
would file certain financial information no later than the date required by Item
7 of Form 8-K. This Amendment No. 1 is filed to provide the required financial
information.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of PACIFIC
SOFTWORKS, INC. AND SUBSIDIARIES as of December 31, 1999 and 1998, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PACIFIC
SOFTWORKS, INC. AND SUBSIDIARIES as of December 31, 1999 and 1998, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
February 2, 2000
<PAGE> 3
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,661,708 $ 224,031
Accounts receivable, net of allowance for doubtful
accounts of $72,986 and $86,400 175,751 268,902
Related party receivable -- 43,000
Note receivable 1,000,000 --
Prepaid expenses and other current assets 75,753 15,523
----------- -----------
Total current assets 2,913,212 551,456
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization of $426,589 and $348,761 241,003 82,196
OTHER ASSETS 13,193 9,674
----------- -----------
TOTAL ASSETS $ 3,167,408 $ 643,326
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 390,546 $ 180,469
Related party payable -- 103,705
Accrued taxes payable -- 21,705
Customer deposits -- 23,100
----------- -----------
Total current liabilities 390,546 328,979
----------- -----------
DEFERRED REVENUE 149,872 106,874
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; 4,402,500 and 3,200,000 shares
issued and outstanding 4,403 3,200
Additional paid-in capital 5,042,624 174,658
Retained earnings (deficit) (2,445,615) 18,452
Cumulative adjustment for foreign currency translation 25,578 11,163
----------- -----------
2,626,990 207,473
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,167,408 $ 643,326
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Sales $ 1,817,654 $ 2,479,589
Royalties and other 424,890 307,808
----------- -----------
Total 2,242,544 2,787,397
COST OF REVENUE
Purchases and royalty fees 167,486 100,336
----------- -----------
GROSS PROFIT 2,075,058 2,687,061
----------- -----------
OPERATING EXPENSES
Selling, general and administrative 2,706,384 1,936,117
Research and development 1,625,599 851,568
Depreciation and amortization 77,828 58,850
Former officer's consulting and administrative expenses 257,143 314,286
----------- -----------
Total operating expenses 4,666,954 3,160,821
----------- -----------
LOSS FROM OPERATIONS (2,591,896) (473,760)
OTHER INCOME (EXPENSES)
Interest income 14,389 --
Other income 119,941 --
Interest expense (6,501) --
----------- -----------
Total other income (expense) 127,829 --
----------- -----------
LOSS BEFORE INCOME TAXES (2,464,067) (473,760)
INCOME TAX EXPENSE -- --
----------- -----------
NET LOSS $(2,464,067) $ (473,760)
=========== ===========
LOSS PER SHARE - Basic and Diluted $ (.62) $ (0.14)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
Basic and diluted 3,946,392 3,340,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
COMPREHENSIVE INCOME (LOSS)
Net loss $(2,464,067) $ (473,760)
Foreign currency translation adjustment 14,415 (9,399)
----------- -----------
COMPREHENSIVE LOSS $(2,449,652) $ (483,159)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency Total
------------------------------ Paid-in Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustment Equity
------------ ---------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance of January 1, 1998 3,200,000 $3,200 $ 174,658 $ 492,212 $20,562 $ 690,632
Foreign currency translation
adjustment - - - - (9,399) (9,399)
Net loss - - - (473,760) - (473,760)
--------- ------ ---------- ----------- ------- -----------
Balance at December 31, 1998 3,200,000 3,200 174,658 18,452 11,163 207,473
Private placement of common
stock 100,000 100 499,900 - - 500,000
Initial public offering, net 950,000 950 3,642,350 - - 3,643,300
Sale of over allotment, net 142,500 143 650,726 - - 650,869
Exercise of warrants 10,000 10 74,990 - - 75,000
Foreign currency translation
adjustment - - - - 14,415 14,415
Net loss - - - (2,464,067) - (2,464,067)
--------- ------ ---------- ----------- ------- -----------
Balance at December 31, 1999 4,402,500 $4,403 $5,042,624 $(2,445,615) $25,578 $ 2,626,990
========= ====== ========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,464,067) $ (473,760)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 77,828 58,850
Bad debt (recovery) (13,414) 50,000
(Increase) decrease in assets:
Accounts receivable 106,565 18,788
Related party receivable 43,000 (43,000)
Other receivables - 2,125
Prepaid expenses and other current assets (60,230) 20,589
Deposits and trademark (3,519) (8,486)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 210,077 (38,558)
Related party payable (103,705) 3,705
Accrued taxes payable (21,705 1,104
Customer deposits (23,100) 23,100
Deferred revenue 42,998 (33,937)
----------- -----------
Net cash used in operating activities (2,209,272) (419,480)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (236,635) (71,888)
Acquisition of note receivable (1,000,000) --
----------- -----------
Net cash used in investing activities (1,236,635) (71,888)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement 500,000 --
Proceeds from initial public offering 3,643,300 --
Proceeds from over allotment 650,869 --
Exercise of warrants 75,000 --
Acquisition of stock in subsidiary -- (5,500)
Proceeds of borrowings 459,295 150,000
Repayment of borrowings (459,295) (50,000)
----------- -----------
Net cash provided by financing activities 4,869,169 94,500
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 14,415 (4,053)
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,437,677 (400,921)
CASH AND CASH EQUIVALENTS - BEGINNING 224,031 624,952
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 1,661,708 $ 224,031
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for -
Interest paid $ 6,501 $482
======= ====
Income taxes paid $ -- $ --
======= ====
</TABLE>
CASH FLOW STATEMENT
SCHEDULE OF NON-CASH ACTIVITIES:
During 1999, the Company issued warrants to purchase the following:
a) 80,000 units valued at $107,481 for services rendered by various
consultants, attorneys and others in connection with its IPO;
b) 1,180,000 units valued at $1,736,323 for services rendered by various
consultants in connection with its restructuring;
c) 7,654 units valued at $14,147 to an executive search firm.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 9
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) NATURE OF OPERATIONS
Pacific Softworks, Inc., incorporated in California in November 1992,
develops and licenses Internet and Web related software and software
development tools. Its products enable Internet and Web based
communications, based on a set of rules known as protocols, and are
embedded into systems and "information appliances" developed or
manufactured by others. Information appliances are Internet connected
versions of everyday products such as telephones, televisions, fax
machines and other digitally based devices. The Company's operations
are conducted principally from its offices in Southern California, and
it maintains sales offices in England and Japan.
b) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Pacific
Softworks, Inc. ("PSI") and its wholly owned subsidiaries:
(1) Network Research Corp. Japan, Ltd. ("NRC");
(2) iApplianceNet.com ("iAppliance"), a California Corporation;
(3) Pacific Acquisition Corporation ("PAC"), a California
Corporation; and
(4) Pacific Softworks Europe Limited ("Europe"), a United Kingdom
Corporation
All references herein to PSI or the "Company" include the consolidated
results of PSI and its subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
In January of 1998, PSI purchased the remaining 21% of NRC stock held
by a third party, to increase its holdings to 100%. The purchase price
was $5,000. The acquisition has been accounted for as a purchase. All
of NRC's operations and assets are located in Japan.
iAppliance is a wholly owned subsidiary of PSI and was incorporated in
California in August 1999. The Company was inactive during the period
ended December 31, 1999 and began operations in January 2000.
PAC and Europe were formed in 1999. Both companies were inactive
during the period ended December 31, 1999.
c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE> 10
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
d) REVENUE RECOGNITION
The Company is a developer and licensor of software and generates
revenue primarily from the one-time sales of licensed software.
Generally, revenue is recognized upon shipment of the licensed
software. For multiple element license arrangements, the license fee
is allocated to the various elements based on fair value. When a
multiple element arrangement includes rights to a post-contract
customer support, the portion of the license fee allocated to each
function is recognized ratably over the term of the arrangement.
e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
f) CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed FDIC insured
levels at various times during the year.
g) ACCOUNTS RECEIVABLE
For financial reporting purposes, the Company utilizes the allowance
method of accounting for doubtful accounts. The Company performs
ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses. The allowance is based on an experience
factor and review of current accounts receivable. Uncollectible
accounts are written off against the allowance accounts when deemed
uncollectible.
h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives, primarily on a
straight-line basis. The estimated lives used in determining
depreciation are five to seven years for furniture, fixtures and
computer equipment. purchased computer software costs are amortized
over five years.
Maintenance and repairs are charged to expense as incurred; additions
and betterments are capitalized. Upon retirement or sale, the cost and
related accumulated depreciation of the disposed assets are removed
and any resulting gain or loss is credited or charged to operations.
i) RESEARCH AND DEVELOPMENT
Costs incurred in research and development activities are charged to
operations as incurred. All research and development activities are
incurred in connection with the development of computer software
products.
<PAGE> 11
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, note receivable, accounts payable and short-term debt. The
carrying amounts of cash, accounts receivable, note receivable,
accounts payable and short-term debt approximate fair value due to the
highly liquid nature of these short-term instruments at December 31,
1999 and 1998.
k) LONG-LIVED ASSETS
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair
value of the assets and long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to
sell.
l) INCOME TAXES
Until February 14, 1999, the Company was a subchapter S corporation.
Income was passed through to the stockholders who paid personally
their share of the applicable taxes. Therefore, no provision for
income taxes was made at December 31, 1998 and in 1999 through
February 1999.
Subsequent to the termination of the Company's S Corporation election,
provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
m) OFFERING COSTS
Offering costs consists primarily of professional fees. These costs
are charged against the proceeds of the sale of common stock in the
periods in which they occur.
n) ADVERTISING COSTS
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of
direct-response advertising, if any, are capitalized and amortized
over the period during which future benefits are expected to be
received.
<PAGE> 12
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
o) TRANSLATION OF FOREIGN CURRENCY
The Company translates the foreign currency financial statements of
its foreign subsidiaries in accordance with the requirements of SFAS
No. 52, "Foreign Currency Translation." Assets and liabilities are
translated at current exchange rates and related revenues and expenses
are translated at average exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate component
in stockholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
p) STOCK BASED COMPENSATION
The Company uses the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles
Board Opinion ("APB") No. 25. See Note 8 for proforma disclosure of
net income and earnings per share under the fair value method of
accounting for stock-based compensation as proscribed by SFAS No. 123.
q) EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share" requires presentation of basic
earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS").
The computation of basic earnings per share is computed by dividing
earnings available to common stockholders by the weighted average
number of outstanding common shares during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on losses.
The shares used in the computation of earnings per share were as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
--------- ----------
<S> <C> <C>
Basic 3,946,392 3,340,000
========= =========
Diluted 3,946,392 3,340,000
========= =========
Loss per share - Basic and Diluted $ (0.62) $ (0.14)
========= =========
</TABLE>
<PAGE> 13
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
r) IMPACT OF YEAR 2000 ISSUE
During the year ended December 31, 1999, the Company conducted an
assessment of issues related to the Year 2000 and determined that it
was necessary to modify or replace portions of its software in order
to ensure that its computer systems will properly utilize dates beyond
December 31, 1999. The Company completed Year 2000 systems
modifications and conversions in 1999. Costs associated with becoming
Year 2000 compliant were not material. At this time, the Company
cannot determine the impact the Year 2000 will have on its key
customer or suppliers. If the Company's customers or suppliers don't
convert their systems to become Year 2000 compliant, the Company may
be adversely impacted. The Company is addressing these risks in order
to reduce the impact on the Company.
s) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" was issued, which changes the way
public companies report information about segments. SFAS No. 131 is
based on the selected segment information and requires quarterly and
entity-wide disclosures about products and services, major customers,
and the material countries in which the entity holds assets and
reports revenue. This statement is effective for the Company's 1998
fiscal year.
SFAS No. 132, "Employers' Disclosures about Pension and Other Post
Employment Benefits," was issued in February 1998 and specifies
amended disclosure requirements regarding such obligations. SFAS No.
132 does not effect the Company as of December 31, 1999 or 1998.
In March 1998, Statement of Position No. 98-1 was issued, which
specifies the appropriate accounting for costs incurred to develop or
obtain computer software for internal use. The new pronouncement
provides guidance on which costs should be capitalized, and over what
period such costs should be amortized and what disclosures should be
made regarding such costs. This pronouncement is effective for fiscal
years beginning after December 15, 1998, but earlier application is
acceptable. Previously capitalized costs will not be adjusted. The
Company believes that it is already in substantial compliance with the
accounting requirements as set forth in this new pronouncement, and
therefore believes that adoption will not have a material effect on
financial condition or operating results.
In April 1998, Statement of Position No. 98-5 was issued which
requires that companies write-off defined previously capitalized
start-up costs including organization costs and expense future
start-up costs as incurred. Adoption of this statement does not have
an effect on the Company's financial condition or operating results.
<PAGE> 14
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
s) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities". This new pronouncement requires that certain derivative
instruments be recognized in balance sheets at fair value and for
changes in fair value to be recognized in operations.
Additional guidance is also provided to determine when hedge
accounting treatment is appropriate whereby hedging gains and losses
are offset by losses and gains related directly to the hedged item.
While the standard, as amended, must be adopted in the fiscal year
beginning after June 15, 2000, its impact on the Company's
consolidated financial statements is not expected to be material as
the Company has not historically used derivative and hedge
instruments.
NOTE 2 - NOTE RECEIVABLE
On December 3, 1999, the Company acquired for cash a $1,000,000
promissory note bearing interest at 10% from FSP Network, Inc.
("FSPN"). The note is convertible into FSPN's capital stock at the
time of FSPN's next equity based round of venture financing
("Subsequent Equity"). The principal amount and the portion of
interest accrued for the actual number of days elapsed at a rate of 6%
shall automatically convert into Subsequent Equity during the period
from December 3, 1999 to December 2, 2000 upon FSPN's sale and
issuance of Subsequent Equity, for an aggregate purchase price of at
least $1,000,000, at one or more closings, at the same price per share
at which such shares of Subsequent Equity are sold to other
participants at such closings; provided, however, if the "Pre-Money
Valuation" (PMV - as defined below) of FSPN in the sale and issuance
of shares of Subsequent Equity shall be greater than $20,000,000, then
the debt shall automatically convert into Subsequent Equity at the
price per share at which the PMV would be equal to $20,000,000. For
purposes of this note, PMV shall mean the product obtained by
multiplying: (x) the price per share (on an as-if-converted basis into
common stock basis) of the Subsequent Equity, by (y) the aggregate
number of shares (on an as-if-converted into or exercised for common
stock basis) of all the issued and outstanding capital stock of FSPN
and options, warrants or other rights to purchase capital stock of
FSPN (including only those options, warrants or other rights issued
and outstanding as of immediately prior to the closing and excluding
those securities into which this note shall convert) immediately prior
to the closing. Upon such conversion, this note shall be canceled and
accrued interest in excess of 6% for the number of days elapsed shall
be forfeited. If the note is not converted, principal and accrued
interest at 10% are due and payable on December 2, 2000.
<PAGE> 15
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment $ 388,879 $ 216,421
Computer software 278,713 214,536
--------- ---------
667,592 430,957
Less: accumulated depreciation and amortization (426,589) (348,761)
--------- ---------
Fixed assets - net $ 241,003 $ 82,196
========= =========
Depreciation and amortization expense recorded in
the statement of operations $ 77,828 $ 30,243
========= =========
Unamortized computer software costs $ -- $ --
========= =========
Amortization of computer software costs $ -- $ 28,607
========= =========
</TABLE>
NOTE 4 - NOTE PAYABLE
The Company had a note payable from its underwriter for $200,000,
dated July 6, 1999, bearing interest at 10% per annum and due at the
earlier of October 6, 1999 or upon the Company's receipt of funds from
its IPO. The loan was repaid in 1999.
NOTE 5 - DEFERRED REVENUE
The Company provides technical support for its products, usually over
a twelve-month term. Revenue is recognized as earned on a straight-
line basis.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company occupies two facilities under terms of operating leases
expiring September 15, 2000 and August 31, 2002, respectively. Rent
expense included in the statement of operations totaled $137,643 and
$106,592 in 1999 and 1998, respectively. The Company leases an auto
under the term of an operating lease, expiring August 31, 2002. Auto
lease expense included in the statements of operations totaled $19,278
and $15,513 in 1999 and 1998, respectively.
Future minimum lease payments are as follows:
2000 $125,729
2001 40,866
2002 20,374
<PAGE> 16
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - CAPITAL STOCK
a) The Company is authorized to issue 10,000,000 shares of Preferred
Stock, par value $.01. Preferred shares may be issued from time to
time in one or more series. The number of shares in each series and
the designation of each series to be issued shall be determined from
time to time by the board of directors of the Company.
b) On January 30, 1998, the Company approved an increase in the number of
shares of common stock it is authorized to issue from 1,000,000 shares
to 50,000,000 shares and the restated articles of incorporation were
filed on June 5, 1998. In June of 1998, the Company effected a stock
split and subsequently effected a reverse stock split. The net result
of these two stock transactions was an effective 6.27205 shares for
one stock split, increasing the outstanding shares from 510,200 to
3,200,000.
All references in the accompanying financial statements to the number
of shares of common stock and per-share amounts for 1999 and 1998 have
been restated to reflect the effective stock split.
c) In February 1999 the Company sold 100,000 units to a single accredited
investor at a price of $5.00 per unit for total proceeds of $500,000.
Each unit consisted of one share of common stock and one common stock
purchase warrant, entitling the holder thereof to purchase one share
of common stock for two years at an exercise price of $6.00 per share.
d) In July 1999 the Company through its underwriter, sold 950,000 units
and an overallotment of 142,500 units at $5.25 per unit. The proceeds
were as follows:
<TABLE>
<CAPTION>
950,000 Units 142,500 Units
------------- -------------
<S> <C> <C>
950,000 at $5.25 per share $4,987,500 $ --
142,500 at $5.25 per share -- 748,125
Underwriter's discount and expenses (613,375) (97,256)
Other offering costs (730,825) --
---------- --------
Net proceeds $3,643,300 $650,869
========== ========
</TABLE>
Each unit consists of one share of common stock and one common stock
purchase warrant, entitling the holder thereof to purchase one share
of common stock for two years at an exercise price of $7.50 per share.
<PAGE> 17
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 8 - STOCK PLAN
On April 17, 1998, the Company adopted the 1998 Equity Incentive
Program (the "Plan"). The Plan provides for the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii)
Non-Statutory Stock Options, (iii) Stock Appreciation Rights, (iv)
Stock Bonuses, and (v) Rights to acquire Restricted Stock. Persons
eligible to receive Stock Awards are the employees, directors and
consultants of the Company and its Affiliates, as defined. Incentive
Stock Options may be granted only to employees. Stock awards other
than Incentive Stock Options may be granted to all eligible persons.
The maximum term of any options granted is ten years. Vesting
requirements may vary, and will be determined by the board of
directors.
The number of shares reserved for issuance under the Plan is 440,200
shares.
NOTE 9 - STOCK OPTIONS
a) In 1998, the Company granted certain non-statutory options to purchase
shares of common stock to two employees. Each option is for 70,000
shares at an exercise price of $1.25 per share. The options vest on
January 1, 1999 and expire December 31, 2003.
b) In 1999, the company granted certain non-statutory options to purchase
shares of common stock to three directors. Each option is for 15,000
shares at an exercise price of $5.00 per share, vest immediately, and
expire in 2003.
c) On May 1, 1999, the Company granted stock options to certain
employees, covering 283,000 shares. The options are exercisable for
five years at a price of $5.00 per share for 253,000 shares and $5.50
per share for 30,000 shares. The options vest at a rate of 2% of the
shares covered per month up to 36 months, at which time they will be
fully vested.
d) On December 1, 1999, the president and chief financial officer of the
Company was granted options to purchase 300,000 shares of common stock
of the Company at an exercise price of $5.75 per share. These options
expire on November 30, 2004.
<PAGE> 18
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9 - STOCK OPTIONS (continued)
Plan and non-plan stock option activity is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------- -------
<S> <C> <C>
Outstanding at beginning of period 140,000 --
Options granted at an exercise price of
$1.25 per share -- 140,000
Options granted at an exercise price of
$5.00 per share 298,000 --
Options granted at an exercise price of
$5.50 per share 30,000 --
Options granted at an exercise price of
$5.75 per share 300,000 --
------- -------
Outstanding at end of period 768,000 140,000
======= =======
Exercisable at end of period 213,300 --
======= =======
Weighted average exercise price of
options outstanding $ 4.63 $ 1.25
======= =======
Weighted average remaining contractual
life of options outstanding 47 months 60 months
</TABLE>
The Company accounts for its stock option transactions under the
provisions of APB No. 25. The following proforma information is based
on estimating the fair value of grants based upon the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." The fair value of each
option granted during the period ended December 31, 1999 has been
estimated as of the date of grant using the Black-Scholes option
pricing model with the following assumptions: risk free interest rate
of 5.5%, life of options of 2-5 years, volatility of 0% (except for
the options described in item (d) above for which the volatility is
44%) and expected dividend yield of 0%. Under these assumptions, the
weighted average fair value of options granted during the period
ending December 31, 1999 was $2.05.
The Company's proforma net loss and net loss per share assuming
compensation cost was determined under SFAS No. 123 would have been
the following:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Net Loss $(2,559,096) $(513,360)
Net Loss Per Share $ (0.65) $ (0.15)
</TABLE>
<PAGE> 19
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 10 - WARRANTS
a) Warrants to purchase 80,000 units have been issued to certain
professionals who have rendered legal services, temporary accounting
and administrative services to the Company in connection with its IPO.
Each of these units consists of one share of the Company's common
stock exercisable at any time over a period of 60 months commencing
July 29, 1999 at a price of $5.25 per unit, and a common stock
purchase warrant exercisable at a price of $7.50 per share until 24
months after such common stock purchase warrants are registered. These
units are identical to the units sold in the IPO.
b) Upon completion of the IPO, the Company issued warrants to purchase
95,000 units to its underwriter. Each unit consists of one share of
the Company's common stock exercisable at $6.30 per unit for a period
of four years, and a common stock purchase warrant exercisable at a
price of $7.50 per share until 24 months after such common stock
purchase warrants are registered. $0 value has been assigned to these
warrants.
c) In August 1999, in connection with its IPO, the Company issued 200,000
common stock purchase warrants to an outside consultant that are
exercisable at a price of $5.75 per share, expiring in August 2001.
d) Warrants to purchase 1,180,000 shares have been issued to certain
professionals who have rendered consulting services, in connection
with its restructuring. Each of these warrants may be exercised at
$5.75 per unit until November 2004.
e) Warrants to purchase 7,674 shares have been issued to an executive
search firm. The warrants may be exercised at $5.75 per unit until
November 2004. In accordance with SFAS No. 123, the Company has valued
these warrants at the fair value of the warrants using the
Black-Scholes pricing model.
In accordance with SFAS No. 123, the Company has valued the warrants,
issued under a), c), and d) above, at the fair value of the warrants
using the Black-Scholes pricing model; accordingly, as of December 31,
1999, the Company recognized $107,481, $1,750,470, and $0 as offering
costs, respectively, which have been offset against additional paid-in
capital.
The fair value of each warrant granted during the period ended
December 31, 1999 has been estimated as of the date of grant using the
Black-Scholes pricing model with the following assumptions: risk-free
interest rate, ranging from 5.5% - 6%, life of warrants ranging from
24 to 60 months, volatility of 0% and expected dividend yield of 0%.
<PAGE> 20
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 11 - RELATED PARTY TRANSACTIONS
a) As of December 31, 1998, the Company had advanced funds to its
principal stockholder in the amount of $43,000. The advances did not
bear any interest and were payable upon demand. The funds were repaid
in 1999.
b) As of December 31, 1998, the Company had received advances from a
company controlled by the spouse of the principal stockholder of PSI.
The advances totaled $103,705. The advances did not bear any interest
and were repayable upon demand. This liability was satisfied in 1999.
c) In 1998, the company mentioned in item (b) above occupied space in
premises leased by PSI. The Company believes that the terms of
occupancy are no less favorable than those that could be obtained from
unaffiliated third parties. This party relocated during 1999.
d) During 1998 and 1999, the principal stockholder of the Company
personally guaranteed advances made to the Company pursuant to a line
of credit provided by Bank of America. Total availability under the
line was $250,000. No advances were outstanding as of December 31,
1998. The account was closed in 1999.
NOTE 12 - SEGMENT INFORMATION
The Company's assets are located principally in the United States.
Product sales are to the following geographic areas:
1999 1998
---- ----
United States and the Americas 48% 43%
Europe 30% 40%
Asia and Australia 22% 17%
NOTE 13 - INCOME TAXES AND S CORPORATION STOCKHOLDER DISTRIBUTIONS
a) DISTRIBUTIONS
The Company has paid no distributions to its stockholders.
b) TAX PROVISION
As a result of the Company's tax status as an S Corporation, operating
results as presented in the accompanying consolidated financial
statements do not include a provision for income taxes for the year
ended December 31, 1998 and in 1999 through February 14th.
As a result of the sale of common stock described in Note 7(c), the
Company's S Corporation election was terminated as of February 14,
1999.
<PAGE> 21
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 13 - INCOME TAXES AND S CORPORATION STOCKHOLDER DISTRIBUTIONS (continued)
c) PROFORMA INCOME TAXES
Proforma income taxes (benefit), assuming that the Company had not
been an S Corporation in the period presented, are as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Federal $ (93,510)
State (30,674)
---------
$(124,184)
=========
</TABLE>
d) The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Current Tax Expense
U.S. Federal $ -
State and Local -
------
Total Current -
------
Deferred Tax Expense
U.S. Federal $ -
State and Local -
------
Total Deferred -
------
Total Tax Provision from Continuing Operations $ -
======
</TABLE>
e) The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Federal Income Tax Rate (34.0)%
Deferred Tax Charge (Credit) -
Effect of Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
-----
Effective Income Tax Rate 0.0%
=====
</TABLE>
At December 31, 1999, the Company had a net carryforward loss of
approximately $2,464,000. A valuation allowance equal to the tax
benefit for deferred taxes has been established due to the uncertainty
of realizing the benefit of the tax carryforward.
<PAGE> 22
PACIFIC SOFTWORKS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 13 - INCOME TAXES AND S CORPORATION STOCKHOLDER DISTRIBUTIONS (continued)
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Non-Current Deferred Tax Assets (Liabilities):
Loss Carryforwards $ 838,000
Less: Valuation Allowance (838,000)
---------
Net Deferred Tax Assets (Liabilities) $ --
=========
</TABLE>
The net operating loss carryforward expires in 2019.
NOTE 14 - EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in
the future that were note included in the computation of diluted
earnings per share because their effect would have been antidilutive
are as follows:
<TABLE>
<CAPTION>
December 31,
1999
-------------
<S> <C>
Warrants $ 2,920,174
Options 768,000
-----------
Total Shares $ 3,688,174
===========
</TABLE>
NOTE 15 - ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the statement of
operations were $243,059 and $213,670 for the years ended December 31,
1999 and 1998, respectively.
NOTE 16 - INTEREST COSTS
Interest costs incurred were $6,501 and $6,004 in 1999 and 1998,
respectively, all of which were charged to operations.
NOTE 17 - SUBSEQUENT EVENT
COMPANY NAME
The Company intends to change the name of the parent company Pacific
Softworks, Inc. to PASW, Inc. and the name of Pacific Acquisition
Corporation to Pacific Softworks, Inc.
* * * * * * *
<PAGE> 23
PASW, INC. (FORMERLY PACIFIC SOFTWORKS, INC)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 717,156 $1,661,708
Accounts receivable, net of allowance
of $72,986 and $72,986 102,301 175,751
Note receivable 1,000,000
Prepaid expenses and other current assets 53,688 75,753
---------- ----------
Total current assets 873,145 2,913,212
Property and equipment less accumulated
depreciation and amortization of
$474,299 and $426,589 318,032 241,003
Investments 1,000,000
Other assets 19,038 13,193
---------- ----------
Total assets $2,210,215 $3,167,408
========== ==========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE> 24
PASW, INC. (FORMERLY PACIFIC SOFTWORKS, INC)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Accounts payable and accrued expenses $ 310,758 $ 390,546
----------- -----------
Total current liabilities 310,758 390,546
Deferred revenues 143,164 149,872
----------- -----------
Commitments and contingencies
Minority interest 1,400
-----------
Stockholders' equity
Preferred stock, par value $.01 per share,
10,000,000 shares authorized; no shares
outstanding
Common stock, par value $.001 per share, 50,000,000 shares authorized;
4,500,900 and 4,402,500 shares issued and
outstanding 4,501 4,403
Additional paid in capital 5,939,750 5,042,624
Retained earnings (deficit) (4,293,866) (2,445,615)
Cumulative adjustment for currency
translation 104,508 25,578
----------- -----------
Total stockholders' equity 1,754,893 2,626,990
----------- -----------
$ 2,210,215 $ 3,167,408
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 25
PASW, INC. (FORMERLY PACIFIC SOFTWORKS, INC)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue
Sales $ 369,318 $ 495,678 $ 927,920 $1,208,737
Royalties
and others 133,565 151,711 235,000 210,302
---------- ---------- ----------- ----------
Total 502,883 647,389 1,162,920 1,419,039
Cost of revenue
Purchases and
royalty fees 11,024 44,923 48,648 75,259
---------- ---------- ----------- ----------
Gross profit 491,859 602,466 1,114,272 1,343,780
Expenses
Selling, general and
administrative 930,837 541,476 1,759,660 922,291
Research and
development 537,526 354,145 1,155,153 677,969
Depreciation and
amortization 18,214 13,460 47,710 26,920
Former officers
consulting and
administrative
expense 97,905 180,585
---------- ---------- ----------- ----------
Total 1,486,577 1,006,986 2,962,523 1,807,765
---------- ---------- ----------- ----------
Net loss $ (994,718) $ (404,520) $(1,848,251) $ (463,985)
========== ========== =========== ==========
Net loss per common share
Basic and diluted $ (0.21) $ (0.12) $ (0.40) $ (0.14)
========== ========== =========== ==========
Weighted average common
stock shares outstanding
Basic and diluted 4,640,900 3,440,000 4,606,345 3,409,613
========== ========== =========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 26
PASW, INC. (FORMERLY PACIFIC SOFTWORKS, INC)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- -----
<S> <C> <C> <C> <C>
Net loss $(994,718) $(404,520) $(1,848,251) $(463,985)
Other comprehensive
income (loss)
Foreign currency
translation
adjustment 184,475 1,377 104,508 ( 27,192)
--------- --------- ----------- ---------
Comprehensive loss $(810,243) $(403,143) $(1,743,743) $(491,177)
========= ========= =========== ========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 27
PASW, INC. (FORMERLY PACIFIC SOFTWORKS, INC)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended June 30,
---------------------------
2000 1999
------ ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,848,251) $ (463,985)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 47,710 26,920
(Increase) decrease in assets:
Accounts receivable 73,450 (130,426)
Related party receivable 43,000
Other receivables (25,000)
Prepaid expenses 22,065 (22,180)
Other assets (5,845)
Deposits and trademarks (518)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses (79,788) 287,260
Related party payable
Accrued taxes payable (7,243)
Customer deposits (23,100)
Deferred revenue (6,708) 44,000
----------- ----------
Net cash used in
operating activities (1,797,367) (271,272)
----------- ----------
Cash flows from investing activities
Acquisition of fixed assets (124,739) (61,770)
Disposition of assets, net 1,254
----------- ----------
Net cash used in investing activities (124,739) (60,516)
----------- ----------
Cash flows from financing activities:
Exercise of warrants 548,624
Private placement of preferred stock 350,000
Proceeds from borrowings 249,295
Repayment of borrowings (103,705)
Deferred offering costs (324,450)
Private placement of common stock 500,000
----------- ----------
Net cash provided by financing
activities 898,624 321,140
----------- ----------
Effect of exchange rate changes on cash 78,930 ( 27,193)
----------- ----------
Net decrease in cash ( 944,522) ( 37,841)
Cash - Beginning 1,661,708 224,031
----------- ----------
Cash - Ending $ 717,156 $ 186,190
=========== ==========
Supplemental non-cash financing activities:
During the period ended June 30, 1999
Warrants valued at $200,000 were issued in
connection with the public offering.
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 28
PASW, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of presentation
The accompanying unaudited consolidated financial statements of PASW, Inc.
("PASW", or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position at June 30, 2000, the results
of operations for the three and six months ended June 30, 2000 and June 30,
1999, and the cash flows for the six months ended June 30, 2000 and June 30,
1999 are included. Operating results for the three and six month periods ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000.
The information contained in this Form 10-QSB should be read in conjunction
with audited financial statements and related notes for the year ended December
31, 1999 which are contained in the Company's Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission (the "SEC") on March 29, 2000 and
the unaudited financial statements as of March 31, 1999 filed as a part of the
Company's Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission on July 29, 1999. (File 333-75137).
(2) Earnings per share
The Company adopted SFAS No. 128, "Earnings Per Share", during 1998. SFAS
No. 128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. All prior
period weighted average and per share information has been restated in
accordance with SFAS No. 128.
<PAGE> 29
(b) PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma combined financial statements
contain certain restated financial information. The financial
information reflects the combined pro forma financial position and
results of operations of NETsilicon, Inc. ("NETsilicon") and Pacific
Softworks Technology, Inc. ("Pacific"), for all periods presented,
giving effect to NETsilicon's acquisition of Pacific's strategic
network technology assets as if it had occurred on July 29, 2000 for
balance sheet purposes and at February 1, 1999 for purposes of
preparing the combined statements of operations. The accompanying
unaudited Pro Forma Combined Statements of Operations (the "Pro Forma
Statements of Operations") for the year ended January 31, 2000 reflect
the results of operations of NETsilicon for the year ended January 31,
2000 combined with the results of operations of Pacific for the year
ended December 31, 1999. The Pro Forma Statements of Operations for
the six month period ended July 31, 2000 reflect the operations of
NETsilicon for the six month period ended July 31, 2000 combined with
the results of operations of Pacific for the six month period ended
June 30, 2000. The unaudited Pro Forma Combined Balance Sheet (the
"Pro Forma Balance Sheet") at July 29, 2000 reflects the balance sheet
of NETsilicon at July 29, 2000 combined with the assets purchased
from Pacific at June 30, 2000. The pro forma adjustments included in
the pro forma financial statements do not include adjustments to align
the fiscal periods of NETsilicon and Pacific as these adjustments
would not have a significant impact on the pro forma financial
statements.
The unaudited pro forma combined financial statements are presented
for illustrative purposes only and are not necessarily indicative of
future operating results or financial position.
NETSILICON, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
NETSILICON PACIFIC PRO FORMA PRO FORMA
JULY 29, 2000 JUNE 30, 2000 ADJUSTMENTS COMBINED
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents .......................................... $ 5,716,100 $ 717,200 $ (717,200) b $ 5,716,100
Short-term investments ........................................ 10,224,300 -- -- 10,224,300
Accounts receivable, net ...................................... 4,862,800 102,300 -- 4,965,100
Inventory, net ................................................ 5,537,800 -- -- 5,537,800
Prepaid expenses and other current assets .................. 1,130,600 53,600 -- 1,184,200
------------ ----------- ----------- ------------
TOTAL CURRENT ASSETS ................................. 27,471,600 873,100 (717,200) 27,627,500
PROPERTY AND EQUIPMENT, NET ...................................... 2,394,100 318,000 -- 2,712,100
OTHER ASSETS ..................................................... 2,021,500 1,019,100 1,348,600 a b 4,389,200
------------ ----------- ----------- ------------
TOTAL ASSETS ..................................................... $ 31,887,200 $ 2,210,200 $ 631,400 $ 34,728,800
============ =========== =========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable .......................................... $ 3,941,000 $ 310,800 $ (310,800) b $ 3,941,000
Due to affiliate .......................................... 1,100 -- -- 1,100
Deferred revenue .......................................... -- 144,600 (144,600) b --
Other current liabilities ................................. 3,177,600 -- 570,000 c 3,747,600
------------ ----------- ----------- ------------
TOTAL CURRENT LIABILITIES ............................ 7,119,700 455,400 114,600 7,689,700
------------ ----------- ----------- ------------
STOCKHOLDER'S EQUITY
Preferred stock, $0.01 par value; 5,000,000 authorized;
none issued -- -- --
Common stock, $0.01 par value; 35,000,000 authorized;
Issued and outstanding:
Voting (6,127,500 shares) ............................ 61,400 4,500 (3,600) d e 62,300
Non-Voting (7,500,000 shares) ........................ 75,000 -- -- 75,000
Additional paid-In capital ................................ 25,489,300 5,939,700 (3,669,000) d e 27,760,000
Unrealized loss on investments ............................ (3,100) -- -- (3,100)
Accumulated deficit ....................................... (855,100) (4,293,900) 4,293,900 d (855,100)
Cumulative adjustment for foreign currency translation .... -- 104,500 (104,500) d --
------------ ----------- ----------- ------------
TOTAL STOCKHOLDER'S EQUITY ........................... 24,767,500 1,754,800 516,800 27,039,100
------------ ----------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ....................... $ 31,887,200 $ 2,210,200 $ 631,400 $ 34,728,800
============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 30
NETSILICON, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
NETSILICON PACIFIC PRO FORMA PRO FORMA
JULY 29, 2000 JUNE 30, 2000 ADJUSTMENTS COMBINED
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
NET SALES .................................................... $ 18,866,900 $ 1,162,900 $ -- $ 20,029,800
COST OF SALES ................................................ 7,640,400 48,600 -- 7,689,000
------------ ----------- --------- ------------
GROSS MARGIN ............................................ 11,226,500 1,114,300 -- 12,340,800
------------ ----------- --------- ------------
OPERATING EXPENSES:
Selling and marketing ................................... 5,332,100 1,759,700 -- 7,091,800
Engineering, research and development ................... 2,793,400 1,155,100 -- 3,948,500
General and administrative .............................. 2,039,500 47,700 -- 2,087,200
Amortization of goodwill and purchased intangibles ...... -- -- 441,100 f 441,100
Merger-related costs .................................... -- -- -- --
------------ ----------- --------- ------------
TOTAL OPERATING EXPENSES ........................... 10,165,000 2,962,500 441,100 13,568,600
------------ ----------- --------- ------------
OPERATING INCOME (LOSS)....................................... 1,061,500 (1,848,200) (441,100) (1,227,800)
Other income ............................................ 464,900 -- -- 464,900
------------ ----------- --------- ------------
INCOME BEFORE TAXES ON INCOME ................................ 1,526,400 (1,848,200) (441,100) (762,900)
Taxes on income ......................................... -- -- -- --
------------ ----------- --------- ------------
NET INCOME (LOSS) ............................................ $ 1,526,400 $(1,848,200) $(441,100) $ (762,900)
============ =========== ========= ============
NET INCOME (LOSS) PER COMMON SHARE
Basic .............................................. $ 0.11 $ (0.06)
============ ============
Diluted ............................................ $ 0.10 $ (0.06)
============ ============
SHARES USED IN PER SHARE CALCULATION
Basic .............................................. 13,594,968 90,000 13,684,968
============ ========= ============
Diluted ............................................ 15,910,216 13,684,968
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 31
NETSILICON, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
NETSILICON PACIFIC PRO FORMA PRO FORMA
JANUARY 31, 2000 DECEMBER 31, 1999 ADJUSTMENTS COMBINED
---------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES .................................................... $ 31,840,900 $ 2,242,500 $ -- $34,083,400
COST OF SALES ................................................ 15,422,900 167,500 -- 15,590,400
------------ ----------- --------- -----------
GROSS MARGIN ............................................ 16,418,000 2,075,000 -- 18,493,000
------------ ----------- --------- -----------
OPERATING EXPENSES:
Selling and marketing ................................... 7,560,300 2,706,400 -- 10,266,700
Engineering, research and development ................... 3,083,500 1,625,600 -- 4,709,100
General and administrative .............................. 3,550,500 334,900 -- 3,885,400
Amortization of goodwill and purchased intangibles ...... -- -- 882,100f 882,100
Merger-related costs .................................... -- -- -- --
------------ ----------- --------- -----------
TOTAL OPERATING EXPENSES ........................... 14,194,300 4,666,900 882,100 19,743,300
------------ ----------- --------- -----------
OPERATING INCOME (LOSS)....................................... 2,223,700 (2,591,900) (882,100) (1,250,300)
Other income (expense) .................................. (206,100) 127,800 -- (78,300)
------------ ----------- --------- -----------
INCOME BEFORE TAXES ON INCOME ................................ 2,017,600 (2,464,100) (882,100) (1,328,600)
Taxes on income ......................................... -- -- -- --
------------ ----------- --------- -----------
NET INCOME (LOSS) ............................................ $ 2,017,600 $(2,464,100) $(882,100) $(1,328,600)
============ =========== ========= ===========
NET INCOME (LOSS) PER COMMON SHARE
Basic .............................................. $ 0.18 $ (0.12)
============ ===========
Diluted ............................................ $ 0.17 $ (0.12)
============ ===========
SHARES USED IN PER SHARE CALCULATION
Basic .............................................. 11,326,600 90,000 11,416,600
============ ========= ===========
Diluted ............................................ 11,978,200 11,416,600
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 32
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined financial statements and
related notes of NETsilicon are unaudited. In the opinion of management,
the pro forma financial statements include all adjustments necessary for a
fair presentation of NETsilicon's financial position and results of
operations for the periods presented. These financial statements should be
read in conjunction with the audited financial statements and accompanying
notes included in the Company's 2000 From 10-K as filed with the Securities
and Exchange Commission (the "SEC") on May 1, 2000.
In accordance with the rules and regulations of the Securities and Exchange
Commission, unaudited combined financial statements may omit or condense
certain information and disclosures normally required for a complete set of
financial statements prepared in accordance with generally accepted
accounting principles. However, NETsilicon believes that the notes to the
combined financial statements contain disclosures adequate to make the
information presented not misleading.
The pro forma financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the future financial
position or future results of operations of NETsilicon after the
acquisition of Pacific assets, or of the financial position or results of
operations of NETsilicon that would have actually occurred had the
acquisition of Pacific assets been effected as of the dates indicated.
2. PERIODS PRESENTED
NETsilicon's fiscal year ends on January 31. Prior to the merger, Pacific's
fiscal year ended December 31. The accompanying Pro Forma Statements of
Operations for the year ended January 31, 2000 reflect the results of
operations of NETsilicon for the year ended January 31, 2000 combined with
the results of operations of Pacific for the year ended December 31, 1999.
The Pro Forma Statements of Operations for the six month period ended July
29, 2000 reflect the operations of NETsilicon for the six month period
ended July 29, 2000 combined with the results of operations of Pacific for
the six month period ended June 30, 2000. The Pro Forma Balance Sheet at
July 29, 2000 reflects the balance sheet of NETsilicon at July 29, 2000
combined with the assets purchased from Pacific at June 30, 2000. The pro
forma adjustments included in the pro forma financial statements do not
include adjustments to align the fiscal periods of NETsilicon and Pacific
as these adjustments would not have a significant impact on the pro forma
financial statements.
3. PURCHASE PRICE ALLOCATION AND ACQUISITION COSTS
On August 31, 2000, NETsilicon acquired the strategic network technology
assets of Pacific. The acquired assets, which represented substantially all
of the assets of Pacific, are used to develop and license embedded network
protocols - software that enables electronic devices to communicate over
local and wide area networks.
The purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair
values on the acquisition date. The following represents a preliminary
allocation of the purchase price and is subject to change.
Completed technology........................ $2,417,700
Workforce................................... 228,700
Fixed assets................................ 103,700
Accounts receivable......................... 91,500
----------
Total purchase price........................ $2,841,600
==========
The estimated value of completed technology is based upon a preliminary
independent third party valuation. The purchase price consists of 90,000
shares of the common stock of NETsilicon valued at $2,271,600 based on the
average NETsilicon stock price during a period of five business days before
and after the acquisition date. NETsilicon incurred approximately $570,000
of costs associated with the merger, including $400,000 for investment
banking fees and fees for legal, accounting and consulting.
4. PRO FORMA ADJUSTMENTS
<PAGE> 33
The following pro forma adjustments have been made to the historical
financial statements of NETsilicon and Pacific based upon assumptions made
by management for the purpose of preparing the unaudited Pro Forma
Statements of Operations and Pro Forma Balance sheet.
a) To record the preliminary allocation of the purchase price to
purchased intangible assets.
b) To eliminate assets that were not purchased and liabilities that were
not assumed by NETsilicon.
c) To accrue estimated transaction costs.
d) To eliminate the Pacific common stock and retained earnings accounts.
e) To record the issuance of NETsilicon shares.
f) To record amortization expense for purchased completed technology and
other acquired assets.
5. PRO FORMA EARNINGS PER SHARE
Basic earnings (loss) per share is computed based on the weighted average
number of shares outstanding during the historical period plus the effect
of shares issued in connection with the acquisition of Pacific assets.
Diluted earnings (loss) per share is computed based on the weighted average
number of shares outstanding during the historical period plus shares
issued in connection with the acquisition of Pacific assets and the effect
of dilutive potential common shares which consist of shares issuable under
stock benefit plans.
(c) EXHIBITS
Exhibit No. Exhibit Description
----------- -------------------
2.1* Asset Purchase Agreement, dated as of August 31, 2000,
between NETsilicon, Inc., PASW, Inc. and PSI Softworks
Technology, Inc. (Pursuant to Item 601 (b)(2) of Regulation
S-K, the exhibits to the Asset Purchase Agreement have been
omitted. The Registrant agrees to furnish such exhibits
supplementally upon the request of the SEC.)
99.1* Press release, dated September 5, 2000 announcing Asset
Purchase Agreement.
*Exhibit incorporated by reference to the exhibit previously filed with the SEC
on the Form 8-K filed on September 15, 2000.
<PAGE> 34
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETsilicon, Inc.
----------------
November 14, 2000 By: /s/ Daniel J. Sullivan
----------------- -------------------------------------
Name: Daniel J. Sullivan
Title: Vice President, Finance
Chief Financial Officer
<PAGE> 35
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
2.1* Asset Purchase Agreement, dated as of August 31, 2000,
between NETsilicon, Inc., PASW, Inc. and PSI Softworks
Technology, Inc. (Pursuant to Item 601 (b)(2) of Regulation
S-K, the exhibits to the Asset Purchase Agreement have been
omitted. The Registrant agrees to furnish such exhibits
supplementally upon the request of the Securities and
Exchange Commission.)
99.1* Press release, dated September 5, 2000 announcing Asset
Purchase Agreement.
*Previously filed.
