<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1999
REGISTRATION NO. 333-75137
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Pacific Softworks, Inc.
----------------------------------------------
(Name of small business issuer in its charter)
California 8980 77-0390628
- ---------------------------- ------------------------- --------------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
703 Rancho Conejo Boulevard
Newbury Park, California 91320
(805) 499-7722
----------------------------------------------
(Address and Telephone Number of Principal Executive Offices
and Address of Principal Place of Business or
Intended Principal Place of Business)
Glenn P. Russell
President and Chief Executive Officer
Pacific Softworks, Inc.
703 Rancho Conejo Boulevard
Newbury Park, California 91320
(805) 499-7722
(Name, Address and Telephone Number of Agent For Service)
With Copies To:
Aaron A. Grunfeld, Esq. Gary A. Agron, Esq.
Marty B. Lorenzo, Esq. Law Offices of Gary A. Agron
Resch Polster Alpert & Berger LLP 5445 DTC Parkway, Suite 520
10390 Santa Monica Boulevard, Fourth Floor Englewood, Colorado 80111
Los Angeles, California 90025 (303) 770-7254
(310) 277-8300
Approximate date of commencement of proposed sale to the public:
As soon as practicable following the date on which this registration
statement becomes effective.
<PAGE> 2
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Maximum Maximum
Class Of Amount Offering Aggregate Amount Of
Securities To Be To Be Price Offering Registration
Registered Registered(1) Per Unit(2) Price Fee
- -------------------------------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Units, each comprising one share of
common stock and one warrant(3)(4) 1,092,500 $5.25 $ 5,735,625 $1,594.50
(a) Common stock 1,092,500 -- -- --
(b) Warrants to purchase
common stock 1,092,500 -- -- --
(c) Common Stock 1,092,500 $7.50 $ 8,193,750 $2,277.86
Underwriter's option for the
purchase of units 1 Warrant -- $ 100 $ 1.00
Units, underlying underwriter's option
each comprising one share of
common stock and one warrant(4)(5) 95,000 $6.30 $ 598,500 $ 166.38
(a) Common stock 95,000 -- -- --
(b) Warrants to purchase common
stock 95,000 -- -- --
(c) Common stock 95,000 $7.50 $ 712,500 $ 198.08
Units, each comprising one share of
common stock and one warrant(4)(6) 80,000 $5.25 $ 420,000 $ 116.76
(a) Common stock 80,000 -- -- --
(b) Warrants to purchase
common stock 80,000 -- -- --
(c) Common stock 80,000 $7.50 $ 600,000 $ 166.80
Common stock(7) 200,000 $5.25 $ 1,050,000 $ 291.90
----------- ---------
Total $17,310,475 $4,813.28
=========== =========
</TABLE>
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<PAGE> 3
(1) Assumes the underwriter's over-allotment option is exercised in full.
(2) Estimated pursuant to Rule 457(o) under the Securities Act solely for the
purpose of calculation of the registration fee.
(3) Includes 1,092,500 shares of common stock issuable upon exercise of the
warrants.
(4) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, an indeterminate number of additional shares of common stock are
registered hereunder in the event that provisions preventing dilution are
triggered, as provided in the warrants. No additional registration fee has
been paid for these shares of common stock.
(5) Shares of common stock and warrants to purchase common stock included in the
units issuable on exercise of the underwriter's option for the purchase of
units.
(6) Shares of common stock and warrants to purchase common stock issuable on
exercise of warrants to acquire 80,000 units and also includes 80,000 shares
of common stock issuable upon exercise of the warrants.
(7) Shares of common stock registered on behalf of certain registering
stockholders.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such section 8(a), may determine.
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<PAGE> 4
EXPLANATORY NOTE
This registration statement contains two prospectuses.
The first prospectus forming a part of this registration statement is to be used
in connection with the underwritten public offering of 1,092,500 units,
including 142,500 units subject to the underwriter's over-allotment option. Each
unit consists of one share of common stock and one warrant. The first prospectus
immediately follows this explanatory note.
The second prospectus forming a part of this registration statement is
to be used in connection with the resale by named stockholders of and
consultants to Pacific Softworks of up to:
- 80,000 units issuable upon exercise of their warrants to purchase
units, and
- 200,000 shares of common stock.
The second prospectus will consist of:
- the cover page and inside cover page immediately following the first
prospectus,
- pages 1 through 62, other than the section entitled "Underwriting,"
and pages F-1 through F-16 of the first prospectus,
- pages SS-1 through SS-4,
- page SS-2 which will appear in place of the section entitled
"Underwriting," and
- the back cover page, which immediately follows the inside back cover
page of the first prospectus.
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<PAGE> 5
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission or any applicable state securities
commission becomes effective. This preliminary prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
PROSPECTUS Subject to completion, dated July 8, 1999
950,000 UNITS
[PACIFIC SOFTWORKS, INC. LOGO]
CONSISTING OF 950,000 SHARES OF COMMON STOCK
AND
950,000 WARRANTS
This is our initial public offering of securities. We expect that the
initial public offering price per unit will be between $5.00 and $5.50. Each
unit consists of one share of common stock and one warrant. The common stock and
warrants will trade separately. The public offering price may not reflect the
market price of our securities after the offering.
Each warrant allows its holder to purchase for a period of 24 months one
share of common stock for $7.50. We have the right to redeem all outstanding
warrants at $0.05 per warrant if the closing bid price of our common stock
equals or exceeds $8.00 per share for 15 consecutive trading days.
We expect to list our common stock and warrants on the Nasdaq SmallCap
Market under the symbols "PASW" and "PASWW."
By a separate prospectus concurrent with this offering, security holders
who are not officers or directors will offer for sale up to 80,000 units and
200,000 shares of our common stock. We will not receive any proceeds from the
sale of these securities.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriter a 45-day option to purchase an
additional 142,500 units from us at the initial public offering price less the
underwriting discounts.
<TABLE>
<CAPTION>
Without Over- With Over-
Per Unit Allotment Allotment
-------- ------------- -----------
<S> <C> <C> <C>
Public offering price $ $ $
Underwriting discounts $ $ $
Proceeds to Pacific Softworks before expenses $ $ $
</TABLE>
The underwriter is offering the units on a firm commitment basis and
expects to deliver the units against payment in Los Angeles, California on
____________, 1999.
SPENCER EDWARDS, INC.
JULY ___, 1999
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary............................................................... 2
Risk Factors..................................................................... 5
You Should Not Rely On Our Forward-Looking Statements............................ 15
Use Of Proceeds.................................................................. 16
Dividend Policy.................................................................. 17
Capitalization................................................................... 18
Dilution......................................................................... 19
Selected Consolidated Financial Data............................................. 20
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations................................................................ 21
Business......................................................................... 29
Management....................................................................... 44
Certain Transactions............................................................. 50
Principal Stockholders........................................................... 51
Description Of Securities........................................................ 52
Underwriting..................................................................... 57
Legal Matters.................................................................... 59
Experts.......................................................................... 59
Where You Can Find Additional Information........................................ 59
Index To Consolidated Financial Statements....................................... 61
</TABLE>
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor sale of units means
that information contained in this prospectus is correct after the date of this
prospectus. This prospectus in not an offer to sell or solicitation of an offer
to buy these securities in any circumstances under which the offer or
solicitation is unlawful.
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<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information from this prospectus and may not contain all
the information that is important to you. To understand this offering fully, you
should read carefully the entire prospectus, including the risk factors and the
consolidated financial statements.
OUR BUSINESS
Pacific Softworks develops and licenses software which enables Internet and
Web-based communications. Our software products are embedded into systems and
"information appliances" developed or manufactured by others. Information
appliances are Internet-connected versions of everyday products. Information
appliance manufacturers and software developers have included our products
within the following applications and information appliances:
<TABLE>
<CAPTION>
Applications Information Appliances
- ------------ ----------------------
<S> <C>
- - Office automation - Internet fax, copiers, laser printers, scanners
- - Medical - Patient monitors, imaging systems
- - Multimedia - DVD players, projectors, digital cameras
- - Industrial controls - Vending machines, traffic controls, scoring systems,
security controls
- - Networking - Routers, switches, network controls, cable modems
- - Set-top boxes - Set-top boxes, Internet TV
- - Wireless - Telephones, personal digital assistants, pagers, electronic
organizers
- - Navigation systems - Navigational controls, air traffic controls
- - Defense and aerospace - Engine controls, smart weapons
- - Satellite - Satellite positioning, uplink and downlink of streaming video
</TABLE>
Rapid advances are enabling wired and wireless information appliances to
assume many of the tasks now handled by personal computers. We believe that Web
browsing enabled by embedded software in information appliances used by
businesses and individuals will be a major market. International Data Corp.
estimates that 94% of Internet access is now made through PCs. By 2002, that
percentage is expected to decrease to 64% and the number of information
appliances sold is expected to exceed the number of PCs sold.
We have developed a new proprietary Internet browser for use within
independent, "nonWindows(R)" information appliances. We expect to begin
marketing the initial version of this browser, under the "FUSION WebPilot Micro
Browser(TM)" name, during the fourth quarter of 1999. Our browser may be
effectively placed in use without an operating system and does not require
substantial amounts of memory. We believe that our browser may prove
particularly attractive to manufacturers of information appliances who would
rather give their products a proprietary or subjective "look and feel" than to
be restricted by a browser which requires or depends on the "look and feel" of
commercially available operating systems such as Windows(R).
We have historically licensed our software for a one-time fee. Depending
on the products and their use, this one-time fee typically ranged from $10,000
to $40,000. With the introduction of our new Internet and Web products later
this year, we expect to change the way we price new products to include:
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<PAGE> 8
- a royalty for each product incorporating our new software, and
- a one-time initial license fee.
Since 1992, we have licensed our products to over 400 companies around
the world, including: Alcatel, AT&T/Lucent Technologies, America OnLine, Canon,
Canal+, Cisco, Cocom, Bell Labs, Data General, Concurrent Technologies,
Ericsson, General Instruments, Hughes, Honeywell, Hewlett Packard, Intel,
Motorola, Newbridge, Nortel, Psion, Philips, Samsung, Siemens, ST Microsystems,
Tandberg, Unisys and VLSI.
Our executive offices are located at 703 Rancho Conejo Boulevard,
Newbury Park, California 91320 and our telephone number is (805) 499-7722. Our
Web site address is www.pacificsw.com. Information contained on our Web site
does not constitute part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Units offered: 950,000, each consisting of one share of common stock and one
warrant.
Warrant attributes: Each warrant entitles the holder
to purchase one share of common stock for
$7.50 for the 24 months ending ___________,
subject to our right to redeem warrants at
$0.05 per warrant if the closing bid price of
our common stock equals or exceeds $8.00 per
share for 15 consecutive trading days.
Common stock to be
outstanding after the offering: 4,250,000 shares.
Use of proceeds: We estimate that we will receive net proceeds of about
$4,140,000. We expect to use net proceeds for:
- research and development of our Web products,
- enhancements to existing Internet and application
products,
- marketing and sales,
- intellectual property protection,
- repayment of indebtedness, and
- other general corporate purposes including working
capital.
Proposed Nasdaq SmallCap Common stock: PASW
Market symbols: Warrants: PASWW
</TABLE>
In addition to 4,250,000 shares of common stock outstanding after the
offering, Pacific Softworks may issue 950,000 shares of common stock on exercise
of the warrants and 728,000 shares of common stock on exercise of currently
outstanding options and other warrants.
Concurrent with this offering we have also prepared a separate
prospectus for security holders who are not officers or directors so that they
may sell up to 80,000 units and 200,000 shares of common stock. We will not
receive any proceeds from the sale of these securities. The security holders
have agreed with the underwriter not to sell their securities for 13 months from
the date of this prospectus without the prior written consent of the
underwriter.
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<PAGE> 9
Except where noted otherwise, all information in this prospectus,
including share and per share information, assumes no exercise of the
underwriter's over-allotment option.
SUMMARY CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Unaudited
Year Ended Three Months Ended
December 31, March 31,
----------------------- -------------------
1997 1998 1998 1999
-------- -------- ------ ------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Net revenue $ 3,310 $ 2,787 $ 696 $ 772
Gross profit 3,193 2,687 668 741
Selling, general and administrative 2,110 1,936 386 381
Research and development 834 852 214 324
Depreciation and amortization 64 59 15 13
Former officer's consulting and
administrative expense 314 314 82 82
Loss from operations (129) (474) (29) (59)
Net loss $ (129) $ (474) $ (29) $ (59)
======== ======== ====== ======
Net loss per share, basic and diluted $ (0.04) $ (0.14) $(0.01) $(0.02)
======== ======== ====== ======
</TABLE>
The following table indicates a summary of our balance sheet as of December 31,
1998 and March 31, 1999. The column labeled "as adjusted" reflects our receipt
of estimated net proceeds from the sale of 950,000 units at an assumed initial
public offering price of $5.25 per unit, after deducting underwriting discounts
and estimated expenses.
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Unaudited
March 31, 1999
December 31, ---------------------
1998 Actual As Adjusted
------------ ------ -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents........... $224 $ 461 $ 4,601
Working capital..................... 222 546 4,686
Total assets........................ 643 1,331 5,471
Total stockholders' equity.......... 207 819 4,959
</TABLE>
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<PAGE> 10
RISK FACTORS
The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties of which we are unaware or which we
currently deem immaterial also may become important factors that may adversely
affect us.
WE HAVE REPORTED LOSSES FOR OUR LAST TWO YEARS AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999, AND IF WE DO NOT BECOME PROFITABLE OUR BUSINESS COULD BE
ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT COULD DECLINE.
We reported losses of $129,000 and $474,000 for the years ending
December 31, 1997 and 1998. These losses include about $314,000 paid during each
of those years for a former officer's consulting and administrative expense. We
also reported losses of $29,000 and $59,000 for the three months ended March 31,
1998 and 1999, and have an accumulated deficit of $42,000 as of March 31, 1999.
These losses include $82,000 paid during each of those calendar quarters for the
former officer's consulting and administrative expense. We can provide no
assurance that we will be profitable in the future.
IF THE OUTCOME OF A PENDING ACTION RECENTLY BROUGHT IN THE UNITED STATES
DISTRICT COURT IN OREGON IS DECIDED AGAINST US, WE MAY BE ENJOINED FROM SELLING
THE MAJORITY OF OUR CURRENT PRODUCTS.
In June 1999 we were served with a summons and complaint by United
States Software Corporation. The complaint alleges copyright infringement,
misappropriation of trade secrets, breach of contract and unfair competition.
United States Software asserts that we improperly obtained its source code and
incorporated that source code within our FUSION products. The complaint seeks an
unspecified amount of damages in excess of $1 million, punitive damages and
attorney's fees. The complaint also asks the court to enjoin us from:
- distributing or copying the computer code, and
- disclosing the trade secrets
of United States Software. We have recently filed a response to the complaint.
We have not yet conducted discovery and we are unable to determine the exposure
which we may have to liability in this suit. If the action proceeds to trial and
a decision is rendered against us we may be enjoined from selling TCP/IP
products, which constitute the majority of our current product line. This
outcome would have a material adverse effect on our business, results of
operation and financial condition. In that event the price of our shares could
decline substantially and you could experience material losses in your
investment.
WE MAY INCUR SUBSTANTIAL COSTS IN CONNECTION WITH INTELLECTUAL PROPERTY
INFRINGEMENT CLAIMS THAT OTHERS MAY BRING AGAINST US WHICH COULD ADVERSELY
AFFECT OUR PROFITABILITY AND REDUCE THE VALUE OF YOUR INVESTMENT.
In addition to the technology we have developed internally, we use code
libraries developed and maintained by third parties and have acquired or
licensed technologies from other companies. Our internally developed technology,
the code libraries, or the technology we acquire or license may infringe on the
intellectual property rights of others. These persons may bring claims against
us alleging infringement of their intellectual property rights. If we infringe
or others bring claims against us alleging infringement, our business, financial
condition and operating results could be materially and adversely affected.
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<PAGE> 11
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Aside from the
action discussed in the Risk Factor above, we are not currently involved in any
material intellectual property litigation. We may, however, be a party to
additional litigation in the future to protect our intellectual property or as a
result of an alleged infringement of the intellectual property of others. These
claims and any resulting litigation could subject us to significant liability
for damages and invalidation of our proprietary rights. Litigation, regardless
of its success, would likely be time-consuming and expensive to prosecute or
defend and would divert management attention from our business. Any potential
intellectual property litigation could also force us to do one or more of the
following:
- cease selling, incorporating, or using products or services that
incorporate the challenged intellectual property,
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all, and
- redesign those products or services that incorporate the infringed
intellectual property.
Any of these events could have a material adverse effect on our business,
financial condition and operating results.
BECAUSE WE EXPECT THAT OUR OPERATING RESULTS WILL CONTINUE TO FLUCTUATE, YOU
SHOULD NOT RELY ON THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE
PERFORMANCE.
From time to time we have experienced material period-to-period
fluctuations in revenue and operating results. We anticipate that these periodic
fluctuations in revenue and operating results will occur in the future. We
attribute these fluctuations to a variety of business conditions that include:
- the volume and timing of orders received during the quarter,
- the timing and acceptance of new products and product enhancements by
us and our competitors,
- unanticipated sales and buyouts of run-time licenses,
- stages of product life cycles,
- purchasing patterns of customers and distributors,
- market acceptance of products sold by our customers, and
- competitive conditions in our industry.
As a result of the factors described above we believe that quarterly
revenue and operating results are likely to vary significantly in the future and
that quarter-to-quarter comparisons of our operating results may not be
meaningful. You should therefore not rely on the results of one quarter as an
indication of future performance.
BECAUSE WE DEPEND ON A SMALL NUMBER OF LARGE ORDERS, THE LOSS OR DEFERRAL OF
ORDERS MAY HAVE A NEGATIVE IMPACT ON REVENUE WHICH COULD LOWER THE VALUE OF OUR
SHARES.
Although no customer has accounted for 10% or more of total revenue in
any fiscal year, we derive a significant portion of our software license revenue
in each quarter from a small number of relatively large orders. While we believe
that the loss of any particular customer is not likely to have a material
adverse effect on our business, our operating results could be materially
adversely affected if we were unable to complete one or more substantial license
sales in any future period.
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<PAGE> 12
ANY DECREASE IN THE MARKET ACCEPTANCE OF OUR INTERNET AND WEB PRODUCTS OR LACK
OF ACCEPTANCE OF NEW PRODUCTS WOULD DECREASE OUR REVENUE AND LOWER THE VALUE OF
YOUR INVESTMENT.
Our future results depend heavily on continued market acceptance of our
products in existing and new markets. Revenue from licenses of our suite of
Internet and Web products and sales of our services accounted for all of our
revenue in the year ended December 31, 1998. Our research and development
expenditures for 1997 and 1998 resulted in several new products. We introduced
FastTrack(TM) in November 1998 and expect to market our FUSION WebPilot Micro
Browser(TM) by the fourth quarter of 1999. We cannot give any assurances that
these products will be accepted by our customers.
OUR RECENTLY ADOPTED PRICING STRATEGY FOR NEW WEB PRODUCTS BASED ON FLEXIBLE
UP-FRONT FEES WITH ONGOING ROYALTIES MAY NOT RESULT IN INCREASED REVENUE WHICH
COULD REDUCE THE VALUE OF YOUR INVESTMENT.
Historically we have charged a one-time fee for a source code license
and have occasionally also charged royalties for each copy of our software
embedded in our customers' products. Our recently formulated strategy for new
products is to seek flexible up-front fees with ongoing royalties measured
against our customers' units of production or run times. We may be unsuccessful
in implementing this change to our product pricing. Any increase in the portion
of revenue attributable to royalties will depend on our successful negotiation
of royalty agreements and on the successful commercialization by our customers
of their underlying products.
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES IN THE INTERNET SOFTWARE MARKET, WE MAY BE UNABLE TO COMPETE
SUCCESSFULLY WHICH WOULD REDUCE OUR REVENUE AND THE VALUE OF YOUR INVESTMENT.
The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition could result in:
- pricing pressures, resulting in reduced margins,
- decreased volume, resulting in reduced revenue, or
- the failure of our products to achieve or maintain market acceptance.
Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Each of our products faces
intense competition from multiple competing vendors. Our principal competitors
include Wind River Systems, Inc., Integrated Systems, Inc., Mentor Graphics,
Inc., Microware Systems Corporation and Microsoft Corporation. Many of our
current and potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
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<PAGE> 13
IF WE ARE UNABLE TO RAISE MARKET AWARENESS OF OUR FUSION BRAND, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
If we fail to promote our brand successfully or if we incur significant
expenses promoting and maintaining our FUSION brand names, we may experience a
material adverse effect on our business, financial condition and operating
results. Due in part to the still emerging nature of the market for Internet and
embedded software products and the substantial resources available to many of
our competitors, we may have a time limited opportunity to achieve and maintain
market share. We believe that developing and maintaining awareness of the FUSION
brand names will be critical to achieving widespread acceptance of our products.
We believe that brand recognition will become increasingly important as
competition in the market for our products increases. Successfully promoting and
positioning our brand will depend largely on the effectiveness of our marketing
efforts and our ability to develop reliable and useful products at competitive
prices. As a result, we may need to expand our financial commitment to creating
and maintaining brand awareness among potential customers.
IF WE ARE UNABLE TO DEVELOP ACCEPTABLE NEW PRODUCTS OR ENHANCEMENTS TO OUR
EXISTING PRODUCTS AT THE RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET, WE MAY BE
UNABLE TO COMPETE SUCCESSFULLY AND OUR BUSINESS WOULD SUFFER.
Our future success depends upon our ability to address the rapidly
changing needs of our customers by developing and introducing high quality
products, product enhancements and services on a timely basis and by keeping
pace with technological developments and emerging industry standards. The
markets for our products are rapidly evolving. Failure to develop and release
enhanced or new products, or delays or quality problems in doing so, could have
a material adverse effect on our business, financial condition and operating
results.
As is common in new and rapidly evolving industries, demand and market
acceptance for recently introduced products are subject to high levels of
uncertainty and risk. Furthermore, new products can quickly render obsolete
products that were only recently in high demand. The market for our existing
products may not be sustainable at its current level. We launched several new
products in calendar 1998 and January 1999. We have additional new product
launches, as well as upgrades to our existing products, planned for 1999. The
market for our recently introduced and planned products may not develop or grow.
If the market for these products does not develop or grow we will experience a
material adverse effect on our business, financial condition and operating
results.
BECAUSE WE PLAN TO DEVOTE SIGNIFICANT FINANCIAL AND MANAGEMENT RESOURCES TO
EXPAND SALES AND MARKETING ACTIVITIES OVER THE NEXT 18 MONTHS WE WILL INCUR
SUBSTANTIAL ADDITIONAL OPERATING EXPENSES WHICH MAY NOT RESULT IN MEANINGFUL
REVENUE INCREASES.
To expand our business, we plan to hire additional product engineering,
sales and marketing personnel. Any new hires will require training and may take
six months or more to achieve full productivity. We may not be able to hire
enough qualified individuals when needed, or at all. We can give you no
assurance that our added operating expenses from these activities will result in
meaningful revenue increases.
BECAUSE WE RELY ON A SMALL MANAGEMENT TEAM TO OVERSEE OPERATIONS AND GROWTH, THE
LOSS OF OUR PRESIDENT OR OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
AND DECREASE THE VALUE OF YOUR INVESTMENT.
We depend upon the continued services of a few executive officers and
other key management and development personnel. We do not have employment
agreements with any of our executive officers or key employees. As a result they
could terminate their employment with us at any time. We do not maintain key
person life insurance policies on our president or any of our other employees.
The loss of the services of one or more of our executive officers, engineering
personnel, or other key employees could have a material adverse effect on our
business, financial condition and operating results.
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<PAGE> 14
IF OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS RELATED TO OUR
INTERNET AND WEB SOFTWARE PRODUCTS ARE UNSUCCESSFUL WE MAY EXPERIENCE A MATERIAL
ADVERSE EFFECT ON OUR OPERATIONS WHICH WOULD REDUCE THE VALUE OF YOUR
INVESTMENT.
We regard substantial elements of our Internet and embedded software
products as proprietary and attempt to protect them by relying on:
- copyright,
- trade secret and trademark laws,
- nondisclosure, and
- other contractual restrictions on copying, distribution and technical
measures.
Any steps we take to protect our intellectual property may be inadequate,
time-consuming and expensive.
Despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property. Any infringement
or misappropriation of our intellectual property by third parties could have a
material adverse effect on our business, financial condition and operating
results.
We currently have no issued patents. We believe that one or more
features of our software technology are unique and may be patentable. We expect
to devote a portion of the proceeds from this offering to seek patent protection
for these features. We have no patent applications pending. New patent
applications may not result in issued patents and may not provide us with any
competitive advantages, or may be challenged by third parties. Legal standards
relating to the validity and enforceability of intellectual property rights in
Internet-related industries are uncertain and still evolving.
The future viability or value of any of our intellectual property rights
is uncertain. Effective trademark, copyright and trade secret protection may not
be available in every country in which our products are distributed or made
available through the Internet. Furthermore, our competitors may independently
develop similar technology that adversely affects the value of our intellectual
property.
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<PAGE> 15
IF OUR PRODUCTS ARE DEFECTIVE WE MAY LOSE CUSTOMERS AND ENCOUNTER PRODUCT
LIABILITY CLAIMS THAT WOULD REQUIRE CONSIDERABLE EFFORT AND EXPENSE TO DEFEND
WHICH COULD DAMAGE OUR REPUTATION AND MATERIALLY HARM OUR BUSINESS.
Our products provide functions that are often critical to the
performance of information appliances. The occurrence of errors or failures in
our products could result in adverse publicity, loss of or delay in market
acceptance, or claims by customers against us, any of which could have a
material adverse effect on our business, financial condition and operating
results.
Our end-user licenses contain provisions that limit our exposure to
product liability claims, but these provisions may not be enforceable in all
jurisdictions. Additionally, we maintain limited product liability insurance. To
the extent our contractual limitations are unenforceable or if claims are not
covered by insurance, a successful product liability claim could have a material
adverse effect on our business, financial condition and operating results.
Although we have not experienced any product liability or economic loss
claims, our products and product enhancements are very complex and may from time
to time contain errors or result in failures that we did not detect or
anticipate. The computer hardware environment is characterized by a wide variety
of nonstandard configurations that make pre-release testing for programming or
compatibility errors very difficult and time-consuming. Despite our testing,
errors may be present in new products or enhancements that we deliver to
customers.
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<PAGE> 16
WE MAY BE ADVERSELY AFFECTED IF OUR CUSTOMERS' PRODUCTS ARE NOT YEAR 2000
COMPLIANT.
Although we believe that our products are year 2000 compliant, if our
customers have material sales decreases or other disruptions because their
products are not year 2000 compliant, we may experience reduced license fees and
royalty income. In that event we will suffer a material adverse impact on our
operations.
BECAUSE WE DERIVE MORE THAN 50% OF OUR REVENUE FROM SALES OUTSIDE OF NORTH
AMERICA, WE ARE SUBJECT TO MATERIAL RISKS ASSOCIATED WITH INTERNATIONAL MARKETS.
Our international operations are subject to various risks, including:
- foreign government regulation,
- foreign currency fluctuations which could reduce our revenue in
dollar terms or make our products more expensive,
- more prevalent software piracy,
- longer payment cycles,
- unexpected changes in regulatory requirements, tariffs, import and
export restrictions and other barriers and restrictions,
- greater difficulty in accounts receivable collection,
- potentially adverse tax consequences including restrictions on
repatriation of earnings,
- the burdens of complying with a variety of foreign laws,
- difficulties in staffing and managing foreign operations,
- political and economic instability,
- changes in diplomatic and trade relationships, and
- possible recessionary environments in economies outside the United
States.
These factors may have a material adverse effect on our international
sales and, consequently, our business, operating results and financial
condition.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS, IMPAIR OUR LIQUIDITY AND ADVERSELY AFFECT OUR OPERATIONS.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time we have had discussions and negotiations with companies regarding our
acquiring or investing in their businesses. No discussions with any of these
companies are currently pending. We cannot assure you that we will be able to
identify future suitable acquisitions or investment candidates. If we do
identify suitable candidates and investment opportunities, we cannot assure you
that we will be able to make acquisitions or investments on commercially
acceptable terms or at all. If we acquire or invest in another company or
business opportunity, we could have difficulty in assimilating personnel,
operations, technology and software. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our expenses
and adversely affect our results of operations. We may also expend cash, incur
indebtedness or issue equity securities to pay for any future acquisitions or
investments. The issuance of equity securities would be dilutive to our existing
stockholders. Our liquidity and profitability also may suffer because of
acquisition-related costs or amortization of acquired goodwill and other
intangible assets.
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<PAGE> 17
WE MAY APPLY THE PROCEEDS OF THIS OFFERING AND THE PROCEEDS FROM THE EXERCISE OF
WARRANTS TO USES THAT DO NOT INCREASE OUR PROFITS OR MARKET VALUE.
The net proceeds from the sale of our securities will be used primarily
for research and development, marketing, sales and general working capital. We
may also obtain up to $7,125,000 from exercise of warrants. The proceeds from
any exercise of the warrants will be added to our general working capital. Our
management will have broad discretion in the application of the total proceeds
of this offering in addition to our general working capital and you will not
have the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. The net proceeds may be used for
corporate purposes that do not increase our profitability or market value.
IF WE ARE UNABLE IN THE FUTURE TO OBTAIN NEEDED ADDITIONAL CAPITAL, WE MAY BE
UNABLE TO EXPAND OR SUSTAIN OUR OPERATIONS WHICH MAY ADVERSELY AFFECT THE VALUE
OF YOUR INVESTMENT.
We expect that the net proceeds from this offering, cash on hand, cash
equivalents and commercial credit facilities will be adequate to meet our
working capital and capital expenditure needs for about the next 18 months.
After that, we may require additional funds for product development, market
support and additional expansion.
We can provide no assurance that the warrants will be exercised. We
cannot be certain that additional financing will be obtained on favorable terms,
if at all. If we cannot raise needed funds on acceptable terms, we may be unable
to:
- develop or enhance products,
- take advantage of future opportunities, or
- respond to competitive pressures or unanticipated capital
requirements.
The occurrence of any of these events could have a material adverse effect on
Pacific Softworks.
FUTURE NONPUBLIC SALES OF OUR SECURITIES MAY BE ON TERMS MORE FAVORABLE THAN
THOSE OF THIS OFFERING.
In order to raise additional working capital, we could sell our common
stock or other securities to qualified investors in transactions that are exempt
from registration under the securities laws. These purchasers may acquire our
securities on terms more favorable than those available to you in this offering.
BECAUSE OWNERSHIP IS CONCENTRATED, YOU AND OTHER INVESTORS WILL NOT BE ABLE TO
CONTROL STOCKHOLDER DECISIONS.
Our officers and directors will beneficially own about 71.8% of the
outstanding common stock after this offering. If all the warrants are exercised,
our officers and directors will own about 60.8% of the outstanding common stock.
Our officers and directors will be able to exercise control over all matters
requiring stockholder approval and you and other investors will have minimal
influence over the election of directors or other stockholder actions. As a
result, our officers and directors could approve or cause Pacific Softworks to
take actions of which you disapprove or that are contrary to your interests.
This ability to exercise control over all matters requiring stockholder approval
could prevent or significantly delay another company from acquiring or merging
with us at prices and terms that you might find to be attractive.
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<PAGE> 18
ISSUANCE OF OUR AUTHORIZED PREFERRED STOCK MAY DISCOURAGE A CHANGE IN CONTROL
AND REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND THE HOLDERS OF PREFERRED
STOCK MAY BE GRANTED SUPERIOR VOTING RIGHTS.
We are authorized to issue preferred stock without obtaining the consent
or approval of our shareholders. The issuance of preferred stock could have the
effect of delaying, deferring, or preventing a change in control. Management
also has the right to grant superior voting rights to the holders of preferred
stock. Any issuance of preferred stock could materially and adversely affect the
market price of the common stock and the voting rights of the holders of common
stock. The issuance of preferred stock may also result in the loss of the voting
control of holders of common stock to the holders of preferred stock.
YOU WILL INCUR IMMEDIATE SUBSTANTIAL DILUTION OF $4.15 PER SHARE BY PURCHASING
SECURITIES IN THIS OFFERING.
The initial public offering price applicable to the common stock
included in a unit will be substantially higher than the book value per share of
the common stock before the offering. By purchasing securities in this offering
you will incur immediate substantial dilution of $4.15 per share or 79% and our
existing stockholders will receive a material increase of $0.94 in the net
tangible book value per share of their common stock.
YOU MAY EXPERIENCE ADDITIONAL DILUTION IF WE ARE COMPELLED TO LITIGATE OR
ARBITRATE CLAIMS THAT HAVE BEEN ASSERTED BY GOLENBERG & CO. FOR THE RIGHT TO
PURCHASE 10% OF PACIFIC SOFTWORKS AT A PRICE WHICH IS SUBSTANTIALLY LOWER THAN
THE VALUATION IN THIS OFFERING.
In April 1999 we were notified that a merchant banker, Golenberg & Co.,
claimed rights under a June 1998 letter agreement to purchase 10% of our
outstanding common stock for $400,000. In June 1999 counsel for Golenberg
reiterated this demand and advised us that Golenberg's claims were being
evaluated for possible legal action. Investors in this offering will be
significantly diluted if Golenberg successfully brings a lawsuit against us.
BECAUSE THE MARKET PRICES FOR OUR SECURITIES, LIKE THOSE OF OTHER TECHNOLOGY
ISSUES, MAY BE VOLATILE YOU MAY BE UNABLE TO RESELL OUR SECURITIES AT PRICES
EQUAL TO OR GREATER THAN THE PRICES AT WHICH YOU PURCHASED THEM.
The value of your investment in Pacific Softworks could decline from the
impact of any of the following factors:
- changes in market valuations of Internet software companies,
- variations in our actual and anticipated operating results,
- changes in our earnings estimates by analysts,
- our failure to meet analysts' performance expectations, and
- lack of liquidity.
The stock markets have in general, and with respect to Internet companies in
particular, recently experienced stock price and volume volatility that has
affected companies' stock prices.
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<PAGE> 19
The stock markets may continue to experience volatility that may adversely
affect the market price of our securities.
Stock prices for many companies in the technology and emerging growth
sector have experienced wide fluctuations that have often been unrelated to the
operating performance of those companies. Fluctuations such as these may affect
the market prices of our common stock and warrants.
THE FUTURE SALE OF SHARES BY SELLING SECURITY HOLDERS MAY LOWER THE PRICE OF
COMMON STOCK AND WARRANTS PURCHASED IN THIS OFFERING.
The market prices of the common stock and the warrants could decrease as
a result of large numbers of shares of common stock being available for sale
after the offering. These sales could also make it more difficult for us to
raise funds through future offerings. The 3,300,000 shares of common stock
outstanding before the offering are subject to certain resale restrictions under
federal securities laws. Holders of these shares have agreed that they will not
sell these securities without the written consent of the underwriter for 13
months after the date of this prospectus.
SIGNIFICANT FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK AND WARRANTS
COULD RESULT IN SECURITIES CLASS ACTION CLAIMS AGAINST US WHICH COULD BE COSTLY
TO DEFEND AND DEPRESS THE TRADING PRICES OF OUR SECURITIES.
Securities class action claims have been brought against issuing
companies in the past where there has been volatility in the market price of a
company's securities. Litigation could be very costly and divert our
management's attention and resources. Any adverse determination in litigation
could also subject us to significant liabilities. Any or all of these events
could have a material adverse effect on our business, financial condition and
operating results.
IF WE REDEEM YOUR WARRANTS, YOU MAY BE PREVENTED FROM PARTICIPATING IN THE
APPRECIATION OF THE UNDERLYING COMMON STOCK.
We may redeem your warrants for a nominal amount if the closing bid
price of our common stock equals or exceeds $8.00 per share for 15 consecutive
trading days. If you do not exercise or sell your warrants before the redemption
date, you will only be entitled to receive the redemption price of $0.05 per
warrant. Our redemption of the warrants could force you to:
- exercise them and pay the exercise price at a time when it may not be
advantageous for you to do so,
- sell the warrants at their then current market price when you might
otherwise wish to hold them, or
- accept the redemption price which is likely to be substantially less
than the market value of the warrants.
TRADING IN OUR COMMON STOCK AND WARRANTS MAY BE LIMITED AND COULD NEGATIVELY
AFFECT YOUR ABILITY TO SELL YOUR SECURITIES.
A public market for our common stock and our warrants has not existed
before this offering. Although this offering will result in a trading market for
our common stock and warrants, we do not know how liquid that market might be.
The initial public offering price for the units will
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<PAGE> 20
be determined through negotiations between the underwriter and us. If you
purchase units, you may not be able to resell these securities at or above the
initial public offering price.
IF THE UNDERWRITER DOES NOT ACT AS, OR WITHDRAWS FROM ACTING AS, MARKET MAKER
FOR OUR SECURITIES, THE PRICE AND LIQUIDITY OF OUR SECURITIES FOLLOWING THIS
OFFERING COULD BE ADVERSELY AFFECTED WHICH COULD RESULT IN YOUR INCURRING LOSSES
IN YOUR INVESTMENT.
Although it has no legal obligation to do so, the underwriter may make a
market in and otherwise engage in transactions involving the purchase and sale
of our common stock and warrants. In addition, a significant amount of our
securities may be sold to customers of the underwriter in this offering. These
customers may subsequently buy or sell securities through or with the
underwriter. As a result, the underwriter may be influential in any market that
develops for our securities. The degree of the underwriter's participation in
this market may significantly affect the price and liquidity of our securities.
The underwriter's market making activities, if commenced, may be discontinued at
any time without any prior notice. The underwriter's discontinuance of market
making activities and retail support of our securities could adversely affect
the price and liquidity of the common stock and warrants.
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" as well as within this prospectus generally. In
addition, when used in this prospectus, the words "believes," "intends,"
"plans," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. Forward-looking statements are subject to a
number of risks and uncertainties. Actual results could differ materially from
those described in the forward-looking statements as a result of the risk
factors set forth in this section and the information provided in this
prospectus generally. We do not intend to update any forward-looking statements.
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<PAGE> 21
USE OF PROCEEDS
Based on an assumed public offering price of $5.25 per unit, we expect
that net proceeds from the sale of the 950,000 units sold in this offering will
be approximately $4,140,000, or $4,791,000 if the underwriter's over-allotment
option is exercised in full.
We intend to use the net proceeds approximately as indicated in the
following table.
<TABLE>
<CAPTION>
APPLICATION AMOUNT %
- ----------- ---------- ----
<S> <C> <C>
Research and development of Web products $1,900,000 46%
Enhancements to existing Internet and application products 600,000 14%
Marketing and sales 950,000 23%
Intellectual property protection 150,000 4%
Repayment of bank line of credit 250,000 6%
Repayment of short-term loan 100,000 2%
Other general corporate purposes including working capital 190,000 5%
---------- ----
$4,140,000 100%
========== ====
</TABLE>
We expect to spend up to $1,900,000 over the next 12 to 18 months for
research and development of our Web products. Most of these funds will be used
to hire and train engineers and programming staff experienced in developing
Internet and Web based software products. We also expect to spend up to $600,000
during the same period to hire additional staff who will be mainly devoted to
making ongoing refinements and enhancements to our existing products. We have
budgeted $950,000 to expand our marketing and sales efforts by
- increasing amounts devoted to advertising within trade and industry
magazines and other print media, and
- hiring up to 15 additional persons who will engage in business
development, sales, and customer support.
We expect to spend up to $150,000 for intellectual property protection
over the next 12 to 18 months. We anticipate that most of this amount will be
spent for legal fees and costs in connection with
- domestic and foreign applications for patents on portions of our
technology which may be patentable,
- trademarks, servicemarks and copyrights.
As of July 1, 1999 we had fully utilized our $250,000 bank credit line.
The credit line bears interest at 10% per annum, is due August 1, 1999, is
guaranteed by Glenn P. Russell, our president, and is collateralized by our
accounts receivable. We used the proceeds of this credit line for general
corporate purposes and working capital.
In July 1999 we obtained a commitment for a short-term loan of up to
$200,000 from Spencer Edwards, Inc., our underwriter. As of July 7, 1999 the
underwriter has advanced us $100,000 which we have used for general corporate
purposes and working capital. The loan
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<PAGE> 22
bears interest at 10% per annum and is payable on the earlier of either
October 6, 1999 or upon our receipt of the proceeds from this offering.
We may acquire or invest in complementary businesses, technologies,
services or products and a portion of the net proceeds currently allocated to
other corporate purposes including working capital may be used for such
acquisitions or investments. However, we currently have no understandings,
commitments or agreements for any material acquisition or investment.
The description above represents our best estimate of the uses of the
net proceeds to be received in this offering, based on current planning and
business conditions. The precise allocation of funds among the uses described
above will depend on
- the amount of cash generated by our operations,
- future technological developments,
- the competitive climate in which we operate, and
- the emergence of future opportunities.
We believe that our existing capital resources and the net proceeds of
this offering will be sufficient to maintain current and planned operations for
a period of at least 18 months from the date of this prospectus. Net proceeds
not immediately required for the purposes described above will be invested
principally in investment grade, interest-bearing securities.
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion
of our business and for general corporate purposes. Other than distributions to
shareholders for tax purposes during the period of time we were operating as a
subchapter S corporation we have not declared or paid any cash dividends on
our common stock or other securities. We do not anticipate paying cash dividends
in the foreseeable future. Our line of credit currently prohibits the payment of
dividends.
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<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998 and
our unaudited capitalization as of March 31, 1999:
- on a historical basis, and
- on an as adjusted basis, giving effect to the sale of 950,000 units
at an assumed initial public offering price of $5.25 per unit, after
deducting underwriting discounts and estimated offering expenses.
You should read this table together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," consolidated financial
statements and notes to consolidated financial statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------
December 31, (in thousands)
1998 Actual As Adjusted
------------ ----- -----------
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value;
10,000,000 shares authorized; none issued
and outstanding ............................... $ -- $ -- $ --
Common Stock, $0.001 par value;
50,000,000 shares authorized; 3,300,000
shares issued and outstanding; 4,250,000
shares, as adjusted ........................... 3 3 4
Additional paid-in capital .................... 175 875 5,014
Accumulated earnings (deficit) ................ 18 (42) (42)
Cumulative adjustment for currency
translation.................................... 11 (17) (17)
---- ----- -------
Total stockholders' equity .................... 207 819 4,959
---- ----- -------
Total capitalization ............................. $207 $ 819 $ 4,959
==== ===== =======
</TABLE>
The information provided above excludes:
- 950,000 shares of common stock issuable upon exercise of warrants,
- 728,000 shares of common stock issuable upon exercise of outstanding
options and warrants,
- 95,000 units issuable on exercise of the underwriter's option to
purchase units.
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<PAGE> 24
DILUTION
At March 31, 1999, our unaudited net tangible book value was $536,710,
or $0.16 per share. Net tangible book value per share represents our net
tangible assets less liabilities divided by the shares of common stock
outstanding.
After giving effect to our sale of 950,000 units and our receipt of an
estimated $4,140,000 of net proceeds from the offering, based on an assumed
offering price of $5.25 per unit, all of which is attributable to the common
stock and none of which is attributable to the warrants, adjusted net tangible
book value at March 31, 1999 would have been $1.10 per share. This amount
represents an immediate increase in net tangible book value of $0.94 per share
to existing stockholders and an immediate dilution of $4.15 or 79% per share of
common stock to new investors purchasing units in the offering. The following
table illustrates per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................. $ 5.25
Net tangible book value prior to the offering........... $ 0.16
Increase attributable to new investors.................. 0.94
--------
Adjusted net tangible book value after the offering..... 1.10
--------
Dilution per share to new investors in this offering.... $ 4.15
========
</TABLE>
The following table sets forth as of March 31, 1999, the number of
shares of common stock purchased from Pacific Softworks, the total consideration
paid to Pacific Softworks and the average price per share paid by existing
stockholders and new investors purchasing units in the offering, before
deducting underwriting discounts and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
--------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------ -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 3,300,000 77.6% $ 678,000 12.0% $ 0.21
New investors 950,000 22.4% 4,987,500 88.0% $ 5.25
--------- ----- ----------- -----
Total 4,250,000 100.0% $ 5,665,500 100.0%
========= ===== =========== =====
</TABLE>
The information for existing stockholders in the table above excludes
shares issuable upon exercise of outstanding options or warrants, the
underwriter's option to purchase units and exercise of the underwriter's
over-allotment option. To the extent that currently outstanding options or
warrants are exercised at prices below $5.25, there will be further dilution to
new investors.
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<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31, 1997
and 1998 and the consolidated balance sheet data at December 31, 1997 and 1998
are derived from and qualified by reference to the audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
statements of operations data for the three months ended March 31, 1998 and 1999
and the consolidated balance sheet data at March 31, 1999 have been derived from
our unaudited consolidated financial statements but have been prepared on the
same basis as our audited consolidated financial statements which are included
in this prospectus. In our opinion, these unaudited consolidated financial
statements include all adjustments, consisting of normally recurring
adjustments, considered necessary for a fair presentation of our consolidated
financial position and results of operations for that period.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Unaudited
Year Ended Three Months Ended
December 31, March 31,
----------------------- -------------------
1997 1998 1998 1999
-------- -------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenue ............................. $ 3,310 $ 2,787 $ 696 $ 772
Cost of revenue ......................... 117 100 28 31
-------- -------- ------ ------
Gross profit ............................ 3,193 2,687 668 741
-------- -------- ------ ------
Selling, general and administrative ..... 2,110 1,936 386 381
Research and development ................ 834 852 214 324
Depreciation and amortization ........... 64 59 15 13
Former officer's consulting and
administrative expense ............... 314 314 82 82
-------- -------- ------ ------
Total expense ........................... 3,322 3,161 697 800
-------- -------- ------ ------
Net loss ................................ $ (129) $ (474) $ (29) $ (59)
======== ======== ====== ======
Net loss per share, basic and diluted ... $ (0.04) $ (0.14) $(0.01) $(0.02)
======== ======== ====== ======
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Unaudited
December 31, March 31,
1997 1998 1999
----------- ---- ---------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents...................... $625 $224 $ 461
Working capital................................ 761 222 546
Total assets................................... 1,071 643 1,331
Total stockholders' equity..................... 691 207 819
</TABLE>
See notes 1 and 12 of notes to consolidated financial statements for a
discussion regarding the computation and presentation of basic and diluted net
loss per share.
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<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with "Selected Consolidated Financial Data" and the consolidated financial
statements and related notes.
OVERVIEW
Pacific Softworks develops and licenses a suite of embedded Internet and
Web software products for business and individual customers that seek to add
Internet-based communication capabilities to their information appliances.
In distributing our products, we primarily have licensed source code to
our customers for a one time fee. Manufacturers or developers customize their
information appliances containing our licensed software to serve a particular
need or market.
Our traditional focus and expertise has been on one of the principal
building blocks of the Internet, the underlying information transport protocol
known as TCP/IP. We have subsequently developed additional products that provide
other various essential elements of networked data communication and transport.
We have historically derived the majority of our revenue from the licensing of a
small range of relatively independent protocols that our customers integrate
with their own software products. We are in the process of completing
development of a range of embedded products, including an embedded Web browser
and related software accessories. These products will provide customer ready
solutions for the information appliance and embedded systems market.
Historically, we had no materially significant post sale commitments
following software delivery. As a result we recognized revenue upon product
shipments to customers. We found that many of our older products were becoming
commodity items, with steady price erosion and competition. We could therefore
not support royalty bearing licenses on these products.
With the introduction of our new Internet and Web application products,
we initiated a plan to charge a one-time fee for an initial license and a
run-time or per unit production license fee for each copy of these applications
used in the customer's products. We intend to follow this approach for the
majority of our new products introduced and expected to be sold in 1999. Any
increase in the percentage of revenue attributable to run-time and unit
production licenses will depend on our successful negotiation of run-time and
unit production license agreements and on the successful commercialization by
our customers of their underlying products.
The one-time license fee of our base TCP/IP product has typically been
priced between $10,000 and $40,000. Due to competitive pressures and the
implementation of upgraded TCP/IP protocols, we expect this average sale amount
for our more mature products to decrease by 20% or more per year over the next
few years. We expect that this decay in pricing and reduced gross profit margins
for our mature TCP/IP product line may be partially offset by:
- increased use and thus increased total licenses of TCP/IP,
- availability of the new FastTrack(TM) solutions, which could increase
our average license fee by $10,000,
- availability of our new TCP/IP version 5, which we expect to become
available within the next 12 to 18 months, and that may increase our
average license to as much as $80,000, and
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<PAGE> 27
- availability of our IP security and encryption products before the
end of this fiscal year at prices which we believe will exceed
$80,000 per license.
We anticipate that the FUSION WebPilot Micro BrowserTM will be priced at
approximately $100,000 per unit and above for the initial license, plus
royalties measured against run-time or customer's units of production. We expect
to be licensing and delivering this product before the end of the fourth quarter
of 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net revenue of certain items in our consolidated
statements of operations and comprehensive income:
<TABLE>
<CAPTION>
Unaudited
Year Ended Three Months
December 31, Ended March 31,
---------------------- ----------------------
1997 1998 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue ....................... 100.00% 100.00% 100.00% 100.00%
Cost of revenue ................... 3.53 3.59 4.02 4.01
------- ------- ------- -------
Gross profit ...................... 96.47 96.41 95.98 95.99
------- ------- ------- -------
Selling, general and administrative 63.75 69.47 55.46 49.35
Research and development .......... 25.20 30.55 30.75 41.97
Depreciation and amortization ..... 1.94 2.11 2.16 1.68
Former officer consulting and
administrative expense.......... 9.48 11.28 11.78 10.63
------- ------- ------- -------
Total operating expenses .......... 100.37 113.41 100.15 103.63
------- ------- ------- -------
Net loss from operations .......... (3.90) (17.00) (4.17) (7.64)
Foreign currency translation
adjustment ..................... 1.51 (0.34) (5.74) (3.70)
------- ------- ------- -------
Comprehensive loss ................ (2.39%) (17.34%) (9.91%) (11.34)%
------- ------- ------- -------
</TABLE>
The following table sets forth, for the periods indicated, the
percentage of net revenue by principal geographic area to total revenue:
<TABLE>
<CAPTION>
Unaudited
Year Ended Three Months Ended
December 31, March 31,
--------------- ------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
---- ---- ---- ----
United States .......................... 48% 42% 58% 43%
United Kingdom and Europe .............. 35 40 38 42
Australia and Asia ..................... 15 17 3 14
Other .................................. 2 1 1 1
---- ---- ---- ----
Total .................................. 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
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<PAGE> 28
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET REVENUE
Our net revenue for the three months ended March 31, 1999 increased 11%
to $771,650 from $696,079 for the three months ended March 31, 1998. The
increase in revenue for 1999 was attributable to royalty revenue received from
our operations in Japan. The increase in international sales from 42% to 57% of
total sales is principally due to a decline in domestic sales as a result of
increased competition and related price discounting.
COST OF REVENUE
Our cost of revenue for the three months ended March 31, 1999 totaled
$30,336 compared to $27,843 for the three months ended March 31, 1998. The cost
of revenue in both periods was 4% of net revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased from $386,447 or
56% of revenue in the three months ended March 31, 1998 to $380,815 or 49% of
revenue for the three months ended March 31, 1999. The reduction from period to
period reflects a continuing reduction of sales and operating expenses offset in
part by increases in corporate consulting expenditures related to strategic
planning and marketing and an increase in rent following the relocation of our
principal executive offices to our current location in mid-1998.
RESEARCH AND DEVELOPMENT EXPENSE
Our research and development expense increased from $213,703 or 31% of
revenue in the three months ended March 31, 1998 to $323,824 or 42% of revenue
for the three months ended March 31, 1999. The increase in research and
development expense in 1999 was principally attributable to a continuation of
development of the FastTrack product line and the beginning of development of
the FUSION WebPilot Micro Browser(TM) in 1998.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense decreased from $14,713 in the
three months ended March 31, 1998 to $13,460 in the three months ended March 31,
1999. This decrease was attributable to capitalized costs of computer software
acquired from third party vendors in 1996 that became fully amortized in early
1998.
FORMER OFFICER'S CONSULTING AND ADMINISTRATIVE EXPENSE
Former officer's consulting and administrative expense remained constant
at $82,680 for the three months ended March 31, 1999 and 1998. We incurred this
expense in connection with our buyout of a former officer's employment agreement
in March 1996. At that time the former officer also entered into a covenant not
to compete and into a consulting agreement with Pacific Softworks. Under the
consulting agreement, he agreed to make himself available to provide financial
consulting to Pacific Softworks, as requested. To date, we have not called upon
him to render any significant services. These agreements expire in September
1999 and are not expected to be renewed.
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<PAGE> 29
PROVISION FOR TAXES
Commencing in 1995 we elected to be treated as a subchapter S
corporation. Through 1998 all federal tax liabilities were recognized at the
individual stockholder level. In February 1999 Pacific Softworks terminated the
subchapter S election and became subject to taxation at the corporate level. Had
Pacific Softworks been subject to taxation as a C corporation in 1998, it would
have received a pro forma income tax benefit of $1,099. For the three months
ended March 31, 1999, Pacific Softworks has no income tax liability.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUE
Net revenue decreased approximately 16% from 1997 to 1998. Our revenue
results primarily from fees for licenses of software products, fees for customer
support, training, maintenance and engineering services and royalties. The
decrease in revenue for 1998 was attributable primarily to increased
competition, related discounting on older product categories, delayed
introductions of new products and substantially lower revenue from Japan
stemming from recessionary economic conditions in that country.
The increase in international sales from 52% to 58% of total sales for
1997 and 1998 is principally due to a decline in domestic sales as a result of
increased competition and related price discounting. We expect international
sales to continue to represent a significant portion of net revenue although the
percentage may fluctuate from period to period.
We generally price our foreign licenses in dollars. An increase in the
relative value of the dollar against Japanese and European currencies may reduce
our revenue in dollar terms or could make our products more expensive. As a
result, an increase in the relative value of the dollar against other currencies
may cause our products to be less competitive in foreign markets. To pay
expenses and for other corporate purposes we maintain a small portion of our
funds outside of the United States in local currency. We actively monitor our
foreign currency exchange exposure and to date this exposure has not had a
material impact on the results of operations. To date, we have not utilized
derivative instruments to hedge such exposure.
COST OF REVENUE
Cost of revenue includes direct and indirect costs for the production
and duplication of manuals and media for software products, as well as those
relating to packaging, shipping and delivery of the products to our customers.
Cost of revenue also includes license and other direct purchase costs of
third-party software that we distribute or integrate into our products. Cost of
revenue has remained relatively constant for fiscal 1997 and 1998 at
approximately 4% of net revenue. As a result, gross profit margins for products
have also remained constant at about 96%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased from $2,110,038 to
$1,936,117 or 8%, from 1997 to 1998. Because of a 16% decrease in net revenue,
these expenses as a percentage of revenue increased from 64% to 69%. The higher
absolute expense in 1997 reflected a nonrecurring distribution to the president
and majority stockholder. Pacific Softworks, then a corporation governed under
the provisions of subchapter S of the Internal Revenue Code,
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<PAGE> 30
made the nonrecurring distribution to its president and majority stockholder to
permit him to pay corporate income taxes payable for 1996. The decrease in
expenditures for 1998 reflected reductions in sales staff and related operating
costs in 1998. Our decreases in expenditures were partially offset by increases
in corporate consulting expenditures related to strategic planning and marketing
and an increase in rent following the relocation of our principal executive
offices to our current location in mid 1998.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased from $834,049 to $851,568, or
2%, from 1997 to 1998. Because of a 16% decrease in net revenue, research and
development expense as a percentage of revenue increased from 25% to 31%. The
increase in research and development expense in 1998 was principally
attributable to an increase in the number of employees and consultants we hired
to assist in the development of the FastTrack(TM) product line and the FUSION
WebPilot Micro Browser(TM). These costs were partially offset by a decrease in
cost of third-party software acquired for the development process.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense decreased from $64,195 to $58,850
or 8%, from 1997 to 1998 and remained constant as a percentage of net revenue at
2%. This decrease in 1998 was attributable to certain capitalized costs of
computer software acquired from third party vendors in 1996 that became fully
amortized in early 1998.
FORMER OFFICER'S CONSULTING AND ADMINISTRATIVE EXPENSE
Former officer's consulting and administrative expense remained constant
at $314,286 for 1997 and 1998. This expense increased as a percentage of net
revenue from 9% to 11% as a result of the decrease in our net revenue. We
incurred this expense in connection with our buyout of a former officer's
employment agreement in March 1996. At that time, the former officer also
entered into a covenant not to compete and into a consulting agreement. Under
the consulting agreement, he agreed to make himself available to provide
financial consulting to Pacific Softworks as requested. To date, we have not
called upon him to render any significant services. These agreements expire in
September 1999 and are not expected to be renewed.
PROVISION FOR TAXES
Commencing in 1995 we elected to be treated as a subchapter S
corporation. Through 1998 all federal tax liabilities were recognized at the
individual stockholder level. In February 1999 Pacific Softworks terminated the
subchapter S election and became subject to taxation at the corporate level. Our
historical financial statements do not reflect any income tax provision or
benefit. Had Pacific Softworks been subject to taxation as a C corporation, it
would have received pro forma income tax benefits totaling $48,375 and $177,750
in 1997 and 1998, based on a combined federal and state tax rate of 37.5%. We
will record income tax expense (benefit) in future periods at the corporate
level.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 and March 31, 1999, we had working capital of
$222,477 and $546,095 and cash and cash equivalents of $224,031 and $460,907. We
expect that our cash and financing needs in 1999 will continue to be met by:
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<PAGE> 31
- cash on hand,
- cash generated by operations,
- proceeds of $500,000 from a private sale of securities in February
1999,
- a bank line of credit,
- other short-term loans, and
- net proceeds of this offering.
If these sources of financing are insufficient or unavailable, or if we
experience an increase in operating cash requirements, we would slow the rate at
which we bring additional FastTrack(TM) products and the FUSION WebPilot Micro
Browser(TM) to market. We would also reduce our related marketing and
development activities.
To date, we have satisfied operating cash requirements principally
through internally generated funds. Our operating activities have generated
(used) net cash of $286,567 and ($419,480) for 1997 and 1998 and ($26,286) for
the three months ended March 31, 1999. Cash generated by or used in operating
activities in each period principally reflected the loss from operations for
each period and the related change in working capital components. Reduced
revenue for 1998 contributed to decreases in accounts receivable, accounts
payable and deferred revenue. Our investing activities during 1998 and the three
months ended March 31, 1999 used net cash of $71,888 and $27,982 for capital
expenditures. Our financing activities during 1998 generated net cash of
$94,500. This net cash primarily resulted from our acquisition of the minority
interest in our Japanese subsidiary for $5,500, that was offset by $150,000 of
short-term borrowings of which $50,000 was repaid during the period. Our
financing activities for the three months ended March 31, 1999 include receipt
of $500,000 from our sale to a single corporate investor of 100,000 shares of
common stock. This amount was partially offset by $81,541 representing costs
incurred through that date in connection with this offering and by a $100,000
repayment of borrowings.
We have available a $250,000 bank line of credit, personally guaranteed
by our president and majority stockholder and collateralized by our accounts
receivable, under which no balance was outstanding at December 31, 1998 and
March 31, 1999. In 1998 we borrowed $100,000, interest free, from a company
affiliated with our president and his spouse who is a former director of Pacific
Softworks. Pacific Softworks repaid this loan after December 31, 1998.
During 1999 we hired additional operating personnel and expanded our
pace of operation in anticipation of the proceeds from this offering. As of July
1, 1999 we have fully utilized our $250,000 bank line of credit. In order to
meet our ongoing working capital needs we also obtained in July 1999 a
commitment for a short-term loan from Spencer Edwards, Inc., our underwriter.
The loan commitment provides for advances of up to $200,000 as needed for
general corporate purposes and working capital. The loan carries interest of 10%
per annum from the date of the advance and is payable on the earlier of either
October 6, 1999 or upon our receipt of the proceeds from this offering. On July
6, 1999 the underwriter advanced $100,000 to us against this commitment.
PRIVATE PLACEMENT
In February 1999 we sold 100,000 units to one investor at a price of
$5.00 per share for total proceeds of $500,000. Each unit consisted of one share
of common stock and one common stock purchase warrant entitling the holder to
purchase one share of common stock at $6.00 per share. These warrants expire
March 1, 2001.
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<PAGE> 32
YEAR 2000 ISSUES
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex, as many computer systems will be affected in some way by
the rollover of the two-digit year value to 00. Systems that do not properly
recognize this information could generate erroneous data or cause a system to
fail. The year 2000 issue could create risk for us from unforeseen problems in
our own computer systems and from third parties with whom we deal on
transactions worldwide. Failures of our and/or third parties' computer systems
could have a material impact on our ability to conduct business. Based on our
review and analysis, however, we believe that our computer systems and software
products are year 2000 compliant. We have further concluded that the products we
obtain from our vendors and suppliers for use within our systems and products
are also year 2000 compliant. We have not incurred and do not expect to incur
any material expense in connection with year 2000 matters.
INTRODUCTION OF THE EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and a new currency called the "Euro." These countries agreed to adopt the Euro
as their common legal currency on that date. The Euro trades on currency
exchanges and is available for noncash transactions. The existing sovereign
currencies will remain legal tender in these countries until January 1, 2002. On
that date the Euro is scheduled to replace the sovereign legal currencies of the
member countries.
Our European operations are centered in the United Kingdom, which has
not adopted the Euro. We will evaluate the impact the implementation of the Euro
will have on our business operations. We do not expect the Euro to have a
material effect on our competitive position. We can provide no assurance,
however, that the implementation of the Euro will not have a material adverse
effect on our business, financial condition and operating results. In addition,
we cannot accurately predict the impact the Euro will have on currency exchange
rates or our currency exchange risk. We have historically priced our foreign
licenses in dollars and as a result we have had no material need to hedge our
foreign currency exposure. If competitive conditions require us to license our
products in terms of Euro or other currencies, we may engage in currency hedging
to manage this exposure in the future if we think that it is appropriate for us
to do so.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board, issued Statement
of Financial Accounting Standards No. 130. FAS 130 establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from nonowner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. We adopted the disclosure prescribed by FAS 130
in fiscal 1997.
In June 1997 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. We have not
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<PAGE> 33
yet determined the impact, if any, of adopting this statement. We will adopt the
disclosures prescribed by FAS 131 in the year ending December 31, 1999.
In October 1997 and March 1998 the American Institute of Certified
Public Accountants issued Statements of Position 97-2, "Software Revenue
Recognition," and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," which we are currently required to adopt
for transactions occurring in the fiscal year beginning January 1, 1998. SOP
97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. We believe that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on our current licensing or
revenue recognition practices. However, should we adopt new licensing practices
or change our existing licensing practices, our revenue recognition practices
may change to comply with the accounting guidance provided in SOP 97-2 and SOP
98-4.
In April 1998 the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for
determining whether computer software is internal-use software as well as
guidance on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. We have not yet determined the
impact, if any, of adopting this statement. We will adopt the disclosures
prescribed by SOP 98-1 in the year ending December 31, 2000.
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<PAGE> 34
BUSINESS
OUR BUSINESS
We develop and license Internet and Web related software and software
development tools. Our 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, personal digital assistants and other
digitally based devices.
Rapid advances are enabling wired and wireless information appliances to
assume many of the tasks now handled by personal computers. We believe that Web
browsing enabled by embedded software in information appliances used by
businesses and individuals will be a major market. International Data Corp.
estimates that 94% of Internet access is now made through PCs. By 2002, that
percentage is expected to decrease to 64%. By 2002 the number of information
appliances sold is expected to exceed the number of PCs sold. We believe our
Internet and Web related software development tools offer significant benefits
to our customers including:
- accelerated product development and market entry,
- portability across multiple hardware and software system
environments, and
- comprehensive embedded solutions that enable information appliances
to connect with the Internet and use the Web.
Information appliance manufacturers and software developers have included our
products within the following applications and information appliances:
<TABLE>
<CAPTION>
Applications Information Appliances
- ------------ ----------------------
<S> <C>
- - Office automation - Internet fax, copiers, laser printers, scanners
- - Medical - Patient monitors, imaging systems
- - Multimedia - DVD players, projectors, digital cameras
- - Industrial controls - Vending machines, traffic controls, scoring systems,
security controls
- - Networking - Routers, switches, network controls, cable modems
- - Set-top boxes - Set-top boxes, Internet TV
- - Wireless - Telephones, personal digital assistants, pagers, electronic
organizers
- - Navigation systems - Navigational controls, air traffic controls
- - Defense and aerospace - Engine controls, smart weapons
- - Satellite - Satellite positioning, uplink and downlink of streaming video
</TABLE>
OUR STRATEGY
We intend to evolve and refine our business to track the growth of
embedded software in information appliances that incorporate Internet and Web
communications capabilities. As information appliances proliferate, we
anticipate that our opportunities for long term revenue growth will also
increase.
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<PAGE> 35
Our objective is to be a leading provider of embedded software that
enables information appliances and other devices to connect with and communicate
through the Internet and Web. To attain our objective and to increase revenue,
we intend to:
- Increase sales and marketing activities,
- Expand our existing collaborative relationships to capitalize on our
new micro-browser and other technologies designed for information
appliances,
- Create new collaborative relationships with key information appliance
manufacturers,
- Maintain research and development of new Internet-based products that
enable reliable and secure communication and transport of data over
the Internet, and
- Continue to provide additional functions and features to our existing
and upgraded software and communication products.
BACKGROUND
INDUSTRY BACKGROUND - SIGNIFICANT GROWTH OF THE INTERNET
The Internet has grown in less than a decade from a limited research
tool to a global network consisting of millions of computers and users. The
Internet is expected to continue to grow rapidly. We estimate that the number of
Internet users worldwide will grow from approximately 69 million in 1997 to 320
million in 2002. The number of Internet Web sites is growing rapidly. The number
of Web sites detected by the Netcraft Web Server Survey increased from
approximately 526,000 in November 1996 to approximately 1.6 million in November
1997, and to over 3.5 million in November 1998, reflecting annual growth
exceeding 100%.
Network Solutions, Inc., which estimates that it holds a 75% worldwide
market share in domain name registrations, registered over 1.9 million new
domains in 1998, nearly double those of the previous year. The growth of the
Internet is primarily attributable to its value as a low-cost, open, and readily
accessible platform for communications and commerce.
As a result of these attributes, organizations are increasingly
embracing the Internet as a principal platform for communicating with key
constituents and conducting business. Internally, many organizations have
adopted Internet-based systems to facilitate communications among employees and
to automate internal business processes. Many organizations are adding Web-based
applications to increase sales, cut costs, and improve customer service. These
applications range from Web sites offering electronic brochures, to electronic
acquisition of goods and services, and automated customer service and support.
Organizations are making large investments in these applications to
create meaningful and attractively presented content that informs, entertains,
and communicates. Emerging applications now enable organizations to attract
customers and build customer loyalty by offering dynamic, personalized content.
Web-based applications for suppliers and distributors have also significantly
improved business-to-business procurement, payment systems, and logistics
planning. Entirely new businesses have emerged that have been developed
specifically to exploit the unique characteristics of the Internet and
e-commerce. International Data Corporation forecasts the U.S. Internet economy
to grow from $124 billion in 1998 to $518 billion in 2002.
Advertising revenue has also played an important role in the growth of
the Internet. Attracted by increasing numbers of users, Internet-based
businesses have developed that are supported primarily by advertising revenue.
Traditional businesses have also realized incremental
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<PAGE> 36
advertising spending from their Web sites. We estimate that Internet advertising
spending will grow from $2.1 billion in 1998 to $7.1 billion in 2002.
GROWTH OF INTERNET TECHNOLOGY, CONTENT AND INFRASTRUCTURE
Organizations are supporting their Internet-based systems by investing
heavily in technology, content, and infrastructure. Forrester Research estimates
that spending on software and services for e-commerce alone will exceed $5.6
billion in 1998 and $35 billion by 2002. The creation of Internet content
continues to grow rapidly by any measure. For example, as of the end of May
1998, the AltaVista search engine had indexed more than 140 million Web pages,
an increase of more than 40 million pages in the first five months of 1998.
The Internet uses Web and specialized servers for different tasks and
forms of communications. For example, specialized servers are used for Web
browsing, email, chat, news groups, file transfers, and audio and video
streaming. A measure of the growth of the Internet infrastructure is the number
of Web and other Internet servers that are installed. These servers respond to
requests for information and manage data. We estimate that the number of Web and
other Internet servers installed will grow from approximately 6.3 million in
1998 to nearly 12 million in the year 2002.
TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL
Transmission Control Protocol/Internet Protocol, which we refer to below
as "TCP/IP," is a suite of communications protocols that have been adopted as a
standard and enable the communications that take place on the Internet. As a
standard, TCP/IP enables Internet users to adopt or acquire pre-made, "off the
shelf" products, such as those of Pacific Softworks, and eliminates the need by
those users to develop a proprietary communications infrastructure on their own.
The TCP/IP stack is a collection of components consisting of various layers of
protocols and programs that operate together to transfer data over the Internet.
These protocols include the Internet Protocol, various messaging and addressing
protocols, and the Transmission Control Protocol.
Embedded systems consist of a microprocessor and related software
incorporated into a product and dedicated to performing a specific set of tasks.
The market for embedded Internet applications continues to grow substantially as
customers deploy TCP/IP based networks. TCP/IP and related technologies are
emerging as the building blocks for next-generation wired and wireless networks.
According to Datapro, total industry sales of TCP/IP products are projected to
grow at a compounded annual growth rate of 11.6% with industry sales rising from
$1.6 billion in 1995 to $2.7 billion in 2000.
We believe that key elements defining our market today include the
following:
- TCP/IP is a commodity type product that remains a key component of
the Internet. Generic public domain software for TCP/IP is available
at low cost.
- The competitive market for TCP/IP products currently focuses on
selling value-added applications, such as file transfer protocols
designed to send large files over the Internet, email, and management
tools that enhance the embedded protocol stack.
- The market is migrating away from proprietary protocols to standard
Internet protocols.
- Manufacturers continue to implement Internet and Web embedded
software in a growing number of consumer and industrial information
appliances.
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<PAGE> 37
- International market growth will ultimately outpace market growth in
the United States.
- As more powerful microprocessors become available and decrease in
price, embedded systems are being used in a wider range of
applications and are facilitating the development of a new generation
of information appliances. Emerging embedded Internet applications
for interactive entertainment, network computers, remote management
and other uses may offer significant additional opportunities for
embedded systems and information appliances.
- Manufacturers of products using embedded technology must bring
complex applications for embedded systems to market rapidly and
economically. Developing embedded applications has evolved from a
relatively modest programming task to a complex engineering effort.
As more powerful and affordable microprocessors have become
available, products based on them have become richer in features and
functions.
- More sophisticated software solutions are required to develop these
more complex applications, frequently including a real-time operating
system and Internet and Web products that provide developers with far
more features, higher performance and greater productivity than those
necessary or feasible for programming prior generations of
microprocessors.
- As embedded applications increase in complexity, the costs associated
with providing software development, support and training of
engineers are rising rapidly. In this environment, time-to-market,
conformance to standards and product reliability have become critical
issues for companies developing information appliances and other
devices which may be connected to the Internet.
OUR PRODUCTS
We have designed FUSION products with the developer in mind. The FUSION
solution assists system developers by adding compliant Internet protocols and
applications to their products. FUSION products are very flexible and portable.
Our products are not dependent on any particular hardware or software. Our
products are also designed for easy integration.
Our FastTrack(TM) development products provide a pre-built "drop-in
solution" that facilitates quick and easy protocol implementation within the
products of our customers. FUSION FastTrack(TM) solutions provide users with a
complete suite of networking tools to ease the development and porting of new
projects. Our customers do not face the uncertainty of trying to determine what
components will work with FUSION. Our engineers have integrated FastTrack(TM)
with the processor, operating system, compiler, debugger and development board
to assure a simplified and reliable drop-in solution that moves a customer's
project to more rapid completion. A user need only add its application and then
transfer our software to the targeted hardware or device.
FUSION protocols products are not dependent on any particular processor.
They have been and are currently being developed and integrated by us and our
customers under the FastTrack(TM) product line for several families of
processors including those of:
- Advanced Micro Devices - MIPS Technologies
- Advanced Risc Machines - Motorola Corporation
- Analog Devices - NEC
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<PAGE> 38
- ARC - Philips
- Hitachi - Siemens
- Hyperstone - ST Microsystems
- Intel Corporation - Texas Instruments
- LSI Logic
Our Internet and Web server products provide an integrated suite of critical
functions which feature:
- a small sized, fast, efficient, high performance embedded Internet
protocol stack,
- an extensive range of Internet and Web applications,
- custom-built software code optimized for embedded systems,
- mature software code for the Internet products that have been tested
and used in a wide variety of products by companies including Alcatel
Telcom, AT&T/Lucent Technologies, Hewlett-Packard, Honeywell, Hughes
Aircraft, Intel, Cisco and SGS Thomson,
- code developed for embedded systems and information appliances with
fine tuning capabilities built into the code to optimize Internet
connectivity for specific applications,
- multiple interface software support for most of the major
communication chip sets, and
- pre-built, ready to add "drop-in solutions" for easy integration of
customer application software across multiple processor platforms.
OUR INTERNET AND APPLICATION PRODUCTS
FUSION TCP/IP. This product enables data to be transported over the
Internet. Our product is not dependent on any particular processor, operating
system or compiler. FUSION is high performance, small, tunable and can be
readily incorporated in a customer's information appliances and other embedded
products.
FusOS. This product is our FUSION operating system. Customers may choose
to use FusOS or remove it from our Internet product and replace it with any
commercial operating system of their choice.
FUSION RIP, Routing Information Protocol. RIP routers send broadcast
messages onto a network and contain routing information about the network. This
information is shared among all the RIP-capable routers in a network thereby
allowing each router to understand where it exists in a network and where its
routes lead. RIP specifies how routers exchange routing table information.
Industry standards describe and prescribe the specifications required to
implement RIP. Our FUSION RIP is a high-performance portable software engine
that implements IP forwarding and route generation consistent with industry
standards. With RIP, routers periodically exchange entire tables of routing
data. Because this is inefficient, RIP is gradually being replaced by a newer
protocol called Open Shortest Path First Protocol, or OSPF.
FUSION OSPF, Open Shortest Path First Protocol. Unlike RIP, which
transfers entire tables of routing data, OSPF transfers only routing information
which has changed since the previous transfer. As a result, use of this protocol
reduces the amount of data to be transmitted
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and conserves system resources. This product has been designed specifically for
use in high performance multi-protocol routers.
FUSION PPP, Point-to-Point Protocol. This application links one device
to another over telephone lines and cable. This product provides a means for
transmitting packets of data known as datagrams over serial point-to-point
links.
FUSION SNMP, Simple Network Management Protocol. SNMP helps to manage
and control devices over the Internet. SNMP is a set of protocols that
interfaces transparently into FUSION TCP/IP.
FUSION FTP, File Transfer Protocol. This application software allows the
efficient sharing of files, programs or data between devices over the Internet.
FTP also provides a secure way to allow or deny access to specific files or
directories among diverse systems.
FUSION TFTP, Trivial File Transfer Protocol. This product is a subset of
FTP that allows the efficient transfer of files among diverse host systems
without the extended features and potential overhead or consumption of computing
resources associated with FTP. TFTP is designed with small size and easy
implementation in mind for devices with minimal memory.
FUSION Telnet. This product is a general, bi-directional oriented
communications application which allows a standard method of interfacing or
connecting terminal devices and terminal-oriented processes to each other. This
application software can be used for terminal-to-terminal and/or
application-to-application communications.
FUSION SMTP, Simple Mail Transfer Protocol. This product is a protocol
used for sending email messages between or among servers on a network. SMTP is
independent of any transmission protocol or operating system and only requires a
reliable data stream. We have designed FUSION SMTP to be small, efficient and
easy to implement in virtually any environment.
FUSION POP3, Post Office Protocol Version 3. This software provides
messaging capability within products or systems that do not have the memory or
other resources to use SMTP or where there is no continuous Internet connection.
POP3 is typically used to access and retrieve email that is being held on a mail
server. Most email applications, sometimes called an email client, use a POP
Protocol. POP3 is independent of any transport protocol or operating system. We
have designed FUSION POP3 to be a small, efficient messaging client that is easy
to implement in environments where memory and system resources are sparse.
FUSION BOOTP, Bootstrap Protocol. BOOTP provides a secure way to allow
or deny access to specific files or directories among diverse systems. This
Internet protocol enables a diskless device to discover its own IP address, the
IP address of a BOOTP server on the network and a file to be loaded into memory
to activate or boot the device. This application software allows the efficient
sharing of files, programs or data among diverse host systems.
FUSION DHCP, Dynamic Host Configuration Protocol. This protocol assigns
dynamic addresses to devices linked to the Internet. With dynamic addressing, a
device can have a different address every time it connects to the Internet. DHCP
also supports a mix of fixed and dynamic Internet addresses. Dynamic addressing
simplifies network administration because the software keeps track of the
addresses rather than requiring an administrator to manage the task. This means
that a device can be added to the Internet without the difficulties associated
with
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manually assigning it a unique address. Many Internet service providers use
dynamic addressing for dial-up users.
OUR WEB PRODUCTS
FUSION WebPilot Micro Browser(TM). Our FUSION WebPilot Micro Browser(TM)
is an embedded browser aimed at applications like set-top boxes, wired and
wireless telephones, other hand-held information appliances, kiosks and other
remote Internet information appliances. This application has been designed for
limited memory environments and is independent of the operating system,
processor or compiler. It has been designed to be applicable across diverse
computer systems and environments.
Unlike other browsers based on Windows(R), the FUSION WebPilot Micro
Browser(TM) is designed for applications where space and computing resources are
limited. Unlike other browsers, the FUSION WebPilot Micro Broswer(TM) is not a
modified or simplified version of existing PC code. Our browser has also been
designed specifically for embedded applications. We believe that our product is
the only embeddable Web browser that currently can make this claim. Our product
will provide full browsing capabilities in an embedded environment without
needing a full PC-type operating system such as Microsoft Windows(R) NT. In
addition to browsing capabilities, the FUSION WebPilot Micro Browser(TM) will
include email and e-commerce applications.
The FUSION WebPilot Micro Browser(TM) has its own embedded windowing and
graphical support. These features allow users to create custom designs and
custom fonts and icons. We believe that these features are particularly
important in addressing foreign languages such as Japanese and in developing
branded presentation screens for customers.
We have designed the FUSION WebPilot Micro Browser(TM) to permit
incorporation of various add-on modules. Our browser will have a functionality
and presentation similar to those of the much larger PC-based browsers such as
Internet Explorer and Netscape but will have substantially reduced memory
requirements. We intend actively to market and deliver the FUSION WebPilot Micro
Browser(TM) during the third quarter of 1999.
FUSION Embedded Web Server. This application software provides Web
servers with the capability to monitor and manage any Internet connected device
through the Web. Examples of devices which could incorporate this product
include:
- video cameras,
- vending machines,
- utility power meters,
- medical equipment, and
- other remote devices.
The FUSION Web Server is compatible with the FUSION WebPilot Micro Browser(TM)
and other standard browsers including Netscape, Mosaic and Internet Explorer. We
intend actively to market and deliver the FUSION Web Server version 1.0 during
the fourth quarter of 1999.
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OTHER PRODUCTS WE INTEND TO MARKET
Over the next 12 to 18 months we intend to introduce and market the
products described below:
FUSION 5. This product is our major TCP/IP upgrade. It will contain
major enhancement, significant improvements to our existing version and
compliance with changing industry standards.
FUSION Mobile IP. We are designing this product for use within wireless
and cellular applications. Internet protocols do not currently operate
efficiently in wireless environments. We are designing Mobile IP to handle
information processing delays and interruptions associated with Internet
protocols in wireless applications.
FUSION IPsec. This product is the FUSION IP security protocol suite
which provides privacy and authentication services at the Internet Protocol
layer. IPsec will use advanced encryption technology and is designed to provide
secure financial and e-commerce transactions from information appliances over
the Internet.
FUSION Satellite IP. FUSION Satellite IP is being designed to handle
communication over satellite links for uplink and downlink modes and will adapt
to the delays inherent in satellite communications. We expect this product to
add the power and scalability required for Internet protocols to work in a
slow-start or delayed environment such as in satellites and set-top boxes.
FUSION MultiLink PPP. MultiLink PPP will allow users to broadcast data
simultaneously to multiple devices within different operating environments and
will allow users to transfer more data by combining available links. MultiLink
PPP will extend the features and capabilities of PPP over multiple links or
channels. We expect to design both FUSION PPP and MultiLink PPP modules for use
within any major embedded processor.
SERVICES AND SUPPORT
Pacific Softworks seeks to provide comprehensive customer service and
support which help customers realize the value and potential of our products.
TRAINING CLASSES
We offer several training courses and workshops for an additional fee.
We provide courses monthly at our executive office in California or in the
United Kingdom. We also provide training courses at customer sites. We tailor
these training courses to meet specific customer needs and schedules.
TECHNICAL SUPPORT
Our technical support staff assists customers with problems and
questions in the installation and use of our products. We bundle technical
support with product updates and maintenance on an annual fee basis.
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ENGINEERING SERVICES
We provide a number of services on a fee-for-service basis including
application-level consulting, customization and porting to proprietary
semiconductor architectures. We coordinate and perform these services in North
America, Japan and Europe.
INDUSTRY COLLABORATION
Pacific Softworks works with various companies in jointly developing
products for the Internet market for those companies and their customers. The
nature of this work is generally a process of informal collaboration that does
not require written agreements or ongoing legal obligations. We have described
some of our more significant collaborations below. We plan to continue
developing these and other relationships.
INTEL. Under a program called "wired for manageability," Intel has
worked with Pacific Softworks and has incorporated FUSION Internet software
products into various Intel products.
MOTOROLA. Pacific Softworks and Motorola have collaborated for a number
of years on providing Internet connectivity for most of the Motorola product
families. Pacific Softworks has provided Internet solutions for Motorola
customers. In return members of the Motorola sales force and application
engineers have recommended Pacific Softworks as a solution partner to their
customers.
ST MICROELECTRONICS. ST Microelectronics has worked with Pacific
Softworks in the United States and Europe on incorporating our products with the
set-top boxes, cable modems and other product designs of ST Microelectronics.
ADVANCED RISC MACHINES. Advanced RISC Machines and Pacific Softworks
have worked together to incorporate FUSION products onto the ARM7 development
board, a foundation used for the development of other products. ARM recommends
Pacific Softworks products to its customers.
TEXAS INSTRUMENTS. Since late 1998 Texas Instruments has been evaluating
the FUSION Protocols on its set-top box development board. We are currently
discussing joint development for new Texas Instruments products. In addition,
FUSION Internet protocols have been incorporated into digital signal processors
of Texas Instruments.
ANALOG DEVICES INC. Analog has licensed our email technology for use in
conjunction with its SHARC chip set. The license is royalty bearing. These
digital signal processors are targeted at a variety of communications
applications including digital television and video phones. Our software will be
bundled with the chip set that will also form part of Analog's SHARC development
platform design. We expect to work with Analog to meet the requirements of its
customers and to work on joint developments for the next generation of
information appliance technology.
TOOLS AND OPERATING SYSTEM COLLABORATION
We currently work or collaborate with the following companies in
developing and expanding our FastTrack(TM) suite of products:
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GREENHILLS SOFTWARE. Several of our FastTrack(TM) developer kits use the
GreenHills' tools suite. These products provide a robust development environment
that is well accepted in the embedded market.
EXPRESS LOGIC. We have worked with Express Logic for about two years. We
believe that Express Logic has superior real-time operating systems products for
the embedded market. Most of our FastTrack(TM) solutions are built using this
real-time operating system. In addition, with the exception of Germany and
Switzerland, Pacific Softworks distributes Express Logic software code on a
nonexclusive basis worldwide.
DIAB DATA CORPORATION. Pacific Softworks has worked with Diab Data for
over three years on Motorola platforms. Diab Data is a leading supplier of
software tools for Motorola based products.
SOFTWARE DEVELOPMENT SYSTEMS. Pacific Softworks has collaborated with
Software Development Systems to use the Software Development Systems compiler
for Motorola platforms. Based on information available to us, we believe that
Software Development Systems has over 50% of compiler sales for Motorola
products.
GAIO JAPAN. GAIO is one of the largest suppliers of integrated tools in
Japan. We are currently building our Hitachi FastTrack(TM) products with the
complete tools suite from GAIO. In return we believe we have become the Internet
software supplier of choice for GAIO.
WIDE AREA NETWORK COLLABORATION
NEXT LEVEL. Next Level and Pacific Softworks have recently co-developed
a complete router reference platform with Motorola for the small office/home
office market. This router reference platform is being reviewed by 3COM and
other companies. The collaboration is continuing for other wide area network
products. Pacific Softworks is a worldwide value added reseller for Next Level.
The combination of our products with those of Next Level provides a complete
WAN/LAN solution for the products manufactured by our customers.
UNISOFT JAPAN. Unisoft is experienced in developing and integrating
Internet and Web protocols for customer applications. Unisoft also provides wide
area network solutions for the Japanese market. Pacific Softworks and Unisoft
have cooperated on several joint developments involving our FUSION WebPilot
Micro Browser(TM) within automobile navigation systems.
CUSTOMERS
Since 1992, Pacific Softworks has licensed its products to over 400
companies around the world. In the last three fiscal years those customers have
included Alcatel, AT&T/Lucent Technologies, Cisco Systems, Cocom, General
Instruments, Hewlett Packard, Honeywell, Intel and SGS Thomson Microelectronics.
No single customer accounted for more than 10% of our total revenue in
1997 or 1998.
MARKETING, SALES AND DISTRIBUTION
In North America, Europe and Japan, we market our products and services
primarily through our own direct sales organization, which consists of
salespersons and field application engineers. As of June 30, 1999, Pacific
Softworks had three domestic salespersons and field
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application engineers located in North America, one salesperson and field
application engineer in Europe and two salespersons in Japan.
We distribute our products in Japan through a wholly owned subsidiary,
Network Research Corporation Japan. We have licensed our products exclusively to
Network Research for distribution in Japan.
We have appointed international distributors to serve customers in
regions not serviced by our direct sales force. We also collaborate with
semiconductor and software vendors and work closely with a number of system
integrators worldwide. We believe these relationships enable us further to
broaden the geographic and market scope for our products.
Revenue from international sales represented approximately 52% and 58%
of our total revenue in fiscal 1997 and 1998. Revenue from international sales
represented approximately 57% of our total revenue for the three months ended
March 31, 1999.
Pacific Softworks has experienced and expects to continue to experience,
significant seasonality of revenue resulting primarily from customer buying
patterns and product development cycles. We have generally experienced the
strongest demand for our products in the fourth quarter of each fiscal year and
the weakest demand in the first quarter of each fiscal year. Quarterly revenue
has typically decreased in the first quarter of each fiscal year from the fourth
quarter of the prior fiscal year.
COMPETITION
The embedded Internet and Web-based software industry is highly
competitive and is characterized by rapidly advancing technology. We believe
that competition in our markets is based on:
- product capabilities,
- price/performance characteristics,
- product portability,
- ease of use, and
- support services and corporate reputation.
We compete with other independent software vendors, including Wind River
Systems, Inc., Integrated Systems, Inc., Mentor Graphics, Inc. (through its
acquisition of Microtec/Ready Systems), Microware Systems Corporation and
Microsoft Corporation. In addition, hardware or other software vendors could
seek to expand their product offerings by designing and selling products that
directly compete with or adversely affect sales of our products.
Many of our existing and potential competitors have substantially
greater financial, technical, marketing and sales resources than we have. We are
aware of ongoing efforts by competitors to emulate the performance and features
of our products and we can provide no assurance that competitors will not
develop equivalent or superior technology to that of Pacific Softworks.
Because we have been substantially dependent on our TCP/IP family of
Internet products and services, the effects of competition could be more adverse
on us than would be the case if we had a broader product offering. In addition,
competitive pressures could cause us to reduce
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the prices of our products, which would result in reduced profit margins. We
cannot assure you that we will be able to compete effectively against our
current and future competitors. If we are unable to compete successfully, our
business, financial condition and operating results would be materially
adversely affected.
PRODUCT DEVELOPMENT AND ENGINEERING
The embedded software industry faces a fragmented market characterized
by ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. We believe that our success will depend in
large part on our ability to:
- maintain and enhance our current product line,
- develop and introduce in a timely manner new products that take
advantage of technological advances,
- identify and implement emerging standards,
- offer products across a spectrum of microprocessor families used in
the embedded systems market, and
- support sustained marketing and promotion of brand identity and
product lines.
During 1997 and 1998 we incurred product development and engineering
expenses of $834,049 and $851,568. In the three months ended March 31, 1999,
product development and engineering expenses totaled $323,824. We intend to
increase our commitment to product development and engineering for 1999 from the
proceeds of this offering.
Pacific Softworks has from time to time experienced delays in the
development of new products and the enhancement of existing products. These
delays are commonplace in the software industry. We cannot assure you that we
will be successful in developing and marketing, on a timely basis or at all,
competitive products, product enhancements and new products that respond to
technological change and changes in customer requirements. We also cannot assure
you that our enhanced or new products will adequately address the changing needs
of the marketplace. The inability of Pacific Softworks, due to resource
constraints or technological or other reasons, to develop and introduce new
products or product enhancements in a timely manner could have a material
adverse effect on our business, financial condition or operating results.
From time to time, we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. We cannot assure you that announcements of
currently planned or other new products by us or others will not cause customers
to defer purchasing existing products. Any failure by Pacific Softworks to
anticipate or respond adequately to changing market conditions, or any
significant delays in product development or introduction, could have a material
adverse effect on our business, financial condition and operating results.
As a result of their complexity, software products may contain
undetected errors or compatibility issues, particularly when first introduced or
as new versions are released. Despite testing by us and testing and use by
current and potential customers, it is always possible for errors to be found in
new products after shipments to our customers. The occurrence of these errors
could result in loss of or delay in market acceptance of our products, which
could have a material adverse effect on our business, financial condition and
operating results.
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Our products are increasingly used for applications in systems that
interact directly with the general public, particularly applications in
transportation, medical systems and other markets where the failure of the
embedded system could cause substantial property damage or personal injury. This
failure of our products could expose Pacific Softworks to significant product
liability claims. In addition, our products may be used for applications in
mission-critical business systems where the failure of the embedded system could
be linked to substantial economic loss. Although Pacific Softworks has not
experienced any product liability or economic loss claims to date, the sale and
support of our products entail the risk of these claims.
PROPRIETARY RIGHTS
Our success is heavily dependent upon our proprietary technology. We
rely on a combination of:
- copyright,
- trade secret and trademark laws,
- nondisclosure agreements,
- other contractual restrictions on copying or distribution, and
- technical measures
to protect our software, documentation and other written materials.
As a part of our confidentiality procedures, we generally enter into
nondisclosure agreements with our employees and consultants and limit access to
and distribution of our software, documentation and other proprietary
information. End user licenses of our software are frequently in the form of
source license agreements, which are signed by licensees and which we believe
may be enforceable under the laws of many jurisdictions.
Despite our efforts to protect our proprietary rights, unauthorized
third parties may be able to copy our products or to reverse engineer or obtain
and use information that we regard as proprietary. We can provide you with no
assurance that competitors will not independently develop technologies that are
substantially equivalent or superior to ours. Policing unauthorized use of our
products is difficult. We are unable to determine the extent to which software
piracy of our products exists. Software piracy, however, can be expected to be a
continuing and persistent problem.
We believe that, due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal protections of our
technology.
As the number of patents, copyrights, trademarks, trade secrets and
other intellectual property rights in our industry increases, products based on
our technology may increasingly become the subject of infringement claims. We
can provide you with no assurance that third parties will not assert
infringement claims against us in the future. Any of these claims with or
without merit could:
- be time consuming,
- result in costly litigation,
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- cause product shipment delays, or
- require us to enter into unwanted royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to us, or at all, which could have a material adverse effect on
our business, financial condition and operating results.
In addition, we may initiate claims or litigation against third parties
for infringement of our proprietary rights or to establish the validity of our
proprietary rights. Litigation to determine the validity of any claims, whether
or not such litigation is determined in favor of Pacific Softworks, could result
in significant expense to Pacific Softworks and divert the efforts of our
technical and management personnel from productive tasks.
The outcome or settlement of any litigation may require us to:
- pay substantial damages,
- discontinue the use and sale of infringing products,
- expend significant resources to develop noninfringing technology, or
- obtain a license to the infringing technology or grant a license of
our technology to others.
Any of these events could have a material adverse effect on our business,
financial condition and operating results.
MANUFACTURING AND BACKLOG
Our manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
We manufacture our source code and duplicate compact disks in our California
facility. We use outside vendors to print documentation and manufacture
packaging materials. We believe that backlog is not a meaningful indicator of
revenue that can be expected in future periods.
EMPLOYEES
As of July 7, 1999, Pacific Softworks employed 29 persons full-time,
including six in sales and marketing, 20 in product development, engineering and
support , including seven consulting engineers, and three in management,
operations, finance and administration. Of these employees, 26 are located in
North America, two are located in Japan and one is located in Europe. None of
our employees are represented by a labor union or is subject to a collective
bargaining agreement. We have never experienced a work stoppage. We believe that
relations with our employees are good.
PROPERTIES
Our executive offices are located in a leased facility in Newbury Park,
California consisting of approximately 11,500 square feet of office space. The
lease for this facility expires in September 2000. Our monthly lease payment is
approximately $8,500. In Japan we have subleased space of approximately 700
square feet at a monthly rate of approximately $2,000 on a month to month basis.
We believe that these facilities are adequate for our current needs and for
expected personnel additions over the next 18 months. In the United Kingdom our
representative
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operates from facilities that are secured by him and which entail no material
ongoing obligation by Pacific Softworks.
LEGAL PROCEEDINGS
In June 1999 we were served with a summons and complaint by United
States Software Corporation. The suit was filed in the United States District
Court of the district of Oregon, Case Number CV 99-496. The complaint also names
Glenn Russell, Laura Russell and Luke Systems International, Inc. as additional
defendants. United States Software alleges:
- copyright infringement,
- misappropriation of trade secrets,
- breach of contract,
- fraud, and
- unfair competition.
The complaint alleges that in November 1996 Pacific Softworks, Glenn
Russell and Laura Russell improperly obtained the source code of two copyrighted
computer programs and incorporated that source code along with other trade
secrets of United States Software within our FUSION products. In the suit United
States Software demands a jury trial and principally seeks:
- to enjoin us and the other defendants from copying or distributing
its computer code,
- to enjoin us and the other defendants from disclosing its trade
secrets,
- orders from the court requiring us to destroy, or the court to
impound, all files and media containing trade secrets of United
States Software,
- damages in an amount not yet ascertained but more than $1 million,
and
- punitive damages and attorney fees.
On July 1, 1999 we filed an answer to the complaint. We intend to defend
this lawsuit vigorously. Because we have currently not undertaken any discovery
in this action, we are unable to determine the extent to which we may have
exposure to liability. If the action proceeds to trial and a jury or judge
decides against us we may, in addition to incurring costs of suit and other
monetary damages, be enjoined from selling TCP/IP products which constitute the
majority of our current product line. Even if we are not enjoined from selling
those products the outcome of this litigation if decided against us could have a
material adverse effect on our business, results of operation and financial
condition.
In June 1999 Glenn Golenberg and Marc Guren notified us in writing
through their legal counsel that they are evaluating for possible legal action a
claim against us for an option to acquire 10% of outstanding, fully diluted
shares of Pacific Softworks as of June 18, 1998 for $400,000. This claim arises
out of a June 1998 letter agreement between Golenberg & Co., merchant bankers,
and Pacific Softworks. In that letter, Golenberg & Co. undertook to create for
us a business plan, to develop a comprehensive financing plan and to perform
other related services. Golenberg & Co. has asserted that it is entitled to the
option based on the services it has allegedly provided to us. We believe that
Golenberg & Co. has not fulfilled the conditions required to vest the option.
If we are compelled to litigate or arbitrate this claim we intend to defend
ourselves vigorously. If however Golenberg & Co. is successful in the pursuit
of its claim, it may be awarded an option to purchase up to 320,000 shares of
our common stock at a price of about $1.25 per share.
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Except for the actions described above, we are not currently a party to
any material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Pacific Softworks are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Glenn P. Russell 44 Chairman, President and Chief Executive Officer
William E. Sliney 60 Chief Financial Officer
Chaim Kaltgrad 45 Vice President - Program Management
Mark Sewell 37 Vice President - Business Development
Sandra J. Garcia 37 Vice President - North American Sales
Robert G. J. Burg II 42 Director
Wayne T. Grau 50 Director
Reuben Sandler, Ph.D. 62 Director
Joseph Lechman 32 Secretary
</TABLE>
Glenn P. Russell. Mr. Russell has been our chairman, president and chief
executive officer since 1992. Before 1992 he had various sales and marketing
positions at IBM, Unisys and Network Research Corporation, a predecessor of
Pacific Softworks. Mr. Russell is also an officer and director of Luke Systems
International, a distributor of electronic components. Luke Systems
International is controlled by Mr. Russell's spouse. Mr. Russell devotes
substantially all of his time to Pacific Softworks. Mr. Russell was educated in
the United Kingdom.
William E. Sliney. Mr. Sliney has been our chief financial officer since
April 1999. Before joining us, Mr. Sliney was the chief financial officer for
Legacy Software Inc. from 1995 to 1998. From 1993 to 1994, Mr. Sliney was chief
executive officer for Gumps. Mr. Sliney received his masters in business
administration from the University of California at Los Angeles.
Chaim Kaltgrad. Mr. Kaltgrad has been our vice president - program
management since May 1999. From 1992 to 1999, Mr. Kaltgrad was a consultant for
Lockheed Martin Corporation. From 1997 to 1998, Mr. Kaltgrad was also a
consultant at Demo Systems. He received a masters degree in computer science
from California State University Northridge and a bachelors of mathematics and
computer science from the University of California at Los Angeles.
Mark Sewell. Mr. Sewell, a resident of the United Kingdom, has been the
general manager for our European operations since 1996, with responsibility for
European sales and business development. For over two years prior to 1996, he
was the business and support manager for the Asia Pacific region of PictureTel,
Inc. He received his masters degree in electrical and electronic engineering
from the University of Canterbury.
Sandra J. Garcia. Ms. Garcia joined us in 1993 as our regional sales
manager and became vice president - North American sales in 1996. Ms. Garcia
graduated with a degree in business administration from Santa Barbara College.
Robert G. J. Burg II. Mr. Burg has been a director of Pacific Softworks
since January 1999. He has been the president of Profile Sports, a corporate
sports and outing entertainment business, since 1998. For more than five years
before that he served as president, senior vice
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president and in other managerial positions at Royal Grip, Inc., a manufacturer
and distributor of golf grips and sports headwear. Mr. Burg received a bachelor
of arts degree from the University of Colorado. He currently serves on the
boards of directors of EMD/Empyrean Diagnostics, Ltd. and Royal Precision, Inc.
Wayne T. Grau. Mr. Grau has been a director of Pacific Softworks since
January 1999. He has been the president and chief executive officer of Fielding
Electric, Inc. since 1981. He is currently a member of the Los Angeles Chapter
membership committee of the National Electrical Contractors Association, a
trustee for the Joint Apprenticeship Training Committee and a trustee for the
Los Angeles Electrical Training Trust.
Reuben Sandler, Ph.D. Dr. Sandler has been a director of Pacific
Softworks since January 1999. He has been the president and chief information
officer for MediVox, Inc., a medical software development company, since June
1997. From 1989 to 1996, he was an executive vice president for R&D
Laboratories, Inc. Dr. Sandler received a Ph.D. from the University of Chicago
and is the author of four books on mathematics. He currently serves on the
boards of directors of MediVox, Inc. and Alliance Medical Corporation and is an
advisor to the board of directors of R&D Laboratories, Inc.
Joseph Lechman. Mr. Lechman has been our secretary since March 1999. He
is a principal in the law firm of Gose & Lechman and has been practicing law in
Ventura County, California since 1991. Mr. Lechman received his bachelor of arts
degree in business administration from California State University at Fullerton.
He received his juris doctorate from Pepperdine University School of Law and
obtained a masters of law in taxation from the New York University School of
Law. He was admitted to the State Bar of California in 1990.
BOARD OF DIRECTORS
We currently are authorized to have five persons on our board of
directors. We have four persons serving as directors and one vacancy. We have no
current intention to appoint any person to fill that vacancy however we may do
so if a suitable candidate becomes available. Our directors are elected for a
one year term. Each director holds office until the expiration of his term,
until his successor has been duly elected and qualified or until the earlier of
his resignation, removal or death. Each officer serves at the discretion of the
board of directors. There are no family relationships among any of our directors
or officers. We will maintain at least three independent outside directors on
our board who are not officers or employees of Pacific Softworks and who do not
have any material business or professional relationship with us or any of our
affiliates.
Our directors receive $200 for attending meetings of the board of
directors. We will also reimburse our directors for actual and reasonable out of
pocket expenses incurred when attending board of directors and committee
meetings. Directors who are not employees are eligible to participate in the
1998 Equity Incentive Program. Each of our three nonemployee directors received
options to purchase 15,000 shares of common stock following his election to the
board of directors as indicated in the table below.
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<PAGE> 51
<TABLE>
<CAPTION>
Number of Securities
Underlying Options
Name Granted Exercise Price Expiration Date
---- -------------------- -------------- ---------------
<S> <C> <C> <C>
Robert G. J. Burg 15,000 $5.00 April 30, 2004
Wayne Grau 15,000 $5.00 April 30, 2004
Reuben Sandler 15,000 $5.00 April 30, 2004
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors maintains a compensation committee and an audit
committee. The compensation committee is composed of Robert Burg, chair, Reuben
Sandler and Wayne Grau. The audit committee is composed of Reuben Sandler chair,
Robert Burg and Wayne Grau. The compensation committee reviews and makes
recommendations to the board of directors on compensation matters, including
bonuses, of our officers and administers the grants under our equity incentive
program. The audit committee:
- reviews the scope of the audit procedures employed by our independent
auditors,
- reviews our accounting practices and policies with our independent
auditors,
- recommends to whom reports should be submitted within Pacific
Softworks,
- reviews with the independent auditors their final audit reports,
- reviews our overall accounting and financial controls with our
internal and independent auditors,
- has its members available to the independent auditors for
consultation,
- approves the audit fee charged by the independent auditors,
- reports to the board of directors with respect to the matters
described above, and
- recommends the selection of the independent auditors.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1998, 1997 and 1996 by
our chief executive officer, vice president of business development and vice
president for sales, or the named executive officers, rendered during the fiscal
years ended December 31, 1998, 1997 and 1996. No other executive officer of
Pacific Softworks earned or was paid compensation of more than $100,000 in the
year ended December 31, 1998.
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<PAGE> 52
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Year Annual Compensation
ended ------------------------------------
Name and Principal Position Dec. 31 Salary Bonus Other
- --------------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
Glenn P. Russell 1998 $207,692 $ -- $ 80,637
Chairman, President, Chief Executive 1997 215,384 -- 343,757
Officer and Chief Financial Officer 1996 162,502 -- 111,500
Mark Sewell 1998 134,823 -- 262,500
Vice President - Business Development 1997 115,886 -- --
1996 58,162 -- --
Sandra J. Garcia 1998 120,443 -- 262,500
Vice President - North American Sales 1997 154,563 -- --
1996 175,750 -- --
</TABLE>
Other compensation for Mr. Russell represents distributions which we
made to him in excess of his base salary while we were a subchapter S
corporation. In February 1999 Pacific Softworks terminated the subchapter S
election and became subject to taxation at the corporate level. Mr. Russell
currently has an annual salary of $200,000.
In July 1998 Pacific Softworks granted to each of Mark Sewell and Sandra
J. Garcia options to purchase 70,000 shares of common stock. These options were
fully exercisable as of the date of grant. The calculations of the value of the
unexercised options reflected in the above table under "Other" are based on the
difference between the fair market value per share of the common stock on
December 31, 1998, approximately $5.00, and the $1.25 exercise price of each
option multiplied by the number of shares covered by the option.
OPTION GRANTS IN 1998
The following table sets forth each grant of nonqualified stock options
to named executive officers during the fiscal year ended December 31, 1998.
OPTION GRANTS FOR FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Number Of Percent Of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise Expiration
Name Granted Fiscal Year 1998 Price Date
- ---- ------------ ---------------- -------- -----------------
<S> <C> <C> <C> <C>
Mark Sewell 70,000 50% $1.25 December 31, 2003
Sandra J. Garcia 70,000 50% $1.25 December 31, 2003
</TABLE>
The options may be exercised at any time during their term. There were no
options exercised in during 1998.
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<PAGE> 53
EQUITY INCENTIVE PROGRAM
Our 1998 equity incentive program was adopted by the board of directors
and approved by stockholders in April 1998. We have authorized a total of
330,000 shares of common stock for issuance under this plan. As of December 31,
1998, no options were granted under the equity incentive program. As of May 31,
1999, we granted options to purchase 328,000 shares of common stock under the
program to employees, officers and directors.
Under the equity incentive program, employees, nonemployee members of
the board and consultants may be awarded options to purchase shares of common
stock, stock appreciation rights, restricted shares or stock units. Options may
be incentive stock options designed to satisfy the requirements of Section 422
of the Internal Revenue Code of 1986, or nonstatutory stock options designed not
to meet those requirements. If restricted shares or shares issued upon the
exercise of options granted under this plan are forfeited, then these shares
will again become available for awards under the equity incentive program. If
stock units, options or stock appreciation rights granted under the equity
incentive program are forfeited or terminate for any other reason before being
exercised, then the corresponding shares will again become available for awards
under the equity incentive program.
The equity incentive program is administered by the compensation
committee of the board of directors. This committee has complete discretion to:
- determine who should receive any award,
- determine type, number, vesting requirements and other features and
conditions of an award,
- interpret the equity incentive program, and
- make all other decisions relating to the operation of the equity
incentive program.
The exercise price for statutory and incentive stock options granted
under the equity incentive program may not be less than 85% or 100%,
respectively, of the fair market value of the common stock on the option grant
date and may be paid in cash or in outstanding shares of common stock. Holders
may exercise options by using a cashless exercise method, a pledge of shares to
a broker or promissory note. The payment for an award of newly issued restricted
shares will be made in cash, by promissory note or the rendering of services.
The committee has the authority to modify or extend outstanding options
and stock appreciation rights. The committee may also accept the cancellation of
outstanding options or stock appreciation rights in return for a grant of new
options or stock appreciation rights for the same or a different number of
shares at the same or a different exercise price.
If there is a change in control of Pacific Softworks, an award will
become fully exercisable as to all shares subject to an award if the award is
not assumed by the surviving corporation or its parent and the surviving
corporation or its parent does not substitute such award with another award of
substantially the same terms. In the event of an involuntary termination of
service within 18 months following a change in control, all of the awards then
outstanding and not vested will then be fully vested.
A change in control includes:
- a merger or consolidation of Pacific Softworks after which our then
current stockholders own less than 50% of the surviving corporation,
- sale of all or substantially all of the assets of Pacific Softworks,
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<PAGE> 54
- a proxy contest that results in replacement of more than one-third of
the directors over a 24-month period, or
- acquisition of 50% or more of our outstanding stock by a person other
than a trustee of our equity incentive program or a corporation owned
by the stockholders of Pacific Softworks in substantially the same
proportions as their stock ownership in Pacific Softworks.
In the event of a merger or other reorganization, outstanding options, stock
appreciation rights, restricted shares and stock units will be subject to the
agreement of merger or reorganization, which may provide for:
- the assumption of outstanding awards by the surviving corporation or
its parent,
- their continuation by Pacific Softworks (if Pacific Softworks is the
surviving corporation),
- accelerated vesting and
- for settlement in cash followed by cancellation of outstanding
awards.
The board of directors may amend or terminate the equity incentive
program at any time. Amendments may be subject to stockholder approval to the
extent required by applicable laws. The equity incentive program will continue
in effect unless otherwise terminated by the board of directors.
In May 1999 the board of directors voted to grant our officers and other
employees options to purchase 283,000 shares of common stock under our equity
incentive program. These options have a term of five years and vest at the rate
of 2% per month from the date of grant over a period of 36 months, after which
they vest in full. These options may not be exercised until after 30 days from
the date of this offering.
The table below sets forth grants of options in May 1999 under our
equity incentive program to our named officers:
OPTION GRANTS IN MAY 1999 UNDER OUR EQUITY INCENTIVE PROGRAM
<TABLE>
<CAPTION>
Percent of
Total
Number of Options
Options Granted to Exercise Expiration
Name Granted Employees Price Date
- ---- ----------- ---------------- -------- --------------
<S> <C> <C> <C> <C>
Glenn P. Russell 30,000 10.6% $5.50 April 30, 2004
William E. Sliney 12,000 4.2% $5.00 April 30, 2004
Chaim Kaltgrad 12,000 4.2% $5.00 April 30, 2004
Mark Sewell 12,000 4.2% $5.00 April 30, 2004
Sandra J. Garcia 12,000 4.2% $5.00 April 30, 2004
Joseph Lechman 12,000 4.2% $5.00 April 30, 2004
</TABLE>
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<PAGE> 55
CONSULTANTS
From April 1998 through January 1999, Georgette W. Pagano served as a
member of the board of directors of Pacific Softworks. Ms. Pagano is the sister
of Laura Russell, the spouse of Glenn P. Russell, our president and chief
executive officer. In January 1998, Ms. Pagano purchased 200,000 shares of
common stock from Mr. Russell for $250,000. The purchase price is evidenced by a
promissory note dated January 25, 1998. The note bears interest at the rate of
10% per annum and is due and payable February 1, 2001. The note permits the
return of the shares in lieu of payment. In April 1999, Ms. Pagano was retained
by Pacific Softworks to establish a shareholder relations program and to prepare
and organize due diligence materials in connection with this offering. We are
paying Ms. Pagano $5,000 per month through July 1999, or a total of $20,000, for
these services and we have granted her warrants to purchase 12,500 units. The
terms of her units are identical to those sold in this offering and may be
exercised at any time over a period of 60 months commencing from the date of
this prospectus at a price of $5.25 per unit. In January 1998, Ms. Pagano sold
140,000 of her shares to John P. McGrain for $175,000. The purchase price is
evidenced by a promissory note payable on February 1, 2001. The terms of this
promissory note are substantially the same as those contained within the
promissory note which Ms. Pagano delivered to Mr. Russell. Since the fall of
1998 Mr. McGrain has provided us with advice on corporate, financial and
administrative matters, including matters related to this offering. We have not
compensated Mr. McGrain for these services.
CERTAIN TRANSACTIONS
In March 1996, Pacific Softworks agreed with a former officer, director
and principal stockholder to a buyout of his employment agreement and Glenn P.
Russell agreed to purchase all of that former officer's shares of common stock
of Pacific Softworks. Pacific Softworks and that former officer also entered
into a consulting agreement and that former officer agreed not to compete with
Pacific Softworks. Pacific Softworks paid the former officer $314,286 for each
of 1997 and 1998. Our agreement with this former stockholder restricts us from
making any distributions to stockholders, other than those necessary for tax
liabilities resulting from corporate earnings during the time we were an S
corporation. Our obligations to the former stockholder are secured by
substantially all of the outstanding shares of common stock of Pacific Softworks
owned by Glenn P. Russell and all assets of Pacific Softworks. As of July 1999
Pacific Softworks is obligated to pay approximately $43,000 to that former
officer.
In December 1998, Luke Systems International, a company controlled by
the spouse of Glenn P. Russell, loaned Pacific Softworks $100,000 interest free.
In March 1999, Pacific Softworks repaid the loan.
We rent a portion of our premises to Luke Systems International. We
believe the terms of occupancy to be favorable to us. We expect this affiliated
company to relocate to other premises before September 30, 1999.
At July 1, 1999 we owed a bank approximately $250,000 for advances that
we obtained under a line of credit. Glenn P. Russell has provided our bank with
his personal guarantee and we have collateralized our accounts receivable as
security for these advances. This amount will be repaid from proceeds of this
offering.
During 1996, 1997 and 1998 we employed our chief executive's mother, a
resident of the United Kingdom, to perform various administrative and managerial
tasks for us within that country. We paid her $57,885 in 1997 and $105,769 in
1998. She ceased to be our employee in the fall of 1998.
Pacific Softworks believes that the transactions described above, other
than the employment of the mother of Glenn P. Russell, were made on terms no
less favorable to Pacific
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<PAGE> 56
Softworks than could have been obtained from unaffiliated third parties. All
future related party transactions will be approved by a majority of the board of
directors, including a majority of the independent and disinterested outside
directors on the board of directors who do not have an interest in the subject
transactions and who have had access (at our expense) to our counsel or other
independent legal counsel. All future material affiliated transactions will be
made on terms no less favorable to Pacific Softworks than could be obtained from
unaffiliated third parties.
Our articles of incorporation limit the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the California General Corporation
Law. This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws require us to indemnify our directors, officer, employees and
agents to the fullest extent permitted by California law, including in
circumstances in which indemnification is otherwise discretionary under
California law. We have also entered into indemnification agreements with our
officers and directors containing provisions that may require us, among other
things, to indemnify these officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified and to obtain directors' and officers'
insurance if available on reasonable terms.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and control persons of Pacific
Softworks under the provisions described above, or otherwise, Pacific Softworks
has been advised that in the opinion of the SEC, this indemnification is against
public policy as expressed in the Securities Act and is unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of the date of this prospectus and as adjusted
to reflect the sale of the units offered by this prospectus, by:
- each person who is known by Pacific Softworks to own beneficially
more than 5% of our outstanding common stock,
- each of our executive officers and directors and
- all executive officers and directors as a group.
Shares of common stock not outstanding but deemed beneficially owned
because an individual has the right to acquire the shares of common stock within
60 days are treated as outstanding when determining the amount and percentage of
common stock owned by that individual and by all directors and executive
officers as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown.
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<PAGE> 57
<TABLE>
<CAPTION>
Percentage of
Number of Shares Outstanding
Shares ----------------------
Name and Address of Beneficially Before After
Beneficial Owner Owned Offering Offering
------------------- ------------ -------- --------
<S> <C> <C> <C>
Glenn P Russell ....................... 3,000,000 90.91% 70.59%
William E Sliney ...................... * * *
Chaim Kaltgrad ........................ * * *
Mark Sewell ........................... 70,000 2.08 1.62
Sandra J Garcia ....................... 70,000 2.08 1.62
Robert G J Burg II .................... 15,000 * *
Wayne T Grau .......................... 15,000 * *
Reuben Sandler, PhD ................... 15,000 * *
Joseph Lechman ........................ * * *
IAT Resources Corp. ................... 200,000 5.88 4.60
All directors and executive
officers as a group (9 persons) ..... 3,185,000 91.39% 71.82%
</TABLE>
- --------------
* Less than 1%.
The address of each officer and director is 703 Rancho Conejo Boulevard,
Newbury Park, California 91320. The address of IAT Resources Corp. is 5757
Wilshire Boulevard, Penthouse, Los Angeles, California 90036.
In the foregoing table, the common stock beneficially owned by
- Glenn P. Russell represents shares owned by the Russell Trust of
which Glenn Russell and Laura Russell, husband and wife, are
principal beneficiaries but excludes options for the purchase of
30,000 shares of common stock which we granted to him under our
equity incentive program in May 1999;
- Glenn P. Russell excludes 200,000 shares of common stock which Glenn
P. Russell sold to Georgette W. Pagano in January 1998. The purchase
price for these shares is evidenced by a promissory note which is due
in February 2001 and which may be paid to Glenn P. Russell in cash or
by return of the shares of Pacific Softworks;
- IAT Resources Corp. includes currently exercisable warrants to
purchase 100,000 shares of common stock at $6.00 per share;
- all of the officers and directors as a group includes 70,000 shares
underlying presently exercisable options granted to each of Mark
Sewell and Sandra J. Garcia and also includes includes15,000 shares
underlying presently exercisable options granted to each of Robert G.
J. Burg II, Wayne T. Grau and Reuben Sandler; and
- all of the officers and directors as a group excludes an aggregate of
90,000 shares of common stock underlying options which we granted to
officers in May 1999 under our equity incentive program.
DESCRIPTION OF SECURITIES
The authorized capital stock of Pacific Softworks consists of 50,000,000
shares of $0.001 par value common stock and 10,000,000 shares of $0.01 par value
preferred stock. Pacific Softworks may issue the preferred stock in one or more
series as determined by the board of directors. There currently are 3,300,000
shares of common stock issued and outstanding that are held of record by four
stockholders.
UNITS
Each unit being offered in this prospectus consists of one share of
common stock and one warrant. The common stock and warrants are separately
transferable. There is currently no trading market for the common stock or
warrants of Pacific Softworks and we can provide no assurance that a trading
market will develop in the future.
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<PAGE> 58
PREFERRED STOCK
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of the
authorized but unissued shares of preferred stock with such dividend,
redemption, conversion and exchange provisions as may be provided by the board
of directors with regard to such particular series. Any series of preferred
stock may possess voting, dividend, liquidation and redemption rights superior
to those of the common stock.
The rights of the holders of common stock will be subject to and may be
adversely affected by the rights of the holders of any preferred stock that we
may issue in the future. Our issuance of a new series of preferred stock could
make it more difficult for a third party to acquire, or discourage a third party
from acquiring, the outstanding shares of common stock of Pacific Softworks and
make removal of the board of directors more difficult. No shares of preferred
stock are currently issued and outstanding and Pacific Softworks has no current
plans to issue any shares of preferred stock.
Our board of directors has ratified and approved the following
conditions which must be satisfied before we issue preferred stock to a
promoter:
- any shares of our preferred stock offered and sold to a promoter must
be made on terms no less favorable than those that unaffiliated third
parties would be given in connection with an offer and sale of the
preferred stock; and
- any transaction in which shares of our preferred stock will be
offered, sold, and issued to a promoter must be approved by a
majority of the independent outside directors who do not have an
interest in that transaction and who had access, at our expense, to
our attorneys or other independent legal counsel.
A promoter includes any person who is:
- a founder, officer, director, or controlling person of Pacific
Softworks;
- the beneficial owner of 5% or more of any class of our issued and
outstanding securities; or
- an affiliate or an associate of any person mentioned above.
COMMON STOCK
Each holder of record of common stock is entitled to one vote for each
share held on all matters properly submitted to the stockholders for their vote.
Before election of directors, any stockholder may cumulate votes for any
candidate, if a stockholder has given notice that he intends to cumulate his
votes and if the candidate's name was placed in nomination prior to voting. In
cumulative voting, each stockholder is entitled in the election of directors to
one vote for each voting share held by him multiplied by the number of directors
to be elected. Each stockholder may cast all of those votes for a single nominee
for director or he may distribute those votes among any two or more nominees as
the stockholder deems appropriate.
Holders of outstanding shares of common stock are entitled to those
dividends declared by the board of directors out of legally available funds and,
in the event of liquidation, dissolution or winding up of the affairs of Pacific
Softworks, holders are entitled to receive, pro rata, the net assets of Pacific
Softworks available to the common stockholders. Holders of outstanding common
stock have no preemptive, conversion or redemption rights. All of the issued and
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<PAGE> 59
outstanding shares of common stock are, and all unissued shares of common stock,
when offered and sold will be, duly authorized, validly issued, fully paid and
nonassessable. To the extent that additional shares of common stock may be
issued in the future, the relative interests of the then existing stockholders
may be diluted.
The shares of common stock outstanding before this offering are
restricted securities as that term is defined in Rule 144 under the Securities
Act. Restricted securities generally cannot be resold without registration or an
exemption from registration.
WARRANTS
Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $7.50 for a period of 24 months from the date of this
prospectus, subject to our redemption rights described below. The warrants will
be issued under the terms of a warrant agreement between Pacific Softworks and
American Securities Transfer & Trust, Inc. as warrant agent. Pacific Softworks
has authorized and reserved for issuance the shares of common stock issuable on
exercise of the warrants. The warrants are exercisable to purchase a total of
950,000 shares of common stock of Pacific Softworks. If the underwriter's
over-allotment option relating to the warrants is exercised, the warrants are
exercisable to purchase a total of 1,092,500 shares of common stock.
The warrant exercise price and the number of shares of common stock that
may be purchased upon exercise of the warrants are subject to adjustment should
any of the following events occur:
- a stock dividend on the common stock,
- a subdivision of the common stock,
- a recapitalization of the common stock,
- a reorganization of the common stock, or
- a merger or consolidation of Pacific Softworks with or into another
corporation or business entity.
Commencing 30 days from the date of this prospectus and until the
expiration of the warrants, Pacific Softworks may redeem outstanding warrants,
in whole but not in part, upon not less than 30 days' notice, at a price of
$0.05 per warrant. This right to redeem outstanding warrants is conditioned upon
the closing bid price of the common stock equaling or exceeding $8.00 per share
for 15 consecutive trading days. We must provide the redemption notice not more
than five business days after conclusion of the 15 consecutive trading days in
which the closing bid price of the common stock equals or exceeds $8.00 per
share.
In the event we exercise our right to redeem the warrants, the warrants
will be exercisable until the close of business on the date fixed for redemption
in our notice. If any warrant called for redemption is not timely exercised,
that warrant will no longer be exercisable and the holder of that warrant will
be entitled to the redemption price.
Pacific Softworks must have on file a current registration statement
with the SEC pertaining to the common stock underlying the warrants for a holder
to exercise the warrants or for the warrants to be redeemed by Pacific
Softworks. The shares of common stock underlying the warrants must also be
registered or qualified for sale under the securities laws of the states in
which the warrant holders reside. We intend to use our best efforts to keep the
registration
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<PAGE> 60
statement incorporating this prospectus current, but we can give no assurance
that the registration statement (or any other registration statement we may file
covering shares of common stock underlying the warrants) can be kept current. If
the registration statement covering the underlying common stock is not kept
current, or if the common stock underlying the warrants is not registered or
qualified for sale in the state in which a warrant holder resides, the warrants
may be deprived of any value.
Pacific Softworks is not required to issue any fractional shares of
common stock upon the exercise of warrants or upon the occurrence of adjustments
under anti-dilution provisions. Pacific Softworks will pay to holders of
fractional interests an amount equal to the cash value of their fractional
interests based upon the then-current market price of a share of common stock.
Warrants may be exercised upon surrender of the certificate representing
those warrants on or before their expiration date (or earlier redemption date)
at the offices of the warrant agent with the form of "Election to Purchase" on
the reverse side of the warrant certificate completed and executed as indicated,
accompanied by payment of the full exercise price by check payable to the order
of Pacific Softworks for the number of warrants being exercised. Shares of
common stock issued upon exercise of warrants for which payment has been
received in accordance with the terms of the warrants will be fully paid and
nonassessable.
The warrants do not confer upon the warrantholder any voting or other
rights of a stockholder of Pacific Softworks. Upon notice to the warrantholders,
Pacific Softworks has the right to reduce the exercise price or extend the
expiration date of the warrants. Although this right is intended to benefit
warrantholders, to the extent Pacific Softworks exercises this right when the
warrants would otherwise be exercisable at a price higher than the prevailing
market price of the common stock, the likelihood of exercise, and the resultant
increase in the number of shares outstanding, may impede or make more costly a
change in control of Pacific Softworks.
ANTI-TAKEOVER PROVISIONS
Our articles of incorporation and bylaws contain provisions that may
make it more difficult for a third party to acquire, or may discourage
acquisition bids for, Pacific Softworks. The board of directors of Pacific
Softworks is authorized, without action of its stockholders, to issue authorized
but unissued common stock and preferred stock. The existence of undesignated
preferred stock and authorized but unissued common stock enables Pacific
Softworks to discourage or to make it more difficult to obtain control of
Pacific Softworks by means of a merger, tender offer, proxy contest or
otherwise.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
Pacific Softworks has retained American Securities Transfer & Trust,
Inc., Englewood, Colorado to serve as the transfer agent and registrar for the
common stock and warrant agent for the warrants.
SHARES ELIGIBLE FOR FUTURE SALE
On completion of this offering, Pacific Softworks will have 4,250,000
shares of common stock outstanding, assuming no warrants are exercised. If the
underwriter's over-allotment option is exercised in full, 4,392,500 shares of
common stock will be outstanding. Of these shares, 950,000 shares of common
stock sold in this offering and any shares sold by Pacific Softworks upon
exercise of the underwriter's over-allotment option will be freely transferable
by persons other than "affiliates" of Pacific Softworks as that term is defined
under the Securities Act, without
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<PAGE> 61
restriction or further registration. In addition, 200,000 shares beneficially
owned by two persons, one of whom is a consultant and former director, who are
not employees of Pacific Softworks and up to 160,000 shares issuable upon
exercise of warrants to purchase units, are being registered concurrently with
this offering. These securities may not be sold without the prior written
consent of the underwriter for a period of 13 months from the date of this
prospectus. These restrictions may be waived by the underwriter, although it has
no current intention to do so.
The remaining 3,100,000 outstanding shares of common stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration unless an exemption from
registration is available, including the exemption contained in Rule 144. Three
million of these shares become eligible for sale under Rule 144 commencing 90
days after the date of this prospectus. Under the terms of the underwriting
agreement, the underwriter has required that the shares of common stock owned by
officers, directors and the current stockholders, including their transferees
and even if registered hereby, may not be sold until at least 13 months from the
date of this prospectus without the underwriter's prior written consent.
In general, under Rule 144, a stockholder who has beneficially owned
shares of common stock for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to sale limitations, notice requirements and the
availability of current public information about Pacific Softworks. Rule 144(k)
provides that a stockholder who is not deemed to be an "affiliate" and who has
beneficially owned shares of common stock for at least two years is entitled to
sell those shares at any time under Rule 144(k) without regard to the
limitations described above. In addition to the shares of common stock that are
currently outstanding, a total of 328,000 shares of common stock are reserved
for issuance upon exercise of options granted to our directors, executive
officers and employees under the equity incentive program an additional 140,000
shares of common stock are reserved for issuance upon exercise of options
granted to two of our officers.
Pacific Softworks is unable to estimate the number of shares that may be
sold in the future by the existing holders of shares of our common stock or
holders of options or warrants that are outstanding or the effect, if any, that
sales of shares of common stock by these persons will have on the market price
of the common stock prevailing from time to time. Sales of substantial amounts
of common stock by these persons could adversely affect the then prevailing
market prices of the common stock and warrants.
Pacific Softworks, its directors, executive officers and other
stockholders have agreed with the underwriter that they will not sell any common
stock without the prior consent of the underwriter for a period of 13 months
from the date of this prospectus, except that Pacific Softworks may, without
this consent, grant options and issue shares under its equity incentive program.
The underwriter has no current intention to waive or shorten the lock-up
arrangements.
Pacific Softworks intends to file a registration statement on Form S-8
under the Securities Act to register shares of common stock issued or reserved
for issuance under outstanding options and our equity incentive program within
180 days after the date of this prospectus, thus permitting the resale of these
shares by nonaffiliates in the public market without restriction under the
Securities Act. Pacific Softworks intends to register these shares on Form S-8,
along with common stock underlying options that have not been issued under our
equity incentive program as of the date of this prospectus.
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<PAGE> 62
ADDITIONAL WARRANTS TO PURCHASE UNITS
Pacific Softworks also has issued warrants to purchase 40,000 units to
members of Resch Polster Alpert & Berger LLP, special counsel to Pacific
Softworks in this offering, and warrants to purchase an additional 40,000 units
to two persons, one of whom is a former director, who have provided temporary
accounting and administrative services to Pacific Softworks. Each of these
warrants to purchase units may be exercised at any time over a period of 60
months commencing from the date of this prospectus at a price of $5.25 per unit.
These units are identical to the units sold in this offering. Pacific Softworks
is also registering these units concurrently with this offering. The underwriter
has required all holders of these units to not sell, transfer or convey any
shares of common stock or warrants issued upon exercise of these warrants for 13
months after the date of this prospectus except upon written consent of the
underwriter.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement,
Spencer Edwards, Inc. has agreed to purchase 950,000 units from Pacific
Softworks. The underwriter will purchase the units at the price to public less
underwriting discounts set forth on the cover page of this prospectus.
The underwriting agreement provides that the underwriter is committed to
purchase all units offered in this offering, other than those covered by the
over-allotment option described below, if the underwriter purchases any of these
securities.
The underwriter has advised Pacific Softworks that the underwriter
proposes to offer the units directly to the public at the price to public set
forth on the cover page of this prospectus, and that it may allow to certain
dealers that are members of the National Association of Securities Dealers,
Inc., concessions not in excess of $__________. The price to public, concessions
and reallowance will not be charged until after the initial public offering is
completed. After the initial public distribution of the units is completed, the
shares of common stock and warrants will trade separately and their offering
prices may change as a result of market conditions. No change in these terms
will alter the amount of proceeds to be received by Pacific Softworks as set
forth on the cover page of this prospectus. The underwriter has also advised
Pacific Softworks that the underwriter does not intend to confirm sales to any
accounts over which it exercises discretionary authority.
Pacific Softworks has agreed to pay the underwriter a nonaccountable
expense allowance of 3% of the aggregate public offering price of the units
offered, including units sold on exercise of the over-allotment option. Pacific
Softworks paid the underwriter $35,000 before the date of this prospectus as an
advance against this nonaccountable expense allowance. Pacific Softworks has
also agreed to pay all expenses in connection with qualifying the units for sale
under the laws of various states designated by the underwriter.
Pacific Softworks has granted the underwriter an option, exercisable for
45 days after the date of this prospectus, to purchase up to 142,500 additional
units at the same price as the initial units offered. The underwriter may
purchase the units solely to cover over-allotments, if any, in connection with
the sale of the units offered in the offering. If the underwriter fully
exercises its over-allotment option, the total public offering price,
underwriting discounts and proceeds to Pacific Softworks will be $5,735,625,
$573,563 and $5,162,062, respectively.
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<PAGE> 63
The underwriter may engage in over-allotment, stabilizing transactions
and covering transactions. Over-allotment involves sales in excess of the
offering size, which create a short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover short positions. These stabilizing transactions and covering
transactions may cause the price of the common stock or warrants to be higher
than they would otherwise be in the absence of these transactions.
Neither Pacific Softworks nor the underwriter makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock or
warrants. In addition, neither Pacific Softworks nor the underwriter makes any
representation that the underwriter will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
Our officers, directors and stockholders have agreed not to offer, sell
or otherwise dispose of any shares of common stock or derivative securities of
Pacific Softworks for a period of 13 months after the date of this prospectus
without the prior written consent of the underwriter. The underwriter has agreed
that Pacific Softworks may file a registration statement on Form S-8 180 days
after the date of this prospectus registering common stock underlying
outstanding options. However, sales of common stock so registered:
- may not exceed an aggregate of 25,000 shares until expiration of the
13 month lockup arrangement, and
- may only be made by persons who are not officers or directors of
Pacific Softworks.
The underwriter has no present intention to waive or shorten the period of the
lock-up arrangements.
Pacific Softworks will sell to the underwriter on completion of the
offering, for a total purchase price of $100, the underwriter's option for the
purchase of units entitling the underwriter or its assigns to purchase one unit
for each 10 units sold to the public (excluding the units sold in the
over-allotment option). The underwriter's option will be exercisable on the date
of this prospectus and will expire five years from that date. For each warrant
included in the units underlying the underwriter's option, the underwriter will
be able to purchase one share of common stock at an exercise price of $7.50 per
share during the exercise period of these warrants. The rights and attributes of
these warrants issuable to the underwriter are identical to the warrants
included in the units sold in the offering. The exercise price of the
underwriter's option to purchase units is 120% of the public offering price or
$6.30 per unit.
Pacific Softworks will set aside and at all times have available a
sufficient number of securities to be issued upon exercise of the underwriter's
option. The underwriter's option and underlying securities will be restricted
from sale, transfer, assignment or hypothecation for a period of one year after
the date of this prospectus, except to officers of the underwriter, selling
group members, and their officers or partners. Thereafter, the underwriter's
option and underlying units will be transferable provided that transfers are
made in accordance with the provisions of the Securities Act. Pacific Softworks
has agreed, at the request of the underwriter, to register the common stock
included in the units and underlying the warrants included in the units issuable
upon exercise of the underwriter's option.
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<PAGE> 64
For a period of five years after the date of this prospectus, the
underwriter has the right to have an observer attend meetings of our board of
directors. This observer will be reimbursed for expenses incurred in attending
any meeting.
Before this offering, there was no public market for our securities. The
public offering price of the units and the exercise price of the warrants were
determined by arms-length negotiation between Pacific Softworks and the
underwriter. There is no direct relation between the offering price of the units
and the assets, book value or net worth of Pacific Softworks. Among the factors
considered by Pacific Softworks and the underwriter in pricing the units and in
determining the exercise price of the warrants were the results of operations,
the current financial condition and future prospects of Pacific Softworks, the
experience of management, the amount of ownership to be retained by present
stockholders, the general condition of the economy and the securities markets
and the demand for securities of companies considered comparable to Pacific
Softworks.
In connection with this offering, Pacific Softworks and the underwriter
have agreed to indemnify each other against various liabilities, including
liabilities under the Securities Act, and if indemnification is unavailable or
insufficient, Pacific Softworks and the underwriter have agreed to damage
contribution arrangements based upon relative benefits received from this
offering and relative fault resulting in such damage.
LEGAL MATTERS
The validity of the securities offered hereby will be passed on for
Pacific Softworks by Resch Polster Alpert & Berger LLP, Los Angeles, California.
Members of Resch Polster Alpert & Berger LLP own warrants to acquire a total of
40,000 units. Certain legal matters in connection with the offering will be
passed on for the underwriter by the Law Offices of Gary A. Agron, Englewood,
Colorado.
EXPERTS
Merdinger, Fruchter, Rosen & Corso, P.C., independent auditors, have
audited the consolidated financial statements of Pacific Softworks for the years
ended December 31, 1996, 1997 and 1998, as set forth in their report, which is
included in this prospectus. Pacific Softworks consolidated financial statements
are included in this prospectus in reliance on their report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Pacific Softworks has filed with the Securities and Exchange Commission,
450 Fifth Street, Washington, D.C. 20549, a registration statement on Form SB-2
under the Securities Act with respect to the securities offered. As permitted by
SEC rules, this prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the registration
statement. For further information concerning Pacific Softworks and the
securities offered, we refer you to the registration statement and the exhibits
and schedules filed as a part of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete. In each instance
where a copy of that contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement is qualified in all respects by reference to
that exhibit. The registration statement, including its exhibits and schedules,
may be
-59-
<PAGE> 65
inspected without charge at the SEC's Public Reference Room, at 450 Fifth
Street, N.W., Room 1024 in Washington, D.C 20549 and at the SEC's regional
offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048.
Copies of all or any part of those documents may be obtained from the SEC's
office after payment of the SEC's prescribed fees. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public
reference rooms. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and will make available to stockholders quarterly reports containing
unaudited consolidated financial data for the first three quarters of each year.
As a result of this offering we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file
periodic reports, proxy statements and other information with the SEC.
-60-
<PAGE> 66
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Merdinger, Fruchter, Rosen & Corso, P.C., Independent Auditors ........................... F-1
Consolidated balance sheets as of December 31, 1997 and 1998 and March 31, 1999 (Unaudited) ........ F-2
Consolidated statements of operations for the years ending December 31, 1996,
1997 and 1998 and the three months ended March 31, 1998 and 1999 (Unaudited) .................... F-3
Consolidated statements of comprehensive income for the years ending December
31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (Unaudited) .......... F-4
Consolidated statements of stockholders' equity .................................................... F-5
Consolidated statements of cash flows for the years ending December 31, 1996,
1997 and 1998 and the three months ended March 31, 1998 and 1999 (Unaudited) .................... F-6
Notes to Financial Statements ...................................................................... F-7
</TABLE>
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<PAGE> 67
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of PACIFIC
SOFTWORKS, INC. AND SUBSIDIARY as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 SUBSIDIARY as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
January 29, 1999, except
for Notes 10, 13(d), 13(e)
and 14 as to which the
date is July 6, 1999
F-1
<PAGE> 68
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------- March 31,
1997 1998 1999
---------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash $ 624,952 $224,031 $ 460,907
Accounts receivable, net of allowance for doubtful
accounts of $36,400, $86,400 and $86,400 337,690 268,902 442,091
Related party receivable -- 43,000 --
Other receivable 2,125 -- 25,000
Prepaid expenses 36,112 15,523 15,523
---------- -------- -----------
Total current assets 1,000,879 551,456 943,521
---------- -------- -----------
Fixed assets, net of accumulated depreciation and
amortization of $311,204, $348,761 and $362,221 69,158 82,196 95,464
---------- -------- -----------
Other assets
Trademark 1,034 1,188 1,188
Security deposit -- 8,486 9,025
Deferred offering costs -- -- 281,541
---------- -------- -----------
1,034 9,674 291,754
---------- -------- -----------
Total assets $1,071,071 $643,326 $ 1,330,739
========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 219,027 $180,469 $ 388,069
Related party payable -- 103,705 --
Accrued taxes payable 20,601 21,705 9,357
Customer deposits -- 23,100 --
---------- -------- -----------
Total current liabilities 239,628 328,979 397,426
---------- -------- -----------
Deferred revenue 140,811 106,874 113,874
---------- -------- -----------
Commitments and contingencies -- -- --
Minority interest
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, 3,200,000, 3,200,000 and 3,300,000
shares issued and outstanding 3,200 3,200 3,300
Additional paid-in capital 174,658 174,658 874,558
Retained earnings (deficit) 492,212 18,452 (41,013)
Cumulative adjustment for currency translation 20,562 11,163 (17,406)
---------- -------- -----------
Total stockholders' equity 690,632 207,473 819,439
---------- -------- -----------
Total liabilities and stockholders' equity $1,071,071 $643,326 $ 1,330,739
========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 69
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
----------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
---------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue:
Sales $3,123,893 $ 2,929,536 $ 2,479,589 $ 679,092 $ 713,059
Royalties and other 564,217 380,248 307,808 16,987 58,591
---------- ------------ ------------ ------------ ------------
Total 3,688,110 3,309,784 2,787,397 696,079 771,650
Cost of revenue -
Purchases and royalty fees 96,576 116,311 100,336 27,843 30,336
---------- ------------ ------------ ------------ ------------
Gross profit 3,591,534 3,193,473 2,687,061 668,236 741,314
---------- ------------ ------------ ------------ ------------
Expenses:
Selling, general and
administrative 2,257,560 2,110,038 1,936,117 386,447 380,815
Research and development 632,811 834,049 851,568 213,703 323,824
Depreciation and amortization 72,415 64,195 58,850 14,713 13,460
Former officer's consulting
and administrative expense 235,714 314,286 314,286 82,680 82,680
---------- ------------ ------------ ------------ ------------
Total expenses 3,198,500 3,322,568 3,160,821 697,543 800,779
---------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 393,034 (129,095) (473,760) (29,307) (59,465)
Income tax expense -- -- -- -- --
---------- ------------ ------------ ------------ ------------
Net income (loss) $ 393,034 $ (129,095) $ (473,760) $ (29,307) $ (59,465)
========== ============ ============ ============ ============
Net income (loss) per share -
Basic and diluted $ 0.12 $ (0.04) $ (0.14) $ (0.01) $ (0.02)
========== ============ ============ ============ ============
Weighted average number of shares
outstanding 3,340,000 3,340,000 3,340,000 3,340,000 3,378,888
========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 70
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended
For the Years Ended December 31, March 31,
----------------------------------------- -----------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) $393,034 $ (129,095) $ (473,760) $(29,307) $(59,465)
Other comprehensive income (loss)
Foreign currency translation adjustment 19,219 49,946 (9,399) (39,979) (28,569)
-------- ---------- ---------- -------- --------
Comprehensive income (loss) $412,253 $ (79,149) $ (483,159) $(69,286) $(88,034)
======== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 71
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
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, January 1, 1996 3,200,000 $3,200 $174,658 $ 228,273 $(48,603) $ 357,528
Foreign currency translation
adjustment -- -- -- -- 19,219 19,219
Net income -- -- -- 393,034 -- 393,034
---------- ------ -------- ---------- -------- ----------
Balance, December 31, 1996 3,200,000 3,200 174,658 621,307 (29,384) 769,781
Foreign currency translation
adjustment -- -- -- -- 49,946 49,946
Net loss -- -- -- (129,095) -- (129,095)
---------- ------ -------- ---------- -------- ----------
Balance, December 31, 1997 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, 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
Warrants issued in connection
with offering -- -- 200,000 -- -- 200,000
Foreign currency translation
adjustment -- -- -- -- (28,569) (28,569)
Net loss -- -- -- (59,465) -- (59,465)
---------- ------ -------- ---------- -------- ----------
Balance, March 31, 1999 3,300,000 $3,300 $874,558 $ (41,013) $(17,406) $ 819,439
========== ====== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 72
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
For the Years Ended December 31, March 31,
-------------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 393,034 $ (129,095) $ (473,760) $ (29,307) $ (59,465)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 72,415 64,195 58,850 14,713 13,460
Bad debts -- -- 50,000 -- --
(Increase) decrease in assets:
Accounts receivable (247,081) 305,048 18,788 (148,758) (173,189)
Related party receivable -- -- (43,000) -- 43,000
Other receivables (23,216) 22,152 2,125 2,125 (25,000)
Prepaid expenses (16,600) 10,990 20,589 5,512 --
Deposits and trademark 458 392 (8,486) (91) (539)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 87,710 (44,532) (38,558) 32,014 207,600
Related party payable -- -- 3,705 -- (3,705)
Accrued taxes payable 1,867 13,771 1,104 (12,796) (12,348)
Customer deposits -- -- 23,100 -- (23,100)
Deferred revenue 63,898 43,646 (33,937) -- 7,000
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities 332,485 286,567 (419,480) (136,588) (26,286)
---------- ---------- ---------- ---------- ----------
Cash flows used for investing activities:
Acquisition of fixed assets (14,493) (19,903) (71,888) (6,421) (27,982)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Private placement of common stock -- -- -- -- 500,000
Acquisition of stock in subsidiary (5,743) (5,555) (5,500) (5,500) --
Proceeds of borrowings -- -- 150,000 -- --
Repayment of borrowings (200,000) -- (50,000) -- (100,000)
Deferred offering costs -- -- -- -- (81,541)
---------- ---------- ---------- ---------- ----------
Net cash (used) provided by financing
activities (205,743) (5,555) 94,500 (5,500) 318,459
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash 25,114 55,501 (4,053) (13,917) (27,315)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash 137,363 316,610 (400,921) (162,426) 236,876
Cash - Beginning 170,979 308,342 624,952 624,952 224,031
---------- ---------- ---------- ---------- ----------
Cash - Ending $ 308,342 $ 624,952 $ 224,031 $ 462,526 $ 460,907
========== ========== ========== ========== ==========
Supplemental cash flow information:
Cash paid during the year for -
Interest $ 42 $ -- $ 482 $ -- $ --
========== ========== ========== ========== ==========
Supplemental non-cash financing activities:
During the period ended March 31, 1999,
warrants valued at $200,000 were
issued in connection with the public
offering.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 73
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Its operations are
conducted principally from its offices in Southern California, and it
maintains sales offices in England and Japan.
Basis of Consolidation
The consolidated financial statements include the accounts of Pacific
Softworks, Inc. ("PSI") and its wholly owned subsidiary, Network
Research Corp. Japan, Ltd. ("NRC"). Accordingly, all references herein
to PSI or the "Company" include the consolidated results of its
subsidiary. 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 the country of
Japan.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Revenue Recognition
The Company is engaged primarily as 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.
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.
F-7
<PAGE> 74
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Depreciation and Amortization
Furniture, fixtures and equipment are stated at cost and depreciated
using both the straight-line and double declining balance methods over
their estimated useful lives, generally five to seven years. Purchased
computer software costs have been amortized over five years.
The costs of maintenance and repairs are charged to expense when
incurred; costs of renewals and betterments are capitalized. Upon the
sales or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts
and the resulting gain or loss is included in operations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and short-term debt. The carrying amounts
of cash, accounts receivable, accounts payable and short-term debt
approximate fair value due to highly liquid nature of these short-term
instruments.
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 of fair value less cost to
sell.
Income Taxes
The Company has been a subchapter S corporation. Income is passed
through to the stockholders who pay personally their share of the
applicable taxes. Therefore, no provision for income taxes is made at
December 31, 1996, 1997 and 1998. (See Note 14).
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.
Translation of Foreign Currency
The Company translates the foreign currency financial statements of
its foreign subsidiary 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.
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.
F-8
<PAGE> 75
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Per Share of Common Stock
In February 1997, the Financial Accounting Standards Board issued a
new statement titled "Earnings Per Share" (SFAS No. 128). This
statement is effective for both interim and annual periods ending
after December 15, 1997 and specifies the computation, presentation,
and disclosure requirements for earnings per share for entities with
publicly held common stock or potential common stock. All prior-period
earnings per share data presented has been restated to conform with
the provisions for SFAS No. 128.
Per share amounts have been computed based on the average number of
shares of common stock outstanding during each period. In connection
with the Company's proposed initial public offering ("IPO"), stock
options issued for consideration below the IPO per share price during
the twelve months before the filing of the registration statement are
considered to be similar to a stock dividend or stock split and have
been included in the calculation of shares of common stock outstanding
for all periods presented.
Stock Based Compensation
The Company uses the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25. See Note 10 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.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued a new
statement titled "Reporting Comprehensive Income" (SFAS No. 130). This
statement is effective for both interim and annual periods beginning
after December 15, 1997. This statement uses the term "comprehensive
income" to describe the total of all components of comprehensive
income, including net income. This statement uses the term "other
comprehensive net income" to refer to revenues, expenses, gains or
losses that under generally accepted accounting principles are
included in comprehensive income, but excluded from net income.
Interim Financial Information
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which,
in the opinion of management, are necessary to fairly state the
Company's financial position, the results of its operations and cash
flows for the periods presented. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of
results for the entire fiscal year ending December 31, 1999.
F-9
<PAGE> 76
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Furniture, fixtures and equipment $124,764 $144,533 $216,421 150,954 243,149
Computer software 235,829 235,829 214,536 235,829 214,536
-------- -------- -------- -------- --------
360,593 380,362 430,957 386,783 457,685
Less: accumulated depreciation and
amortization 247,143 311,204 348,761 325,917 362,221
-------- -------- -------- -------- --------
Fixed assets - net $113,450 $ 69,158 $ 82,196 60,866 95,464
======== ======== ======== ======== ========
Depreciation expense recorded in
the statement of operations $ 25,647 $ 19,348 $ 30,243 $ 7,563 $ 13,460
======== ======== ======== ======== ========
Unamortized computer software costs $ 71,514 $ 28,607 $ -- $ 21,457 $ --
======== ======== ======== ======== ========
Amortization of computer software costs $ 46,768 $ 42,907 $ 28,607 $ 7,150 $ --
======== ======== ======== ======== ========
</TABLE>
NOTE 3 - 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 4 - RELATED PARTY TRANSACTIONS
a) As of December 31, 1998, the Company has advanced funds to its
principal stockholder in the amount of $43,000. The advances bear no
interest and are repayable upon demand. (See Note 14).
b) As of December 31, 1998, the Company has received advances from a
company controlled by the spouse of the principal stockholder of PSI.
The advances totaled $103,705. The advances bear no interest and are
repayable upon demand. (See Note 14).
c) The company mentioned in item (b) above also occupies 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 is expected to relocate during
1999.
d) The principal stockholder of the Company has personally guaranteed any
advances made to the Company pursuant to a line of credit provided by
Bank of America. Total availability under the line is $250,000. No
advances were outstanding as of December 31, 1998.
F-10
<PAGE> 77
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 5 - 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 1996, 1997,1998
and 1999 have been restated to reflect the effective stock split.
NOTE 6 - 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 320,000
shares. (See Note 10).
NOTE 7 - ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the statement of
operations were $222,051, $263,912 and $213,670 for the years ended
December 31, 1996, 1997 and 1998, respectively, and were $59,259 and
$43,999 for the three months ended March 31, 1998 and 1999,
respectively.
NOTE 8 - INTEREST COSTS
Interest costs incurred were $42, ($43) and $6,004 in 1996, 1997 and
1998, respectively, all of which were charged to operations.
F-11
<PAGE> 78
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 9 - INCOME TAXES AND S CORPORATION STOCKHOLDER DISTRIBUTIONS
a) S Corporation Election
Effective January 1, 1995, the Company, with the consent of its
stockholders, elected under the Internal Revenue Code to be an S
corporation. For 1996, 1997 and 1998, the stockholders of the Company
were taxed on their proportional share of the corporation's taxable
income, or deducted personally any corporate losses. Therefore, no
provision or liability or carry-forward loss for federal income taxes
has been included in these financial statements.
b) Distributions
The Company has paid no distributions to its stockholders.
c) 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 years
ended December 31, 1996, 1997 and 1998.
d) Proforma Income Taxes
Proforma income taxes (benefit), assuming that the Company had not
been an S Corporation in each of the periods presented, are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Federal $ 90,410 $ 3,100 $ (93,510)
State 28,174 2,500 (30,674)
-------- --------- ---------
$118,584 $ 5,600 $(124,184)
======== ========= =========
</TABLE>
NOTE 10 - STOCK OPTIONS
a) The Company has 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 option 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. The options vest
immediately and expire in 2004.
c) Plan and non-plan stock option activity is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------- March 31,
1996 1997 1998 1999
---- ---- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period -- -- -- 140,000
Options granted at an exercise price of
$5.00 per share -- -- -- 45,000
Options granted at an exercise price of
$1.25 per share -- -- 140,000 --
---- ---- ----------- -----------
Outstanding at end of period -- -- 140,000 185,000
==== ==== =========== ===========
Exercisable at end of period -- -- -- 185,000
==== ==== =========== ===========
Weighted average exercise price of
options outstanding $ -- $ -- $ 1.25 $ 2.16
==== ==== =========== ===========
Weighted average remaining contractual
life of options outstanding -- -- 5 years 4 3/4 years
</TABLE>
F-12
<PAGE> 79
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 10 - STOCK OPTIONS (continued)
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
SFAS No. 123. The fair value of each option granted during the period
ended December 31, 1998 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 5
years, and expected dividend yield of 0%. The fair value of each
option granted during the period ended March 31, 1999 has been
estimated with the following assumptions: risk free interest rate of
5.5%, life of options of 5 years and expected dividend yield of 0%.
Under these assumptions, the weighted average fair value of options
granted during the periods ending December 31, 1998 and March 31, 1999
was $0.30 and $1.19, respectively. Accordingly, 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 Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
<S> <C> <C>
Net Loss $(515,360) $(63,925)
Net Loss Per Share $ (0.15) $ (0.02)
</TABLE>
NOTE 11 - SEGMENTED INFORMATION
The Company's assets are located principally in the United States.
Product sales are to the following geographic areas:
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
---------------------------- -------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
United States and the Americas 50% 50% 43% 59% 44%
Europe and the United Kingdom 17% 35% 40% 38% 42%
Asia and Australia 27% 15% 17% 3% 14%
</TABLE>
NOTE 12 - EARNINGS PER SHARE
Stock options issued with an exercise price below the IPO purchase
price during the twelve months before the filing of the registration
statement have been included in the calculation of shares of common
stock outstanding as if they had been outstanding for all periods
presented. The amount of such shares included in earnings per share
calculations totals 140,000.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
a) The Company occupies facilities under terms of an operating lease
expiring September 15, 2000. Rent expense included in the statement of
operations totaled $30,000, $56,100 and $106,592 in 1996, 1997 and
1998, respectively and $823 and $27,676 for the three months ended
March 31, 1998 and 1999, respectively. The Company leases an auto
under term of an operating lease expiring August 31, 1999. Auto lease
expense included in the statement of operations totaled $0, $5,171 and
$15,513 in 1996, 1997 and 1998, respectively and $0 and $3,878 for the
three months ended March 31, 1998 and 1999, respectively.
F-13
<PAGE> 80
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999 $114,894
2000 76,608
</TABLE>
b) The Company maintains a revolving line of credit arrangement with Bank
of America. The credit limit under the arrangement is $250,000.
Advances, when drawn upon, bear interest at the Bank's Reference Rate
plus two percent (9.75% at December 31, 1998). Advances are
collateralized by the Company's accounts receivable and inventory and
are secured by the personal guaranty of the Company's principal
stockholder.
No advances were outstanding under the line at December 31, 1998.
c) The Company is obligated to a former officer and 49% stockholder for a
consulting agreement, covenant not to compete and buy-out of an
employment agreement (collectively, the "Agreement"). The obligation
provides for a monthly payment of $26,190.49 over a 42 month period.
At December 31, 1998, nine payments remain. In addition to these
payments, the Agreement requires that so long as the Company has not
paid in full all obligations under the Agreement, it is restricted
from making any distributions to stockholders, other than necessary
for any tax liability resulting from corporate earnings; is prohibited
from issuing securities; is prohibited from paying executive
compensation in excess of certain levels; and accelerates payment of
obligations under the Agreement if certain corporate income levels are
not met. The obligations under the Agreement are secured by
substantially all of the outstanding shares of common stock of the
Company and all assets of the Company.
The former officer and stockholder has given his consent to the sale
of common stock described in Note 14(c).
d) In June 1998, the Company agreed, subject to the conditions described
below, to issue options to a consultant to purchase shares equal in
number to 10% of the Company's then outstanding capital stock for
$400,000. These options will be issued if the consultant introduces
the Company to a merger, acquisition or other transaction which is
acceptable to the Company before June 1999. To date, the consultant
has not introduced any such transaction to the Company. If issued, the
options will be exercisable for a period of five years commencing from
June 1998 at an exercise price of $1.20 per share. In April 1999 the
consultant demanded that the options be issued pursuant to the
agreement. Counsel for the consultant has advised the Company that the
claim was being evaluated for possible legal action. The Company
believes that the consultant has not fulfilled the conditions required
to vest the option. If compelled to litigate or arbitrate this claim,
the Company intends to defend itself vigorously.
F-14
<PAGE> 81
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 13 - COMMITMENTS AND CONTINGENCIES
e) A lawsuit was filed by United Sates Software Corporation ("USSC")
against the Company and other related parties on April 12, 1999
alleging copyright infringement, misappropriation of trade secrets,
breach of contract, fraud and unfair competition in that the Company
and named parties are alleged to have improperly obtained the source
code of two of USSC's copyrighted computer programs and incorporated
that source code along with other trade secrets into the Company's
products. The complaint principally seeks to enjoin the named parties
from copying or distributing USSC's computer code, to enjoin the
parties from disclosing USSC's trade secrets, to compel the parties to
destroy or turn over all files and media containing trade secrets of
USSC, damages in an amount not yet ascertained but more than
$1,000,000 and punitive damages and attorney fees. The Company was
served with the complaint on or about June 1, 1999 and at this time it
is not possible to evaluate the Company's exposure on this matter or
estimate the range of possible loss; however, the Company intends
vigorously to contest this lawsuit.
NOTE 14 - SUBSEQUENT EVENTS
a) Subsequent to December 31, 1998, the Company paid in full the
liability to the related party described in Note 4(b).
b) Subsequent to December 31, 1998, the related party receivable
described in Note 4(a) was repaid.
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) As a result of the sale of common stock described in item (c) above,
the Company's S Corporation election has been terminated as of
February 14, 1999.
e) In February 1999, the Company entered into a letter of intent with an
underwriter in connection with a proposed initial public offering of
the Company's securities. The letter of intent, as amended in May
1999, relates to the proposed sale by the Company of 950,000 units.
Each unit will consist of one share of common stock and one warrant.
Each warrant will entitle the holder to purchase one share of common
stock at an exercise price of $7.50 for a period of two years
commencing from the initial issuance. Under the letter of intent, the
underwriters will also be granted the right to purchase up to an
additional 142,500 units for the sole purpose of covering
over-allotments. It is expected that the units will be offered to the
public at an offering price of $5.25 per unit.
f) Warrants to purchase 80,000 units have been issued to certain
professionals who have rendered legal, temporary accounting and
administrative services to the Company. Each of these warrants to
purchase units may be exercised at any time over a period of 60 months
commencing from the date of the Company's prospectus at a price of
$5.25 per unit. These units are identical to the units to be sold by
the Company in the proposed IPO. The warrants have been valued at
$200,000.
F-15
<PAGE> 82
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 14 - SUBSEQUENT EVENTS (continued)
g) Upon completion of the IPO, the Company will issue to the underwriter
options to purchase one unit for each 10 units sold to the public. The
options will be exercisable commencing one year from the effective
date of the registration statement and for a period of four years
thereafter. The exercise price of the option is $6.30 per unit.
h) The Company has been advanced the full $250,000 pursuant to its line
of credit arrangement with Bank of America. The advances are due
August 1, 1999.
i) The Company executed a promissory note with its underwriter in the
amount of $200,000. As of July 6, 1999, $100,000 has been advanced
to the Company pursuant to the note. Advances bear interest at
the rate of 10% per annum and are due at the earlier of October 6,
1999 or upon the Company's receipt of funds from the planned IPO.
j) On May 1, 1999 the Company granted stock options to certain employees,
covering 283,000 shares. The options are exercisable for five years at
an exercise price of $5.00 per share for 253,000 shares and $5.50 per
share for 30,000 shares. The options vest at the rate of 2% of the
shares covered per month up to 36 months at which time they will be
fully vested.
F-16
<PAGE> 83
950,000 Units
Pacific Softworks, Inc.
[Company Logo]
Consisting of
950,000 shares of common stock
and
950,000 warrants
SPENCER EDWARDS, INC.
July __, 1999
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
Until _____, 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the units, common stock and warrants, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE> 84
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission or any applicable state securities
commission becomes effective. This preliminary prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
PROSPECTUS Subject to Completion, Dated July __,1999
[PACIFIC SOFTWORKS, INC. LOGO]
80,000 UNITS
CONSISTING OF 80,000 SHARES OF COMMON STOCK AND
80,000 WARRANTS
AND
200,000 SHARES
The security holders named in this prospectus may sell for their
accounts up to 80,000 units and 200,000 shares of common stock of Pacific
Softworks. Each unit consists of one share of common stock and one warrant. The
common stock and warrants will trade separately.
Each warrant allows its holder to purchase for a period of 24 months one
share of common stock at a price of $7.50. Pacific Softworks reserves the right
to redeem all outstanding warrants at $0.05 per warrant if the closing bid price
of our common stock equals or exceeds $8.00 per share for 15 consecutive trading
days.
The securities described in this prospectus are not being sold by any
underwriter. Pacific Softworks will not receive any proceeds from the sale of
these securities.
Pacific Softworks expects to list the common stock and warrants on the
Nasdaq SmallCap Market under the symbols "PASW" and "PASWW."
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is July ___, 1999
SS-1
<PAGE> 85
SALE OF SECURITIES DESCRIBED IN THIS PROSPECTUS.
The sale of the securities described in this prospectus may be made from
time to time in transactions, which may include block transactions by or for the
account of the holders, in the over-the-counter market or in negotiated
transactions through a combination of these methods of sale or otherwise. Sales
may be made at fixed prices which may be changed, at market prices prevailing at
the time of sale, or at negotiated prices.
A post-effective amendment to the registration statement that includes
this prospectus must be filed and declared effective by the Securities and
Exchange Commission before a holder may:
- sell any securities described in this prospectus according to the
terms of this prospectus either at a fixed price or a negotiated
price, either of which is not the prevailing market price,
- sell securities described in this prospectus in a block transaction
to a purchaser who resells,
- pays compensation to a broker-dealer that is other than the usual and
customary discounts, concessions or commissions, or
- makes any arrangements, either individually or in the aggregate, that
would constitute a distribution of the securities described in this
prospectus.
Information contained in this prospectus, except for the cover page, the
back cover page and the information under the heading "Selling Security
Holders", is a part of that separate prospectus relating to a concurrent initial
public offering by Pacific Softworks. This prospectus contains information,
including all information relating to the concurrent underwritten offering and
the underwriter, that may not be pertinent to the sale of the securities offered
in this prospectus by the named holders.
Except as noted below, the securities described in this prospectus may
be sold by the named holders or their transferees starting on the date of this
prospectus. The named holders have agreed with Spencer Edwards, Inc. not to sell
any of their securities for a period of 13 months from the date of this
prospectus without the prior written consent of the underwriter. Sales of these
securities may depress the price of the common stock and the warrants in any
market that may develop for these securities.
SS-2
<PAGE> 86
SELLING SECURITY HOLDERS
This prospectus relates to the sale of 80,000 units and 200,000 shares
of common stock of Pacific Softworks by the security holders named below. Each
unit consists of one share of common stock and one warrant. Each warrant
entitles the holder to buy one share of common stock at a price of $7.50 per
share for a period of 24 months starting from the date of this prospectus.
Pacific Softworks will not receive any of the proceeds of the sale of the
securities by the selling security holders. Pacific Softworks will receive
$420,000 upon exercise of all the warrants to purchase units.
The following tables set forth information regarding the units and
shares of common stock owned beneficially as of July 7, 1999 by each selling
security holder. The selling security holders are not required, and may choose
not, to sell any of their units or shares of common stock. The selling security
holders have agreed with Spencer Edwards, Inc. not to sell any of their
securities for a period of 13 months from the date of this prospectus without
the prior written consent of the underwriter. None of the selling security
holders is an officer, director or other affiliate of Pacific Softworks.
Georgette Pagano is the sister of Laura Russell, the spouse of Glenn P. Russell,
chief executive officer and principal stockholder of Pacific Softworks. Both
Georgette Pagano and Laura Russell were directors of Pacific Softworks from
April 1998 to January 1999.
<TABLE>
<CAPTION>
UNITS OWNED UNITS BEING UNITS AFTER
NAME OF SELLING UNIT HOLDER PRIOR TO OFFERING OFFERED OFFERING
--------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Randall M. Gates 27,500 27,500 --
Georgette W. Pagano 12,500 12,500 --
Aaron A. Grunfeld 25,000 25,000 --
Ronald M. Resch 2,500 2,500 --
Lee M. Polster 2,500 2,500 --
Peter H. Alpert 2,500 2,500 --
Sheldon P. Berger 2,500 2,500 --
David Gitman 2,500 2,500 --
Nicolas Ramniceanu 2,500 2,500 --
------ ------
<S> <C> <C>
Total 80,000 80,000 --
====== ======
</TABLE>
<TABLE>
<CAPTION>
SHARES OWNED SHARES BEING SHARES AFTER
NAME OF SELLING STOCKHOLDER PRIOR TO OFFERING OFFERED OFFERING
--------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
John P. McGrain 140,000 140,000 --
Georgette W. Pagano 60,000 60,000 --
------- -------
Total 200,000 200,000 --
======= =======
</TABLE>
PLAN OF DISTRIBUTION
No underwriting arrangements exist as of the date of this prospectus for
the selling security holders to sell their securities. Upon being advised of any
underwriting arrangements that may be entered into by a selling security holder
after the date of this prospectus, Pacific Softworks will prepare a supplement
to this prospectus to disclose those arrangements. We anticipate that the
selling price for the common stock and warrants will be at or between the "bid"
and "asked" prices for these securities, as quoted in the over-the-counter
market immediately preceding the sale.
SS-3
<PAGE> 87
To the extent that the selling security holders intend to sell their
securities directly, through agents, dealers, or through Spencer Edwards, Inc.,
in the over-the-counter market or otherwise, on terms and conditions that they
determine at the time of sale or that they determine in private negotiations
between buyer and seller, their sales of the shares of common stock and warrants
may be made in accordance with this prospectus and under the provisions of Rule
144 adopted under the Securities Act.
SS-4
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 316 of the California General Corporation Law authorizes a court
to award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
Article III Section 16 of the registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the California
General Corporation Law. The registrant's articles of incorporation provides
that, pursuant to California law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to the company
and its stockholders. This provision in the articles of incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of nonmonetary relief will
remain available under California law. In addition, each director will continue
to be subject to liability for breach of the director's duty of loyalty to
Pacific Softworks for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under California
law. The provision also does not affect a director's responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws. Pacific Softworks has entered into Indemnification Agreements with its
officers and directors, a form of which is attached as Exhibit 10.1 hereto and
incorporated herein by reference. The Indemnification Agreements provide the
registrant's officers and directors with further indemnification to the maximum
extent permitted by the California General Corporation Law. Reference is made to
the Underwriting Agreement contained in Exhibit 1.1 hereto, which contains
provisions indemnifying officers and directors of the registrant against certain
liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by Pacific Softworks in connection with the sale
of units being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq SmallCap Market listing fee.
<TABLE>
<S> <C>
SEC Registration fee ................................................. $ 4,813
NASD fee ............................................................. 2,231
Nasdaq SmallCap Market listing fee ................................... 10,000
Printing and engraving expenses* ..................................... 35,000
Legal fees and expenses* ............................................. 65,000
Accounting fees and expenses* ........................................ 40,000
Blue sky fees and expenses* .......................................... 38,500
Transfer agent fees .................................................. 1,825
Miscellaneous fees and expenses* ..................................... 1,631
========
Total ................................................................ $199,000
</TABLE>
*Estimated
II-1
<PAGE> 89
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities sold within the past
three years which were not registered under the Securities Act of 1933.
In February 1999 Pacific Softworks 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 of the warrant to purchase one share of common
stock for two years at an exercise price of $6.00 per share.
In February 1999 Pacific Softworks also sold for a nominal consideration
and issued warrants to purchase 40,000 units to members of Resch Polster Alpert
& Berger LLP, special counsel to Pacific Softworks in this offering. In February
1999 Pacific Softworks also sold for a nominal consideration and issued warrants
to purchase an additional 27,500 units to Randall M. Gates and 12,500 units to
Georgette W. Pagano. Mr. Gates and Ms. Pagano have provided temporary accounting
and administrative services to Pacific Softworks. Mr. Gates is an "accredited
investor" within the meaning of Rule 501 of Regulation D as promulgated by the
Securities and Exchange Commission. Ms. Pagano is the sister of Laura Russell,
the wife of Glenn P. Russell. Ms. Pagano was a director of Pacific Softworks
from April 1998 to January 1999. Each of these warrants to purchase units may be
exercised at any time over a period of 60 months commencing from the date of
this prospectus at a price of $5.25. The units issuable upon exercise of these
warrants are identical to the units sold in this offering and are being
registered in connection with this offering.
Pacific Softworks issued these securities in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act. The recipients
of securities in these transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof. The certificates evidencing the shares and
warrants bear restrictive legends indicating that the shares and warrants were
not registered under the Securities Act. No underwriter was involved in any of
these transactions.
ITEM 27. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
1.3 Form of Selected Dealers Agreement
3.1 Articles of Incorporation of the Registrant, as amended to date
3.2 Bylaws of the Registrant
4.2 Specimen Warrant
4.3 Form of Warrant Agreement
4.4 Specimen common stock certificate
4.5 Form of Lock Up Agreement
4.6 Form of Underwriter's Option for Purchase of Units
5.1 Opinion of Resch Polster Alpert & Berger LLP**
10.1 Form of Indemnification Agreements
10.2 1998 Equity Incentive Program
10.3 Security and Loan Agreement, dated September 15, 1998 between Bank of America
National Trust and Savings Association and Pacific Softworks*
10.4 Form of Invention Assignment and Proprietary Information Agreement
</TABLE>
II-2
<PAGE> 90
<TABLE>
<S> <C>
10.5 Sublease, dated April 7, 1998 between SHR Perceptual Management and Pacific
Softworks for the premises at 703 Rancho Conejo Blvd., Newbury Park,
California*
10.6 Consulting Agreement dated March 8, 1996 between Kenneth Woodgrift and Pacific
Softworks*
10.7 Letter from Pacific Softworks to Glenn Golenberg dated January 27, 1999 and
Letter from Golenberg & Co, merchant bankers, to Glenn P. Russell dated June
18, 1998*
21.1 Subsidiary of the Registrant
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C., Independent Auditors*
23.3 Consent of Counsel (contained within Exhibit 5.1)*
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
* Filed herewith.
All other exhibits previously filed.
(b) Financial Statement Schedules
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 28. UNDERTAKINGS
The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing
II-3
<PAGE> 91
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 92
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the SEC declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
city of Newbury Park, State of California, on this 7th day of July, 1999.
Pacific Softworks, Inc.
By /s/ GLENN P. RUSSELL
--------------------------------------
Glenn P. Russell
President and Chief Executive Officer
II-5
<PAGE> 93
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement was signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GLENN P. RUSSELL President, Chief Executive July 7, 1999
- ---------------------------------- Officer and Chairman
Glenn P. Russell (Principal Executive Officer)
Chief Financial Officer July 7, 1999
/s/ WILLIAM E. SLINEY (Principal Financial and
- ---------------------------------- Accounting Officer)
William E. Sliney
/s/ CHAIM KALTGRAD Vice President July 7, 1999
- ----------------------------------
Chaim Kaltgrad
* Vice President July 7, 1999
- ----------------------------------
Mark Sewell
* Vice President July 7, 1999
- ----------------------------------
Sandra J. Garcia
* Director July 7, 1999
- ----------------------------------
Robert G. J. Burg II
* Director July 7, 1999
- ----------------------------------
Wayne T. Grau
* Director July 7, 1999
- ----------------------------------
Reuben Sandler, Ph.D.
/s/ JOSEPH LECHMAN Secretary July 7, 1999
- ----------------------------------
Joseph Lechman
</TABLE>
* By Power of Attorney
II-6
<PAGE> 94
EXHIBIT INDEX
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
1.1 Form of Underwriting Agreement
1.3 Form of Selected Dealers Agreement
3.1 Articles of Incorporation of the Registrant, as amended
to date
3.2 Bylaws of the Registrant
4.2 Specimen Warrant
4.3 Form of Warrant Agreement
4.4 Specimen Common Stock Certificate.
4.5 Form of Lock Up Agreement
4.6 Form of Underwriter's Option for Purchase of Units
5.1 Opinion of Resch Polster Alpert & Berger LLP*
10.1 Form of Indemnification Agreements
10.2 1998 Equity Incentive Program
10.3 Security and Loan Agreement, dated September 15, 1998 between
Bank of America National Trust and Savings Association and
Pacific Softworks
10.4 Form of Invention Assignment and Proprietary Information
Agreement
10.5 Sublease, dated April 7, 1998 between SHR Perceptual
Management and Pacific Softworks for the premises at 703
Rancho Conejo Blvd., Newbury Park, California
10.6 Consulting Agreement dated March 8, 1996 between Kenneth
Woodgrift and Pacific Softworks
10.7 Letter from Golenberg & Co, merchant bankers, to
Glenn Russell dated June 18, 1998 and Letter from Pacific
Softworks to Glenn Golenberg dated January 27, 1999
21.1 Subsidiary of the Registrant
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.,
Independent Auditors*
23.3 Consent of Counsel (contained within Exhibit 5.1)*
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
* Filed herewith.
All other exhibits previously filed.
<PAGE> 1
EXHIBIT 5.1
July 7, 1999
Pacific Softworks, Inc.
703 Rancho Boulevard
Newbury Park, California 91320
Re: Pacific Softworks, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
Pacific Softworks, Inc., a California corporation (the "Company"),
proposes to issue up to 950,000 units (the "Units") with each Unit consisting of
one share of common stock (the 950,000 shares of common stock are collectively
referred to as the "Public Shares") and one warrant (the 950,000 warrants are
collectively referred to herein as the "Public Warrants"). Each warrant allows
its holder to purchase for a period of 24 months one share of common stock at a
price of $7.50 (the 950,000 shares of common stock issuable upon exercise of the
Public Warrants are collectively referred to as the "Public Warrant Shares").
The common stock and warrants will trade separately. The Units are to be offered
pursuant to a public offering underwritten on a firm commitment basis by Spencer
Edwards, Inc. ("Spencer Edwards").
The Company also proposes to issue to Spencer Edwards the Underwriter's
Unit Purchase Option (the "Option") to purchase 142,500 Units. The Company is
registering the Shares, the Public Warrants, the Public Warrant Shares, the
Option, the 142,500 shares of common stock issuable upon exercise of the Option
(the "Option Shares"), the 142,500 warrants issuable upon exercise of the Option
(the "Option Warrants") and the 142,500 shares of common stock issuable upon
exercise of the Option Warrants (the "Option Warrant Shares") (collectively the
"Public Securities") pursuant to a registration statement on Form SB-2, File no.
333-75137 (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Act") filed with the Securities and Exchange Commission (the
"Commission") on March 26, 1999.
The Registration Statement also covers 80,000 Units (the "Private Units")
and 200,000 shares of common stock to be sold by certain Selling Security
Holders. The securities underlying the Private Units are 160,000 shares of
common stock (collectively referred to, along with the 200,000 shares described
in the previous sentence, herein as
<PAGE> 2
Pacific Softworks, Inc.
July 7, 1999
Page 2
the "Private Shares") and 80,000 warrants (the "Private Warrants"). The Private
Units, Private Shares and Private Warrants are collectively referred to herein
as the Private Securities.
In rendering the following opinion, we examined and relied only upon the
documents, and the reports (verbal and written) and certificates of public
officials, independent third parties, and officers and directors of the Company
as are specifically described below. In our examination, we have assumed the
genuineness of all signatures, the authenticity, accuracy and completeness of
the documents submitted to us as originals, and the conformity with the original
documents of all documents submitted to us as copies. Our examination was
limited to the following documents and no others:
1. Articles of Incorporation of the Company, as amended to date;
2. By-laws of the Company, as amended to date, certified by the
Secretary of Company;
3. Resolutions adopted on _____________, by the Board of Directors of
the Company authorizing the issuance of the Units;
4. The form of Warrant Agreement for the Public Warrants and Private
Warrants (collectively, the "Warrants"), between the Company and
American Securities Transfer, Incorporated (the "Warrant Agent"),
and form of certificate for the Warrants in the forms filed as an
Exhibit to the Registration Statement;
5. The form of the Company's Common Stock Certificate in the form filed
as an Exhibit to the Registration Statement;
6. The form of the Option in the form filed as an Exhibit to the
Registration Statement;
7. The Registration Statement, together with all amendments thereto,
exhibits filed in connection therewith and form of prospectus
contained therein; and
8. The form of the Underwriting Agreement between the Company and
Spencer Edwards in the form filed as an Exhibit to the Registration
Statement.
<PAGE> 3
Pacific Softworks, Inc.
July 7, 1999
Page 3
We have not undertaken, nor do we intend to undertake, an independent
investigation beyond such documents and records, or to verify the adequacy or
accuracy of such documents and records.
Additionally, we have consulted with officers and directors of the Company
and have obtained such statements and representations with respect to matters of
fact as we considered necessary or appropriate in the circumstances to render
the opinions contained herein. We have not independently verified the content of
the factual statements made to us in connection therewith, nor the veracity of
such representations, nor do we intend to do so.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Shares to be sold as part of the Units, subject to the
effectiveness of the Registration Statement and compliance with applicable blue
sky laws, when issued and delivered against payment therefor in accordance with
the terms of the Underwriting Agreement (assuming execution of the Underwriting
Agreement), and as set forth in the Registration Statement, will constitute
legally issued, fully paid and nonassessable shares of common stock of the
Company.
(ii) The Public Warrants to be sold as part of the Units and the Private
Warrants held by the Selling Security Holders have been duly authorized, and,
when duly executed by the Company and authenticated by the Warrant Agent in
accordance with the terms of the Warrant Agreement and, subject to due execution
of the Warrant Agreement by the Company and the Warrant Agent, the effectiveness
of the Registration Statement, and compliance with applicable blue sky laws,
when issued and delivered against payment therefor in accordance with the terms
of the Underwriting Agreement (assuming execution of the Underwriting Agreement)
and the Warrant Agreement, and as set forth in the Registration Statement, will
have been legally issued and will constitute valid and binding obligations of
the Company in accordance with their terms, subject to:
(a) applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application (including without limitation, general
principles of equity, whether considered in a proceeding in equity or at law),
now or hereafter in effect relating to creditors' rights and claims generally
and/or general laws affecting or relating to the enforcement of creditors'
rights, including, but not limited to Section 547 of the Federal Bankruptcy
Reform Act of 1978; and
(b) the remedy of specific performance and injunctive and other
forms of equitable relief which are subject to equitable defenses and to the
discretion of the court before which any proceeding therefore may be brought.
<PAGE> 4
Pacific Softworks, Inc.
July 7, 1999
Page 4
(iii) The Public Warrant Shares to be sold upon exercise of the Warrants,
subject to the effectiveness of the Registration Statement and compliance with
applicable blue sky laws, when issued and delivered against payment therefor in
accordance with the terms of the Warrant Agreement and Warrants (assuming
execution of the Warrant Agreement and Warrants), and as set forth in the
Registration Statement, will constitute legally issued, fully paid and
nonassessable shares of Common Stock of the Company.
(iv) The Private Shares have been duly authorized, and, upon the
effectiveness of the Registration Statement and compliance with applicable blue
sky laws, when issued and delivered against payment therefor in accordance with
the terms of the Warrant Agreement and Warrants (assuming execution of the
Warrant Agreement and Warrants), and as set forth in the Registration Statement,
will constitute legally issued, fully paid and nonassessable shares of Common
Stock of the Company.
(v) The Option to be sold to Spencer Edwards has been duly authorized, and
when duly executed by the Company and by Spencer Edwards in accordance with the
terms of the Option Agreement and, subject to due execution of the Option
Agreement by the Company and Spencer Edwards, the effectiveness of the
Registration Statement, and compliance with applicable blue sky laws, when
issued and delivered against payment therefor in accordance with the terms of
the Underwriting Agreement (assuming execution of the Underwriting Agreement)
and as set forth in the Registration Statement, will have been legally issued
and will constitute valid and binding obligations of the Company in accordance
with their terms, subject to:
(a) applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application (including without limitation, general
principles of equity, whether considered in a proceeding in equity or at law),
now or hereafter in effect relating to creditors' rights and claims generally
and/or general laws affecting or relating to the enforcement of creditors'
rights, including, but not limited to Section 547 of the Federal Bankruptcy
Reform Act of 1978;
(b) the remedy of specific performance and injunctive and other
forms of equitable relief which are subject to equitable defenses and to the
discretion of the court before which any proceeding therefore may be brought;
and
(c) the enforcement of indemnification and contribution may be
contrary to federal or state public policy.
(vi) The Option Shares to be sold upon exercise of the Option, subject to
effectiveness of the Registration Statement and compliance with applicable blue
sky laws, when issued and delivered against payment therefor in accordance with
the terms
<PAGE> 5
Pacific Softworks, Inc.
July 7, 1999
Page 5
of the Option (assuming execution of the Option) and as set forth in the
Registration Statement, will constitute legally issued, fully paid and
nonassessable shares of common stock of the Company.
(vii) The Option Warrants to be issued upon exercise of the Option have
been duly authorized, and, when duly executed by the Company and authenticated
by the Warrant Agent in accordance with the terms of the Warrant Agreement and,
subject to due execution of the Warrant Agreement by the Company and the Warrant
Agent, the effectiveness of the Registration Statement and compliance with
applicable blue sky laws, when issued and delivered against payment therefor in
accordance with the terms of the Option (assuming execution of the Option) and
the Warrant Agreement and as set forth in the Registration Statement, will have
been legally issued and will constitute valid and binding obligations to the
Company in accordance with their terms, subject to:
(a) applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application (including without limitation, general
principles of equity, whether considered in a proceeding in equity or at law),
now or hereafter in effect relating to creditors' rights and claims generally
and/or general laws affecting or relating to the enforcement of creditors'
rights, including, but not limited to Section 547 of the Federal Bankruptcy
Reform Act of 1978;
(b) the remedy of specific performance and injunctive and other
forms of equitable relief which are subject to equitable defenses and to the
discretion of the court before which any proceeding therefore may be brought;
and
(c) the enforcement of indemnification and contribution may be
contrary to federal or state public policy.
(viii) The Option Warrant Shares to be issued upon exercise of the Option
Warrants, subject to effectiveness of the Registration Statement and compliance
with applicable blue sky laws, when issued and delivered in accordance with the
terms of the Warrant Agreement and the Option Warrants (assuming execution of
the Warrant Agreement and the Option Warrants) and as set forth in the
Registration Statement, will constitute legally issued, fully paid and
nonassessable shares of the common stock of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement; to the filing of this opinion in connection with such
filings of applications as may be necessary to register, qualify or establish
eligibility for an exemption from registration or qualification of the
securities under the blue sky laws of any state or other jurisdiction; and to
the reference to this Firm in the prospectus under the heading "Legal Opinions."
In giving this consent, we do not admit that we are in the category of
<PAGE> 6
Pacific Softworks, Inc.
July 7, 1999
Page 6
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.
The opinions set forth herein are based upon the federal laws of the
United States of America, the laws of the State of California all as now in
effect. We express no opinion as to whether the laws of any particular
jurisdiction apply, and no opinion to the extent that the laws of any
jurisdiction other than those identified above are applicable to the subject
matter hereof.
The information set forth herein is as of the date of this letter. We
disclaim any undertaking to advise you of changed which may be brought to our
attention after the effective date of the Registration Statement.
Very truly yours,
Resch Polster Albert & Berger, LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement on Pacific
Softworks, Inc. on Form SB-2 of our report dated January 29, 1999 (except for
Notes 10, 13(d), 13(e) and 14 as to which the date is July 6, 1999), appearing
in the Prospectus, which is a part of such Registration Statement relating to
the consolidated financial statements of Pacific Softworks, Inc. and
Subsidiary, and to the reference to our Firm under caption "Experts" in such
Prospectus.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
July 8, 1999
