<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-75137
PACIFIC SOFTWORKS, INC.
(Exact name of registrant as specified in its charter)
California 77-0390628
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
703 Rancho Conejo Boulevard
Newbury Park, California 91320
(Address of principal executive offices) (Zip Code)
(805) 499-7722
Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
There were 4,250,000 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of September 7, 1999.
<PAGE> 2
PACIFIC SOFTWORKS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item l. Financial Statements (Unaudited):
Balance Sheets at June 30, 1999 and
December 31, 1998 3
Statements of Operations for the three
months ended June 30, 1999 and 1998 and
six months ended June 30, 1999 and 1998. 5
Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 7
Notes to Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis or
Plan of Operations 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits
Exhibit 1 22
Exhibit 11 26
Exhibit 27 27
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC SOFTWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 186,190 $ 224,031
Accounts receivable, net of allowance
of $86,400 and $86,400 399,328 268,902
Related party receivable 0 43,000
Other receivables 25,000 0
Prepaid expenses 37,703 15,523
---------- ----------
Total current assets 648,221 551,456
Fixed assets, net of accumulated
depreciation and amortization of
$363,474 and $348,761 115,792 82,196
Other assets 10,192 9,674
Deferred offering costs 524,450 0
---------- ----------
Total assets $1,298,655 $ 643,326
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
PACIFIC SOFTWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- ------------
LIABILITIES AND STOCKHOLDERS'EQUITY
<S> <C> <C>
Current liabilities
Accounts payable and accrued expenses $ 467,728 $ 180,469
Related party payable 0 103,705
Line of credit 249,295 0
Taxes payable 14,462 21,705
Customer deposits 0 23,100
----------- -----------
Total current liabilities 731,485 328,979
Deferred revenues 150,874 106,874
Commitments and contingencies
Stockholders'equity
Preferred stock, par value $.01 per share,
10,000,000 shares authorized; no shares
outstanding
Common stock, par value $.001 per share,
50,000,000 shares authorized;
3,300,000 and 3,200,000 shares issued and
outstanding 3,300 3,200
Additional paid in capital 874,558 174,658
Retained earnings (445,533) 18,452
Cumulative adjustment for currency
translation (16,029) 11,163
----------- -----------
Total stockholders' equity 416,296 207,473
----------- -----------
$ 1,298,655 $ 643,326
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
PACIFIC SOFTWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue
Sales $ 495,678 $ 724,624 $ 1,208,737 $ 1,403,716
Royalties
and others 151,711 109,498 210,302 126,485
----------- ----------- ----------- -----------
Total 647,389 834,122 1,419,039 1,530,201
Cost of revenue
Purchases and
royalty fees 44,923 32,729 75,259 60,572
----------- ----------- ----------- -----------
44,923 32,729 75,259 60,572
----------- ----------- ----------- -----------
Gross profit 602,466 801,393 1,343,780 1,469,629
Expenses
Selling, general and
administrative 541,476 544,948 922,291 931,395
Research and
development 354,145 196,634 677,969 410,337
Depreciation and
amortization 13,460 14,713 26,920 29,426
Former officers
consulting and
administrative
expense 97,905 82,680 180,585 165,360
----------- ----------- ----------- -----------
Total 1,006,986 838,975 1,807,765 1,536,518
----------- ----------- ----------- -----------
Net loss $ (404,520) $ (37,582) $ (463,985)$ (66,889)
=========== =========== =========== ===========
Net loss per common share
Basic and diluted $ (0.12) $ (0.01) $ (0.14) $ (0.02)
=========== =========== =========== ===========
Weighted average common
stock shares outstanding
Basic and diluted 3,440,000 3,340,000 3,409,613 3,340,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
PACIFIC SOFTWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (404,520) $ (37,582) $(463,985) $ (66,889)
Other comprehensive
income (loss)
Foreign currency
translation
adjustment 1,377 14,149 (27,192) 4,131
--------- --------- --------- ---------
Comprehensive loss $ (403,143) $ (20,433) $(491,177) $ (62,758)
========== ========= ========= =========
</TABLE>
6
<PAGE> 7
PACIFIC SOFTWORKS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(463,985) $ (66,889)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 26,920 29,426
(Increase) decrease in assets:
Accounts receivable (130,426) (280,285)
Related party receivable 43,000 0
Other receivables (25,000) 2,125
Prepaid expenses (22,180) 5,512
Deposits and trademarks (518) 1,034
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses 287,260 44,272
Accrued taxes payable (7,243) (14,136)
Customer deposits (23,100) 0
Deferred revenue 44,000 0
--------- ---------
Net cash provided by (used in)
operating activities (271,272) (278,941)
Cash flows from investing activities
Acquisition of fixed assets (61,770) (20,036)
Disposition of assets, net 1,254 0
--------- ---------
Net cash used in investing activities (60,516) (20,036)
Cash flows from financing activities:
Proceeds from borrowings 249,295 0
Repayment of borrowings (103,705) 0
Acquisition of stock in subsidiary 0 (5,500)
Deferred offering costs (324,450) 0
Private placement of common stock 500,000 0
--------- ---------
Net cash provided by financing
activities 321,140 (5,500)
Effect of exchange rate changes on cash (27,193) 232
Net increase (decrease) in cash (37,841) (304,245)
Cash - Beginning 224,031 624,952
--------- ---------
Cash - Ending $ 186,190 $ 320,707
========= =========
</TABLE>
7
<PAGE> 8
Supplemental non-cash financing activities: During the period ended June 30,
1999, warrants valued at $200,000 were issued in connection with the
public offering
See accompanying notes to condensed financial statements.
8
<PAGE> 9
PACIFIC SOFTWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation of the Company's financial position
at June 30, 1999, the results of operations for the three and six months ended
June 30, 1999 and June 30, 1998, and the cash flows for the six months ended
June 30, 1999 and June 30, 1998 are included. Operating results for the three
and six month periods ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
The information contained in this Form 10-QSB should be read in
conjunction with audited financial statements as of December 31, 1998 and the
unaudited financial statements as of March 31, 1999 filed as a part of the
Company's Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission on July 30, 1999. (File 333-75137).
(2) Earnings per share
The Company adopted SFAS No. 128, "Earnings Per Share", during 1998.
SFAS No. 128 requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. All prior
period weighted average and per share information has been restated in
accordance with SFAS No. 128.
9
<PAGE> 10
(3) Year 2000 issues
The Company is 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 the Company from unforeseen
problems in its own computer systems and from third parties with which it deals
on transactions worldwide. Failures of the Company's and/or third parties'
computer systems could have a material impact on its ability to conduct
business. Based on the Company's review and analysis, however, it believes that
its computer systems and software products are year 2000 compliant. The Company
has further concluded that the products it obtains from its vendors and
suppliers for use within its systems and products are also year 2000 compliant.
The Company has not incurred and does it expect to incur any material expense in
connection with year 2000 matters.
(4) Subsequent events
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. The Company
accounts for its stock options under the provisions of APB No.25. The following
proforma information is based on estimating the fair value of grants based on
the provisions of SFAS No.123. The fair value of each option granted during the
period ended June 30, 1999 has been estimated as of the date of the grant using
the Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 5.5%, life of options 5 years and expected dividend yield of
0%. Under these assumptions, the weighted average fair value of options granted
during the period ended June 30, 1999 was $1.10. Accordingly the Company's
proforma net loss and net loss per share as determined under SFAS No.12 would
have been $(531,942) and $(0.16).
At June 30, 1999 the Company had been advanced $250,000 pursuant to its
line of credit arrangement with Bank of America. The advance was due on August
1, 1999.
On July 5, 1999 the Company executed a promissory note with the
underwriter in the amount of $200,000. As of July 29, 1999 the full $200,000 had
been advanced to the Company.
10
<PAGE> 11
As of July 29, 1999 the Company completed an initial public offering of
950,000 units consisting of 950,000 common shares and 950,000 warrants priced at
$5.25 per unit. Net proceeds from the offering were $4,339,125 after deducting
underwriters discount and non-accountable expenses. The Company expects to use
the majority of the net proceeds for research and development of internet web
products, enhancements of existing internet and application products and the
development of a marketing and sales organization. The shares and warrants are
listed on the Nasdaq Small Cap Market under the ticker symbols of PASW and PASWW
respectively.
On September 3, 1999 the Company entered into a Letter of Intent to acquire
a 100% interest in privately-held ApplianceWare, Inc. a California corporation
("Ware"). Under the Letter of Intent the Company will issue 1,846,154 shares of
common stock with a value of approximately $12 million for all of the
outstanding shares of Ware and will acquire the software tools and technology
and key business relationships of Ware in the Far East consumer electronics
industry. The Company expects to complete the acquisition in the fourth quarter
of 1999.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that the Company
"expects," "estimates," anticipates," or "believes" and all other statements
concerning future financial results, product offerings, proposed acquisitions or
combinations or other events that have not yet occurred) are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Forward-looking statements involve known and unknown factors, risks and
uncertainties, which may cause the Company's actual results in future periods to
differ materially from forecasted results. Those factors, risks and
uncertainties include, but are not limited to: the positioning of the Company's
products in the Company's market segments; the Company's ability to effectively
manage its various businesses in a rapidly changing environment; the timing of
new product introductions; sell-through of the Company's products; the continued
emergence of the internet resulting in new competition and changing customer
demands; the Company's ability to adapt and expand its product offerings in
light of changes to and developments in the internet environment; growth rates
of the Company's market segments; variations in the cost of, and demand for,
customer service and technical support; price pressures and competitive
environment; the possibility of programming errors or other "bugs' in the
Company's software; the timing and customer acceptance of new product releases
and services (including current users' willingness to upgrade from older
versions of the Company's products); the consummation of possible acquisitions
or combinations; and the Company's ability to integrate acquired or combined
operations with its existing business and otherwise manage growth; and the
Company's ability to generate or obtain additional capital resources to fund its
operations and growth. Additional information on these and other risk factors
are included in the Company's Registration Statement on Form SB-2 (File No.
333-75137) filed with the Securities and Exchange Commission on July 29, 1999
under the headings "Risk Factors" and elsewhere in this Form 10-QSB.
12
<PAGE> 13
General
The Company completed an initial public offering of 950,000 units
consisting of one share of common stock and one warrant on July 29, 1999. The
Company develops and licenses software which enables internet and web based
communications. The software products are embedded into systems and "information
appliances" developed or manufactured by others. Information appliances are
internet-connected versions of every day products such as telephones, fax
machines, personal digital assistants and other digitally based devices. The
Company has developed a new proprietary internet browser for use within
independent, "non Windows(R)" information appliances. The browser may be
effectively placed in use without an operating system and does not require
substantial amounts of memory. The Company expects to begin marketing the
initial version of this browser during the fourth quarter of 1999. The Company
operates in one business segment. The Company's fiscal year ends on December 31.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship to net revenue of certain items in the consolidated
statements of operations and comprehensive income:
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months
June 30, Ended June 30,
------------------ ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.00% 100.00% 100.00% 100.00%
Cost of revenue 6.94 3.92 5.30 3.96
------ ------ ------ ------
Gross profit 93.06 96.08 94.70 96.04
------ ------ ------ ------
Selling, general and administrative 83.64 65.33 65.00 60.86
Research and development 54.70 23.57 47.77 26.82
Depreciation and
Amortization 2.08 1.76 1.90 1.92
Former officer consulting and
And administrative expense 15.12 9.92 12.72 10.81
------ ------ ------ ------
Total operating expenses 155.54 100.58 127.39 100.41
------ ------ ------ ------
Net loss from operations (62.48) (4.50) (32.69) (4.37)
Foreign currency translation
adjustment 0.21 2.06 (1.92) 0.27
------ ------ ------ ------
Comprehensive loss (62.27%) (2.44%) (34.61%) (4.10%)
====== ====== ====== ======
</TABLE>
13
<PAGE> 14
The following table sets forth, for the periods indicated, the
percentage of net revenue by principal geographic area to total revenue:
<TABLE>
<CAPTION>
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States 53% 43% 48% 50%
United Kingdom and Europe 20 40 32 34
Japan and Asia 26 16 19 15
Other 1 1 1 1
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===
</TABLE>
Three months ended June 30, 1999 and 1998.
Net revenue
For the three months ended June 30, 1999 revenues decreased 22% to
$647,389 from $834,122 for the three months ended June 30, 1998. Sales of
licenses decreased 32% for the three months ended June 30, 1999 due to lower
sales in the United Kingdom. This was partially offset by a 38% increase in
royalty income in Japan and Asia.
Cost of revenue
The cost of revenue for the three months ended June 30, 1999 was
$44,923 or 6.9% of sales compared to $32,729 or 3.9% of sales for the three
months ended June 30, 1998. The increase in cost of sales related to direct and
indirect costs for production and duplication of manuals and media for software
products charged against lower sales for the three months ended June 30, 1999.
Selling, general and administrative
Selling, general and administrative expense decreased $3,472 to
$541,476 for the three months ended June 30, 1999 from $544,948 for the three
months ended June 30, 1998. This reduction from period to period reflects a
reduction of sales and operating expenses offset by an increase in rent
following the relocation of the Company's principal office to a new location in
mid 1998. Because of the 22% decrease in net revenues the cost of these expenses
as a percentage of revenue increased to 84% of net revenue for the three months
ended June 30, 1999 from 65% for the three months ended June 30, 1998.
14
<PAGE> 15
Research and development expense
Research and development expense increased to $354,145 or 54% of
revenue for the three months ended June 30, 1999 from $196,634 or 24% of revenue
for the three months ended June 30, 1998. The increase is principally
attributable to a continuation of development of the Fast Track product line and
the development of the FUSION WebPilot Micro Browser(TM) begun in 1998.
Depreciation and amortization
Depreciation and amortization decreased to $13,460 in the three months
ended June 30, 1999 from $14,713 for the three months ended June 30, 1998. This
decrease was attributable to capitalized costs of computer software acquired
from third party vendors in 1996 that became fully amortized in 1998.
Former officer's consulting and administrative expense
Former officer's consulting and administrative expense increased to
$97,905 for the three months ended June 30,1998 from $82,680 for the three
months ended June 30, 1998. This increase of $15,225 related to an acceleration
of the final payment on the former officer's employment contract entered into in
1996. This agreement plus an agreement not to compete and a consulting agreement
with the former officer will expire in September 1999.
Provision for taxes
Commencing in 1995 the Company 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 the Company terminated the S
election and became subject to taxation at the corporate level. Had the Company
been subject to taxation as a C corporation in 1998, it would have received a
pro forma tax benefit of $1,099. For the three months ended June 30, 1999 the
Company had no income tax liability.
Six months ended June 30, 1999 and 1998.
Net revenue
For the six months ended June 30, 1999 revenues decreased 7% to
$1,419,039 from $1,530,201 for the six months ended June 30, 1998. Sales of
licenses decreased 14% for the six months ended June 30, 1999 principally due to
a decline in domestic sales early in 1999 and lower sales in the United Kingdom
in the three month period ended June 30, 1999. This was partially offset by a
66% increase in royalty income in Japan and Asia.
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<PAGE> 16
Cost of revenue
The cost of revenue for the six months ended June 30, 1999 was $75,259
or 5.3% of sales compared to $60,572 or 4% of sales for the six months ended
June 30, 1998. The increase in cost of sales related to direct and indirect
costs for production and duplication of manuals and media for software products
charged against lower sales for the three month period ended June 30, 1999.
Selling, general and administrative
Selling, general and administrative expense was $922,291 or 65% of
revenue for the six months ended June 30, 1999 compared to $931,395 or 61% for
the six months ended June 30, 1999. This reduction of $9,104 from period to
period reflects a reduction of sales and operating expenses offset by an
increase in rent following the relocation of the Company's principal office to a
new location in mid 1998.
Research and development expense
Research and development expense was $677,969 or 48% of revenue for the
six months ended June 30, 1999 compared to $410,337 or 27% of revenue for the
six months ended June 30, 1998. The increase is principally attributable to a
continuation of development of the Fast Track product line and the development
of the FUSION WebPilot Micro Browser(TM) begun in 1998.
Depreciation and amortization
Depreciation and amortization decreased to $26,920 in the six months
ended June 30, 1999 from $29,426 for the six months ended June 30, 1998. This
decrease was attributable to capitalized costs of computer software acquired
from third party vendors in 1996 that became fully amortized in 1998.
Former officer's consulting and administrative expense
Former officer's consulting and administrative expense was $180,585 for
the six months ended June 30,1999 compared to $165,360 for the six months ended
June 30, 1998. This increase of $15,225 related to an acceleration of the final
payment on the former officer's employment contract entered into in 1996. This
agreement plus an agreement not to compete and a consulting agreement with the
former officer will expire in September 1999.
Provision for taxes
Commencing in 1995 the Company 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 the Company
terminated the S election and became subject to taxation at the corporate level.
Had the Company been subject to taxation as a C corporation in 1998, it would
have received a pro forma tax benefit of $1,099. For the six months ended June
30, 1999 the Company had no income tax liability.
16
<PAGE> 17
Liquidity and capital resources
At June 30, 1999 and December 31, 1998 the Company had working capital
deficit of ($234,138) and $115,603 and cash and cash equivalents of $186,190 and
$224,031.
The Company used $271,272 in cash flow from operating activities in the
six months ended June 30, 1999 compared to using $278,941 in the six months
ended June 30, 1998. The decrease of $6,669 was the result a decrease of
$149,859 in accounts receivable, a decrease of $28,210 in prepaid expenses, a
decrease of $28,180 in other receivables, an increase of $242,987 in accounts
payable and accrued expenses, $44,000 in deferred revenue, an decrease in
accrued taxes of $6,893 offset by an increase in related party receivable of
$43,000, an increase in deferred revenue of $44,000. a decrease of $6,893 in
accrued taxes and an increase of $23,100 in customer deposits.
Investing activities in the six months ended June 30, 1999 consisted of
purchase of fixed assets of $61,770 and the disposition of assets of $1,254
compared to the purchase of assets of $20,036 in the six months ended June 30,
1998.
The Company provided $321,140 from financing activities in the six
months ended June 30, 1999 consisting of $145,590 from borrowings and $500,000
from a private placement for common stock offset by $324,450 in deferred
offering costs. In the six months ended June 30, 1998 the Company used $5,500
for the acquisition of the minority interest in the Company's Japanese
subsidiary.
On July 30, 1999 the Company completed an initial public offering of
950,000 units consisting of 950,000 common shares and 950,000 warrants priced at
$5.25 per unit. Net proceeds from the offering were $4,339,125 after deducting
underwriters discount and non-accountable expenses. The Company expects to use
the majority of the net proceeds for research and development of internet web
products, enhancements of existing internet and application products and the
development of a marketing and sales organization. The shares and warrants are
listed on the Nasdaq Small Cap Market under the ticker symbols of PASW and PASWW
respectively.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999 Glenn Golenberg and Mark Guren notified the Company in
writing through their legal counsel that they are evaluating for possible legal
action a claim against the Company for an option to acquire 10% of outstanding,
fully diluted shares of the Company as of June 18, 1998 for $400,000. This claim
arises out of a June 1998 letter agreement between Golenberg & Co., merchant
bankers, and the Company. In that letter, Golenberg & Co. agreed to create for
the Company 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 allegedly provided the Company. The
Company believes that Golenberg & Co. has not fulfilled the conditions required
to vest the option. If the Company is compelled to litigate or arbitrate this
claim the Company intends to defend itself vigorously. If however Golenberg &
Co. is successful in pursuit of this claim, it may be awarded an option to
purchase up to 320,000 shares of common stock of the Company at a price of
approximately $1.25 per share.
In June 1999 the Company was 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
named Glenn Russell, Laura Russell and Luke Systems International, Inc. as
additional defendants.
United States Software alleged:
o copyright infringement,
o misappropriation of trade secrets,
o breach of contract,
o fraud, and
o unfair competition.
The complaint alleged that in November 1996 the Company, Glenn Russell
and Laura Russell improperly obtained source code of two copyrighted computer
programs and incorporated that source code along with other trade secrets of
United States Software within the Company's FUSION products. In the suit United
States Software demanded a jury trial and principally sought:
o to enjoin the Company and the other defendants from copying or
distributing its computer code,
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<PAGE> 19
o to enjoin the Company and the other defendants for disclosing its
trade secrets,
o orders from the court requiring the Company to destroy, or the court
to impound, all files and media containing trade secrets of United
States Software,
o damages in an amount not yet ascertained but more than $1 million,
and
o punitive damages and attorney fees.
The Company filed an answer to the complaint on July 1, 1999. On
or around July 20, 1999 United States Software and the Company agreed to settle
the litigation on terms which have no material financial impact on the Company.
The Company is not currently involved in any litigation that is expected to
have a material adverse effect on the Company's business or financial position.
There can be no assurance, however, that third parties will not assert
infringement or other claims against the Company in the future which, regardless
of the outcome, could have an adverse impact on the Company as a result of
defense costs, diversion of management resources and other factors.
ITEM 2. CHANGES IN SECURITIES.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) The following exhibits are included herewith:
Exhibit 1 - Letter of Intent
Exhibit 11 - Weighted Average of Common Stock Shares
Outstanding
Exhibit 27 - Financial Data Schedule
19
<PAGE> 20
(B) The Company filed no reports on Form 8-K during the
quarter for which this form is filed.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 7, 1999 PACIFIC SOFTWORKS, INC.
/s/ WILLIAM E. SLINEY
----------------------------------
William E. Sliney
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
21
<PAGE> 1
EXHIBIT 1
LETTER OF INTENT
This Letter of Intent ("LOI") is entered into and effective the 24th
day of August, 1999 between Pacific Softworks, Inc. ("Pacific") a California
corporation, and ApplianceWare, Inc. ("Ware"), a California corporation,
collectively (the "Parties") under the following terms and conditions.
1. Pacific, through its wholly owned subsidiary Pacific Acquisition Corp
("PAC"), will issue 1,846,154 shares of Pacific common stock in
exchange for the acquisition of 100% of the stock of Ware (the
"Acquisition"). As of August 24, 1999, the date of approval by
Pacific's Board of Directors, this Acquisition is valued at $12,000,000
as based upon Pacific's closing price of $6.50 per share on that date.
The parties hereto contemplate that the Acquisition will be structured
as an IRS Code 368(a) tax free reorganization with an effective date of
October 1, 1999 and a closing date no later than October 31, 1999.
2. Pacific shall form a US subsidiary tentatively known as Appliance Net
("Appliance"). Ware's stockholders' shall participate in the ownership
of Appliance proportionate to (1) Pacific's ownership in Appliance and
(2) the shares of Appliance in any dividend trust deemed to be a
dividend return for the beneficial ownership of Pacific's stockholders.
Ware's stockholders will own, through attribution, a pro rata portion
of the shares held by Pacific prior to declaration of the dividend and
the shares of the dividend trust as based upon Ware's ownership of the
shares in Pacific prior to the dividend.
3. Ware shall have free and clear title to certain intellectual property
and software technology without any liabilities or commitments other
than what may be disclosed during the diligence to be performed by the
Parties prior to consummation of the Acquisition.
4. Ware shall have acquired and established certain operating rights
("Operating Rights") with respect to the software technology and the
marketing of software technology and related services, and the design,
manufacture and distribution of hardware.
5. Upon completion of the acquisition of Ware by Pacific, Pacific shall
elect one of Ware's existing stockholders, Mr. Kaz Hashimoto or his
designee, on the Board of Directors of Pacific and Appliance.
6. In selecting the Chief Executive Officer and any Vice Presidents for
Pacific and Appliance, Ware's existing stockholders, as represented by
Mr. Kaz Hashimoto or his designee, will be given the right to
22
<PAGE> 2
participate in the selection, choice and recommendation for employment
of any candidates. Pacific may not proceed in the selection process
without resolution and agreement by said representative of Ware's
existing stockholders whose approval may not be unreasonably withheld.
7. The Parties represent and warrant that no brokers, investment bankers
or other "finders" are involved in introducing the Parties to each
other and that no brokers fees, investment bankers or other finders are
owed to any person.
8. This LOI is further subject to and conditioned upon the satisfaction of
the following conditions:
(a) The negotiation, execution and delivery of a definitive
binding written agreement and such other documentation as may
be necessary or appropriate (the "Acquisition Agreement"), all
in form and substance satisfactory to the Parties, and will
include customary representations and warranties which shall
survive the closing of the Acquisition as well as customary
conditions precedent and indemnification;
(b) The completion by the Parties and their respective
accountants, counsel and other experts of a customary due
diligence investigation with respect to the business and
affairs (including business, financial and legal matters) of
Pacific, and Ware and the resolution, in a manner satisfactory
to the Parties of any and all issues raised as a result of
such investigation; including but not limited to Pacific's
anticipation that the Acquisition will yield at least $2.0
million in Earnings Before Interest and Taxes ("EBIT") during
the first year following the effective date of the
Acquisition.
(c) The receipt of all necessary and appropriate corporate
stockholder, and governmental approvals by the Parties to
enter into, and consummate the transactions contemplated by
the Acquisition;
(d) The obtaining of such consents and approvals from third
parties as may be required in order lawfully to consummate the
Acquisition without violating any contract or rights of third
parties; and
(e) The occurrence prior to the Closing Date (as defined within
the Acquisition Agreement) of no material adverse change in
the financial condition, business or prospects of any of the
Parties and no threatened litigation with respect to the
transactions contemplated hereby or otherwise with respect to
any of the Parties.
23
<PAGE> 3
9. The Parties represent to each other that each has the necessary power
and authority to execute and deliver this LOI. By executing and
delivering this LOI the Parties represent that to their knowledge
neither of the Parties nor any stockholder of the Parties is in
violation of, breach of or default under any material contract,
agreement or understanding, whether oral or written, to which the
Parties or stockholders is a party.
10. This LOI is only an expression of mutual interest by the Parties
concerning some aspects of the proposed transactions described herein,
it being understood that all of the material terms of such proposed
transactions are not yet agreed upon among the Parties and still must
be agreed upon mutual satisfaction of the Parties.
11. For and during the period of time commencing with the date hereof and
ending on the expiration date of this LOI, or the close of the
Acquisition (whichever occurs first) (the "Lock-Up Period") none the
Parties shall permit any officers, directors, stockholders, employees,
agents or representatives (including without limitation, investment
bankers, attorneys and accountants) to, directly or indirectly
(1) initiate contact with, (2) make, solicit or encourage any inquiries
or proposals by, (3) enter into or participate in any discussions or
negotiations with any other entity with respect to an acquisition
of Ware, or (4) disclose any of the terms and conditions of the
Acquisition or other information not customarily disclosed concerning
the business and properties of Ware or Pacific hereto without the
prior approval of the Parties.
12. It is the further understanding and agreement of the Parties except as
explicitly otherwise set forth in this LOI that (1) no liabilities or
obligations of any kind whatsoever are intended to be created hereby
among the Parties; (2) this LOI is not intended to constitute a legally
binding contract or to consummate the proposed transactions described
herein and is not an agreement to enter into a legally binding
agreement, (3) any binding legal obligation of any nature among the
Parties shall be only set forth in the definitive agreement; (4) no
party may claim any legal rights against the other by reason
of the execution of this LOI or by taking any action in reliance
thereon and (5) each Party shall bear their own costs in connection
with this LOI, any due diligence and the Acquisition contemplated
thereby.
24
<PAGE> 4
13. Pacific and Ware intend in good faith to use their best efforts to
proceed promptly with the negotiation, execution and the delivery of
the definitive agreement and the closing transactions contemplated by
this LOI. This LOI shall terminate and shall be of no further force or
effect if the Acquisition Agreement has not been approved by Pacific's
and Ware's Boards of Directors, all required regulatory agencies and,
if required, submitted to the stockholders of Pacific and Ware for
approval no later than October 31, 1999 or any other date that may be
mutually acceptable to the Parties.
AGREED: AGREED:
- ------------------------------ ------------------------------
Glenn P. Russell Kaz Hashimoto
Chief Executive Officer Chairman and CEO
Pacific Softworks, Inc. ApplianceWare, Inc.
25
<PAGE> 1
EXHIBIT 11
PACIFIC SOFTWORKS, INC.
COMPUTATION OF WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
Three Months Six Months
Total Number Ended Ended
Of Shares June 30, 1999 June 30, 1999
------------ ------------- -------------
<S> <C> <C> <C>
Outstanding shares
as of January 1, 1999 3,200,000 3,200,000 3,200,000
Private placement
of common stock on
2/24/99 100,000 100,000 69,613
Options treated as
common stock 140,000 140,000 140,000
------- ------- -------
Total weighted average
shares outstanding 3,440,000 3,440,000 3,409,613
========= ========= =========
Net loss $(404,520) $(463,985)
========== ==========
Net loss per common share
basic and diluted $ (0.12) $ (0.14)
========== ==========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
SOFTWORKS, INC. BALANCE SHEET AT JUNE 30, 1999 AND THE STATEMENTS OF OPERATIONS,
STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE PERIOD THEN ENDED, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 186,190
<SECURITIES> 0
<RECEIVABLES> 485,728
<ALLOWANCES> 86,400
<INVENTORY> 0
<CURRENT-ASSETS> 648,221
<PP&E> 479,266
<DEPRECIATION> 363,474
<TOTAL-ASSETS> 1,298,655
<CURRENT-LIABILITIES> 882,359
<BONDS> 0
0
0
<COMMON> 3,300
<OTHER-SE> 412,996
<TOTAL-LIABILITY-AND-EQUITY> 1,298,655
<SALES> 1,419,039
<TOTAL-REVENUES> 1,419,039
<CGS> 75,259
<TOTAL-COSTS> 1,807,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (463,985)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (463,985)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
