<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 September 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 4,392,500 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of November 12, 1999.
<PAGE> 2
PACIFIC SOFTWORKS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited):
Balance Sheets at September 30, 1999 and
December 31, 1998 3
Statements of Operations for the three
months ended September 30, 1999 and 1998 and
nine months ended September 30, 1999 and 1998 5
Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 7
Notes to Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis or
Plan of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits
Exhibit 1 20
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>
September 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $3,839,401 $ 224,031
Accounts receivable, net of allowance
of $86,400 and $86,400 238,811 268,902
Related party receivable 0 43,000
Prepaid expenses 42,124 15,523
---------- ----------
Total current assets 4,120,336 551,456
Fixed assets, net of accumulated
depreciation and amortization of
$389,144 and $355,343 182,223 82,196
Other assets 9,674
---------- ----------
Total assets $4,302,559 $ 643,326
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
PACIFIC SOFTWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 195,735 $ 180,469
Related party payable 0 103,705
Taxes payable 1,382 21,705
Customer deposits 0 23,100
----------- -----------
Total current liabilities 197,117 328,979
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;
4,392,500 and 3,200,000 shares issued and
outstanding 4,393 3,200
Additional paid in capital 5,346,594 174,658
Retained earnings (1,336,390) 18,452
Cumulative adjustment for currency
translation (60,029) 11,163
----------- -----------
Total stockholders' equity 3,954,568 207,473
----------- -----------
$ 4,302,559 $ 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 Nine Months
Ended September 30 Ended September 30
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue
Sales $ 434,234 $ 558,160 $ 1,642,970 $ 1,961,876
Royalties
and others 101,219 106,169 311,522 232,654
----------- ----------- ----------- -----------
Total 535,453 664,329 1,954,492 2,194,530
Cost of revenue
Purchases and
royalty fees 40,767 35,879 116,026 96,450
----------- ----------- ----------- -----------
40,767 35,879 116,026 96,450
----------- ----------- ----------- -----------
Gross profit 494,686 628,450 1,838,466 2,098,080
Expenses
Selling, general and
administrative 684,885 480,287 1,607,175 1,411,683
Research and
development 597,245 207,489 1,275,214 617,826
Depreciation and
amortization 13,461 14,713 40,382 44,139
Former officers
consulting and
administrative
expense 71,500 82,680 252,085 248,040
----------- ----------- ----------- -----------
Total 1,367,091 785,169 3,174,856 2,321,688
----------- ----------- ----------- -----------
Net loss $ (872,405) $ (156,719) $(1,336,390) $ (223,608)
=========== =========== =========== ===========
Net loss per common share
Basic and diluted $ (0.20) $ (0.05) $ (0.36) $ (0.07)
=========== =========== =========== ===========
Weighted average common
stock shares outstanding
Basic and diluted 4,416,332 3,340,000 3,748,873 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 Nine Months
Ended September 30 Ended September 30
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $ (872,405) $ (156,719) $(1,336,390) $ (233,608)
Other comprehensive
income (loss)
Foreign currency
translation
adjustment (44,000) 14,149 48,866 4,131
----------- ----------- ----------- -----------
Comprehensive loss $ (916,405) $ (142,570) $(1,287,524) $ (229,477)
=========== =========== =========== ===========
</TABLE>
6
<PAGE> 7
PACIFIC SOFTWORKS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended September 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,336,390) $ (223,608)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 40,382 44,139
(Increase) decrease in assets:
Accounts receivable 30,091 (94,091)
Related party receivable 43,000
Other receivables 0 (23,434)
Prepaid expenses (26,601) 36,112
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses 15,266 (12,321)
Related party payable (103,705) 0
Accrued taxes payable (20,323) (18,592)
Customer deposits (23,100) 0
Deferred revenue 44,000 (76,013)
----------- -----------
Net cash provided by (used in)
operating activities (1,337,380) (367,808)
Cash flows from investing activities
Acquisition of fixed assets (153,761) (57,177)
Disposition of assets, net 13,461 0
----------- -----------
Net cash used in investing activities (140,300) (57,177)
Cash flows from financing activities:
Proceeds from initial public offering 4,651,131 0
Proceeds from borrowings 459,295 0
Repayment of borrowings (563,000) 0
Acquisition of stock in subsidiary (5,500)
Private placement of common stock 500,000 0
----------- -----------
Net cash provided by financing
activities 5,047,426 (5,500)
Effect of exchange rate changes on cash 45,624 (14,946)
Net increase (decrease) in cash 3,615,370 (445,431)
Cash - Beginning 224,031 624,952
----------- -----------
Cash - Ending $ 3,839,401 $ 179,521
=========== ===========
</TABLE>
Supplemental non-cash financing activities:
None
See accompanying notes to condensed financial statements.
7
<PAGE> 8
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 September 30, 1999, the results of operations for the three and nine months
ended September 30, 1999 and September 30, 1998, and the cash flows for the nine
months ended September 30, 1999 and September 30, 1998 are included. Operating
results for the three and nine month periods ended September 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 29, 1999. (File 333-75137).
(2) Earnings per share
The Company adopted SFAS No. 128, "Earnings Per Share", during 1998.
SFAS No. 128 requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. All prior
period weighted average and per share information has been restated in
accordance with SFAS No. 128.
8
<PAGE> 9
(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 271,000 shares. The options are exercisable for five years at an
exercise price of $5.00 per share for 241,000 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 September 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 September 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 $(1,402,621) and $(0.37).
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. On September 13, 1999 the
Company received $650,868 representing the proceeds of 142,500 units from the
underwriter's overallotment of units. 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
9
<PAGE> 10
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 1,850,000 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. On November 9, 1999 the Company's negotiations for the acquisition
were suspended and exploration with regard to potential sales and licensing
arrangements with the same parties were initiated. The Company believes that one
of two aforementioned plans will be concluded during the fourth quarter of this
year.
On October 25, 1999 the Company and Financial Services Provider Network,
Inc ("FSPN") signed a Letter of Intent to enter into discussions with the intent
of entering a strategic relationship to jointly develop certain internet
applications with financial institutions. The Company indicated that subject to
entering into a definitive agreement it would invest up to $1,000,000 in FSPN
and under certain conditions up to an additional $2,000,000. On October 25, 1999
the Company loaned FSPN $250,000 through a promissory note bearing interest at
ten (10%) percent due in ninety days. The loan is for general corporate
purposes.
10
<PAGE> 11
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.
11
<PAGE> 12
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. An
additional 142,500 units representing the underwriter's overallotment was sold
on September 13, 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.
12
<PAGE> 13
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 Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 100.00% 100.00% 100.00% 100.00%
Cost of revenue 7.61 5.40 5.93 4.39
------- ------ ------ ------
Gross profit 92.39 94.60 94.07 95.61
------- ------ ------ ------
Selling, general and administrative 127.91 72.30 82.22 64.33
Research and development 111.54 31.23 65.25 28.16
Depreciation and
Amortization 2.51 2.22 2.07 2.01
Former officer consulting and
And administrative expense 13.35 12.43 12.89 11.30
------- ------ ------ ------
Total operating expenses 255.31 118.19 162.43 105.80
------- ------ ------ ------
Net loss from operations (162.92) (23.59) (68.36) (10.19)
Foreign currency translation
adjustment (8.21) 2.13 2.50 0.26
------- ------ ------ ------
Comprehensive loss (171.13%) (21.46%) (65.86%) (10.45%)
======= ====== ====== ======
</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 Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States 54% 44% 50% 51%
United Kingdom and Europe 26 41 30 36
Japan and Asia 19 14 19 12
Other 1 1 1 1
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===
</TABLE>
13
<PAGE> 14
Three months ended September 30, 1999 and 1998.
Net revenue
For the three months ended September 30, 1999 revenues decreased 20% to
$535,453 from $664,329 for the three months ended September 30, 1998. Sales of
licenses decreased 22% for the three months ended September 30, 1999 due to
lower sales in the United Kingdom and a 5% decrease in royalty income in Japan
and Asia.
Cost of revenue
The cost of revenue for the three months ended September 30, 1999 was
$40,767 or 7.6% of sales compared to $35,879 or 5.4% of sales for the three
months ended September 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
September 30, 1999.
Selling, general and administrative
Selling, general and administrative expense increased $204,598 to
$684,885 for the three months ended September 30, 1999 from $480,287 for the
three months ended September 30, 1998. This increase is the result of increases
in the sales and marketing staffs which were expanded after the receipt of funds
from the Company's initial public offering in July, 1999 and an increase in
administrative costs for expenses associated with the Company becoming a public
company. Because of the 20% decrease in net revenues the cost of these expenses
as a percentage of revenue increased to 128% of net revenue for the three months
ended September 30, 1999 from 72% for the three months ended September 30, 1998.
Research and development expense
Research and development expense increased to $597,245 or 112% of
revenue for the three months ended September 30, 1999 from $207,489 or 31% of
revenue for the three months ended September 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 $13,461 in the three months
ended September 30, 1999 from $14,713 for the three months ended September 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.
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<PAGE> 15
Former officer's consulting and administrative expense
Former officer's consulting and administrative expense decreased to
$71,500 for the three months ended September 30,1999 from $82,680 for the three
months ended September 30, 1998. This agreement plus an agreement not to compete
and a consulting agreement with the former officer expired 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 September 30, 1999
the Company had no income tax liability.
Nine months ended September 30, 1999 and 1998.
Net revenue
For the nine months ended September 30, 1999 revenues decreased 11% to
$1,954,492 from $2,194,530 for the nine months ended September 30, 1998. Sales
of licenses decreased 16% for the nine months ended September 30, 1999
principally due to a decline in domestic sales early in 1999 and lower sales in
the United Kingdom in the nine month period ended September 30, 1999. This was
partially offset by a 34% increase in royalty income in Japan and Asia.
Cost of revenue
The cost of revenue for the nine months ended September 30, 1999 was
$116,026 or 6% of sales compared to $96,450 or 4% of sales for the nine months
ended September 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 nine month period ended September
30, 1999.
Selling, general and administrative
Selling, general and administrative expense was $1,607,175 or 82% of
revenue for the nine months ended September 30, 1999 compared to $1,411,683 or
64% for the nine months ended September 30, 1999. This increase of $195,492 from
period to period is the result of increases in the sales and marketing staffs
which were expanded after the receipt of funds from the Company's initial public
offering in July, 1999, an increase in administrative costs for expenses
associated with the Company becoming a public company and an increase in rent
following the
15
<PAGE> 16
relocation of the Company's principal office to a new location in mid 1998.
Research and development expense
Research and development expense was $1,275,214 or 65% of revenue for the nine
months ended September 30, 1999 compared to $617,826 or 28% of revenue for the
nine months ended September 30, 1998. The increase of $657,388 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 $40,382 in the nine months
ended September 30, 1999 from $44,139 for the nine months ended September 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 $252,085 for
the nine months ended September 30,1999 compared to $248,040 for the nine months
ended September 30, 1998. This agreement plus an agreement not to compete and a
consulting agreement with the former officer expired 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 nine months ended
September 30, 1999 the Company had no income tax liability.
Liquidity and capital resources
At September 30, 1999 and December 31, 1998 the Company had working
capital of $3,772,401 and $115,603 and cash and cash equivalents of $3,839,401
and $224,031.
The Company used $1,337,380 in cash flow from operating activities in
the nine months ended September 30, 1999 compared to using $367,808 in the nine
months ended September 30, 1998. The increase of $969,572 was the result a
decrease of $192,970 in accounts receivable, a increase of $16,555 in prepaid
expenses, an increase of
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<PAGE> 17
$35,613 in accounts payable and accrued expenses, an increase of $86,077 in
deferred revenue, an decrease in accrued taxes of $627.
Investing activities in the nine months ended September 30, 1999
consisted of purchase of fixed assets of $153,761 and the disposition of assets
of $13,461 compared to the purchase of assets of $51,177 in the nine months
ended September 30, 1998.
The Company provided $5,047,426 from financing activities in the nine
months ended September 30, 1999. On July 29, 1999 the Company successfully
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. On September 13, 1999 the Company received $650,868
from the sale of 142,500 units representing the proceeds of the sales of the
underwriter's overallotment. 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. Additional
financing activities for the nine months ended September 30, 1999 consisted of
$459,295 of borrowings and $500,000 from a private placement of common stock
offset by repayment of borrowings of $563,000. In the nine months ended
September 30, 1998 the Company used $5,500 for the acquisition of the minority
interest in the Company's Japanese subsidiary.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999 Golenberg & Co., Merchant Bankers ("Banker"), 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 the
Banker and the Company. In that letter, the Banker agreed to create for the
Company a business plan, to develop a comprehensive financing plan and to
perform other related services. The Banker has asserted that it is entitled to
the option based on the services it allegedly provided the Company. The Company
believes that the Banker 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 the Banker is successful
in pursuit of this claim, it may be
17
<PAGE> 18
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.
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
(b) The Company filed no reports on Form 8-K during the
quarter for which this form is filed.
18
<PAGE> 19
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: November 12, 1999 PACIFIC SOFTWORKS, INC.
/s/ WILLIAM E. SLINEY
----------------------------------
William E. Sliney
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
19
<PAGE> 1
EXHIBIT 1
LETTER OF INTENT
October 25, 1999
Mr. Mark Bragg
Financial Services Provider Network, Inc.
801 E. Taquitz Canyon Way
Suite 101
Palm Springs, CA 92262
Dear Mark:
This letter is intended to summarize our recent discussions between
Pacific Softworks, Inc. and Financial Services Provider Network.
1. Pacific Softworks, Inc. ("PSI") is desirous of entering into a
strategic relationship with Financial Services Provider Network,
Inc. ("FSPN") to jointly develop certain specific aspects of
their respective businesses.
2. FSPN, is currently in the process of procuring additional capital
and PSI is interested in investing, under certain circumstances,
up to Three Million Dollars ($3,000,000) to assist in FSPN's
development.
3. PSI is investigating the acquisition of an independent Internet
Service Provider ("ISP").
4. If PSI acquires, or otherwise enters into a formal agreement
with, an ISP whereby PSI can offer FSPN Internet connection
services for FSPN's customers, PSI will have the right to explore
and enter into discussions relating to ISP, to provide Internet
connection services to FSPN'S customers. The primary focus of
such discussion will center on performance and areas of potential
service.
20
<PAGE> 2
5. Subject to entering into a definitive agreement, PSI would be
willing to invest One Million Dollars ($1,000,000) at the time of
closing with FSPN and subject to other conditions, invest up to
an additional Two Million Dollars ($2,000,000) by December 31,
1999.
6. At a minimum, PSI would expect this investment to be subject to
the following terms and conditions:
A. FSPN and PSI will endeavor to develop areas of common
interest as they relate to software and hardware
requirements.
Mr. Mark Bragg
October 25, 1999
Page Two
B. PSI's investment in FSPN will be valued at a Twenty
Million Dollars ($20,000,000) current evaluation of FSPN,
i.e., for the first $1,000,000 invested, PSI would receive
5% of the fully diluted outstanding stock of FSPN.
For each additional One Million Dollars ($1,000,000)
invested by PSI, within 30 days of closing, (up to an
additional $2,000,000) the evaluation of FSPN will remain
at Twenty Million dollars ($20,000,000) and PSI would
receive 5% per One Million Dollars, of the fully diluted
outstanding stock of FSPN.
In the event that additional funds are invested after 31 days from the
date of closing, the evaluation of FSPN will increase to Twenty Five Million
Dollars ($25,000,000) and PSI's interest would decrease to 4% of the fully
diluted outstanding stock of FSPN, per One Million Dollars ($1,000,000)
invested.
PSI dilution after the initial investment will be in parity with
existing stockholders
C. PSI will have the right to appoint one Director to FSPN's
Board of Directors and PSI will invite
21
<PAGE> 3
Mr. Mark Bragg to serve on the Board of Directors of PSI,
if he wishes.
D. PSI and FSPN will agree to discuss ISP services that are
anticipated to be provided by PSI, or its affiliate. The
terms by which said ISP services could be provided shall
be included in a separate agreement that will cover the
quality of service, schedule of service to be provided,
cost of service, and FSPN's possible participation in the
revenues generated by the ISP based on certain levels of
volume of new customers to the ISP by customers of FSPN.
E. PSI and FSPN will negotiate a first right of refusal for
embedded Internet technologies to be provided by PSI for
use by FSPN, or its partners, in delivering FSPN products
and services via automated teller machines. Said Internet
technologies will include, but will not be limited to,
embedded Web browsers, networking protocol stacks and thin
client technologies.
F. 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,
investment bankers or other finders' fees are owed to any
person.
G. The negotiation, execution and delivery of a definitive
binding written agreement and such other documentation as
may be necessary or appropriate, all in form and substance
satisfactory to PSI and FSPN, and will include customary
representations and warranties which shall survive the
closing of the Agreement as well as customary conditions
precedent and indemnification.
22
<PAGE> 4
Mr. Mark Bragg
October 25, 1999
Page Three
H. The completion by PSI and FSPN 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 PSI and FSPN and the resolution, in a manner
satisfactory to the Parties of any and all issues raised
as a result of such investigation.
I. 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 Agreement.
J. The obtaining of such consents and approvals from third
parties as may be required in order lawfully to consummate
a definitive agreement without violating any contract or
rights of third parties.
K. The occurrence prior to the Closing Date (as defined
within the definitive 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.
7. The Parties represent that each has the necessary power and
authority to execute and deliver this Letter. By executing and
delivering this Letter each of the Parties represents that to
their knowledge none the Parties nor any stockholder of any 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.
8. This Letter 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
23
<PAGE> 5
are not yet agreed upon between the Parties and still must be
agreed upon mutual satisfaction of all the Parties.
9. Except as explicitly otherwise set forth in this Letter
o No liabilities or obligations of any kind whatsoever are
intended to be created hereby between the Parties;
o This Letter 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;
o Any binding legal obligation of any nature between the
Parties shall be only set forth in the definitive
Agreement;
o No party may claim any legal rights against the other by
reason of the execution of this Letter or by taking any
action in reliance thereon; and
o Each Party shall bear its own costs in connection with
this Letter and the Agreement contemplated thereby.
Mr. Mark Bragg
October 25, 1999
Page Four
10. The Parties 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 Letter. This Letter shall terminate and,
except as set forth in Item 1O, shall be of no further force or
effect if the Agreement has not been approved by PSI's and FSPN's
Boards of Directors, all required regulatory agencies and, if
required, submitted to the stockholders of PSI and FSPN for
approval by November 1, 1999 or any other date that may be
mutually acceptable to the Parties.
11. It is expressly understood that none of the above funds will be
invested or disbursed until PSI has performed complete due
diligence and review, and complete documentation presented to the
PSI Board and only after the approval of the Board will the
investment be made.
24
<PAGE> 6
If the terms and conditions set forth in this Letter correctly set forth our
understanding, please execute this Letter in duplicate and return one fully
executed copy to me at your convenience.
If this Letter has not been executed and returned to us by October 27, 1999, it
shall be deemed null and void.
Very truly yours,
Glenn P. Russell
President and CEO
The foregoing correctly sets forth our understanding:
FINANCIAL SERVICES PROVIDER NETWORK, INC.
By
---------------------------------
Title:
-----------------------------
Dated:
-----------------------------
25
<PAGE> 1
EXHIBIT 11
PACIFIC SOFTWORKS, INC.
COMPUTATION OF WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
Three Months Nine Months
Total Number Ended Ended
Of Shares September 30, 1999 September 30, 1999
------------ ------------------ ------------------
<S> <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 79,853
Options treated as
common stock 140,000 140,000 140,000
Initial public offering
7/29/99 950,000 950,000 320,146
Sale of underwriters
overallotment 9/13/99 142,500 26,332 8,874
Total weighted average
shares outstanding 4,532,500 4,416,332 3,748,873
=========== =========== ===========
Net loss $ (872,405) $(1,336,390)
=========== ===========
Net loss per common share
basic and diluted $ (0.20) $ (0.36)
=========== ===========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
SOFTWORKS, INC. BALANCE SHEET AT SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,839,401
<SECURITIES> 0
<RECEIVABLES> 325,211
<ALLOWANCES> 86,400
<INVENTORY> 0
<CURRENT-ASSETS> 4,120,336
<PP&E> 571,367
<DEPRECIATION> 389,144
<TOTAL-ASSETS> 4,302,559
<CURRENT-LIABILITIES> 347,991
<BONDS> 0
0
0
<COMMON> 4,393
<OTHER-SE> 3,950,184
<TOTAL-LIABILITY-AND-EQUITY> 4,302,559
<SALES> 1,954,492
<TOTAL-REVENUES> 1,954,492
<CGS> 116,026
<TOTAL-COSTS> 3,174,856
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,336,390)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,336,390)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
