UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: September 30, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 000-26731 PACIFIC WEBWORKS, INC. (Exact name of registrant as specified in its charter) Nevada 87-0627910 (State of incorporation) (I.R.S. Employer Identification No.) 180 South 300 West, Suite 400 Salt Lake City, Utah 84101 (801) 578-9020 (Address and telephone number of principal executive offices and principal place of business) 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 [ ] As of November 1, 2001 the Registrant had a total of 22,826,688 shares of common stock issued and outstanding. TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Item 1: Financial Statements..............................................3 Item 2: Management's Discussion And Analysis of Financial Condition And Results of Operations........................................16 Item 3: Quantitative and Qualitative Disclosures About Market Risk.......21 PART II: OTHER INFORMATION Item 1: Legal Proceedings................................................21 Item 2: Changes in Securities and Use of Proceeds........................21 Item 6: Exhibits and Reports filed on Form 8-K.......................... 22 Signatures................................................................23 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS The financial information set forth below with respect to our statements of operations for the three and nine month periods ended September 30, 2001 and 2000 is unaudited. This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the nine months ended September 30, 2001, are not necessarily indicative of results to be expected for any subsequent period. 2 Pacific WebWorks, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS ASSETS September 30, December 31, 2001 2000 ------------- ------------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 255,611 $ 163,801 Receivables Trade, less allowance for doubtful receivables 136,560 257,492 Employee 2,096 2,469 Prepaid expenses 252,475 275,022 ------------- ------------- Total current assets 646,742 698,784 ------------- ------------- PROPERTY AND EQUIPMENT, NET AT COST 331,801 374,259 OTHER ASSETS 3,256,009 4,331,979 ------------- ------------- $ 4,234,552 $ 5,405,022 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long- term capital leases $ 1,410 $ 2,425 Capital leases in default 440,174 - Payables past due 295,576 - Overdraft in bank 23,766 - Accounts payable 331,165 611,950 Accrued liabilities 300,235 193,161 Other current liabilities 228,058 197,048 Deferred revenue 156,749 1,811,020 Notes payable 216,580 216,580 Notes payable - related parties - 250,000 ------------- ------------- Total current liabilities 1,993,713 3,282,184 Long-term capital lease obligations - 670 STOCKHOLDERS' EQUITY Common stock - par value $0.001; authorized 50,000,000; issued and outstanding 22,826,688 in 2001 and 15,008,000 in 2000 22,827 15,008 Additional paid-in capital 14,874,633 10,153,603 Accumulated deficit (12,656,621) (8,046,443) ------------- ------------- Total stockholders' equity 2,240,839 2,122,168 $ 4,234,552 $ 5,405,022 ============= ============== The accompanying notes are an integral part of these statements. 3 Pacific WebWorks, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Nine months ended Three months ended September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Revenues, net Software, access and license fees $ 1,682,762 $ 2,913,515 $ 121,886 $ 1,509,443 Hosting and maintenance fees 827,624 311,419 330,732 160,067 Training, design and other 65,363 48,574 18,244 13,159 ------------- ------------- ------------- ------------- 2,575,749 3,273,508 470,862 1,682,669 Cost of sales 435,394 549,067 79,416 238,804 ------------- ------------- ------------- ------------- Gross profit 2,140,355 2,724,441 391,446 1,443,865 Selling expenses 498,128 4,503,581 164,372 737,804 Research and development 343,164 645,372 88,087 246,972 General and administrative 1,313,460 1,918,994 389,445 528,141 Depreciation and amortization 1,540,941 730,052 365,556 349,024 Compensation expense for options and warrants 188,782 - 133,803 - Impairment loss - goodwill and other long-lived assets 2,688,300 - - - ------------- ------------- ------------- ------------- Total operating expenses 6,572,775 7,797,999 1,141,263 1,861,941 ------------- ------------- ------------- ------------- Loss from operations (4,432,420) (5,073,558) (749,817) (418,076) ------------- ------------- ------------- ------------- Other income (expense) Loss on sale or abandonment of assets (69,319) - - - Interest and other income 5,493 - 181 - Interest expense (106,036) (100,553) (19,958) (40,226) Other expenses (7,896) - (7,896) - ------------- ------------- ------------- ------------- (177,758) (100,553) (27,673) (40,226) ------------- ------------- ------------- ------------- NET LOSS $ (4,610,178) $ (5,174,111) $ (777,490) $ (458,302) ============= ============= ============= ============= Net loss per common share - basic and diluted $ (0.23) $ (0.41) $ (0.03) $ (0.03) Weighted-average number of shares outstanding - basic and diluted 19,927,725 12,504,532 22,693,355 14,267,212 ============= ============= ============= ============= The accompanying notes are an integral part of these statements. 4 Pacific WebWorks, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended September 30, 2001 2000 ------------- ------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net loss $ (4,610,178) $ (5,174,111) Adjustments to reconcile net loss to net cash used in operating activities Depreciation & amortization 1,540,941 730,051 Issuance of options and warrants for compensation 188,782 - Impairment loss 2,688,300 - Bad debt expense 55,000 18,000 Loss on sale or abandonment of property and equipment 69,319 - Loss on investment - 25,000 Other adjustments 34,661 - Changes in assets and liabilities (Net of effects of acquisitions) Receivables 69,474 (95,021) Prepaid expenses and other assets 541,169 (346,018) Accounts payable and accrued liabilities (32,244) 71,071 Deferred revenue (1,654,271) 2,719,588 ------------- ------------- Total adjustments 3,501,131 3,122,671 Net cash used in operating activities (1,109,047) (2,051,440) ------------- ------------- Cash flows from investing activities Purchases of property and equipment (78,319) (244,150) Proceeds from sale of property and equipment 14,412 - Cash paid for deposits - (500) Cash acquired in acquisitions 5,058 9,718 ------------- ------------- Net cash used in investing activities (58,849) (234,932) ------------- ------------- Cash flows from financing activities Overdraft in bank 23,766 - Proceeds from issuance of notes payable 900,000 597,446 Cash received for contributed capital 1,475 - Net proceeds from issuance of stock 376,000 1,625,945 Principal payments of long-term obligations (41,536) (18,873) ------------- ------------- Net cash provided by financing activities 1,259,705 2,204,518 ------------- ------------- Net increase decrease in cash and cash equivalents 91,809 (81,854) Cash and cash equivalents at beginning of period 163,801 153,898 ------------- ------------- Cash and cash equivalents at end of period $ 255,611 $ 72,044 ============= ============= Supplemental disclosures of cash flow information: Cash paid for interest $ 63,227 $ 98,715 Cash paid for income taxes - - Non-cash financing activities: Issuance of common stock for prepaid services, deposit and rent $ 488,600 $ - Purchase of Logio subsidiary for stock 2,450,000 - Retired debt through escrow 1,214,000 - Prepaid insurance for stock 70,000 - The accompanying notes are an integral part of these statements. 5 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION The Company - ----------- Pacific WebWorks, Inc. and its subsidiaries, engage in the development and distribution of web tools software, electronic business storefront hosting, and Internet payment systems for individuals and small to mid-sized businesses. The Company conducts its business within one industry segment. Basis of Presentation - --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for form 10-Q of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting standards have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying interim consolidated financial information reflects all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the quarter and nine months ended September 30, 2001 may not be indicative of the results that may be expected for the fiscal year ended December 31, 2001. Certain prior period balances have been reclassified to conform with current period presentation. The accompanying condensed consolidated financial statements include the accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries, Intellipay, Inc., World Commerce Network, LLC., and Logio, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing the financial statements are reasonable and prudent; however, actual results could differ from these estimates. 6 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - Continued Revenue Recognition - ------------------- The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101 clarifies application of generally accepted accounting principles to revenue transactions. The Company also follows SOP 97-2. Revenues from up-front fees are deferred and recognized over the period services are performed (which is generally one year). Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. Impairment of Long-Lived and Intangible Assets - ---------------------------------------------- The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires that impairment losses be recognized on such assets when indicators of impairment are discovered and estimated undiscounted future cash flows to be generated from those assets are less than their carrying value. As of June 30, 2001, and as a result of certain events and management's assessment of impaired assets, the Company recorded $911,532 in losses relating to the impairment of certain long-lived assets in Logio, Inc. and $1,776,768 in losses relating to the impairment of goodwill for Logio, Inc. and World Commerce Network. Recently Issued Accounting Pronouncements - ----------------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations" and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", which establishes new standards for the treatment of goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001. SFAS 142 prescribes that amortization of goodwill will cease as of the adoption date. Additionally, the Company will be required to perform an impairment test on goodwill and other intangible assets as of the adoption date, annually thereafter, and whenever events and circumstances occur that might affect the carrying value of such assets. The Company estimates that the effect of ceasing the amortization of goodwill related to SFAS 142 will be material to the company's financial statements subsequent to the adoption date. The Company amortizes approximately $906,000 annually of goodwill for its Intellipay subsidiary. The Company has not yet determined what effect, if any, the impairment test of goodwill and other intangible assets will have on the Company's results of operations and financial position. The Company does not believe that SFAS 141 will have a material impact on its financial position and results of operations. 7 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - Continued Recently Issued Accounting Pronouncements- Continued - ---------------------------------------------------- In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS replaces Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 144 prescribes, among other things, an accounting model for long-lived assets to be disposed of including sales and discontinued operations. The Company is evaluating the impact of this pronouncement on its financial position and results of operations in future filings. NOTE 2 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a limited operating history and has sustained losses since inception. In addition the Company had negative cash flows from operations of $1,109,046 and $2,051,440 during the nine-month periods ended September 30, 2001 and 2000, respectively and $2,100,149 during the year ended December 31, 2000. The company had negative working capital of $1,346,971 at September 30, 2001 and $2,583,400 at December 31, 2000. As a result, the Company has relied significantly upon equity and debt funding to support certain of its operations. The Company is working through various matters related to disputes with a vendor and an employee claim, which may impact its cash position (see Note 10). During the nine months ended September 30, 2001, the Company has taken steps to reduce its burn rate in order to meet its monthly cash requirements from operations with its reoccurring monthly cash revenues. This has been accomplished through a reduction in personnel, relocation to lower-cost office facilities and other expense reduction activities. The Company has also focused its immediate attention to the operations and growth of its core business units: Pacific WebWorks, Inc. and Intellipay, Inc. In the course of these activities, the Logio, Inc. subsidiary, which had temporarily ceased development and operations of its Internet products, became unable to make payment on its payables and certain of its capital lease agreements related to hardware and infrastructure. As a result of these defaults, Logio's most significant creditor obtained possession of the equipment under its lease agreements in May of 2001. These events have caused impairments related to the loss of the equipment under capital leases, other long-lived assets related to the equipment and the goodwill of the subsidiary to be recorded during second quarter 2001 (see Note 5). Impairment losses recorded for these events and the 8 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 2 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY - Continued assessment of impairment in the World Commerce Network subsidiary resulted in $2,688,300 of impairment losses for the nine months ended September 30, 2001. In May of 2001, the Company entered into a stock purchase agreement with certain of its existing shareholders and other entities pursuant to the sale of 4,000,000 shares of its common stock and warrants for $1,600,000 (see Note 8). The funding was used to retire certain debt and is being used to support operations. The Company expects to generate positive cash flows from operations through continued burn rate reduction and our business development and sales activities. The Company's cash requirements in excess of monthly cash inflows until this point will be funded primarily by the net cash received from our June offering (see Note 8). Further equity placements and debt issuance may be required to support operations and to pay existing liabilities of the Company. There is substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. NOTE 3 - ACQUISITION OF LOGIO, INC. On February 8, 2001, Pacific WebWorks completed its acquisition of Logio, Inc., a development stage company, in a stock-for-stock exchange. Pacific WebWorks exchanged 2,800,000 shares of its common stock for 18,425,830 shares of common stock. This transaction was accounted for on the purchase method of accounting using generally accepted accounting principles and valued at approximately $2,450,000 representing the fair value of the Pacific WebWorks shares on the date of exchange. Goodwill totaling $1,855,388 began to be amortized over three years and approximately $242,967 was amortized for the period from acquisition to June 30, 2001. The Company's goodwill related to the acquisition of Logio has been impaired in second quarter 2001 (see Notes 2 and 5). Logio's results of operations are included in the Pacific WebWorks, Inc. consolidated results of operations from the acquisition date to June 30, 2001 and it's the fair values of its assets and liabilities have also been recorded on the acquisition date and are included in the Pacific WebWorks, Inc. consolidated balance sheet. 9 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment includes the following: September 30, December 31, 2001 2000 ------------- ------------- Computer Equipment $ 421,898 $ 332,714 Equipment 83,781 96,833 Software 83,641 74,342 Furniture and Fixtures 93,672 72,090 Leasehold Improvements - 6,667 ------------- ------------- 682,992 582,646 Less Accumulated Depreciation (351,191) (208,387) ------------- ------------- $ 331,801 $ 374,259 ============= ============= Impairment charges totaling $911,532 were recorded in Logio, Inc. during the nine months ended September 30, 2001 representing equipment under capital lease agreements under default, primarily returned to hardware vendors, cash down payments and related equipment and software. Loss on sale or abandonment of property and equipment totals $69,319 for the nine months ended September 30, 2001. NOTE 5 - OTHER ASSETS Other assets include the following: September 30, December 31, 2001 2000 ------------- ------------- Goodwill $ 6,628,642 $ 4,773,255 Acquired technology 824,480 824,480 Other 19,250 20,258 ------------- ------------- 7,472,372 5,617,993 ------------- ------------- Accumulated amortization (2,439,595) (1,286,014) Impairment losses (1,776,768) - ------------- ------------- $ 3,256,009 $ 4,331,979 ============= ============= 10 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 6 - ACCRUED AND OTHER LIABILITIES Accrued liabilities consist of the following: September 30, December 31, 2001 2000 -------------- ------------- Payroll related liabilities $ 164,127 $ 139,096 Interest payable 48,940 14,192 Reseller commissions 55,490 39,400 Contingent liabilities 30,000 - Other 1,678 473 ------------- ------------- $ 300,235 $ 193,161 ============= ============= Payroll related liabilities totaling $140,240 at September 30, 2001 includes approximately $85,000 in estimated taxes, penalties and interest past due from Intellipay, Inc. to the Internal Revenue Service for periods prior to and immediately after its acquisition by Pacific WebWorks, Inc. Other current liabilities consist of estimated returns and chargebacks from a leasing company that funded customer purchases and placed them on a payment plan during 2000. The Company is responsible for recourse on leases on which customers have not made first payment. Estimated chargebacks and other estimated returns and refunds approximates $228,058 at September 30, 2001 and $197,000 at December 31, 2000 for all companies under consolidation. The Company makes an effort to further collect all amounts that have fallen under recourse with the leasing company. NOTE 7 - PAYABLES AND CAPITAL LEASES IN DEFAULT In March 2001, Logio, Inc., a subsidiary of Pacific WebWorks, Inc., was unable to make payment on some of its capital lease obligations. Logio, Inc. transferred the equipment back to the vendor in May of 2001. The default on these and other capital lease obligations, approximating $440,000 at September 30, 2001, results in impairment losses of $122,685, representing cash down payments by Logio at the beginning of the leases that were being amortized over the life of the leases and $788,847 in equipment under capital leases and related software and equipment. The leases expire through December 2002. 11 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 8 - RELATED PARTY TRANSACTIONS Unit Purchase Agreement - ----------------------- On May 30, 2001, the Company entered into a unit purchase agreement with three entities for the purchase of 4,000,000 units, each of which includes one share of the company's common stock and one warrant for the purchase of one common share at a price of $0.80 per share. The shares were issued in a private placement into escrow and funding was also placed in escrow in accordance with the agreement. The shares and monies were to be released to each party provided that a registration statement was filed with the Securities and Exchange Commission on or before July 25, 2001 to register the sale of the shares and warrants and provided that the registration statement was declared effective by the Securities and Exchange Commission on or before September 28, 2001. The Company would have been responsible for liquidated damages for failure to meet the above requirements totaling five percent of the purchase price of the then outstanding securities for every 30 calendar day period until the registration statement was filed or made effective. In mid July, the Securities and Exchange Commission notified the Company that its registration statement (Form SB-2, as amended) would become effective. Pursuant to the unit purchase agreement, a total of $1,600,000, representing a $0.40 per unit sales price, was released from escrow as follows: a total of $1,214,000 of notes payable and interest to shareholders was paid in full as held in escrow, $10,000 was paid to the escrow agent for services rendered and the remaining $376,000 was funded to the Company. The fair value of the common stock component of each unit was $0.32 and the warrant component of each unit was valued at $0.10 each using the Black Scholes valuation model. The remaining $0.02 in value given per unit in excess of value received has been recorded in the operating statement under compensation for warrants totaling $77,134 during the third quarter 2001. NOTE 9 - STOCKHOLDERS' EQUITY Equity Incentive Plan - --------------------- On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of awards in the form of stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants. The Company may grant awards representing up to 5,000,000 shares of the Company's common stock under the Plan. The Plan has not been approved by the Company's shareholders as of September 30, 2001 12 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 9 - STOCKHOLDERS' EQUITY - Continued Equity Incentive Plan- Continued - -------------------------------- During the nine months ended September 30, 2001, the Company granted options as follows: In February 2001 the Company granted 195,252 options, each representing one share of the Pacific WebWorks, Inc. common stock to employees and directors. The options have exercise prices of $0.87 per share, representing the fair market value of the common stock on the date of grant. The options are fully vested and expire through February 2011. On April 4, 2001, the Company granted a total of 3,055,000 options, each representing one share of Pacific WebWorks, Inc. common stock to employees and directors. The options have exercise prices of $0.75, representing the fair value of the stock on the date of grant, expire through April 2011 and vest 1/6 on the day of grant and 1/6 every six months through October 4, 2001. As of September 30, 2001, approximately 3,839,000 options were outstanding at exercise prices ranging from $0.75 to $3.53 per share and approximately 1,745,000 options were exercisable at prices ranging from $0.75 to $3.53 per share. Options forfeited during the nine months ended September 30, 2001 approximate 103,000 at exercise prices ranging from $0.75 to $3.53 per share. Granting of warrants - -------------------- On April 25, 2001, the Company entered into an agreement with a consultant to provide investor relations, public relations, and fulfillment services related to financing in exchange for warrants. A total of 500,000 warrants were issued at an exercise price of $0.50 per share under the terms of the agreement and 500,000 were issued at an exercise price of $0.75 per share for a total of 1,000,000 warrants granted under this agreement. Vesting of the warrants commences as follows: 25% immediately, 25% on July 1, 2001 and 50% on November 1, 2001. Deferred consulting charges related to this agreement approximate $175,000 and represent the fair value of the warrants using the Black Scholes valuation model. The services under this contract will be performed through April 25, 2002 and the fair value of the warrants are recognized ratably over the service period. The agreement terminates in April of 2002 when the services are completed. As discussed in Note 8, warrants to purchase 4,000,000 shares, valued at $0.10 each were granted in an equity offering at an exercise price of $0.80 per share. As of September 30, 2001, warrants for the purchase of 5,850,000 shares of the Company's common stock were outstanding and warrants for the purchase of 5,350,000 shares of the Company's common stock were exercisable. The warrants outstanding and exercisable have exercise prices ranging from $0.50 to $7.50 per share. 13 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 9 - STOCKHOLDERS' EQUITY - Continued Issuance of stock - ----------------- In August 2001, the Company issued a total of 200,000 shares of its common stock as a prepayment for certain insurance services totaling $70,000. The services will be provided and related expenses will be recognized over the one-year period in which the services are to be received by the Company. As discussed in Note 8, common stock totaling 4,000,000 shares, valued at $0.32 each, were issued in an equity offering. NOTE 10 - COMMITMENTS AND CONTINGENCIES Threatened litigation - --------------------- In February 2001, the Company received notice from the State of Utah Labor Commission regarding an allegation of racial discrimination charged by a former employee. The former employee claims that he was forced to resign as our sales manager due to demotions and pay cuts based on differential treatment based on his race and color. We have responded to the request for information from the Labor Commission and have stated that we believe the former employee was treated fairly while employed by the Company. At this time, the former employee has not identified any specific remedy and we are awaiting further action. In April 2001, one of the Company's former vendors filed a complaint alleging default under a certain application for credit and personal guaranty made by a former officer of the Company. The vendor seeks approximately $65,000 plus interest. The Company is defending the claim and believes the amount should be reduced based upon the vendor's performance and other disputes. The Company has filed an answer to the complaint and further litigation is pending. The Company has recorded amounts in the consolidated financial statements representing its estimated liability for this matter. Management believes that the amount recorded is sufficient to cover the resulting liability from this complaint, if any. Although no formal proceedings have been instituted, we were aware of a threatened copyright infringement claim by Business Software Alliance. The Company settled this matter out of court for $5,000 in August 2001. As previously discussed, in March 2001, Logio, Inc., a subsidiary of Pacific WebWorks, Inc., was unable to make payment on some of its capital lease obligations. Logio, Inc. transferred the 14 Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued Threatened litigation- Continued - -------------------------------- equipment back to the vendor in May of 2001. The default on these and other capital lease obligations totals $440,174. These leases have been classified as current liabilities in accordance with the terms of default under the lease agreements. The creditor filed a complaint pursuant to the default seeking the full amount of the default plus legal fees. This matter was dismissed without prejudice in the State of Minnesota on September 24, 2001 The Company is involved in other various disputes and legal claims in the normal course of business. It is not possible to state the ultimate liability, if any, in these matters. In the opinion of management, any resulting litigation will have no material effect on the financial position and results of operations of the Company in excess of amounts recorded. Other - ----- In June 2001, the Company received notice from a leasing company that funded customer purchases and placed them on a payment plan during 2000 that certain leases could be charged back to the Company. Lease documentation was processed by third parties for World Commerce Network and the Company is unable to estimate the extent of incomplete documentation, if any, as of September 30, 2001. 15 In this report references to "Pacific WebWorks," "we," "us," and "our" refer to Pacific WebWorks, Inc. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within Pacific WebWork's control. These factors include but are not limited to economic conditions generally and in the industries in which Pacific WebWorks may participate; competition within Pacific WebWork's chosen industry, including competition from much larger competitors; technological advances and failure by Pacific WebWorks to successfully develop business relationships. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We and our subsidiaries are engaged in the development and distribution of web tools software, electronic business storefront hosting and Internet payment systems for individuals and small to mid-sized businesses. In April 2001 our management implemented a wholesale distribution strategy in which we discontinued our internal sales operations and focused on wholesaling to distributors and retailers. We have a limited operating history and have sustained losses since our inception. However, we have taken steps to reduce our burn rate, including reduction in personnel, relocation to lower-cost office facilities and other expense reduction activities. Cash from our current sales channels is insufficient to support our existing operations; but management believes that the sales channels we are currently developing will provide sufficient revenues by the fiscal year end to support our operations. Sales projections are expected to remain down throughout fiscal year 2001 due to the alteration of our short-term goals and our overall sales and marketing strategy. Acquisitions On April 4, 2000 we completed the acquisition of IntelliPay, Inc., a Delaware corporation, as a wholly owned subsidiary. In an arms length transaction, Pacific WebWorks issued 2,400,000 common shares, valued at $4,320,000, in a stock-for-stock exchange for 1,000 shares of IntelliPay. The acquisition was accounted for under the purchase method of accounting. Accordingly, IntelliPay's results of operation have been included with Pacific WebWorks from the closing date in April 2000 and its consolidated assets and liabilities have been recorded at their fair values on the same date. Pacific WebWorks and U.S. Merchant Systems, Inc., a major customer during fiscal year 1999, formed World Commerce Network, LLC, in December of 1999 as a joint venture. Originally, we held a 50% interest in World Commerce, which was held on the equity method of accounting. In March 2000 we completed the acquisition of an additional 1% interest in World Commerce for 4,663 shares of Pacific WebWorks common stock, valued at $9,180, which then gave us a 51% total interest. In the third quarter of 2000, we determined that we would acquire the remaining 49% of World Commerce. We and U.S. Merchant Systems agreed to complete our scheduled seminars and then we would assume the outstanding ownership of World Commerce held by US Merchant Systems and continue forward with World Commerce operations. As a result we acquired the remaining 49% interest for $100 in August 2000. The operations of World Commerce are consolidated with our financials statements as a wholly owned subsidiary of Pacific WebWorks. World Commerce discontinued seminar marketing 16 activities in June 2000. In February 2001 we completed the acquisition of Logio, Inc., a development stage Nevada corporation. We acquired Logio in an arms length transaction by issuing approximately 2.8 million shares of our common stock for 18,425,830 shares of Logio common stock. This transaction was valued at $2,447,200. The acquisition was accounted for under the purchase method of accounting using generally accepted accounting principles. Logio's results of operation are included with ours from the closing date and its consolidated assets and liabilities are recorded at their fair values at the same date. Logio temporarily discontinued its development and operations of its Internet products in October 2000 due to funding constraints and the pending acquisition by Pacific WebWorks. Results of Operations The following discussions are based on the consolidated financial statements included with this report of Pacific WebWorks and its wholly owned subsidiaries, IntelliPay, World Commerce and Logio. Comparisons are presented for the three (the third quarter) and nine month periods ended September 30, 2001 and 2000. Net revenues. We receive revenues primarily from the sale of access to our software technology and continuing monthly service and hosting fees. Additionally, we derive revenues for services provided related to web site design, training, education and consulting. Revenues are recognized when persuasive evidence of an agreement exists, delivery has occurred and services have been rendered, the price is fixed or determined and collectability is reasonably assured. Up-front fees are non-refundable and are deferred and recognized systematically over the period the product is delivered and services are performed, which is generally one year. Monthly fees for our services are recognized as services are performed. Net revenues decreased $679,759 for the nine month period ended September 30, 2001, compared to the September 30, 2000 period. Net revenues decreased $1,211,807 for the third quarter ended September 30, 2001 compared to the same quarter in 2000. The decrease for the three and nine month period was primarily the result of discontinued seminar marketing, which resulted in a decrease in sales of software, access and license fees. We expect our sales for software, access and license fees to continue to decrease through the fourth quarter of 2001 as a result of our change in sales plan. We anticipate this decrease of these sales to level off in the first quarter of 2002. Our sales recorded for hosting and maintenance fees are expected to increase incrementally in the future as a result of our new sales and distribution model. Cost of sales and gross profits. These include costs of merchant accounts and fulfillment costs, support and other third party products and services. Cost of sales decreased $113,673 for the 2001 nine month period and decreased $159,388 for the 2001 third quarter, respectively, compared to the same periods in 2000. The cost of sales decrease in the 2001 three and nine month periods was primarily related to personnel reductions and streamlined operations. Gross profits decreased $584,086 for the 2001 nine month period and decreased $1,052,419 for the 2001 third quarter compared to the 2000 periods due to decreased revenues in these periods. Total operating expenses. Total operating expenses decreased $1,225,224 in the 2001 nine month period compared to the 2000 nine month period and decreased $720,678 in the 2001 third quarter compared to the 2000 third quarter. The decrease in the nine month period was primarily the result of decreases in selling expenses, research and development and general and administrative expenses. Management reduced these expenses through personnel reductions, pay cuts, the elimination of costly seminars and the relocation of our offices. However, the decrease in operating expenses was offset by compensation expense attributed to options and warrants earned by employees, directors and consultants, along with impairment losses, which are discussed below. The 2001 third quarter decrease in total operating expenses was primarily due to overall reduction in selling, research and development and general and administrative expenses. Selling expenses. Selling expenses consist of both sales and marketing expenses, including department salaries and benefits, advertising, seminar costs, and commissions paid to resellers. Our selling expenses decreased $4,005,453 for the 2001 nine month period and $573,432 for the 2001 third quarter compared to the 2000 periods. 17 The decrease in selling expenses occurred due to discontinuing our seminar marketing program, management in this department taking pay cuts of approximately 37.5% and a reduction in personnel in this department from fifteen to five employees. The cessation of the seminar marketing program eliminated printing and mailing costs, travel expenses, show crew costs, hotel ballroom rental and other costs associated with the seminars. Our sales efforts since the fourth quarter of 2000 have been primarily focused on business development and strategic alliance with large distributors of our products and services. Research and development expenses. Research and development consists primarily of personnel expenses related to product design, programming, and quality control. Research and development expenses decreased $302,208 and $158,885 for the 2001 nine month period and third quarter, respectively, as compared to the 2000 comparable periods. The decrease resulted primarily from personnel reductions from sixteen to three engineers. General and administrative expense. General and administrative expenses consist of all finance and administrative salaries and benefits, rental of office space, professional fees and other general office expenses. General and administrative expenses decreased $605,534 and $138,696 for the 2001 nine month period and third quarter, respectively, compared to the same time periods in 2000. The decreases were due to management taking pay cuts of approximately 12.5% in the 2001 nine month period, implementation of a hire and raise freeze, reduction in personnel from nine to six, limits placed on travel, automation of certain administrative and financial processes and moving our offices to a less expensive office building. Depreciation and amortization. These expenses include depreciation of property and equipment and amortization of goodwill and other assets. These expenses increased $810,889 in the 2001 nine month period and increased $16,532 for the 2001 third quarter compared to the 2000 time periods primarily due to the property and equipment increases from the consolidation of Logio's operations beginning in February 2000. Compensation expense for options and warrants. These expenses relate to stock options earned by employees, directors and consultants. We granted options to employees in September 2000 and the strike price of these options was less than the fair value on the date of grant, creating intrinsic value. We recognized the expense of these options over the one-year vesting period and recorded $38,700 for the 2001 nine month period. Included in the 2001 nine month period is the recognition of $72,948 of compensation expense related to the fair value over the period earned of one million warrants granted to a consultant and $77,134 of expense related to the fair value of warrants issued in conjunction with completion of our Unit Purchase Agreement with investors in July 2001. Impairment loss. As of September 30, 2001, as a result of certain events and management's assessment of impaired assets, we recorded $911,532 in losses related to impairment of long-lived assets in Logio and $1,776,768 in losses related to impairment of goodwill for Logio and World Commerce for the 2001 nine month period. (See, "Liquidity and Capital Resources," below, for details of the impairment losses.) Total other income (expense). Total other expenses increased $77,205 and decreased $12,553, respectively, for the 2001 nine month period and the 2001 third quarter compared to the 2000 periods. Interest expense related to $1.2 million in notes payable and losses on the sale or abandonment of assets related to Logio were the primary reasons for the increase in the 2001 nine month period. Net Loss. Our net loss decreased $563,933 in the 2001 nine month period compared to the same period in 2000; however, the net loss increased $319,188 in the 2001 third quarter compared to the 2000 third quarter. The nine month period net loss decrease is primarily the result of management's steps to shift our business model away from costly seminar activities to a focus on client acquisition for monthly hosting and maintenance fee revenues. However, the impairment losses for the 2001 periods reduced the overall cost reductions. The increase in net loss for the 2001 third quarter period is due primarily to the large reduction in sales recognized from software, access and license fees due to our shift in the sales and distribution model. We expect to see similar results through the end of 2001. We recorded a net loss per common share of $0.23 for the 2001 nine month period compared to $0.41 for the 2000 nine month period. For the 2001 third quarter a net loss remained at $0.03 per share 18 Liquidity and Capital Resources At September 30, 2001, we had $255,611 cash on hand with total current assets of $646,742 compared to $163,801 cash on hand with total current assets of $698,784 at December 31, 2000. Total current liabilities were $1,993,713 for the 2001 nine month period compared to $3,282,184 at December 31, 2000. Capital leases in default, past due payables and bank overdraft accounted for $759,516, or 38.1%, of total current liabilities. Deferred revenue, which has been deferred in accordance with SAB101 and recognized on a ratable basis over the period the service revenues are earned, represented $156,749, or 7.9%, of total current liabilities as of September 30, 2001, compared to 55.2% as of December 31, 2000. Our accumulated deficit totaled $12,656,621 as of September 30, 2001, and we had negative working capital totaling $1,346,971. Net cash used in operating activities for the 2001 nine month period was $1,109,047. Net cash used in investing activities for the period was $58,849, which was primarily used for fixed assets additions. Net cash provided by financing activities was $1,259,705, with $900,000 provided from the issuance of notes payable and $376,000 net proceeds from issuance of common stock. The notes payable were paid in full in July 2001. As of the year ended December 31, 2000, management decided as a cost saving measure to discontinue the seminar marketing activities of World Commerce. Prior to our acquisition of Logio, its management had temporarily ceased its corporate development and operations of its Internet products. Our management intended to revisit the operations of these subsidiaries, but due to market forces and cash flow shortages decided it was in our best interest to focus our immediate attention on our core business of Pacific WebWorks and IntelliPay. As a result, Logio was unable to satisfy its obligations under certain notes payable and capital leases. Accordingly, we have recorded impairment losses for the 2001 nine month period of $911,532 related to Logio's return of hardware to a vendor in May 2001, cash down payments made by Logio under agreements which are in default and other losses related to equipment and software. In addition, $1,776,768 in losses were related to impairment to goodwill for Logio and World Commerce. During fiscal year 2000 we entered into agreements with the holders of a majority of our debt to convert those debts into equity. In June 2000 we converted notes payable with interest of $2,037,536 into 1,440,000 common shares of which 400,000 common shares were converted for $1,000,000 along with warrants for the purchase of an additional 600,000 common shares at strike prices ranging from $5.00 to $7.50 per share. Then in September 2000 we converted a $600,000 note payable to 600,000 common shares. As of December 31, 2000, we had notes payable of $250,000, including principal and interest. During the first and second quarter of 2001, we borrowed additional funds resulting in $950,000 of principal and interest resulting in $1.2 million of outstanding debt with accrued interest, which was due and payable to various parties. In May 2001 we agreed to sell 4,000,000 units at $0.40 per unit for $1,600,000 to four accredited investors. Each unit consisted of one common share and a warrant to purchase one common share. Pursuant to the agreement, the shares were issued in a private placement into escrow and the $1.6 million was also placed in escrow. Three of the investors assumed our $1.2 million of outstanding debt taking new notes payable with 15% interest and payable on the earlier of September 20, 2001, or at such time as we received up to $1 million in equity financing. These notes payable were also placed in the escrow. Subsequently, in July 2001, $1.6 million was released from the escrow which paid in full $1,214,000 of notes payable with interest, $10,000 was paid to the escrow agent and the remaining $376,000 was funded to Pacific WebWorks. During the 2001 second quarter we sold units for cash and granted warrants to purchase shares, which may provide additional sources of funding. In April 2001 we agreed to issue warrants to Columbia Financial Group to purchase 1,000,000 shares of our common stock at an aggregate exercise price of $625,000 in exchange for their services to us for one year. Portions of the warrants vest on a predetermined time schedule and the warrants expire in April 2006. In May 2001 we sold 4,000,000 units to four accredited investors and each unit included a warrant to purchase one common share at an exercise price of $0.80 per share, expiring May 30, 2003. As a result of these and previous transactions, as of September 30, 2001, we had outstanding warrants to purchase 5,850,000 common shares which may result in maximum proceeds of $7,450,000. However, the holders of the 19 warrants have total discretion whether or not to exercise the warrants and we cannot assure that all of the warrants will be exercised before their expiration through April 2006. Our shift in business strategy resulted in decreased cash inflow. As a result of our marketing and sales strategies shifting away from costly seminars to business development during the fourth quarter 2000, our monthly cash inflow remained down in the 2001 third quarter. We have payables past due and accrued liabilities that, cumulatively, cannot be paid with cash on hand or monthly cash flows. Thus, we require additional funding sources to meet the requirements on our existing liabilities and the liabilities of our subsidiaries. We continue to fund our operations with loans and the sale of unregistered stock where cash flows fall short of requirements. While we have taken steps to reduce our monthly burn rate and move to become cash flow positive, we believe we will need an additional $1 million to $3 million into 2002 to further develop our products and services and further our business development strategies during the next twelve months. We operate in a very competitive industry in which large amounts of capital are required in order to continually develop and promote products. Many of our competitors have significantly greater capital resources than we do. We believe we will need to continue to raise additional capital, both internally and externally, in order to successfully compete. While we may be able to fund a portion of our operations through our revenues for the short term, we currently anticipate using private placements of our common stock to fund operations over time. We intend to issue such stock pursuant to exemptions from the registration requirements provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock our stockholders may experience dilution in the value per share of their common stock. Factors Affecting Future Performance . We may not be able to obtain additional funds on acceptable terms. If we fail to obtain funds on acceptable terms, we might be forced to delay or abandon some or all of our business plans, which could have a material adverse effect on us. . Wide scale implementation of a new technology or payment method, such as stored-value cards, electronic cash equivalents or wireless communications, could force us to modify our payment services or software to remain competitive, and could potentially render one or more of our services or products obsolete . We currently are unable to finance our operations through our generated revenues. Our revenues and operating results have varied significantly from period to period. Although our earnings are becoming more predictable as the market for our services and products begins to mature, our revenues and operating results can be expected to fluctuate somewhat for a variety of reasons beyond our control which may result in our quarterly operating results from time to time being below the expectations of public market analysts and investors. In that case, we expect that the price of our common stock would be materially and adversely affected. . We face intense competition that may slow our growth and force our prices down. We expect this competition to intensify in the future, with new competitors, and competitive services and products regularly entering the market. If these competitors were to bundle competing products for their customers, it could adversely affect our ability to market our services. . We may experience software defects and development delays, damaging customer relations. Or we may experience breakdowns or unauthorized entry into our hosting services, infrastructure or payment processing system, harming our business. We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted. 20 . Breach of our e-commerce security measures could reduce demand for our services. The e-commerce industry is intensely focused on the need for Internet security, particularly with respect to the transmission and storage of confidential personal and financial data. Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services. . We depend upon our proprietary rights, none of which can be completely safeguarded against infringement. Intellectual property rights, by their nature, are uncertain and involve complex legal and factual questions. We may unknowingly infringe upon the proprietary rights of others, thereby exposing us to significant liability and/or damages. To the extent we rely upon confidential information to maintain our competitive position, other parties may independently develop the same or similar information. . Our stock price is volatile. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors and these broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS Although no formal proceedings were instituted, Business Software Alliance had threatened a copyright infringement claim in June 2001. This matter was settled out of court for $5,000 in August 2001. Sunrise International Leasing Corporation, a Minnesota corporation and assignee of Sun Microsystems Finance, filed a complaint in the Fourth District Court, County of Hennepin, of the State of Minnesota related to the default under the equipment lease agreement between Logio and Sun Microsystems. Sunrise International sought damages of $444,589.40 and costs and reasonable attorney fees. On September 24, 2001, this matter was dismissed without prejudice in the State of Minnesota. ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS Recent Sales of Unregistered Securities The following discussion describes all securities sold without registration by Pacific WebWorks from July 1, 2001 through a recent date. On August 28, 2001, we issued 200,000 common shares to Universal Business Insurance for General Liability, Director and Officer and Intrusion Technology Insurance, valued at $70,000. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act. In connection with this isolated issuance of our securities, we believe that the purchaser was aware that the securities had not been registered under federal securities laws; acquired the securities for his/its own account for investment purposes and not with a view to or for resale in connection with any distribution for purposes of the federal securities laws; understood that the securities would need to be indefinitely held unless registered or an exemption from registration applied to a proposed disposition; and was aware that the certificate representing the securities would bear a legend restricting their transfer. 21 We believe that, in light of the foregoing, the sale of our securities to the acquirer did not constitute the sale of an unregistered security in violation of the federal securities laws and regulations by reason of the exemptions provided under Sections 3(b) and 4(2) of the Securities, and the rules and regulations promulgated thereunder. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Part II Exhibits. Exhibit Number Description - ------- ----------- 2.1 Agreement and Plan of Reorganization between Pacific WebWorks and IntelliPay, dated April 4, 2000 (Incorporated by reference to exhibit No. 2.1 for Pacific WebWork's Form 8-K, filed April 19, 2000.) 2.2 Agreement and Plan of Reorganization between Pacific WebWorks and Logio, dated October 31, 2000 (Incorporated by reference to exhibit No. 2.1 for Pacific WebWork's Form 8-K, filed November 14, 2000.) 3.1 Articles of Incorporation of Pacific WebWorks as amended. 3.2 Amended and Restated Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit No. 3.2 for Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.1 Master Service Agreement between Electric Lightware, Inc., and Utah WebWorks, Inc., dated February 2, 1998. (Incorporated by reference to exhibit No. 10.1 for Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.2 Internet Access Agreement, Addendum to Master Service Agreement between Electric Lightwave, Inc., and Utah WebWorks, Inc., dated February 2, 1998 (Incorporated by reference to exhibit No. 10.2 for Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.3 Form of Employment Agreement with management (Incorporated by reference to exhibit No. 10.3 for Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.4 Lease Agreement between Utah WebWorks, Inc. and Westgate Business Center, dated January 11, 1999 (Incorporated by reference to exhibit No. 10.6 for Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.5 Strategic Reseller Agreement with U.S. Merchant Systems (Incorporated by reference to exhibit No. 10.9 for Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July 16, 1999) 10.8 Purchase Agreement between Pacific WebWorks and U.S. Merchant Systems, Inc., dated February 22, 1999 (Incorporated by reference to exhibit No. 2.3 for Pacific WebWork's Form 10-K, filed March 10, 2000) 10.9 Registration Rights Agreement between Pacific WebWorks and Midwest First National, Inc. and Condiv Investments, Inc. and Columbia Financial Group, dated February 22, 2000 (Incorporated by reference to exhibit No. 10.11 for Pacific WebWorks's Form S-1 Registration Statement, File No. 333-38026, effective June 12, 2000.) 10.10 Lease Agreement between Logio and Sun Microsystems Finance, as amended. 10.11 License Agreement between Logio and Oracle Corporation, as amended. 10.12 Consultant Agreement between Pacific WebWorks and Columbia Financial Group, Inc., dated April 25, 2001 (incorporated by reference to exhibit 10.12 to Post-effective Amendment to Form S-1 filed June 19, 2001) 10.13 Unit Purchase Agreement between Investors and Pacific WebWorks, dated May 30, 2001 (incorporated by reference to exhibit 10.13 to Post-effective Amendment to Form S-1 filed June 19, 2001) 10.14 Registration Rights Agreement between Pacific WebWorks and the Investors (incorporated by reference to exhibit10.14 to Form SB-2, as amended, filed June 28, 2001) (b) Reports on Form 8-K. On July 16, 2001 we filed a report on Form 8-K under Item 5 regarding the effective date of our Registration Statement on Form SB-2. 22 On July 26, 2001 we filed an amendment to our report on Form 8-K originally filed on July 23, 2001, under Item 5 regarding the effective date of our Form S-1 Post-effective Amendment No. 3. 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. Pacific WebWorks, Inc. 11/12/01 /s/ Christian R. Larsen Date: ___________________________ By: _____________________________________ Christian R. Larsen, President and Director 11/13/01 /s/ Kenneth W. Bell Date: ___________________________ By: _____________________________________ Kenneth W. Bell, C.E.O. and Director 11/12/01 /s/ Thomas R. Eldredge Date: ___________________________ By: _____________________________________ Thomas R. Eldredge, Chief Financial Officer and Secretary/Treasurer 23